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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER:
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 68-0070656
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2320 MARINSHIP WAY, SUITE 300, SAUSALITO, CA 94965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 331-5281
TITLE OF EACH CLASS
-----------------------
COMMON STOCK
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 Registration S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 19, 2001 was approximately $40.6 million (based on a
closing sale price of $9.38 per share as reported on the NASDAQ National
Market).
The number of shares of the registrant's Common Stock outstanding as of
March 19, 2001 was 8,713,836.
The Company's Proxy Statement for the 2001 Annual Meeting of Stockholders is
incorporated by reference into Part III of this 10-K.
1
WILLIS LEASE FINANCE CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
PART III
Item 10. Directors and Executives Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management 19
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Schedules and Reports on Form 8-K 20
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Willis Lease Finance Corporation and its subsidiaries (the "Company") is a
provider of aviation services focusing on leasing aftermarket commercial
aircraft engines and other aircraft-related equipment. The Company provides this
service to passenger airlines and air cargo carriers. Aircraft operators require
engines and parts beyond those installed in the aircraft that they operate.
These "spare" aircraft engines and parts are required for various reasons
including requirements that engines and parts be inspected and repaired at
regular intervals based on equipment utilization. Furthermore, unscheduled
events such as mechanical failure, and Federal Aviation Administration ("FAA")
directives or manufacturer recommended actions for maintenance, repair and
overhaul of engines and parts can give rise to demand for spare engines.
The Company's core focus has been on providing operating leases of
aftermarket commercial aircraft engines and other aircraft-related equipment. As
of December 31, 2000, the Company had a total lease portfolio (including 10
engines counted as discontinued operations) of 52 lessees in 23 countries and
the Company's total lease portfolio (including net investments in direct finance
leases) consisted of 110 engines, six aircraft and four spare parts packages
with an aggregate net book value of $419.9 million. The Company targets
medium-term operating leases, typically with initial lease terms of three to
seven years, where the Company retains the risks and benefits associated with
the residual value of the leased asset. The Company actively manages its
portfolio and structures its leases in order to enhance these residual values.
The Company's leasing business focuses on popular Stage III commercial jet
aircraft engines manufactured by CFM International, General Electric, Pratt &
Whitney, Rolls Royce and International Aero Engines. These engines are the most
widely used aircraft engines in the world, powering Boeing, McDonnell Douglas
and Airbus aircraft.
In 1994, the Company began selling aircraft parts and components through a
subsidiary Willis Aeronautical Services, Inc. ("WASI"). WASI's strategy is to
focus on the acquisition of aviation equipment, such as whole engines and
aircraft, which can be dismantled and sold as parts at a greater profit. WASI
also supplies certain parts and components used in the maintenance, repair and
overhaul of the Company's portfolio of aircraft and engines. WASI was sold in
November 2000, as described below.
In 1998, the Company began disassembling commercial jet engines and
providing parts cleaning, testing and classification services through Pacific
Gas Turbine Center, Incorporated ("PGTC Inc."). PGTC Inc. received certification
in November 1998 from the FAA to perform maintenance, repair and overhaul
services for Pratt & Whitney JT8D and JT9D engines. PGTC Inc. commenced repair
of JT8D engines shortly after receiving FAA certification. In May 1999, the
Company contributed the operations and assets of PGTC Inc. to a newly formed
joint venture with Chromalloy Gas Turbine Corporation, Pacific Gas Turbine
Center, LLC ("PGTC LLC"). PGTC Inc. and its successor, PGTC LLC provide engine
disassembly and maintenance, repair and overhaul services to the Company and
third parties. The Company sold its interest in PGTC LLC in November 2000, as
described below.
On November 7, 2000, the Company entered into agreements for a series of
strategic transactions, each of which closed on November 30, 2000, with
Flightlease AG, a corporation organized under the laws of Switzerland
("Flightlease"), SR Technics Group, a corporation organized under the laws of
Switzerland ("SRT"), FlightTechnics, LLC, a Delaware limited liability company
("FlightTechnics") and SR Technics Group America, Inc., a Delaware corporation
("SRT Group America"), each of which are affiliated companies.
The Company sold its membership interests in its engine maintenance, repair
and testing joint venture with Chromalloy Gas Turbine Corporation, Pacific Gas
Turbine Center LLC ("PGTC LLC"), to SRT Group America for $13.1 million (subject
to post-closing adjustments). Also, the Company sold its aircraft parts and
components subsidiary, Willis Aeronautical Services, Inc. ("WASI"), to SRT Group
America for $24.9 million. The Company acquired five aircraft engines from SRT
for $43.0 million drawn from the proceeds of the sale of WASI and its membership
interests in PGTC LLC and subsequently leased them back to SRT for periods of
four and ten years.
The Company entered into a three year business cooperation period with
Flightlease and SRT by which Flightlease and SRT have price discounts and lowest
price guarantees on short term and long term engine leases from the Company.
Flightlease and SRT in turn will provide the Company with access to spare
engines, will promote the Company's engine leasing efforts and the development
of other products, and will facilitate business opportunities among the Company
and Flightlease's and SRT's other business partners. The Company has also
entered into put option arrangements regarding certain engines scheduled to be
run to the end of their useful lives to sell them at the Company's discretion,
to SRT at pre-determined prices.
3
The Company sold 1,300,000 newly issued shares of its common stock to
FlightTechnics and an option, exercisable within 18 months of the closing date,
to purchase newly issued shares of its common stock in a private placement in an
amount between 1,700,000 shares and up to an amount that would give
FlightTechnics 34.9% of the Company's issued and outstanding common stock. The
price per share for the first additional 1,700,000 shares purchased pursuant to
this option will be $15.00, and the price per share for any shares purchased in
excess of the first additional 1,700,000 shares will be $16.50. FlightTechnics
has two demand registration rights which are exercisable beginning three years
after the closing date. The Company amended its Rights Agreement dated September
24, 1999 between the Company and American Stock Transfer & Trust Company to
include FlightTechnics and its affiliates under the definition of an "Exempt
Person", subject to FlightTechnics and its affiliates owning a certain
percentage of the Company's common stock.
FlightTechnics also may purchase more shares of the Company's common stock
in the open market or from existing shareholders upon the occurrence of certain
conditions, but in no event may FlightTechnics and its affiliates collectively
own more than 49.9% of the Company's issued and outstanding common stock.
Certain stockholders, including Charles F. Willis IV, and FlightTechnics have
also agreed to certain voting provisions and to restrictions on their abilities
to sell their shares of the Company's common stock.
As part of these transactions, Donald A. Nunemaker resigned as a member of
the Company's board of directors, although he remains the Company's Executive
Vice President and Chief Administrative Officer. In his place, the Company's
board of directors appointed Hans Jorg Hunziker, President of Flightlease, to
the board. FlightTechnics has the right to appoint an additional director to the
Company's board of directors upon the exercise of its option, at which time the
board membership will be increased from five directors to seven directors.
The Company is a Delaware corporation. Its executive offices are located at
2320 Marinship Way, Suite 300, Sausalito, California 94965. The Company
transacts business directly and through its subsidiaries unless otherwise
indicated.
AIRCRAFT EQUIPMENT LEASING
LEASES. The vast majority of the Company's current leases to air carriers,
manufacturers and overhaul/repair facilities are operating leases as opposed to
finance leases. Under an operating lease, the Company retains title to the
aircraft equipment thereby retaining the benefit and assuming the risk of the
residual value of the aircraft equipment. Operating leases allow airlines
greater fleet and financial flexibility due to their shorter-term nature and the
relatively small initial capital outlay necessary to obtain use of the aircraft
equipment. Operating lease rates are generally priced higher than finance lease
rates, in part because of the risks associated with the residual value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results."
The Company targets the medium-term lease market, typically with initial
lease terms of three to seven years. All of the Company's lease transactions
with initial lease terms of three to seven years are triple-net leases. A
triple-net lease requires the lessee to make the full lease payment and pay any
other expenses associated with the use of the equipment, such as maintenance,
casualty and liability insurance, sales or use taxes and personal property
taxes. The leases contain detailed provisions specifying maintenance standards
and the required condition of the aircraft equipment upon return at the end of
the lease. During the term of the lease, the Company generally requires the
lessee to maintain the aircraft engine in accordance with an approved
maintenance program designed to ensure that the aircraft engine meets applicable
regulatory requirements in the jurisdictions in which the lessee operates. Under
short-term leases and certain medium-term leases, the Company may undertake a
portion of the maintenance and regulatory compliance risk.
The Company attempts to mitigate risk where possible. For example, the
Company typically makes an independent analysis of the credit risk associated
with each lessee before entering into a lease transaction. The Company's credit
analysis generally consists of evaluating the prospective lessee's financial
standing utilizing financial statements and trade and/or banking references. In
certain circumstances, where the Company or its lenders believe necessary, the
Company may require its lessees to obtain a partial letter of credit or a
guarantee from a bank or a third party. The Company also evaluates insurance and
expropriation risk and evaluates and monitors the political and legal climate of
the country in which a particular lessee is located in order to determine the
Company's ability to repossess its equipment should the need arise.
The Company often collects maintenance reserves and security deposits from
engine and aircraft lessees and security deposits from aircraft parts lessees.
Generally, the Company collects, in advance, a security deposit equal to at
least one month's lease payment, together with one month's estimated maintenance
reserve. The security deposit is returned to the lessee after all return
conditions have been met. Maintenance reserves are accumulated in accounts
maintained by the Company or its lenders and are used when normal repairs
associated with engine use or maintenance are required. In many cases, to the
extent that cumulative maintenance reserves are inadequate to fund normal
repairs required prior to return of the
4
engine to the Company, the lessee is obligated to cover the shortfall. Parts
leases generally require that the parts be returned in the condition the parts
were in at lease inception.
During the lease period, the Company's leases require that the leased
equipment undergo maintenance and inspection at qualified maintenance facilities
certified by the FAA or its foreign equivalent. In addition, when equipment
comes off-lease, it undergoes inspection to verify compliance with lease return
conditions.
As a result of these guidelines, the Company has not experienced any
material losses attributable to credit or collection problems. However, the
Company cannot assure that it will not experience collection problems or
significant losses in the future. In addition, while the Company cannot assure
that its maintenance and inspection requirements will result in a realized
return upon termination of a lease, the Company believes that its attention to
its lessees and its emphasis on maintenance and inspection contributes to
residual values and generally helps the Company to recover its investment in its
leased equipment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results."
Upon termination of a lease, the Company will re-lease or sell the aircraft
equipment. The demand for aftermarket aircraft equipment for either sale or
re-lease may be affected by a number of variables including general market
conditions, regulatory changes (particularly those imposing environmental,
maintenance and other requirements on the operation of aircraft engines),
changes in the supply and cost of aircraft equipment and technological
developments. In addition, the value of particular used aircraft, spare parts or
aircraft engines varies greatly depending upon their condition, the maintenance
services performed during the lease term and as applicable the number of hours
remaining until the next major maintenance is required. If the Company is unable
to re-lease or sell aircraft equipment on favorable terms, its ability to
service debt may be adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results."
AIRCRAFT EQUIPMENT HELD FOR LEASE. The Company's management frequently
reviews opportunities to acquire suitable aircraft equipment based on market
demand, customer airline requirements and in accordance with the Company's lease
portfolio mix criteria and planning strategies for leasing. Before committing to
purchase specific equipment, the Company generally takes into consideration such
factors as estimates of future values, potential for remarketing, trends in
supply and demand for the particular make, model and configuration of the
equipment and the anticipated obsolescence of the equipment. As a result,
certain types and configurations of equipment do not necessarily fit the profile
for inclusion in the Company's portfolio of equipment owned and used in its
leasing operation.
The Company focuses particularly on the noise compliant Stage III aircraft
engines manufactured by CFM International ("CFM"), General Electric, Pratt &
Whitney ("PW"), Rolls Royce and International Aero Engines. As of December 31,
2000, all but 20 (10 of which are classified as discontinued operations) of the
engines in the Company's lease portfolio were Stage III or Stage II engines that
have been fitted with "hush-kits" and were generally suitable for use on one or
more commonly used aircraft. The Company's parts packages consist of rotable
parts for use on commercial aircraft or the engines appurtenant to such
aircraft. The Company's investments in aircraft have primarily involved the
purchase of de Havilland DHC-8 commuter aircraft which are Stage III compliant.
The Company may make further investments in aircraft for lease in the future.
As of December 31, 2000, the Company had a total portfolio of 110 aircraft
engines and related equipment (including 10 engines counted as discontinued
operations), four spare parts packages and six aircraft with an aggregate
original cost of $451.9 million in its lease portfolio. As of December 31, 1999,
the Company had a total portfolio (including 14 engines counted as discontinued
operations) of 101 aircraft engines and related equipment, four spare parts
packages and eight aircraft with an aggregate original cost of $370.5 million in
its lease portfolio.
5
As of December 31, 2000, minimum future rentals for continuing operations
under the noncancelable leases (both operating and direct finance leases) of
these engines, parts and aircraft assets was as follows:
YEAR (in thousands)
----
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,782
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,267
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,915
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,945
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,952
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,975
------
$153,836
========
LESSEES. As of December 31, 2000, for continuing operations, the Company had
45 lessees of commercial aircraft engines and other aircraft-related equipment
in 23 countries.
The following table displays the regional profile of the Company's lease
customer base for continuing operations for the years ended December 31, 2000,
1999 and 1998. No single country other than the United States accounted for more
than 7%, 10% and 11% of the Company's lease revenue for the years ended December
31, 2000, 1999 and 1998, respectively.
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
---------------------------- ---------------------------- ----------------------------
(dollars in thousands) LEASE LEASE LEASE
REVENUE PERCENTAGE REVENUE PERCENTAGE REVENUE PERCENTAGE
--------- ---------- ------- ---------- ------- ----------
United States $12,554 26% $10,191 23% $9,465 30%
Europe 16,775 34 13,557 31 6,704 21
Mexico 3,560 7 4,546 10 3,440 11
Canada 4,141 8 3,327 8 2,047 6
Australia/New Zealand 280 1 551 1 925 3
Asia 4,173 9 4,147 10 2,710 9
South America 5,840 12 6,751 15 5,399 17
Middle East 1,689 3 1,009 2 917 3
----------------------------------------------------------------------------------------------------
Total $49,012 100% $44,079 100% $31,607 100%
----------------------------------------------------------------------------------------------------
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors that May Affect Future Results."
EQUIPMENT ACQUIRED FOR RESALE
The Company engages in the selective purchase and resale of commercial aircraft
engines and engine components in the aftermarket to complement its engine and
parts leasing business. The Company may purchase engines and components without
having a commitment for their sale. The Company assesses the supply and demand
of target engines and components through its sales force and relies, to a lesser
extent, on referrals and advertising in industry publications. The Company also
subscribes to a data package that provides it with access to lists composed of
operators and their specific engine inventories and engines on order.
6
DISCONTINUED OPERATIONS
EQUIPMENT HELD FOR LEASE
As part of the transaction with SRT and affiliates, the Company agreed to
retain a lease portfolio of 10 engines maintained and managed by WASI. Certain
of these engines are subject to put option arrangements where, at the option of
the Company, these engines can be sold to SRT Group America. In addition, other
additional engines have been identified as likely to be sold during the next
year.
To the extent that the engines in the portfolio retained are subject to put
options and do not fit within the Company's main portfolio or are identified as
likely to be sold, the assets and the results of operation are included in
discontinued operations.
As of December 31, 2000, for discontinued operations, the Company had three
lessees of commercial aircraft engines in two countries, the USA and Mexico.
SPARE PARTS SALES
In 1994, the Company began selling aircraft parts and components to
airlines, air cargo carriers, Maintenance, Repair and Overhaul (MRO) facilities
and other aircraft parts distributors through WASI. WASI purchases and resells
aftermarket engine parts, engines, modules, airframes and rotable components.
WASI purchases individual engine parts from airlines and others in the
aftermarket or acquires whole engines and aircraft. WASI has contracted with
PGTC Inc. and currently contracts with PGTC LLC as well as third parties to have
the engines dismantled and with third parties to have the aircraft dismantled
into their component parts for resale. Some of the parts are overhauled for WASI
by FAA-authorized repair agencies and then offered for sale to airlines,
maintenance and repair facilities, and distributors. To date, WASI has targeted
primarily General Electric CF6-50, Pratt & Whitney JT8D, JT9D and PW4000
aircraft engines and components. These engines are amongst the most widely used
aircraft engines in the world, powering Boeing, McDonnell Douglas and Airbus
aircraft, including the Boeing 727, 737, 747, 757 and 767, the McDonnell Douglas
MD-80 series and the Airbus A300, A310, A320, A330 and A340 aircraft. WASI has
begun to expand into engine components for the CFM-56, a high thrust engine used
on the popular Boeing 737.
The Company sold its shares in WASI on November 30, 2000.
ENGINE REPAIR, DISASSEMBLY, AND RELATED ACTIVITIES
In 1998, the Company began disassembling large commercial jet engines and
providing parts cleaning, testing and classification services through PGTC Inc.
PGTC Inc. was formed initially to provide such disassembly services to WASI. In
November 1998, PGTC Inc. received its FAR 145 Repair Station Air Agency
Certification from the FAA. The FAA certification allows PGTC Inc. and its
successor PGTC LLC to perform maintenance, repair and overhaul services for the
Pratt & Whitney JT8D and JT9D engines as well as clean, perform non-destructive
testing of and classify, as to condition, certain Pratt & Whitney engine parts.
PGTC Inc. commenced repair of JT8D engines shortly after receiving FAA
certification.
In May 1999, the Company entered into an agreement with Chromalloy Gas
Turbine Corporation, a subsidiary of Sequa Corporation ("Chromalloy"), to
operate a joint venture to perform maintenance, repair and overhaul of
commercial jet engines. Under the terms of the joint venture agreement, the
Company and Chromalloy formed a new company, PGTC LLC. The Company contributed
the operations and assets of its wholly owned subsidiary PGTC Inc. and
Chromalloy contributed working capital to the joint venture giving each a 50%
interest in the joint venture.
The Company sold its 50% interest in the PGTC LLC joint venture on November
30, 2000.
FINANCING/SOURCE OF FUNDS
The Company typically acquires the engines it leases with a combination of
equity capital and funds borrowed from financial institutions. The Company can
typically borrow 80% to 100% of an engine purchase price and 50% to 80% of an
aircraft or spare parts purchase price on a recourse, non-recourse or partial
recourse basis. Under several of the Company's term loans, the lender is
entitled to receive most of the lease payments associated with the financed
equipment to apply to debt service. Generally, lenders take a security interest
in the equipment. The Company retains ownership of the equipment, subject to
such security interest. Loan interest rates often reflect the financial
condition of the underlying lessees, the terms of the lease and percentage of
purchase price advanced, and the financial condition of the Company. The Company
obtains the
7
balance of the purchase price of the equipment, the "equity" portion, from
internally generated funds, cash-on-hand, and the net proceeds of prior common
stock offerings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
COMPETITION
The markets for the Company's products and services are very competitive,
and the Company faces competition from a number of sources. These include
aircraft, engine and aircraft parts manufacturers, aircraft and aircraft engine
lessors, airline and aircraft service and repair companies and aircraft spare
parts redistributors. Certain of the Company's competitors have substantially
greater resources than the Company, including greater name recognition, larger
and more diverse inventories, complementary lines of business and greater
financial, marketing, information systems and other resources. In addition,
equipment manufacturers, aircraft maintenance providers, FAA certified repair
facilities and other aviation aftermarket suppliers may vertically integrate
into the markets that the Company serves, thereby significantly increasing
industry competition. The Company can give no assurance that competitive
pressures will not materially and adversely affect the Company's business,
financial condition or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results."
INSURANCE
The Company requires its lessees to carry the types of insurance customary
in the air transportation industry, including comprehensive third party
liability insurance and physical damage and casualty insurance. In addition to
requiring full indemnification under the terms of the lease, the Company is
named as an additional insured on liability insurance policies carried by
lessees, with the Company or its lenders normally identified as the payee for
loss and damage to the equipment. The Company monitors compliance with the
insurance provisions of the leases. The Company also carries contingent physical
damage and third party liability insurance as well as product liability
insurance.
GOVERNMENT REGULATION
The Company's customers are subject to a high degree of regulation in the
jurisdictions in which they operate. For example, the FAA regulates the
manufacture, repair and operation of all aircraft operated in the United States
and equivalent regulatory agencies in other countries regulate aircraft operated
in those countries. Such regulations also indirectly affect the Company's
business operations. All aircraft operated in the United States must be
maintained under a continuous condition monitoring program and must periodically
undergo thorough inspection and maintenance. The inspection, maintenance and
repair procedures for commercial aircraft are prescribed by regulatory
authorities and can be performed only by certified repair facilities utilizing
certified technicians. The FAA can suspend or revoke the authority of air
carriers or their licensed personnel for failure to comply with regulations and
ground aircraft if their airworthiness is in question.
While the Company's leasing and reselling business is not regulated, the
aircraft, engines and engine parts that the Company leases and sells to its
customers must be accompanied by documentation that enables the customer to
comply with applicable regulatory requirements. Furthermore, before parts may be
installed in an aircraft, they must meet certain standards of condition
established by the FAA and/or the equivalent regulatory agencies in other
countries. Specific regulations vary from country to country, although
regulatory requirements in other countries are generally satisfied by compliance
with FAA requirements. Presently, whenever necessary, with respect to a
particular engine or engine component, the Company utilizes FAA and/or Joint
Aviation Authority certified repair stations to repair and certify engines and
components to ensure marketability.
Effective January 1, 2000, federal regulations stipulate that all aircraft
engines hold, or be capable of holding, a noise certificate issued under Chapter
3 of Volume 1, Part II of Annex 16 of the Chicago Convention, or have been shown
to comply with Stage III noise levels set out in Section 36.5 of Appendix C of
Part 36 of the FAA Regulations of the United States if the engines are to be
used in the continental United States. Additionally, much of Europe has adopted
similar regulations. As of December 31, 2000, all but 20 (10 of which are
classified as discontinued operations) of the engines in the Company's lease
portfolio were Stage III engines. The 20 engines that do not meet Stage III
noise level requirements (Stage II engines) are on-lease or available for lease
to customers located in countries which have not adopted Stage III noise
regulations such as Mexico and the countries of South America. Additionally,
Stage II engines may be "hush-kitted" so as to meet Stage III noise regulations.
The Company believes that the aviation industry will be subject to continued
regulatory activity. Additionally, increased oversight has and will continue to
originate from the quality assurance departments of airline operators. The
Company has been able to meet all such requirements to date, and believes that
it will be able meet any additional requirements that may be imposed. The
Company cannot assure, however, that new, more stringent government regulations
will not be adopted in the future or that any such new regulations, if enacted,
would not have a material adverse impact on the Company.
8
EMPLOYEES
As of December 31, 2000, the Company had 33 full-time employees and 1
part-time employee (excluding consultants), in equipment acquisition, leasing,
sales and administration. None of the Company's employees is covered by a
collective bargaining agreement and the Company believes its employee relations
are satisfactory.
ITEM 2. PROPERTIES
The Company's principal offices are located at 2320 Marinship Way, Suite
300, Sausalito, California 94965. The Company occupies space in Sausalito under
a lease that covers approximately 9,300 square feet of office space and expires
on May 31, 2003. Aircraft asset leasing, financing, sales and general
administrative activities are conducted from the Sausalito location. The Company
also sub-leases from WASI on a month-to-month basis approximately 2,800 square
feet of office and warehouse space for the Company's operations at San Diego,
California.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year 2000.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following information relates to the Company's Common Stock, which is
listed on the NASDAQ National Market under the symbol WLFC. As of March 19, 2001
there were approximately 917 stockholders of record of the Company's Common
Stock.
The high and low sales price of the Common Stock for each quarter of 2000
and 1999, as reported by NASDAQ, are set forth below:
2000 1999
---- ----
HIGH LOW HIGH LOW
First Quarter $ 9.13 $5.00 $19.25 $14.87
Second Quarter 8.56 6.00 18.25 14.50
Third Quarter 8.00 5.81 17.37 13.19
Fourth Quarter 10.00 5.06 7.31 3.81
During the years ended December 31, 2000 and 1999 the Company did not pay
cash dividends to Company stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data and
operating information of the Company. The selected consolidated financial and
operating data should be read in conjunction with the Consolidated Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
YEARS ENDED DECEMBER, 31
-----------------------------------------
(dollars in thousands) 2000 1999 1998 1997 1996
---- ---- ---- ----
REVENUE:
Lease revenue 49,012 44,079 31,607 19,304 13,741
Gain on sale of leased equipment 8,129 11,371 12,628 4,165 2
Sale of equipment acquired for resale - 9,775 4,106 12,748 12,105
Other Income 489 - - - -
------------------------------------------------------------
Total revenue 57,630 65,225 48,341 36,217 25,848
------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 5,474 10,123 8,314 3,943 2,103
------------------------------------------------------------
NET INCOME 7,814 3,283 9,251 7,338 2,804
------------------------------------------------------------
BASIC EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE $ 0.73 $ 1.37 $ 1.14 $ 0.72 $ 0.56
DILUTED EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE $ 0.72 $ 1.36 $ 1.11 $ 0.69 $ 0.56
BALANCE SHEET DATA:
Total assets $ 455,930 $ 408,752 $ 326,105 $ 196,667 $123,987
Debt (includes capital lease obligation) $ 301,346 $ 292,167 $ 214,860 $ 104,235 $ 76,146
Shareholder's equity $ 95,690 $ 69,538 $ 65,842 $ 54,601 $ 23,202
LEASE PORTFOLIO:
Engines at end of the period - continuing operations 100 87 69 44 32
Engines at end of the period - discontinued operations 10 14 5 - -
Spare parts packages at the end of the period 4 4 7 7 2
Aircraft at the end of the period 6 8 5 3 -
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
GENERAL. The Company's core focus has been on providing operating leases of
aftermarket commercial aircraft engines and other aircraft-related equipment. As
of December 31, 2000, the Company had a total portfolio (including engines
counted as discontinued operations) of 52 lessees in 23 countries and its total
lease portfolio consisted of 110 engines, six commuter aircraft and four spare
parts packages with an aggregate net book value of $419.9 million. The Company
targets medium-term operating leases, typically with initial lease terms of
three to seven years, where the Company retains the risks and benefits
associated with the residual value of the leased asset. The Company actively
manages its portfolio and structures its leases in order to enhance these
residual values. The Company's leasing business focuses on popular Stage III
commercial jet aircraft engines manufactured by CFM, General Electric, Pratt &
Whitney, Rolls Royce and International Aero Engines. These engines are the most
widely used aircraft engines in the world, powering Boeing, McDonnell Douglas
and Airbus aircraft.
In 1994, the Company began selling aircraft parts and components through
WASI. WASI's strategy is to focus on the acquisition of aviation equipment, such
as whole engines and aircraft, which can be dismantled and sold as parts at a
greater profit. WASI also supplies certain parts and components used in the
maintenance, repair and overhaul of the Company's portfolio of aircraft and
engines. WASI was sold on November 30, 2000.
In 1998, the Company began disassembling commercial jet engines and
providing parts cleaning, testing and classification services through Pacific
Gas Turbine Center, Incorporated ("PGTC Inc."). PGTC Inc. received certification
in November 1998 from the FAA to perform maintenance, repair and overhaul
services for Pratt & Whitney JT8D and JT9D engines. PGTC Inc. commenced repair
of JT8D engines shortly after receiving FAA certification. In May 1999, the
Company contributed the operations and assets of PGTC Inc. to a newly formed
joint venture, Pacific Gas Turbine Center, LLC ("PGTC LLC"). PGTC Inc. provided
and its successor, PGTC LLC provides engine disassembly and maintenance, repair
and overhaul services to the Company and third parties. The Company sold its
interest in PGTC LLC on November 30, 2000.
With the sale of these two businesses, the Company no longer engages in the
business of parts sales or in dissembling repair and maintenance of aircraft
engine, and its core focus is its leasing portfolio.
LEASING RELATED ACTIVITIES. Revenue from leasing of aircraft equipment is
recognized as operating lease or finance lease revenue over the terms of the
applicable lease agreements. The vast majority of the Company's leases are
accounted for as operating leases. Under an operating lease, the Company retains
title to the leased equipment, thereby retaining the potential benefit and
assuming the risk of the residual value of the leased equipment.
The Company generally depreciates engines on a straight-line basis over 15
years to a 55% residual value. Spare parts packages are generally depreciated on
a straight-line basis over 15 years to a 25% residual value. Aircraft are
generally depreciated on a straight-line basis over 13-20 years to a 15%-17%
residual value. For assets that are leased with an intent to disassemble upon
lease termination, the Company depreciates the assets over their estimated lease
term to a residual value based on an estimate of the wholesale value of the
parts after disassembly.
At the commencement of a lease, the Company often collects security deposits
(normally equal to at least one month's lease payment) and maintenance reserves
(normally equal to one month's estimated maintenance expenses) from the lessee.
The security deposit is returned to the lessee after all lease conditions have
been met. Maintenance reserves are accumulated in accounts maintained by the
Company or the Company's lenders and are used when normal repair associated with
engine use or maintenance is required. In many cases, to the extent that
cumulative maintenance reserves are inadequate to fund normal repairs required
prior to return of the engine to the Company, the lessee is obligated to cover
the shortfall.
SALES RELATED ACTIVITIES. For equipment sold out of the Company's lease
portfolio, the Company recognizes the gain associated with the sale as revenue.
Gain consists of sales proceeds less the net book value of the equipment sold
and any costs directly associated with the sale. Additionally, to the extent
that any deposits or reserves are not included in the sale and the purchaser of
the equipment assumes any liabilities associated therewith, such deposits and
reserves are included in the gain on sale.
11
The Company engages in the selective purchase and sale of commercial
aircraft engines and engine components. Assets acquired for resale are recorded
at the lower of cost or net realizable value. Gross revenue from the sale of
equipment is reflected as sale of equipment acquired for resale with the
corresponding cost of the equipment shown as an expense item.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Revenue from continuing operations is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999
----------------------------------------------------------
AMOUNT % AMOUNT %
------ - ------ -
(DOLLARS IN THOUSANDS)
Lease revenue $49,012 85.0% $44,079 67.6%
Gain on sale of leased equipment 8,129 14.1 11,371 17.4
Sale of equipment acquired for resale - - 9,775 15.0
Other income 489 0.9 - -
----------------------------- ----------------------------
Total $57,630 100.0% $65,225 100.0%
============================= ============================
LEASING RELATED ACTIVITIES. Lease related revenue for the year ended
December 31, 2000, increased 11% to $49.0 million from $44.1 million for the
comparable period in 1999. This increase reflects lease related revenues from
additional engines. The aggregate of net book value of leased equipment and
net investment in direct finance lease at December 31, 2000 and 1999 was
$416.7 million and $338.6 million, respectively, an increase of 23%.
During the year ended December 31, 2000, 27 engines and three aircraft
were added to the Company's lease portfolio at a total cost of $137.9
million. Eighteen engines from the lease portfolio were sold or transferred
to WASI for sale as parts. The engines sold had a total net book value of
$36.5 million and were sold for a gain of $8.1 million.
During the year ended December 31, 1999, 24 engines and three spare parts
packages, from the lease portfolio were sold or transferred to WASI for sale
as parts. These engines and the parts packages had a total net book value of
$39.2 million and were sold for a gain of $11.4 million.
During the year ended December 31, 1999, the Company sold three engines
acquired for resale for $9.8 million resulting in a gain of $1.4 million.
OTHER INCOME. Other income relates to a one-time event
associated with assignment of a lease for office and warehouse space.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to
continuing activities increased 22% to $24.6 million for the year ended December
31, 2000, from the comparable period in 1999, due to an increase in average debt
outstanding and interest rates during the period. This increase in debt was
primarily related to debt associated with the increase in lease portfolio
assets. Residual sharing expense decreased 25% to $0.6 million for the year
ended December 31, 2000 from $0.8 million for the comparable period in 1999.
Residual sharing arrangements apply to two of the Company's engines as of
December 31, 2000 and are a function of the difference between the debt
associated with the residual sharing arrangement and estimated residual
proceeds. The Company accrues for its residual sharing obligations using net
book value as an estimate for residual proceeds.
INTEREST INCOME. Interest income for the year ended December 31, 2000,
decreased to $0.9 million from $1.0 million for the year ended December 31,
1999.
DEPRECIATION EXPENSE. Depreciation expense increased 8% to $12.4 million for
the year ended December 31, 2000, from the comparable period in 1999, due
primarily to the increase in lease portfolio assets in 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 1% to $11.9 million for the year ended December 31, 2000, from the
comparable period in 1999. Five months of expenses related to PGTC Inc. are
included in the year ended December 31, 1999.
12
INCOME TAXES. Income taxes, exclusive of tax on discontinued operations for
the year ended December 31, 2000, increased to $3.5 million from $3.2 million
for the comparable period in 1999. This increase reflects an increase in the
Company's effective tax rate for the year ended December 31, 2000 to
approximately 39% on continuing operations from approximately 24% in 1999 due to
adjustments of state tax apportionment. The Company's tax rate is subject to
change based on changes in the mix of domestic and foreign leased assets, the
proportions of revenue generated within and outside of California and numerous
other factors, including changes in tax law.
DISCONTINUED OPERATIONS. In November 2000, the Company agreed to sell its
engine parts and components subsidiary (WASI) and its membership interest in its
joint venture (PGTC LLC). The sale was completed on November 30, 2000.
Accordingly, the Company's parts operations and its equity share of the
results of the joint venture are accounted for as discontinued operations and
prior periods financial statements have been reclassified accordingly.
Net earnings/(loss) from discontinued operations for the years ended
December 31, 2000 and 1999 are as follows (in thousands of dollars):
2000 1999
---- ----
Revenue:
Operating lease income $2,383 $4,087
Gain on sale of leased equipment - -
Spare parts sales 23,479 25,436
Sale of equipment acquired for resale 2,500 -
Other income (20) 231
-------------------------
Total Revenue $28,342 $29,754
-------------------------
Expenses:
Depreciation expense $2,206 $2,183
Cost of spare parts sales 18,030 28,317
Cost of equipment acquired for resale 2,150 -
General and administrative 3,153 5,750
-------------------------
Total expenses $25,539 $36,250
-------------------------
Earnings (loss) from operations: $2,803 $(6,496)
Net interest and finance cost 1,037 1,902
Loss from unconsolidated affiliate 1,344 622
-------------------------
Earnings (loss) before income taxes $422 $(9,020)
Income taxes (164) 2,180
-------------------------
Net earnings (loss) from discontinued
operations $258 $(6,840)
-------------------------
The gain on disposal of discontinued operations for the year ended December 31,
2000 is as follows (in thousands of dollars):
Proceeds from sale of shares in WASI and interest in PGTC LLC $37,985
Book value of assets sold (33,759)
--------
$4,226
Transaction costs (448)
Operating loss from measurement date to closing (588)
Write-down of leased engine portfolio (471)
-----
Gain on disposal of discontinued operations $2,719
Income tax (637)
-----
Net gain on disposal of discontinued operations $2,082
------
13
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue from continuing operations is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
AMOUNT % AMOUNT %
------ - ------ -
(DOLLARS IN THOUSANDS)
Lease revenue $44,079 67.6% $31,607 65.4%
Gain on sale of leased equipment 11,371 17.4 12,628 26.1
Sale of equipment acquired for resale 9,775 15.0 4,106 8.5
----- ---- ----- ---
Total $65,225 100.0% $48,341 100.0%
===========================================================
LEASING RELATED ACTIVITIES. Lease related revenue for the year ended
December 31, 1999, increased 39% to $44.1 million from $31.6 million for the
comparable period in 1998. This increase reflects lease related revenues from
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at December 31, 1999 and
1998 was $338.6 million and $283.4 million, respectively, an increase of 19%.
During the year ended December 31, 1999, 51 engines and three aircraft were
added to the Company's lease portfolio at a total cost of $119.8 million.
Twenty-four engines and three spare parts packages from the lease portfolio were
sold or transferred to WASI for sale as parts. The engines sold had a total net
book value of $39.2 million and were sold for a gain of $11.4 million.
During the year ended December 31, 1998, 10 engines, one spare parts package
and one aircraft from the lease portfolio were sold or transferred to WASI for
sale as parts. These engines and the aircraft had a total net book value of
$25.3 million and were sold for a gain of $12.6 million.
During the year ended December 31, 1999, the Company sold three engines
acquired for resale for $9.8 million which resulted in a gain of $1.4 million,
compared to the year ended December 31, 1998, during which the Company sold one
engine acquired for resale for $4.1 million resulting in a gain of $0.5 million.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense increased 44% to
$20.1 million for the year ended December 31, 1999, from the comparable period
in 1998, due to an increase in average debt outstanding during the period. This
increase in debt was primarily related to debt associated with the increase in
lease portfolio assets. Residual sharing expense increased 5% to $846,000 for
the year ended December 31, 1999 from $803,000 for the comparable period in
1998. Residual sharing arrangements apply to three of the Company's engines as
of December 31, 1999 and are a function of the difference between the debt
associated with the residual sharing arrangement and estimated residual
proceeds. The Company accrues for its residual sharing obligations using net
book value as an estimate for residual proceeds.
INTEREST INCOME. Interest and other income for the year ended December 31,
1999, decreased to $1.0 million from $1.4 million for the year ended December
31, 1998. The decrease was primarily due to ancillary fees generated in
connection with a lease arrangement during the year ended December 31, 1998. The
Company had no such fee activity during the comparable 1999 period.
DEPRECIATION EXPENSE. Depreciation expense increased 56% to $11.5 million
for the year ended December 31, 1999, from the comparable period in 1998, due
primarily to the increase in lease portfolio assets in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19% to $12.1 million for the year ended December 31, 1999, from the
comparable period in 1998. This change reflects increased expenses, in all
business segments, associated with staff additions, increased non-capitalizable
engine maintenance related expenses, as well as an increase in professional
fees. Five months of expenses related to PGTC Inc. are included in the year
ended December 31, 1999.
14
INCOME TAXES. Income taxes, exclusive of tax on discontinued operations and
extraordinary items, for the year ended December 31, 1999, decreased to $3.2
million from $5.6 million for the comparable period in 1998. This decrease
mainly reflects a decrease in the Company's effective tax rate for the year
ended December 31, 1999. The decrease in the effective tax rate was related to
state taxes. The Company's tax rate is subject to change based on changes in the
mix of domestic and foreign leased assets, the proportions of revenue generated
within and outside of California and numerous other factors, including changes
in tax law.
DISCONTINUED OPERATIONS. In November 2000, the Company agreed to sell its
engine parts and components subsidiary (WASI) and its membership interest in its
joint venture (PGTC LLC). The sale was completed on November 30, 2000.
Accordingly, the Company's parts operations and its equity share of the
results of the joint venture are accounted for as discontinued operations and
prior periods financial statements have been reclassified accordingly.
Net earnings/(loss) from discontinued operations for the years ended
December 31, 1999 and 1998 are as follows (in thousands of dollars):
1999 1998
---- ----
Revenue:
Operating lease income $4,087 $1,439
Gain on sale of leased equipment - 785
Spare parts sales 25,436 24,077
Other income 231 46
---------------------
Total Revenue $29,754 $26,347
---------------------
Expenses:
Depreciation expense $2,183 $875
Cost of spare parts sales 28,317 17,245
General and administrative 5,750 5,058
---------------------
Total expenses $36,250 $23,178
---------------------
Earnings (loss) from operations: $(6,496) $3,169
Net interest and finance cost 1,902 1,273
Loss from unconsolidated affiliate 622 -
---------------------
Earnings (loss) before income taxes $(9,020) $1,896
Income taxes 2,180 (759)
---------------------
Net earnings (loss) from discontinued operations $(6,840) $1,137
---------------------
EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had
residual sharing provisions and an interest rate of 10%. The repayment resulted
in an extraordinary expense of $0.2 million, net of tax.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value.
SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the effective
date of SFAS No. 133. SFAS No. 133, as amended, is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Statement
requires the recognition of derivative instruments at their fair value and that
changes in the fair value are recorded as components of other Comprehensive
Income and/or Earnings for the period. The Company has a limited number of
interest rate swaps which will be accounted for under this Statement. Transition
arrangements under this Statement mean that the fair value of the swaps,
estimated at $0.7 million as of December 31, 2000, would be recorded to Other
Comprehensive Income. Future changes in fair value are not estimable at this
time.
15
In September 2000, FASB issued SFAS 140 "Accounting for transfers and
servicing of financial assets and extinguishment of liabilities, an amendment of
FASB Statement No. 125." Statement 140 provides guidance on the following
topics: securitization transactions involving financial assets, sales of
financial assets such as receivables, loans and securities, collateralized
borrowing arrangements, repurchase agreements, and extinguishments of
liabilities. The provisions of Statement 140 will become effective for
transactions entered into after March 31, 2001. The Company is currently
evaluating the impact of SFAS140 on the Company's consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth through borrowings secured
by its equipment lease portfolio. Cash of approximately $104.4 million, $118.2
million and $194.7 million, in the years ended December 31, 2000, 1999 and 1998,
respectively, was derived from this activity. In these same time periods $95.3
million, $73.0 million and $51.4 million, respectively, was used to pay down
related debt or capital lease obligations. On November 30, 2000, net proceeds
from a private placement of common stock and options were approximately $18.2
million. Cash flow from operating activities generated $26.5 million and $24.3
million in the years ended December 31, 2000 and 1999 respectively, and cash
flows from operating activities used approximately $20.5 million in the year
ended December 31, 1998. The deficit cash flow from operations in 1998 was
primarily attributable to the acquisition of used aircraft assets for WASI's
inventory and deposits made in connection with future, committed inventory
purchases.
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $137.9 million, $119.8 million and $171.1 million of funds
were used for this purpose in the years ended December 31, 2000, 1999 and 1998,
respectively.
At December 31, 2000, the Company had a $150.0 million revolving credit
facility to finance the acquisition of aircraft engines, aircraft and spare
parts for lease as well as for general working capital purposes. As of December
31, 2000, this facility was fully drawn. The facility had a revolving period
which ended September 2000 and was extended to January 29, 2001, followed by a
term-out period ending September 2004. The interest rate on this facility at
December 31, 2000 is LIBOR plus 1.75%.
At December 31, 2000, the Company had a $125.0 debt warehouse facility. The
facility is available to a wholly-owned special purpose finance subsidiary of
the Company, WLFC Funding Corporation, for the financing of jet aircraft engines
acquired by or transferred to such finance subsidiary by the Company. The
facility is renewable annually. This facility's structure facilitates public or
private securitized note issuances by the special purpose finance subsidiary.
The subsidiary is consolidated for financial statement presentation purposes.
The facility has an eight-year initial term with a revolving period to February
2001 as of December 31, 2000 followed by a seven-year amortization period. At
December 31, 2000, the interest rate was a commercial paper based rate plus a
spread of 1.55%. The Company has guaranteed the obligations under the facility
on a limited basis, up to an amount equal to the greater of: (i) the lesser of
$5.0 million and 20% of the outstanding obligations or (ii) 10% of the
outstanding obligations. Assuming compliance with the facility's terms,
including sufficiency of collateral, as of December 31, 2000, $34.6 million was
available under this facility. In February 2001, this facility was increased to
$180.0 million and its revolving period was extended to February 2002.
At December 31, 2000 the Company had a $28.7 million term loan facility
available to a wholly-owned consolidated special purpose subsidiary of the
Company, WLFC AC1 Corporation, for the financing of jet aircraft engines
transferred by the Company to such subsidiary. The facility is a five year term
loan with final maturity of June 30, 2005. The interest rate is currently LIBOR
plus 2.05%. This facility is fully drawn.
Approximately $35.6 million of the Company's debt is repayable during 2001.
Such repayments consist of scheduled installments due under term loans.
The Company believes that its current equity base, internally generated
funds and existing debt facilities are sufficient to maintain the Company's
current level of operations. A decline in the level of internally generated
funds or the availability under the Company's existing debt facilities would
impair the Company's ability to sustain its current level of operations. The
Company is currently discussing additions to its debt base with its commercial
and investment banks. If the Company is not able to access additional debt, its
ability to continue to grow its asset base consistent with historical trends
will be impaired and its future growth limited to that which can be funded from
internally generated capital.
The Company has committed to purchase, during 2001, additional used aircraft
and used engines for its operations. As of December 31, 2000, the Company's
current commitment to such purchases is not more than $4.5 million.
16
MANAGEMENT OF INTEREST RATE EXPOSURE
To mitigate exposure to interest rate changes, the Company has entered into
interest rate swap agreements which have notional outstanding amounts of $30.0
million, a weighted average remaining term of 19 months and a weighted average
fixed rate of 6.2%. Under its borrowing agreement, WLFC Funding Corporation is
required to hedge a certain portion of its $125.0 million warehouse facility
against changes in interest rates. WLFC Funding Corporation has entered into
interest rate swap agreements in order to meet such hedging requirements and to
manage the variable interest rate risk related to its debt. As of December 31,
2000, such swap agreements had notional outstanding amounts totaling $65.0
million, a weighted average remaining term of 26 months and a weighted average
fixed rate of 6.02%. The effect of the hedge instruments was to reduce interest
expense by $0.5 million for the year ended December 31, 2000.
The Company will be exposed to risk in the event of non-performance of the
interest rate hedge counter parties. The Company may hedge additional amounts of
its floating rate debt during the next year.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for historical information contained herein, the discussion in this
report contains forward-looking statements that involve risks and uncertainties,
such as statements of the Company's plans, objectives, expectations and
intentions. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include those discussed below. The cautionary statements made in this report
should be read as being applicable to all related forward-looking statements
wherever they appear in this report or in other written or oral statements by
the Company.
The businesses in which the Company is engaged are capital intensive
businesses. Accordingly, the Company's ability to successfully execute its
business strategy and to sustain its operations is dependent, in large part, on
the availability of debt and equity capital. The Company is currently in the
process of negotiating a new revolving credit facility. There can be no
assurance that the necessary amount of capital will continue to be available to
the Company on favorable terms or at all or that the new credit facility will be
completed on favorable terms or at all. The Company's inability to obtain
sufficient capital, or to complete its new credit facility could result in
increased funding costs and would limit the Company's ability to: (i) add new
aircraft engines, aircraft and spare parts packages to its portfolio, (ii) fund
its working capital needs, and (iii) finance possible future acquisitions. The
Company's inability to obtain sufficient capital would have a material adverse
effect on the Company's business, financial condition and/or results of
operations.
The Company retains title to the aircraft engines, aircraft and parts
packages that it leases to third parties. Upon termination of a lease, the
Company will seek to re-lease or sell the aircraft. The Company also engages in
the selective purchase and resale of commercial aircraft engines. On occasion,
the Company purchases engines without having a firm commitment for their sale.
Numerous factors, many of which are beyond the Company's control, may have an
impact on the Company's ability to re-lease or sell aircraft equipment on a
timely basis, including the following: (i) general market conditions, (ii) the
condition of the aircraft equipment upon termination of the lease, (iii) the
maintenance services performed during the lease term and, as applicable, the
number of hours remaining until the next major maintenance is required, (iv)
regulatory changes (particularly those imposing environmental, maintenance and
other requirements on the operation of aircraft engines), (v) changes in the
supply or cost of aircraft engines, and (vi) technological developments. There
is no assurance that the Company will be able to re-lease or sell aircraft
equipment on a timely basis or on favorable terms. The failure to re-lease or
sell aircraft equipment on a timely basis or on favorable terms could have a
material adverse effect on the Company's business, financial condition and/or
results of operations.
The Company experiences fluctuations in its operating results. Such
fluctuations may be due to a number of factors, including: (i) general economic
conditions, (ii) the timing of sales of engines, (iii) financial difficulties
experienced by airlines, (iv) interest rates, (v) fuel costs, (vi) downturns in
the air transportation industry, (vii) increased fare competition, (viii)
decreases in growth of air traffic, (ix) unanticipated early lease termination
or a default by a lessee, (x) the timing of engine acquisitions, (xi) engine
marketing activities, (xii) fluctuations in market prices for the Company's
assets. The Company anticipates that fluctuations from period to period will
continue in the future. As a result, the Company believes that comparisons to
results of operations for preceding periods are not necessarily meaningful and
that results of prior periods should not be relied upon as an indication of
future performance.
A lessee may default in performance of its lease obligations and the Company
may be unable to enforce its remedies under a lease. The Company's inability to
collect receivables due under a lease or to repossess aircraft equipment in the
event of a default by a lessee could have a material adverse effect on the
Company's business, financial condition and/or results of operations. Various
airlines have experienced financial difficulties in the past, certain airlines
have filed for bankruptcy and a number of such airlines have ceased operations.
In most cases where a debtor seeks protection under Chapter 11 of Title 11 of
the United States Code, creditors are automatically stayed from enforcing their
rights. In the case of United States certified
17
airlines, Section 1110 of the Bankruptcy Code provides certain relief to lessors
of aircraft equipment. The scope of Section 1110 has been the subject of
significant litigation and there is no assurance that the provisions of Section
1110 will protect the Company's investment in an aircraft, aircraft engines or
parts in the event of a lessee's bankruptcy. In addition, Section 1110 does not
apply to lessees located outside of the United States and applicable foreign
laws may not provide comparable protection. Leases of spare parts may involve
additional risks. For example, it is likely to be more difficult to recover
parts in the event of a lessee default and the residual value of parts may be
less ascertainable than an engine.
The Company's leases are generally structured at fixed rental rates for
specified terms while many of the Company's borrowings are at a floating rate.
Increases in interest rates could narrow or eliminate the spread, or result in a
negative spread, between the rental revenue the Company realizes under its
leases and the interest rate the Company pays under its borrowings, and have a
material adverse effect on the Company's business, financial condition and/or
results of operations.
In 2000, 74% of the Company's lease revenue was generated by leases to
foreign customers. Such international leases may present greater risks to the
Company because certain foreign laws, regulations and judicial procedures may
not be as protective of lessor rights as those which apply in the United States.
The Company is subject to the timing and access to courts and the remedies local
laws impose in order to collect its lease payments and recover its assets. In
addition, political instability abroad and changes in international policy also
present risk of expropriation of the Company's leased engines. Furthermore, many
foreign countries have currency and exchange laws regulating the international
transfer of currencies.
The Company has experienced significant growth in lease revenues during the
past year. The Company's growth has placed, and is expected to continue to
place, a significant strain on the Company's managerial, operational and
financial resources. There is no assurance that the Company will be able to
effectively manage the expansion of its operations, or that the Company's
systems, procedures or controls will be adequate to support the Company's
operations, in which event the Company's business, financial condition and/or
results of operations could be adversely affected. The Company may also acquire
businesses that would complement or expand the Company's existing businesses.
Any acquisition or expansion made by the Company may result in one or more of
the following events: (i) the incurrence of additional debt, (ii) future charges
to earnings related to the amortization of goodwill and other intangible assets,
(iii) difficulties in the assimilation of operations, services, products and
personnel, (iv) an inability to sustain or improve historical revenue levels,
(v) diversion of management's attention from ongoing business operations, and
(vi) potential loss of key employees. Any of the foregoing factors could have a
material adverse effect on the Company's business, financial condition and/or
results of operations.
The markets for the Company's products and services are extremely
competitive, and the Company faces competition from a number of sources. These
include aircraft manufacturers, aircraft and aircraft engine lessors and airline
and aircraft service companies. Certain of the Company's competitors have
substantially greater resources than the Company, including greater name
recognition, a broader range of material, complementary lines of business and
greater financial, marketing and other resources. In addition, equipment
manufacturers, and other aviation aftermarket suppliers may vertically integrate
into the markets that the Company serves, thereby significantly increasing
industry competition. There can be no assurance that competitive pressures will
not materially and adversely affect the Company's business, financial condition
and/or results of operations.
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an ongoing
basis. In addition, the Company's lessees currently enjoy favorable accounting
and tax treatment by entering into operating leases. Any change to current tax
laws or accounting principles that make operating lease financing less
attractive or affect the Company's recognition of revenue or expense would have
a material impact on the Company's business, financial condition and/or results
of operations.
The Company obtains a substantial portion of its inventories of aircraft and
engines from airlines, overhaul facilities and other suppliers. There is no
organized market for aircraft and engines, and the Company must rely on field
representatives and personnel, advertisements and its reputation as a buyer of
surplus inventory in order to generate opportunities to purchase such equipment.
The market for bulk sales of surplus aircraft and engines is highly competitive,
in some instances involving a bidding process. While the Company has been able
to purchase surplus inventory in this manner successfully in the past, there is
no assurance that surplus aircraft and engines of the type required by the
Company's customers will be available on acceptable terms when needed in the
future or that the Company will continue to compete effectively in the purchase
of such surplus equipment.
California is in the midst of an energy crisis that could disrupt the
Company's operations and increase its expenses. In the event of an acute power
shortage, that is, when power reserves for the State of California fall below
1.5%, California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout California. The Company
currently does not have backup generators or alternate sources of power in the
event of a blackout, and its current insurance may not provide coverage for any
damages it or its customers may suffer as a result of any interruption in its
power supply. If blackouts interrupt its power supply, the Company would be
temporarily unable to continue operations. Any such
18
interruption in its ability to continue operations could damage its reputation,
harm its ability to retain existing customers and to obtain new customers, and
could result in lost revenue, any of which could substantially harm its business
and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate risk. A
change in the U.S. prime interest rate, LIBOR rate, or cost of funds based on
commercial paper market rates, would affect the rate at which the Company could
borrow funds under its various borrowing facilities. Increases in interest rates
to the Company, which may cause the Company to raise the implicit rates charged
to its customers, could result in a reduction in demand for the Company's
leases. Certain of the Company's warehouse credit facilities are variable rate
debt. The Company estimates a one percent increase or decrease in the Company's
variable rate debt (net of hedges) would result in an increase or decrease,
respectively, in interest expense of $1.6 million per annum. The Company
estimates a two percent increase or decrease in the Company's variable rate debt
(net of hedges) would result in an increase or decrease, respectively, in
interest expense of $3.3 million per annum. The foregoing effect of interest
rate changes on per annum interest expense is estimated as constant due to the
terms of the Company's variable rate borrowings, which generally provide for the
maintenance of borrowing levels given adequacy of collateral and compliance with
other loan conditions.
The Company hedges a portion of its borrowings, effectively fixing the rate
of these borrowings. The Company is currently required to hedge a portion of
debt of the WLFC Funding Corporation Facility. Such hedging activities may limit
the Company's ability to participate in the benefits of any decrease in interest
rates, but may also protect the Company from increases in interest rates. A
portion of the Company's leases provide that lease payments be adjusted based on
changes in interest rates. Furthermore, since lease rates tend to vary with
interest rate levels, it is likely that the Company can adjust lease rates for
the effect of change in interest rates at the termination of leases. Other
financial assets and liabilities are at fixed rates.
The Company is also exposed to currency devaluation risk. During 2000, 74%
of the Company's total lease revenues came from non-United States domiciled
lessees. All of the leases require payment in United States (U.S.) currency. If
these lessees' currency devalues against the U.S. dollar, the lessees could
potentially encounter difficulty in making the U.S. dollar denominated lease
payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted as a separate section of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The response to this portion of Item 14 is submitted as a separate
section of this report beginning on page 24.
(a) (2) Financial Statement Schedules
Schedule II Valuation Accounts
All other financial statement schedules have been omitted as the
required information is not pertinent to the Registrant or is not
material or because the information required is included in the
financial statements and notes thereto.
(a) (3) and (c): Exhibits: The response to this portion of Item 14 is
submitted as a separate section of this report beginning on page 51.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation, filed on March 12, 1998
together with Certificate of Amendment of Certificate of
Incorporation filed on May 6, 1998. Incorporated by
reference to Exhibits 4.01 and 4.02 of the Company's
report on Form 8-K filed on June 23, 1998.
3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the
Company's report on Form 8-K filed on June 23, 1998.
4.1 Specimen of Common Stock Certificate. Incorporated by
reference to Exhibit 4.1 of the Company's report on Form
10-Q for the quarter ended June 30, 1998.
4.2 Rights Agreement dated September 30, 1999, by and between
the Company and American Stock Transfer and Trust Company,
as Rights Agent. Incorporated by reference to Exhibit 4.1
of the Company's report on Form 8-K filed on October 4,
1999.
4.3 First Amendment to Rights Agreement, dated as of November
30, 2000, by and between the Company and American Stock
Transfer and Trust Company. Incorporated by reference to
Exhibit 10.1 of the Company's report on form 8-K filed
December 15, 2000.
10.1 Form of Indemnification Agreement entered into between the
Company and its directors and officers. Incorporated by
reference to Exhibit 10.3 to Registration Statement No.
333-5126-LA filed on June 21, 1996.
10.2 Employment Agreement between the Company and Charles F.
Willis IV dated November 7, 2000.
10.3 Employment Agreement between the Company and Donald A.
Nunemaker dated November 21, 2000.
10.4 Employment contract for Nicholas J. Novasic dated June 15,
2000. Incorporated by reference to Exhibit 10.3 of the
Company's report on Form 10-Q for the quarter ended
September 30, 2000.
10.5 Separation Agreement dated May 24,2000 between the Company
and James D. McBride
10.6 Settlement Agreement dated August 10, 2000 between the
Company and Robert Rau.
10.7* Indenture dated as of September 1, 1997, between WLFC
Funding Corporation and The Bank of New York, as Indenture
Trustee. Incorporated by reference to Exhibit 10.16 to the
Company's Report on Form 10-K for the year ended December
31, 1997.
10.8 Note Purchase Agreement (Series 1997-1 Notes) dated
February 11, 1999. Incorporated by
20
reference to Exhibit 10.1 of the Company's report on Form
10-Q for the quarter ended March 31, 1999.
10.9* Amended and Restated Series 1997-1 Supplement dated
February 11, 1999. Incorporated by reference to Exhibit
10.2 to the Company's report on Form 10-Q for the quarter
ended March 31, 1999.
10.10* Administration Agreement dated as of September 1, 1997
between WLFC Funding Corporation, the Company, First Union
Capital Markets Corp. and The Bank of New York.
Incorporated by reference to Exhibit 10.19 to the
Company's Report on Form 10-K for the year ended December
31, 1997.
10.11 The Company's 1996 Stock Option/Stock Issuance Plan, as
amended and restated as of April 24, 2000. Incorporated by
reference to the Company's Proxy Statement dated April 27,
2000.
10.12* Operating Agreement of PGTC LLC dated May 28, 1999 among
the Company, Chromalloy Gas Turbine Corporation and
Pacific Gas Turbine Center, Incorporated. Incorporated by
reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended June 30, 1999.
10.13* Contribution and Assumption Agreement dated May 28, 1999
among Pacific Gas Turbine Center Incorporated, the Company
and Pacific Gas Turbine Center LLC. Incorporated by
reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended June 30, 1999.
10.14* Second Amendment to Amended and Restated Series 1997-1
Supplement. Incorporated by reference to Exhibit 10.1 of
the Company's report on Form 10-Q for the quarter ended
March 31, 2000.
10.15 Amended and Restated Credit Agreement as of February 10,
2000. Incorporated by reference to Exhibit 10.2 of the
Company's report on Form 10-Q for the quarter ended March
31, 2000.
10.16 Investment Agreement, dated as of November 7, 2000, by and
among the Company, FlightTechnics LLC, Flightlease AG, SR
Technics Group and SR Technics Group America, Inc.
Incorporated by reference to Exhibit 10.1 of the Company's
report on Form 8-K filed on November 13, 2000.
10.17 Membership Interest Purchase Agreement, dated as of
November 7, 2000, by and between the Company and SR
Technics Group America, Inc. Incorporated by reference to
Exhibit 10.3 of the Company's report on Form 8-K filed on
November 13, 2000.
10.18 Share Purchase Agreement, dated as of November 7, 2000, by
and between the Company and SR Technics Group America,
Inc. Incorporated by reference to Exhibit 10.4 of the
Company's report on Form 8-K filed on November 13, 2000.
10.19* Cooperation Agreement, dated as of November 7, 2000, by
and among the Company, Flightlease AG and SR Technics
Group. Incorporated by reference to Exhibit 10.6 of the
Company's report on Form 8-K filed on November 13, 2000.
10.20 Stockholders' Agreement, dated as of November 7, 2000, by
and among the Company, Charles F. Willis, IV, CFW
Partners, L.P., Austin Chandler Willis 1995 Irrevocable
Trust and FlightTechnics LLC. Incorporated by reference to
Exhibit 10.8 on Form 8-K filed on November 13, 2000.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company
23.1 Consent and Report on Schedule II of KPMG LLP, Independent
Accountants
* Portions of these exhibits have been omitted pursuant to a request for
confidential treatment and the redacted material has been filed separately
with the Commission.
21
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the fourth quarter of 2001.
The first report was filed on November 13, 2000 announcing the signing of
agreements with SAirGroup and the second report was filed on December 15, 2000
and reported the fact that the Company had issued additional shares in a private
placement and sold its interests in Willis Aeronautical Services Inc. and
Pacific Gas Turbine LLC. Proforma financial statements were included in the
Report on Form 8-K filed on December 15, 2000.
22
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.
Dated: March 21, 2001
Willis Lease Finance Corporation
By: /s/ CHARLES F. WILLIS, IV
-------------------------
Charles F. Willis, IV
Chairman of the Board, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
DATE TITLE SIGNATURE
Date: March 21, 2001 Chief Executive Officer and Director /s/ CHARLES F. WILLIS, IV
-------------- ---------------------------
(Principal Executive Officer) Charles F. Willis, IV
Date: March 21, 2001 Chief Financial Officer /s/ NICHOLAS J. NOVASIC
-------------- ---------------------------
(Principal Financial and Nicholas J. Novasic
Accounting Officer)
Date: March 21, 2001 Director /s/ WILLIAM M. LEROY
-------------- ---------------------------
William M. LeRoy
Date: March 21, 2001 Director /s/ DONALD E. MOFFITT
-------------- ---------------------------
Donald E. Moffitt
Date: March 21, 2001 Director /s/ HANS JORG HUNZIKER
-------------- ---------------------------
Hans Jorg Hunziker
Date: March 21, 2001 Director /s/ WILLARD H. SMITH, JR.
-------------- ---------------------------
Willard H. Smith, Jr.
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants Page 25
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999. Page 26
Consolidated Statements of Income for the years ended December 31, 2000,
December 31, 1999 and December 31, 1998. Page 27
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2000, December 31, 1999 and December 31, 1998. Page 28
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
December 31, 1999 and December 31, 1998. Page 29
Notes to Consolidated Financial Statements. Page 30
24
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated financial statements of Willis
Lease Finance Corporation and subsidiaries (the "Company") as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We have conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Willis Lease
Finance Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
SAN FRANCISCO, CALIFORNIA
MARCH 21, 2001
25
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- -------------
ASSETS
Cash and cash equivalents including restricted cash of $16,666 and
$15,992 at December 31, 2000 and December 31, 1999 respectively $25,371 $25,203
Equipment held for operating lease, less accumulated depreciation
of $27,296 at December 31, 2000 and $20,195 at December 31, 1999 408,814 329,889
Net investment in direct finance lease 7,910 8,666
Operating lease related receivable 4,143 1,316
Trade receivables, net - 1,904
Net assets of discontinued operations 3,841 36,320
Investments 780 22
Other assets 5,071 5,432
-------------- -------------
Total assets $ 455,930 $ 408,752
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $6,353 $3,427
Deferred income taxes 17,076 12,625
Notes payable 301,346 289,678
Capital lease obligation - 2,489
Residual share payable 2,630 3,465
Maintenance reserves 24,452 18,555
Security deposits 4,251 5,432
Unearned lease revenue 4,132 3,543
-------------- -------------
Total liabilities 360,240 339,214
-------------- -------------
Shareholders' equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; none
outstanding) - -
Common stock, ($0.01 par value, 20,000,000 shares authorized;
8,704,638 and 7,397,877 shares issued and outstanding
as of December 31, 2000 and December 31,1999, respectively) 87 74
Paid-in capital in excess of par 60,771 42,446
Retained earnings 34,832 27,018
-------------- -------------
Total shareholders' equity 95,690 69,538
-------------- -------------
Total liabilities and shareholders' equity $ 455,930 $ 408,752
============== =============
See accompanying notes to the consolidated financial statements
26
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUE
Lease revenue $49,012 $44,079 $31,607
Gain on sale of leased equipment 8,129 11,371 12,628
Sale of equipment acquired for resale - 9,775 4,106
Other income 489 - -
---------- ---------- ----------
Total revenue 57,630 65,225 48,341
---------- ---------- ----------
EXPENSES
Depreciation expense 12,416 11,458 7,376
Cost of equipment acquired for resale - 8,351 3,626
General and administrative 11,927 12,081 10,127
---------- ---------- ----------
Total expenses 24,343 31,890 21,129
---------- ---------- ----------
Earnings from operations 33,287 33,335 27,212
Interest expense 24,609 20,092 13,936
Interest income (902) (952) (1,392)
Residual share 638 846 803
---------- ---------- ----------
Net interest and finance costs 24,345 19,986 13,347
---------- ---------- ----------
Income from continuing operations before income taxes 8,942 13,349 13,865
Income taxes (3,468) (3,226) (5,551)
---------- ---------- ----------
Income from continuing operations 5,474 10,123 8,314
---------- ---------- ----------
DISCONTINUED OPERATIONS
Income/(loss) from discontinued operations (net of income tax of
$164,($2,180) and $759 for the years ended December 31, 2000,
1999 and 1998, respectively) 258 (6,840) 1,137
Gain on disposal of discontinued operations
(net of income tax of $637 for the year ended December 31, 2000) 2,082 - -
---------- ---------- ----------
2,340 (6,840) 1,137
---------- ---------- ----------
---------- ---------- ----------
Earnings before extraordinary item 7,814 3,283 9,451
Extraordinary item less applicable income taxes - - (200)
---------- ---------- ----------
Net earnings $7,814 $3,283 $9,251
========== ========== ==========
Basic earnings per common share:
Income from continuing operations $0.73 $1.37 $1.14
Discontinued operations 0.31 (0.93) 0.16
Extraordinary item - - (0.03)
---------- ---------- ----------
Net earnings $1.04 $0.44 $1.27
========== ========== ==========
Diluted earnings per common share:
Income from continuing operations $0.72 $1.36 $1.11
Discontinued operations 0.31 (0.92) 0.15
Extraordinary item - - (0.03)
---------- ---------- ----------
Net earnings $1.03 $0.44 $1.24
========== ========== ==========
Average common shares outstanding 7,512 7,382 7,266
Diluted average common shares outstanding 7,607 7,447 7,461
See accompanying notes to the consolidated financial statements
27
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
Issued and
outstanding Paid-in Total
shares of Common Capital in Retained shareholders'
common stock Stock Excess of par earnings equity
-------------- ---------- ---------------- ---------- --------------
Balance at December 31, 1997 7,178 $40,117 - $14,484 $54,601
Shares issued 183 587 737 - 1,324
Tax benefit from disqualified
dispositions of qualified shares - - 666 - 666
Conversion to par value stock - (40,630) 40,630 - -
Net income - - - 9,251 9,251
---------- ----------- ------------ ------------ -----------
Balance at December 31, 1998 7,361 74 42,033 23,735 65,842
Shares issued 37 - 339 - 339
Tax benefit from disqualified
dispositions of qualified shares - - 74 - 74
Net income - - - 3,283 3,283
---------- ----------- ------------ ------------ -----------
Balances at December 31, 1999 7,398 74 42,446 27,018 69,538
Shares issued 1,307 13 15,004 - 15,017
Options granted - - 3,321 - 3,321
Net income - - - 7,814 7,814
---------- ----------- ------------ ------------ -----------
Balances at December 31, 2000 8,705 $87 $60,771 $34,832 $95,690
========== =========== ============ ============ ===========
See accompanying notes to the consolidated financial statements
28
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,814 $3,283 $9,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 14,622 13,639 8,251
Stock option compensation 144 - -
Gain on sale of leased equipment (8,129) (11,371) (13,413)
Gain on sale of discontinued operations (3,307) - -
Loss from unconsolidated affiliate 1,560 622 -
Changes in assets and liabilities:
Spare parts inventory 7,404 13,293 (27,447)
Receivables (6,851) 3,076 (3,206)
Other assets 1,064 (2,470) (946)
Accounts payable and accrued expenses 3,545 (4,910) 6,219
Deferred income taxes 4,254 1,131 3,208
Residual share payable (835) 847 526
Unearned lease revenue 609 918 1,707
Maintenance reserves 5,897 5,282 (6,745)
Security deposits (1,270) 961 2,125
------------- ------------ ------------
Net cash provided (used in) by operating activities 26,521 24,301 (20,470)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for operating lease (net
of selling expenses) 47,023 52,523 40,486
Proceeds from sale of discontinued operations (net of transaction costs) 37,536 - -
Purchase of equipment held for operating lease (137,892) (119,753) (171,101)
Purchase of property, equipment and furnishings (655) (1,720) (2,285)
Investment at cost (758) (87) -
Principal payments received on direct finance lease 756 583 573
------------- ------------ ------------
Net cash used in investing activities (53,990) (68,454) (132,327)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 104,446 118,202 194,703
Proceeds from issuance of common stock and options (net of transaction costs) 18,194 339 1,990
Principal payments on notes payable (92,779) (72,802) (51,260)
Principal payments on capital lease obligation (2,489) (161) (150)
------------- ------------ ------------
Net cash provided by financing activities 27,372 45,578 145,283
(Decrease)/increase in cash and cash equivalents (97) 1,425 (7,514)
Cash and cash equivalents at beginning of period including restricted cash
of $15,992, $13,738 and $18,461 at December 31, 2000, 1999 and 1998 25,468 24,043 31,557
------------- ------------ ------------
Cash and cash equivalents at end of period including restricted cash
of $16,666, $15,992 and $13,738 at December 31, 2000, 1999 and 1998 25,371 $25,468 $24,043
============= ============ ============
Supplemental information:
Net cash paid for:
Interest $26,131 $21,658 $14,505
------------- ------------ ------------
Income Taxes $27 $675 $4,839
------------- ------------ ------------
Non-cash investing activity:
Transfer of assets to unconsolidated affiliate (net) - $5,630 -
------------- ------------ ------------
Non-cash financing activity:
Short term loan related to sale of equipment - $650 -
------------- ------------ ------------
See accompanying notes to the consolidated financial statements
29
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Willis Lease Finance Corporation ("Willis") is a provider of aviation
services whose primary focus has been on providing operating leases of
aftermarket commercial aircraft engines and other aircraft-related equipment to
air carriers, manufacturers and overhaul/repair facilities worldwide. Willis
also engages in the selective purchase and resale of commercial aircraft
engines.
Terandon Leasing Corporation (Terandon), T-2 Inc. (T-2), T-4 Inc. (T-4),
T-5 Inc. (T-5), T-7 Inc. (T-7), T-8 Inc. (T-8), T-10 Inc. (T-10) and T-11 Inc.
(T-11) are wholly-owned subsidiaries of Willis. They are all California
corporations and were established to purchase and lease and resell commercial
aircraft engines and parts.
WLFC Funding Corporation ("WLFC-FC") is a wholly owned subsidiary of Willis.
WLFC-FC is a Delaware corporation and was established in 1997 for the purpose of
financing aircraft engines. WLFC Engine Pooling Company ("WLFC - Pooling") is a
wholly-owned subsidiary of Willis. WLFC-Pooling is a California Corporation and
was established in 1997 for the purpose of acquiring and leasing aircraft
engines. WLFC (Ireland) Limited is a wholly-owned subsidiary of Willis. WLFC
(Ireland) Limited was formed in 1998 to facilitate certain of Willis'
international leasing activities. WLFC AC1 Incorporated is a wholly owned
subsidiary of Willis Lease Finance Corp. WLFC AC1 Incorporated is a Delaware
corporation and was established in 2000 for the purpose of acquiring and leasing
aircraft engines.
Willis Aeronautical Services, Inc. ("WASI") was a wholly owned subsidiary of
Willis. WASI is a California corporation established in 1994 for the purpose of
marketing and selling aircraft parts and components and was sold in November
2000. Pacific Gas Turbine Center Incorporated ("PGTC Inc.") was a wholly owned
subsidiary of Willis. PGTC Inc. was formed in 1998 to provide, among other
things, engine disassembly services and was dissolved in May 1999 upon the
Company contributing the operations and assets to a newly formed joint venture,
Pacific Gas Turbine Center, LLC ("PGTC LLC"). The Company sold its interest in
PGTC LLC in November 2000.
Management considers the continuing operations of the Company to operate in
one reportable segment.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Willis,
Terandon, T-2, T-4, T-5, T-7, T-8, T-10, T-11, WASI (11 months ended November
2000), WLFC-FC, WLFC-Pooling, PGTC Inc. (five months ended May 1999), WLFC AC1
Incorporated and WLFC (Ireland) Limited (together, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) REVENUE RECOGNITION
Revenue from leasing of aircraft equipment is recognized as operating lease
or finance lease revenue over the terms of the applicable lease agreements. The
Company includes in operating lease revenue non-refundable maintenance payments
received from lessees to the extent that, in the Company's opinion, it would not
be economically advantageous to overhaul the engine the next time the
life-limited parts need to be replaced. In this circumstance, the engines are
normally sold for dismantling.
(d) EQUIPMENT HELD FOR OPERATING LEASE
Aircraft assets held for operating lease are stated at cost, less
accumulated depreciation. Certain professional fees incurred in connection with
the acquisition and leasing of aircraft assets are capitalized as part of the
cost of such assets. Major overhauls paid for by the Company which add economic
value are capitalized and depreciated over the estimated remaining useful life
of the engine.
The Company generally depreciates engines on a straight-line basis over a 15
year period from the acquisition date to a 55% residual value. The Company
believes that this methodology accurately reflects the Company's typical holding
period for the assets and, further, that the residual value assumption
reasonably approximates the selling price of the assets 15 years from date of
acquisition.
30
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For engines or aircraft that are leased with an intent to disassemble upon
lease termination, the Company depreciates the engines or aircraft over their
estimated lease term to a residual value based on an estimate of the wholesale
value of the parts after disassembly.
The spare parts packages owned by the Company are depreciated on a
straight-line basis over an estimated useful life of 15 years to a 25% residual
value.
The aircraft owned by the Company are depreciated on a straight-line basis
over an estimated useful life of 13 to 20 years to a 15% to 17% residual value.
Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,"
(SFAS 121) requires that (i) long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable and (ii) long-lived assets and certain identifiable
intangibles to be disposed of generally be reported at the lower of carrying
amount or fair value less cost to sell. The Company reviews at least quarterly
the carrying value of long-lived assets. Such reviews resulted in a write-down
of assets of $147,000 in continuing operations (disclosed under depreciation in
the Income Statement) and $471,000 in discontinued operations in 2000 (disclosed
under Gain on Disposal of Discontinued Operations in the Income Statement).
There were no such losses on revaluation in 1999 or 1998.
(e) LOAN COMMITMENT AND RELATED FEES
To the extent that the Company is required to pay fees in order to secure
debt, such fees are amortized over the life of the related loan on a
straight-line basis which approximates the interest method.
(f) MAINTENANCE COSTS
Maintenance costs under the Company's long-term leases are generally the
responsibility of the lessees. Additionally, under many of the Company's
long-term leases, lessees pay fees to the Company based on the usage of the
asset. Upon the completion of approved maintenance of an asset, such fees are
returned to the lessee. The Company records a Maintenance Reserve liability in
connection with the obligation to reimburse lessees for approved maintenance.
Under certain of the Company's leases, the lessee is not obligated to perform
maintenance on the asset. To the extent that such leases require the lessee to
make payments to the Company based on the usage of the asset and the Company
does not plan to apply such payments to the repair of the asset, the usage
payments are included in lease revenue.
(g) INTEREST RATE HEDGING
The Company has entered into interest rate swap agreements to mitigate its
exposure on its variable rate borrowings. The durations of the swap agreements
are set consistent with the duration of the Company's leases. The differential
to be paid or received under the swap agreements is charged or credited to
interest expense.
(h) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in the tax rates is
recognized in income in the period that includes the enactment date.
(i) PROPERTY, EQUIPMENT AND FURNISHINGS
Property, equipment and furnishings are recorded at cost and depreciated by
the straight-line method over the estimated useful lives of the related assets,
which range from three to seven years. Leasehold improvements are recorded at
cost and depreciated by the straight-line method over the lease term and are
included as other assets in the balance sheets.
31
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) RESIDUAL SHARING WITH LENDERS
Certain of the Company's credit agreements require the Company to share
"residual proceeds" as defined in the agreements with the lenders upon sale of
engines held for operating lease. The Company provides for its residual sharing
obligation with respect to each engine by a charge or credit to income or
expense, each period, sufficient to adjust the residual share payable at the
balance sheet date to the amount that would be payable at that date if all
engines under said agreements were sold on the balance sheet date at their net
book values.
Residual share payable totaled $2.6 million and $3.5 million as of
December 31, 2000 and 1999, respectively. As of December 31, 2000 and 1999, two
engines (1999 three engines), with a total net book value of $7.4 million and
$10.6 million, respectively, were subject to residual sharing arrangements.
(k) SALE OF LEASED EQUIPMENT AND EQUIPMENT ACQUIRED FOR RESALE
The Company regularly sells equipment from its lease portfolio. This
equipment may or may not be subject to lease at time of sale. The gain on such
sales is recognized as revenue and consists of proceeds associated with the sale
less the net book value of the asset sold and any direct costs associated with
the sale. To the extent that deposits or maintenance reserves are not included
in the sale and the liability associated with such items is transferred to the
purchaser of the equipment, the Company includes such items in its calculation
of gain.
The Company periodically engages in transactions involving the purchase and
resale of aircraft equipment. Assets acquired for resale are recorded at the
lower of cost or net realizable value. Gross revenue from the sale of equipment
is reflected as sale of equipment acquired for resale with the corresponding
cost of the equipment shown as an expense item.
(l) CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments readily convertible into
known amounts of cash, with original maturities of 90 days or less, as cash
equivalents.
(m) RECLASSIFICATIONS
Certain items in the consolidated financial statements of prior years have
been reclassified to conform to the current year's presentation.
(n) MANAGEMENT ESTIMATES
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. This
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
32
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(o) PER SHARE INFORMATION
Basic earnings per common share is computed by dividing net income to common
shares by weighted-average number of shares outstanding during the period. The
computation of fully diluted earnings per share is similar to the computation of
basic earnings per share, except for the inclusion of all potentially dilutive
common shares. The reconciliation between basic common shares and fully diluted
common shares is presented below:
YEARS ENDED DECEMBER 31,
(in thousands, except per share data)
-----------------------------------------------
2000 1999 1998
------ ------ ------
Shares:
Weighted-average number of common shares outstanding 7,512 7,382 7,266
Potentially dilutive common shares 95 65 195
-----------------------------------------------
Total Shares 7,607 7,447 7,461
(p) ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value.
SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the effective
date of SFAS No. 133. SFAS No. 133, as amended, is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Statement
requires the recognition of derivative instruments at their fair value and that
changes in the fair value are recorded as components of other Comprehensive
Income and/or Earnings for the period. The Company has a limited number of
interest rate swaps which will be accounted for under this Statement. Transition
arrangements under this Statement mean that the fair value of the swaps,
estimated at $0.7 million as of December 31, 2000, would be recorded to Other
Comprehensive Income. Future changes in fair value are not estimable at this
time.
In September 2000 FASB issued SFAS 140 "Accounting for transfers and
servicing of financial assets and extinguishment of liabilities, an amendment of
FASB Statement No. 125." Statement 140 provides guidance on the following
topics: securitization transactions involving financial assets, sales of
financial assets such as receivables, loans and securities, collateralized
borrowing arrangements, repurchase agreements, and extinguishments of
liabilities. The provisions of Statement 140 will become effective for
transactions entered into after March 31, 2001. The Company is currently
evaluating the impact of SFAS 140 on the Company's consolidated financial
statements.
(q) COMPREHENSIVE INCOME
The Company's net income is equal to comprehensive income for the years
ended December 31, 2000, 1999 and 1998.
(r) INVESTMENTS
Investments are in non-marketable securities where management does not have
significant influence and are recorded at cost. Management evaluates the
investments for impairment quarterly and at December 31, 2000, no adjustment to
the carrying value was required.
33
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) DISCONTINUED OPERATIONS
On November 7, 2000, the Company entered into agreements for a series of
strategic transactions, each of which closed on November 30, 2000, with
Flightlease AG, a corporation organized under the laws of Switzerland
("Flightlease"), SR Technics Group, a corporation organized under the laws of
Switzerland ("SRT"), FlightTechnics, LLC, a Delaware limited liability company
("FlightTechnics") and SR Technics Group America, Inc., a Delaware corporation
("SRT Group America"), each of which are affiliated companies.
The Company sold its membership interests in its engine maintenance, repair
and testing joint venture with Chromalloy Gas Turbine Corporation, Pacific Gas
Turbine Center LLC ("PGTC"), to SRT Group America for $13,066,000, subject to
post-closing adjustments which have not yet been finalized. Also, the Company
sold its aircraft parts and components subsidiary, Willis Aeronautical Services,
Inc. ("WASI"), to SRT Group America for $24,919,222.
As part of the transaction, the Company agreed to retain the lease portfolio
of engines maintained and managed by WASI. Certain of these engines are subject
to put option arrangements where, at the option of the Company, these engines
can be sold to SRT Group America for part-out. In addition, further engines have
been identified as likely to be sold during the next year.
To the extent that the engines in the portfolio retained are subject to put
options or are identified as likely to be sold, the assets and the results of
operation are included in discontinued operations.
Net earnings/(loss) from discontinued operations for the years ended
December 31, 2000, 1999 and 1998 are as follows (in thousands of dollars):
2000 1999 1998
---- ---- ----
REVENUE:
Operating lease income $ 2,383 $ 4,087 $ 1,439
Gain on sale of leased equipment - - 785
Spare parts sales 23,479 25,436 24,077
Sale of equipment acquired for resale 2,500 - -
Other income (20) 231 46
--------------------------------
Total Revenue $28,342 $29,754 26,347
--------------------------------
EXPENSES:
Depreciation expense $2,206 $2,183 $875
Cost of spare parts sales 18,030 28,317 17,245
Cost of equipment acquired for resale 2,150 - -
General and administrative 3,153 5,750 5,058
--------------------------------
Total expenses $25,539 $36,250 $23,178
--------------------------------
EARNINGS (LOSS) FROM OPERATIONS: $2,803 ($6,496) $3,169
Net interest and finance cost 1,037 1,902 1,273
Loss from unconsolidated affiliate 1,344 622 -
--------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 422 ($9,020) 1,896
Income Taxes (164) 2,180 (759)
--------------------------------
NET EARNINGS (LOSS) FROM DISCONTINUED
OPERATIONS $258 ($6,840) $1,137
--------------------------------
34
The gain on disposal of discontinued operations for the year ended December 31,
2000 is as follows (in thousands of dollars):
Proceeds from sale of shares in WASI and interest in PGTC $ 37,985
Book value of assets sold (33,759)
--------
$ 4,226
Transaction costs (448)
Operating loss from measurement date to closing (588)
Write-down of leased engine portfolio (471)
--------
Gain on disposal of discontinued operations $ 2,719
Income tax (637)
--------
Net Gain on disposal of discontinued operations $ 2,082
--------
Net assets of discontinued operations on the balance sheet as of December 31,
2000 and 1999 are as follows (in thousands of dollars):
2000 1999
------ -------
Cash and cash equivalents $- $265
Receivables (net) 694 1,920
Equipment held for operating lease (net of
accumulated depreciation of $2,457 and $1,397) 3,205 8,899
Inventory 150 22,237
Investment in unconsolidated affiliate - 5,060
Other assets - 1,502
Payable and accrued liabilities - (2,711)
Deferred income taxes - (190)
Security deposits - (90)
Unearned lease revenue (208) (572)
-------------------
Net assets of discontinued operations $3,841 $36,320
-------------------
INTEREST EXPENSE. To the extent that engines and inventory have been
financed, interest expense has been allocated based on the principal outstanding
during the year.
EQUIPMENT HELD FOR OPERATING LEASE. During 2000 WASI acquired or received by
transfer from WLFC, 4 engines at a cost of $3.4 million and transferred into
inventory 12 engines at a cost of $5.3 million. No gain or loss was recognized
on the transfers. Future minimum rentals receivable for equipment under
non-cancelable leases as of December 31, 2000 are approximately $600,000 in 2001
and $120,000 in 2002.
At December 31, 2000, discontinued operations had 10 engines with an
aggregate original cost of $5.7 million in its operating and lease portfolio. At
December 31, 1999, discontinued operations had 14 engines with an aggregate
original cost of $10.3 million in its operating and lease portfolio.
35
INVESTMENT IN UNCONSOLIDATED AFFILIATE. In May 1999, the Company entered
into an agreement with Chromalloy Gas Turbine Corporation ("Chromalloy"), a
subsidiary of Sequa Corporation, to operate a joint venture to perform
maintenance, repair and overhaul of commercial jet engines. Under the terms of
the joint venture agreement, the Company and Chromalloy formed a new company,
PGTC LLC. The Company contributed the operations and assets of its wholly owned
subsidiary PGTC Inc. (with a book value of $5.7 million) and Chromalloy
contributed working capital to the joint venture. The Company and Chromalloy had
a 50% interest in the joint venture. The equity method of accounting is used for
the Company's 50% ownership in PGTC LLC. Under the equity method, the original
contribution was recorded at cost and is adjusted periodically to recognize the
Company's share of the earnings or losses of PGTC LLC after the date of
formation. For the year ended December 31, 2000 up to the sale of the Company's
interest, the Company and WASI purchased $1.3 million (1999 $1.1 million) of
services from PGTC LLC and PGTC LLC purchased $4.8 million (1999 $1.0 million)
of engine parts from WASI. All intercompany profits or losses have been
eliminated. The Company had no such activity during the comparable 1998 period.
The Company sold its interest in PGTC LLC in November 2000.
STOCK COMPENSATION. In conjunction with the sale of its shares in WASI, the
Company accelerated the vesting of options granted to employees of WASI and
recognized an expense of approximately $144,000.
CONCENTRATIONS AND CREDIT RISK. During the 11 months prior to November 30,
2000 the top 5 customers of the spare parts business accounted for approximately
52% of total parts revenue (1999 37%, 1998 49%).
(3) EQUIPMENT HELD FOR LEASE
At December 31, 2000 for continuing operations, the Company had 100 aircraft
engines and related equipment with an aggregate original cost of $407.9 million,
4 spare parts packages with an aggregate original cost of $14.8 million and 6
aircraft with an aggregate original cost of $23.5 million in its operating and
lease portfolio. At December 31, 1999, the Company had 87 aircraft engines and
related equipment with an aggregate original cost of $319.2 million, four spare
parts packages with an aggregate original cost of $14.8 million and eight
aircraft with an aggregate original cost of $26.2 million in its operating and
finance lease portfolio.
Certain of the Company's aircraft equipment is leased and operated
internationally. All leases relating to this equipment are denominated and
payable in U.S. dollars.
The Company leases its aircraft equipment to lessees domiciled in eight
geographic regions. The tables below set forth geographic information about the
Company's operating leased aircraft equipment for continuing operations grouped
by domicile of the lessee:
YEARS ENDED DECEMBER 31,
REGION (in thousands)
- ------ ------------------------------------------
2000 1999 1998
------- ------- -------
Operating lease revenue from continuing
operations
United States $12,554 $10,191 $ 9,465
Canada 4,141 3,327 2,047
Mexico 3,561 4,546 3,441
Australia/New Zealand 280 551 926
Europe 16,775 13,557 6,704
South America 5,840 6,751 5,399
Asia 3,434 3,350 1,862
Middle East 1,689 1,009 916
------------------------------------------
Totals $48,274 $43,282 $30,760
==========================================
36
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31,
REGION (in thousands)
- ------ ------------------------------------------
2000 1999 1998
------- ------- -------
Operating lease revenue from continuing
operations less applicable
depreciation, interest and residual
share:
United States $ 3,137 $ 3,383 $ 3,272
Canada 858 667 495
Mexico 1,105 1,789 1,699
Australia/New Zealand 64 379 276
Europe 4,273 3,535 1,824
South America 1,552 1,593 2,198
Asia 816 1,200 755
Middle East 385 385 321
Off-lease and other (557) (1,611) (419)
------------------------------------------
Totals $11,633 $11,320 $10,421
==========================================
YEARS ENDED DECEMBER 31,
REGION (in thousands)
- ------ ------------------------------------------
2000 1999 1998
------- ------- -------
Net book value for continuing
operations of operating
leased assets:
United States $ 74,045 $ 72,368 $ 60,865
Canada 32,714 27,645 17,447
Mexico 12,737 27,563 29,559
Australia/New Zealand - 5,373 6,281
Europe 186,728 103,821 75,179
South America 40,484 41,433 44,169
Asia 22,946 23,689 15,348
Middle East 11,895 7,521 4,188
Off-lease and other 27,265 20,476 20,068
------------------------------------------
Totals $408,814 $329,889 $273,104
==========================================
37
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Finance leased assets, generated $739,000 and $797,000 of revenue in 2000
and 1999, respectively. After estimated interest expense such assets generated
$53,000 and $127,000, respectively. The net investment in direct finance leases
on December 31, 2000 and 1999 was as follows:
(in thousands)
2000 1999
-------- --------
Minimum payments receivable $ 4,998 $ 6,426
Estimated residual value of leased assets 4,950 4,950
Unearned income (2,038) (2,710)
-------- --------
Net investment in finance lease $ 7,910 $ 8,666
-------- --------
As of December 31, 2000, minimum future payments under noncancelable leases
were as follows:
(in thousands)
YEAR OPERATING FINANCE
---- --------- -------
2001 $ 46,247 $1,535
2002 31,732 1,535
2003 24,380 1,535
2004 16,177 768
2005 9,952 -
Thereafter 19,975 -
---------------------------
$148,463 $5,373
---------------------------
38
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) EXTRAORDINARY EXPENSE/GAIN
In March 1998, the Company repaid a loan that had residual sharing
provisions and an interest rate of 10%. The repayment resulted in an
extraordinary expense of $0.2 million, net of tax.
(5) NOTES PAYABLE
Notes payable consisted of the following:
AS OF DECEMBER 31,
(in thousands)
---------------------
2000 1999
---- ----
Note payable at a floating interest rate of LIBOR plus 5%. Secured by aircraft engines
and the proceeds thereof. The note matures in April 2001 or upon sale of such engines. $ - $250
Note payable at a floating interest rate of LIBOR plus 2.3%. Secured by aircraft
engines and the proceeds thereof. The note matures in October 2006. 746 802
Subordinated note payable at a fixed interest rate of 7%. Secured by aircraft
engines, spare parts and the proceeds thereof. The note matures in June 2004. 854 1,098
Note payable at a fixed interest rate of 11.68%. Secured by an aircraft engine and the
proceeds thereof. The note matures in December 2001. 1,561 1,783
Note payable at a fixed interest rate of 7.8%. Secured by aircraft engines and
proceeds thereof. This note matures in April 2006. - 2,400
Note payable at a fixed interest rate of 8.05%. Secured by an aircraft engine and the
proceeds thereof. The note matures in May 2003. 2,305 2,458
39
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable at a fixed interest rate of 8.63%. Secured by aircraft engines and the
proceeds thereof. The note matures in October 2006. 3,587 3,846
Note payable at a fixed interest rate of 8.89%. Secured by aircraft engines and the
proceeds thereof. The note matures in August 2002. - 4,012
Note payable at a fixed interest rate of 8.18% secured by aircraft and the proceeds
thereof. The note matures in November 2002. 7,228 8,419
Note payable at a fixed interest rate of 6.95% secured by aircraft and the proceeds
thereof. The note matures in September 2005. 8,413 9,137
Notes payable at fixed interest rates ranging from 10.23% to 10.77%. Secured by
aircraft engines and parts and the proceeds thereof. The notes mature between
December 2001 and February 2002. 7,587 13,488
Note payable at a floating rate of interest based on commercial paper rates plus
1.55% secured by engines, the proceeds thereof and certain deposits. The
facility has a committed amount of $125 million. At December 31, 1999, $34.6
million was available under the facility subject to the Company providing
additional collateral. The facility has an eight-year initial term with a
revolving period to February 2001 followed by a seven-year amortization period.
The Company has guaranteed the obligations under the facility on a limited
basis, up to an amount equal to the greater of: (i) the lesser of $5.0 million
and 20% of the outstanding obligations or (ii) 10% of the outstanding
obligations. In February 2001, this facility was increased to $180.0 million and
its revolving period was extended to February 2002. 90,384 106,931
Credit facility at a floating rate of interest of LIBOR plus 1.75%. Secured by
engines, and the proceeds thereof. The facility has a committed amount of $150
million. The facility has a revolving period which ended September 2000 and was
extended to January 29, 2001, followed by a term-out period ending September 2004. 150,000 135,054
Note payable at a floating rate of LIBOR + 2.05% The facility matures on June 30, 2005. 28,681 -
-----------------------
Total notes payable $301,346 $289,678
=======================
40
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of the Company's long-term debt is estimated based on quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The fair value of the
Company's debt is estimated by the Company to be $301.3 million at December 31,
2000.
Principal outstanding at December 31, 2000 is repayable as follows:
YEAR (in thousands)
----
2001 $ 35,585
2002 41,956
2003 41,863
2004 94,667
2005 35,968
Thereafter 51,307
--------
$301,346
========
Certain of the debt instruments above also have covenant requirements such
as a minimum tangible net worth. As of December 31, 2000, the Company was in
compliance with all covenant requirements.
Although it is the intention of the Company to hold the interest rate swaps
until their maturity, at December 31, 2000 the Company estimated it would have
to pay a net settlement of $743,000 to terminate the agreements.
At December 31, 2000 and 1999, the Company held deposits in the amount of
$16.7 million and $16.0 million, respectively, consisting of bank accounts that
are subject to withdrawal restrictions as per lease or loan agreements. Included
in these amounts are payments to the Company required by certain lease
agreements for periodic engine maintenance. These accounts also include security
deposits held. Substantially all of the deposits bear interest for the Company's
benefit.
41
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
The components of income tax for continuing operations for the years ended
December 31, 2000, 1999 and 1998, respectively, included in the accompanying
statement of income were as follows:
(in thousands)
FEDERAL STATE TOTAL
------- ------- ---------
December 31, 2000
Current $ - $ 15 $ 15
Deferred 2,853 600 3,453
---------------------------------------------------
$2,853 $ 615 $3,468
===================================================
December 31, 1999
Current $ - $ (85) $ (85)
Deferred 2,511 800 3,311
---------------------------------------------------
$2,511 $ 715 $3,226
===================================================
December 31, 1998
Current $ 704 $ 482 $1,186
Deferred 3,878 487 4,365
---------------------------------------------------
$4,582 $ 969 $5,551
===================================================
The following is a reconciliation of the statutory federal income tax expense
(net of income tax benefit related to the extraordinary item) to the effective
income tax expense on continuing operations:
Years ended December 31,
(in thousands)
------------------------------------------------
2000 1999 1998
Statutory federal income tax expense $ 3,040 $4,538 $4,714
State taxes, net of federal benefit 406 472 521
Adjustment of state tax apportionment rates - (2,294) -
Other 22 510 316
------------------------------------------------
Effective income tax expense $3,468 $3,226 $5,551
================================================
42
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
AS OF DECEMBER 31,
(in thousands)
2000 1999
---- ----
Deferred tax assets:
Charitable contribution $ 16 $ 15
Unearned lease revenue 1,582 1,418
Residual sharing expenses 987 1,301
Uniform capitalization expenses - 726
State Taxes 5 5
Reserves - 527
Alternative minimum tax credit 2,843 2,844
Net operating loss carryforward 7,993 6,023
--------------------------------
Total gross deferred tax assets $ 13,426 $ 12,859
Less valuation allowances - -
--------------------------------
Net deferred tax assets $ 13,426 $ 12,859
Deferred tax liabilities:
Depreciation on aircraft equipment (30,502) (25,554)
Investment in PGTC LLC - (107)
Goodwill income amortization - (13)
Other - 190
--------------------------------
Net deferred tax liability $(17,076) $(12,625)
================================
As of December 31, 2000, the Company had net operating loss carryforwards of
approximately $23.1 million for federal tax purposes and $4.2 million for state
tax purposes. The federal net operating loss carryforwards will expire in the
year 2020 and the state net operating loss carry forwards will expire in 2005.
Net operating losses can be used as a deduction against future income arising
from any source. As of December 31, 2000, the Company also had alternative
minimum tax credits of approximately $2.8 million for federal income tax
purposes which have no expiration date and which should be available to offset
future tax liabilities. Management believes that no valuation allowance is
required on deferred tax assets as it is more likely than not that all amounts
are recoverable through previously paid taxes and/or future taxable income.
(7) RISK MANAGEMENT ISSUES
RISK CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits and
receivables.
The Company places its cash deposits with financial institutions and other
creditworthy issuers and limits the amount of credit exposure to any one party.
Concentrations of credit risk with respect to lease receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across different geographic areas.
43
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2000 and 1999, management believes the Company had no
significant concentrations of credit risk.
For the year ended December 31, 1998, the Company had one significant
customer, Kellstrom Industries, Inc., which accounted for approximately 13% of
total revenue and 74% of gain on sale of leased equipment. The Company had no
such customer concentrations during the comparable 2000 and 1999 periods.
INTEREST RATE RISK MANAGEMENT
To mitigate exposure to interest rate changes, Willis Lease Finance
Corporation has entered into interest rate swap agreements. As of December 31,
2000, such swap agreements had notional outstanding amounts of $30 million, a
weighted average remaining duration of 19 months and a weighted average fixed
rate of 6.2%.
Under its borrowing agreement, WLFC Funding Corporation is required to hedge
a certain portion of its $125 million debt warehouse facility against changes in
interest rates. WLFC Funding Corporation has entered into interest rate swap
agreements in order to meet the hedging requirements and to manage the variable
rate interest risk related to WLFC Funding Corporation's debt. As of December
31, 2000, such swap agreements had notional outstanding amounts of $65 million,
a weighted average remaining duration of 26 months and a weighted average fixed
rate of 6.02%. As a result of these swap arrangements, interest expense was
decreased by $484,000 in 2000 and increased in 1999 and 1998 by $307,000 and
$28,000, respectively.
(8) COMMITMENTS AND CONTINGENCIES
The Company has one lease for its office space. The annual lease rental
commitments are $325,000 and the lease expires on May 31, 2003.
The Company has committed to purchase one additional used engine for its
operations for not more than $4.5 million.
44
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 1999, the Company entered into an agreement to participate in a
joint venture - Sichuan Snecma Aero-engine Maintenance Co. Ltd. Sichuan Snecma
will focus on providing maintenance services for CFM56 series engines. Other
participants in the joint venture are China Southwest Airlines, Snecma Services
and Beijing Kailan Aviation Technology Development and Services Corporation. As
of the year ended December 31, 2000, $0.8 million has been contributed. Under
the terms of the agreement, the Company contributed an additional $0.7 million
in January 2001 and not more than an additional $1.5 million is expected to be
contributed to the joint venture over the next three years.
In January 2000, a suit was filed against the Company in connection with the
sale by the Company of an aircraft engine for cash consideration. The buyer of
the engine alleges that the sale was not validly consummated and amongst other
things requests that the purchase price of the engine, $3.2 million, be returned
to the buyer. This suit was dismissed in December 2000.
(9) INVESTMENTS
In July 1999, the Company entered into an agreement to participate in a
joint venture formed as a limited company - Sichuan Snecma Aero-engine
Maintenance Co. Ltd. The Company's investment is 7% in the venture. Sichuan
Snecma will focus on providing maintenance services for CFM56 series engines.
Other participants in the joint venture are China Southwest Airlines, Snecma
Services and Beijing Kailan Aviation Technology Development and Services
Corporation. As of the year ended December 31, 2000, $0.8 million has been
contributed. This investment is recorded at cost.
(10) EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company has a 1996 Employee Stock Purchase Plan (the "Purchase Plan")
under which 75,000 shares of common stock have been reserved for issuance. This
plan was effective in September 1996. Eligible employees may designate not more
than 10% of their cash compensation to be deducted each pay period for the
purchase of common stock under the Purchase Plan, and participants may purchase
not more than $25,000 of common stock in any one calendar year. Each January 31
and July 31 shares of common stock are purchased with the employees' payroll
deductions over the immediately preceding six months at a price per share of 85%
of the lesser of the market price of the common stock on the purchase date or
the market price of the common stock on the date of entry into an offering
period. In fiscal 2000 and 1999, 6,761 and 6,864 shares of common stock,
respectively were issued under the Purchase Plan.
The weighted average per share fair value of the employee's purchase rights
under the Purchase Plan for the rights granted in 2000 and 1999 were $3.55 and
$7.36, respectively.
45
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 STOCK OPTION/STOCK ISSUANCE PLAN
In June 1996, the Board of Directors approved the 1996 Stock Option/Stock
Issuance Plan (the "Plan"). The Plan was amended by the Shareholders and
restated in May 2000, to provide for an increase in the number of shares
reserved for issuance under the Plan from 1,025,000 shares to 1,525,000 shares.
The plan includes a Discretionary Option Grant Program, a Stock issuance Program
and an Automatic Option Grant Program for eligible non-employee Board members.
A summary of the activity under the plan is as follows:
OPTIONS OUTSTANDING
----------------------------------------------
OPTIONS WEIGHTED WEIGHTED
AVAILABLE AVERAGE AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE FAIR VALUE
----------- ---------- -------------- ------------
Balances at December 31, 1997 71,500 438,500 $10.27
Additional Options Made Available 500,000 - -
Options Granted (302,000) 302,000 14.98 $5.32
Options Exercised - (150,000) 8.28
Options Canceled 70,000 (70,000) 10.47
-------------------------------------------
Balances at December 31, 1998 339,500 520,500 $13.51
Options Granted (480,185) 480,185 8.79 $4.28
Options Exercised - (32,250) 8.10
Options Canceled 238,000 (238,000) 14.17
-------------------------------------------
Balances at December 31, 1999 97,315 730,435 $10.43
Additional Options Made Available 500,000 - -
Options Granted (389,264) 389,264 10.70 $3.35
Options Exercised - - -
Options Canceled 151,544 (151,544) 10.94
-------------------------------------------
Balance at December 31, 2000 359,595 968,155 $8.54
A summary of the outstanding, exercisable options and their weighted average
exercise prices is as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
At December 31, 1998 162,500 $11.76
At December 31, 1999 198,760 $13.06
At December 31, 2000 347,474 $10.70
46
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER REMAINING AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING PRICE
---------------------------------------------------------------------------------------------
From $2.04 to $8.00 629,515 8.50 $ 5.13 150,557 $4.97
From $8.50 to $13.50 48,340 7.36 11.98 38,340 12.89
From $14.00 to $22.13 290,300 7.01 15.43 158,577 15.62
---------------------------------------------------------------------------------------------
From $2.04 to $22.13 968,155 8.00 $8.55 347,474 $10.70
=============================================================================================
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123). SFAS 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 encourages all
entities to adopt a fair value based method of accounting for stock based
compensation plans in which compensation cost is measured at the date the award
is granted based on the value of the award and is recognized over the employee
service period. However, SFAS 123 allows an entity to continue to use the method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), with pro forma disclosures of net income and
earnings per share as if the fair value based method had been applied. APB 25
requires compensation expense to be recognized over the employee service period
based on the excess, if any, of the quoted market price of the stock at the date
the award is granted or other measurement date, as applicable, over an amount an
employee must pay to acquire the stock. SFAS 123 is effective for financial
statements for fiscal years beginning after December 15, 1995.
At December 31, 1999, 1998 and 1997, the Company had two stock-based
compensation plans, as described above. The Company applies APB 25 in accounting
for its plans. Accordingly, no compensation cost for continuing operations has
been recognized for its fixed stock option plans and its stock purchase plan.
Had compensation cost for the Company's two stock-based compensation plans and
warrants been determined consistent with SFAS 123, the Company's net income and
earnings per share would have been as follows:
2000 1999 1998
---- ---- ----
Income from Continuing operations
as reported $ 5,474 $10,123 $ 8,314
Income from continuing operations
pro forma $ 5,226 $ 9,233 $ 7,707
Basic earnings per common share
from continuing operations as
reported $ 0.73 $ 1.37 $ 1.14
Basic earnings per common share
from continuing operations
pro forma $ 0.70 $ 1.25 $ 1.06
Diluted earnings per common share
from continuing operations as
reported $ 0.72 $ 1.36 $ 1.11
Diluted earnings per common share
from continuing operations
pro forma $ 0.69 $ 1.24 $ 1.03
The fair value of the purchase rights under the Purchase Plan, the options
and the warrants is estimated using the Black-Scholes option pricing model.
47
The assumptions underlying the estimates derived using the Black-Scholes
model are as follows:
1996 STOCK OPTION/ EMPLOYEE STOCK
STOCK ISSUANCE PLAN PURCHASE PLAN
------------------- ---------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Expected Dividend Yield 0% 0% 0% 0% 0% 0%
Risk-free Interest Rate 6.75% 5.7% 4.5% 5.63% 5.4% 5.4%
Expected Volatility 74.4% 67% 48% 74.4% 67% 48%
Expected Life (in years) 3.77 3.0 2.9 0.5-2.0 0.5-2.0 0.5-2.0
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options.
EMPLOYEE 401(k) PLAN
The Company adopted The Willis 401(k) Plan (the "401(k) Plan") effective as
of January 1997. The 401(k) Plan provides for deferred compensation as described
in Section 401(k) of the Internal Revenue Code. The 401(k) Plan is a
contributory plan available to essentially all full-time and part-time employees
of the Company in the United States. In 2000, employees who participated in the
401(k) Plan could elect to defer and contribute to the 401(k) Plan up to 20% of
pretax salary or wages up to $10,500. The Company made no 401(k) contributions
during the years ended December 31, 2000 and 1999.
(11) WARRANTS
In conjunction with the initial public offering, the Company sold five-year
purchase warrants for $.01 per warrant covering an aggregate of 100,000 shares
of Common Stock exercisable at a price equal to 130% of the initial public
offering price. The warrants are exercisable commencing 24 months after the
effective date of the offering or earlier, but not earlier than 12 months after
the initial public offering, if and when the Company files a registration
statement for the sale by the Company of shares of Common Stock or securities
exercisable for, convertible into or exchangeable for shares of Common Stock
(other than pursuant to a stock option or other employee benefit or similar
plan, or in connection with a merger or an acquisition). The secondary offering
in December 1997 constituted such a registration. The warrants' exercise price
and the number of shares of Common Stock are subject to adjustment to protect
the warrant holders against dilution in certain events. On February 26, 1998, a
holder of 50,000 of the warrants exercised the warrants under the net issuance
rights of the warrants. Based on the closing price on such date, the exercise
resulted in the issuance of 25,238 shares to the holder of the warrants.
(12) EQUITY
In addition to stock issued under the Employee Stock Purchase Plan described in
note 10, the Company sold 1,300,000 newly issued shares of its common stock to
FlightTechnics and an option, exercisable within 18 months of the closing date,
to purchase newly issued shares of its common stock in a private placement in an
amount between 1,700,000 shares and up to an amount that would give
FlightTechnics 34.9% of the Company's issued and outstanding common stock. The
price per share for the first additional 1,700,000 shares purchased pursuant to
this option will be $15.00, and the price per share for any shares purchased in
excess of the first additional 1,700,000 shares will be $16.50. Total proceeds
of the transaction were $19.5 million before transaction costs of $1.3 million.
Proceeds are allocated $14.8 million to shares and $3.3 million to options based
upon the relative fair values at the issuance date, November 30, 2000.
48
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2000 and 1999 (in thousands, except per share
data):
Fiscal 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
- ---------------------------------------------------------------------------------------------------------
Total Revenue 13,947 15,163 15,263 13,257 57,630
Income from continuing
operations 1,541 1,522 2,010 401 5,474
Discontinued Operations 141 332 61 1,806 2,340
Net income 1,682 1,854 2,071 2,207 7,814
Basic earnings per common
share
Income from continuing
operations 0.21 0.21 0.27 0.05 0.73
Discontinued Operations 0.02 0.04 0.01 0.23 0.31
Net income 0.23 0.25 0.28 0.28 1.04
Diluted earnings per common
share
Income from continuing
operations 0.21 0.21 0.27 0.05 0.72
Discontinued Operations 0.01 0.04 0.01 0.23 0.31
Net income 0.22 0.25 0.28 0.28 1.03
Average common shares
outstanding 7,402 7,402 7,403 7,843 7,512
Diluted Average common shares
outstanding 7,484 7,495 7,496 7,997 7,607
Fiscal 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
- ---------------------------------------------------------------------------------------------------------
Total Revenue 19,250 18,447 13,481 14,047 65,225
Income from continuing
operations 2,724 2,800 1,031 3,568 10,123
Discontinued Operations 61 (14) (5,415) (1,473) (6,840)
Net income 2,785 2,787 (4,384) 2,095 3,283
Basic earnings per common
share
Income from continuing
operations 0.37 0.38 0.14 0.48 1.37
Discontinued Operations 0.01 - (0.73) (0.20) (0.93)
Net income 0.38 0.38 (0.59) 0.28 0.44
Diluted earnings per common
share
Income from continuing
operations 0.37 0.37 0.14 0.48 1.36
Discontinued Operations - - (0.73) (0.20) (0.92)
Net income (loss) 0.37 0.37 (0.59) 0.28 0.44
Average common shares
outstanding 7,363 7,374 7,394 7,398 7,382
Diluted Average common shares
outstanding 7,450 7,453 7,448 7,443 7,447
During the fourth quarter of 1999, WLFC recorded a reduction to its income tax
expense of approximately $756,000 related to state taxes. The adjustment lowered
the Company's effective tax rate for 1999 to 24%. The reduction in the income
tax expense arose from a review of the Company's sources of revenue during 1998
and 1999. Based on this review, the effective tax rate applicable for deferred
tax liability recognition during 1998 and 1999 was reduced.
49
SCHEDULE II
Valuation Accounts (in thousands)
WILLIS LEASE FINANCE CORPORATION
Valuation Accounts
(in thousands)
Balance at Additions Charged Balance at
Beginning of to Expense Deductions End of
Period Period
---------------------------------------------------------------------------
December 31, 1998
Accounts receivable, allowance
for doubtful accounts $22 12 - $34
December 31, 1999
Accounts receivable, allowance
for doubtful accounts 34 105 (92) 47
December 31, 2000
Accounts receivable, allowance
for doubtful accounts 47 24 (71) -
December 31, 1998
Reserve for sales returns $223 550 (428) $345
December 31, 1999
Reserve for sales returns 345 389 (29) 705
December 31, 2000
Reserve for sales returns 705 144 (849) -
50
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation, filed on March 12, 1998
together with Certificate of Amendment of Certificate of
Incorporation filed on May 6, 1998. Incorporated by
reference to Exhibits 4.01 and 4.02 of the Company's
report on Form 8-K filed on June 23, 1998.
3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the
Company's report on Form 8-K filed on June 23, 1998.
4.1 Specimen of Common Stock Certificate. Incorporated by
reference to Exhibit 4.1 of the Company's report on Form
10-Q for the quarter ended June 30, 1998.
4.2 Rights Agreement dated September 30, 1999, by and between
the Company and American Stock Transfer and Trust Company,
as Rights Agent. Incorporated by reference to Exhibit 4.1
of the Company's report on Form 8-K filed on October 4,
1999.
4.3 First Amendment to Rights Agreement, dated as of November
30, 2000, by and between the Company and American Stock
Transfer and Trust Company. Incorporated by reference to
Exhibit 10.1 of the Company's report on form 8-K filed
December 15, 2000.
10.1 Form of Indemnification Agreement entered into between
the Company and its directors and officers. Incorporated
by reference to Exhibit 10.3 to Registration Statement No.
333-5126-LA filed on June 21, 1996.
10.2 Employment Agreement between the Company and Charles F.
Willis IV dated November 7, 2000.
10.3 Employment Agreement between the Company and Donald A.
Nunemaker dated November 21, 2000.
10.4 Employment contract for Nicholas J. Novasic dated
June 15, 2000. Incorporated by reference to Exhibit 10.3
of the Company's report on Form 10-Q for the quarter ended
September 30, 2000.
10.5 Separation Agreement dated May 24,2000 between the Company
and James D. McBride
10.6 Settlement Agreement dated August 10, 2000 between the
Company and Robert Rau.
10.7* Indenture dated as of September 1, 1997, between WLFC
Funding Corporation and The Bank of New York, as Indenture
Trustee. Incorporated by reference to Exhibit 10.16 to the
Company's Report on Form 10-K for the year ended December
31, 1997.
10.8 Note Purchase Agreement (Series 1997-1 Notes) dated
February 11, 1999. Incorporated by reference to Exhibit
10.1 of the Company's report on Form 10-Q for the quarter
ended March 31, 1999.
10.9* Amended and Restated Series 1997-1 Supplement dated
February 11, 1999. Incorporated by reference to Exhibit
10.2 to the Company's report on Form 10-Q for the quarter
ended March 31, 1999.
10.10* Administration Agreement dated as of September 1, 1997
between WLFC Funding Corporation, the Company, First Union
Capital Markets Corp. and The Bank of New York.
Incorporated by reference to Exhibit 10.19 to the
Company's Report on Form 10-K for the year ended
December 31, 1997.
10.11 The Company's 1996 Stock Option/Stock Issuance Plan, as
amended and restated as of April 24, 2000. Incorporated by
reference to the Company's Proxy Statement dated April 27,
2000.
10.12* Operating Agreement of PGTC LLC dated May 28, 1999 among
the Company, Chromalloy Gas
51
EXHIBIT
NUMBER DESCRIPTION
------- -----------
Turbine Corporation and Pacific Gas Turbine Center,
Incorporated. Incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the quarter ended
June 30, 1999.
10.13* Contribution and Assumption Agreement dated May 28, 1999
among Pacific Gas Turbine Center Incorporated, the Company
and Pacific Gas Turbine Center LLC. Incorporated by
reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended June 30, 1999.
10.14* Second Amendment to Amended and Restated Series 1997-1
Supplement. Incorporated by reference to Exhibit 10.1 of
the Company's report on Form 10-Q for the quarter ended
March 31, 2000.
10.15 Amended and Restated Credit Agreement as of February 10,
2000. Incorporated by reference to Exhibit 10.2 of the
Company's report on Form 10-Q for the quarter ended March
31, 2000.
10.16 Investment Agreement, dated as of November 7, 2000, by and
among the Company, FlightTechnics LLC, Flightlease AG, SR
Technics Group and SR Technics Group America, Inc.
Incorporated by reference to Exhibit 10.1 of the Company's
report on Form 8-K filed on November 13, 2000.
10.17 Membership Interest Purchase Agreement, dated as of
November 7, 2000, by and between the Company and SR
Technics Group America, Inc. Incorporated by reference to
Exhibit 10.3 of the Company's report on Form 8-K filed on
November 13, 2000.
10.18 Share Purchase Agreement, dated as of November 7, 2000, by
and between the Company and SR Technics Group America,
Inc. Incorporated by reference to Exhibit 10.4 of the
Company's report on Form 8-K filed on November 13, 2000.
10.19* Cooperation Agreement, dated as of November 7, 2000, by
and among the Company, Flightlease AG and SR Technics
Group. Incorporated by reference to Exhibit 10.6 of the
Company's report on Form 8-K filed on November 13, 2000.
10.20 Stockholders' Agreement, dated as of November 7, 2000, by
and among the Company, Charles F. Willis, IV, CFW
Partners, L.P., Austin Chandler Willis 1995 Irrevocable
Trust and FlightTechnics LLC. Incorporated by reference to
Exhibit 10.8 on Form 8-K filed on November 13, 2000.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company
23.1 Consent and Report on Schedule II of KPMG LLP, Independent
Accountants
52