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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER:
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 68-0070656
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2320 MARINSHIP WAY, SUITE 300, SAUSALITO, CA 94965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 331-5281
TITLE OF EACH CLASS
-------------------
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 23, 2000 was approximately $21,106,907 million (based
on a closing sale price of $8.8125 per share as reported on the NASDAQ
National Market).
The number of shares of the registrant's Common Stock outstanding as of
March 23, 2000 was 7,401,866.
The Company's Proxy Statement for the 2000 Annual Meeting of Stockholders
is incorporated by reference into Part III of this 10-K.
1
WILLIS LEASE FINANCE CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 17
PART III
Item 10. Directors and Executives Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
Item 14. Exhibits, Financial Schedules and Reports on Form 8-K 18
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Willis Lease Finance Corporation and its subsidiaries (the "Company") is
a provider of aviation services including: (i) leasing aftermarket commercial
aircraft engines and other aircraft-related equipment, (ii) selling
aftermarket aircraft engines and aircraft spare parts, and (iii) maintaining,
repairing and overhauling engines. The Company provides these services to
passenger airlines, air cargo carriers, aircraft maintenance, repair and
overhaul ("MRO") facilities and to other distributors of aircraft spare parts
worldwide. Aircraft operators require engines and parts beyond those
installed in the aircraft that they operate. These "spare" aircraft engines
and parts are required for various reasons including requirements that
engines and parts be inspected and repaired at regular intervals based on
equipment utilization. Furthermore, unscheduled events such as mechanical
failure, and Federal Aviation Administration ("FAA") directives or
manufacturer recommended actions for maintenance, repair and overhaul of
engines and parts can give rise to demand for spare engines and parts and
services.
The Company's core focus has been on providing operating leases of
aftermarket commercial aircraft engines and other aircraft-related equipment.
As of December 31, 1999, the Company had 55 lessees in 26 countries and the
Company's lease portfolio consisted of 101 engines, eight aircraft and four
spare parts packages with an aggregate net book value of $347.4 million. The
Company targets medium-term operating leases, typically with initial lease
terms of three to seven years, where the Company retains the risks and
benefits associated with the residual value of the leased asset. The Company
actively manages its portfolio and structures its leases in order to enhance
these residual values. The Company's leasing business focuses on popular
Stage III commercial jet aircraft engines manufactured by CFM International,
General Electric, Pratt & Whitney, Rolls Royce and International Aero
Engines. These engines are the most widely used aircraft engines in the
world, powering Boeing, McDonnell Douglas and Airbus aircraft.
In 1994, the Company began selling aircraft parts and components through
its subsidiary Willis Aeronautical Services, Inc. ("WASI"). WASI's strategy
is to focus on the acquisition of aviation equipment, such as whole engines
and aircraft, which can be dismantled and sold as parts at a greater profit.
WASI also supplies certain parts and components used in the maintenance,
repair and overhaul of the Company's portfolio of aircraft and engines.
Finally, WASI provides an alternate method for realizing the maximum value
from an engine in our lease portfolio through dismantling the engine and
selling the individual parts and components.
In 1998, the Company began disassembling commercial jet engines and
providing parts cleaning, testing and classification services through Pacific
Gas Turbine Center, Incorporated ("PGTC Inc."). PGTC Inc. received
certification in November 1998 from the FAA to perform maintenance, repair
and overhaul services for Pratt & Whitney JT8D and JT9D engines. PGTC Inc.
commenced repair of JT8D engines shortly after receiving FAA certification.
In May 1999, the Company contributed the operations and assets of PGTC Inc.
to a newly formed joint venture with Chromalloy Gas Turbine Corporation,
Pacific Gas Turbine Center, LLC ("PGTC LLC"). PGTC Inc. and its successor,
PGTC LLC provide engine disassembly and maintenance, repair and overhaul
services to the Company and third parties. PGTC Inc. purchased and its
successor, PGTC LLC has and will purchase parts from WASI for use during the
maintenance, repair, and overhaul of engines.
The Company is a Delaware corporation. Its executive offices are located
at 2320 Marinship Way, Suite 300, Sausalito, California 94965. The Company
transacts business directly and through its subsidiaries unless otherwise
indicated.
AIRCRAFT EQUIPMENT LEASING
LEASES. The vast majority of the Company's current leases to air
carriers, manufacturers and overhaul/repair facilities are operating leases
as opposed to finance leases. Under an operating lease, the Company retains
title to the aircraft equipment thereby retaining the benefit and assuming
the risk of the residual value of the aircraft equipment. Operating leases
allow airlines greater fleet and financial flexibility due to their
shorter-term nature and the relatively small initial capital outlay necessary
to obtain use of the aircraft equipment. Operating lease rates are generally
priced higher than finance lease rates, in part because of the risks
associated with the residual value. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results."
The Company targets the medium-term lease market, typically with initial
lease terms of three to seven years. All of the Company's lease transactions
with initial lease terms of three to seven years are triple-net leases. A
triple-net lease requires the lessee to make the full lease payment and pay
any other expenses associated with the use of the equipment, such as
maintenance, casualty and liability insurance, sales or use taxes and
personal property taxes. The leases contain detailed provisions specifying
maintenance standards and the required condition of the aircraft equipment
upon return at the end of
3
the lease. During the term of the lease, the Company generally requires the
lessee to maintain the aircraft engine in accordance with an approved
maintenance program designed to ensure that the aircraft engine meets
applicable regulatory requirements in the jurisdictions in which the lessee
operates. Under short-term leases and certain medium-term leases, the Company
may undertake a portion of the maintenance and regulatory compliance risk.
The Company attempts to mitigate risk where possible. For example, the
Company typically makes an independent analysis of the credit risk associated
with each lessee before entering into a lease transaction. The Company's
credit analysis generally consists of evaluating the prospective lessee's
financial standing utilizing financial statements and trade and/or banking
references. In certain circumstances, where the Company or its lenders
believe necessary, the Company may require its lessees to obtain a partial
letter of credit or a guarantee from a bank or a third party. The Company
also evaluates insurance and expropriation risk and evaluates and monitors
the political and legal climate of the country in which a particular lessee
is located in order to determine the Company's ability to repossess its
equipment should the need arise.
The Company often collects maintenance reserves and security deposits
from engine and aircraft lessees and security deposits from aircraft parts
lessees. Generally, the Company collects, in advance, a security deposit
equal to at least one month's lease payment, together with one month's
estimated maintenance reserve. The security deposit is returned to the lessee
after all return conditions have been met. Maintenance reserves are
accumulated in accounts maintained by the Company or its lenders and are used
when normal repairs associated with engine use or maintenance are required.
In many cases, to the extent that cumulative maintenance reserves are
inadequate to fund normal repairs required prior to return of the engine to
the Company, the lessee is obligated to cover the shortfall. Parts leases
generally require that the parts be returned in the condition the parts were
in at lease inception.
During the lease period, the Company's leases require that the leased
equipment undergo maintenance and inspection at qualified maintenance
facilities certified by the FAA or its foreign equivalent. In addition, when
equipment comes off-lease, it undergoes inspection to verify compliance with
lease return conditions.
As a result of these guidelines, the Company has not experienced any
material losses attributable to credit or collection problems. However, the
Company cannot assure that it will not experience collection problems or
significant losses in the future. In addition, while the Company cannot
assure that its maintenance and inspection requirements will result in a
realized return upon termination of a lease, the Company believes that its
attention to its lessees and its emphasis on maintenance and inspection
contributes to residual values and generally helps the Company to recover its
investment in its leased equipment. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results."
Upon termination of a lease, the Company will re-lease or sell the
aircraft equipment 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 particular used aircraft, spare parts
or aircraft engines varies greatly depending upon their condition, the
maintenance services performed during the lease term and as applicable the
number of hours remaining until the next major maintenance is required. If
the Company is unable to re-lease or sell aircraft equipment on favorable
terms, its ability to service debt may be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results."
AIRCRAFT EQUIPMENT HELD FOR LEASE. The Company's management frequently
reviews opportunities to acquire suitable aircraft equipment based on market
demand, customer airline requirements and in accordance with the Company's
lease portfolio mix criteria and planning strategies for leasing. Before
committing to purchase specific equipment, the Company generally takes into
consideration such factors as estimates of future values, potential for
remarketing, trends in supply and demand for the particular make, model and
configuration of the equipment and the anticipated obsolescence of the
equipment. As a result, certain types and configurations of equipment do not
necessarily fit the profile for inclusion in the Company's portfolio of
equipment owned and used in its leasing operation.
The Company focuses particularly on the noise compliant Stage III
aircraft engines manufactured by CFM International ("CFM"), General Electric
Pratt & Whitney ("PW"), Rolls Royce and International Aero Engines. As of
December 31, 1999, all but eighteen of the engines in the Company's lease
portfolio were Stage III or Stage II engines that have been fitted with
"hush-kits" and were generally suitable for use on one or more commonly used
aircraft. The Company's parts packages consist of rotable parts for use on
commercial aircraft or the engines appurtenant to such aircraft. The
Company's investments in aircraft have primarily involved the purchase of de
Havilland DHC-8 commuter aircraft which are Stage III compliant. The Company
may make further investments in aircraft for lease in the future.
As of December 31, 1999, the Company had 101 aircraft engines and related
equipment, four spare parts packages and eight aircraft with an aggregate
original cost of $370.5 million in its lease portfolio. As of December 31,
1998, the Company
4
had 74 aircraft engines and related equipment, seven spare parts packages and
five aircraft with an aggregate original cost of $300.2 million in its lease
portfolio.
As of December 31, 1999, minimum future rentals under the noncancelable
leases of these aircraft assets was as follows:
Year (in thousands)
----
2000................................................ $38,857
2001................................................ 26,558
2002................................................ 22,082
2003................................................ 14,420
2004................................................ 8,979
Thereafter.......................................... 6,615
--------
$117,511
========
LESSEES. As of December 31, 1999, the Company had 55 lessees of
commercial aircraft engines and other aircraft-related equipment in 26
countries.
The following table displays the regional profile of the Company's lease
customer base by revenue for the years ended December 31, 1999 and December
31, 1998. No single country other than the United States accounted for more
than 13% and 12% of the Company's lease revenue for the years ended December
31, 1999 and December 31, 1998, respectively.
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
---------------------------- ----------------------------
(dollars in thousands) LEASE LEASE
REVENUE PERCENTAGE REVENUE PERCENTAGE
------- ---------- ------- ----------
United States $12,547 26% $10,540 33%
Europe 13,557 28 6,704 20
Mexico 6,118 13 3,780 11
Canada 3,329 7 2,071 6
Australia/New Zealand 551 1 926 3
Asia 4,147 9 2,710 8
South America 6,910 14 5,399 16
Middle East 1,008 2 917 3
--------------------------------------- ---------------------------------------
Total $48,167 100% $33,047 100%
======================================= =======================================
SPARE PARTS SALES
In 1994, the Company began selling aircraft parts and components to
airlines, air cargo carriers, MRO facilities and other aircraft parts
distributors through WASI. WASI purchases and resells aftermarket engine
parts, engines, modules, airframes and rotable components. WASI purchases
individual engine parts from airlines and others in the aftermarket or
acquires whole engines and aircraft. WASI has contracted with PGTC Inc. and
currently contracts with PGTC LLC as well as third parties to have the
engines dismantled and with third parties to have the aircraft dismantled
into their component parts for resale. Some of the parts are overhauled for
WASI by FAA-authorized repair agencies and then offered for sale to airlines,
maintenance and repair facilities, and distributors. To date, WASI has
targeted primarily General Electric CF6-50, Pratt & Whitney JT8D, JT9D and
PW4000 aircraft engines and components. These engines are amongst the most
widely used aircraft engines in the world, powering Boeing, McDonnell Douglas
and Airbus aircraft, including the Boeing 727, 737, 747, 757 and 767, the
McDonnell Douglas MD-80 series and the Airbus A300, A310, A320, A330 and A340
aircraft. WASI has begun to expand into engine components for the CFM-56, a
high thrust engine used on the popular Boeing 737.
The Company believes that the operations of WASI complement the Company's
leasing and maintenance, repair, and overhaul businesses. WASI's operations
have afforded the Company additional contacts and opportunities in the
aircraft engine market. WASI was and is a major supplier of parts to PGTC
Inc. and PGTC LLC, respectively. WASI also supplies certain parts and
components used in the maintenance, repair and overhaul of the Company's
portfolio of aircraft and engines. In addition, WASI provides an alternate
method for realizing the maximum value from an engine in the lease portfolio
through dismantling the engine and selling the individual parts and
components.
5
ENGINE REPAIR, DISASSEMBLY, AND RELATED ACTIVITIES
In 1998, the Company began disassembling large commercial jet engines and
providing parts cleaning, testing and classification services through PGTC
Inc. PGTC Inc. was formed initially to provide such disassembly services to
WASI. In November 1998, PGTC Inc. received its FAR 145 Repair Station Air
Agency Certification from the FAA. The FAA certification allows PGTC Inc. and
its successor PGTC LLC to perform maintenance, repair and overhaul services
for the Pratt & Whitney JT8D and JT9D engines as well as clean, perform
non-destructive testing of and classify, as to condition, certain Pratt &
Whitney engine parts. PGTC Inc. commenced repair of JT8D engines shortly
after receiving FAA certification.
In May 1999, the Company entered into an agreement with Chromalloy Gas
Turbine Corporation, a subsidiary of Sequa Corporation ("Chromalloy"), to
operate a joint venture to perform maintenance, repair and overhaul of
commercial jet engines. Under the terms of the joint venture agreement, the
Company and Chromalloy formed a new company, PGTC LLC. The Company
contributed the operations and assets of its wholly owned subsidiary PGTC
Inc. and Chromalloy contributed working capital to the joint venture. Both
the Company and Chromalloy have a 50% interest in the joint venture.
PGTC Inc. and its successor PGTC LLC have and will provide services to
WASI and to third party customers. PGTC Inc. and PGTC LLC have and will
purchase parts from WASI since spare parts are used extensively during the
maintenance, repair and overhaul of engines. PGTC Inc. and PGTC LLC's
services have and will continue to allow the Company to reduce the cost and
improve the timeliness of engine disassemblies, component overhaul services
and parts classification.
EQUIPMENT ACQUIRED FOR RESALE
The Company engages in the selective purchase and resale of commercial
aircraft engines and engine components in the aftermarket to complement its
engine and parts leasing business. The Company may purchase engines and
components without having a commitment for their sale. The Company assesses
the supply and demand of target engines and components through its sales
force and relies, to a lesser extent, on referrals and advertising in
industry publications. The Company also subscribes to a data package that
provides it with access to lists composed of operators and their specific
engine inventories and engines on order.
FINANCING/SOURCE OF FUNDS
The Company typically acquires the engines it leases with a combination
of equity capital and funds borrowed from financial institutions. The Company
can typically borrow 80% to 100% of an engine purchase price and 50% to 80%
of an aircraft or spare parts purchase price on a recourse, non-recourse or
partial recourse basis. Under many of the Company's term loans, the lender is
entitled to receive most of the lease payments associated with the financed
equipment to apply to debt service. Under the Company's warehouse facilities,
the lender is paid interest plus principal as a function of the book value of
assets pledged as collateral under the facilities. Generally, lenders take a
security interest in the equipment. The Company retains ownership of the
equipment, subject to such security interest. Loan interest rates often
reflect the financial condition of the underlying lessees, the terms of the
lease and percentage of purchase price advanced, and the financial condition
of the Company. The Company obtains the balance of the purchase price of the
equipment, the "equity" portion, from internally generated funds,
cash-on-hand, and the net proceeds of prior common stock offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
COMPETITION
The markets for the Company's products and services are very competitive,
and the Company faces competition from a number of sources. These include
aircraft, engine and aircraft parts manufacturers, aircraft and aircraft
engine lessors, airline and aircraft service and repair companies and
aircraft spare parts redistributors. Certain of the Company's competitors
have substantially greater resources than the Company, including greater name
recognition, larger inventories, a broader range of material, complementary
lines of business and greater financial, marketing, information systems and
other resources. In addition, equipment manufacturers, aircraft maintenance
providers, FAA certified repair facilities and other aviation aftermarket
suppliers may vertically integrate into the markets that the Company serves,
thereby significantly increasing industry competition. The Company can give
no assurance that competitive pressures will not materially and adversely
affect the Company's business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations Factors That May Affect Future Results."
INSURANCE
The Company requires its lessees to carry the types of insurance
customary in the air transportation industry, including comprehensive third
party liability insurance and physical damage and casualty insurance. In
addition to requiring full indemnification under the terms of the lease, the
Company is named as an additional insured on liability insurance policies
carried by lessees, with the Company or its lenders normally identified as
the payee for loss and damage to the equipment.
6
The Company monitors compliance with the insurance provisions of the leases.
The Company also carries contingent physical damage and third party liability
insurance as well as product liability insurance.
GOVERNMENT REGULATION
The Company's customers are subject to a high degree of regulation in the
jurisdictions in which they operate. For example, the FAA regulates the
manufacture, repair and operation of all aircraft operated in the United
States and equivalent regulatory agencies in other countries regulate
aircraft operated in those countries. Such regulations also indirectly affect
the Company's business operations. All aircraft operated in the United States
must be maintained under a continuous condition monitoring program and must
periodically undergo thorough inspection and maintenance. The inspection,
maintenance and repair procedures for commercial aircraft are prescribed by
regulatory authorities and can be performed only by certified repair
facilities utilizing certified technicians. The FAA can suspend or revoke the
authority of air carriers or their licensed personnel for failure to comply
with regulations and ground aircraft if their airworthiness is in question.
While the Company's leasing and reselling business is not regulated, the
aircraft, engines and engine parts that the Company leases and sells to its
customers must be accompanied by documentation that enables the customer to
comply with applicable regulatory requirements. Furthermore, before parts may
be installed in an aircraft, they must meet certain standards of condition
established by the FAA and/or the equivalent regulatory agencies in other
countries. Specific regulations vary from country to country, although
regulatory requirements in other countries are generally satisfied by
compliance with FAA requirements. Presently, whenever necessary, with respect
to a particular engine or engine component, the Company utilizes FAA and/or
Joint Aviation Authority certified repair stations to repair and certify
engines and components to ensure marketability.
Parts must also be traceable to sources deemed acceptable by the FAA or
such equivalent regulatory agencies. Such standards may change in the future,
requiring engine components already contained in the Company's inventory to
be scrapped or modified. Aircraft engine manufacturers may also develop new
engine components to be used in lieu of engine components already contained
in the Company's inventory. In all such cases, to the extent the Company has
such engine components in its inventory, their value may be reduced.
Effective January 1, 2000, federal regulations stipulate that all
aircraft engines hold, or be capable of holding, a noise certificate issued
under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention,
or have been shown to comply with Stage III noise levels set out in Section
36.5 of Appendix C of Part 36 of the FAA Regulations of the United States if
the engines are to be used in the continental United States. Additionally,
much of Europe has adopted similar regulations. As of December 31, 1999, all
but eighteen of the engines in the Company's lease portfolio were Stage III
engines. The eighteen engines that do not meet Stage III noise level
requirements (Stage II engines) are on-lease or available for lease to
customers located in countries which have not adopted Stage III noise
regulations such as Mexico and the countries of South America. Additionally,
Stage II engines may be "hush-kitted" so as to meet Stage III noise
regulations.
The Company believes that the aviation industry will be subject to
continued regulatory activity. Additionally, increased oversight has and will
continue to originate from the quality assurance departments of airline
operators. The Company has been able to meet all such requirements to date,
and believes that it will be able meet any additional requirements that may
be imposed. The Company cannot assure, however, that new, more stringent
government regulations will not be adopted in the future or that any such new
regulations, if enacted, would not have a material adverse impact on the
Company.
EMPLOYEES
As of December 31, 1999, the Company had 59 full-time employees and four
part-time employees (excluding consultants), including 36 employees in
equipment acquisition, leasing, sales and administration and 27 employees in
airframe and engine component sales and administration. None of the Company's
employees is covered by a collective bargaining agreement and the Company
believes its employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company's principal offices are located at 2320 Marinship Way, Suite
300, Sausalito, California 94965. The Company occupies space in Sausalito
under a lease that covers approximately 9,300 square feet of office space and
expires on May 31, 2003. Aircraft asset leasing, financing, sales and general
administrative activities are conducted from the Sausalito location. The
Company also leases approximately 43,000 square feet of office and warehouse
space for WLFC's and WASI's operations at San Diego, California. This lease
expires on March 31, 2000 and may be extended on a month-to-month basis. The
Company plans to move the San Diego operation to a new facility within the
San Diego area during 2000. In addition, the Company leases approximately
10,730 square feet of warehouse and office 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, 2000 and it is expected that the
Company will not renew this lease. See Note 8 to the audited consolidated
Financial Statements.
7
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 1999.
8
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 23,
2000 there were approximately 1,265 stockholders of record of the Company's
Common Stock.
The high and low sales price of the Common Stock for each quarter of 1999
and 1998, as reported by NASDAQ, are set forth below:
1999 1998
---- ----
HIGH LOW HIGH LOW
First Quarter $19.25 $14.87 $22.62 $16.25
Second Quarter 18.25 14.50 24.37 19.25
Third Quarter 17.37 13.19 25.25 13.75
Fourth Quarter 7.31 3.81 19.50 14.62
During the years ended December 31, 1999, 1998 and 1997 the Company did
not pay cash dividends to Company stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data and
operating information of the Company. The selected consolidated financial and
operating data should be read in conjunction with the Consolidated Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Form 10-K.
YEARS ENDED DECEMBER 31,
------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
REVENUE:
Lease revenue $48,167 $33,047 $19,456 $13,740 $13,771
Gain (loss) on sale of leased equipment 11,371 13,413 4,165 2 (483)
Spare parts sales 25,436 24,088 14,110 5,843 3,859
Sale of equipment acquired for resale 9,775 4,093 12,748 12,105 5,472
Interest and other income 1,182 1,439 728 618 119
Total Revenue $95,931 $76,080 $51,207 $32,308 $22,738
EXPENSES:
Cost of spare parts sales $28,317 $17,298 $9,469 $3,308 $2,546
Cost of equipment acquired for resale 8,354 3,574 10,678 10,789 2,742
All other expenses 54,309 39,447 22,245 13,351 14,168
Gain on modification of credit facility - - - - (2,203)
Loss from unconsolidated affiliate 622 - - - -
-----------------------------------------------------------------
Income before income taxes, minority interest
and extra ordinary item $4,329 $15,761 $8,815 $4,860 $5,485
Net income $3,283 $9,251 $7,338 $2,804 $3,216
BALANCE SHEET DATA:
Total assets $412,315 $360,005 $198,430 $124,933 $91,437
Debt (includes capital lease obligation) 293,807 248,233 104,235 76,146 69,911
Shareholders' equity 69,538 65,842 54,601 23,202 4,812
LEASE PORTFOLIO:
Engines at the end of the period 101 74 44 32 31
Spare parts packages at the end of the period 4 7 7 2 -
Aircraft at the end of the period 8 5 3 - -
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
GENERAL. The Company's core focus has been on providing operating leases
of aftermarket commercial aircraft engines and other aircraft-related
equipment. As of December 31, 1999, the Company had 55 lessees in 26
countries and its lease portfolio consisted of 101 engines, eight commuter
aircraft and four spare parts packages with an aggregate net book value of
$347.4 million. The Company targets medium-term operating leases, typically
with initial lease terms of three to seven years, where the Company retains
the risks and benefits associated with the residual value of the leased
asset. The Company actively manages its portfolio and structures its leases
in order to enhance these residual values. The Company's leasing business
focuses on popular Stage III commercial jet aircraft engines manufactured by
CFM, General Electric, Pratt & Whitney, Rolls Royce and International Aero
Engines. These engines are the most widely used aircraft engines in the
world, powering Boeing, McDonnell Douglas and Airbus aircraft.
In 1994, the Company began selling aircraft parts and components through
WASI. WASI's strategy is to focus on the acquisition of aviation equipment,
such as whole engines and aircraft, which can be dismantled and sold as parts
at a greater profit. WASI also supplies certain parts and components used in
the maintenance, repair and overhaul of the Company's portfolio of aircraft
and engines. Finally, WASI provides an alternate method for realizing the
maximum value from an engine in the lease portfolio through dismantling the
engine and selling the individual parts and components.
In 1998, the Company began disassembling commercial jet engines and
providing parts cleaning, testing and classification services through Pacific
Gas Turbine Center, Incorporated ("PGTC Inc."). PGTC Inc. received
certification in November 1998 from the FAA to perform maintenance, repair
and overhaul services for Pratt & Whitney JT8D and JT9D engines. PGTC Inc.
commenced repair of JT8D engines shortly after receiving FAA certification.
In May 1999, the Company contributed the operations and assets of PGTC Inc.
to a newly formed joint venture, Pacific Gas Turbine Center, LLC ("PGTC
LLC"). PGTC Inc. provided and its successor, PGTC LLC provides engine
disassembly and maintenance, repair and overhaul services to the Company and
third parties. PGTC Inc. purchased and its successor, PGTC LLC purchases
parts from WASI for use during the maintenance, repair, and overhaul of
engines.
LEASING RELATED ACTIVITIES. Revenue from leasing of aircraft equipment is
recognized as operating lease or finance lease revenue over the terms of the
applicable lease agreements. The vast majority of the Company's leases are
accounted for as operating leases. Under an operating lease, the Company
retains title to the leased equipment, thereby retaining the potential
benefit and assuming the risk of the residual value of the leased equipment.
The Company generally depreciates engines on a straight-line basis over
15 years to a 55% residual value. Spare parts packages are generally
depreciated on a straight-line basis over 15 years to a 25% residual value.
Aircraft are generally depreciated on a straight-line basis over 13-17 years
to a 15%-17% residual value. For assets that are leased with an intent to
disassemble upon lease termination, the Company depreciates the assets over
their estimated lease term to a residual value based on an estimate of the
wholesale value of the parts after disassembly.
At the commencement of a lease, the Company often collects security
deposits (normally equal to at least one month's lease payment) and
maintenance reserves (normally equal to one month's estimated maintenance
expenses) from the lessee. The security deposit is returned to the lessee
after all lease conditions have been met. Maintenance reserves are
accumulated in accounts maintained by the Company or the Company's lenders
and are used when normal repair associated with engine use or maintenance is
required. In many cases, to the extent that cumulative maintenance reserves
are inadequate to fund normal repairs required prior to return of the engine
to the Company, the lessee is obligated to cover the shortfall.
For equipment sold out of the Company's lease portfolio, the Company
recognizes the gain associated with the sale as revenue. Gain consists of
sales proceeds less the net book value of the equipment sold and any costs
directly associated with the sale. Additionally, to the extent that any
deposits or reserves are not included in the sale and the purchaser of the
equipment assumes any liabilities associated therewith, such deposits and
reserves are included in the gain on sale.
The Company engages in the selective purchase and sale of commercial
aircraft engines and engine components. Assets acquired for resale are
recorded at the lower of cost or net realizable value. Gross revenue from the
sale of equipment is reflected as sale of equipment acquired for resale with
the corresponding cost of the equipment shown as an expense item.
SPARE PARTS SALES. WASI acquires aviation equipment, such as whole
engines and aircraft, which can be dismantled and sold as parts at a greater
profit. The Company records the purchases at cost and capitalizes additional
costs relating to acquisition, overhaul, insurance and other direct costs.
Gross revenue from the sale of parts is reflected as spare parts sales. WASI
may also engage in the short term leasing of engines destined for disassembly
and sale of parts.
10
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998
----------------------------------------------------------
AMOUNT % AMOUNT %
-------- --- -------- ---
(DOLLARS IN THOUSANDS)
Lease revenue $48,167 50.2% $33,047 43.4%
Gain on sale of leased equipment 11,371 11.9 13,413 17.6
Spare parts sales 25,436 26.5 24,088 31.7
Sale of equipment acquired for resale 9,775 10.2 4,093 5.4
Interest and other income 1,182 1.2 1,439 1.9
----------------------------------------------------------
Total $95,931 100.0% $76,080 100.0%
==========================================================
LEASING RELATED ACTIVITIES. Lease related revenue for the year ended
December 31, 1999, increased 46% to $48.2 million from $33.0 million for the
comparable period in 1998. This increase reflects lease related revenues from
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at December 31, 1999 and
1998 was $347.4 million and $283.9 million, respectively, an increase of 22%.
During the year ended December 31, 1999, 51 engines and three aircraft
were added to the Company's lease portfolio at a total cost of $115.2
million. Twenty-four engines and three spare parts packages from the lease
portfolio were sold or transferred to WASI for sale as parts. The engines
sold had a total net book value of $39.2 million and were sold for a gain of
$11.4 million.
During the year ended December 31, 1998, ten engines, one spare parts
package and one aircraft from the lease portfolio were sold or transferred to
WASI for sale as parts. These engines and the aircraft had a total net book
value of $27.1 million and were sold for a gain of $13.4 million.
During the year ended December 31, 1999, the Company sold three engines
acquired for resale for $9.8 million which resulted in a gain of $1.4
million, compared to the year ended December 31, 1998, during which the
Company sold one engine acquired for resale for $4.1 million resulting in a
gain of $0.5 million.
SPARE PARTS SALES. Revenues from spare parts sales for the year ended
December 31, 1999 increased 6% to $25.4 million from $24.1 million for the
comparable period in 1998. The gross margin for the year ended December 31,
1999 was negative 11% compared to positive 28% for the corresponding period
in 1998. The decrease in gross margin was primarily due to a third quarter
1999 inventory write-down expense of $7.4 million, lower parts sales margins,
scrappage of parts and other inventory write-downs in the normal course of
business.
INTEREST AND OTHER INCOME. Interest and other income for the year ended
December 31, 1999, decreased to $1.2 million from $1.4 million for the year
ended December 31, 1998. The decrease was primarily due to ancillary fees
generated in connection with a lease arrangement during the year ended
December 31, 1998. The Company had no such fee activity during the comparable
1999 period.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 47% to $22.4 million for the year ended December 31,
1999, from the comparable period in 1998, due to an increase in average debt
outstanding during the period. This increase in debt was primarily related to
debt associated with the increase in lease portfolio assets. Residual sharing
expense increased 5% to $847,000 for the year ended December 31, 1999 from
$803,000 for the comparable period in 1998. Residual sharing arrangements
apply to three of the Company's engines as of December 31, 1999 and are a
function of the difference between the debt associated with the residual
sharing arrangement and estimated residual proceeds. Because a greater
portion of the principal of such debt is amortized as debt ages, residual
sharing expense increases. The Company accrues for its residual sharing
obligations using net book value as an estimate for residual proceeds.
DEPRECIATION EXPENSE. Depreciation expense increased 65% to $13.6 million
for the year ended December 31, 1999, from the comparable period in 1998, due
primarily to the increase in lease portfolio assets in 1999.
11
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 15% to $17.5 million for the year ended December 31, 1999, from the
comparable period in 1998. This change reflects increased expenses, in all
business segments, associated with staff additions, increased
non-capitalizable engine maintenance related expenses, as well as an increase
in professional fees. Five months of expenses related to PGTC Inc. are
included in the year ended December 31, 1999.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the year ended December 31, 1999, decreased to $1.0 million from $6.3 million
for the comparable period in 1998. This decrease reflects a decrease in the
Company's pre-tax earnings and effective tax rate for the year ended December
31, 1999. The decrease in the effective tax rate was related to state taxes.
The Company's tax rate is subject to change based on changes in the mix of
domestic and foreign leased assets, the proportions of revenue generated
within and outside of California and numerous other factors, including
changes in tax law.
LOSS FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company entered into
a joint venture to perform maintenance, repair and overhaul of commercial jet
aircraft engines. The Company accounts for its 50% interest in the joint
venture using the equity method. For the year ended December 31, 1999, the
Company's share of net losses from the joint venture, after inter-company
eliminations, was $622,000. The Company had no such activity during the
comparable 1998 period.
In accordance with APB18, "The Equity Method for Investments in Common
Stock", an amount representing the difference between the book value of the
Company's investment in its unconsolidated affiliate and the amount of
underlying equity in net assets of PGTC LLC is being accreted into income
over the estimated life of the asset. For the year ended December 31, 1999,
the Company recorded $172,000 in income from unconsolidated affiliate related
to this asset.
EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had
residual sharing provisions and an interest rate of 10%. The repayment
resulted in an extraordinary expense of $0.2 million, net of tax.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenue is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997
-----------------------------------------------------------
AMOUNT % AMOUNT %
-------- --- -------- ---
(DOLLARS IN THOUSANDS)
Lease revenue $33,047 43.4% $19,456 38.0%
Gain on sale of leased equipment 13,413 17.6 4,165 8.1
Spare parts sales 24,088 31.7 14,110 27.6
Sale of equipment acquired for resale 4,093 5.4 12,748 24.9
Interest and other income 1,439 1.9 728 1.4
-----------------------------------------------------------
Total $76,080 100.0% $51,207 100.0%
===========================================================
LEASING RELATED ACTIVITIES. Lease related revenue for the year ended
December 31, 1998, increased 70% to $33.0 million from $19.5 million for the
comparable period in 1997. This increase reflects lease related revenues from
additional engines, aircraft and spare parts packages. The aggregate of net
book value of leased equipment and net investment in direct finance lease at
December 31, 1998 and 1997 was $283.9 million and $148.4 million,
respectively, an increase of 91%.
During the year ended December 31, 1998, 40 engines, three aircraft, and
one spare parts package were added to the Company's lease portfolio at a
total cost of $171.1 million. Ten engines, one spare parts package and one
aircraft from the lease portfolio were sold or transferred to WASI for sale
as parts. The engines and the aircraft had a total net book value of $27.1
million and were sold for a gain of $13.4 million.
During the year ended December 31, 1997, the Company sold six engines
from the lease portfolio. These engines had a net book value of $11.5 million
and were sold for a gain of $4.2 million.
During the year ended December 31, 1998, the Company sold one engine
acquired for resale for $4.1 million which resulted in a gain of $0.5
million, compared to the year ended December 31, 1997, during which the
Company sold ten
12
engines acquired for resale for $12.7 million resulting in a gain of $2.1
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.
SPARE PARTS SALES. Revenues from spare parts sales increased 71% to $24.1
million for the year ended December 31, 1998 compared to the year ended
December 31, 1997. The gross margin, decreased to 28% in 1998, from 33% in
the corresponding period in 1997. This decrease was due to increased
provisions for write-downs of inventory, the Company's decision to sell,
shortly after their acquisition, certain of the engines acquired under its
agreement with United Airlines, thus avoiding carrying costs and a change in
the mix of engine type parts sold.
INTEREST AND OTHER INCOME. Interest and other income for the year ended
December 31, 1998, increased to $1.4 million from $0.7 million for the year
ended December 31, 1997. This is a result of interest earned on cash and
deposits held.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 95% to $15.2 million for the year ended December 31,
1998, from the comparable period in 1997, due to an increase in average debt
outstanding during the period. This increase in debt was primarily related to
debt associated with the increase in lease portfolio assets and to a lesser
extent an increase in spare parts inventories. The Company accrues for
residual sharing obligations using net book value as a proxy for residual
proceeds. Residual sharing expense decreased 10% to $803,328 for the year
ended December 31, 1998 from $892,861 for the comparable period in 1997. The
decline was due to the repayment, in March 1998, of one of the Company's
loans which had residual sharing provisions. Residual sharing arrangements
apply to three of the Company's engines as of December 31, 1998.
DEPRECIATION EXPENSE. Depreciation expense increased 95% to $8.3 million
for the year ended December 31, 1998, from the comparable period in 1997, due
primarily to the increase in lease portfolio assets in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 63% to $15.2 million for the year ended December 31, 1998, from the
comparable period in 1997. This increase reflects expenses, in all business
segments, associated with staff additions, increased rent due to the
expansion of the facilities, as well as an increase in professional fees and
insurance expense.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the year ended December 31, 1998, increased to $6.3 million from $3.5 million
for the comparable period in 1997. This increase reflects an increase in the
Company's pre-tax earnings.
EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had
residual sharing provisions and an interest rate of 10%. The repayment
resulted in an extraordinary expense of $0.2 million, net of tax. 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 $2.0 million, net of tax.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that
an entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value.
SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the
effective date of SFAS No. 133. SFAS No. 133, as amended, is now effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. As
of December 31, 1999, the Company is reviewing the effect SFAS No. 133 will
have on the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth through borrowings
secured by its equipment lease portfolio. Cash of approximately $118.2
million, $194.7 million and $165.6 million, in the years ended December 31,
1999, 1998 and 1997, respectively, was derived from this activity. In these
same time periods $73.0 million, $51.4 million and $137.2 million,
respectively, was used to pay down related debt or capital lease obligations.
In December 1997, net proceeds from a follow-on common stock offering were
approximately $23.8 million. Cash flow from operating activities used
approximately $18.9 million in the year ended December 31, 1998 and cash
flows from operating activities generated $22.0 million and $6.5 million in
the years ended December 31, 1999 and 1997, respectively. The deficit cash
flow from operations in 1998 was primarily attributable to the acquisition of
used aircraft assets for WASI's inventory and deposits made in connection
with future, committed inventory purchases. Such deposits are carried as
other assets on the Company's consolidated balance sheet.
13
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $119.8 million, $171.1 million and $68.1 million of
funds were used for this purpose in the years ended December 31, 1999, 1998
and 1997, respectively.
At December 31, 1999, the Company had a $150.0 million revolving credit
facility to finance the acquisition of aircraft engines, aircraft and spare
parts for sale or lease as well as for general working capital purposes. As
of December 31, 1999, $14.9 million was available under this facility,
subject to the Company providing sufficient collateral. On October 28, 1999,
effective September 30, 1999, the Company wrote down the value of portions of
the spare parts inventory which serves as collateral for the Company's
revolving credit facility. Consistent with the terms of the revolving credit
facility, the Company reduced the level of borrowing under the revolving
credit facility in order to maintain the required relationship between
collateral and loans outstanding. The facility has a revolving period ending
September 2000 followed by a four-year term-out period. The facility is
renewable and the Company expects to begin discussing such renewal with its
banks in mid-2000. The interest rate on this facility is currently
LIBOR plus 2.0%.
In May 1999, the Company increased its $80 million debt warehouse
facility to $125 million. The facility is available to a wholly-owned special
purpose finance subsidiary of the Company, WLFC Funding Corporation, for the
financing of jet aircraft engines transferred by the Company to such finance
subsidiary. The facility is renewable annually. This transaction's structure
facilitates public or private securitized note issuances by the special
purpose finance subsidiary. The subsidiary is consolidated for financial
statement presentation purposes. The facility has an eight-year initial term
with a revolving period to February 2001 followed by a seven-year
amortization period. At December 31, 1999, the interest rate was a commercial
paper based rate plus a spread of 1.8%. The Company has guaranteed the
obligations under the facility on a limited basis, up to an amount equal to
the greater of: (i) the lesser of $5 million and 20% of the outstanding
obligations or (ii) 10% of the outstanding obligations. Assuming compliance
with the facility's terms, including sufficiency of collateral, as of
December 31, 1999, $18.1 million was available under this facility.
Approximately $17.0 million of the Company's debt is repayable during
2000. Such repayments consist of scheduled installments due under term loans.
The Company believes that its current equity base, internally generated
funds and existing debt facilities are sufficient to maintain the Company's
current level of operations. A decline in the level of internally generated
funds or the availability under the Company's existing debt facilities would
impair the Company's ability to sustain its current level of operations. The
Company is currently discussing additions to its debt and equity capital
bases with its commercial and investment banks. If the Company is not able to
access additional debt and equity capital, its ability to continue to grow
its asset base consistent with historical trends will be impaired and its
future growth limited to that which can be funded from internally generated
capital.
The Company has committed to purchase, during 2000, additional used
aircraft and used engines for its operations. In 1998, certain deposits were
made in connection with these commitments. As of December 31, 1999, the
Company's current commitment to such purchases is not more than $6.4 million,
which includes $1.0 million of deposits in other assets.
MANAGEMENT OF INTEREST RATE EXPOSURE
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 7.7%. As of December 31, 1999, the
notional principal amount of the cap was $29.3 million, which will decline to
$26.0 million at the end of its term, October 2000. The cost of the cap is
being amortized as an expense over its remaining term. To further mitigate
exposure to interest rate changes, the Company has entered into interest rate
swap agreements which have notional outstanding amounts of $60.0 million, a
weighted average remaining term of 24 months and a weighted average fixed
rate of 5.9%. Under its borrowing agreement, WLFC Funding Corporation is
required to hedge a certain portion of its $125 million warehouse facility
against changes in interest rates. WLFC Funding Corporation has entered into
interest rate swap agreements in order to meet such hedging requirements and
to manage the variable interest rate risk related to its debt. As of December
31, 1999, such swap agreements had notional outstanding amounts totaling $65
million, a weighted average remaining term of 38 months and a weighted
average fixed rate of 6.0%.
The Company will be exposed to risk in the event of non-performance of
the interest rate hedge counter parties. The Company anticipates that it will
hedge additional amounts of its floating rate debt during the next several
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for historical information contained herein, the discussion in
this report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The
14
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below as well as those discussed elsewhere herein and in the
Company's report on Form 10-K for the year ended December 31, 1998. The
cautionary statements made in this report should be read as being applicable
to all related forward-looking statements wherever they appear in this report
or in other written or oral statements by the Company.
The businesses in which the Company is engaged are capital intensive
businesses. Accordingly, the Company's ability to successfully execute its
business strategy and to sustain its operations is dependent, in large part,
on the availability of debt and equity capital. 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 is not successful in
obtaining sufficient capital, the Company's ability to: (i) add new aircraft
engines, aircraft and spare parts packages to its portfolio, (ii) add
inventory to support its spare parts sales, (iii) fund its working capital
needs, (iv) develop the business of PGTC LLC, and (v) finance possible future
acquisitions, would be impaired. The Company's inability to obtain sufficient
capital would have a material adverse effect on the Company's business,
financial condition and/or results of operations.
The Company retains title to the aircraft engines, aircraft and parts
packages that it leases to third parties. Upon termination of a lease, the
Company will seek to re-lease or sell the aircraft equipment or will
dismantle the equipment and will sell the parts. The Company also engages in
the selective purchase and resale of commercial aircraft engines and engine
components. On occasion, the Company purchases engines or components without
having a firm commitment for their sale. Numerous factors, many of which are
beyond the Company's control, may have an impact on the Company's ability to
re-lease or sell aircraft equipment on a timely basis, including the
following: (i) general market conditions, (ii) the condition of the aircraft
equipment upon termination of the lease, (iii) the maintenance services
performed during the lease term and, as applicable, the number of hours
remaining until the next major maintenance is required, (iv) regulatory
changes (particularly those imposing environmental, maintenance and other
requirements on the operation of aircraft engines), (v) changes in the supply
or cost of aircraft engines, and (vi) technological developments. There is no
assurance that the Company will be able to re-lease or sell aircraft
equipment on a timely basis or on favorable terms. The failure to re-lease or
sell aircraft equipment on a timely basis or on favorable terms could have a
material adverse effect on the Company's business, financial condition and/or
results of operations.
The Company experiences fluctuations in its operating results. Such
fluctuations may be due to a number of factors, including: (i) general
economic conditions, (ii) the timing of sales of engines and spare parts,
(iii) financial difficulties experienced by airlines, (iv) interest rates,
(v) fuel costs, (vi) downturns in the air transportation industry, (vii)
increased fare competition, (viii) decreases in growth of air traffic, (ix)
unanticipated early lease termination or a default by a lessee, (x) the
timing of engine acquisitions, (xi) engine marketing activities, (xii)
fluctuations in market prices for the Company's assets. The Company
anticipates that fluctuations from period to period will continue in the
future. As a result, the Company believes that comparisons to results of
operations for preceding periods are not necessarily meaningful and that
results of prior periods should not be relied upon as an indication of future
performance.
A lessee may default in performance of its lease obligations and the
Company may be unable to enforce its remedies under a lease. The Company's
inability to collect receivables due under a lease or to repossess aircraft
equipment in the event of a default by a lessee could have a material adverse
effect on the Company's business, financial condition and/or results of
operations. Various airlines have experienced financial difficulties in the
past, certain airlines have filed for bankruptcy and a number of such
airlines have ceased operations. In most cases where a debtor seeks
protection under Chapter 11 of Title 11 of the United States Code, creditors
are automatically stayed from enforcing their rights. In the case of United
States certified airlines, Section 1110 of the Bankruptcy Code provides
certain relief to lessors of aircraft equipment. The scope of Section 1110
has been the subject of significant litigation and there is no assurance that
the provisions of Section 1110 will protect the Company's investment in an
aircraft, aircraft engines or parts in the event of a lessee's bankruptcy. In
addition, Section 1110 does not apply to lessees located outside of the
United States and applicable foreign laws may not provide comparable
protection. Leases of spare parts may involve additional risks. For example,
it is likely to be more difficult to recover parts in the event of a lessee
default and the residual value of parts may be less ascertainable than an
engine.
The Company's leases are generally structured at fixed rental rates for
specified terms while many of the Company's borrowings are at a floating
rate. Increases in interest rates could narrow or eliminate the spread, or
result in a negative spread, between the rental revenue the Company realizes
under its leases and the interest rate the Company pays under its borrowings,
and have a material adverse effect on the Company's business, financial
condition and/or results of operations.
In 1999, 74% of the Company's lease revenue was generated by leases to
foreign customers. Such international leases may present greater risks to the
Company because certain foreign laws, regulations and judicial procedures may
not be as protective of lessor rights as those which apply in the United
States. The Company is subject to the timing and access to courts and the
remedies local laws impose in order to collect its lease payments and recover
its assets. In addition, political instability abroad and changes in
international policy also present risk of expropriation of the Company's
leased engines. Furthermore, many foreign countries have currency and
exchange laws regulating the international transfer of currencies.
15
The Company has recently experienced significant growth in revenues. The
Company's growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational and financial
resources. There is no assurance that the Company will be able to effectively
manage the expansion of its operations, or that the Company's systems,
procedures or controls will be adequate to support the Company's operations,
in which event the Company's business, financial condition and/or results of
operations could be adversely affected. The Company may also acquire
businesses that would complement or expand the Company's existing businesses.
Any acquisition or expansion made by the Company may result in one or more of
the following events: (i) the incurrence of additional debt, (ii) future
charges to earnings related to the amortization of goodwill and other
intangible assets, (iii) difficulties in the assimilation of operations,
services, products and personnel, (iv) an inability to sustain or improve
historical revenue levels, (v) diversion of management's attention from
ongoing business operations, and (vi) potential loss of key employees. Any of
the foregoing factors could have a material adverse effect on the Company's
business, financial condition and/or results of operations.
The markets for the Company's products and services are extremely
competitive, and the Company faces competition from a number of sources.
These include aircraft and aircraft part manufacturers, aircraft and aircraft
engine lessors, airline and aircraft service companies and aircraft spare
parts redistributors. 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,
equipment manufacturers, aircraft maintenance providers, FAA certified repair
facilities and other aviation aftermarket suppliers may vertically integrate
into the markets that the Company serves, thereby significantly increasing
industry competition. There can be no assurance that competitive pressures
will not materially and adversely affect the Company's business, financial
condition and/or results of operations.
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an
ongoing basis. In addition, the Company's lessees currently enjoy favorable
accounting and tax treatment by entering into operating leases. Any change to
current tax laws or accounting principles that make operating lease financing
less attractive or affect the Company's recognition of revenue or expense
would have a material impact on the Company's business, financial condition
and/or results of operations.
Before parts may be installed in an aircraft, they must meet certain
standards of condition established by the FAA and/or the equivalent
regulatory agencies in other countries. Specific regulations vary from
country to country, although regulatory requirements in other countries are
generally satisfied by compliance with FAA requirements. Parts must also be
traceable to sources deemed acceptable by the FAA or such equivalent
regulatory agencies. Such standards may change in the future, requiring
engine components already contained in the Company's inventory to be scrapped
or modified. In all such cases, to the extent the Company has such engine
components in its inventory, their value may be reduced and the Company's
business, financial condition and/or results of operations could be adversely
affected.
The Company obtains a substantial portion of its inventories of aircraft,
engines and engine parts from airlines, overhaul facilities and other
suppliers. There is no organized market for aircraft, engines and engine
parts, and the Company must rely on field representatives and personnel,
advertisements and its reputation as a buyer of surplus inventory in order to
generate opportunities to purchase such equipment. The market for bulk sales
of surplus aircraft, engines and engine parts is highly competitive, in some
instances involving a bidding process. While the Company has been able to
purchase surplus inventory in this manner successfully in the past, there is
no assurance that surplus aircraft, engines and engine parts of the type
required by the Company's customers will be available on acceptable terms
when needed in the future or that the Company will continue to compete
effectively in the purchase of such surplus equipment.
A change in the market for aircraft and engine parts could result in the
Company's inventory being overvalued and could require the Company to
write-down its inventory valuations in order to bring them into line with the
revised fair market value. Airline manufacturers may also develop new parts
to be used in lieu of parts already contained in the Company's inventory.
There is no assurance that a write-down would not adversely affect the
Company's business, operating results or financial condition.
To date, the Company has not experienced any material Year 2000 issues
with its purchased software. In addition, to date, the Company has not been
impacted by any Year 2000 problems that may have impacted various third
parties that are important to the Company's business, including lessees,
customers, vendors and financial institutions. The amount the Company has
spent related to Year 2000 issues has not been material. The Company
continues to monitor its computer systems for any potential Year 2000 issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate risk.
A change in the U.S. prime interest rate, LIBOR rate, or cost of funds based
on commercial paper market rates, would affect the rate at which the Company
could borrow funds under its various borrowing facilities. Increases in
interest rates to the Company, which may cause the
16
Company to raise the implicit rates charged to its customers, could result in
a reduction in demand for the Company's leases. Certain of the Company's
warehouse credit facilities are variable rate debt. The Company estimates a
one percent increase or decrease in the Company's variable rate debt would
result in an increase or decrease, respectively, in interest expense of $1.1
million per annum. The Company estimates a two percent increase or decrease
in the Company's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $2.1 million per annum. The foregoing
effect of interest rate changes on per annum interest expense is estimated as
constant due to the terms of the Company's variable rate borrowings, which
generally provide for the maintenance of borrowing levels given adequacy of
collateral and compliance with other loan conditions.
The Company hedges a portion of its borrowings, effectively fixing the
rate of these borrowings. The Company is currently required to hedge a
portion of debt of the WLFC Funding Corporation Facility. Such hedging
activities may limit the Company's ability to participate in the benefits of
any decrease in interest rates, but may also protect the Company from
increases in interest rates. A portion of the Company's leases provide that
lease payments be adjusted based on changes in interest rates. Furthermore,
since lease rates tend to vary with interest rate levels, it is likely that
the Company can adjust lease rates for the effect of change in interest rates
at the termination of leases. Other financial assets and liabilities are at
fixed rates.
The Company is also exposed to currency devaluation risk. During 1999,
74% of the Company's total lease revenues came from non-United States
domiciled lessees. All of the leases require payment in United States (U.S.)
currency. If these lessees' currency devalues against the U.S. dollar, the
lessees could potentially encounter difficulty in making the U.S. dollar
denominated lease payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted as a separate section
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The response to this portion of Item 14 is submitted as a separate
section of this report beginning on page 21.
(a) (2) Financial Statement Schedules
Schedule II Valuation Accounts
All other financial statement schedules have been omitted as the
required information is not pertinent to the Registrant or is not
material or because the information required is included in the
financial statements and notes thereto.
(a) (3) and (c): Exhibits: The response to this portion of Item 14 is
submitted as a separate section of this report beginning on page 49.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1 Certificate of Incorporation, filed on March 12, 1998
together with Certificate of Amendment of Certificate of
Incorporation filed on May 6, 1998. Incorporated by reference
to Exhibits 4.01 and 4.02 of the Company's report on Form 8-K
filed on June 23, 1998.
3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the
Company's report on Form 8-K filed on June 23, 1998.
4.1 Specimen of Common Stock Certificate. Incorporated by
reference to Exhibit 4.1 of the Company's report on Form 10-Q
for the quarter ended June 30, 1998.
4.2 Rights Agreement dated September 30, 1999, by and between the
Company and American Stock Transfer Company, as Rights Agent
incorporated by reference to Exhibit 4.1 of the Company's
report on Form 8-K filed on October 4, 1999.
10.1 Form of Indemnification Agreement entered into between the
Company and its directors and officers. Incorporated by
reference to Exhibit 10.3 to Registration Statement No.
333-5126-LA filed on June 21, 1996.
10.2 Employment Agreement between the Company and Edwin Dibble.
Incorporated by reference to Exhibit 10.9 to Registration
Statement No. 333-39865 filed on December 11, 1997.
10.3 Settlement Agreement and General Release of Claims dated
October 29, 1999 between the Company and Edwin F. Dibble.
10.4 Employment Agreement between the Company and Donald Nunemaker
dated July 16, 1997. Incorporated by reference to Exhibit
10.10 to the Company's Report on Form 10-K for the year ended
December 31, 1997.
10.5 Employment Agreement between the Company and James D. McBride
dated September 9, 1997. Incorporated by reference to Exhibit
10.4 to the Company's Report on Form 10-K for the year ended
December 31, 1998.
10.6 Employment Agreement between the Company and David J. Hopkins
dated August 16, 1999.
10.7* Indenture dated as of September 1, 1997, between WLFC Funding
Corporation and The Bank of New York, as Indenture Trustee.
Incorporated by reference to Exhibit 10.16 to the Company's
Report on Form 10-K for the year ended December 31, 1997.
10.8 Note Purchase Agreement (Series 1997-1 Notes) dated February
11, 1999. Incorporated by reference to Exhibit 10.1 of the
Company's report on Form 10-Q for the quarter ended March 31,
1999.
18
10.9* Amended and Restated Series 1997-1 Supplement dated February
11, 1999. Incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended March 31,
1999.
10.10* Administration Agreement dated as of September 1, 1997
between WLFC Funding Corporation, the Company, First Union
Capital Markets Corp. and The Bank of New York. Incorporated
by reference to Exhibit 10.19 to the Company's Report on Form
10-K for the year ended December 31, 1997.
10.11* Aircraft Purchase and Sale Agreement dated as of March 24,
1998 between the Company and United Air Lines, Inc.
Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ended March 31, 1998.
10.12* Amended and Restated Credit Agreement dated September 30,
1998. Incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarter ended September
30, 1998.
10.13 The Company's 1996 Stock Option/Stock Issuance Plan, as
amended and restated as of April 6, 1999.
10.14* Operating Agreement of PGTC LLC dated May 28, 1999 among the
Company, Chromalloy Gas Turbine Corporation and Pacific Gas
Turbine Center, Incorporated. Incorporated by reference to
Exhibit 10.1 to the Company's Report on Form 10-Q for the
quarter ended June 30, 1999.
10.15* Contribution and Assumption Agreement dated May 28, 1999
among Pacific Gas Turbine Center Incorporated, the Company
and Pacific Gas Turbine Center LLC. Incorporated by
reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended June 30, 1999.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company
23.1 Consent and Report on Schedule II of KPMG LLP, Independent
Accountants
27.1 Financial Data Schedule.
* Portions of these exhibits have been omitted pursuant to a request for
confidential treatment and the redacted material has been filed separately
with the Commission.
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the fourth quarter of
1999. This report was filed on October 4, 1999 and reported the fact that the
Company entered into a Rights Agreement with American Stock Transfer and
Trust Company in connection with the adoption by the Company of a Stockholder
Rights Plan. No financial statements were included in the Report on Form 8-K.
19
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 29, 2000
Willis Lease Finance Corporation
By: /S/ CHARLES F. WILLIS, IV
--------------------------------------
Charles F. Willis, IV
Chairman of the Board, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
DATE TITLE SIGNATURE
---- ----- ---------
Date: March 29, 2000 Chief Executive Officer and Director /S/ CHARLES F. WILLIS, IV
(Principal Executive Officer) ---------------------------
Charles F. Willis, IV
Date: March 29, 2000 Chief Financial Officer /S/ JAMES D. McBRIDE
(Principal Financial and ----------------------
Accounting Officer) James D. McBride
Date: March 29, 2000 Director /S/ WILLIAM M. LEROY
----------------------
William M. LeRoy
Date: March 29, 2000 Director /S/ DONALD E. MOFFITT
-----------------------
Donald E. Moffitt
Date: March 29, 2000 Director /S/ ROBERT H. RAU
-------------------
Robert H. Rau
Date: March 29, 2000 Director /S/ WILLARD H. SMITH, JR.
---------------------------
Willard H. Smith, Jr.
20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants Page 22
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998. Page 23
Consolidated Statements of Income for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997. Page 24
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1999, December 31, 1998 and December 31, 1997. Page 25
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997. Page 26
Notes to Consolidated Financial Statements. Page 27
21
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated financial statements of
Willis Lease Finance Corporation and subsidiaries (the "Company") as listed
in the accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We have conducted our audits in accordance with 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 and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
SAN FRANCISCO, CALIFORNIA
FEBRUARY 17, 2000
22
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
1999 1998
------------------ -----------------
ASSETS
Cash and cash equivalents $9,476 $10,305
Restricted cash 15,992 13,738
Equipment held for operating lease, less accumulated depreciation
of $21,592 at December 31, 1999 and $15,455 at December 31, 1998 338,788 274,618
Net investment in direct finance lease 8,666 9,249
Property, equipment and furnishings, less accumulated depreciation
of $674 at December 31, 1999 and $577 at December 31, 1998 933 2,480
Spare parts inventory 22,237 35,858
Operating lease related receivable 3,236 2,492
Trade receivables, net 1,904 5,310
Note receivable 650 -
Investment in unconsolidated affiliates 5,082 -
Other receivables 8 757
Other assets 5,343 5,198
------------------ -----------------
Total assets $412,315 $360,005
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $4,139 $9,620
Salaries and commissions payable 359 977
Deferred income taxes 12,815 11,684
Deferred gain 338 157
Notes payable and accrued interest 291,318 245,581
Capital lease obligation 2,489 2,652
Residual share payable 3,465 2,618
Maintenance reserves 18,555 13,273
Security deposits 5,522 4,561
Unearned lease revenue 3,777 3,040
------------------ -----------------
Total liabilities 342,777 294,163
------------------ -----------------
Shareholders' equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; none
outstanding) - -
Common stock, ($0.01 par value, 20,000,000 shares authorized;
7,397,877 and 7,360,813 shares issued and outstanding
as of December 31, 1999 and December 31, 1998, respectively) 74 74
Paid-in capital in excess of par 42,446 42,033
Retained earnings 27,018 23,735
------------------ -----------------
Total shareholders' equity 69,538 65,842
------------------ -----------------
Total liabilities and shareholders' equity $412,315 $360,005
================== =================
See accompanying notes to the consolidated financial statements
23
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ -------------
REVENUE
Lease revenue $48,167 $33,047 $19,456
Gain on sale of leased equipment 11,371 13,413 4,165
Spare part sales 25,436 24,088 14,110
Sale of equipment acquired for resale 9,775 4,093 12,748
Interest and other income 1,182 1,439 728
------------ ------------ -------------
Total revenue 95,931 76,080 51,207
------------ ------------ -------------
EXPENSES
Interest expense 22,357 15,209 7,797
Depreciation expense 13,639 8,251 4,223
Residual share 847 803 893
Cost of spare part sales 28,317 17,298 9,469
Cost of equipment acquired for resale 8,354 3,574 10,678
General and administrative 17,466 15,184 9,332
------------ ------------ -------------
Total expenses 90,980 60,319 42,392
------------ ------------ -------------
Income from operations 4,951 15,761 8,815
Loss from unconsolidated affiliate (622) - -
------------ ------------ -------------
Income before income taxes and extraordinary item 4,329 15,761 8815
Income taxes (1,046) (6,310) (3,485)
------------ ------------ -------------
Income before extraordinary item 3,283 9,451 5,330
Extraordinary item less applicable income taxes - (200) 2,008
------------ ------------ -------------
Net income $3,283 $9,251 $7,338
============ ============ =============
Basic earnings per common share:
Income before extraordinary item $0.44 $1.30 $0.97
Extraordinary item - (0.03) 0.36
------------ ------------ -------------
Net income $0.44 $1.27 $1.33
============ ============ =============
Diluted earnings per common share:
Income before extraordinary item $0.44 $1.27 $0.94
Extraordinary item - (0.03) 0.35
------------ ------------ -------------
Net income $0.44 $1.24 $1.29
============ ============ =============
Average common shares outstanding 7,382 7,266 5,497
Diluted average common shares outstanding 7,447 7,461 5,673
See accompanying notes to the consolidated financial statements
24
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
Issued and
outstanding Paid-in Total
shares of Common Capital in Retained shareholders'
common stock Stock Excess of par earnings equity
------------ ------ ------------- -------- ------
Balance at December 31, 1996 5,427 $16,056 $ - $7,147 $23,203
Shares issued 26 221 - - 221
Common stock issued and
proceeds from follow-on
offering, net 1,725 23,840 - - 23,840
Net income - - - 7,337 7,337
------------ ------------- ------------- ------------ -------------
Balance at December 31, 1997 7,178 $40,117 $ - $14,484 $54,601
Shares issued 183 587 737 - 1,324
Tax benefit from disqualified
dispositions of qualified shares - - 666 - 666
Conversion to par value stock - (40,630) 40,630 - -
Net income - - - 9,251 9,251
------------ ------------- ------------- ------------ -------------
Balances at December 31, 1998 7,361 $74 $ 42,033 $23,735 $65,842
Shares issued 37 - 339 - 339
Tax benefit from disqualified
dispositions of qualified shares - - 74 - 74
Net income - - - 3,283 3,283
------------ ------------- ------------- ------------ -------------
Balances at December 31, 1999 7,398 $74 $ 42,446 $27,018 $69,538
============ ============= ============= ============ =============
See accompanying notes to the consolidated financial statements
25
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------- ----------------- -----------------
Cash flows from operating activities:
Net income $3,283 $9,251 $7,338
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of equipment held for lease 13,251 7,945 4,098
Depreciation of property, equipment and furnishings 388 306 125
(Loss) gain on sale of property, equipment and furnishings (15) 24 (45)
Gain on sale of leased equipment (11,371) (13,413) (4,165)
Increase in residual share payable 847 526 893
Loss from unconsolidated affiliate 622 - -
Changes in assets and liabilities:
Restricted cash (2,254) (303) (4,861)
Spare parts inventory 13,293 (25,524) (6,276)
Receivables 3,076 (3,206) (2,155)
Other assets (2,455) (986) (1,335)
Accounts payable and accrued expenses (4,729) 5,608 1,257
Salaries and commission payable (518) (93) 531
Deferred income taxes 1,131 3,208 2,526
Deferred gain 181 (26) (26)
Accrued interest 337 704 (248)
Maintenance reserves 5,282 (6,745) 8,337
Security deposits 961 2,125 457
Unearned lease revenue 737 1,733 32
-------------- ----------------- -----------------
Net cash provided by (used in) operating activities 22,047 (18,866) 6,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for operating lease (net
of selling expenses) 52,523 40,486 15,673
Proceeds from sale of property, equipment and furnishings 1 16 81
Purchase of equipment held for operating lease (119,752) (171,101) (68,144)
Deposits made in connection with inventory purchases - (1,923) -
Purchase of property, equipment and furnishings (1,720) (2,285) (242)
Investment in unconsolidated affiliate (87) - -
Principal payments received on direct finance lease 583 573 273
-------------- ----------------- -----------------
Net cash used in investing activities (68,452) (134,234) (52,359)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 118,202 194,703 165,591
Proceeds from issuance of common stock 339 1,990 24,062
Principal payments on notes payable (72,802) (51,260) (137,096)
Principal payments on capital lease obligation (163) (150) (158)
-------------- ----------------- -----------------
Net cash provided by financing activities 45,576 145,283 52,399
(Decrease) increase in cash and cash equivalents (829) (7,817) 6,523
Cash and cash equivalents at beginning of period 10,305 18,122 11,599
-------------- ----------------- -----------------
Cash and cash equivalents at end of period $9,476 $10,305 $18,122
============== ================= =================
Supplemental information:
Net cash paid for: Interest $21,658 $14,505 $7,951
-------------- ----------------- -----------------
Income Taxes $675 $4,839 $197
-------------- ----------------- -----------------
Non-investing activity:
Transfer of assets to unconsolidated affiliate (net) $5,630 - -
-------------- ----------------- -----------------
Non-cash financing activity:
Short term loan related to sale of equipment $650 - -
-------------- ----------------- -----------------
See accompanying notes to the consolidated financial statements
26
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Willis Lease Finance Corporation ("Willis") is a provider of aviation
services whose primary focus has been on providing operating leases of
aftermarket commercial aircraft engines and other aircraft-related equipment
to air carriers, manufacturers and overhaul/repair facilities worldwide.
Willis also engages in the selective purchase and resale of commercial
aircraft engines.
Terandon Leasing Corporation (Terandon), T-2 Inc. (T-2), T-4 Inc. (T-4),
T-5 Inc. (T-5), T-7 Inc. (T-7), T-8 Inc. (T-8), T-10 Inc. (T-10), T-11 Inc.
(T-11), and T-12 Inc. (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 marketing and selling aircraft parts and components. 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. Pacific Gas Turbine Center Incorporated ("PGTC Inc.") was a wholly
owned subsidiary of Willis. PGTC Inc. was formed in 1998 to provide, among
other things, engine disassembly services and was dissolved in May 1999 upon
the Company contributing the operations and assets to a newly formed joint
venture, Pacific Gas Turbine Center, LLC ("PGTC LLC"). WLFC (Ireland) Limited
is a wholly-owned subsidiary of Willis. WLFC (Ireland) Limited was formed in
1998 to facilitate certain of Willis' international leasing activities.
(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,
WLFC-Pooling, PGTC Inc. (five months ended May 1999) and WLFC (Ireland)
Limited (together, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) REVENUE RECOGNITION
Revenue from leasing of aircraft equipment is recognized as operating
lease or finance lease revenue over the terms of the applicable lease
agreements. The Company includes in operating lease revenue non-refundable
maintenance payments received from lessees to the extent that, in the
Company's opinion, it would not be economically advantageous to overhaul the
engine the next time the life-limited parts need to be replaced. In this
circumstance, the engines are normally dismantled and sold as parts.
The Company records an allowance for estimated returns of spare parts
based on recent experie