-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QZ5rUFcMiVMKGDl2xUETjr3R4a1qXSzssLZpw+yJdAhDIowCh3glItddkra9fa0k Wb+rW2Q/rE4zgTJU07LhKg== 0001092306-04-000161.txt : 20040318 0001092306-04-000161.hdr.sgml : 20040318 20040318162331 ACCESSION NUMBER: 0001092306-04-000161 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRLEASE LTD CENTRAL INDEX KEY: 0000799033 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 943008908 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-09259 FILM NUMBER: 04678027 BUSINESS ADDRESS: STREET 1: 555 CALIFORNIA STREET STREET 2: 4TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4157651814 MAIL ADDRESS: STREET 1: 555 CALIFORNIA STREET STREET 2: 4TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10KSB 1 form10-ksb.txt FORM 10-KSB - 12-31-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2003 Commission File No. 1-9259 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP ______________________________________________________ (Exact name of registrant as specified in its charter) CALIFORNIA 94-3008908 _______________________ ____________________________________ (State of Organization) (I.R.S. Employer Identification No.) 555 CALIFORNIA STREET, FOURTH FLOOR, SAN FRANCISCO, CA 94104 ____________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 765-1814 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE TITLE OF EACH CLASS: NAME OF EACH EXCHANGE N/A ON WHICH REGISTERED: N/A SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Depository Units Representing Limited Partnership Interests (Title of Class) 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. Indicate by check mark whether the registrant is an accelerated filer (as designated in Exchange Act Rule 12b-2). YES NO X ___ ___ Aggregate market value of Depositary Units, held by non-affiliates of the registrant as of the close of business at February 19, 2004 was $6,641,223.00. The revenues for 2003 were $1,615,000.00 TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS.................................................... 3 ITEM 2. PROPERTIES.................................................. 14 ITEM 3. LEGAL PROCEEDINGS........................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 16 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 19 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................... 26 ITEM 8A. CONTROLS AND PROCEDURES..................................... 26 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 27 ITEM 10. EXECUTIVE COMPENSATION...................................... 29 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 30 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 31 ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K................................................. 31 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................... 36 SIGNATURES................................................................... 37 INDEX TO EXHIBITS.......................................................... A-12 2 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 PART I ITEM 1. BUSINESS GENERAL Airlease Ltd., A California Limited Partnership (the "Partnership"), has been engaged in the business of acquiring, either directly or through joint ventures, commercial jet aircraft, and leasing such aircraft or parts thereof to domestic and foreign airlines, freight carriers and charter companies. The general partner of the Partnership (the "General Partner") is Airlease Management Services, Inc. From 1999 to June 2002, the General Partner was a wholly owned subsidiary of Banc of America Leasing and Capital, LLC, a Delaware limited liability company ("BALCAP"), in turn a wholly owned subsidiary of Bank of America National Assocation ("BANA"). In June 2002, BALCAP transferred its stock of the General Partner to BANA and the General Partner became a wholly owned subsidiary of BANA. BALCAP also holds 793,750 limited partnership units and United States Airlease Holding, Inc. ("Holding"), also a wholly owned subsidiary of BANA, holds 231,250 limited partnership units. An additional 3,600,000 units are publicly held. DECISION TO SELL ASSETS AND DISSOLVE The Partnership's principal investment objectives have been to generate income for quarterly cash distributions to Unitholders and to own a portfolio of leased aircraft. The Partnership's original intent was that until January 1, 2005, it would use a substantial portion of the cash derived from the sale, refinancing or other disposition of aircraft to purchase additional aircraft if attractive investment opportunities were available. On March 17, 2004, the Board of Directors of the General Partner, acting in response to a recommendation made by a special committee of independent directors of its Board of Directors (the "Special Committee"), directed the General Partner to cease making new aircraft investments, sell the Partnership's remaining assets as attractive sale opportunities arise, distribute sale proceeds (after repaying debt and establishing appropriate reserves) to Unitholders after disposition, and dissolve the Partnership when all assets are sold. The General Partner also has amended the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended (the "Limited Partnership Agreement"), to give effect to this directive. 3 In 1997, the Unitholders of the Partnership authorized the General Partner to take these actions. Since that time, the General Partner had deferred taking such actions and continued to operate the Partnership while considering, from time to time, alternative investments. However, the General Partner has not made new investments in aircraft, primarily due to the weak aircraft leasing market. For a variety of reasons, including the General Partner's belief that significant improvement in this market is not forthcoming in the near term for the Partnership's aircraft, the General Partner determined, on the basis of the Special Committee's determination, that Unitholders likely will realize greater value from a dissolution of the Partnership compared to continued operation of the Partnership. Accordingly, the General Partner intends to exercise fully and promptly the authority granted to it previously by the Unitholders to sell assets, distribute net proceeds and dissolve the Partnership. To that end, the General Partner has commenced actively seeking buyers for the Partnership's aircraft. Given current market conditions, the General Partner cannot predict either the actual timing for completing sales of the Partnership's aircraft or the prices and other terms of such sales.. The General Partner also cannot predict when net proceeds will be distributed to Unitholders or the aggregate amount of such net proceeds, both of which will depend upon a number of factors, including market conditions, the timing and terms of such asset sales, the amount of cash required to settle outstanding liabilities and contingencies, the amount of necessary cash reserves, and the expenses associated with selling assets and dissolving the Partnership. In 1997, the Unitholders also authorized the General Partner to impose restrictions on the transferability of outstanding units. The General Partner has not taken this action, although it reserves the right to do so if it concludes that implementing such restrictions would be in the best interests of the Unitholders in light of current partnership tax law. 4 AIRCRAFT PORTFOLIO The Partnership's aircraft portfolio consists of narrow-body (single-aisle) twin and tri-jet commercial aircraft, which were acquired as used aircraft. Although the Partnership is permitted to do so, the Partnership does not own interests in aircraft that were acquired as new aircraft; nor does the Partnership own any wide-body aircraft, such as the Boeing 747 and MD-11, or any turboprop or prop-fan powered aircraft. At December 31, 2003, the Partnership's portfolio consisted of four Stage-III commercial aircraft. Two were leased to CSI Aviation Services, Inc. ("CSI"), one aircraft was leased to FedEx Corporation ("FedEx"), and one aircraft was held for sale. The following table further describes the Partnership's aircraft portfolio at December 31, 2003:
_______________________________________________________________________________________________________________ Number & Current type; year of Ownership Acquired by lease Lease Noise Lessee Delivery Interest Partnership expiration Type compliance(1) ______ _____________ _________ ___________ __________ _____ _____________ CSI Aviation 2 MD-82 100% 1986 2004 Operating Stage III 1981 FedEx 1 727-200FH 100% 1987 2006 Direct finance Stage III 1979 Held for sale(2) 1 MD-81 100% 1986 N/A N/A Stage III 1981 (1) See "Government Regulation-Aircraft Noise" below, for a description of laws and regulations governing aircraft noise. (2) As described below, the aircraft held for sale at December 31, 2003 was sold on January 26, 2004. _______________________________________________________________________________________________________________
At December 31, 2003, the book value of aircraft by lessee as a percent of total assets was as follows: FedEx, 32.2%; CSI, 19.5%; and off-lease aircraft, 10.4%. Revenues by lessee as a percentage of total revenue for 2003 and 2002, respectively, were as follows: CSI, 82.4% and 88.2%; and FedEx, 15.7% and 9.9%. CSI operates the two aircraft it leases under a contract for charter services to the United States Marshals Service ("USMS"). In March 2003, the CSI leases were extended on a month-to-month basis at a monthly rental rate of $60,000 per aircraft. In September 2003, the CSI leases were amended to provide for a reduced lease rate of $45,000 per aircraft, so long as CSI is leasing both aircraft, and a lease rate of $60,000 per aircraft if CSI is leasing only one of the two aircraft. CSI's contract with USMS was expected to terminate in January 2004. In January 2004, the leases on the two aircraft were extended to May 2004 to coincide with USMS's extension of its contract with CSI. The lease extension provides for a monthly rental of $100,000 per month per aircraft. However, the Partnership is required to contribute $150,000 per aircraft toward the 5 FAA required airframe maintenance referred to as a C-Check. In addition, the Partnership is required to provide a $50,000 per month rent credit per aircraft for the three-month period commencing February 10, 2004. As a result, the expenses and rent credit will fully offset the rental income during this period. The monthly rental on one of the aircraft will revert to $60,000 if CSI and the Partnership agree on an additional extension past May 10, 2004. During 2003, management prepared quarterly impairment evaluations on the two MD-82 aircraft currently on lease to CSI. The evaluations indicated that the aircraft were impaired as defined by SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"). An impairment charge was recorded in June 2003 in the amount of $1,576,000 per aircraft. A second impairment charge was recorded in December 2003 in the amount of $2,858,000 per aircraft as a result of additional declines in estimated values and changes to probability assumptions applied to projected cash flows from the aircraft. After consideration of these impairment charges, each aircraft has a book value of $1,125,000 at December 31, 2003. The Partnership also leases a 727-200 FH aircraft to FedEx Corporation ("FedEx"). This lease is scheduled to terminate in April 2006. In 2003, the residual value of the aircraft was reviewed. The review indicated that the estimate of residual value had declined, and such decline was judged to be other than temporary. As a result, a downward adjustment was made, reducing the residual value from $2,000,000 to $700,000. This new valuation resulted in an immediate charge to earnings in the amount of $1,168,000, and a reduction of $132,000 in earnings over the remaining term of the lease. 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. On August 12, 2003, the Partnership entered into an agreement with OLSF, LLC ("OLSF") to sell three off-lease MD-81 aircraft in intervals of 120 days, with the first aircraft being delivered on that date. The purchase price per aircraft was $1,200,000. As a result of the contractual sales price of the aircraft being lower than their book value, the aircraft were written-down in the second quarter of 2003. The amount of the write-down per aircraft of $1,500,000 was equal to the difference between the carrying book value of $2,700,000 and the sale amount of $1,200,000. In September of 2003, the agreement with OLSF was amended to accelerate the sale and delivery of the second aircraft to September 26, 2003. A deposit of $200,000 previously paid to the Partnership and included on the balance sheet as sale deposit as of December 31, 2003, was credited against the $1,200,000 purchase price of the third aircraft, which was sold and delivered on January 26, 2004. In June 2002, the Partnership commenced litigation against US Airways seeking to recover damages for US Airways' failure to return three aircraft leased to US Airways in the condition prescribed in the lease following its expiration on October 1, 2001 and to pay rent due on the aircraft. US Airways subsequently filed for bankruptcy, and the owner trustee for the Partnership (the "Owner Trustee") filed a proof of claim in the bankruptcy case in the amount of $13.0 million with respect to the aircraft. In September 2003, the Owner Trustee and US Airways entered into a stipulation providing for the allowance of an unsecured claim in the bankruptcy 6 case in the amount of $9.3 million. In its Disclosure Statement dated January 17, 2003, filed as part of its proposed plan of reorganization, US Airways projected that it would pay between 1.2 percent and 1.8 percent on unsecured claims. In December 2003, the Partnership received a partial distribution from US Airways in the form of US Airways Class A Common stocks and Warrants redeemable for Class A Preferred stocks. The Partnership received 6,975 shares of Class A Common stocks, valued at $43,385 ($6.22 per share) and warrants for 4,278 shares of Class A Preferred stocks. No value was recorded on the Preferred stocks since the per share strike price of $7.42 is higher than the closing stock price of $6.22 at December 31, 2003. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a further discussion of the Partnership's lessees. COMPETITIVE POSITION OF THE PARTNERSHIP The aircraft leasing industry has become increasingly competitive. In making aircraft investments, leasing aircraft to lessees, and seeking purchasers of aircraft, the Partnership competes with large leasing companies, aircraft manufacturers, airlines and other operators, equipment managers, financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft. Affiliates of the General Partner are engaged in many of these businesses and may be deemed to be in competition with the Partnership. There are many large leasing companies, which have the financial strength to borrow at very low rates and to obtain significant discounts when purchasing large quantities of aircraft. The lower capital and acquisition costs available to these large leasing companies and the large inventory of aircraft permit them to offer airlines lower lease rates than smaller leasing companies can offer. The Partnership does not have the resources to purchase newer aircraft or to purchase aircraft at volume discounts and has only a limited ability to use tax deferrals in its pricing. As previously reported to Unitholders, the Partnership's access to capital is limited. Since all Cash Available from Operations, as defined in the Limited Partnership Agreement, is distributed, there is no build up of equity capital, and acquisitions must be funded from proceeds available when aircraft are sold or from debt. Access to debt is limited because the Partnership's leased aircraft are generally used to collateralize existing borrowings. In general, the Partnership's pricing is uncompetitive for new acquisitions because of its limited sources and high cost of capital. Because of these factors, finding new aircraft investments that offer an appropriate balance of risk and reward has been difficult. During the past ten years (and before 1997) the Partnership has made only two aircraft investments, both of which were possible because of special circumstances. In 1996, 1997, 2001, 2003 and January 2004, the Partnership sold its interests in twelve aircraft: 7 o a 50% interest in an aircraft on lease to Finnair, o a one-third interest in six aircraft on lease to Continental, o a 50% interest in one aircraft leased to Sun Jet International, Inc., o a 100% interest in an aircraft previously on lease to TWA and American Airlines, and o a 100% interest in three MD-81 off-lease aircraft, previously on lease to US Airways. See "Disposition of Aircraft" below for a further discussion of these transactions. Because of the factors described above, the Partnership was unable to reinvest the proceeds from these transactions in aircraft at an acceptable return, and the General Partner determined that the best use of the net proceeds was to distribute them to Unitholders. These sales and distributions have reduced the size of the Partnership's portfolio. DESCRIPTION OF LEASES Operating leases are for a shorter term than full-payout leases and, therefore, it is necessary to remarket the aircraft in order to recover the full investment. Full-payout leases are generally for a longer term and hence provide more predictable revenue than operating leases. The 727-200FH aircraft on lease to FedEx is leased pursuant to a full-payout lease, and the two MD-82 aircraft on lease to CSI are leased pursuant to operating leases. The two MD-82 aircraft on lease to CSI, were previously leased to US Airways pursuant to full-payout 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 fair value of the aircraft); and maintain liability insurance naming the Partnership as an additional insured with a minimum coverage which the General Partner deems appropriate. In general, substantially all obligations connected with the ownership and operation of the leased aircraft are assumed by the lessee and minimal operating obligations are imposed upon the Partnership. Default by a lessee may cause the Partnership to incur unanticipated expenses. See "Government Regulation" below. Certain provisions of the Partnership's leases may not be enforceable upon a default by a lessee or in the event of a lessee's bankruptcy. The enforceability of leases will be subject to limitations imposed by Federal, California, or other applicable state law and equitable principles. In order to encourage equipment financing to certain transportation industries, Federal bankruptcy laws traditionally have afforded special treatment to certain lenders or lessors who have provided such financing. Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended (the "Bankruptcy Code"), implements this policy by creating a category of aircraft lenders and lessors whose rights to repossession are substantially improved. If a transaction is eligible under Section 1110, the right of the lender or lessor to take possession of 8 the equipment upon default is not affected by the automatic stay provisions of the Bankruptcy Code, unless within 60 days after commencement of a bankruptcy proceeding the trustee agrees to perform all obligations of the debtor under the agreement or lease and all defaults (except those relating to insolvency or insolvency proceedings) are cured within such 60-day period or 30 days after the default. One court has recently held that Section 1110 does not apply after the 60-day period, and thus the automatic stay may apply after such 60-day period. The Bankruptcy Reform Act of 1994 (the "Reform Act") made several changes to Section 1110, such that it now protects all transactions involving qualifying equipment, whether the transaction is a lease, conditional sale, purchase money financing or customary refinancing. For equipment first placed in service on or prior to the date of enactment (October 22, 1994), the requirement that the lender provide purchase money financing continues to apply, but there is a "safe harbor" definition for leases, so that Section 1110 benefits will be available to the lessor without regard to whether or not the lease is ultimately determined to be a "true" lease. This safe harbor is not the exclusive test so that other leases which do not qualify under the safe harbor, but which are true leases, will continue to be covered as leases by Section 1110. The Partnership may not be entitled to the benefits of Section 1110 upon insolvency of a lessee airline under all of its leases. In the past, the Partnership had interests in aircraft leased to operators based outside the United States. It is possible that the Partnership's aircraft could be leased or subleased to foreign airlines. Aircraft on lease to such foreign operators are not registered in the United States and it is not possible to file liens on such foreign aircraft with the Federal Aviation Administration (the "FAA"). Further, in the event of a lessee default or bankruptcy, repossession and claims would be subject to laws other than those of the United States. AIRCRAFT REMARKETING On termination of a lease and return of the aircraft to the Partnership, the Partnership previously remarketed the aircraft to realize its full investment. 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 would 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 analyzes the credit of a potential lessee and evaluate the aircraft's potential value prior to entering into any lease. From and after March 17, 2004, the General Partner will evaluate leasing opportunities in light of its decision to sell the Partnership's assets and dissolve. 9 DISPOSITION OF AIRCRAFT The Partnership's original intent was to dispose of all its aircraft by the year 2011, subject to prevailing market conditions and other factors. From and after March 17, 2004, the General Partner intends to sell aircraft as attractive opportunities arise. 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. 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 receives a Disposition or Remarketing Fee for all aircraft sold. No aircraft were sold to affiliates in 2001, 2002 or 2003. In March 1996, the Partnership sold its 50% interest in one MD-82 on lease to Finnair to a third party for approximately $6,900,000, resulting in a net gain of approximately $556,000. The Partnership had acquired its interest in this aircraft in April 1992, for approximately $8,500,000. A portion of the sale proceeds were used to pay off the outstanding balance under a non-recourse loan, which was collateralized by this aircraft and the balance, after retaining a reserve for liquidity purposes, was distributed to Unitholders. The Partnership sold its one-third interest in six 737-200 aircraft on lease to Continental at lease expiration on December 31, 1996, at a sale price of approximately $3,100,000, resulting in a net gain of approximately $1,900,000. The proceeds were distributed to Unitholders in the first quarter of 1997. On September 29, 1997 the Partnership sold its 50% ownership interest in a DC9-51 aircraft on lease to Sun Jet International, Inc. The sale price was $1,200,000, resulting in a gain of $393,000 even though the lessee had filed for bankruptcy in June 1997, and had ceased making the rent payments. The proceeds were distributed to Unitholders in the fourth quarter of 1997. In December 2001, the Partnership sold its 100% interest in an MD-82 aircraft previously on lease to American Airlines, at a sale price of approximately $9,000,000, resulting in a net gain of approximately $965,000. The proceeds were distributed to Unitholders in the first quarter of 2002. In August and September of 2003, and in January 2004, the Partnership sold its 100% interest in three MD-81 aircraft to OLSF, LLC, at a sale price of $1,200,000 per aircraft. As a result of the contractual sale price of the aircraft being lower than their book value at the time of the sales agreement, each of the three aircraft was written-down by $1,500,000 in the second quarter of 2003. No gain was recorded in connection with these sales. 10 JOINT VENTURES/GENERAL ARRANGEMENTS Under the Limited Partnership Agreement, the Partnership may enter into joint ventures with third parties to acquire or own aircraft. No such joint ventures presently exist. 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 7 of Notes to Financial Statements. MANAGEMENT OF AIRCRAFT PORTFOLIO Aircraft management services are provided by the General Partner and its affiliates. The fees and expenses for these services are reviewed annually and are subject to approval by the Audit Committee of the Partnership. See Note 9 of Notes to Financial Statements. REGISTRATION OF AIRCRAFT; UNITED STATES PERSON Under the Federal Aviation Act, as amended (the "FAA Act"), the operation of an aircraft not registered with the Federal Aviation Administration (the "FAA") in the United States is generally unlawful. Subject to certain limited exceptions, an aircraft may not be registered under the FAA Act unless it is owned by a "citizen of the United States" or a "resident alien" of the United States. In order to attempt to ensure compliance with the citizenship requirements of the FAA Act, the Limited Partnership Agreement requires that all Unitholders (and all transferees of Units) be United States citizens or resident aliens within the meaning of the FAA Act. 11 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. 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. 12 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. AIRCRAFT NOISE The FAA, through regulations, has categorized certain aircraft types as Stage I, Stage II and Stage III according to the noise level as measured at three designated points. Stage I aircraft create the highest measured noise levels. Stage I and Stage II aircraft are no longer allowed to operate from civil airports in the United States. See "Aircraft Portfolio" above, for a description of the Partnership's aircraft portfolio. At December 31, 2003, all of the aircraft in the Partnership's portfolio were Stage III aircraft. ACQUISITION OF ADDITIONAL AIRCRAFT From and after March 17, 2004, the General Partner will no longer make investments in aircraft. See "Decision to Sell Assets and Dissolve" above. Notwithstanding the above, if the Partnership were to acquire additional aircraft, it could do so in many different forms, such as in sale/leaseback transactions, by purchasing interests in existing leases from other lessors, by making loans secured by aircraft or by acquiring or financing leasehold interests in aircraft. The Partnership is permitted to acquire aircraft from affiliates of the General Partner subject to limitations set forth in the Limited Partnership Agreement. FEDERAL INCOME TAXATION The Partnership is considered a publicly traded partnership ("PTP") under the Revenue Act of 1987 with a special tax status, whereby it has not been subject to federal income taxation. This special tax status was scheduled to expire at the beginning of 1998. However, during 1997 federal and California tax laws were amended to provide that PTPs may elect to continue to be publicly traded and retain their Partnership tax status if they pay a federal tax of 3.5% and a California state tax of 1% on their applicable annual gross income beginning in January 1998. The Partnership made an election to pay this tax beginning in 1998. EMPLOYEES The Partnership has no employees. See "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - General" below. Employees of the General Partner provide services 13 on behalf of the Partnership. ITEM 2. PROPERTIES The Partnership does not own any real property, and shares office space in the offices of BALCAP and its affiliates. ITEM 3. LEGAL PROCEEDINGS In June 2002, the Partnership commenced litigation against US Airways seeking to recover damages for Airways' failure to return three aircraft leased to US Airways in the condition prescribed in the lease following lease expiration on October 1, 2001 and to pay rent due on such aircraft. US Airways subsequently filed for bankruptcy, and the owner trustee for the Partnership (the "Owner Trustee") filed a proof of claim in the bankruptcy case in the amount of $13.0 million with respect to the aircraft. In September 2003, the Owner Trustee and US Airways entered into a stipulation providing for the allowance of an unsecured claim in the bankruptcy case in the amount of $9.3 million. In its Disclosure Statement dated January 17, 2003, filed as part of its proposed plan of reorganization, US Airways projected that it would pay between 1.2 percent and 1.8 percent on unsecured claims. In December 2003, the Partnership received a partial distribution from US Airways in the form of company Class A Common stocks and Warrants redeemable for Class A Preferred stocks. The Partnership received 6,975 shares of Class A Common stocks, valued at $43,385 ($6.22 per share) and warrants for 4,278 of Class A Preferred stocks. No value was recorded on the Preferred stocks since the per share strike price of $7.42 is higher than the closing stock price of $6.22 at December 31, 2003. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS UNITS OUTSTANDING Since September 9, 2002, the Partnership's Units have been trading on the OTC Bulletin Board ("OTCBB") under the symbol AIRL. Prior to that date, the Units were traded on the New York Stock Exchange ("NYSE") under the symbol FLY. The units were delisted from the NYSE because the Partnership ceased to meet the NYSE's continued listing criteria. As of February 19, 2004, there were 722 Unitholders of record. MARKET PRICE The following chart sets forth the high and low closing prices on the New York Stock Exchange or the high and low bid information as reported on the over-the-counter market and the trading volume for each of the quarters in the years ended December 31, 2003 and 2002. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Trading Volume Quarter Ended (in thousands) Unit Prices (high-low) _____________ ______________ ______________________ March 31, 2003 510 $0.97 - $0.72 June 30, 2003 561 $1.85 - $0.65 September 30, 2003 571 $2.03 - $1.25 December 31, 2003 571 $2.03 - $1.55 March 31, 2002 378 $6.60 - $4.95 June 30, 2002 361 $5.99 - $3.03 September 30, 2002 438 $3.30 - $1.50 December 31, 2002 678 $1.25 - $0.61 DISTRIBUTIONS TO UNITHOLDERS CASH DISTRIBUTIONS Historically the Partnership has made quarterly cash distributions to Unitholders, which are based on Cash Available from Operations (as defined in the Limited Partnership Agreement) and 15 are partially tax sheltered. From time to time, the Partnership also has made cash distributions from Cash Available from Sale or Refinancing (as defined in the Limited Partnership Agreement.) Information on the tax status of such payments, which is necessary in the preparation of individual tax returns, is prepared and mailed to Unitholders as quickly as practical after the close of each year. Distributions declared during 2003 and 2002 were as follows: Record Date Payment Date Per Unit ___________ ____________ ________ March 31, 2003 May 15, 2003 5 cents June 30, 2003 August 15, 2003 5 cents September 30, 2003 November 14, 2003 5 cents September 30, 2003 (Special) November 14, 2003 26 cents December 30, 2003 February 13, 2004 5 cents December 30, 2003 (Special) February 13, 2004 26 cents March 29, 2002 May 15, 2002 11 cents June 28, 2002 August 15, 2002 11 cents October 4, 2002 November 15, 2002 5 cents December 31, 2002 February 14, 2003 5 cents CASH AVAILABLE FROM OPERATIONS The Partnership distributes all Cash Available from Operations (as defined in the Limited Partnership Agreement). The Partnership is authorized to make distributions from any source, including reserves and borrowed funds. Distributions of Cash Available from Operations are allocated 99% to Unitholders and 1% to the General Partner. The Partnership makes distributions each year of Cash Available from Operations generally on the fifteenth day of February, May, August and November to Unitholders of record on the last business day of the calendar quarter preceding payment. CASH AVAILABLE FROM SALE OR REFINANCING On March 17, 2004, the Board of Directors of the General Partner directed the General Partner to cease making new aircraft investments, sell the Partnership's remaining assets as attractive sale opportunities arise, distribute sale proceeds (after repaying debt and establishing appropriate reserves) to Unitholders after disposition, and dissolve the Partnership when all assets are sold. The General Partner also has amended the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended (the "Limited Partnership Agreement") to give effect to this directive. See "BUSINESS - - Decision to Sell Assets and Dissolve." Among other things, the Limited Partnership Agreement has been amended to require that, after March 17, 2004, all Cash Available From Sale or Refinancing (as defined therein) would be distributed to the Unitholders. 16 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 to Unitholders. Also, any Cash Available from Sale or Refinancing received after January 1, 2005 would not be reinvested but was to be distributed to the Unitholders. For information as to the sales giving rise to distributions from Cash Available from Sales or Refinancing, see "BUSINESS--Disposition of Aircraft." TAX ALLOCATIONS Allocations for tax purposes of income, gain, loss deduction, credit and tax preference are made on a monthly basis to Unitholders who owned Units on the first day of each month. Thus, for example, if an aircraft were sold at a gain, that gain would be allocated to Unitholders who owned Units on the first day of the month in which the sale occurred. If proceeds from this sale were distributed to Unitholders, such proceeds would be distributed to Unitholders who owned Units on the record date for such distribution, which, because of notice requirements, likely would not occur in the same month as the sale. In addition, a Unitholder who transfers his or her Units after the commencement of a quarter but prior to the record date for that quarter will be allocated a share of tax items for the first two months of that quarter without any corresponding distribution of Cash Available from Operations for, among other things, payment of any resulting tax. 17 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Partnership has included in this annual report certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the Partnership's business, operations and financial condition. The words or phrases "can be", "may affect", "may depend", "expect", "believe", "anticipate", "intend", "will", "estimate", "project" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and the Partnership cautions you that any forward-looking information provided by or on behalf of the Partnership is not a guarantee of future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Partnership's control, in addition to those discussed in the Partnership's public filings and press releases, including (i) changes in the aircraft or aircraft leasing market, (ii) economic downturn in the airline industry, (iii) default by lessees under leases causing the Partnership to incur uncontemplated expenses or not to receive rental income as and when expected, (iv) the impact of the events of September 11, 2001, and war, acts of terrorism, or other military involvement by the U.S. or others in Iraq or other regions, on the aircraft or aircraft leasing market and on the airline industry, (v) changes in interest rates and (vi) legislative or regulatory changes that adversely affect the value of aircraft. All such forward-looking statements are current only as of the date on which such statements were made. The Partnership does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events. CRITICAL ACCOUNTING POLICIES On March 17, 2004, the Board of Directors of the General Partner directed the General Partner to cease making new aircraft investments, sell the Partnership's remaining assets as attractive sale opportunities arise, distribute sale proceeds (after repaying debt and establishing appropriate reserves) to Unitholders after disposition, and dissolve the Partnership when all assets are sold. The leased assets in the portfolio of the Partnership as reflected in the consolidated financial statements accompanying this report are shown at the estimated fair value. See " -- Long Lived Assets" and "Impairment" below. The Partnership will classify all lease assets as held for sale for the quarter ending March 31, 2004. In response to the SEC's financial release FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Partnership has identified the most critical accounting principles upon which its financial reporting depends. It determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. The Partnership identified its most critical accounting policies to be those related to lease revenue recognition, depreciation policies, and valuation of aircraft. These 18 accounting policies are stated in the notes to the financial statements and in relevant sections in this discussion and analysis. All three accounting policies directly affect the Partnership's earnings and involve estimations regarding residual and salvage values and current aircraft market values. These estimations involve judgments and assumptions on the part of management regarding current and future aircraft market conditions and lease rates. Aircraft valuations are typically derived from publications published by independent aircraft appraisers and adjusted for aircraft conditions as to whether the aircraft need additional maintenance work or refurbishing. These estimations bear the risk of change due among other things to uncertainties about the future of the economy, the health of the airline industry and to changes in the aircraft or aircraft leasing market. Long Lived Assets - The Partnership accounts for its long-lived assets, including Operating Leases, aircraft held for lease and aircraft held for sale, in accordance with Statement of Financial Accounting Standards ("SFAS") No 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". The statement's provisions supersede SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", which addressed asset impairment, and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. SFAS 144 addresses how and when to measure impairment on long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution to owners. SFAS 144 retains the requirements of SFAS 121 whereby an impairment loss is recognized in an amount equal to the difference between the carrying value and the fair value if the carrying value of an asset is not recoverable based on undiscounted future cash flows. In accordance with SFAS 144, the Partnership tests its long-lived assets for recoverability at least annually and whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Operating Leases - Leases that do not meet the criteria for finance leases are accounted for as operating leases. The Partnership's undivided interests in aircraft subject to operating leases are recorded at carrying value of the aircraft at lease inception. Aircraft are depreciated over the related lease terms, generally five to nine years on a straight-line basis to an estimated salvage value, or over their estimated useful lives for aircraft held for lease, on a straight-line basis to an estimated salvage value. IMPAIRMENT On August 12, 2003, the Partnership signed a sales agreement with OLSF, LLC ("OLSF") to sell three off-lease aircraft in intervals of 120 days, with the first aircraft being delivered on August 12, 2003. The purchase price per aircraft was $1,200,000. As a result of the contractual sale price of the aircraft being lower than their book value, the aircraft were written-down in 19 the second quarter of 2003. The $1,500,000 write-down per aircraft was equal to the difference between the carrying book value of $2,700,000 and the sale price of $1,200,000. Residual valuation, which is reviewed annually, represents the estimated amount to be received from the disposition of aircraft after lease termination. If necessary, residual adjustments are made which result in an immediate charge to earnings and/or a reduction in earnings over the remaining term of the lease. In 2003, the residual value of the 727-200FH aircraft on lease to FedEx was reviewed. The review indicated that the estimate of residual value had declined, and such decline was judged to be other than temporary. As a result, the booked residual was reduced from $2,000,000 to $700,000. This new valuation resulted in an immediate charge to earnings in the amount of $1,168,000, which is included on the statement of operations as impairment charge on aircraft, and a reduction of $132,000 in earnings over the remaining term of the lease. During 2003, management prepared quarterly impairment evaluations on the two aircraft currently on lease to CSI. The evaluations indicated that the carrying value of the aircraft was not recoverable based on the undiscounted future cash flows to be generated by the aircraft. An impairment charge was recorded in June 2003 in the amount of $1,576,000 per aircraft. A second impairment charge was recorded in December 2003 in the amount of $2,858,000 per aircraft as a result of additional declines in estimated values and changes to probability assumptions applied to projected cash flows from the aircraft. The book value per aircraft after the impairment charges is $1,125,000. LIQUIDITY AND CAPITAL RESOURCES On March 17, 2004, the Board of Directors of the General Partner directed the General Partner to cease making new aircraft investments, sell the Partnership's remaining assets as attractive sale opportunities arise, distribute sale proceeds (after repaying debt and establishing appropriate reserves) to Unitholders after disposition, and dissolve the Partnership when all assets are sold. The General Partner also has amended the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended (the "Limited Partnership Agreement") to give effect to this directive. See "BUSINESS - - Decision to Sell Assets and Dissolve." Aircraft sales will further reduce the Partnership's portfolio, which in turn will prospectively reduce net cash flows from operations. Also, given current market conditions, the General Partner cannot predict either the actual timing for completing sales of the Partnership's aircraft or the prices and other terms of such sales. The General Partner also cannot predict when net proceeds will be distributed to Unitholders or the aggregate amount of such net proceeds, both of which will depend upon a number of factors, including market conditions, the timing and terms of such asset sales, the amount of cash required to settle outstanding liabilities and contingencies, the amount of necessary cash reserves, and the expenses associated with selling assets and dissolving the Partnership. The Partnership presently has one long-term debt facility. At December 31, 2003, the 20 7.4% non-recourse note collateralized by one aircraft leased to FedEx had an outstanding balance of $2.0 million. The facility matures in April 2006. Long-term borrowings at December 31, 2003 represented 2.93% of the original cost of the aircraft presently owned by the Partnership, including capital expenditures for upgrades. Total scheduled debt service in 2004 is $0.9 million. Debt service is expected to be paid from the rental payments received under the FedEx lease. Net cash provided by operating activities was $1.1 million for 2003, $1.6 million for 2002, and $2.7 million for 2001. The 2003 decrease in net cash provided by operating activities was primarily due to having three aircraft off-lease for most of the year. The decrease in net cash provided by operating activities during 2002 as compared to 2001 was primarily due to reduced revenue as a result of the termination on October 1, 2001 of the US Airways leases on five MD-81 aircraft. Total debt service on the fixed loan as a percentage of net cash provided by operating activities was 123%, 57%, and 80% for 2001, 2002 and 2003, respectively. However, cash flow from operating activities does not fully reflect cash receipts from lease payments. When the excess of rental receipts above finance lease income is added to cash flow from operating activities, the ratios of total debt service on the fixed loan as a percentage of net cash provided by operating activities become 27%, 35%, and 41%, for 2001, 2002 and 2003, respectively. Regular cash distributions paid by the Partnership were $7.1 million ($1.51 per unit) in 2001, $1.8 million ($0.38 per unit) in 2002, and $0.9 million ($0.20 per unit) in 2003. There were no special cash distributions paid in 2001. A special cash distribution of $7.0 million ($1.50 per unit) was declared in December 2001, and was paid in the first quarter of 2002. Also, a special cash distribution of $1.2 million was paid in November 2003. Pursuant to the Limited Partnership Agreement, the Partnership distributes all Cash Available from Operations net of expenses and reserves. Since such distributions were in excess of earnings, and because of the Partnership's net loss in 2003, Partnership equity declined from $25.8 million at December 31, 2002 to $6.1 million at December 31, 2003, and limited partner equity per Unit declined from $5.51 to $1.30. Included in the equity decline are the non-cash aircraft impairment charges of $14.5 million, or $3.11 per Unit, recorded in 2003. At December 31, 2003, the Partnership had cash on hand in the amount of $4.3 million, of which $1.4 million is payable to Unitholders on February 14, 2004 as cash distributions. In the event that the Partnership's cash on hand is significantly reduced as a result of unanticipated expenses, including unanticipated maintenance and refurbishing expenses with respect to the two aircraft leased by CSI following their lease expirations, cash distributions to Unitholders may be reduced or eliminated. 21 RESULTS OF OPERATIONS 2003 VS. 2002 _____________ Net loss in 2003 was $16,302,000 compared with a net loss of $13,035,000 in 2002. The decline in earnings results from an increase in expenses, primarily due to higher impairment charges in 2003, and from reduced operating lease rental revenues. In 2003 and 2002, revenues were earned from only three of the six aircraft in the Partnership's portfolio during those years. The remaining three aircraft were off-lease, two of which were sold in 2003 and the third of which was sold in January 2004. Two of the leased aircraft were leased to CSI and the other was leased to FedEx. Revenues in 2003 were $1,615,000 compared with $3,027,000 in 2002. The revenue reductions were primarily due to lower operating lease rentals associated with the two aircraft leased to CSI, as the leases were extended at lower monthly rental rates to reflect the changing aircraft market conditions, and to the scheduled decline in finance lease income in 2003 associated with the aircraft leased to Fed Ex. Expenses in 2003 were $17,917,000, an increase of $1,855,000 from $16,062,000 for the comparable 2002 period. The increase in expenses was primarily due to higher aircraft impairment charges in 2003, as $14,533,000 in impairment charges was recorded in 2003 versus $11,086,000 recorded in 2002. The increase in impairment charges in 2003 was partially offset by lower interest expense in 2003 as a result of the reduction in the Partnership's debt balances, by lower depreciation expenses as a result of reduced depreciable aircraft values primarily due to the aircraft write-downs in 2002 and 2003, and by lower management fees and taxes due to a smaller asset base and lower revenues. In addition, $43,000 in credit to bad debt expense was recorded in December 2003, as a result of the receipt of stock from US Airways. The stock was issued by US Airways to the Partnership as a partial payment on the settlement reached with the airline in 2003. See "Aircraft Portfolio." 2002 VS. 2001 _____________ Net loss in 2002 was $13,035,000, compared with a net income of $1,623,000 in 2001. The decline in earnings results from an increase in expenses, primarily due to aircraft impairment charges and an increase in depreciation expense, and from reduced revenues. In 2002, revenues were earned from only three of the six aircraft in the Partnership's portfolio. The remaining three aircraft were off-lease throughout the year. Two of the leased aircraft were leased to CSI and the other was leased to FedEx. Revenues in 2002 were $3,027,000 compared with $6,067,000 in 2001. The revenue reductions were primarily due to the expiration of the lease with US Airways for five aircraft in the fourth quarter of 2001, three of which remained off-lease as of December 31, 2002; the sale of one aircraft in December 2001; and the scheduled decline in finance lease income in 2002 associated with the aircraft leased to FedEx. 22 Expenses in 2002 were $16,062,000, an increase of $11,618,000 from $4,444,000 for the comparable 2001 period. The increase in expenses was primarily due to the aircraft impairment charges in the third quarter of 2002 of $11,086,000, as the three off-lease aircraft were deemed impaired under SFAS 144, and depreciation expense of $3,206,000 in 2002 compared to depreciation expense of $1,268,000 for the comparable 2001 period. A note receivable from US Airways recorded on the Partnership's books in 2001 for $34,000 (net of discount and deferred income) was written off as a loss. The note was written off as a result of US Airways' bankruptcy filing, in August 2002, and the uncertainty of collection. Interest expense was lower in 2002 as a result of the reduction in the Partnership's debt balances. Management fees and taxes were lower due to a smaller asset base and lower revenues. For information regarding the percentage of total Partnership assets represented by aircraft owned and leased by the Partnership, see "Aircraft Portfolio." 2001 VS. 2000 _____________ In 2001, revenues were earned from seven aircraft subject to finance and operating leases and from the gain on sale of one aircraft. The lease revenue reduction in 2001 as compared with 2000 was primarily due to the scheduled decline in finance lease income as the balances due from the lessees declined, the expiration of the lease with US Airways for five aircraft, three of which remained off lease, and the restructure of the TWA lease. In 2001, five MD-82 aircraft leased to US Airways generated $3,363,000 in finance lease income prior to their return upon lease expiration. Two of the five aircraft were leased to CSI Aviation Services, Inc. ("CSI") in November 2001 under operating leases, which generated $296,000 in operating lease income (before depreciation expense). The remaining three aircraft were being held for lease as of December 31, 2001. The finance lease of one MD-82 aircraft with TWA was assumed by American Airlines in April of 2001, and was reclassified as an operating lease. In 2001, the finance lease generated $293,000 in finance lease income, and the operating lease generated $750,000 in operating lease rental income (before depreciation expense). In December of 2001, the aircraft was sold, generating a gain on sale before remarketing fee of $965,000. The lease of one 727-200FH aircraft to FedEx generated $346,000 in finance lease income. Interest expense decreased in 2001 by $359,000 as compared with 2000, as a result of declining debt balances. Depreciation expense of $1,268,000 in 2001 related to aircraft subject to operating leases and to aircraft available for lease. No depreciation expense was recorded in 2000 as the Partnership's portfolio did not include any aircraft subject to operating lease or held for lease. 23 Management fees and tax on gross income increased in 2001 as compared with the prior year as a result of the sale of the MD-82 aircraft. The increase in general and administrative expenses was primarily due to aircraft maintenance and refurbishing expenses incurred in the preparation of two MD-82 aircraft for delivery to CSI. The lease with US Airways for five MD-82 aircraft was scheduled to terminate on October 1, 2001. However, US Airways failed to satisfy the aircraft return conditions relating to aircraft maintenance as specified in the lease agreement. Under the lease, US Airways was obligated to pay rent for each aircraft on a prorated basis until the required maintenance has been completed and the aircraft has been returned. The lease required the maintenance to be completed within 60 days of the expiration of the lease term. In November 2001 the Partnership entered into an agreement with US Airways with respect to the two MD-82 aircraft now leased to CSI, providing for US Airways to pay hold-over rent and to pay for certain agreed-upon maintenance work. US Airways made a cash payment covering a portion of the rent and maintenance costs and delivered an unsecured note for the remaining amount. The note was written off as a result of US Airways' bankruptcy filing, in August 2002, and the uncertainty of collection, resulting in a charge to bad debt expense of $34,000. See Note 5 of the Notes to Financial Statements. OUTLOOK On March 17, 2004, the Board of Directors of the General Partner directed the General Partner to cease making new aircraft investments, sell the Partnership's remaining assets as attractive sale opportunities arise, distribute sale proceeds (after repaying debt and establishing appropriate reserves) to Unitholders after disposition, and dissolve the Partnership when all assets are sold. The General Partner also has amended the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended (the "Limited Partnership Agreement") to give effect to this directive. See "BUSINESS - - Decision to Sell Assets and Dissolve." Aircraft sales will further reduce the Partnership's portfolio, which in turn will prospectively reduce net cash flows from operations. Also, given current market conditions, the General Partner cannot predict either the actual timing for completing sales of the Partnership's aircraft or the prices and other terms of such sales. The General Partner also cannot predict when net proceeds will be distributed to Unitholders or the aggregate amount of such net proceeds, both of which will depend upon a number of factors, including market conditions, the timing and terms of such asset sales, the amount of cash required to settle outstanding liabilities and contingencies, the amount of necessary cash reserves, and the expenses associated with selling assets and dissolving the Partnership. As a result of the March 17, 2004 Board of Directors action, the Partnership will classify lease assets as held for sale for the quarter ended March 31, 2004. 24 The market conditions for aircraft leasing continue to be weak, as the supply of aircraft exceeds demand. The leases on the two aircraft on lease to CSI are scheduled to terminate in May 2004. In light of the decision of the General Partner to sell the Partnership's assets and dissolve the partnership, Management is not able to predict if or when the aircraft may be leased again after their return from CSI. If the leases with CSI are not extended, management's best estimate at the present time is that the Partnership would be able to recover net book value through a combination of lease rentals and sales proceeds; however, if the Partnership's assumptions regarding renewal lease rates and terms are not realized, the Partnership could record additional impairment charges with respect to these aircraft. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and Notes to Financial Statements described in Item 14(a) are set forth in Appendix A and are filed as part of this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES (a) The Chief Executive Officer and the Chief Financial Officer of the General Partner of the Partnership, after evaluating the effectiveness of the Partnership's disclosure controls and procedures as of the end of the period covered by this annual report, have concluded that the Partnership's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Partnership in this annual report is accumulated and communicated to the Partnership's management to allow timely decisions regarding required disclosure. (b) No significant change was made in the Partnership's control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting. 25 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT GENERAL The Partnership has no directors or executive officers. Under the Limited Partnership Agreement, the General Partner has full power and authority in the management and control of the business of the Partnership, subject to certain provisions requiring the consent of the Limited Partners. DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information about the directors and executive officers of the General Partner as of February 29, 2004. As used below, "BALCAP" refers both to BALCAP and to BA Leasing and Capital prior to its BALCAP in September 1999.
POSITION WITH PRINCIPAL OCCUPATION AND NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS __________________ _________________ ___ ___________________________ David B. Gebler Chairman of the 54 Mr. Gebler is a Managing Director of Bank of America Board, President, National Association ("Bank of America") and of Chief Executive BALCAP. He has been with BALCAP since September Officer and a 1996. From 1993 to September 1996 he was Senior Vice Director 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, and has been Chairman and CEO since September 1996. Mr. Gebler holds a bachelor degree in mathematics from Clarkson University and graduate degrees in Engineering and Management from the University of Michigan. William A. Hasler Director 62 Mr. Hasler has been the Co-Chief Executive Officer of Aphton Corporation , a biopharmaceutical company, since July 1998 and a Director of the General Partner since 1995. From August 1991 to June 1998 he was the Dean of the Haas School of Business at the University of California at Berkeley. 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 Selectron Corp., Schwab Funds, Mission West, Ditech Communications, Stratex Network, and Aphton Corporation. He is a graduate of Pomona College and earned his MBA from Harvard . Leonard Marks, Jr. Director 82 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 2001, and previously was a Director to the General Partner from 1986 to 1997. 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 holds a Ph.D in Business Administration from Harvard University. 26 POSITION WITH PRINCIPAL OCCUPATION AND NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS __________________ _________________ ___ ___________________________ Richard P. Powers Director 63 Mr. Powers is a Vice President and Chief Financial Officer of Corgentech. From 1996 to 2000 he was an Executive Vice President of Finance and Administration of Eclipse Surgical Technologies, Inc., a medical device company. He has been a Director of the General Partner 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 58 Mr. Rose has been Managing Director, Credit of BALCAP since 1992. 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. Robert A. Keyes Chief Financial 51 Mr. Keyes has been Senior Vice President and Senior Officer and a Finance Manager of BALCAP since December 2000. Prior Director to assuming his present responsibilities at BALCAP, Mr. Keyes was with Citicorp Bankers Leasing as Vice President and Head of Operations from 1997 to 2000. From 1990 to 1997 Mr. Keyes was with USL Capital Corporation (former parent of the General Partner) as Vice President and Corporate Controller. While at USL Capital, Mr. Keyes served as Chief Financial Officer and as a Director of the General Partner. From 1980 to 1990 Mr. Keyes held various Finance positions with Wells Fargo Leasing Corporation, including Senior Vice President and Chief Financial Officer. Mr. Keyes holds a Bachelor of Science degree in Economics from Bates College and a Masters in Business Administration and Accounting from Rutgers University.
AUDIT COMMITTEE FINANCIAL EXPERTS The General Partner's Board of Directors has determined that each of William A. Hasler, Richard P. Powers and Leonard Marks, Jr. is an audit committee financial expert as defined by Item 401(e) of Regulation S-B of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act. CODE OF ETHICS The General Partner has adopted a code of ethics applicable to all employees, including the General Partner's President, Chief Executive Officer and Chief Financial Officer. The code of ethics is filed as an exhibit to this Form 10-KSB. 27 ITEM 10. 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 2003, such unaffiliated directors were paid an annual fee of $14,500 plus $500 for each board or committee meeting attended. The Partnership has not established any plans pursuant to which cash or non-cash compensation has been paid or distributed during the last fiscal year or is proposed to be paid or distributed in the future. The Partnership has not issued or established any options or rights relating to the acquisition of its securities or any plans therefore. 28 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS As of February 29, 2004, the following persons were known to the Partnership to be beneficial owners of more than five percent of the Partnership's equity securities:
Name and Address Amount and Nature of Title of Class of Beneficial Owner Beneficial Ownership Percent of Class ________________ ____________________________________ ____________________ ________________ Depositary Units United States Airlease Holding, Inc. 231,250(1) (2) 5% 555 California Street San Francisco, CA 94104 Depositary Units BALCAP 793,750(3) 17.2% 555 California Street San Francisco, CA 94104 ____________________ (1) United States Airlease Holding, Inc. ("Holding") reported that it had sole voting and dispositive power over these Units. (2) Bank of America National Association ("BANA") owns all of the outstanding stock of Holding and the membership interests of BALCAP. Therefore, BANA may be deemed also to be the indirect beneficial owner of the Units owned by Holding and by BALCAP. In addition, BANA owns all the outstanding stock of the General Partner. Therefore, BANA may be deemed to be the indirect beneficial owner of the General Partner's 1% General Partner interest. BANA 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 BANA may also be deemed to be the indirect beneficial owner of all Units and of the General Partner's 1% General Partner interest deemed owned by BANA. (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.
Name of Amount and Nature of Title of Class Beneficial Owner Beneficial Ownership Percent of Class ________________ ____________________________________ ____________________ ________________ Depositary Units David B. Gebler 700(1) (2) 29 Depositary Units William A. Hasler 8,700 (2) Depositary Units Leonard Marks Jr. 750 (2) All directors and executive 10,150 (2) officers as a group ____________________ (1) Includes 200 Units held by Mr. Gebler as custodian for a 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%.
ITEM 12. 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 9 of Notes to Financial Statements. From time to time, the Partnership has borrowed funds from BALCAP or BA Leasing & Capital, including advances for expense payments. All such borrowings were unsecured and bore interest at a floating rate not exceeding the prime rate. At December 31, 2003 Airlease owed BALCAP $238,000 for such borrowings. ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) The following financial statements of the Partnership are included in this report as Appendix A:
Page ____ Management's Responsibility for Financial Statements................................... A-1 Report of Independent Auditors ........................................................ A-2 Financial Statements: Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 ................................................................ A-3 30 Balance Sheets, as of December 31, 2003 and 2002.............................. A-4 Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001........................................................... A-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 2003, 2002 and 2001.............................................. A-6 Notes to Financial Statements ......................................................... A-6
Financial statement schedules other than those listed above are omitted because the required information is included in the financial statements or the notes thereto or because of the absence of conditions under which they are required. (b) On October 2, 2003, the Partnership filed a report on Form 8-K dated September 26, 2003, disclosing under Item 2 the completion of the sale by the Partnership of two MD-81 aircraft and related assets to OLSF, L.L.C. and the expected future sale of a third off-lease MD-81 aircraft and related assets to OLSF, L.L.C. On December 19, 2003, the Partnership filed a report on Form 8-K dated December 19, 2003, disclosing under Item 9 the formation by the Board of Directors of the General Partner of a special committee of independent directors to review management's recommendation that the Partnership adopt a plan for the immediate sale of all remaining aircraft followed by a dissolution of the Partnership. 31 (c) Exhibits required by Item 601 of Regulation S-B: EXHIBIT NO. DESCRIPTION 3.1(1) Amended and Restated Agreement of Limited Partnership of Partnership. 3.2(1) Form of Certificate for Limited Partnership Units of Partnership. 3.3(1) Form of Depositary Agreement among Partnership, Chase-Mellon Shareholder Services (formerly Manufacturers Hanover Trust Company), the General Partner and Limited Partners and Assignees holding Depositary Receipts. 3.4(1) Form of Depositary Receipt for Units of Limited Partners' Interest in the Partnership 3.5(2) Amendments to Amended and Restated Partnership Agreement. 3.6 Second Amendment to Amended and Restated Partnership Agreement. 3.7 Third Amendment to Amended and Restated Partnership Agreement. 4.1(1) Form of Application for Transfer of Depositary Unit. 10.1(1) Trust Agreement, together with Trust Agreement Supplement No. 1-5, dated as of July 10, 1986, between the Registrant, Meridian Trust Company and the General Partner. 10.3(1) Lease Agreement, together with Lease Supplement Nos. 1-5, dated as of July 10, 1986, between Meridian Trust Company, not in its individual capacity but solely as Trustee, and Pacific Southwest Airlines. ____________________ (1) Incorporated by reference to the Partnership's Registration Statement on Form S-1 (File No. 33-7985), as amended. (2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001. 32 10.44(3) Aircraft Lease Agreement dated as of April 15, 1993 between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee, Lessor, and Federal Express Corporation, Lessee with respect to one (1) Boeing 727-2D4 Aircraft, U.S. Registration No. 362PA (manufacture serial no. 21850). 10.52(4) Assignment, Assumption and Amendment Agreement dated April 9, 2001 among Trans World Airlines, Inc., American Airlines, Inc., the registrant and First Security Bank, National Association, as Owner Trustee. 10.53(2) Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 806USAirframe. 10.54(2) Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 807USAirframe. 10.55(2) Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N806US (manufacture serial no. 48038). 10.56(2) Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N807US (manufacture serial no. 48039). 10.57(5) Lease Supplement Number Three dated April 9, 2003, among Wachovia Bank, National Association, as successor to First Union National Bank, not in its individual capacity but solely as Trustee, the Partnership and CSI Aviation Services, Inc. 10.58(6) Lease Supplement Number Four dated September 10, 2003, among Wachovia Bank, National Association, as successor to First Union National Bank, not in its individual capacity but solely as Trustee, the Partnership and CSI Aviation Services, Inc. 10.59(7) Aircraft Sales Agreement, dated as of August 12, 2003, among Wachovia Bank, National Association as trustee, Airlease Ltd., a California limited partnership, and OLSF, L.L.C., a Delaware limited liability company. 10.60(7) First Amendment to Aircraft Sales Agreement, dated as of September 26, 2003, among Wachovia Bank, National Association as trustee, Airlease Ltd., a California limited partnership, and OLSF, L.L.C., a Delaware limited liability company. 33 ___________________ (2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2000. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2003. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2003. (7) Incorporated by reference to the Partnership's Form 8-K dated September 26, 2003 filed on October 2, 2003. 14.1 Code of Ethics. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Press Release dated March 18, 2004. 34 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the fees for professional audit services rendered by Ernst & Young LLP for the audit of the Partnership's annual financial statements for the years ended December 31, 2003 and 2002 and review of financial statements included in the Partnership's Form 10-Q or Form 10-QSB for the quarters included in those years, and fees for other services rendered by Ernst & Young LLP during those years. The table also sets forth the fees for services rendered by priceWaterhouseCoopers during those years. 2003 2002 ________ ________ Audit Fees - Ernst & Young LLP $ 42,323 $ 42,000 Audit Related Fees ---- ---- Tax Fees (1) Tax Fees - Ernst & Young LLP 24,298 19,900 Tax Fees - PriceWaterhouseCoopers 189,234 166,981 ________ ________ Total $255,855 $228,881 ======== ======== (1) Tax Fees rendered by Ernst & Young LLP consists of fees billed for professional services associated with preparing the Partnership's tax returns. (2) Tax Fees rendered by PriceWaterhouseCoopers consist of fees billed for professional services associated with preparing the Form K-1 tax returns of the general partner and unitholders. All engagements for services to the Partnership by Ernst & Young LLP, PriceWatterhouseCoopers or other independent accountants are subject to prior approval by the General Partner's Audit Committee. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 18, 2004. AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP (Registrant) By: Airlease Management Services, Inc., General Partner By: /s/ DAVID B. GEBLER _______________________________________ David B. Gebler Chairman, Chief Executive Officer and President 36 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. For Airlease Management SERVICES, INC. ("AMSI"), GENERAL PARTNER /s/ DAVID B. GEBLER March 18, 2004 ____________________________________________ David B. Gebler Chairman, Chief Executive Officer, President and Director of AMSI /s/ ROBERT A. KEYES March 18, 2004 ____________________________________________ Robert A. Keyes Chief Financial Officer and Director of AMSI /s/ K. THOMAS ROSE March 18, 2004 ____________________________________________ K. Thomas Rose Director of AMSI /s/ WILLIAM A. HASLER March 18, 2004 ____________________________________________ William A. Hasler Director of AMSI /s/ LEONARD MARKS, JR. March 18, 2004 ____________________________________________ Leonard Marks, Jr. Director of AMSI /s/ RICHARD P. POWERS March 18, 2004 ____________________________________________ Richard P. Powers Director of AMSI The foregoing constitutes a majority of the members of the Board of Directors of Airlease Management Services, Inc. (the General Partner). 37 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Airlease Management Services, Inc. ("AMSI"), the general partner of the Partnership, is responsible for the preparation of the Partnership's financial statements and the other financial information in this report. This responsibility includes maintaining the integrity and objectivity of the financial records and the presentation of the Partnership's financial statements in conformity with accounting principles generally accepted in the United States. The general partner maintains an internal control structure designed to provide, among other things, reasonable assurance that Partnership records include the transactions of its operations in all material respects and to provide protection against significant misuse or loss of Partnership assets. The internal control structure is supported by careful selection and training of financial management personnel, by written procedures that communicate the details of the control structure to the Partnership's activities, and by staff of operating control specialists of Banc of America Leasing and Capital, LLC (a wholly owned subsidiary of Bank of America National Association, which also owns 100% of the stock of AMSI), who conduct reviews of adherence to the Partnership's procedures and policies. The Partnership's financial statements have been audited by Ernst & Young LLP, independent auditors for the years ended December 31, 2003 and 2002. Their audits were conducted in accordance with auditing standards generally accepted in the United States. The Independent Auditors' Report appears on page A-2. The board of directors of the general partner, acting through its Audit Committee composed solely of directors who are not employees of the general partner, is responsible for overseeing the general partner's fulfillment of its responsibilities in the preparation of the Partnership's financial statements and the financial control of its operations. The independent auditors have full and free access to the Audit Committee and meet with it to discuss their audit work, the Partnership's internal controls, and financial reporting matters. /s/ DAVID B. GEBLER _______________________________________________ David B. Gebler Chairman, Chief Executive Officer and President Airlease Management Services, Inc. /s/ ROBERT A. KEYES _______________________________________________ Robert A. Keyes Chief Financial Officer Airlease Management Services, Inc. REPORT OF INDEPENDENT AUDITORS To the Partners of Airlease Ltd., A California Limited Partnership: We have audited the accompanying balance sheets of Airlease Ltd. (the "Partnership") as of December 31, 2003 and 2002, and the related statements of operations, changes in partners'equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Airlease Ltd. at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP _________________________ San Francisco, California February 4, 2004 Except for Note 1, as to which the date is March 17, 2004
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS For the years ended December 31, (In thousands, except per unit amounts) 2003 2002 2001 ________________________________________________________________________________________________________________________ REVENUES Finance lease income $ 253 $ 300 $ 4,002 Operating lease rentals 1,330 2,670 1,046 Gain on sale of aircraft - - 965 Other income 32 57 54 ___________________________________________ Total revenues 1,615 3,027 6,067 ___________________________________________ EXPENSES Interest 190 231 550 Depreciation - aircraft 2,037 3,206 1,268 Management fees and disposition and remarketing fees - General Partner 345 355 984 Investor reporting 353 425 365 General and administrative 149 269 167 Taxes on gross income 211 142 884 Aircraft maintenance 142 314 226 Impairment charge on aircraft 14,533 11,086 - Bad debt recovery (43) - - Bad debt expense - 34 - ___________________________________________ Total expenses 17,917 16,062 4,444 ___________________________________________ NET INCOME/(LOSS) $ (16,302) $ (13,035) $ 1,623 ___________________________________________ NET INCOME/(LOSS) ALLOCATED TO: GENERAL PARTNER $ (163) $ (130) $ 16 ___________________________________________ Limited partners $ (16,139) $ (12,905) $ 1,607 ___________________________________________ NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (3.49) $ (2.79) $ 0.35 ___________________________________________
See notes to financial statements
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP BALANCE SHEETS As of December 31, (In thousands except units outstanding) 2003 2002 ___________________________________________________________________________________________________________________ ASSETS Cash and cash equivalents $ 4,288 $ 2,569 Investments - available for sale 43 - Finance leases - net 3,718 5,939 Operating leases - net 2,250 12,753 Aircraft held for lease - net - 8,500 Aircraft held for sale - net 1,200 - Prepaid expenses and other assets 33 50 _____________________________ Total assets $ 11,532 29,811 _____________________________ LIABILITIES AND PARTNERS' EQUITY LIABILITIES: Distribution payable to partners $ 1,448 $ 234 Accounts payable to General Partner and Affiliates 238 170 Accounts payable and accrued liabilities 112 175 Aircraft sale security deposit 200 - Maintenance reserves 1,425 748 Current portion of long-term note payable 764 709 Long-term note payable 1,256 2,020 _____________________________ Total liabilities 5,443 4,056 _____________________________ PARTNERS' EQUITY: Limited partners (4,625,000 units outstanding) 6,029 25,498 General partner (46,717 units outstanding) 60 257 _____________________________ Total partners' equity 6,089 25,755 _____________________________ TOTAL LIABILITIES AND PARTNERS' EQUITY $ 11,532 $ 29,811 =============================
See notes to financial statements
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the years ended December 31, (In thousands) 2003 2002 2001 _____________________________________________________________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (16,302) $(13,035) $ 1,623 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation - aircraft 2,037 3,206 1,268 Increase in deferred income - - 509 Bad debt expense - 34 - Bad debt recovery (43) - - Gain on sale of aircraft - - (965) Increase (decrease) in accounts payable and accrued liabilities 5 (256) 134 Increase in aircraft sale security deposit 200 - - Increase in maintenance reserves 677 748 - Decrease in prepaid expenses and other assets 17 10 94 Impairment charge on aircraft 14,533 11,086 - Increase (decrease) in taxes payable - (224) 84 _______________________________________ Net cash provided by operating activities 1,124 1,569 2,747 _______________________________________ CASH FLOWS FROM INVESTING ACTIVITIES Rental receipts in excess of earned finance and operating lease income 1,053 1,010 9,869 Proceeds from sale of equipment 2,400 - 9,000 Increase in notes receivable - - (544) _______________________________________ Net cash provided by investing activities 3,453 1,010 18,325 _______________________________________ CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit repayment-net - - (1,765) Repayment of long-term notes payable (709) (660) (2,838) Distributions paid to partners (2,149) (8,782) (7,054) _______________________________________ Net cash and cash equivalent used by financing activities (2,858) (9,442) (11,657) _______________________________________ Increase (decrease) in cash and cash equivalents 1,719 (6,863) 9,415 Cash at beginning of year 2,569 9,432 17 _______________________________________ Cash and cash equivalents at end of year $ 4,288 $ 2,569 $ 9,432 _______________________________________ Additional information: Cash paid for interest $ 193 $ 244 $ 510 _______________________________________
See notes to financial statements
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the years ended December 31, 2003, 2002, and 2001 General Limited (In thousands except per unit amounts) Partner Partners Total ___________________________________________________________________________________________________________________ Balance, December 31, 2000 511 50,624 51,135 Net Income - 2001 16 1,607 1,623 Distributions to partners declared ($2.67 per limited partnership unit) (125) (12,348) (12,474) _____________________________________ Balance, December 31, 2001 402 39,883 40,285 Net Loss - 2002 (130) (12,905) (13,035) Distributions to partners declared ($0.32 per limited partnership unit) (15) (1,480) (1,495) _____________________________________ Balance, December 31, 2002 257 25,498 25,755 Net Loss - 2003 (163) (16,139) (16,302) Distributions to partners declared ($0.72 per limited partnership unit) (34) (3,330) (3,364) _____________________________________ BALANCE, DECEMBER 31, 2003 $ 60 $6,029 $6,089 _____________________________________
See notes to financial statements AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. BACKGROUND AND ORGANIZATION Airlease Ltd., A California Limited Partnership (the "Partnership"), engages in the business of acquiring, either directly or through joint ventures, commercial jet aircraft, and leasing such aircraft or parts thereof to domestic and foreign airlines and freight carriers. The general partner of the Partnership (the "General Partner") is Airlease Management Services, Inc. From 1999 to June 2002, the General Partner was a wholly owned subsidiary of Banc of America Leasing and Capital, LLC, a Delaware limited liability company ("BALCAP"), in turn a wholly owned subsidiary of Bank of America National Assocation ("BANA"). In June 2002, BALCAP transferred its stock of the General Partner to BANA and the General Partner became a wholly owned subsidiary of BANA. BALCAP also holds 793,750 limited partnership units and United States Airlease Holding, Inc. ("Holding"), also a wholly owned subsidiary of BANA, holds 231,250 limited partnership units. An additional 3,600,000 units are publicly held. At December 31, 2003 and 2002, the Partnership's portfolio consisted of four and six Stage-III commercial aircraft, respectively. At December 31, 2003, two aircraft were leased to CSI Aviation Services, Inc. ("CSI"), one aircraft was leased to Federal Express Corporation ("FedEx"), and one was held for sale. At December 31, 2003 and 2002, the book value of aircraft by lessee as a percent of assets was as follows: FedEx, 32.2% and 19.9%; CSI, 19.5% and 42.8%; and off-lease aircraft, 10.4% and 28.5%. Revenues by lessee as a percentage of total revenue for 2003, 2002 and 2001, respectively, were as follows: CSI, 82.4%, 88.2% and 4.9%; and FedEx, 15.7%, 9.9% and 5.7%. On March 17, 2004, the Board of Directors of the General Partner, acting in response to a recommendation made by a special committee of independent directors of its Board of Directors (the "Special Committee"), directed the General Partner to cease making new aircraft investments, sell the Partnership's remaining assets as attractive sale opportunities arise, distribute sale proceeds (after repaying debt and establishing appropriate reserves) to Unitholders after disposition, and dissolve the Partnership when all assets are sold. The General Partner also has amended the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended (the "Limited Partnership Agreement") to give effect to this directive. As a result of the foregoing, the Partnership will classify its lease assets as held for sale for the quarter ended March 31, 2004. In 1997, the Unitholders of the Partnership authorized the General Partner to take these actions. Since that time, the General Partner had deferred taking such actions and continued to operate the Partnership while considering, from time to time, alternative investments. However, the General Partner has not made new investments in aircraft, primarily due to the weak aircraft leasing market. For a variety of reasons, including the General Partner's belief that significant improvement in this market is not forthcoming in the near term for the Partnership's aircraft, the General Partner determined, on the basis of the Special Committee's determination, that Unitholders likely will realize greater value from a dissolution of the Partnership compared to continued operation of the Partnership. Accordingly, the General Partner intends to exercise fully and promptly the authority granted to it previously by the Unitholders to sell assets, distribute net proceeds and dissolve the Partnership. To that end, the General Partner has commenced actively seeking buyers for the Partnership's aircraft. Given current market conditions, the General Partner cannot predict either the actual timing for completing sales of the Partnership's aircraft or the prices and other terms of such sales. The General Partner also cannot predict when net proceeds will be distributed to Unitholders or the aggregate amount of such net proceeds, both of which will depend upon a number of factors, including market conditions, the timing and terms of such asset sales, the amount of cash required to settle outstanding liabilities and contingencies, the amount of necessary cash reserves, and the expenses associated with selling assets and dissolving the Partnership. In 1997, the Unitholders also authorized the General Partner to impose restrictions on the transferability of outstanding units. The General Partner has not taken this action, although it reserves the right to do so if it concludes that implementing such restrictions would be in the best interests of the Unitholders in light of current partnership tax law. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. CASH EQUIVALENTS - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVESTMENT SECURITIES - Investment securities available for sale include 6,975 shares of US Airways Class A common stock received in December 2003 in partial settlement of a claim against US Airways for past due lease payments and damages resulting from US Airways' failure to return three aircraft in the condition prescribed in the lease agreement. These shares are reported at market value, with unrealized gains and losses, net of taxes, reported as a component of cumulative other comprehensive income in partners' equity. Unrealized gains and losses other-than-temporary impairments related to investment securities are determined using specific identification. Investment securities are regularly reviewed for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline and the financial health of and specific prospects of the issuer of the investment security. At December 31, 2003, there were no realized or unrealized gains or losses on these investment securities. FINANCE LEASES - Lease agreements, under which the Partnership recovers substantially all its investment from the minimum lease payments are accounted for as finance leases. At lease commencement, the Partnership records the lease receivable, estimated residual value of the leased aircraft, and unearned lease income. The original unearned income is equal to the receivable plus the residual value less the cost of the aircraft (including the acquisition fee paid to an affiliate of the general partner). The remaining unearned income is recognized as revenue over the lease term so as to approximate a level rate of return on the investment. OPERATING LEASES - Leases that do not meet the criteria for finance leases are accounted for as operating leases. The Partnership's undivided interests in aircraft subject to operating leases are recorded at carrying value of the aircraft at lease inception. Aircraft are depreciated over the related lease terms, generally five to nine years on a straight-line basis to an estimated salvage value, or over their estimated useful lives for aircraft held for lease, on a straight-line basis to an estimated salvage value. MAINTENANCE RESERVES - On certain operating leases the Partnership requires the lessees to pay aircraft maintenance reserves. The reserves will be applied toward the aircraft's future maintenance requirements. Reserves are collected for engines, airframe, and other aircraft components. The amount of the reserves is based on flight hours. NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT is computed by dividing the net income/(loss) allocated to the Limited Partners by the weighted average units outstanding (4,625,000 for each of the past three years). LONG LIVED ASSETS - The Partnership accounts for its long-lived assets, including Operating Leases, aircraft held for lease and aircraft held for sale, in accordance with Statement of Financial Accounting Standards ("SFAS") No 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". The statement's provisions supersede SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", which addressed asset impairment, and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. SFAS 144 addresses how and when to measure impairment on long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution to owners. SFAS 144 retains the requirements of SFAS 121 whereby an impairment loss is recognized in an amount equal to the difference between the carrying value and the fair value if the carrying value of an asset is not recoverable based on undiscounted future cash flows. In accordance with SFAS 144, the Partnership tests its long-lived assets for recoverability at least annually and whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. (See Notes 4 and 6). In accordance with SFAS 144, the Partnership classifies an aircraft as held for sale in the period in which a) management, having the authority to approve the action, commits to a plan to sell the asset, b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets, c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated at a price that is reasonable in relations to the assets current fair value, and d) the sale of the asset within one year is considered to be probable and it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. 3. FINANCE LEASES At December 31, 2003, and 2002, the Partnership owned one aircraft that was subject to a finance lease. The aircraft is leased to FedEx Corporation (FedEx) under a 13-year finance lease that expires in 2006. 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. In 2003, 2002, and 2001 this lease with FedEx resulted in finance lease income of $253,000, $300,000, and $346,000, respectively. The components of this finance lease at December 31, 2003 and 2002, are summarized as follows (in thousands): 2003 2002 ______ ______ Lease Receivable in installments $3,276 $4,582 Residual valuation 700 2,000 Unearned lease income (258) (643) ______ ______ Net Investment $3,718 $5,939 ====== ====== Residual valuation, which is reviewed annually, represents the estimated amount to be received from the disposition of aircraft after lease termination. If necessary, residual adjustments are made which result in an immediate charge to earnings and/or a reduction in earnings over the remaining term of the lease. In 2003, the residual value was reviewed. The review indicated that the estimate of residual value had declined, and such decline was judged to be other than temporary. As a result the booked residual was reduced from $2,000,000 to $700,000. This new valuation resulted in an immediate charge to earnings in the amount of $1,168,000, which is included on the statement of operations as impairment charge on aircraft, and a reduction of $132,000 in earnings over the remaining term of the lease. Finance lease receivables at December 31, 2003 are due in installments of $1,310,000 in 2004 and 2005, and $656,000 in 2006. 4. OPERATING LEASES At December 31, 2003 and 2002, the Partnership had two aircraft that were subject to operating lease treatment. The two MD-82 aircraft were leased to CSI Aviation Services, Inc. (CSI) and generated $1,330,000 and $2,670,000 in operating lease rental income in 2003 and 2002, respectively. During 2001, the Partnership had three aircraft that were subject to operating lease treatment. As mentioned above, two aircraft were leased to CSI and generated $296,000 in operating lease rental income in 2001. The third aircraft was leased to American Airlines and generated $750,000 in operating lease rental income during 2001. The aircraft was sold in December 2001. During 2003, management prepared quarterly impairment evaluations on the two CSI MD-82 aircraft. The evaluations indicated that the carrying value of the aircraft was not recoverable based on the undiscounted future cash flows to be generated by the aircraft. An impairment charge was recorded in June 2003 in the amount of $1,576,000 per aircraft. A second impairment charge was recorded in December 2003 in the amount of $2,858,000 per aircraft as a result of additional declines in values and to changes to probability assumptions applied to projected cash flows from the aircraft. The book value per aircraft after the impairment charges is $1,125,000. The operating leases at December 31, 2003 and 2002 are summarized as follows (in thousands): 2003 2002 2001 _______ _______ _______ Leased aircraft (at cost) $14,560 $14,560 $14,560 Impairment charges (8,866) 0 0 Accumulated depreciation (3,444) (1,807) (342) _______ _______ _______ Net Investment $ 2,250 $12,753 $14,218 ======= ======= ======= 5. NOTE RECEIVABLE In November 2001, the Partnership accepted a note receivable of $606,231 from US Airways in exchange for past due rent obligations owed to the Partnership on two of the five leased aircraft. The note receivable accrues interest at a rate of 7% per annum and provides for twelve equal monthly payments beginning in January 2003. The note was recorded at fair market value determined by discounting the future cash flows. Rental income associated with this note was deferred and was to be recognized as the note was repaid. The entire note was written off, as a result of US Airways' bankruptcy filing, in August 2002 and the uncertainty of collection, resulting in a charge to bad debt expense of $34,000. 6. AIRCRAFT HELD FOR LEASE OR SALE In October 2001, US Airways, Inc. returned five aircraft that had been on lease under a finance lease to the Partnership. During 2001, two of these aircraft were re-leased to CSI under two operating lease agreements as previously described, and are included in the Operating Leases-net in the accompanying balance sheets as of December 31, 2003 and 2002. The other three aircraft sold in 2003 and January 2004 as described below. On August 12, 2003, the Partnership signed a sales agreement with OLSF, LLC ("OLSF") to sell the three remaining aircraft in intervals of 120 days, with the first aircraft being delivered on August 12, 2003. The purchase price per aircraft is $1,200,000. As a result of the contractual sale price of the aircraft being lower than its book value, the aircraft were written-down in the second quarter of 2003. The $1,500,000 write-down per aircraft was equal to the difference between the carrying book value of $2,700,000 and the sale amount of $1,200,000. In September of 2003, the sales agreement was amended to accelerate the sale and delivery of the second aircraft to September 26, 2003. A deposit of $200,000 previously paid to the Partnership and included in the balance sheet as of December 31, 2003, was credited against the $1,200,000 purchase price of the third aircraft, which was sold and delivered on January 26, 2004. 7. LONG-TERM NOTE PAYABLE As of December 31, 2003 and 2002, the Partnership had one long-term note payable, a 7.4% non-recourse loan facility collateralized by the aircraft leased to FedEx, due in semi-annual installments of principal and interest of $451,000 through April 2006. At December 31, 2003 and 2002, $2,020,000 and $2,729,000, were outstanding, respectively. Based upon amounts outstanding at December 31, 2003, the minimum future principal payments on the outstanding fixed-rate long-term note payable are due as follows (in thousands): 2004 $ 764 2005 822 2006 434 ______ Total Long Term Debt $2,020 ====== 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents carrying amounts and fair values of the Partnership's financial instruments at December 31, 2003 and 2002. 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.
2003 2003 2002 2002 (In thousands) Carrying Amount Fair Value Carrying Amount Amount Fair Value _______________ __________ _______________ __________ Long-term notes (Note 7) $2,020 $2,079 $2,729 $2,762
The carrying amounts presented in the table are included in the balance sheets under the indicated captions. 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. 9. 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, 2003, 2002, and 2001, were as follows (in thousands): 2003 2002 2001 ____ ____ ____ Management fees $173 $303 $ 481 Disposition and remarketing fees 172 52 503 Reimbursement of other costs 79 79 79 Reimbursement of interest costs 2 2 10 ____ ____ ______ TOTAL $426 $436 $1,073 ==== ==== ====== The General Partner was allocated its 1% share of the Partnership net income/(loss) and cash distributions. Holding and BALCAP, each a limited partner and an affiliate of the General Partner, were also allocated their share of income/(loss) and cash distributions. As of December 31, 2003 and 2002, the Partnership had accounts payable to the General Partner or its affiliates of approximately $238,000 and $170,000 respectively. 10. FEDERAL INCOME TAX STATUS The Partnership is considered a publicly traded Partnership ("PTP") under the Revenue Act of 1987. Under that Act, the Partnership was not subject to federal income tax as a partnership until 1998. Instead, net income or net loss are apportioned among Unitholders in accordance with their respective partnership interest and the number of months they held that interest. Effective January 1, 1998, PTP's were required to choose to retain PTP status and be subjected to federal income tax as a corporation or to delist their units thereby removing themselves from the scope of the PTP rules. Faced with these alternatives, the Partnership initially recommended that its units be delisted. In August and October 1997, respectively, Federal and California tax laws were amended to provide PTP's a third alternative. Under these amended laws, PTP's are allowed to continue to be publicly traded during 1998 and subsequent years without becoming subject to corporate income tax if they elect to pay a 3.5% Federal tax and a 1% California tax on their applicable gross income on a tax basis. The board of directors of the General Partner unanimously concluded, after authorization from the Unitholders and consideration of a number of factors, including the 1997 tax law changes and the benefits of liquidity, that is was in the best interests of Unitholders for the Partnership to remain publicly traded at that time. Accordingly, in January 1998, the Partnership made an election to pay the annual gross income tax at the Partnership level. 11. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING AND THE NET DIFFERENCE BETWEEN THE PARTNERSHIP'S ASSETS AND LIABILITIES (UNAUDITED) 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):
2003 2002 2001 _________ _________ _______ Net income (loss) per financial statements: $ (16,302) $ (13,035) $ 1,623 Increases/(decreases) resulting from: 3.5% Gross Income Tax - non deductible 141 124 721 Gain on sale of equipment 2,400 0 6,487 Lease rents earned less finance lease income 2,387 404 7,114 Bad debt charge-off - 34 - Impairment charge on aircraft 14,533 11,086 - Operating lease finance book depreciation 2,037 3,206 1,268 Depreciation and amortization (7) (11) (627) _____________________________________ Income per income tax method 5,189 1,808 16,586 Allocable to General Partner (52) (18) (166) _____________________________________ TAXABLE INCOME ALLOCABLE TO LIMITED PARTNERS $ 5,137 $ 1,790 $16,420 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) $ 1.11 $ 0.39 $ 3.55
ASSETS' TAX AND FINANCE BOOKS DIFFERENCES (IN THOUSANDS): FINANCE TAX YEAR BOOKS BOOKS DIFFERENCE ____ ________ ________ __________ 2003 $ 11,532 $ 11,255 $ 277 2002 29,811 8,184 21,627 The difference between the booked assets on the finance and tax books in 2002 is primarily due to the faster aircraft depreciation method on the tax books versus the finance books. The difference narrowed in 2003 as a result of the aircraft impairment charges. LIABILITIES' TAX AND FINANCE BOOKS DIFFERENCES (IN THOUSANDS): FINANCE TAX YEAR BOOKS BOOKS DIFFERENCE ____ ________ ________ __________ 2003 $ 5,443 $ 5,443 - 2002 4,056 4,056 - 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 2003 and 2002 (in thousands, except per unit amounts):
2003 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ____ ________ _______ ________ _______ Total Revenues $ 476 $ 433 $ 399 $ 307 Impairment Charge on Aircraft - $ (7,651) - $ (6,882) Net Income/(Loss) $ (458) $ (8,186) $ (371) $ (7,287) Net Income/(Loss) Per Limited $(0.10) $ (1.75) $(0.08) $ (1.56) Partnership Unit Unit Trading Data: Unit Prices (high-low) $0.97-$0.72 $1.85-$0.65 $2.03-$1.25 $2.03-$1.55 Unit Trading Volumes OTCBB 510 561 571 571 2002 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ____ ________ _______ ________ _______ Total Revenues $ 859 $ 833 $ 833 $ 502 Impairment Charge on Aircraft - - $(11,086) - Net Income/(Loss) $ (422) $ (337) $(11,567) $ (709) Net Income/(Loss) Per Limited $(0.09) $(0.07) $ (2.48) $ (0.15) Partnership Unit Unit Trading Data: Unit Prices (high-low) on NYSE/OTCBB $6.60-$4.95 $5.99-$3.03 $3.30-$1.50 $1.25-$0.61 Unit Trading Volumes on NYSE/OTCBB 378 361 438 678
INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 3.1(1) Amended and Restated Agreement of Limited Partnership of Partnership. 3.2(1) Form of Certificate for Limited Partnership Units of Partnership. 3.3(1) Form of Depositary Agreement among Partnership, Chase-Mellon Shareholder Services (formerly Manufacturers Hanover Trust Company), the General Partner and Limited Partners and Assignees holding Depositary Receipts. 3.4(1) Form of Depositary Receipt for Units of Limited Partners' Interest in the Partnership 3.5(2) Amendments to Amended and Restated Partnership Agreement. 3.6 Second Amendment to Amended and Restated Partnership Agreement. 3.7 Third Amendment to Amended and Restated Partnership Agreement. 4.1(1) Form of Application for Transfer of Depositary Unit. 10.1(1) Trust Agreement, together with Trust Agreement Supplement No. 1-5, dated as of July 10, 1986, between the Registrant, Meridian Trust Company and the General Partner. 10.3(1) Lease Agreement, together with Lease Supplement Nos. 1-5, dated as of July 10, 1986, between Meridian Trust Company, not in its individual capacity but solely as Trustee, and Pacific Southwest Airlines. ____________________ (1) Incorporated by reference to the Partnership's Registration Statement on Form S-1 (File No. 33-7985), as amended. (2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001. 10.44(3) Aircraft Lease Agreement dated as of April 15, 1993 between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee, Lessor, and Federal Express Corporation, Lessee with respect to one (1) Boeing 727-2D4 Aircraft, U.S. Registration No. 362PA (manufacture serial no. 21850). 10.52(4) Assignment, Assumption and Amendment Agreement dated April 9, 2001 among Trans World Airlines, Inc., American Airlines, Inc., the registrant and First Security Bank, National Association, as Owner Trustee. 10.53(2) Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 806USAirframe. 10.54(2) Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 807USAirframe. 10.55(2) Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N806US (manufacture serial no. 48038). 10.56(2) Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N807US (manufacture serial no. 48039). 10.57(5) Lease Supplement Number Three dated April 9, 2003, among Wachovia Bank, National Association, as successor to First Union National Bank, not in its individual capacity but solely as Trustee, the Partnership and CSI Aviation Services, Inc. 10.58(6) Lease Supplement Number Four dated September 10, 2003, among Wachovia Bank, National Association, as successor to First Union National Bank, not in its individual capacity but solely as Trustee, the Partnership and CSI Aviation Services, Inc. 10.59(7) Aircraft Sales Agreement, dated as of August 12, 2003, among Wachovia Bank, National Association as trustee, Airlease Ltd., a California limited partnership, and OLSF, L.L.C., a Delaware limited liability company. 10.60(7) First Amendment to Aircraft Sales Agreement, dated as of September 26, 2003, among Wachovia Bank, National Association as trustee, Airlease Ltd., a California limited partnership, and OLSF, L.L.C., a Delaware limited liability company. ____________________ (2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001. (4) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2000. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2003. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2003. (7) Incorporated by reference to the Partnership's Form 8-K dated September 26, 2003 filed on October 2, 2003. 14.1 Code of Ethics. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Press Release dated March 18, 2004. EX-3 3 ex3-6.txt EXHIBIT 3.6 EXHIBIT 3.6 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 17th day of March, 2004. 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. 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. 2 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 fights 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. 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 3 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 24, 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. 4 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: /s/ DAVID B. GEBLER __________________________________ Name: David B. Gebler Title: Chairman, Chief Executive Officer and President LIMITED PARTNERS (pursuant to power- of-attorney to the General Partner) 5 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) _____ (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. 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. Dated ___________________ ____________________________________________________ Signature of Transferee (Must Be United States Citizens or Resident Alien) _________________________ ____________________________________________________ Social Security or other Residence Address identifying number _________________________ Purchase Price (including Commissions, if any) 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. EX-3 4 ex3-7.txt EXHIBIT 3.7 EXHIBIT 3.7 THIRD AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIRLEASE LTD. A CALIFORNIA LIMITED PARTNERSHIP This Third 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 17th day of March, 2004. 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 and on March 17, 2004 (the "Partnership Agreement"); WHEREAS, the Partners desire to amend the Partnership Agreement as specified in this Amendment; and WHEREAS, Article 18 of the 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 Partnership Agreement, as amended by this Amendment. 2. AMENDMENT OF SECTION 3.3(B). Sections 3.3(B)(1) and 3.3 (B)(2) of the Agreement hereby are deleted in their entirety and replaced with the following new Section 3.3(B) to read in its entirety as follows: (B) After March 17, 2004, 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. 3. AMENDMENT OF SECTION 4.1(FF). Section 4.1(ff) of the Agreement hereby is deleted in its entirety and replaced with the following new 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. 4. AMENDMENT OF SECTION 7.9(A)(2). Section 7.9 (A )(2) of the Agreement hereby is deleted in its entirety and replaced with the following new 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; 5. AMENDMENT OF SECTION 10.3. Section 10.3(B) of the Agreement hereby is deleted in its entirety. Section 10.3(C) of the Agreement hereby is deleted in its entirety and replaced with the following new Section 10.3(C) to read in its entirety as follows: (C) After March 17, 2004, 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. 6. AGREEMENT IN FULL FORCE AND EFFECT. Except as amended hereby, the Agreement shall continue in full force and effect. 7. GOVERNING LAW. This Amendment shall be governed by and construed under the laws of the State of California. 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: /s/ DAVID B. GEBLER __________________________________________ Name: David B. Gebler Title: Chairman, Chief Executive Officer and President EX-14 5 ex14-1.txt EXHIBIT 14.1 EXHIBIT 14.1 CODE OF ETHICS BANK OF AMERICA CORPORATION CODE OF ETHICS AND GENERAL POLICY ON INSIDER TRADING BANK OF AMERICA CORPORATION CODE OF ETHICS GENERAL STATEMENT Bank of America Corporation is committed to the highest standards of ethical and professional conduct, and this Code of Ethics provides you guidance in how to uphold these standards. In addition, the General Policy on Insider Trading, which is included in this booklet, sets forth the policies of the Corporation(1) with respect to personal securities transactions. Additional direction is provided in the job related manuals, policies and procedures of certain areas because of the areas' particular activities, operating risks or individual responsibilities, and in other publications that address associate conduct, such as the ASSOCIATE HANDBOOK and the policies included therein. The Code of Ethics, the General Policy on Insider Trading, the ASSOCIATE HANDBOOK, any work-related manuals, policies or procedures applicable to you, and any other publications that address associate conduct are collectively referred to as the "Documents." This Code supersedes and replaces any prior communications, policies, rules, practices, standards and/or guidelines to the contrary, whether written or oral. To the extent there are any conflicts with the ASSOCIATE HANDBOOK, the language of this Code controls. This Code consists of basic standards of business practice as well as professional and personal conduct. Such standards require honesty and candor in our activities, including the observance of the spirit and the letter of the law. As set forth below, these standards have both personal and corporate implications. PERSONAL CONDUCT. Because the Corporation is judged by the collective performance and public perception of its associates, you must always act in a manner that merits public trust and confidence. The following are our basic principles of personal conduct: o You must not take any action, either personally or on behalf of the Corporation, which will violate any law or regulation affecting our business. o You must perform your assigned duties to the best of your ability and in the best interests of the Corporation, its customers, associates and shareholders. o You must avoid all circumstances that could produce conflicts or the appearance of conflicts between your personal interests and those of the Corporation. o You must comply with security and safety procedures established by the Corporation. o You must adhere to and fully comply with all of the Corporation's policies and procedures, including the Code, the Policy and the ASSOCIATE HANDBOOK. o You must respect the confidentiality of information obtained in the course of business, including information related to the financial affairs of customers or to the investment value of any business enterprise. o You must exercise absolute candor and fully cooperate in providing facts and information in connection with company Investigations, or if requested of you by management or other authorized persons, to the fullest extent permitted by law. o You must not use corporate resources or your corporate position in pursuit of personal interests that violate the documents or any law or regulation. Some specific examples of prohibited conduct are set forth in the ASSOCIATE HANDBOOK for your guidance, but such examples are not meant to be all-inclusive. (1) THE TERMS "CORPORATION" AND "BANK OF AMERICA" REFER TO BANK OF AMERICA CORPORATION AND ITS SUBSIDIARIES. FOR convenience, we USE THESE TERMS BECAUSE VARIOUS COMPANIES WITHIN BANK OF AMERICA CORPORATION USE THIS BOOKLET THE USE OF THESE TERMS HERE OR IN OTHER PUBLICATIONS DOES NOT MEAN YOU ARE ALT EMPLOYEE OF SANK OF AMERICA CORPORATION. You REMAIN SOLELY ART EMPLOYEE OF THE COMPANY THAT DIRECTLY PAYS YOUR WAGES, AND THE USE OF THESE TERMS OR ISSUANCE OF THIS BOOKLET DOES NOT CHANGE YOUR EXISTING AT-WILL EMPLOYEE STATUS. Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 1 of 13 CORPORATE CONDUCT. Our corporate activities should earn the confidence and trust of our customers, associates and shareholders, The following are our basic principles of corporate conduct: o The Corporation will not cause or tolerate any violation of law or regulation in the conduct of its business or related activities. o The Corporation is committed to maintaining a level of earnings that provides an equitable return on investment for its shareholders; providing satisfying employment opportunities in its various communities; and providing financial services and resources that meet the needs of its customers and the communities it serves. o The Corporation will cooperate fully with its regulators and auditors and will disclose, on a timely basis, information required for judging the soundness of its condition and its merits as art investment. o The Corporation will maintain and uphold standards and procedures that are designed to safeguard the legitimate confidentiality of information pertaining to customers and associates. o The Corporation will conduct its business in fair and open competition and will not enter into illegal arrangements with competitors affecting pricing or marketing policies. ASSOCIATE RESPONSIBILITIES The reputation of any financial institution depends upon the conduct and values of its associates. Building and ensuring an unblemished reputation involves: o creating a culture of personal accountability; o shaping the judgment of each associate on basic matters of policy; o providing specific direction for each associate's approach to a variety of situations; o accepting responsibility for decisions based on these directions; and o calling upon each associate's individual pride and spirit in being recognized as part of a respected professional entity. As an associate within Bank of America, you must: o be thoroughly familiar with, and periodically review, the Documents; o be sensitive to situations that could result in inadvertent actions by yourself or your associates which could appear to be, or are directly in violation of, the Documents, or any law or regulation; o ensure that job-related manuals, policies and procedures support the other Documents, and that these manuals, policies and procedures address ethical issues specific to your particular business activity; o help other associates uphold the highest ethical standards; o seek counsel regarding ethical issues through your manager or the Escalation Response Team at 1.888.411.1744; and o maintain a working environment that is supportive of your responsibilities as set forth in the Documents. CONFLICTS OF INTEREST You must avoid conflicts between personal interests and the interests of Bank of America, or even the appearance of such conflicts. You must not act on behalf of Bank of America In any transaction involving persons or organizations with which you, or a family member(2), has any financial or residual interest, other than through a compensation or similar plan sponsored by Bank of America. (2) AS USED IN THE BANK OF AMERICA CORPORATION CODE OF ETHICS, "FAMILY MEMBER" MEANS YOUR SPOUSE OR DOMESTIC PARTNER, CHILD PARENT, GRANDPARENT, SIBLING OR PARENT-IN-LAW. "FAMILY MEMBER" MAY BE DEFINED DIFFERENTLY IN OTHER POLICIES THAT ARE INCORPORATED BY REFERENCE INTO THE CODE. Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 2 of 13 Defined broadly, a conflict of interest includes any situation in which you are engaged in two or more activities or relationships that, to some degree, are incompatible. Such situations might include activities, conduct or investments that could conflict with your duty to Bank of America, or that could adversely affect your judgment or job performance. The appearance of a conflict of interest can often be as detrimental as a conflict itself. You should exercise sound judgment before committing to any activity or participating in any transaction that could potentially be a conflict. In general, you should consider the following factors to avoid conflict of interest situations: o PERCEPTION. Could the activity or transaction be perceived as a conflict of interest or a potential conflict by others, including associates, customers, suppliers, competitors, regulators or the public? If all the facts of the activity or transaction were made public, would you or the Corporation be embarrassed? o INTENT. Is the activity or transaction being offered in an attempt to influence your judgment? o IMPACT. Will the Corporation be disadvantaged if you participate in the activity or transaction? o OBJECTIVITY. Will participation in the activity or transaction in any way affect your ability to be objective with regard to any decision concerning a customer, associate or supplier? o TIME CONSIDERATIONS. Will the time required for the activity or transaction interfere with your ability to effectively carry out your job responsibilities at Bank of America? WORK CONFLICTS AND OUTSIDE ACTIVITIES. If you decide to pursue additional employment, engage In an independent business venture or perform services for another business organization, you must disclose such activities to your manager and obtain his or her preapproval to avoid any potential conflicts. You must not pursue such activities during Bank of America business hours or allow any outside business, civic or charitable activities to interfere with your job performance. A conflict of interest may arise when you or one of your family members is a significant shareholder, director, officer, employee, consultant or agent of an organization that Is a competitor, or that has current or prospective business with Bank of America as a customer, supplier or contractor. In such event, you must take steps to protect confidential information, remove yourself from situations where conflicts may arise and otherwise take steps to ensure that outside activities do not conflict with or impair your ability to perform your responsibilities for Bank of America and do not adversely affect the Integrity, goodwill or public perception of Bank of America. OUTSIDE DIRECTORSHIPS OF ASSOCIATES. Although you are encouraged to take part in community and charitable activities, due to the time demands and potential conflicts of interest, you are encouraged to advise your manager before serving on a board of a nonprofit organization. Directorships that will involve significant time away from the Corporation, or that might otherwise interfere with efficient performance of normal duties or pose a conflict of interest, require the written approval of your manager. If you wish to serve as a director of any profit-making organization, you must first obtain the approval of the Finance Committee (or any successor committee). The terms of any approval will determine whether you may keep the compensation earned from a directorship. You may contact the Office of the Corporate Secretary to determine the meeting schedule of the Finance Committee and the process for submitting your request. Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 3 of 13 You should avoid directorships that might pose a conflict of interest or create the appearance of a conflict of interest. If an apparent or actual conflict of interest develops and cannot be immediately resolved, you must withdraw promptly from service as a director of the outside corporation or organization. You should also be aware that you have sole responsibility for your actions and that the Corporation does not provide indemnification for associates who serve as directors of outside entities unless such service is at the specific written direction of an authorized representative of a Bank of America company. You are to abstain from, and not be physically present during, negotiations, preparations, recommendations or approvals of any extensions of credit or other business transactions between any company in the Bank of America family and any outside organization on whose board of directors you sit. DUTY OF LOYALTY. You owe a duty of loyalty to the Corporation. You must not deprive the Corporation of an opportunity or take for your own advantage an opportunity that belongs to the Corporation. Further, you must not help others do so if they are in a position to divert a corporate opportunity for their own benefit. GIFTS. You must not solicit, and are discouraged from accepting, gifts from current or prospective customers or suppliers who are not family members. Gifts valued in excess of $200 U.S. ($100 U.S. for broker-dealer associates) may not be accepted. Gifts of money, in any amount, may not be accepted. You may accept GIFTS valued at $200 U.S. ($100 U.S., if applicable) or less, if declining the gift would damage the relationship, and the circumstances are appropriate when the conflict of interest factors enumerated above are taken into consideration, and you have not accepted gifts from the same source within the previous 12 months. Under no circumstance, however, may you receive GIFTS or anything of value from current or prospective customers or suppliers If there i5 a corrupt intent. You are also prohibited, on behalf of the Corporation, from giving, offering or promising anything of value to an employee of another financial institution in connection with any business of that Financial institution if there is a corrupt intent. You should dedicate the same careful consideration and thought for the appropriateness of gifts to customers and suppliers of Bank of America as you would apply to any gifts you receive. Certain of the Corporation's business units have more restrictive policies with respect to gifts. You must become familiar with the policies and procedures applicable to you, and are encouraged to discuss the appropriateness of any gift, given the circumstances, with your manager. HOSPITALITY. You must not accept hospitality or entertainment that is: o solicited; o lavish or unusual; o not a normal or customary type of amenity; or o an expense reimbursed by a customer or supplier that the Corporation would not pay. In addition, you should consider the following: o RECIPROCITY. Are you in a position where you could provide reciprocal hospitality at Bank of America expense? You should consider not only the nature of the hospitality being offered, but also the organizational stature of the person making the offer. o REASONABLENESS. Is the nature of the hospitality being offered typical for the size and status of the customer or supplier relationship? The type of hospitality being offered should be customary and appropriate with regard to your job responsibilities. Bank of America Corporation Code of Ethics and General policy on Insider Trading Page 4 of 13 You are encouraged to discuss the appropriateness of any offer of hospitality, given the circumstances, with your manager. If there remains any question as to the appropriateness of such offer, the matter should be escalated to the Escalation Response Team at 1.888.411.1744. SUPPLIER RELATIONSHIPS. If you are authorized to approve or award orders, contracts and commitments to suppliers of goods or services, you must do so based on objective business standards to avoid any real or perceived personal favoritism. Bank of America business of this nature must be conducted strictly on an arm's-length basis with due regard to Bank of America policies Involving public relations, community reinvestment and other business considerations. FAIR DEALING. Bank of America will conduct its business equitably, fostering fair and open competition. YOU MUST not imply the possibility of, or enter into arrangements with, customers, competitors or suppliers that appear TO OR directly violate applicable laws and regulations with regard to fair and open competition. Further, you must not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair-dealing practice. CONFIDENTIALITY Confidentiality is a fundamental principle of our business that is particularly applicable to nonpublic information concerning Bank of America and to information received by Bank of America from a customer or supplier for an express business purpose. It applies with equal force to oral or informal communications as well as to written, printed or computergenerated information. Specific corporate policies exist regarding the use of information and adequate control of critical and secured information. These policies include the General Policy on Insider Trading, THE GLOBAL POLICIES AND PROCEDURES REGARDING INFORMATION WALLS AND INSIDE INFORMATION, the CORPORATE INFORMATION SECURITY POLICY and the PRIVACY POLICY FOR CONSUMERS. Associates must be familiar with these policies and understand how such policies impact their work. BANK OF AMERICA INFORMATION. Nonpublic information regarding Bank of America is to be conveyed to others only on a reasonable need-to-know basis that furthers a legitimate business purpose of Bank of America. Information is t0 be conveyed with the express understanding that the information is confidential and is to be used solely for the limited purpose for which it was received and given. Unless otherwise instructed, you must treat internal Bank of America activities and plans as confidential, to be disseminated within the internal structure of Bank of America only on a need-to-know basis. CUSTOMER INFORMATION. Bank of America subscribes to extremely high standards of protection for personally identifiable confidential information obtained from or about a customer, and recognizes its obligation to keep such customer information secure and confidential. Such confidential information may Include account balances and transaction data, financial condition, and anticipated changes in management, business plan, or financial projections. The Corporation's comprehensive Privacy Policy for Consumers covers consumer customer information and is provided to consumer customers as required by law. It is the policy of Bank of America to provide customer information to outside companies only in order to conduct our business, comply with applicable law, protect against fraud or other suspected illegal activity, provide products and services to our customers, provide a good customer experience or comply with a customer's request. Information shared will be limited to that needed or legally required and subject to confidentiality agreements, where applicable. In addition, you are authorized to access customer information only for legitimate business purposes on a need-to-know basis. You are Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 5 of 13 responsible for understanding your obligations to protect the confidentiality and security of customer information. Bank of America provides associate training, as appropriate, to help you understand your obligations with respect to confidentiality of customer information. You may also access ASSOCIATE GUIDELINES FOR CUSTOMER PRIVACY. SUPPLIER INFORMATION. Confidential competitive information submitted to Bank of America in connection with the purchase of products or services must be maintained in strictest confidence in order to avoid giving or receiving any improper competitive advantage with respect to any supplier. ASSOCIATE PRIVACY. Information and communications on the Corporation's private computer systems are subject to review, monitoring and recording at any time without notice or permission. Unauthorized use or access may be subject to prosecution or disciplinary action. Additional information regarding associate privacy is set forth in the ASSOCIATE HANDBOOK. DEALING WITH ASSETS OF BANK OF AMERICA PROPER USE AND OWNERSHIP OF BANK OF AMERICA ASSETS. Proper use of Bank of America assets and appropriate recording and documentation of such use is essential to the financial soundness and Integrity of Bank of America. You must not misuse (including inappropriate Internet usage) or remove from our facilities furnishings, equipment, technology or supplies, unless specifically authorized. Further, you must not use Bank of America assets, or your POSITION, for personal gain or another's advantage. Additional information regarding your use of the Internet and intranet is set forth in the ASSOCIATE HANDBOOK. This policy applies equally to property created, obtained or copied by Bank of America for its exclusive use, SUCH AS computer software, customer lists or information, databases, data processing systems, files, reference materials, reports, and the like. Neither originals nor copies may be used for any purpose other than Bank of America business. Any assets you create and any tangible contributions you make to the development and implementation of Bank of America assets, whether directly or Indirectly, while employed within Bank of America are Bank of America property and remain its property even if you leave employment with Bank of America. INTELLECTUAL PROPERTY. Bank of America owns all rights, title and interest in intellectual property, including Inventions, improvements, works of authorship, ideas, data, processes, computer software programs, and discoveries, conceived or developed by you during your term of employment, relating to actual or anticipated business of, or research or development by, Bank of America. You must disclose all intellectual property promptly to your manager and execute all documents and do all things necessary to assist Bank of America, at the Corporation's expense, in obtaining protection for intellectual property. RECORD RETENTION. The Corporation has along-standing record retention policy to prevent, when appropriate, the destruction of records that would normally be purged in the ordinary course of business. References in this section to "company records" include all recorded information, regardless of medium or characteristics (for example, paper, microfilm, magnetic disks/tapes, electronic or OPTICAL), whether centrally stored or retained as desk files at your work areas. "Company records" DOES not include customer records that may be subject to subpoenas in actions, proceedings or investigations not involving the Corporation. Such customer records are produced and retained in accordance with policies and procedures that are separate from this Code. Company records that might normally be destroyed under the Corporation's standard Records Retention Schedule must not be destroyed if those records are relevant to a Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 6 of 13 pending, threatened Or reasonably anticipated legal or administrative action or proceeding against or by the Corporation or internal, regulatory or governmental investigation involving the Corporation (for purposes of this section, collectively referred to as "Actions"). In general, this means you must cease record destruction (and prevent others from destroying records) if you are aware or are notified that: o there is an Action that may reasonably require production of company records; o company records are covered by a request for production, subpoena or similar request; or o the Corporation is voluntarily cooperating with governmental or regulatory authorities or other outside parties in any action, proceeding or investigation that may reasonably require production of company records. If there is any question as to whether a particular record should be maintained, written approval must be obtained from an authorized Legal Department representative prior to its destruction. Company records destroyed after the Corporation is on notice of an Action may result in penalties to the Corporation and to the individuals involved. For information regarding the Bank of America Records Management Program, you may access http://iorder.bankofamerica.com/popup/records/main.htm. MISAPPROPRIATION. Anyone who embezzles, steals or willfully misappropriates any monies, funds or anything of value from Bank of America may be subject to fine, imprisonment, restitution payment and other such actions conferred by law or Bank of America policy, in addition to disciplinary action. OFFICIAL DOCUMENTATION. You must not use official Bank of America stationery, the corporate brand or other official documentation or use the name "Bank of America" for any personal or nonofficial purpose since such use implies endorsement by Bank of America. PERSONAL FINANCIAL RESPONSIBILITY FINANCIAL CONDUCT. You should conduct your financial affairs in a responsible and prudent manner, so as to be above criticism. BORROWING. You may not personally borrow money from or lend to suppliers, customers or other associates unless such loan is to or from a family member or from an institution normally in the business of lending, and there Is no conflict of interest. You may make an occasional loan of nominal value (such as for lunch) to another associate as long as no interest is charged. Certain borrowing from correspondent banks must be reported to the Office of the Corporate Secretary. Those specific individuals who must report such borrowing will be advised directly by the Office of the Corporate Secretary. BUSINESS EXPENSES. You are responsible for the accurate and timely reporting of expenses. All expenditures must be ordinary and necessary to accomplish expected business purposes, include required approvals and be in accordance with existing expense policies. Further, you must not use your business credit card for any purpose other than appropriate business expenses. You may access the Bank of America Corporate Travel and Expense Policies on the SUPPLY CHAIN MANAGEMENT WEB SITE under Policies and Procedures. PERSONAL FEES. Unless specifically authorized by Bank of America, you may not accept personal fees or commissions in connection with any transaction on behalf of Bank of America. Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 7 of 13 COMPLIANCE WITH LAW You must not take any action, either personally or on behalf of the Corporation that will violate any law, regulation or internal policy. ANTI-MONEY LAUNDERING COMPLIANCE. Bank of America will cooperate fully, in accordance with applicable laws, with the efforts of law enforcement agencies to prevent, detect and prosecute money laundering and the financing of terrorism. The Corporation will not knowingly do business with existing or prospective customers (for purposes of this section, collectively referred to as "customers") whose money Is believed to be derived from or used to support criminal or terrorist activity. If the Corporation becomes aware of facts that lead to the reasonable presumption that a customer is engaged in such activities or that a customer's transactions are themselves criminal in purpose, appropriate measures, consistent with the law, will be taken. Such measures could include, for example, terminating business dealings with the customer, closing or freezing the customer's accounts, and filing reports with governmental authorities. You must make reasonable efforts to determine the true identity of all customers requesting the Corporation's products and services to help KEEP THE global financial and trading systems from being used as a channel for financing crime and terrorism. Business transactions will not be conducted with customers who fail to provide appropriate evidence of their identity, or who seek to deceive regulatory or law enforcement agencies by providing altered, incomplete or misleading information. The Corporation will also avoid transactions with financial institutions and jurisdictions that knowingly facilitate the efforts of criminals, terrorists and others t0 disguise the source, ownership and movement of their funds. It is vital for all associates to understand fully those actions that may constitute a violation of applicable anti-money laundering statutes and to report any potential violation in the manner set forth in the CORPORATE ANTI-MONEY LAUNDERING COMPLIANCE MANUAL. BRIBES AND OTHER IMPROPER PAYMENTS. You may not utilize, either directly or indirectly, Sank of America funds or property for any unlawful or improper use. Accordingly, you must not give any bribes, kickbacks, promises or any other thing of value t0 any person or entity or accept any such thing of value from any person or entity to obtain or retain business or for any reason whatsoever. In addition, you shall not make any unlawful preferential extension of credit to any officer, customer, director or principal shareholder of any customer or prospective customer. This policy should not be construed to limit the use of Bank of America funds and other assets ire the ethical pursuit of acquiring additional business for Bank of America In the normal course of business. FOREIGN CORRUPT PRACTICES ACT. You must not give or promise to give money or anything of value to any executive, official or employee of any government, governmental agency, political party (including candidates for political office) or other organization if it could reasonably be construed as being intended to influence a Bank of America business relationship with such entity. Such payments must not be made by you or any agent of Bank of America to obtain or retain business or secure any improper advantage. POLITICAL CONTRIBUTIONS. It is the policy of Bank of America to encourage informed participation in governmental, regulatory and elective processes. You may elect to make personal political contributions, either directly or through political action committees as prescribed and permitted by applicable local, state and federal laws, as well as the laws of any applicable jurisdiction outside of the United States. Federal statutes make it unlawful for a national bank to make any contribution or expenditure through the use of funds, services, property or other resources in conjunction with any federal, state or local election. Additionally, corporations Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 8 of 13 are also restricted from making campaign contributions and expenditures in federal elections and In many states. Certain broker-dealer associates and other associates who may refer municipal securities business to Banc of America Securities LLC are subject to additional conditions regarding political contribution and volunteer activities. These associates should consult their job related policy manual or their manager for SPECIFIC guidance. CLICK HERE for more detailed information on the Sank of America corporate political activity policy. ACCOUNTING. Bank of America has established internal accounting and operating controls t0 ensure the integrity and objectivity of the Corporation's consolidated financial statements. You must maintain and adhere to these controls so that all underlying transactions, both within Bank of America and with third parties, are properly documented, recorded and reported, Further, you must promote full, fair, accurate, timely and understandable disclosure in reports and documents that Bank of America files with, or submits to, the Securities and Exchange Commission and in other public communications made by the Corporation. INVESTIGATIONS. You must cooperate fully with any Investigation, internal audit, external audit or regulatory Examination. REPORTING CERTAIN CONDUCT Bank of America can be held criminally liable if one of its associates, directors or agents commits certain crimes. Accordingly, if you have knowledge or information about employment-related conduct by another associate, director or agent of the Corporation that you reasonably believe to be a crime, a material violation of law or regulation, a dishonest act (including misappropriation of funds or anything of value from Bank of America or the improper recording of the Corporation's assets or liabilities), a breach of trust or other conduct that might seriously affect the reputation of Bank of America, whether or not the Corporation is victimized, you must promptly report the relevant facts to the Escalation Response Team at 1.888.411.1744. In addition, if you become aware of any circumstances or activities that may conflict with the Code, you should report such matters to the Escalation Response Team. You will not be retaliated against for reporting information In good faith in accordance with this POLICY. Also under federal law, any crime or suspicious activity against or involving a financial institution must be reported to its regulators. You should be alert to situations that may constitute criminal wrongdoing against or involving Bank of America. You have the responsibility to identify and report the relevant facts to the Escalation Response Team. ESCALATION PATH In the event specific guidance is not available in the Documents or other corporate publications regarding a particular situation, you should first contact your manager. If the situation cannot be resolved, or if it relates to an action that is, or appears to be, a violation of an ethics-related policy, you should contact the Escalation Response Team at 1.888.411.1744. With respect to the resolution of any particular issue, the Escalation Response Team will: o coordinate the involvement of the appropriate internal teams (such as Corporate Audit, Corporate Compliance, Corporate Security, Personnel, executive management and/or internal legal counsel) as needed; Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 9 of 13 o together with the appropriate internal teams, provide associates with a clearer interpretation of "gray areas" in those instances where specific guidance is not available; and o serve as a necessary step in the escalation path for the resolution of major deviations from policy, Including the responsibility to promptly report significant matters to the appropriate internal team, as needed. WAIVERS OF CODE The Board of directors must approve any waiver of the Code for any executive officer or director. Further, to the extent mandated by the rules of the Securities and Exchange Commission, any waiver of the Code for any other officer will require approval by the Board of Directors. The Corporation will promptly disclose any such waiver via a press release or other public riling to the extent required by law, regulation or any applicable stock exchange rule. SUPPLEMENTAL POLICIES AND PROCEDURES As previously indicated, you may be subject to policies and procedures supplemental to this Code depending on your job function or your area of responsibility. From time to time, the Corporation may publish additional policies as deemed necessary or appropriate. Your manager should provide you with a copy of all policies applicable to you. DISCIPLINE Violation of the Code or the other Documents (including the ASSOCIATE HANDBOOK) constitutes grounds for disciplinary action, including termination of employment. FURTHER INFORMATION If you have any questions about the Code, or about Its applicability with respect to a particular matter, please contact the Escalation Response Team at 1.888.411.1744. Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 10 of 13 BANK OF AMERICA CORPORATION GENERAL POLICY ON INSIDER TRADING PURPOSE This General Policy on Insider Trading sets forth standards of conduct applicable to the directors and associates of Sank of America Corporation and its direct and indirect subsidiaries whenever they are conducting securities transactions, whether for themselves or on behalf of others. BACKGROUND Federal and state laws prohibit you from buying, selling, recommending or making other transfers of securities if you are aware of material, nonpublic information about the issuer of the securities. These laws also prohibit you from disclosing this information t0 others who may trade in those securities. The consequences of an insider trading violation can be severe, both for you and for the Corporation. The Corporation has adopted this Policy to protect you and the Corporation from the serious liabilities and penalties that can result from violations of the insider trading laws. This Policy applies t0 all directors and associates, as well as to your family members who reside in your household or whose securities transactions are subject to your influence or control. This Policy is incorporated in the Bank of America Corporation Code of Ethics. A booklet including the Code and the Policy is provided to each associate upon his or her commencement of employment, as well as to those directors who are not associates. You are required to execute the attached Acknowledgment stating that you have read, and understand and agree to comply with, the Policy and the Code. The Corporation will periodically issue communications reminding associates and directors of their individual responsibility to comply with Corporation policies, including those that relate to insider trading and personal securities transactions. STATEMENT OF POLICY You may, from time to time, have access to material, nonpublic Information concerning the Corporation, its customers or suppliers, or other companies. The following statement regarding the use and disclosure of this Information applies to all your activities, whether related to your official duties for the corporation or to your personal affairs: YOU MUST NOT BUY, SELL, RECOMMEND OR OTHERWISE TRADE IN ANY SECURITY, EITHER PERSONALLY OR ON BEHALF OF OTHERS, INCLUDING TRADING FOR PROPRIETARY OR FIDUCIARY ACCOUNTS OF THE CORPORATION, WHILE IRE POSSESSION OF MATERIAL, NONPUBLIC INFORMATION RELATING TO SUCH SECURITY, OR COMMUNICATE OR DISCLOSE, IN ANY MANNER, MATERIAL, NONPUBLIC INFORMATION TO OTHERS IN VIOLATION OF A DUTY TO KEEP SUCH INFORMATION CONFIDENTIAL. You should consider information "material" if a reasonable investor would consider it important in deciding whether to buy, sell or hold a company's securities (in other words, if the information is reasonably certain to have an effect on the price of the securities, whether such effect is positive or negative). You should consider information "nonpublic" if it is not generally available to the public or investment community. For example, the Corporation generally considers information nonpublic until the expiration of 24 hours following a press release, a public filing with the Securities and Exchange Commission or the appearance of an article in a newspaper or other publication of general circulation. Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 11 of 13 You must not disclose or disseminate to others material, nonpublic information about a company, either within or outside the Corporation, except on a reasonable need-to-know basis that furthers a legitimate business purpose of the Corporation or the subject company. Unlawfully disclosing or "tipping" information about a company to others who then trade while in possession of the information may give rise to claims against the person tipping the information. The Corporation expects you to conduct your personal financial affairs in a responsible and prudent manner. Further, Bank of America encourages you to manage and develop personal financial resources responsibly within your means, to maintain a sound financial condition and to invest in a responsible manner with a view to achieving long-term financial goals. You must never engage in investment practices that, by nature or practice are, or appear to be, inconsistent with the Policy, or that are illegal, improper, unethical or present a real or apparent conflict of interest. SPECULATIVE TRADING. You must not engage in speculative trading with respect to the Corporation's securities. This generally prohibits short sales and trading in puts, calls and other options or derivatives with respect to the Corporation's securities unless the transaction IS for legitimate, non-speculative purposes and you have obtained prior approval for such transaction from the Control Room at 1.704.388.3951. In the event the Control Room approves any such transaction, the Corporation encourages you to effect such transaction through an affiliated broker-dealer of the Corporation. The Policy does not prohibit or require the approval of the Control Room for the exercise of a stock option granted by the Corporation pursuant to one of its stock option plans. BLACKOUT PERIODS AND PRECLEARANCE PROCEDURES. From time to time, the Corporation will designate certain senior officers as "Insiders" for purposes of the Policy. Those officers who have been designated as "Insiders," as well as directors of the Corporation, are prohibited from trading in the Corporation's stock during the period 15 days before the end of each fiscal quarter through the end of the trading day on which financial results for that quarter are released to the public. Further, whether or not the Corporation IS in a trading blackout, if you are a designated "Insider" or director of the Corporation, you must preclear any transaction in Bank of America stock through a designated Legal Department representative. The Corporation will notify you if you are a designated "Insider" and provide you the names of appropriate Legal Department contacts. EXCEPTION TO POLICY FOR BLIND TRUST ARID PRE-ARRANGED TRADING PROGRAMS. Notwithstanding the general prohibition set forth above, you may effect transactions in Corporation securities during a trading blackout or at a time when you are in possession OF material, nonpublic information if your transactions are pursuant to a blind trust or trading program that complies with the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. If you are a director or designated "Insider" subject to the blackout policy and preclearance procedures, you must obtain preclearance from a designated Legal Department representative prior to establishing a blind trust or a prearranged trading program in Bank of America securities. The Corporation reserves the right to bar any transactions pursuant to a l0b5-1 trading program in Bank of America securities if the Board of Directors, in consultation with executive management and the Legal Department, determines that such a bar is in the best Interests of the Corporation. INFORMATION WALL BETWEEN COMMERCIAL AND INVESTMENT BANKING AND FIDUCIARY ACTIVITIES The Corporation has a policy to prevent the flaw of material, nonpublic information FROM those associates engaged in commercial and investment banking to those associates who have trust or fiduciary responsibilities within the Corporation. Therefore, you must not provide any material, nonpublic information that may Influence a credit or investment Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 12 of 13 decision to anyone who has fiduciary responsibilities within the Corporation. Likewise, if you have fiduciary responsibilities within the Corporation, you must not make any Investment decision based upon any such information from the commercial or Investment banking side of the Corporation. OTHER INFORMATION WALLS AND SUPPLEMENTAL POLICIES AND PROCEDURES FOR ASSOCIATES OF DESIGNATED UNITS In addition to the foregoing, there are other "Information Walls" and further supplemental policies and procedures (for purposes of this Policy, collectively referred to as the "Supplemental Policies") applicable to subsidiaries of the Corporation, or departments or groups within the Corporation or such subsidiaries, which, because of their specific activities, may have enhanced access to, or an enhanced potential to misuse, material, nonpublic information (for purposes of this Policy, collectively referred to as the "Designated Units"). It is your responsibility to become familiar with, understand and comply with all policies and procedures that relate to your area of responsibility. The Supplemental Policies generally are designed to (i) prevent the flow of information from associates in units that may receive material, nonpublic information about issuers of securities to associates in units that buy, sell or recommend securities to fiduciary and non-fiduciary accounts and (ii) address other issues raised by the specific activities of each Designated Unit. The Supplemental Policies also may impose additional restrictions on personal securities transactions. Click the following link to access the principal BANK OF AMERICA GLOBAL POLICIES AND PROCEDURES REGARDING INFORMATION WALLS AND INSIDE INFORMATION. Your manager should inform you as to whether you are in a Designated Unit and should provide you a copy of any Supplemental Policies applicable to you at the time of the commencement of your employment (or assumption of duties). All associates in each Designated Unit generally are required to acknowledge that they have read, and understand and agree to comply with, the Supplemental Policies applicable to their Designated Unit. In addition, all associates deemed by their manager to be in one of the Designated Units are required, among other things, to attend periodic informational and compliance sessions relating to insider trading, and to provide data relating to personal securities transactions to the Control Room, or as directed by their manager. PENALTIES Violations of any portion of the Policy may result in disciplinary action, including termination of employment. In addition, violations of insider trading requirements may subject you to civil and criminal penalties, fines and jail terms, and serious sanctions could be imposed against your managers and the Corporation. FURTHER INFORMATION If you have any questions about the Policy, or about its applicability with respect to a particular matter, please contact the Control Room at 1.704.388.3981. Bank of America Corporation Code of Ethics and General Policy on Insider Trading Page 13 of 13 EX-31 6 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, David B. Gebler, Chairman, Chief Executive Officer and President of Airlease Management Services, Inc., the General Partner of Airlease Ltd., A California Limited Partnership, certify that: 1. I have reviewed this annual report on Form 10-KSB of Airlease Ltd., A California Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; 4. The issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) for the issuer and have: a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the issuer's most recent fiscal quarter (the issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and 5. The issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. Date: March 18, 2004 /s/ DAVID B. GEBLER _____________________________________ David B. Gebler Chairman, Chief Executive Officer and President EX-31 7 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Robert A. Keyes, Chief Financial Officer of Airlease Management Services, Inc., the General Partner of Airlease Ltd., A California Limited Partnership, certify that: 1. I have reviewed this annual report on Form 10-KSB of Airlease Ltd., A California Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; 4. The issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) for the issuer and have: a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the issuer's most recent fiscal quarter (the issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and 5. The issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. Date: March 18, 2004 /s/ ROBERT A. KEYES _______________________ Robert A. Keyes Chief Financial Officer EX-32 8 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-KSB for the period ended December 31, 2003 (the "Report") of Airlease Ltd., A California Limited Partnership (the "Partnership"), I, David B. Gebler, Chairman, Chief Executive Officer and President of Airlease Management Services, Inc., the General Partner of the Partnership, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. Dated: March 18, 2004 /s/ DAVID B. GEBLER _______________________________________________ David B. Gebler Chairman, Chief Executive Officer and President A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, AND WILL BE RETAINED BY AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. EX-32 9 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-KSB for the period ended December 31, 2003 (the "Report") of Airlease Ltd., A California Limited Partnership (the "Partnership"), I, Robert A. Keyes, Chief Financial Officer of Airlease Management Services, Inc., the General Partner of the Partnership, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. Dated: March 18, 2004 /s/ ROBERT A. KEYES _______________________ Robert A. Keyes Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, AND WILL BE RETAINED BY AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. EX-99 10 ex99-1.txt EXHIBIT 99.1 EXHIBIT 99.1 Contact: Jad Mansour (415) 765-1814 AIRLEASE LTD. ANNOUNCES PLAN TO SELL REMAINING ASSETS AND DISSOLVE SAN FRANCISCO, March 18, 2004 -- Airlease Ltd., A California Limited Partnership (OTCBB - AIRL), announced today that the Board of Directors of its General Partner, acting in response to a recommendation made by a special committee of independent directors, has directed the General Partner to sell the Partnership's remaining assets as attractive sale opportunities arise, distribute sale proceeds (after repaying debt and establishing appropriate reserves) to unitholders after disposition, and dissolve the Partnership when all assets are sold. Given current market conditions, the General Partner cannot predict either the actual timing for completing such sales or the prices and other terms of such sales. The General Partner also cannot predict when net proceeds will be distributed to unitholders or the aggregate amount of such net proceeds, both of which will depend upon a number of factors, including market conditions, the timing and terms of such asset sales, the amount of cash required to settle outstanding liabilities and contingencies, the amount of necessary cash reserves, and the expenses associated with selling assets and dissolving the Partnership. In 1997, the unitholders of the Partnership authorized the General Partner to decide not to make new aircraft investments, to sell aircraft when attractive opportunities arise, to distribute net sale proceeds and to dissolve the Partnership when all assets are sold. Since that time, the General Partner has continued to operate the Partnership and consider, from time to time, alternative investments. However, the General Partner has not made new investments in aircraft, primarily due to the weak aircraft leasing market. For a variety of reasons, including the General Partner's belief that significant improvement in this market is not forthcoming in the near term for the Partnership's three aircraft, the General Partner has now determined that unitholders likely will realize greater value from a dissolution of the Partnership compared to continued operation of the Partnership. Accordingly, the General Partner intends to exercise fully and promptly the authority granted to it previously by the unitholders to sell assets, distribute net proceeds and dissolve the Partnership. In 1997, the unitholders also authorized the General Partner to impose restrictions on the transferability of outstanding units. The General Partner has not taken this action, although it reserves the right to do so if it 1 concludes that implementing such restrictions would be in the best interests of the unitholders in light of current partnership tax law. The Partnership's portfolio consists of three aircraft. One aircraft, a 727-200FH, is leased to FedEx Corporation under a lease which expires in April 2006. The other two aircraft are MD-82s leased to CSI Aviation Services, Inc. through May 2004. The General Partner is actively seeking buyers for these aircraft. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: The Partnership has included in this press release certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the Partnership's business, operations and financial condition. The words or phrases "can be", "may affect", "may depend", "expect", "believe", "anticipate", "intend", "will", "estimate", "project" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and the Partnership cautions you that any forward-looking information provided by or on behalf of the Partnership is not a guarantee of future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Partnership's control, in addition to those discussed in the Partnership's filings with the Securities and Exchange Commission, including (i) changes in the aircraft or aircraft leasing market; (ii) the economic downturn in the airline industry; (iii) default by lessees under leases causing the Partnership to incur uncontemplated expenses or not to receive rental income as and when expected; (iv) the continued impact of the events of September 11, 2001, as well as war, acts of terrorism, or other military involvement by the U.S. or others in Iraq or other regions, on the aircraft or aircraft leasing market and on the airline industry; (v) changes in interest rates; (vi) the timing of asset sales, the prices received by the Partnership for its assets, and the costs of selling assets, satisfying Partnership liabilities and contingencies, and dissolving the Partnership; and (vii) legislative or regulatory changes that adversely affect the value of aircraft. All such forward-looking statements are current only as of the date on which such statements were made. The Partnership does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events. March 18, 2004 # # # 2 -----END PRIVACY-ENHANCED MESSAGE-----