UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 0-28774
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
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68-0070656 |
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
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2320 Marinship Way, Suite 300, Sausalito, CA |
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94965 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code (415) 331-5281 |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of each exchange on which registered |
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Common Stock |
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Nasdaq |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $20.7 million (based on a closing sale price of $4.63 per share as reported on the NASDAQ National Market).
The number of shares of the registrant’s Common Stock outstanding as of March 4, 2004 was 8,864,535.
The Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders is incorporated by reference into Part III of this 10-K.
WILLIS LEASE FINANCE CORPORATION
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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ITEM 1. BUSINESS
INTRODUCTION
Willis Lease Finance Corporation and its subsidiaries (the “Company”) is a provider of aviation services focusing on leasing commercial aircraft engines and other aircraft-related equipment. The Company provides this service to passenger airlines, air cargo carriers and Maintenance and Repair Organizations (“MROs”). 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, Federal Aviation Administration (“FAA”) directives or manufacturer recommended actions for maintenance, repair and overhaul of engines and parts can give rise to demand for spare engines.
The Company’s core focus is on providing operating leases of commercial aircraft engines and other aircraft-related equipment. As of December 31, 2003, the Company had a total lease portfolio (including net investments in direct finance leases) consisting of 119 engines and related equipment, seven aircraft and four spare parts packages with an aggregate net book value of $505.0 million and 50 lessees in 25 countries. The Company actively manages its portfolio and structures its leases in order to maximize residual values of leased assets. 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 Airbus, Boeing and McDonnell Douglas aircraft.
On November 7, 2000, the Company entered into agreements for a series of strategic transactions, each of which closed on November 30, 2000, with Flightlease AG, a corporation organized under the laws of Switzerland (“Flightlease”), SR Technics Group, a corporation organized under the laws of Switzerland (“SRT”), FlightTechnics, LLC, a Delaware limited liability company (“FlightTechnics”) and SR Technics Group America, Inc., a Delaware corporation (“SRT Group America”), each of which are affiliated companies. The Company sold its engine parts business (Willis Aeronautical Services, Inc., “WASI”) and its membership interest in its engine repair joint venture (Pacific Gas Turbine Center, LLC, “PGTC”) with Chromalloy Gas Turbine Corporation, to SRT Group America for $37.6 million (as adjusted). The Company acquired five aircraft engines from SR Technics Switzerland, a subsidiary of SRT, for $43.0 million and subsequently leased them back to SR Technics Switzerland for periods of four and ten years.
The Company entered into a business cooperation period with Flightlease AG and SRT with an original termination date of November 30, 2003, however Flightlease is in liquidation, and the agreement was terminated January 20, 2003. The Company had also entered into put option arrangements regarding certain engines to sell them at the Company’s discretion, to SRT Group America (which includes avioserv, the successor to WASI) at pre-determined prices. At December 31, 2003 all put options have been exercised and the transactions completed.
In connection with the strategic transactions, the Company sold 1,300,000 newly issued shares of its common stock to FlightTechnics and granted an option to purchase additional shares. No shares were issued pursuant to the option which expired in 2002. FlightTechnics has two demand registration rights which are exercisable beginning November 30, 2003. The Company amended its Rights Agreement dated September 24, 1999 between the Company and American Stock Transfer & Trust Company to include FlightTechnics and its affiliates under the definition of an “Exempt Person”, subject to FlightTechnics and its affiliates owning a certain percentage of the Company’s common stock.
FlightTechnics also may purchase more shares of the Company’s common stock in the open market or from existing stockholders upon the occurrence of certain conditions, but in no event may FlightTechnics and its affiliates collectively own more than 49.9% of the Company’s issued and outstanding common stock before November 30, 2005. Certain stockholders, including Charles F. Willis IV, and FlightTechnics have also agreed to certain voting provisions and to certain restrictions on their abilities to sell their shares of the Company’s common stock.
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.
The Company maintains a website at www.wlfc.com where our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with or furnished to the Securities and Exchange Commission.
Management considers the continuing operations of the Company to operate in one reportable segment.
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AIRCRAFT EQUIPMENT LEASING
The vast majority of the Company’s leases to air carriers, manufacturers and MROs 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 the relatively small initial capital outlay necessary to obtain use of the aircraft equipment. Operating lease rates are generally 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.”
All of the Company’s lease transactions are “triple-net leases”. A triple-net lease requires the lessee to make the full lease payment and pay any other expenses associated with the use of the equipment, such as maintenance, casualty and liability insurance, sales or use taxes and personal property taxes. The leases contain detailed provisions specifying maintenance standards and the required condition of the aircraft equipment upon return at the end of the lease. During the term of the lease, the Company generally requires the lessee to maintain the aircraft engine in accordance with an approved maintenance program designed to ensure that the aircraft engine meets applicable regulatory requirements in the jurisdictions in which the lessee operates. Under short-term leases and certain medium-term leases, the Company may undertake a portion of the maintenance and regulatory compliance risk.
The Company attempts to mitigate risk where possible. For example, the Company may make an independent analysis of the credit risk associated with the 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 believes necessary, the Company may require its lessees to provide additional credit support such as a letter of credit or a guarantee from a bank or a third party or a security deposit. 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.
At the commencement of a lease, the Company often collects, in advance, a security deposit (normally equal to at least one month’s lease payment), and, both at lease commencement and on an ongoing basis, maintenance reserves from the lessee based on the lessees’ creditworthiness. The security deposit is returned to the lessee after all return conditions have been met. Maintenance reserves are collected 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. Recovery is therefore dependent upon the financial condition of the lessee. 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 maintenance and inspection of the leased equipment be performed 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.
Despite these guidelines, the Company cannot assure that it will not experience collection problems or significant losses in the future. In addition, while the Company cannot assure that its maintenance and inspection requirements will result in a realized return upon termination of a lease, the Company believes that its attention to its lessees and its emphasis on maintenance and inspection contributes to residual values and generally helps the Company to recover its investment in its leased equipment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results.”
Upon termination of a lease, the Company will re-lease or sell the aircraft equipment. The demand for aftermarket aircraft equipment for either sale or re-lease may be affected by a number of variables including general market conditions, regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft engines), changes in demand for air travel, 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 financial results and 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.”
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The Company’s management frequently reviews opportunities to acquire suitable aircraft equipment based on market demand, customer 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.
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, 2003, all but 2 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 and Boeing 727 (Super 27) aircraft which are Stage III compliant. The Company may make further investments in aircraft for lease in the future.
As of December 31, 2003, the Company had a total portfolio of 119 aircraft engines and related equipment, four spare parts packages and seven aircraft with an aggregate original cost of $577.4 million in its lease portfolio. As of December 31, 2002, the Company had a total portfolio of 120 aircraft engines and related equipment, four spare parts packages and six aircraft with an aggregate original cost of $560.1 million in its lease portfolio.
As of December 31, 2003, minimum future rentals for continuing operations under the noncancelable leases (both operating and direct finance leases) of these engines, parts and aircraft assets were as follows:
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Year |
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(in thousands) |
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2004 |
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$ |
41,815 |
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2005 |
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26,207 |
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2006 |
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16,104 |
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2007 |
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11,745 |
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2008 |
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8,474 |
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Thereafter |
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10,659 |
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$ |
115,004 |
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As of December 31, 2003, the Company had 50 lessees of commercial aircraft engines, aircraft, and other aircraft-related equipment in 25 countries.
The following table displays the regional profile of the Company’s lease customer base for the years ended December 31, 2003, 2002 and 2001. No single country other than the United States accounted for more than 10% of the Company’s lease revenue for any of the years ended December 31, 2003, 2002 and 2001.
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Year Ended December 31, 2003 |
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Year Ended December 31, 2002 |
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Year Ended December 31, 2001 |
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Lease |
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Percentage |
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Lease |
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Percentage |
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Lease |
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Percentage |
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(dollars in thousands) |
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United States |
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$ |
6,373 |
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11 |
% |
$ |
9,067 |
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16 |
% |
$ |
12,669 |
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21 |
% |
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Canada |
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1,042 |
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2 |
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1,041 |
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2 |
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3,409 |
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6 |
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Mexico |
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4,349 |
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8 |
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2,717 |
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5 |
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2,004 |
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3 |
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Australia/New Zealand |
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853 |
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1 |
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305 |
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1 |
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— |
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— |
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Europe |
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25,310 |
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45 |
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24,906 |
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45 |
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27,919 |
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46 |
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South America |
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7,576 |
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13 |
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6,322 |
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11 |
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5,787 |
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10 |
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Asia |
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5,540 |
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10 |
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6,312 |
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11 |
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5,446 |
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9 |
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Africa |
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1,373 |
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2 |
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418 |
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1 |
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— |
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— |
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Middle East |
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4,561 |
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8 |
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4,309 |
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8 |
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3,281 |
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5 |
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Total |
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$ |
56,977 |
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100 |
% |
$ |
55,397 |
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100 |
% |
$ |
60,515 |
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100 |
% |
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors that May Affect Future Results.”
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 85% 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 two of the Company’s credit facilities,
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the lender is entitled to receive a portion of the lease payments associated with the financed equipment to apply to debt service. Generally, lenders take a security interest in the equipment. The Company retains ownership of the equipment, subject to such security interest. Loan interest rates often reflect the terms of the leases, the 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 and private placements. 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 distributors. Certain of the Company’s competitors have substantially greater resources than the Company, including greater name recognition, larger and more diverse product lines, 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
In addition to requiring full indemnification under the terms of its leases, 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. The Company requires that it be named as an additional insured on liability insurance with the Company or its lenders normally identified as the payee for loss and damage to the equipment on policies carried by lessees. 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, such as the Joint Aviation Authority (“JAA”) in Europe, 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 JAA certified repair stations to repair and certify engines and components to ensure marketability.
Effective January 1, 2000, federal regulations stipulate that all aircraft engines hold, or be capable of holding, a noise certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention, or have been shown to comply with Stage III noise levels set out in Section 36.5 of Appendix C of Part 36 of the FAA Regulations of the United States if the engines are to be used in the continental United States. Additionally, much of Europe has adopted similar regulations. As of December 31, 2003, all but 2 of the engines in the Company’s lease portfolio are Stage III engines or Stage II engines that have been fitted with “hush-kits” and are generally suitable for use on one or more commonly used aircraft. The 2 engines that do not meet Stage III noise level requirements and are not “hush-kitted” 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.
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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, 2003, the Company had 46 full-time employees (excluding consultants), in sales and marketing, technical service and administration. None of the Company’s employees is covered by a collective bargaining agreement and the Company believes its employee relations are satisfactory.
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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 9,900 square feet of office space and expires December 31, 2005. The annual lease rental commitments are approximately $328,000 and $349,000 for 2004 and 2005, respectively. Aircraft asset leasing, financing, sales and general administrative activities are conducted from the Sausalito location. The Company also sub-leases from its former parts subsidiary, WASI, now called avioserv, approximately 3,100 square feet of office and warehouse space for the Company’s operations at San Diego, California. This lease expires November 30, 2004, and the remaining lease commitment is approximately $78,000. The Company also leases office space in Beijing, China. As of December 31, 2003, there was one month remaining on the lease, however the lease has been extended by another month.
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 stockholders during the fourth quarter of the fiscal year 2003.
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