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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
/ / 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)
CALIFORNIA 68-0070656
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
180 HARBOR DRIVE, 94965
SUITE 200, SAUSALITO, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code (415) 331-5281
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
None
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 9, 1998 was approximately $60,099,041 million (based on a
closing sale price of $21.125 per share as reported on the NASDAQ National
Market). Shares of Common Stock held by each executive officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's Common Stock outstanding as of
March 9, 1996 was 7,210,598.
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WILLIS LEASE FINANCE CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
---------
Item 1. Business.......................................................................................
Item 2. Properties.....................................................................................
Item 3. Legal Proceedings..............................................................................
Item 4. Submission of Matters to a Vote of Security Holders............................................
PART II
Item 5. Market for Registrant's Common Equity and related Stockholder Matters..........................
Item 6. Selected Financial Data........................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........
Item 8. Financial Statements and Supplementary Data....................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........
PART III
Item 10. Directors and Executives Officers of the Registrant............................................
Item 11. Executive Compensation.........................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions.................................................
PART IV
Item 14. Exhibits, Financial Schedules and Reports on Form 8-K..........................................
2
PART I
ITEM 1. BUSINESS
Willis Lease Finance Corporation and its subsidiaries (the "Company") is a
provider of operating leases of aircraft equipment and aircraft parts worldwide.
The Company's core business is acquiring and leasing commercial aircraft spare
engines and other aircraft equipment to domestic and international airlines,
manufacturers and overhaul/repair facilities pursuant to operating leases. As a
significant corollary to its core business, the Company through its wholly owned
subsidiary Willis Aeronautical Services, Inc. ("WASI"), acquires engine parts
and other aviation equipment, such as whole engines and aircraft, which can be
dismantled and sold as parts. In addition, the Company engages in the selective
purchase and resale of commercial aircraft engines and engine components in the
aftermarket.
The Company is a California corporation which commenced its leasing business
in 1988. Its executive offices are located at 180 Harbor Drive, Suite 200,
Sausalito, California 94965. The Company transacts business directly and through
its subsidiaries unless otherwise indicated.
INDUSTRY BACKGROUND
Commercial airlines typically maintain a number of spare aircraft engines to
ensure that their aircraft are not grounded when engines or parts are removed
for normal maintenance or as a result of failure. Industry analysts estimate
that the worldwide fleet of approximately 11,500 commercial aircraft utilizes
approximately 30,000 engines, including approximately 5,000 spare engines valued
at over $11 billion. The Boeing 1997 Current Market Outlook (the "Boeing
Report") estimates 16,160 new commercial aircraft will be added over the next 20
years, resulting in a projected worldwide fleet of approximately 23,600
commercial aircraft in 2016, net of retired aircraft. These 16,160 new
deliveries, which represent a mixture of two-, three- and four-engined aircraft,
will require approximately 35,000 installed engines and, assuming a ratio of
approximately 15% spare engines to installed engines, approximately 5,300
additional spare engine acquisitions over the next 20 years. The Boeing Report,
and the foregoing numbers, do not address the additional number of aircraft and
engines which will be required to service the commuter or corporate markets.
Airlines have increasingly turned to operating leases as an alternative to
traditional financing of their aircraft, engines and spare parts. Aviation Week
and Space Technology ("Aviation Week") reports that leasing will be the primary
means by which the global air transport industry acquires new aircraft between
now and 1999, and probably beyond. Aviation Week, based upon data provided by GE
Capital Aviation Services, states that in 1986, 41% of the world's airlines
owned all of their equipment, 15% leased all of their equipment and 44% used a
mix of the two (with 80% owned and 20% leased). By contrast, in 1996, only 16%
owned all of their equipment, while 42% leased all of their equipment and 42%
used a mix of the two (with 40% owned and 60% leased).
Advantages to airlines of leasing include greater flexibility in fleet
management, off-balance sheet treatment of operating leases, the ability to
employ funds without affecting debt-to-equity ratios, and the shifting of
residual value risk to a third party. The Company believes that airlines are
increasingly considering their spare aircraft engines and spare parts as
significant capital assets suitable for lease. Due to the increasing cost of
newer aircraft equipment, the anticipated modernization of the worldwide
aircraft fleet and the significant cost associated therewith, and the emergence
of new niche-focused airlines which generally use leasing for capital asset
acquisitions, the Company believes this trend toward operating leases will
continue.
STRATEGY
The Company's strategy for its leasing business is to focus primarily on
operating leases of commercial aircraft engines and aircraft parts worldwide
while maximizing residual values. The Company purchases
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primarily aftermarket commercial aircraft equipment for lease and resale. The
Company focuses on noise compliant Stage III commercial jet aircraft engines for
its lease portfolio. As of December 31, 1997, all of the Company's engines were
Stage III engines and were generally suitable for use on one or more commonly
used aircraft.
Additionally, the Company has made a selective investment in aircraft for
lease and may make further such investments in the future. This investment,
which occurred in late 1997, involved the purchase of three commuter aircraft
for the lease portfolio.
Through the spare parts and component sales operations of its WASI
subsidiary, the Company sells aircraft spare parts to commercial passenger
airlines, air cargo carriers, overhaul/repair facilities and other spare parts
distributors. WASI can provide some parts for maintenance and overhaul of the
Company's engines at prices lower than the Company could obtain from third
parties. As engines in the Company's leasing portfolio age and reach the point
at which they are more valuable as component parts, the Company expects that
WASI will be able to sell engine components from such engines.
AIRCRAFT EQUIPMENT LEASING
Most 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--Ownership Risks."
The Company primarily targets the medium-term lease market, which generally
consists of leases with three to ten year lease terms. Airlines, manufacturers
and overhaul/repair facilities leasing for this term generally do so when their
projected utilization of specific equipment is deemed to be less than its useful
life, or when they seek to manage their cash flow more efficiently while
strengthening their balance sheets. All of the Company's lease transactions with
three to ten year lease terms 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. To date, the Company has attempted to minimize its
currency and exchange risks by negotiating all of its lease transactions in U.S.
Dollars. In addition, to date, all guarantees obtained to support various lease
agreements are denominated and payable in U.S. Dollars. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--International Risks."
The Company recently made its first investment in the aircraft leasing
market by purchasing three turbo-prop commuter aircraft and three spare engines
which are leased to a domestic commuter airline. Generally, the same benefits,
issues and risks that apply to aircraft engine leasing apply to the lease of
aircraft. The Company anticipates that it may invest in additional aircraft for
lease in the future.
In addition to the benefits, issues and risks that apply to the leasing of
aircraft equipment generally, 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.
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The Company typically collects maintenance reserves and security deposits
from engine lessees and security deposits from its aircraft lessee and its 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
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. Parts leases generally require that the parts
be returned in the condition they were in at lease inception.
The Company 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, trade references 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. 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 its ability to
repossess its collateral should the need arise. While the Company has
experienced some collection problems, including delay in lease rental payments,
to date the Company has not experienced material losses attributable to such
problems; however, there can be no assurance that the Company will not
experience collection problems or significant losses in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Customer Credit Risks."
During a given 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 thorough inspection to verify compliance with
lease return conditions. Maintenance, overhaul and thorough inspections during
and after the lease term help ensure that the Company's leased equipment
maintains its residual value. While there can be no assurance that the Company's
maintenance and inspection requirements will result in a realized return to the
Company upon termination of a lease, the Company believes that its emphasis on
maintenance and inspection generally helps it to recover its investment in
leased equipment.
Upon termination of a lease, the Company will re-lease or sell the aircraft
equipment or will dismantle or have equipment dismantled and will sell the
parts. 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 a 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-- Ownership Risks" and "Business--Aircraft
Equipment Portfolio."
AIRCRAFT EQUIPMENT LESSEES
As of December 31, 1997, the Company had 42 engines under leases to 28
customers in 17 countries, 3 aircraft on lease to one customer and 8 spare parts
packages on lease to 7 customers in 7 countries.
The following table displays the regional profile of the Company's operating
lease customer base by revenue for the years ended December 31, 1996 and
December 31, 1997. No single country other than the
5
United States accounted for more than 13% and 14% of the Company's lease revenue
for the years ended December 31, 1997 and December 31, 1996 respectively.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
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OPERATING LEASE OPERATING LEASE
REVENUE PERCENTAGE REVENUE PERCENTAGE
--------------- ----------- --------------- -----------
(DOLLARS IN THOUSANDS)
United States.......................................... $ 6,718 35% $ 5,295 39%
Europe................................................. 5,432 29% 2,840 21%
Mexico................................................. 2,479 13% 1,865 14%
Canada................................................. 1,521 8% 1,291 9%
Australia/New Zealand.................................. 1,027 6% 1,030 7%
Asia................................................... 807 4% 889 6%
South America.......................................... 778 4% 530 4%
Middle East............................................ 251 1% -- --
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Total.................................................. $ 19,013 100% $ 13,740 100%
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For the years ended 1997 and 1996, Aerovias de Mexico, S.A. de C.V., a
lessee customer of the Company, contributed approximately 13% and 14%
respectively of operating lease revenue.
As of December 31, 1997, the Company had 2 engines under finance lease to
one Asia based lessee which generated $0.4 million of revenue in 1997. The
Company had no such leases in 1996.
AIRCRAFT EQUIPMENT PORTFOLIO
The Company's management frequently reviews opportunities to acquire
suitable aircraft engines based on market demand, customer airline requirements
and in accordance with the Company's engine portfolio mix criteria and planning
strategies for leasing. Before committing to purchase specific engines, 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 engines and their anticipated
obsolescence. As a result, certain types and configurations of engines do not
necessarily fit the profile for inclusion in the Company's portfolio of engines
owned and used in its leasing operation. The Company focuses particularly on the
noise compliant Stage III aircraft engines. As of December 31, 1997, all of the
engines in the Company's lease portfolio were Stage III engines and were
generally suitable for use on one or more commonly used aircraft. The Company
purchases a majority of its engines in the aftermarket, primarily from airlines
or other leasing companies. The Company applies the same general review process
it uses for acquisition of aircraft engines to possible acquisitions of aircraft
and parts for lease. The Company's investment in aircraft in late 1997 involved
the purchase of three de Havilland DHC-8 commuter aircraft. These aircraft are
Stage III compliant. The Company's parts packages consist of rotable parts for
use on commercial aircraft or the engines appurtenant to such aircraft.
The Company's commercial aircraft engine portfolio consists of aircraft
engines manufactured by CFM International ("CFM"), General Electric ("CF"),
Pratt & Whitney ("JT" and "PW") and Rolls Royce ("RB").
AIRCRAFT EQUIPMENT HELD FOR LEASE
At December 31, 1997, the Company had 44 aircraft engines and related
equipment, 8 spare parts packages and 3 aircraft with an aggregate original cost
of $163.9 million in its lease portfolio. At December 31, 1996, the Company had
32 aircraft engines with an aggregate original cost of $112.5 million, 3 spare
parts packages and no aircraft in its lease portfolio.
6
As of December 31, 1997, minimum future rentals under the noncancelable
leases of these aircraft assets was as follows:
(IN
YEAR THOUSANDS)
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1998........................................................................... $ 20,230
1999........................................................................... 16,182
2000........................................................................... 11,817
2001........................................................................... 8,560
2002........................................................................... 5,957
Thereafter..................................................................... 7,018
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$ 69,764
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AIRCRAFT EQUIPMENT 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 the engine purchase price on a recourse,
non-recourse or partial recourse basis. Under most of the Company's term loans,
the lender is entitled to receive most of the lease payments associated with the
financed engines to apply to debt service. Under the Company's warehouse
facilities, the lender is paid interest only until such time as loans under the
facilities become due. Generally, lenders take a security interest in the
engines. The Company retains ownership of the engines, 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 for full or partial recourse loans, the financial condition of the
Company. The Company obtains the balance of the purchase price of the engine,
the "equity" portion, from internally generated funds, cash-on-hand, and the net
proceeds of prior common stock offerings.
The loans available to the Company under recourse arrangements are secured
by the financed engines and the assignment of lease payments due under the
related leases. Upon default under a loan covering equipment financed through
recourse borrowings, the lender providing the financing can foreclose on the
equipment, repossess and sell such equipment and seek any balance due on such
financing from the Company to the extent of the recourse.
The credit standing of certain of the Company's customers and the long
operating life of aircraft engines allows the Company to finance some of its
equipment on a non-recourse or partial recourse basis. Certain of the Company's
engines are owned in wholly-owned subsidiaries set up for financing purposes.
Non-recourse loans represent loans to the Company's subsidiaries which own only
the assets securing the loan and as to which the Company has not guaranteed the
loan. The Company and its subsidiaries at December 31, 1997 had borrowings of
$7.1 million of non-recourse loans and $93.7 million of full or partial recourse
loans. The Company is not liable for the repayment of the non-recourse loans
unless the Company breaches certain limited representations and warranties under
the applicable pledge agreement. The lender assumes the credit risk of each such
lease, and its only recourse, upon a default under a lease, is against the
lessee and the leased engine.
The Company has negotiated a sharing of residual proceeds with certain
lenders in exchange for a higher percentage financing of certain aircraft
engines. Residual sharing arrangements apply to 5 of the Company's engines as of
December 31, 1997. The Company accrues for its residual sharing obligations
using net book value as a proxy for residual proceeds.
Generally, the Company has borrowed to finance the acquisition of aircraft
and parts packages on terms similar to those for engines. Such borrowings have
generally been on a recourse basis.
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Additionally, the Company and WASI have borrowed to finance the acquisition
of spare parts for resale. The advance rates on such financing range from 70% to
85%. To date, such borrowings have been on a recourse basis or in the case of
borrowings by WASI, guaranteed by the Company.
SPARE PARTS SALES
The Company, through WASI, specializes in the purchase and resale of
aftermarket engine parts, engines, modules and rotable components. WASI
purchases individual engine parts from airlines and others in the aftermarket or
acquires whole airframes or engines and contracts to have the airframes or
engines dismantled into their component parts for resale by WASI. Some of the
acquired component 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 JT9D, PW 4000 and JT8D aircraft engines and
components. These engines are the most widely used aircraft engines in the
world, powering the Boeing 747, 727 and 737, McDonnell Douglas DC10 and DC9 and
Airbus A-300 series of aircraft. WASI has begun to expand into engine components
for the CFM-56, an engine used on the Boeing 737.
WASI's operations have afforded the Company additional contacts and
opportunities in the aircraft engine market. WASI can provide some parts for
maintenance and overhaul of the Company's engines at prices lower than the
Company could obtain from third parties. As engines in the Company's leasing
portfolio age and reach the point at which they are more valuable as component
parts, the Company expects that WASI will be able to have them dismantled,
salvage valuable components and thereby maximize the residual value of the
engines.
WASI has strict guidelines regulating how parts are procured and overhauled.
After the completion of an extensive facilities audit and numerous meetings with
the Company's management, the Airline Suppliers Association, an FAA recognized
independent quality assurance organization, accredited WASI as an aftermarket
parts supplier. When procuring aircraft parts, great emphasis is placed on
source and traceability. At December 31, 1997, at least 95% of WASI's inventory
on hand was acquired from a certified commercial air carrier or others operating
under recognized regulatory agencies accepted by the FAA. Less than 5% of the
inventory was acquired from trading companies and in all such cases the parts
are certified by the seller as to origin. WASI does not trade in consumable
parts such as hardware/ fasteners. Hardware/fasteners are the most difficult to
identify as unapproved material and in many cases are impossible to identify as
unapproved material without conducting detailed analysis. WASI's trades in
life-limited parts are restricted to parts that have complete traceability back
to the OEM or in few cases traceability from a commercial air carrier back to
the OEM. See, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Government Regulation."
WASI advertises its aircraft engine parts availability on the Inventory
Locator Service ("ILS") electronic database. Users of ILS can access the
database and determine which companies have the desired inventory. The Company
also advertises in industry publications and receives customers through
referrals.
WASI may from time to time enter into consignment agreements with airlines
or related companies to acquire surplus inventories for the purpose of marketing
and selling such consigned parts. Consignment allows WASI to access inventory
for sale without the cost and risk of ownership.
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. It is the Company's general policy to
minimize risk by not purchasing engines or components on speculation; however,
on occasion, the Company purchases engines and components without having a
commitment for their sale. The Company normally makes a contractual commitment
to purchase specific engines or components for its own account only after, or
concurrently with, obtaining a firm customer purchase commitment.
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Although the Company usually has purchase commitments at delivery, it would have
financial exposure if it purchased an engine or components which could not
immediately be resold. 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. The
Company does not refurbish or perform other maintenance on the engines or
components it sells; however, from time to time, the Company has hired third
party contractors to refurbish or repair such engines and components.
COMPETITION
In the medium-term engine lease market segment, which is the Company's
target market, the Company principally competes with Shannon Engine Services,
headquartered in Shannon, Ireland, which is owned by CFM, a joint venture
between General Electric and SNECMA. The Company also competes with Rolls Royce
Capital ("Rolls Royce"). Rolls Royce limits its leasing activities to products
of its parent company and related parties. The Bank of Tokyo-Mitsubishi, through
its affiliate Engine Lease Finance in Shannon, Ireland, also competes with the
Company. Some of these competitors are substantially larger and each has greater
financial resources than the Company which may permit, among other things,
greater access to capital markets at more favorable terms. In addition, certain
major aircraft lessors, including International Lease Finance Corporation and
General Electric Capital Aviation Services ("GECAS"), compete with the Company
to the extent that they include spare engine leases with their aircraft leases
or may compete on transactions involving numerous engines.
With respect to engine marketing and spare parts and component sales, the
Company competes with airlines, engine manufacturers, aircraft, engine and parts
brokers, and parts distributors. The Company's major competitors include the
Allen Aircraft division of AAR Corp. ("AAR"), The AGES Group ("AGES"), The
Memphis Group, Aviation Sales Company, Kellstrom Industries and AVTEAM, Inc.
Certain of these competitors may have, or may have access to, financial
resources substantially greater than the Company. Significant increases in
competition encountered by the Company in the future may limit the Company's
ability to expand its business, which would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Competition."
The Company believes that the primary competitive factors in the aircraft
engine leasing industry are flexibility in leasing terms, including price,
return conditions and term of lease, and availability of engines. The Company
believes that it is able to compete favorably in leasing commercial aircraft
engines and parts due to its experience in the industry and reputation and
expertise in acquiring commercial aircraft engines which allows the Company to
re-lease or sell such engines and parts at a competitive price.
In the spare parts package leasing market, the Company competes with AAR,
AGES, Aviation Sales Company, Kellstrom Industries and others. In the commuter
aircraft leasing market, the Company competes with The Ages Group, GECAS, the
leasing arms of certain commuter aircraft manufacturers and others.
INSURANCE
The Company requires its lessees to carry the types of insurance customary
in the air transportation industry, including comprehensive liability insurance
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. All policies
contain a breach of warranty endorsement or severability of interest clause so
that the Company continues to be protected even if the operator/lessee violates
one or
9
more of the warranties or conditions of the insurance policy. The Company
monitors compliance with the insurance provisions of the leases. The Company
also carries contingency and product liability insurance.
GOVERNMENT REGULATION
The Company's customers are generally subject to a high degree of regulation
in the various jurisdictions in which they operate. Such regulations also
indirectly affect the Company's business operations. Under the provisions of the
Transportation Act, as amended, the FAA exercises regulatory authority over the
air transportation industry. The FAA regulates the manufacture, repair and
operation of all aircraft and their components in the United States. Its
regulations are designed to insure that all aircraft and aviation equipment are
continuously maintained in proper condition to ensure safe operation of the
aircraft. Similar rules apply in other countries. All aircraft must be
maintained under a continuous condition monitoring program and must periodically
undergo thorough inspection and maintenance. The inspection, maintenance and
repair procedures for the various types of commercial aircraft equipment are
prescribed by regulatory authorities and can be performed only by certified
repair facilities utilizing certified technicians. Certification and conformance
is required prior to installation of a part on an aircraft. 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 worldwide marketability. 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. In addition, by the year 2000, federal regulations
will stipulate that most commercial aircraft that fly in the United States and
the engines appurtenant thereto 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 Federal Aviation Regulations
of the United States. As of December 31, 1997, all of the engines and aircraft
in the Company's lease portfolio were Stage III engines.
EMPLOYEES
As of December 31, 1997, the Company had 45 full-time employees and 2
part-time employees (excluding consultants), including 24 employees in equipment
leasing and trading and 23 employees in airframe and engine component sales.
None of the Company's employees is covered by a collective bargaining agreement
and the Company believes its employee relations are good.
ITEM 2. PROPERTIES
The Company's principal offices are located at 180 Harbor Drive, Suite 200,
Sausalito, California 94965. The Company occupies space in Sausalito under a
lease that covers approximately 5,500 square feet of office space and expires on
March 14, 1999. Aircraft asset leasing, financing, sales, trading and general
administrative activities are conducted from the Sausalito location. In February
1998, the company signed a lease for approximately 9,300 square feet of office
space into which it anticipates moving its Sausalito operations in the second
quarter of 1998. The Company also leases approximately 16,600 square feet of
office and warehouse space for WASI's operations at 291 Harbor Way, South San
Francisco, California. This lease expires on May 31, 1998. WASI leases
approximately 6,000 square feet of warehouse space at a second South San
Francisco location. This lease is a month-to-month lease. In addition, the
Company leases approximately 10,730 square feet of space at 1769 West University
Drive, Suite 177, Tempe, Arizona 85821, which is used for parts storage and
distribution. This lease expires on July 31, 1999. See Note 10 to the Audited
Financial Statements. In March 1998, the Company contingently agreed to lease
approximately 125,000 square feet of warehouse and office space for WASI in San
Diego, California. The initial term of the lease is 6 years. WASI intends to
move substantially all of its South San Francisco operations into this facility.
10
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 1997.
11
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 9, 1998,
there were 1,239 stockholders of record of the Company's Common Stock. The
foregoing number does not include beneficial holders of the Company's common
stock.
The high and low sales price of the Common Stock for each quarter of 1997,
as reported by NASDAQ, are set forth below:
1997 1996
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
First Quarter.................................................................... 14.50 12.25 n/a n/a
Second Quarter................................................................... 12.63 10.31 n/a n/a
Third Quarter.................................................................... 23.50 12.25 10.00 8.50
Fourth Quarter................................................................... 24.13 15.25 12.88 8.75
The Company did not declare any dividends during the years ended December
31, 1997 and December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data and
operating information of the Company. The selected consolidated financial 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,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Revenue:
Operating lease revenue............................... $ 19,013 $ 13,740 $ 13,771 $ 13,636 $ 10,323
Gain (loss) on sale of leased engines................. 4,165 2 (483) 633 (281)
Spare parts sales..................................... 14,110 5,843 3,859 795 --
Sale of equipment acquired for resale................. 12,748 12,105 5,472 2,184 --
Interest income in direct finance lease............... 443 -- -- -- --
Interest and other income............................. 728 618 119 542 938
---------- ---------- --------- --------- ---------
$ 51,207 $ 32,308 $ 22,738 $ 17,790 $ 10,980
Expenses:
Cost of spare parts sales............................. $ 9,469 $ 3,308 $ 2,546 $ 659 --
Cost of equipment acquired for resale................. 10,678 10,789 2,742 1,863 --
All other expenses.................................... 22,245 13,351 14,168 13,295 9,857
Gain on modification of credit facility............... -- -- 2,203 -- --
---------- ---------- --------- --------- ---------
Income before income taxes and minority interest...... $ 8,815 $ 4,860 $ 5,485 $ 1,973 $ 1,123
Net income............................................ $ 7,338 $ 2,804 $ 3,216 $ 1,172 $ 669
Balance Sheet Data:
Total assets.......................................... $ 198,430 $ 124,933 $ 91,437 $ 83,542 $ 68,632
Debt (includes capital lease obligation).............. 104,235 76,146 69,911 69,456 59,840
Shareholders' equity.................................. 54,601 23,202 4,812 1,959 1,151
12
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Lease Portfolio:
Engine portfolio at the end of the period............. 44 32 31 26 25
Spare parts package portfolio at the
end of the period................................... 8 3 -- -- --
Aircraft portfolio at the end of the period........... 3 -- -- -- --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's core business is acquiring and leasing, primarily pursuant to
operating leases, commercial aircraft spare engines and other aircraft
equipment. The Company, through WASI, also specializes in the purchase and
resale of aftermarket airframe and engine parts, engines, modules and rotable
components. In addition, the Company engages in the selective purchase and
resale of commercial aircraft engines.
Revenue consists primarily of operating lease revenue, income from the
leasing and sale of spare parts and components and income from the sale of
engines and equipment.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenue is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996
-------------------- --------------------
AMOUNT % AMOUNT %
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Operating lease revenue............................................... $ 19,013 37.1% $ 13,740 42.5%
Gain on sale of leased equipment...................................... 4,165 8.1% 2 0.0%
Spare parts sales..................................................... 14,110 27.6% 5,843 18.1%
Sale of equipment acquired for resale................................. 12,748 24.9% 12,105 37.5%
Finance lease revenue................................................. 443 0.9% -- --
Interest and other income............................................. 728 1.4% 618 1.9%
--------- --------- --------- ---------
Total................................................................. $ 51,207 100.0% $ 32,308 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
LEASE PORTFOLIO. During 1997, 21 engines, 3 aircraft, and 5 spare parts
packages were added to the Company's lease portfolio at a total cost of $68.1
million. Nine engines were sold or transferred from the portfolio.
LEASING ACTIVITIES. Operating lease revenue for the year ended December 31,
1997, increased 38% to $19.0 million from $13.7 million for the comparable
period in 1996. This increase reflects lease revenues from additional engines
and spare parts packages. In late June 1997, the Company entered into two
finance leases. Finance lease income generated from these transactions totaled
$442,542 for the period ended December 31, 1997. There were no comparable
transactions for the year ended December 31, 1996.
Expenses directly related to operating lease activity increased 48% to $12.5
million. Interest expense related to all leasing activities increased 72% to
$7.5 million for the year ended December 31, 1997, from the comparable period in
1996, due primarily to an increased loan base and the replacement of an existing
facility with a new loan agreement in the first quarter of 1997 bearing a higher
interest rate. Depreciation expense increased 32% to $4.1 million for the year
ended December 31, 1997, from the comparable period
13
in 1996, due to the larger asset base in 1997. Residual sharing expense
increased 24% to $0.9 million for the year ended December 31, 1997, from the
$0.7 million for the comparable period in 1996. This expense is calculated by
comparing the net book value of the engines subject to such agreements to their
related debt balances and adjusting the residual share payable to the
appropriate amount representing the sharing percentage of any excess of the net
book value over the corresponding debt balance for the engines subject to
residual sharing.
GAIN ON SALE OF LEASED ENGINES. During the year ended December 31, 1997,
the Company sold 6 engines from the lease portfolio. These engines had a net
book value of $11.5 million and they were sold for a gain of $4.2 million.
SPARE PARTS SALES. Revenues from spare parts sales increased 142% to $14.1
million. The gross margin, decreased to 33% in 1997, from 43% in the
corresponding period in 1996.
SALE OF EQUIPMENT ACQUIRED FOR RESALE. During the year ended December 31,
1997, the Company sold 10 engines for $12.7 million which resulted in a gain of
$2.1 million, compared to the year ended December 31, 1996, during which the
Company sold 4 engines for $12.1 million resulting in a gain of $1.3 million.
Included in the 1997 sales was one transaction involving the sale of four
engines acquired at a cost of $600,000 and sold for a gain of $100,000.
Equipment sales opportunities and profitability may vary materially from period
to period.
INTEREST AND OTHER INCOME. Interest and other income for the year ended
December 31, 1997, increased to $0.7 million from $0.6 million for the year
ended December 31, 1996. This is a result of interest earned on deposits held,
primarily the proceeds from the Initial Public Offering.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 82% to $9.3 million for the year ended December 31, 1997, from the
comparable period in 1996. This increase reflects expenses associated with staff
additions, increased rent due to the expansion of the WASI facility, as well as
an increase in professional fees, insurance expense and public company costs.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the year ended December 31, 1997, increased to $3.5 million from $2.0 million
for the comparable period in 1996. This increase reflects an increase in the
Company's pre-tax earnings.
EXTRAORDINARY ITEM. In February 1997, the Company obtained a new loan
agreement for $41.5 million to replace an existing loan of $44.2 million. The
transaction resulted in an extraordinary gain of $2 million, net of tax.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
AMOUNT % AMOUNT %
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Revenue:
Leasing activities................................................. $ 13,740 42.5% $ 13,771 60.6 %
Gain (Loss) on sale of leased equipment............................ 2 0.0% (483) (2.1)%
Spare parts sales.................................................. 5,843 18.1% 3,859 17.0 %
Sale of equipment acquired for resale.............................. 12,105 37.5% 5,472 24.0 %
Interest and other income.......................................... 618 1.9% 119 0.5 %
--------- --------- --------- ---------
Total.............................................................. $ 32,308 100.0% $ 22,738 100.0 %
--------- --------- --------- ---------
--------- --------- --------- ---------
14
LEASE PORTFOLIO. At December 31, 1995, the Company had 31 engines in its
operating lease portfolio. During 1996, four engines were either transferred or
sold from the lease portfolio. One of the four engines was transferred at its
net book value to WASI and dismantled for spare parts sales. The remaining three
engines were sold to third parties. In addition, another engine from the lease
portfolio was sold under a sale and leaseback agreement and is now reflected on
the Company's balance sheet as an engine on capital lease. In the third quarter
of 1996, the Company acquired one engine for $2.8 million and in the fourth
quarter of 1996, the Company acquired four engines for a total cost of
approximately $16.3 million, as well as two auxiliary power units (APU's) and a
spare parts package for a total cost of approximately $3.2 million. At December
31, 1996, the Company held 32 engines and 3 spare parts packages in its lease
portfolio.
OPERATING LEASES. Operating lease revenue for the year ended December 31,
1996 decreased to $13.7 million from $13.8 million for the corresponding period
in 1995. This decrease is primarily due to a decrease in revenue from one engine
which was off-lease and in a repair facility for eight months in 1996 and two
engines which were sold in 1996, offset slightly by five engines purchased and
leased late in 1996.
In 1996, expenses directly related to operating lease activity dropped 23%
to $8.1 million from $10.6 million in 1995. The reduction in expenses in 1996
was due to a reduction in depreciation expenses of $1.6 million (33%) as a
result of two engines in 1995 that were fully depreciated and the sale of two
engines in the third quarter of 1996. Interest expense dropped $1.2 million
(22%) in 1996 from 1995, due primarily to the modification of the then-existing
term loan with Marine Midland Bank (the "Midland Loan") in June 1995 resulting
in more favorable interest rates. Residual sharing expenses, however, increased
77% to $723,000 in 1996 from the corresponding period in 1995 due to changes in
the Company's portfolio of engines subject to such agreements. This expense is
calculated by comparing the net book value of these engines to their related
debt balances and adjusting the residual share payable to the appropriate amount
representing the sharing percentage of any excess of the net book value over the
corresponding debt balance for the six engines subject to residual sharing.
GAIN (LOSS) ON SALE OF LEASED ENGINES. The loss in 1995 was attributable to
unanticipated overhaul expenses of $373,000 required in order to prepare an
engine for resale and a $110,000 loss on the sale of the engine.
SPARE PARTS SALES. Revenues from spare parts sales increased 51% to $5.8
million primarily due to increased volume. Gross margin rose to 43% in 1996 from
34% in the corresponding period in 1995, primarily due to a change in the mix of
parts sold and the gross margins related thereto.
SALE OF EQUIPMENT ACQUIRED FOR RESALE. During the year ended December 31,
1996, the Company sold four engines for proceeds of $12.1 million, generating
gains of $1.3 million. In 1995, the Company sold three engines for $4.8 million,
a fuselage and miscellaneous components it acquired in connection with an
aircraft purchase for $572,000 and other components for $100,000. The aggregate
cost of the equipment sold was $10.8 million and $2.7 million in 1996 and 1995,
respectively.
INTEREST AND OTHER INCOME. Interest and other income for 1996 increased to
$617,000 from $119,000 in 1995, an increase of 418%. This increase was due
primarily to increased marketing/brokerage fee income earned on one engine,
nonrecurring credits due the Company regarding excessive engine overhaul costs
and an increase in interest earned on the net proceeds from the Initial Public
Offering, as well as interest earned on certain engine security deposits.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 53% to $5.1 million in 1996, up from $3.3 million in 1995. This
increase reflects additional compensation due to an increased workforce and
increased bonus payments; increased telephone and travel costs due to increased
marketing personnel and activity; increased rent due to the expansion of the
WASI facility and an increase in professional fees and insurance as a result of
the Initial Public Offering.
15
GAIN ON MODIFICATION OF CREDIT FACILITY. In 1995, the Company modified the
terms of the Midland Loan. The gain of $2.2 million in 1995 on the modification
of credit facility reflects a gain from the removal of residual sharing
provisions of $2.4 million and a $199,000 loss on the sale of two engines to the
lender.
INCOME TAXES. Income taxes decreased to $2 million in 1996 from $2.2
million in 1995. The Company's effective tax rates for Federal and state taxes
was approximately 41% and 40% in 1996 and 1995, respectively. Therefore, the
decrease in tax expense was due to the decrease in the Company's income before
taxes and minority interest offset by a slight increase in the effective tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth through borrowings secured
by its lease portfolio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" above and "Business--Aircraft Equipment
Financing/Source of Funds." Cash of approximately $165.6 million, $16.1 million,
and $15.7 million in the years ended December 31, 1997, 1996 and 1995,
respectively, was derived from this activity. In these same time periods, $137.1
million, $13.5 million and $9.3 million, respectively, was used to pay down
related debt. In December 1997, net proceeds from a secondary common stock
offering were approximately $23.8 million, as discussed below. In 1996, net
proceeds from the Initial Public Offering were approximately $15.9 million, as
discussed below. Cash flows from operating activities generated approximately
$6.5 million, $9.6 million and $0.5 million in the years ended December 31,
1997, 1996 and 1995, respectively.
The Company's primary use of funds is for the purchase of equipment for
operating and finance lease. Approximately $68.1 million, $25.3 million, and
$9.3 million of funds were used for this purpose in the years ended December 31,
1997, 1996 and 1995, respectively. Additional funds were used in these periods
to finance the growth of inventories to support parts sales.
The secondary offering which occurred in December 1997 was for 1,725,000
shares of Common Stock at $15.00 per share. The proceeds to the Company, net of
all expenses, were $23.8 million. The primary use of these proceeds was
repayment of amounts outstanding under the Company's revolving credit facility.
The Initial Public Offering which occurred in September 1996 was for
2,300,000 shares of Common Stock at $8.00 per share. The proceeds to the
Company, net of all expenses, were $15.9 million. These proceeds were used to
prepay $1.3 million of indebtedness under an existing term facility, and to
purchase an amortizing interest rate cap to hedge a portion of the Company's
exposure to increases in interest rates on its variable rate borrowings for a
cost of $469,000. The balance of the proceeds, together with debt financing,
were used to acquire additional engines for lease, to acquire engine and
airframe component inventory, and for working capital and other general
corporate purposes.
Until February 1997, the Company's primary lender was Marine Midland Bank
("Midland"). Prior to June 1995, the Midland loan provided, among other things,
for interest payable at LIBOR plus 3.5% to 5%, required a specified percentage
of lease payments to be applied to debt service but required final payment only
upon the sale of the subject engine, and provided to the lender a share of the
residual value of financed engines. In June 1995, the Company modified the
Midland loan. As part of the modification, the Midland loan was converted to a
ten-year, full payout loan, the existing residual sharing arrangement with the
lender was terminated, the interest rate was reduced to LIBOR plus 1%, and the
lender acquired two engines from the Company with a net book value of $5.7
million. This modification resulted in a gain to the Company of $2.2 million. In
February, 1997, the Company repaid the Midland loan at a discount which resulted
in an extraordinary book gain, net of tax and related costs, of approximately
$2.0 million. The transaction was financed through a loan of $41.5 million from
a financial institution at an interest rate of LIBOR plus 2.5%. In December
1997, a substantial portion of this loan was repaid from proceeds of the Funding
Corp. Facility defined below. The remainder of the loan was to mature in
February 1998 but has been extended to June 1998. As of December 31, 1997, $13.4
million was outstanding under this facility.
16
The Company has a revolving credit facility to finance the acquisition of
engines and high-value spare parts for sale or lease. Assuming compliance with
the facility's terms, including sufficiency of collateral, at December 31, 1997
and March 17, 1998, $45 million and $18.1 million was available under this
facility, respectively. Fifteen million of this facility matures on May 31, 1998
and the remainder of the facility expires on June 12, 1998. The facility bore
interest at prime plus .25% on December 31, 1997 and may be renewed annually.
The Company has an $80 million warehouse facility, available to a special
purpose finance subsidiary of the Company, for the financing of jet aircraft
engines transferred by the Company to such finance subsidiary (the "Funding
Corp. Facility"). This transaction's structure facilitates future public or
private securitized note issuances by the special purpose finance subsidiary.
This facility has an eight year term and bears interest at LIBOR plus 2.25%.
This facility requires the issuer to hedge 50% of the facility against interest
rate changes no later than April 30, 1998. Assuming compliance with the
facilities terms, including sufficiency of collateral, as of December 31, 1997
and March 17, 1998, $45.6 million and $34.2 million was available under this
facility, respectively.
WASI has a $3 million secured working capital facility for the acquisition
of engines to be dismantled and sold for parts through WASI. This facility
provides for advances against the purchase price of parts for resale and bears
interest at prime plus 1%. This facility requires interest-only payments for the
first five months with the principal balance due six months after drawdown and
expires on April 30, 1998. The Company directly guarantees WASI's obligations
under this facility. Assuming compliance with the facilities terms, including
sufficiency of collateral, as of December 31, 1997 and March 17, 1998,
approximately $0.4 million and $1.3 million was available under this facility
respectively.
Approximately $27.3 million of the Company's debt is repayable during 1998.
The majority of such repayments consist of scheduled balloon payment maturities
on term loans. The balance of the repayments consist of scheduled installments
due under term loans. A portion of the balloon payment maturities was refinanced
subsequent to year-end 1997 under the Company's $80 million warehouse facility.
The Company anticipates that it will refinance the remaining balloon payment
maturities during the course of 1998.
The Company believes that its current equity base and internally generated
funds are sufficient to fund the Company's anticipated equity requirements
operations for at least 12 months, at which time additional equity may be
required to fund projected growth. The Company believes its current credit
facilities are sufficient to fund the Company's debt capital needs into the
second quarter of 1998. The Company is seeking to expand its existing revolving
credit facility and make other borrowing arrangements to fund future growth.
The Company's ability to successfully execute its business strategy is
dependent in part on its ability to raise equity capital and to obtain debt
capital. There can be no assurance that the necessary amount of such equity or
debt capital will continue to be available to the Company on favorable terms, or
at all. If the Company were unable to continue to obtain required financing on
favorable terms, the Company's ability to add new engines and parts packages to
its portfolio or to conduct profitable operations with its existing asset base
would be impaired, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
As of December 31, 1997, the Company had 3 engines and 5 spare parts
packages which had not been financed. The Company will likely seek financing for
this equipment, although no assurance can be given that such financing will be
available on favorable terms, if at all. In addition, certain of the Company's
engines have been financed under floating rate facilities. Until fixed rate
financing for these assets is in place, the Company is subject to interest rate
risk, since the underlying lease revenue is fixed. See "Managements Discussion
and Analysis of Financial Condition and Results of Operations--Interest Rate
Risks" below.
17
Between December 31, 1997 and March 17, 1998, the Company and WASI purchased
nine engines for the lease portfolio and one engine for the parts operation. The
total cost of these purchases was approximately $39.2 million. These purchases
were funded with cash and borrowings under the Company's revolving line of
credit and the Funding Corp. Facility. Additionally, the Company committed,
subject to documentation, to purchase, during 1998 and 1999, certain used
aircraft for its WASI parts operation. Certain deposits have and will be made in
connection with this commitment and the total commitment to purchase over the
course of 1998 and 1999 is not more than $38 million.
MANAGEMENT OF INTEREST RATE EXPOSURE
At December 31, 1997, $53.5 million of the Company's borrowings were on a
variable rate basis at various interest rates tied to either LIBOR or the prime
rate. The Company's equipment leases are generally structured at fixed rental
rates for specified terms. To date, this variable rate borrowing has resulted in
lower interest expense for the Company. 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 that the
Company pays under its borrowings. See "Risk Factors--Interest Rate Risks."
In September 1996, the Company purchased an amortizing interest rate cap in
order to limit its exposure to increases in interest rates on a portion of its
variable rate borrowings. Pursuant to this cap, the Counter Party will make
payments to the Company, based on the notional amount of the cap, if the three
month LIBOR RATE is in excess of 7.66%. As of December 31, 1997, the notional
principal amount of the cap was 36.2 million and said amount will decline to $26
million at the end of its term. The cost of the cap is being amortized as an
expense over a four-year period. The company will be exposed to credit risk in
the event of non-performance of the interest rate cap counter party.
RISK FACTORS
In addition to other information in this Report, the following risk factors
should be considered carefully by potential purchasers in evaluating an
investment in the Common Stock of the Company. Except for historical information
contained herein, the discussions in this Report contain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. 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. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include those discussed below as
well as those discussed elsewhere herein.
OWNERSHIP RISKS
The Company leases its portfolio of aircraft engines, aircraft and spare
parts packages primarily under operating leases as opposed to finance leases.
Under an operating lease, the Company retains title to the aircraft equipment
and assumes the risk of not recovering its entire investment in the aircraft
equipment through the re-leasing and remarketing process. Operating leases
require the Company to re-lease or sell aircraft equipment in its portfolio in a
timely manner upon termination of the lease in order to minimize off-lease time
and recover its investment in the aircraft equipment. Numerous factors, many of
which are beyond the control of the Company, may have an impact on the Company's
ability to re-lease or sell aircraft equipment on a timely basis. Among the
factors are general market conditions, regulatory changes (particularly those
imposing environmental, maintenance and other requirements on the operation of
aircraft engines), changes in the supply or cost of the aircraft equipment and
technological developments. Further, the value of a particular used aircraft
engine or aircraft varies greatly depending upon its condition, the number of
hours remaining until the next major maintenance of the aircraft engine aircraft
part or aircraft is required and general conditions in the airline industry. In
addition, the success of an operating lease depends in part upon having the
aircraft equipment returned by the lessee in marketable
18
condition as required by the lease. Consequently, there can be no assurance that
the Company's estimated residual value for the aircraft equipment will be
realized. As of December 31, 1997, the Company had 42 engines, 3 aircraft and 8
parts packages under lease to 33 customers in 20 countries (2 additional engines
were off lease, one of which was leased in January 1997.) If the Company is
unable to re-lease or sell the aircraft equipment on favorable terms, its
business, financial condition, cash flow, ability to service debt and results of
operations could be adversely affected.
The Company, through WASI, also acquires aviation equipment such as whole
engines and aircraft which can be dismantled and sold as parts. Before parts may
be installed in an aircraft, they must meet certain standards of condition
established by the Federal Aviation Administration. See "Government Regulations"
below. Parts must also be traceable to sources deemed acceptable by the FAA. See
"Business--Spare Parts Sales." Parts owned by the Company may not meet
applicable standards or standards may change, causing parts which are already in
the Company's inventory to be scrapped or modified. Engine manufacturers may
also develop new parts to be used in lieu of parts already contained in the
Company's inventory. In all such cases, to the extent the Company has such parts
in its inventory, their value may be reduced. In addition, if the Company does
not sell airframe and engine component parts that it purchases in the time frame
contemplated at acquisition, the Company may be subject to unanticipated
inventory financing costs as well as all the risks of ownership described above.
The Company also engages in the selective purchase and resale of commercial
aircraft engines and engine components in the aftermarket. On occasion, the
Company purchases engines or components without having a commitment for their
sale. If the Company were to purchase an engine or component without having a
firm commitment for its sale or if a firm commitment for sale were to exist but
not be consummated for whatever reason, the Company would be subject to all the
risks of ownership described above.
INDUSTRY RISKS
Downturns in the air transportation industry affect each of the three
components of the Company's business. In particular, substantial increases in
fuel costs or interest rates, increased fare competition, slower growth in air
traffic, or any significant downturn in the general economy could adversely
affect the air transportation industry and may therefore negatively impact the
Company's business, financial condition and results of operations.
While the Company believes that its lease terms protect its aircraft
equipment and the Company's investment in such aircraft equipment, there can be
no assurance that the financial difficulties experienced by a number of airlines
will not have an adverse effect on the Company's business, financial condition
or results of operations. In recent years and as discussed in "Customer Credit
Risks" below, a number of commercial airlines have experienced financial
difficulties, in some cases resulting in bankruptcy proceedings.
CUSTOMER CREDIT RISKS
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 existing and
prospective customers include smaller domestic and foreign passenger airlines,
freight and package carriers and charter airlines, which, together with major
passenger airlines, may suffer from the factors which have historically affected
the airline industry. As a result, certain of these customers may pose credit
risks to the Company. 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 or results of operations. A number of airlines have experienced
financial difficulties, 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 (the
"Bankruptcy Code"), creditors are
19
automatically stayed from enforcing their rights. In the case of United States
certified airlines, Section 1110 of the Bankruptcy Code provides certain relief
to lessors of the aircraft equipment. Specifically, the debtor airline has 60
days from the date the airline seeks protection under Chapter 11 of the
Bankruptcy Code to agree to perform its obligations and to cure any defaults. If
it does not do so, the lessor may repossess the aircraft equipment. The scope of
Section 1110 has been the subject of significant litigation and there can be no
assurance that the provisions of Section 1110 will protect the Company's
investment in an aircraft engine 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.
During the three years ended December 31, 1997, four lessees of the Company
filed for bankruptcy protection or otherwise became insolvent or ceased
operations. In two of these cases the Company's engines were returned and
re-leased. In the third case, the lessee was acquired by another airline and the
lease continues. On October 5, 1997, Western Pacific Airlines, Inc., ("West
Pac") a domestic lessee of three of the Company's engines with a combined net
book value of $8.7 million, filed a petition under Chapter 11 of the Bankruptcy
Code in the District of Colorado. In that case, West Pac cured all defaults
under its leases with the Company. In March 1998, West Pac and the Company
entered into a stipulation wherein the three engines have been returned to the
Company. The Company believes it will not have a problem re-leasing these
engines. On February 26, 1998, Pan American Airways Corporation, a domestic
lessee with one spare parts package with a book value of $0.3 million (the "Pan
Am Lease"), filed a petition under Chapter 11 the Bankruptcy Code in Florida.
The Company believes its lawfully terminated the Pan Am lease prior to the
bankruptcy. It has possession of the majority of the spare parts in the Pan Am
lease in value terms and believes it should obtain possession of most of the
remaining spare parts. The Company intends to re-lease or sell these spare
parts.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced fluctuations in its quarterly operating results
and anticipates that these fluctuations may continue. Such fluctuations may be
due to a number of factors, including the timing of sales of engines and spare
parts and engine marketing activities fluctuation of and activities margins on
such, unanticipated early lease terminations, the timing of engine acquisitions
or a default by a lessee. Given the possibility of such fluctuations, the
Company believes that comparisons of the results of its operations for preceding
quarters are not necessarily meaningful and that results for any prior quarter
should not be relied upon as an indication of future performance. In the event
the Company's revenues or earnings for any quarter are less than the level
expected by securities analysts or the market in general, such shortfall could
have an immediate and significant adverse impact on the market price of the
Company's Common Stock.
INTERNATIONAL RISKS
In 1997, approximately 65% of the Company's lease revenue was generated by
leases to foreign customers of which 6% of lease revenue which was generated by
leases to Asian 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. In addition, many foreign countries have currency and exchange laws
regulating the international transfer of currencies. The Company attempts to
minimize its currency and exchange risks by negotiating all of its lease
transactions in U.S. Dollars and all guarantees obtained to support various
lease agreements are denominated for payment in U.S. Dollars. To date, the
Company has experienced some collection problems under certain leases with
foreign airlines, and there can be no assurance that the Company will not
experience such collection problems in the future. The Company may also
experience collection problems related to the enforcement of its lease
agreements under foreign local laws and the attendant remedies in such locales.
Consequently, 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,
20
political instability abroad and changes in international policy also present
risks associated with expropriation of the Company's leased engines. To date,
the Company has experienced limited problems in reacquiring assets; however,
there can be no assurance that the Company will not experience more serious
problems in the future.
Certain countries have no registration or other recording system with which
to locally establish the Company's or its lender's interest in the engines and
related leases, potentially making it more difficult for the Company to prove
its interest in an engine in the event that it needs to recover an engine
located in such a country.
The Company's engines and the aircraft on which they are installed can be
subject to certain foreign taxes and airport fees. Consequently, unexpected
liens on an engine or the aircraft on which it is installed could be imposed in
favor of a foreign entity, such as Eurocontrol or the airports of the United
Kingdom.
DEPENDENCE UPON AVAILABILITY OF FINANCING
The operating lease business is a capital intensive business. The Company's
typical operating lease transaction requires a cash investment by the Company of
approximately 15% to 25% of the aircraft equipment purchase price, commonly
known as an "equity investment." The Company's equity investments have
historically been financed from internally generated cash, the net proceeds of
the Company's initial public offering which was completed on September 18, 1996
at a price of $8.00 per share (the "Initial Public Offering"), and the net
proceeds of the secondary offering which was completed on December 19, 1997 at a
price of $15 per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
balance of the purchase price is typically financed with the proceeds of secured
borrowings. Accordingly, the Company's ability to successfully execute its
business strategy and to sustain its operations is dependent, in part, on the
availability of debt and equity capital. There can be no assurance that the
necessary amount of such capital will continue to be available to the Company on
favorable terms, or at all. If the Company were unable to continue to obtain
required financing on favorable terms, the Company's ability to add new leases
to its portfolio and parts inventory would be limited, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company typically acquires the engines it leases with a combination of
equity capital and funds borrowed from financial institutions. In some
circumstances, the Company acquires assets before it has obtained debt
financing. There can be no assurance that debt financing will be available after
the asset has been acquired or, if available, at attractive rates or terms.
Factors that could cause debt financing to be more expensive or unavailable
include changes in interest rates, financial conditions of the lessee or the
Company, prospects for the airline industry or the asset type as well as general
economic conditions. If debt financing is not available, a like amount of the
Company's equity capital would be unavailable for use to acquire additional
assets, which could have a material adverse effect on the Company's business,
financial condition or results of operations.
INTEREST RATE RISKS
The Company's engine leases are generally structured at fixed rental rates
for specified terms. As of December 31, 1997, borrowings subject to interest
rate risk totaled $53.5 million or 53% of the Company's total borrowings.
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 that the Company pays under its lines of credit or loans.
In 1996, the Company purchased an amortizing interest rate cap which had a
notional principal amount of $36.2 million as of December 31, 1997, to reduce
its interest rate exposure; however, there can be no assurance that the
Company's business, operating results or financial condition will not be
adversely affected during any period of increases in interest rates.
21
COMPETITION
In the medium-term engine lease market segment, which is the Company's
target market, the Company principally competes with Shannon Engine Services,
headquartered in Shannon, Ireland, which is owned by CFM. The Company also
competes with Rolls Royce. Rolls Royce limits its leasing activities to products
of its parent company and related parties. The Bank of Tokyo-Mitsubishi, through
its affiliate Engine Lease Finance in Shannon, Ireland, also competes with the
Company. Each of these competitors is substantially larger and has greater
financial resources than the Company which may permit, among other things,
greater access to capital markets at more favorable terms. In addition, certain
major aircraft lessors, including International Lease Finance Corporation and
GECAS, compete with the Company to the extent that they include spare engine
leases with their aircraft leases or may compete on transactions involving
numerous engines.
With respect to engine marketing and spare parts and component sales, the
Company competes with airlines, engine manufacturers, aircraft, engine and parts
brokers, and parts distributors. The Company's major competitors include AAR,
AGES, The Memphis Group, Aviation Sales Company, Kellstrom Industries and
AVTEAM, Inc. Certain of these competitors may have, or may have access to,
financial resources substantially greater than the Company. Significant
increases in competition encountered by the Company in the future may limit the
Company's ability to expand its business, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
In the spare parts package leasing market, the Company competes with AAR,
AGES, Aviation Sales Company, Kellstrom Industries and others. In the commuter
aircraft leasing market, the Company competes with AGES, GECAS, the leasing arms
of certain commuter aircraft manufacturers and others.
Certain of the Company's competitors have substantially greater resources
than the Company, including greater name recognition, larger inventories, a
broader range of material, complementary lines of business and greater
financial, marketing and other resources. In addition, original equipment
manufacturers ("OEMs"), aircraft maintenance providers, FAA certified repair
facilities and other aviation aftermarket suppliers may vertically integrate
into the aircraft engine leasing or aircraft engine/spare parts sales industry,
thereby significantly increasing industry competition. A variety of potential
actions by any of the Company's competitors, including a reduction of product
prices or the establishment by competitors of long-term relationships with new
or existing customers, could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will continue to compete effectively against present
and future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth in revenues. Such
growth has placed, and is expected to continue to place, a significant strain on
the Company's managerial, operational and financial resources. Due to the
Company's rapid pace of growth during 1997, the Company hired three new officers
(an Executive Vice President and Chief Administrative Officer, an Executive Vice
President and Chief Financial Officer and a Senior Vice President and General
Counsel). There can be 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. An
inability to effectively manage growth could have a material adverse effect on
the Company's business, financial condition or results of operations.
YEAR 2000
The Company's operations are not highly dependent on systems technology and
management believes the Company's exposure to loss as a result of year 2000
issues is minimal. The Company does not believe
22
that the Year 2000 issue will have a bearing on lessees' ability to adhere to
the terms of their lease agreements with the Company. However, it has been
reported in the general press that airlines and the FAA may have material Year
2000 issues, which could effect their operations. Such an effect could impact
future dealings with lessees and other customers.
ACQUISITION AND EXPANSION RISKS
One of the components of the Company's growth strategy is the possible
select acquisition of businesses complementary to the Company's existing
businesses and possible expansion into new aviation-related activities. The
inability of the Company to identify suitable acquisition candidates or to
complete acquisitions or expansions on reasonable terms could adversely affect
the Company's ability to grow. In addition, any acquisition or expansion made by
the Company may result in potentially dilutive issuances of equity securities,
the incurrence of additional debt and future charges to earnings related to the
amortization of goodwill and other intangible assets. The Company also may
experience difficulties in the assimilation of operations, services, products
and personnel, an inability to sustain or improve historical revenue levels, the
diversion of management's attention from ongoing business operations and the
potential loss of key employees. Any of the foregoing could have a material
adverse effect on the Company's business, financial condition or results of
operations. The acquisition of other equipment leasing companies or portfolios
creates certain additional risks. For example, because acquired leases have been
originated by other companies, they are not subject to the Company's
underwriting policies and procedures and, therefore, may be subject to greater
risks of payment delinquencies and charge-offs. In addition, acquired leases may
consist of products not currently offered by the Company, or offered only on a
limited basis. Acquired leases may also increase the concentration of the
Company's portfolio of leases serviced in certain geographical regions or change
the relative concentration of such portfolio among geographical regions.
Acquired leases may not contain the same indemnification provisions, maintenance
provisions, equipment residual value assumptions and other material terms as the
Company's current leases. Finally, the provisions of acquired leases may not
adequately protect the Company from claims arising out of the lessee's use of
the acquired lease equipment.
PRODUCT LIABILITY RISKS
The Company is exposed to product liability claims in the event that the use
of its aircraft engines or parts is alleged to have resulted in bodily injury or
property damage. In addition to requiring indemnification under the terms of the
lease, the Company requires its lessees to carry the types of insurance
customary in the air transportation industry, including comprehensive liability
insurance and casualty insurance. The Company and, if applicable its lenders,
are 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. To date, the Company has not experienced any
significant uninsured or insured aviation-related claims and has not experienced
any product liability claims related to its aircraft engines or parts. However,
an uninsured or partially insured claim, or claim for which third-party
indemnification is not available, could have a material adverse effect upon the
Company's business, financial condition or results of operations.
RISK OF CHANGES IN TAX LAWS OR ACCOUNTING PRINCIPLES
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 could adversely affect the Company's business, financial condition or
results of operations.
23
DEPENDENCE ON KEY MANAGEMENT
The Company's business operations are dependent in part upon the expertise
of certain key employees. Loss of the services of such employees, particularly
Charles F. Willis, IV, President and Chief Executive Officer or Edwin F. Dibble,
the President of WASI, would have a material adverse effect on the Company's
business. The Company has entered into an employment agreement with Mr. Dibble
and the Company maintains key man life insurance of $2.5 million on Mr. Willis
and $1.5 million on Mr. Dibble.
GOVERNMENT REGULATION
The Company's customers are generally subject to a high degree of regulation
in the various jurisdictions in which they operate. Such regulations also
indirectly affect the Company's business operations. Under the provisions of the
Transportation Act, as amended, the FAA exercises regulatory authority over the
air transportation industry. The FAA regulates the manufacture, repair and
operation of all aircraft engines operated in the United States. Its regulations
are designed to insure that all aircraft and aviation equipment are continuously
maintained in proper condition to ensure safe operation of the aircraft. Similar
rules apply in other countries. All aircraft must be maintained under a
continuous condition monitoring program and must periodically undergo thorough
inspection and maintenance. The inspection, maintenance and repair procedures
for the various types of commercial aircraft equipment are prescribed by
regulatory authorities and can be performed only by certified repair facilities
utilizing certified technicians. Certification and conformance is required prior
to installation of a part on an aircraft. 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 worldwide marketability. 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. In addition, by the year 2000, federal regulations will stipulate that
most commercial aircraft that fly in the United States and the engines
appurtenant thereto 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 Federal Aviation Regulations of the United States.
As of December 31, 1997, all of the engines in the Company's lease portfolio
were Stage III engines. See "Business--Government Regulation."
CONTROL BY PRINCIPAL SHAREHOLDER
The Company's principal shareholder, Mr. Willis, beneficially owns
approximately 42% of the outstanding shares of Common Stock of the Company and
therefore effectively controls the Company. Accordingly, Mr. Willis will have
the power to contest the outcome of substantially all matters, including the
election of the Board of Directors of the Company, submitted to the shareholders
for approval. In addition, future sales by the Company's principal shareholder
of substantial amounts of Common Stock, or the potential for such sales, could
adversely affect the prevailing market price of the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to
significant fluctuations in response to operating results of the Company,
changes in general conditions in the economy, the financial markets, the airline
industry, changes in accounting principles or tax laws applicable to the Company
or its lessees, or other developments affecting the Company, its customers or
its competitors, some of which may be unrelated to the Company's performance,
and changes in earnings estimates or recommendations by securities analysts.
24
ANTI-TAKEOVER PROVISIONS
Certain provisions of law, and the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") and Bylaws could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise, and the removal of incumbent officers and directors. These
provisions include authorization of the issuance of up to 5,000,000 shares of
Preferred Stock, with such characteristics that may render it more difficult or
tend to discourage a merger, tender offer or proxy contest. The Articles of
Incorporation also provide that, for as long as the Company has a class of stock
registered pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), shareholder action can be taken only at an annual or special
meeting of shareholders and may not be taken by written consent. The Company's
Bylaws also limit the ability of shareholders to raise matters at a meeting of
shareholders without giving advance notice. In addition, the Company has
qualified as a "listed corporation" as defined in Section 301.5(d) of the
California Corporation Code and cumulative voting has been eliminated. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids, and to encourage persons seeking to
acquire control of the Company to negotiate first with the Company.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2): Financial Statements and Financial Schedules: The response
to this portion of Item 14 is submitted as a separate section of this report
beginning on page 29.
(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 26.
(b) Reports on Form 8-K: The Company filed no reports on Form 8-K during the
last quarter of 1997.
25
EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation, filed September 11, 1996, together with Certificate of
Amendment of Amended and Restated Articles of Incorporation filed on September 24, 1996. Incorporated
by reference to Exhibit 3.2 of the Company's report on Form 10-K for the year ended December 31, 1996.
3.2 Bylaws. Incorporated by reference to Exhibit 3.3 to Registration Statement No. 333-5126-LA filed on June
21, 1996.
4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Registration Statement
No. 333-5126-LA filed on June 21, 1996.
10.1 1996 Stock Option/Stock Issuance Plan and form of agreement thereunder. Incorporated by reference to
Exhibit 10.1 to Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.2 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.2 to Registration Statement No.
333-5126-LA filed on June 21, 1996.
10.3 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.
10.4 Lease dated May 23, 1995 for facilities located in South San Francisco, California, together with
amendment thereto dated March 18, 1996. Incorporated by reference to Exhibit 10.4 to Registration
Statement No. 333-5126-LA filed on June 21, 1996.
10.5 Lease dated February 4, 1997, between Atlas Metal Spinning Company and Willis Aeronautical Services,
Inc., for an office and a warehouse facility located in South San Francisco. Incorporated by reference
to Exhibit 10.5 of the Company's report on Form 10-K for the year ended December 31, 1996.
10.6 Lease dated March 16, 1992 for facilities located in Sausalito, California, together with amendments
thereto. Incorporated by reference to Exhibit 10.6 of the Company's report on Form 10-K for the year
ended December 31, 1996.
10.7 Employment Agreement between the Company and William McElfresh. Incorporated by reference to Exhibit 10.5
to Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.8 Employment Agreement between the Company and Steven Oldenburg. Incorporated by reference to Exhibit 10.6
to Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.9 Employment Agreement between the Company and Edwin Dibble. Incorporated by reference to Exhibit 10.9 to
Registration Statement No. 333-39865 filed on December 11, 1997.
10.10 Employment Agreement between the Company and Donald Nunemaker dated July 16, 1997.
10.11 Loan Agreement dated June 12, 1997 with CoreStates Bank, together with related documents for a $15
million revolving credit facility. Incorporated by reference to Exhibit 10.19 to the Company's Report
on Form 10-Q for the period ended June 30, 1997.
10.12 Amendment dated July 28, 1997, to loan agreement dated June 12, 1997, for the increasing of the revolving
credit facility to $30 million from $15 million. Incorporated by reference to Exhibit 10.20 to the
Company's Report on Form 10-Q for the period ended June 30, 1997.
10.13 Amendment dated November 18, 1997, to loan agreement dated June 12, 1997, for the increasing of the
revolving credit facility to $45 million from $30 million. Incorporated by reference to Exhibit 10.21
to Registration Statement No. 333-39865 filed on December 11, 1997.
26
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
10.14 Engine Sales Agreement dated August 14, 1997, together with related documents, for a $25 million purchase
from Pratt & Whitney for nine bare Pratt & Whitney 4056 engines. Incorporated by reference to Exhibit
10.19 to the Company's Report on Form 10-Q for the period ended September 30, 1997.
10.15 Aircraft Sale Agreement dated as of November 17, 1997, between Finova Capital Corporation as seller and
Willis Lease Finance Corporation as buyer. Incorporated by reference to Exhibit 10.25 to Registration
Statement No. 333-39865 filed on December 11, 1997.
10.16* Indenture dated as of September 1, 1997, between WLFC Funding Corporation and The Bank of New York, as
Indenture Trustee.
10.17* Series 1997-1 Supplement dated as of September 1, 1997 between WLFC Funding Corporation and the Bank of
New York, as Indenture Trustee.
10.18 Class A Note Purchase Agreement dated as of September 1, 1997 between the Company, WLFC Funding
Corporation and First Union National Bank of North Carolina.
10.19* 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.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule
- ------------------------
* Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
27
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.
March 20, 1998
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 followings persons on behalf of the Registrant and
in the capacities and on the dates indicated.
DATE TITLE SIGNATURE
- ---------------------- ----------------------------------------- -----------------------------------------
Date: Chief Executive Officer /s/ CHARLES F. WILLIS, IV
(Principal Executive Officer) --------------------------------
Charles F. Willis, IV
Date: Executive Vice President and /s/ WILLIAM L. MCELFRESH
Director --------------------------------
William L. McElfresh
Date: Chief Financial Officer /s/ JAMES D. MCBRIDE
(Principal Financial and --------------------------------
Accounting Officer) James D. McBride
Date: Director /s/ ROSS K. ANDERSON
--------------------------------
Ross K. Anderson
Date: Director /s/ WILLIAM M. LEROY
--------------------------------
William M. LeRoy
Date: Director /s/ WILLARD H. SMITH, JR
--------------------------------
Willard H. Smith, Jr.
28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................................................... Page 30
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996................. Page 31
Consolidated Statements of Income for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995................................................. Page 32
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995................................................. Page 33
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995................................................. Page 34
Notes to Consolidated Financial Statements................................................ Page 35
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.
29
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 (formerly The Charles F. Willis Company) 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 (formerly The Charles F. Willis Company) and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
February 16, 1998
30
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
ASSETS
Cash and cash equivalents........................................................ $ 13,095,303 $ 6,573,241
Deposits......................................................................... 18,461,456 13,600,204
Equipment held for lease, less accumulated depreciation of $15,193,313 at
December 31, 1997 and $16,372,418 at December 31, 1996......................... 128,119,683 96,092,429
Aircraft held for lease, less accumulated depreciation of $74,370 at December 31,
1997 and $0 at December 31, 1996............................................... 10,415,960 --
Net investment in direct finance lease........................................... 9,821,854 --
Property, equipment and furnishings, less accumulated depreciation of $275,109 at
December 31, 1997 and $160,407 at December 31, 1996............................ 540,856 458,780
Spare parts inventory............................................................ 10,334,113 4,057,648
Maintenance billings receivable.................................................. 1,547,765 1,107,283
Operating lease rentals receivable............................................... 520,466 405,601
Receivables from spare parts sales............................................... 2,908,175 854,566
Other receivables................................................................ 375,878 829,522
Other assets..................................................................... 2,288,547 953,419
-------------- --------------
Total assets..................................................................... $ 198,430,056 $ 124,932,693
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses.......................................... $ 4,010,976 $ 2,753,641
Salaries and commissions payable............................................... 1,070,051 538,658
Deferred income taxes.......................................................... 8,476,040 5,949,676
Deferred gain.................................................................. 183,278 209,774
Notes payable and accrued interest............................................. 101,433,200 73,185,657
Capital lease obligation....................................................... 2,802,119 2,960,457
Residual share payable......................................................... 2,092,140 1,199,279
Maintenance deposits........................................................... 20,018,195 11,680,525
Security deposits.............................................................. 2,435,987 1,978,505
Unearned lease revenue......................................................... 1,306,613 1,274,269
-------------- --------------
Total liabilities................................................................ $ 143,828,599 $ 101,730,441
Shareholders' equity:
Common stock, no par value. Authorized 20,000,000 shares; 7,177,320 and
5,426,793 issued and outstanding at December 31, 1997 and December 31, 1996,
respectively................................................................. 40,117,223 16,055,689
Retained earnings.............................................................. 14,484,234 7,146,563
-------------- --------------
Total shareholders' equity....................................................... 54,601,457 23,202,252
-------------- --------------
Total liabilities and shareholders' equity....................................... $ 198,430,056 $ 124,932,693
-------------- --------------
-------------- --------------
See accompanying notes to the consolidated financial statements
31
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
REVENUE
Operating lease revenue............................................. $ 19,012,822 $ 13,740,438 $ 13,770,730
Finance lease revenue............................................... 442,542 -- --
Gain/loss on sale of leased engines................................. 4,165,443 2,208 (482,894)
Spare part sales.................................................... 14,110,102 5,842,607 3,858,610
Sale of equipment acquired for resale............................... 12,747,840 12,105,315 5,472,362
Interest and other income........................................... 727,995 617,144 119,188
------------- ------------- -------------
Total revenue....................................................... 51,206,744 32,307,712 22,737,996
EXPENSES
Interest expense.................................................... 7,797,446 4,323,276 5,721,811
Depreciation expense................................................ 4,223,286 3,181,216 4,703,487
Residual share...................................................... 892,861 722,753 407,684
Cost of spare part sales............................................ 9,468,953 3,307,928 2,545,872
Cost of equipment acquired for resale............................... 10,677,716 10,788,730 2,742,262
General and administrative.......................................... 9,331,972 5,123,813 3,334,768
------------- ------------- -------------
Total expenses...................................................... 42,392,234 27,447,716 19,455,884
Gain on modification of credit facility............................. -- -- 2,202,928
------------- ------------- -------------
Income before income taxes, minority interest and extraordinary
item.............................................................. 8,814,510 4,859,996 5,485,040
Income taxes........................................................ (3,484,768) (1,976,471) (2,212,280)
------------- ------------- -------------
Income before minority interest and extraordinary item.............. 5,329,742 2,883,525 3,272,760
Less: minority interest in net income of subsidiary................. -- (79,053) (56,343)
------------- ------------- -------------
Income before extraordinary item.................................... 5,329,742 2,804,472 3,216,417
Extraordinary item net of applicable income taxes................... 2,007,929 -- --
------------- ------------- -------------
Net Income.......................................................... $ 7,337,671 $ 2,804,472 $ 3,216,417
------------- ------------- -------------
------------- ------------- -------------
BASIC EARNINGS PER SHARE
Net income before extraordinary item................................ $ 0.97 $ 0.75 $ 1.03
Extraordinary item.................................................. 0.36 -- --
------------- ------------- -------------
Basic earnings per share............................................ $ 1.33 $ 0.75 $ 1.03
------------- ------------- -------------
------------- ------------- -------------
FULLY DILUTED EARNINGS PER SHARE
Net income before extraordinary item................................ $ 0.94 $ 0.74 $ 1.03
Extraordinary item.................................................. 0.35 -- --
------------- ------------- -------------
Fully diluted earnings per share.................................... $ 1.29 $ 0.74 $ 1.03
------------- ------------- -------------
------------- ------------- -------------
Basic average shares outstanding.................................... 5,497,358 3,756,040 3,110,657
Fully diluted average shares outstanding............................ 5,673,425 3,787,788 3,110,657
See accompanying notes to the consolidated financial statements
32
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ISSUED AND
OUTSTANDING TOTAL
SHARES OF ADVANCES TO SHAREHOLDERS'
COMMON STOCK COMMON STOCK RETAINED EARNINGS SHAREHOLDERS EQUITY
-------------- -------------- ----------------- ------------ -------------
Balances at December 31, 1995.... 1,500 $ 500 $ 5,293,566 $ (481,789) $ 4,812,277
Common stock issued and proceeds
from IPO, net.................. 5,425,293 16,055,189 -- -- 16,055,189
Repayments to
shareholders, net.............. -- -- -- 481,789 481,789
Dividends........................ -- -- (951,475) -- (951,475)
Net income....................... -- -- 2,804,472 -- 2,804,472
-------------- -------------- ----------------- ------------ -------------
Balance at December 31, 1996..... 5,426,793 16,055,689 7,146,563 -- 23,202,252
Shares issued under Employee
Stock Purchase Plan............ 25,527 221,244 -- -- 221,244
Common stock issued and proceeds
from secondary offering, net... 1,725,000 23,840,290 23,840,290
Net income....................... -- -- 7,337,671 -- 7,337,671
-------------- -------------- ----------------- ------------ -------------
Balances at December 31, 1997.... 7,177,320 $ 40,117,223 $ 14,484,234 -- $ 54,601,457
-------------- -------------- ----------------- ------------ -------------
-------------- -------------- ----------------- ------------ -------------
See accompanying notes to the consolidated financial statements
33
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
--------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 7,337,671 $ 2,804,472 $ 3,216,417
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of equipment and aircaft held for lease.......... 4,098,348 3,103,601 4,663,949
Depreciation of property, equipment and furnishings........... 124,938 77,615 39,538
Gain on modification on credit facility....................... -- -- (2,202,928)
(Gain) loss on sale of property, equipment and furnishings.... (45,122) 5,701 (5,536)
(Gain) loss on sale of leased equipment....................... (4,165,443) (2,208) 482,894
Increase in residual share payable............................ 892,861 722,753 407,684
Minority interest in net income of subsidiary................. -- 79,053 56,343
Changes in assets and liabilities:
Increase in deposits.......................................... (4,861,252) (2,279,587) (11,061,221)
Increase in spare parts inventory............................. (6,276,465) (1,176,384) (940,494)
Increase in receivables....................................... (2,155,312) (1,931,905) (359,173)
(Increase) decrease in other assets........................... (1,335,128) (745,525) 54,785
(Decrease) increase in accounts payable and accrued
expenses.................................................... 1,257,335 1,701,186 606,656
Increase in salaries and commission payable................... 531,393 374,697 77,201
Increase in deferred income taxes............................. 2,526,364 1,857,351 2,179,381
(Decrease) increase in deferred gain.......................... (26,496) 209,774 --
(Decrease) increase in accrued interest....................... (247,821) 666,571 (341,379)
Increase in maintenance deposits.............................. 8,337,670 2,963,355 3,294,179
Increase in security deposits................................. 457,482 708,484 124,444
Increase in unearned lease revenue............................ 32,344 417,182 243,726
--------------- -------------- --------------
Net cash provided by operating activities..................... 6,483,367 9,556,186 536,466
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for operating lease (net of
selling expenses)............................................. 15,672,655 3,748,035 2,600,000
Proceeds from sale of property, equipment and furnishings....... 80,500 28,198 38,500
Purchase of equipment held for lease............................ (68,143,774) (25,277,021) (9,258,379)
Purchase of property, equipment and furnishings................. (242,392) (362,510) (194,403)
Principal payments received on direct finance lease............. 273,146 -- --
--------------- -------------- --------------
Net cash used in investing activities........................... (52,359,865) (21,863,298) (6,814,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments from (advances to) shareholder, net.................. -- 481,789 (107,944)
Proceeds from issuance of notes payable......................... 165,590,908 16,086,621 15,730,277
Proceeds from issuance of common stock.......................... 24,061,534 15,926,101 --
Principal payments on notes payable............................. (137,095,544) (13,478,332) (9,337,852)
Principal payments on capital lease obligation.................. (158,338) -- --
Cash dividends paid on common stock............................. -- (951,475) (255,000)
--------------- -------------- --------------
Net cash provided by financing activities....................... 52,398,560 18,064,704 6,029,481
Increase (decrease) in cash and cash equivalents................ 6,522,062 5,757,592 (248,335)
Cash and cash equivalents at beginning of period................ 6,573,241 815,649 1,063,984
--------------- -------------- --------------
Cash and cash equivalents at end of period...................... $ 13,095,303 $ 6,573,241 $ 815,649
--------------- -------------- --------------
--------------- -------------- --------------
See accompanying notes to the consolidated financial statements
34
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 (formerly The Charles F. Willis Company)
("Willis") provides operating leases of commercial aircraft engines, certain
aircraft and aircraft equipment and sells aircraft engines and parts to air
carriers, manufacturers and overhaul/repair facilities worldwide. Willis' core
business is acquiring and leasing, primarily pursuant to operating leases,
commercial aircraft spare engines and other aircraft equipment. Willis also,
through its wholly-owned subsidiary Willis Aeronautical Services, Inc. ("WASI")
purchases and resells aftermarket airframe and engine parts, engines, modules
and rotable components. 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), T-11 (T-11), and
T-12 (T-12) 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.
Willis Aeronautical Services, Inc. (WASI) is a wholly-owned subsidiary of
Willis. WASI is a California corporation established in 1994 for the purpose of
commercial aircraft, airframe and powerplant component marketing and sales.
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.
(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, T-12, WASI, WLFC-FC and
WLFC--Pooling (together, the Company). All significant intercompany balances and
transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITION
Revenue from leasing of aircraft assets 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 dismantled and sold as parts.
The Company records an allowance for estimated returns of spare parts based
on recent experience. Such returns occur in the ordinary course of the Company's
business.
35
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
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 in 15 years from date of
acquisition.
Engines that in the Company's opinion would not be economically advantageous
to overhaul the next time the life-limited parts need to be replaced, are
depreciated over the remaining life using component depreciation based on usage
as reported monthly by the lessees.
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 years to a 17% residual value.
In March of 1995, the Financial Accounting Standards Board issued 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). 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 adopted SFAS 121 in 1995 and reviewed the
carrying value of its equipment considering residual values and release rates.
This review resulted in a loss on revaluation related to one engine of $300,000
in 1995, which has been included in depreciation expense. There were no
write-downs required during 1996 or 1997.
(E) SPARE PARTS INVENTORY
The Company, through one or more of its subsidiaries, buys used aircraft
spare parts for resale. This inventory is valued at the lower of cost or market
value. Costs of such sales are specifically identified based on actual purchase
price or allocated cost of parts purchased in a pool or from dismantled engine
based on relative projected sales price.
(F) LOAN COMMITMENT AND RELATED FEES
To the extent that the Company is required to pay loan commitment fees in
order to secure debt, such fees are amortized over the life of the related loan
on a straight-line basis.
36
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) MAINTENANCE COSTS
Maintenance costs under the Company's long-term leases are generally the
responsibility of the lessees. Maintenance deposits in the accompanying balance
sheet include refundable maintenance payments and certain non-refundable
maintenance payments received from the lessees. If 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, the maintenance fees are included in
operating lease revenue. Major overhauls paid for by the Company are capitalized
and depreciated over the estimated remaining useful life of the engine.
(H) INTEREST RATE CAP
In 1996, the Company purchased an interest rate cap in order to mitigate its
exposure to increases in interest rates on a portion of its variable rate
borrowings. The instrument minimizes the Company's exposure to interest rate
fluctuations for a period of four years. The cost of this instrument is
amortized on a straight-line basis over the four year period.
(I) 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.
(J) 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.
(K) ADVANCES TO SHAREHOLDER
The advances to the sole shareholder are non-interest bearing (except for a
$10,000 interest bearing note). All such notes were repaid in 1996. Advances are
accounted for through a reduction of shareholders' equity.
(L) 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.
37
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Residual share payable totaled $2.1 million and $1.2 million as of December
31, 1997 and 1996, respectively. As of December 31, 1997 and 1996, a total of
five and six engines, respectively, with a net book value of $15.3 million and
$16.5 million, respectively, were subject to residual sharing arrangements
(notes 4 and 5).
(M) EQUIPMENT ACQUIRED FOR RESALE
The Company periodically engages in transactions involving the purchase and
immediate resale of aircraft engines. Generally, the Company makes a contractual
commitment to purchase specific assets for its own account for resale only after
or concurrently with obtaining a firm order from a customer. All aircraft
engines purchased by the Company for such transactions during 1997 and 1996 were
sold in the year acquired.
(N) 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.
(O) RECLASSIFICATIONS
Certain items in the consolidated financial statements of prior years have
been reclassified to conform to the current year's presentation.
(P) 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.
(Q) PER SHARE INFORMATION
In February 1997, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which
required the Company to replace its presentation of primary earnings per share
with a presentation of basic and fully diluted earnings per share on the face of
the income statement, effective December 15, 1997. The principal difference
between primary earnings per share and basic earnings per share under the new
statement is that basic earnings per share does not consider common stock
equivalents such as stock options and warrants. 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.
38
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The statement required restatement of all prior periods presented. Basic and
fully diluted earnings per share are presented below:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS OF DOLLARS,
EXCEPT SHARE AND PER SHARE
DATA)
Basic:
Net Income................................................................... $ 7,338 $ 2,804 $ 3,216
Basic earnings per common share.............................................. $ 1.33 $ 0.75 $ 1.03
Fully diluted:
Net income................................................................... $ 7,338 $ 2,804 $ 3,216
Shares:
Weighted-average number of common shares outstanding......................... 5,497 3,756 3,111
Potentially dilutive common shares........................................... 176 32 --
--------- --------- ---------
Total Shares............................................................... 5,673 3,788 3,111
Fully diluted earnings per weighted-average common share..................... $ 1.29 $ 0.74 $ 1.03
(R) ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from non-owner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public company's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Company's fiscal year ended December 31,
1998, with earlier application permitted. The effect of adoption of these
statements will be limited to the form and content of the Company's disclosures
and will not impact the company's results of operations, cash flow, or financial
position.
(2) EQUIPMENT HELD FOR LEASE
At December 31, 1997, the Company had 44 aircraft engines and related
equipment with an aggregate original cost of $146.3 million, 8 spare parts
packages with an aggregate original cost of $7.1 million and 3 commuter aircraft
with an aggregate original cost of $10.5 million in its lease portfolio. At
December 31, 1996, the Company owned 32 aircraft engines and 3 spare parts
packages with an aggregate original cost of $112.5 million. The Company owned no
aircraft at December 31, 1996.
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.
39
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) EQUIPMENT HELD FOR LEASE (CONTINUED)
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 grouped by domicile of the lessee:
YEARS ENDED DECEMBER 31,
-------------------------------------------
REGION 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
Operating lease revenue:
United States..................................................... $ 6,718,408 $ 5,295,084 $ 4,560,472
Canada............................................................ 1,521,278 1,291,000 1,080,000
Mexico............................................................ 2,478,620 1,865,118 1,900,699
Australia/New Zealand............................................. 1,027,026 1,029,600 1,339,433
Europe............................................................ 5,431,681 2,840,428 3,858,792
South America..................................................... 777,849 530,000 308,316
Asia.............................................................. 806,627 889,208 723,018
Middle East....................................................... 251,333 -- --
------------- ------------- -------------
Totals.............................................................. $ 19,012,822 $ 13,740,438 $ 13,770,730
------------- ------------- -------------
------------- ------------- -------------
YEARS ENDED DECEMBER 31,
-------------------------------------------
REGION 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
Operating lease revenue less applicable depreciation, interest and
residual share:
United States..................................................... $2,750,911 $2,405,061 $463,336
Canada............................................................ 580,203 548,769 301,039
Mexico............................................................ 553,981 306,007 348,900
Australia/New Zealand............................................. 402,446 471,293 271,355
Europe............................................................ 2,076,342 1,409,631 1,521,563
South America..................................................... 266,947 185,297 77,569
Asia.............................................................. 123,329 339,545 185,196
Middle East....................................................... 100,223 -- --
Off-lease and other............................................... (69,942) (60,711) (231,210)
------------- ------------- -------------
Totals.............................................................. $6,784,440 $5,604,892 $2,937,748
------------- ------------- -------------
------------- ------------- -------------
40
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) EQUIPMENT HELD FOR LEASE (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------------
REGION 1997 1996 1995
- ------------------------------------------------------------------- -------------- ------------- -------------
Net book value of operating leased assets:
United States.................................................... $ 46,852,525 $ 31,332,388 $ 24,138,266
Canada........................................................... 11,167,483 7,115,984 7,356,011
Mexico........................................................... 13,031,662 13,441,445 9,255,029
Australia/New Zealand............................................ 5,311,730 5,509,070 5,706,410
Europe........................................................... 35,963,753 30,051,738 19,056,190
South America.................................................... 11,205,328 2,033,831 1,951,012
Asia............................................................. 7,436,879 4,109,446 4,243,830
Middle East...................................................... 4,832,970 -- --
Off-lease........................................................ 2,733,313 2,498,527 2,997,631
-------------- ------------- -------------
Totals............................................................. $ 138,535,643 $ 96,092,429 $ 74,704,379
-------------- ------------- -------------
-------------- ------------- -------------
Finance leased assets, the lessee of which is domiciled in Asia, generated
$442,542 of revenue in 1997. After interest expense such assets generated
$171,684. The net investment in direct finance leases on December 31, 1997 was
as follows:
Minimum payments receivable................................ $ 9,280
Estimated residual value of leased assets.................. 4,950
Unearned income............................................ (4,408)
---------
Net investment in finance lease............................ $ 9,822
---------
---------
As of December 31, 1997, minimum future payments under noncancelable leases
were as follows:
YEAR OPERATING FINANCE
- --------------------------------------------------------------------------------------------- ----------- ---------
(IN THOUSANDS)
1998......................................................................................... $ 18,773 $ 1,458
1999......................................................................................... 14,724 1,458
2000......................................................................................... 10,359 1,458
2001......................................................................................... 7,102 1,458
2002......................................................................................... 4,498 1,458
Thereafter................................................................................... 4,831 2,187
----------- ---------
$ 60,287 $ 9,477
----------- ---------
----------- ---------
41
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY, EQUIPMENT AND FURNISHINGS
Property, equipment and furnishings consist of the following:
AS OF DECEMBER 31,
------------------------
1997 1996
----------- -----------
Automobiles......................................................... $ 155,636 $ 140,297
Computer equipment.................................................. 259,418 186,272
Furniture and equipment............................................. 400,911 292,618
----------- -----------
815,965 619,187
Accumulated depreciation............................................ (275,109) (160,407)
----------- -----------
Net book value...................................................... $ 540,856 $ 458,780
----------- -----------
----------- -----------
(4) EXTRAORDINARY GAIN AND GAIN ON MODIFICATION OF CREDIT FACILITY
In February 1997, the Company obtained a new loan agreement for $41.5
million to replace an existing loan of $44.2 million. The transaction resulted
in an extraordinary gain of $2 million net of tax.
In June 1995, the Company's primary credit facility was modified into a 10
year full payout loan. As part of this transaction, the residual sharing
agreement was terminated. Furthermore, the lender agreed to acquire two engines
from the portfolio, with a net book value of $5.7 million as payment in full for
the respective outstanding loan balance on each of the engines. The modification
resulted in a gain of $2.2 million.
(5) NOTES PAYABLE AND ACCRUED INTEREST
Notes payable consisted of the following:
AS OF DECEMBER 31,
-----------------------------
1997 1996
-------------- -------------
Note payable at a floating interest rate of LIBOR plus 1%. Secured by aircaft
engines and the proceeds thereof. This note was repaid in 1997.................... -- $ 44,221,306
Notes payable at fixed interest of 8.05% and 10%. Secured by aircraft engines and
the proceeds thereof. The notes mature in May 2003 and November 1998.............. $ 5,263,108 5,982,236
Note payable at a floating interest rate of LIBOR plus 5%. Secured by aircraft
engines and the proceeds thereof. The note matures in 2001 or upon sale of such
engines........................................................................... 3,015,642 5,189,286
Note payable at a floating interest rate of LIBOR plus 2.25% secured by engines,
the proceeds thereof and certain deposits. This facility has committed amount of
$80 million. Assuming compliance with the facility's terms, including sufficiency
of collateral, $45.6 million was available under this facility at December 31,
1997. The facility matures in
February 2006..................................................................... 34,400,000 --
42
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NOTES PAYABLE AND ACCRUED INTEREST (CONTINUED)
AS OF DECEMBER 31,
-----------------------------
1997 1996
-------------- -------------
Note payable at a floating rate of interest of Prime Rate plus 0.25%. Secured by
engines, parts and the proceeds thereof. This facility has a committed amount of
$45 million. Assuming compliance with the facility's terms, including sufficiency
of collateral, $45 million was available under this facility at December 31, 1997.
Fifteen million of this facility matures on May 31, 1998 and the remainder on June
12, 1998.......................................................................... -- --
Note payable at a floating interest rate of LIBOR plus 2.5%. Secured by aircraft
engines and the proceeds thereof. The note matures in
June 1998......................................................................... 13,433,039 --
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................................................... 18,747,851 --
Notes payable at fixed interest rates of 11.03%. Secured by aircraft engines and
the proceeds thereof. The notes mature on
December 2000..................................................................... 2,892,846 3,128,943
Note payable at a fixed interest rate of 11.68%. Secured by an aircraft engine and
the proceeds thereof. The note matures on December 2001........................... 2,189,465 2,368,242
Note payable at a fixed interest rate of 8.18% secured by aircraft and the
proceeds thereof. The note matures January 2003................................... 10,500,000 --
Notes payable at fixed interest rates of 10% and 8.89%. Secured by aircraft
engines and the proceeds thereof. The notes mature May 1998 and August 2002....... 6,178,807 --
Note payable at a floating interest rate of LIBOR plus 1.5%. Secured by an engine
and the proceeds thereof. The note was repaid in 1997............................. -- 325,000
Notes payable under a line of credit in the amount of $3,000,000. Interest is
variable at prime plus 1%. The loan is secured by the assets of WASI. This
facility expires on April 30, 1998................................................ 2,627,000 661,000
Note payable at a fixed interest rate of 7%. Secured by aircraft engines, spare
parts and the proceeds thereof. The note was repaid in 1997....................... -- 8,632,313
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...... 1,586,470 1,830,538
-------------- -------------
$ 100,834,228 $ 72,338,864
-------------- -------------
-------------- -------------
43
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NOTES PAYABLE AND ACCRUED INTEREST (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 $102.2 million at December 31,
1997.
The fair value of the interest rate cap as estimated by the financial
institution providing the instrument is $(38,805) at December 31, 1997.
In accordance with three of the loan agreements, the Company must maintain
certain net worth levels and, additionally, with respect to one of these loans,
must maintain a certain current ratio and certain earnings levels. In addition,
the Company must prepay loan amounts in the event a collateral engine is sold or
otherwise disposed of. A substantial amount of operating lease revenue is
applied to the repayment of principal and interest. Principal outstanding at
December 31, 1997 is repayable as follows:
(DOLLARS IN
YEAR THOUSANDS)
- ------------------------------------------------------------------------
1998.................................................................... $ 27,328
1999.................................................................... 7,308
2000.................................................................... 8,332
2001.................................................................... 12,882
2002.................................................................... 20,312
Thereafter.............................................................. 24,671
--------
$ 100,834
--------
--------
As of December 31, 1997 and 1996, accrued interest in the amounts of
$598,972 and $846,793, respectively, is included in notes payable and accrued
interest. At December 31, 1997 and 1996, the Company held deposits in the amount
of $18,461,456 and $13,600,204, respectively, consisting of bank accounts that
are subject to withdrawal restrictions as per lease or loan agreements. Certain
lease agreements require prepayments to the Company for periodic engine
maintenance. These accounts also include security deposits held. Substantially
all of the deposits bear interest for the Company's benefit.
(6) INCOME TAXES
FEDERAL STATE TOTAL
------------ ---------- ------------
December 31, 1997
Current................................................................. $ 1,683,474 $ 604,338 $ 2,287,812
Deferred................................................................ 2,252,159 274,205 2,526,364
------------ ---------- ------------
$ 3,935,633 $ 878,543 $ 4,814,176
------------ ---------- ------------
------------ ---------- ------------
December 31, 1996
Current................................................................. $ 93,864 $ 25,256 $ 119,120
Deferred................................................................ 1,580,360 276,991 1,857,351
------------ ---------- ------------
$ 1,674,224 $ 302,247 $ 1,976,471
------------ ---------- ------------
------------ ---------- ------------
44
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
FEDERAL STATE TOTAL
------------ ---------- ------------
December 31, 1995
Current................................................................. $ 25,833 $ 7,066 $ 32,899
Deferred................................................................ 1,670,220 509,161 2,179,381
------------ ---------- ------------
$ 1,696,053 $ 516,227 $ 2,212,280
------------ ---------- ------------
------------ ---------- ------------
The following is a reconciliation of the statutory federal income tax
expense to the effective income tax expense:
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Statutory federal income tax expense.................................... $ 4,131,628 $ 1,652,397 $ 1,864,914
State taxes, net of federal benefit..................................... 709,806 298,307 340,710
Other................................................................... (27,258) 25,767 6,656
------------ ------------ ------------
Effective income tax expense............................................ $ 4,814,176 $ 1,976,471 $ 2,212,280
------------ ------------ ------------
------------ ------------ ------------
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,
------------------------------
1997 1996
-------------- --------------
Deferred tax assets:
Prepaid rent.................................................................... $ 520,476 $ 511,466
Residual sharing expenses....................................................... 833,383 481,367
Uniform capitalization expenses................................................. 94,539 48,166
State Taxes..................................................................... 201,470 7,462
Reserves........................................................................ 76,313 --
Alternative minimum tax credit.................................................. 1,440,762 --
Passive activity loss carryforwards............................................. 2,439,582 6,185,615
-------------- --------------
Total gross deferred tax assets............................................... 5,606,525 7,234,076
Less valuation allowances..................................................... -- --
-------------- --------------
Net deferred tax assets....................................................... 5,606,525 7,234,076
Deferred tax liabilities:
Depreciation on aircraft engines................................................ (14,082,565) (13,183,752)
-------------- --------------
Net deferred tax liability.................................................... $ (8,476,040) $ (5,949,676)
-------------- --------------
-------------- --------------
As of December 31, 1997 the Company had passive activity loss carryforwards
totaling $7,175,240 for federal income tax purposes which have no expiration
date and will be available to offset future passive and active revenue.
Management believes that no valuation allowance is required on deferred tax
assets as all amounts are recoverable through future operations.
45
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
During the years ended December 31, 1997, 1996 and 1995, the Company paid
interest totaling $7,951,352, $3,656,707, and $6,063,190 respectively. Income
taxes paid were $104,850, $31,552 and $13,218 for the years ended December 31,
1997, 1996, and 1995 respectively.
(8) DIVIDENDS AND ADVANCES TO SHAREHOLDERS
During the years ended December 31, 1997, 1996, and 1995 the Company paid
dividends totaling $0, $951,475 and $255,000 to Company shareholder(s),
respectively.
During the years ended December 31, 1997, 1996 and 1995, the Company made
loans of, $0, $265,478 and $165,635 to a Company shareholder. Repayments on such
loans and loans made in prior periods, for the years ended December 31, 1997,
1996 and 1995 were, $0, $747,267, and $57,691 respectively. The outstanding
balances of such loans, as of December 31, 1997 and 1996, were $0 and $0,
respectively.
(9) CONCENTRATION OF CREDIT RISK
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.
As of December 31, 1997 and 1996, management believes the Company had no
significant concentrations of credit risk.
For the year ended December 31, 1997, the Company had one significant
customer, Aerovias Mexico, S.A. de C.V., which accounted for approximately 13%
of lease revenue. The Company does not believe that the loss of this customer
would have a material impact on its operations.
(10) COMMITMENTS
The Company has four leases for its office and warehouse space. The annual
lease rental commitments are $125,640, $97,872, $72,372 and $25,200 and the
leases expire on March 14, 1999, May 31, 1998, and July 31, 1999 respectively.
The last lease is on a month to month basis.
In February 1998, the Company signed a lease for office space into which it
anticipates moving its Sausalito operations. The initial term of this lease is 5
years and the annual rental commitments under the lease are approximately $0.3
million. In March 1998, the Company contingently agreed to lease warehouse and
office space for WASI in San Diego, California into which it anticipates moving
substantially all of WASI's South San Francisco operations. The initial term of
this lease is 6 years and the annual rental commitments under the lease are
approximately $0.4 million. These new leases will replace the leases associated
with the $125,640, $97,872 and $25,200 annual lease rental commitments noted
above. To the extent that the Company has obligations remaining under its
current leases after the relocations described above, the Company expects that
it can sublease to cover such obligations.
46
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) COMMITMENTS (CONTINUED)
The Company finances one of its engines under a capital lease. The
Maturities of capital lease obligation as of December 31, 1997 are as follows:
1998............................................................ $ 376,536
1999............................................................ 376,536
2000............................................................ 376,536
2001............................................................ 376,536
2002............................................................ 376,536
Thereafter...................................................... $2,192,305
----------
Net Minimum Lease Payment....................................... $4,074,985
Less: Amount Representing Interest.............................. $(1,272,866)
----------
Present Value of Net Minimum Lease Payment...................... $2,802,119
----------
In March 1998, the Company committed, subject to documentation, to purchase,
during 1998 and 1999, certain aircraft for its WASI parts operation. Certain
deposits have and will be made in connection with this commitment and the total
commitment to purchase over the course of 1998 and 1999 is not more than $38
million.
47
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) RELATED PARTY TRANSACTION
During 1996, the Company had a note payable to two employees of the Company,
who were minority shareholders of a subsidiary of the Company. This note payable
was repaid in September of 1996.
(12) 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 on the date of entry into an offering period. In fiscal 1997,
10,527 shares 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 1997 and 1996 were $3.47 and
$3.08 respectively.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
Under the 1996 Stock Option/Stock Issuance Plan, 525,000 shares of the
Company's shares have been set aside to provide eligible persons with the
opportunity to acquire a proprietary interest in the Company. The plan includes
a Discretionary Option Grant Program, a Stock issuance Program, and an Automatic
Option Grant Program for eligible nonemployee Board members.
A summary of the activity under the plan is as follows:
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
OPTIONS AVERAGE WEIGHTED
AVAILABLE EXERCISE AVERAGE
FOR GRANT OPTIONS PRICE FAIR VALUE
---------- --------- ------------- -----------
Balances at June 21, 1996 (Inception)........................... 525,000 -- --
Options Granted............................................... (315,000) 315,000 $ 8.00 $ 4.19
Options Exercised............................................. -- --
Options Canceled.............................................. -- --
---------- --------- ------ -----
Balances at December 31, 1996................................... 210,000 315,000 $ 8.00
Options Granted............................................... (191,000) 191,000 $ 13.99 $ 5.83
Options Exercised............................................. (15,000) $ 8.00
Options Canceled.............................................. 52,500 (52,500) $ 10.86
---------- --------- ------ -----
Balances at December 31, 1997................................... 71,500 438,500 $ 10.27
---------- --------- ------
---------- --------- ------
48
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the outstanding, exercisable options and their weighted average
exercise prices is as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------------- ---------------
At December 31, 1996............................................ 90,000.00 $ 8.00
At December 31, 1997............................................ 192,500.00 $ 9.33
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE
- ----------------------------------------- ----------- ------------------- ------------- ----------- -------------
$8.00.................................... 277,500 8.7 $ 8.00 150,000 $ 8.00
$10.63 to $14.75......................... 128,000 8.4 $ 12.81 34,250 $ 12.71
$19.50................................... 33,000 9.7 $ 19.50 8,250 $ 19.50
--
----------- ------ ----------- ------
$8.00 to $19.50.......................... 438,500 8.7 $ 10.27 192,500 $ 9.33
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.
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
49
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
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, 1997 and 1996, 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 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:
1997 1996
------------ ------------
Net Income as reported............................................ $ 7,337,671 $ 2,804,472
Net Income pro forma.............................................. $ 6,900,477 $ 2,393,485
Net Income per Common Share as reported........................... $ 1.29 $ 0.74
Net Income per Common Share pro forma............................. $ 1.22 $ 0.63
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 with
the following weighted average assumptions:
The assumptions underlying the estimates derived using the Black Scholes
model are as follows:
1996 STOCK OPTION/ EMPLOYEE STOCK
STOCK ISSUANCE PLAN PURCHASE PLAN
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Expected Dividend Yield............................ 0% 0% 0% 0%
Risk-free Interest Rate............................ 6.05% 6.22% 5.12% 5.96%
Expected Volatility................................ 54% 84% 54% 84%
Expected Life (in Years)........................... 3.0 2.4 0.5-2.0 1.3
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 "Plan") effective as of
January 1997. The Plan provides for deferred compensation as described in
Section 401(k) of the Internal Revenue Code. The Plan is a contributory plan
available to essentially all full-time and part-time employees of the Company in
the United States. In 1997, employees who participated in the Plan could elect
to defer and contribute to the Plan up to 20% of pretax salary or wages up to
$9,600.
50
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------- -------------
3.1 Amended and Restated Articles of Incorporation, filed September 11, 1996 together with
Certificate of Amendment of Amended and Restated Articles of Incorporation filed on
September 24, 1996. Incorporated by reference to Exhibit 3.2 of the Company's report on
Form 10-K for the year ended December 31, 1996...........................................
3.2 Bylaws, Incorporated by reference to Exhibit 3.3 to Registration Statement No. 333-5126-LA
filed on June 21, 1996...................................................................
4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to
Registration Statement No. 333-5126 filed on June 21, 1996...............................
10.1 1996 Stock Option/Stock Issuance Plan and form of agreement thereunder. Incorporated by
reference to Exhibit 10.1 to Registration Statement No. 333-5126 filed on June 21,
1996.....................................................................................
10.2 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.2 to Registration
Statement No. 333-5126-LA filed on June 21, 1996.........................................
10.3 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.......................................................
10.4 Lease dated May 23, 1995 for facilities located in South San Francisco, California,
together with amendment thereto dated March 18, 1996. Incorporated by reference to
Exhibit 10.4 to Registration Statement No. 333-5126-LA filed on June 21, 1996............
10.5 Lease dated February 4, 1997, between Atlas Metal Spinning Company and Willis Aeronautical
Services, Inc., for an office and warehouse facility located in South San Francisco.
Incorporated by reference to Exhibit 10.5 of the Company's report on Form 10-K for the
year ended December 31, 1996.............................................................
10.6 Lease dated March 16, 1992 for facilities located in Sausalito, California, together with
amendment thereto. Incorporated by reference to Exhibit 10.6 of the Company's report on
Form 10-K for the year ended December 31, 1996...........................................
10.7 Employment Agreement between the Company and William McElfresh. Incorporated by reference
to Exhibit 10.5 to Registration Statement No. 333-5126 LA filed on June 21, 1996.........
10.8 Employment Agreement between the Company and Steven Oldenburg. Incorporated by reference to
Exhibit 10.6 to Registration Statement No. 333-5126-LA filed on June 21, 1996............
10.9 Employment Agreement between the Company and Edwin Dibble. Incorporated by reference to
Exhibit 10.9 to Registration Statement No. 333-39865 filed on December 11, 1997..........
10.10 Employment Agreement between the Company and Donald Nunemaker dated July 16, 1997..........
10.11 Loan Agreement dated June 12, 1997 with CoreStates Bank, together with related documents
for a $15 million revolving credit facility. Incorporated by reference to Exhibit 10.19
to the Company's Report on Form 10-Q for the period ended June 30, 1997..................
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------- -------------
10.12 Amendment dated July 28, 1997, to loan agreement dated June 12, 1997, for the increasing of
the revolving credit facility to $30 million from $15 million. Incorporated by reference
to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended June 30,
1997.....................................................................................
10.13 Amendment dated November 18, 1997, to loan agreement dated June 12, 1997, for the
increasing of the revolving credit facility to $45 million from $30 million. Incorporated
by reference to Exhibit 10.21 to Registration Statement No. 333-39865 filed on December
11, 1997.................................................................................
10.14 Engine Sales Agreement dated August 14, 1997, together with related documents, for a $25
million purchase from Pratt & Whitney for nine bare Pratt & Whitney 4056 engines.
Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the
period ended September 30, 1997..........................................................
10.15 Aircraft Sale Agreement dated as of November 17, 1997, between Finova Capital Corporation
as seller and Willis Lease Finance Corporation as buyer. Incorporated by reference to
Exhibit 10.25 to Registration Statement No. 333-39865 filed on December 11, 1997.........
10.16* Indenture dated as of September 1, 1997, between WLFC Funding Corporation and The Bank of
New York, as Indenture Trustee...........................................................
10.17* Series 1997-1 Supplement dated as of September 1, 1997 between WLFC Funding Corporation and
the Bank of New York, as Indenture Trustee...............................................
10.18 Class A Note Purchase Agreement dated as of September 1, 1997 between the Company, WLFC
Funding Corporation and First Union National Bank of North Carolina......................
10.19* 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..................
11.1 Statement regarding computation of per share earnings......................................
21.1 Subsidiaries of the Company................................................................
27.1 Financial Data Schedule....................................................................
- ------------------------
* Portions of these exhibits have been omitted to a request for confidential
treatment.
2