UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
Commission file number 1-9259
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 94-3008908
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
555 California Street, 4th floor 94104
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(415) 765-1814
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
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I N D E X
Page No.
Part I - Financial Information:
Item 1. Financial Statements
Balance Sheets --
September 30, 1997 and December 31, 1996..... 3
Statements of Income --
Three and nine months ended September 30,
1997 and 1996................................ 4
Condensed Statements of Cash Flows
Nine months ended September 30, 1997
and 1996..................................... 5
Notes to Condensed Financial Statements........ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 7
Part II - Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders............................... 9
Item 6. Exhibits and Reports on Form 8-K............... 9
Signatures..................................... 10
<PAGE>
PART I - FINANCIAL INFORMATION
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
===============================================
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(In thousands except unit data) (Unaudited) 1996
- --------------------------------------------------------------------------------
<S>
<C> <C>
ASSETS
Cash $ 0 $ 580
Finance leases - net 84,592 83,056
Operating leases - net 0 1,090
Notes receivable 0 236
Prepaid expenses and other assets 770 168
------- -------
Total assets $85,362 $85,130
======= =======
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Distribution payable to partners $ 2,102 $ 5,045
Accounts payable and accrued liabilities 501 972
Long-term notes payable 19,885 14,071
------- -------
Total liabilities 22,488 20,088
======= =======
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Limited partners (4,625,000 units outstanding) 62,245 64,391
General partner 629 651
------ ------
Total partners' equity 62,874 65,042
------ ------
Total liabilities and partners' equity $85,362 $85,130
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</TABLE>
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See NOTES TO CONDENSED FINANCIAL STATEMENTS
3
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
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STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Unaudited; in thousands September 30, September 30,
except per unit amounts) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES
Finance lease income $2,257 $2,185 $6,816 $6,653
Operating lease rentals 29 399 170 1,398
Gain on sale of equipment 393 0 393 556
Other income 0 14 12 139
------ ------ ------ ------
Total revenues 2,679 2,598 7,391 8,746
------ ------ ------ ------
EXPENSES
Interest 553 427 1,559 1,441
Depreciation - operating leases 91 353 273 1,148
Allowance for doubtful account 0 0 228 0
Management fee - general partner 179 180 514 559
Investor reporting 201 62 602 186
General and administrative 25 44 77 121
------ ------ ------ ------
Total expenses 1,049 1,066 3,253 3,455
------ ------ ------ ------
Net Income $1,630 $1,532 $4,138 $5,291
====== ====== ====== ======
Net Income Allocated To:
General Partner $ 16 $ 15 $ 41 $ 53
====== ====== ====== ======
Limited Partners $1,614 $1,517 $4,097 $5,238
====== ====== ====== ======
Net Income Per Limited Partnership Unit $ 0.35 $ 0.33 $ 0.89 $ 1.13
====== ====== ====== ======
</TABLE>
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See NOTES TO CONDENSED FINANCIAL STATEMENTS
4
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
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STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Unaudited; in thousands) 1997 1996
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<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 3,202 $ 6,050
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CASH FLOWS FROM INVESTING ACTIVITIES
Aircraft equipment purchase (5,753) 0
Proceeds from sale of equipment 1,182 6,559
(Increase) decrease in notes receivable 8 516
Rental receipts in excess of earned finance lease income 4,217 6,740
-------- --------
Net cash provided (used) by investing activities ( 346) 13,815
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings/(repayment) under lines of credit, net 896 (4,588)
Proceeds from issuance of long-term debt 9,000 0
Repayment of long-term debt (4,083) (4,765)
Distributions paid to partners (9,249) (10,511)
-------- --------
Net cash used by financing activities (3,436) (19,864)
-------- --------
Increase (decrease) in cash (580) 1
Cash at beginning of period 580 0
-------- --------
Cash at end of period $ 0 $ 1
======== ========
ADDITIONAL INFORMATION
Interest paid $ 1,282 $ 1,594
======== ========
</TABLE>
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See NOTES TO CONDENSED FINANCIAL STATEMENTS
5
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
===============================================
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
BASIS OF PRESENTATION - The accompanying unaudited condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of the Partnership, necessary to a
fair statement of the results for the interim periods. The results of
operations for such interim periods are not necessarily indicative of
results of operations for a full year. The December 31, 1996 balance sheet
included herein is derived from the audited financial statements included
in the Partnership's Annual Report and incorporated by reference in the
Form 10-K for the year ended December 31, 1996, but does not include all
disclosures required by generally accepted accounting principles. The
statements should be read in conjunction with the Organization and
Significant Accounting Policies and other notes to financial statements
included in the Partnership's Annual Report for the year ended December 31,
1996.
DERIVATIVES - The Partnership holds one derivative financial instrument,
which is an interest rate swap agreement used to manage the Partnership's
interest rate risk. The Partnership accounts for this derivative financial
instrument on an accrual basis when the cash flows generated from the
hedging instrument fulfill the objectives of the hedge strategy and when
there is high correlation between the derivative and the hedged asset or
liability. Under accrual accounting interest differentials paid or received
under interest rate swap agreements are recognized as an adjustment to
interest expense over the life of the agreements. Termination gains or
losses of such derivatives are amortized to interest expense over the
remaining life of the hedged transaction.
When a derivative no longer fulfills the high correlation objective, it is
accounted for on a mark-to-market basis and termination of such derivatives
is recognized immediately in the Statement of Income as a component of
interest expense.
2. NET INCOME PER LIMITED PARTNERSHIP UNIT
---------------------------------------
Net Income Per Limited Partnership Unit is computed by dividing the net
income allocated to the Limited Partners by the weighted average units
outstanding (4,625,000).
6
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The partnership presently has four long-term debt facilities. At September 30,
1997, the following amounts were outstanding: $4.7 million on an 8.75% non-
recourse note collateralized by three aircraft leased to US Airways (formerly
USAir); $5.8 million on a 7.4% non-recourse note collateralized by one aircraft
leased to FedEx; $896,000 under a non-recourse long-term revolving declining
variable interest loan facility collateralized by a fourth aircraft leased to US
Airways and $8.4 million on a 9.85% non-recourse long-term note agreement
collateralized by one aircraft leased to Trans World Airlines. Approximately
$3.4 million remains available under the revolving loan facility with ABN. This
revolver is due to expire next year.
The partnership is negotiating a new $8 million revolving loan facility to be
collateralized by one aircraft on lease to USAirways.
Long-term borrowing at September 30, 1997 represented 15% of the original cost
of the aircraft presently owned by the partnership, including capital expendi-
tures for upgrades. The terms of the Partnership Agreement permit debt to be at
a level not exceeding 50% of such cost.
Cash distributions paid in the first nine months of 1997 amounted to $1.98 per
unit, consisting of three regular quarterly distributions of $0.45 each and a
special cash distribution of $0.63 per unit paid in January 1997. Cash distribu-
tions paid during the first nine months of 1996 amounted to $2.25 per unit,
consisting of three regular quarterly distributions, two of which were for $0.50
each and a third one for $0.45 and a special distribution of $0.80 per unit paid
in May 1996. The special distributions were paid from the proceeds of aircraft
sales in December 1996 and March 1996, respectively.
In September 1997, the partnership declared a third quarter cash distribution of
$0.45 per unit amounting to $2,102,000 payable on November 14, 1997 to unit-
holders of record on September 30, 1997. In October 1997, the partnership
declared a special cash distribution of $0.22 per unit amounting to $1,028,000
payable on November 4, 1997 to unitholders of record on October 20, 1997. This
special distribution was payable from the sale of a DC-9-51 aircraft on lease to
Sun Jet International, Inc. The two combined distributions exceeded third
quarter net income of $1,630,000, resulting in a return of capital of $1,500,000
or 32 cents per unit.
Results of Operations
- ---------------------
Net income for the third quarter ended September 30, 1997 was $1,630,000, an
increase of $98,000 or 6.4% over the comparable 1996 three-month period. Third-
quarter 1997 revenues were $2,679,000 compared with last year's revenues for the
same period of $2,598,000. The increase in net income for the third quarter of
1997, is primarily due to a gain of $393,000 arising from the sale of the
DC-9-51 aircraft on lease to Sun Jet International, Inc., mentioned previously.
Net income for the first nine months of 1997 was $4,138,000, a decrease of
$1,153,000 or 22% compared with the nine-month period ended September 30, 1996.
Revenues for the 1997 nine-month period were $7,391,000 compared with last
year's revenues for the same period of $8,746,000. The decline in income and
revenue for the first nine months of 1997 reflects higher investor reporting
expenses incurred in connection with the solicitation of unitholder consents
($416,000); a charge against a note receivable taken in the first quarter of
1997 ($228,000); and fewer aircraft on operating leases as a result of the sale
of seven aircraft in 1996.
7
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Depreciation expense under operating leases declined as a result of the aircraft
sales in 1996. Interest expense of $54,000 was recognized to mark-to-market an
interest rate swap agreement associated with the outstanding revolving loan.
Results of Proposal Regarding Public Trading of Units
- -----------------------------------------------------
In August the partnership's unitholders approved a proposal authorizing the
general partner to restrict trading of the units which would have resulted in
the units being de-listed from trading at the end of this year. The proposal
also authorized the general partner to take other actions, which the general
partner determined to be beneficial to unitholders if favorable amendments to
federal and California tax laws were enacted.
In August and October 1997 federal and California tax laws, respectively, were
amended to provide that publicly traded partnerships may elect to continue to be
publicly traded and retain their partnership tax status if they pay a federal
tax of 3.5% and state tax of 1% on their annual gross income beginning in
January 1998.
After consideration of a number of factors, including the recent tax law changes
and the benefits of liquidity, the board of directors of the general partner
unanimously concluded that it is in the best interests of the unitholders for
the partnership to remain a publicly traded partnership at this time.
Accordingly, the partnership will make an election to pay an annual tax at the
partnership level of 4.5% on its gross income beginning in 1998.
As provided in the Consent Solicitation Statement describing the proposal, the
general partner will consider whether it is in the best interests of the limited
partners to cease making new aircraft investments as opportunities arise, in
light of market conditions and the partnership's competitive position. Based on
its investment experience and its knowledge of the market, the general partner
believes that attractive investment opportunities probably will not be
available. In that event, as aircraft are sold the partnership would distribute
sales proceeds to unitholders (after repaying related outstanding debt
obligations and establishing appropriate reserves), and this would result in a
runoff of the partnership's portfolio. The general partner will continue to
actively manage the portfolio, identifying sale or investment opportunities and
taking action deemed beneficial to unitholders.
Portfolio Developments
- ----------------------
On September 29, 1997 the partnership sold its 50% interest in a DC-9-51
aircraft which had been leased to Sun Jet International, Inc., resulting in a
net gain of approximately $393,000.
As of September 30, 1997 the partnership's portfolio consisted entirely of seven
Stage III aircraft, of which six are MD 82s, and one is a 727-200 FH. The
aircraft are leased to USAirways(5), TWA (1) and FedEx (1).
8
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Pursuant to a Consent Solicitation Statement, dated June 24, 1997,
the partnership solicited the consent from its limited partners to a proposal
(the "Proposal") to authorize the general partner to amend the partnership
agreement (i) to impose restrictions on the transferability of units of limited
partnership interest ("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.
The record date for determining limited partners entitled to vote on
the Proposal was June 4, 1997, and the consent solicitation period ended on
August 28, 1997. A total of 3,298,544 Units were voted on the Proposal, of which
3,067,206 Units were voted in favor of the Proposal, 147,931 units were voted
against the Proposal, and 83,407 Units abstained.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further information regarding the Proposal and action
taken by the general partner following approval of the Proposal.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
9
<PAGE>
SIGNATURES
==========
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRLEASE LTD., A CALIFORNIA LIMITED
PARTNERSHIP
By: Airlease Management Services, Inc.
General Partner
November 5, 1997 By: /s/ DAVID B. GEBLER
- ---------------- ---------------------------------
Date David B. Gebler
Chairman, Chief Executive Officer
and President
November 5, 1997 By: /s/ RICHARD C. WALTER
- ---------------- -----------------------
Date Richard C. Walter
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 39,320
<ALLOWANCES> 228
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 85,362
<CURRENT-LIABILITIES> 0
<BONDS> 19,885
0
0
<COMMON> 0
<OTHER-SE> 62,874
<TOTAL-LIABILITY-AND-EQUITY> 85,362
<SALES> 7,379
<TOTAL-REVENUES> 7,391
<CGS> 0
<TOTAL-COSTS> 273
<OTHER-EXPENSES> 1,193
<LOSS-PROVISION> 228
<INTEREST-EXPENSE> 1,559
<INCOME-PRETAX> 4,138
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,138
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.89
</TABLE>
