-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BlGEHj/iTuyp/0ThhdO8/c/nFCXsTWKdVrNHI8snooUmFjzCg9AmOZc8lh/U1jUm W8NJs+McFFXkyle/uaF6TQ== 0000912057-99-006118.txt : 19991117 0000912057-99-006118.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIS LEASE FINANCE CORP CENTRAL INDEX KEY: 0001018164 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 680070656 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15369 FILM NUMBER: 99755502 BUSINESS ADDRESS: STREET 1: 2320 MARINSHIP WAY STREET 2: STE 300 CITY: SAUSALITO STATE: CA ZIP: 94965 BUSINESS PHONE: 4153315281 MAIL ADDRESS: STREET 1: 2320 MARINSHIP WAY STREET 2: SUITE 300 CITY: SAUSALITO STATE: CA ZIP: 94965 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1999 OR [ ] 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) Delaware 68-0070656 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2320 Marinship Way, Suite 300, Sausalito, CA 94965 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 331-5281 ----------------- 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING AT OCTOBER 31, 1999 ------------------- ------------------------------- Common Stock, $0.01 Par Value 7,397,877 1 WILLIS LEASE FINANCE CORPORATION INDEX
PART I FINANCIAL INFORMATION PAGE NO. -------- Item 1. Consolidated Financial Statements Consolidated Balance Sheets As of September 30, 1999 and December 31, 1998 3 Consolidated Statements of Income 4 Three and nine months ended September 30, 1999 and 1998 Consolidated Statements of Shareholders' Equity 5 Year ended December 31, 1998 and nine months ended September 30, 1999 Consolidated Statements of Cash Flows 6 Nine months ended September 30, 1999 and 1998 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition 11 and Results of Operations Item 2A. Quantitative and Qualitative Disclosures About Market Risk 19 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 20
2 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (AUDITED) SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ ASSETS Cash and cash equivalents $14,692 $10,305 Restricted cash 15,420 13,738 Equipment held for operating lease, less accumulated depreciation of $18,603 at September 30, 1999 and $15,455 at December 31, 1998 336,279 274,618 Net investment in direct finance lease 8,946 9,249 Property, equipment and furnishings, less accumulated depreciation of $606 at September 30, 1999 and $509 at December 31, 1998 797 2,480 Spare parts inventory 23,247 35,858 Operating lease related receivables 3,304 2,492 Trade receivables, net 2,155 5,310 Note receivable 852 - Investment in unconsolidated affiliate 5,265 - Other receivables 209 757 Other assets 5,126 5,198 ------------- ------------ Total assets $416,292 $360,005 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $3,468 $9,620 Salaries and commissions payable 571 977 Deferred income taxes 11,986 11,684 Deferred gain 137 157 Notes payable and accrued interest 300,513 245,581 Capital lease obligation 2,531 2,652 Residual share payable 3,253 2,618 Maintenance reserves 17,616 13,273 Security deposits 5,435 4,561 Unearned lease revenue 3,303 3,040 ------------- ------------ Total liabilities 348,813 294,163 ============= ============ 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 September 30, 1999 and December 31,1998, respectively) 74 74 Paid-in capital in excess of par 42,480 42,033 Retained earnings 24,925 23,735 ------------- ------------ Total shareholders' equity 67,479 65,842 ------------- ------------ Total liabilities and shareholders' equity $416,292 $360,005 ============= ============
See accompanying notes to the consolidated financial statements 3 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ REVENUE Lease revenue $12,779 $9,078 $34,426 $22,643 Gain on sale of leased equipment 2,202 3,640 9,462 9,179 Spare part sales 6,065 7,230 21,254 16,829 Sale of equipment acquired for resale - - 9,775 4,093 Interest and other income 334 133 911 753 ------------ ------------ ------------ ------------ Total revenue $21,380 $20,081 $75,828 $53,497 ------------ ------------ ------------ ------------ EXPENSES Interest expense 6,048 4,215 16,054 10,417 Depreciation expense 3,501 2,180 9,485 5,325 Residual share 212 187 635 587 Cost of spare part sales 13,989 5,037 25,248 11,923 Cost of equipment acquired for resale - - 8,354 3,574 General and administrative 4,545 4,326 13,633 10,694 ------------ ------------ ------------ ------------ Total expenses 28,295 15,945 73,409 42,520 ------------ ------------ ------------ ------------ Income/(loss) from operations ($6,915) $4,136 $2,419 $10,977 Income/(loss) from unconsolidated affiliate (395) - (435) - ------------ ------------ ------------- ------------- Income/(loss) before income taxes and extraordinary item (7,310) 4,136 1,984 10,977 Income taxes 2,926 (1,652) (794) (4,394) ------------ ------------ ------------- ------------- Income/(loss) before extraordinary item (4,384) 2,484 1,190 6,583 Extraordinary item less applicable income taxes - - - (200) ------------ ------------ ------------- ------------- Net income/(loss) ($4,384) $2,484 $1,190 $6,383 ============ ============ ============= ============= Basic earnings per common share: Income/(loss) before extraordinary item ($0.59) $0.34 $0.16 $0.91 Extraordinary item - - - (0.03) ------------ ------------ ------------ ------------ Net income/(loss) ($0.59) $0.34 $0.16 $0.88 ============ ============ ============ ============ Diluted earnings per common share: Income/(loss) before extraordinary item ($0.59) $0.33 $0.16 $0.88 Extraordinary item - - - ($0.03) ------------ ------------ ------------ ------------ Net income/(loss) ($0.59) $0.33 $0.16 $0.85 ============ ============ ============ ============ Average common shares outstanding 7,394 7,280 7,377 7,245 Diluted average common shares outstanding 7,448 7,495 7,447 7,466
See accompanying notes to the consolidated financial statements 4 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
ISSUED AND OUTSTANDING PAID-IN TOTAL SHARES OF COMMON CAPITAL IN RETAINED SHAREHOLDERS' COMMON STOCK STOCK EXCESS OF PAR EARNINGS EQUITY ------------ ----- ------------- -------- ------ Balance at December 31, 1997 7,178 $40,117 $ - $14,484 $54,601 Shares issued 183 587 737 - 1,324 Tax benefit from disqualified dispositions of qualified shares - - 666 - 666 Conversion to par value stock - (40,630) 40,630 - - Net income - - - 9,251 9,251 ---------- ---------- ---------- ---------- ---------- Balances at December 31, 1998 (audited) 7,361 74 42,033 23,735 65,842 Shares issued 37 - 339 - 339 Tax benefit from disqualified dispositions of qualified shares - - 108 - 108 Net income - - - 1,190 1,190 ---------- ---------- ---------- ---------- ---------- Balances at September 30, 1999 (unaudited) 7,398 $74 $42,480 $24,925 $67,479 ========== ========== ========== ========== ==========
See accompanying notes to the consolidated financial statements 5 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 1999 1998 ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,190 $6,383 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of equipment held for lease 9,165 5,155 Depreciation of property, equipment and furnishings 320 170 (Loss)/gain on sale of property, equipment and furnishings (15) 16 Gain on sale of leased equipment (9,462) (9,179) Increase in residual share payable 635 310 Loss from unconsolidated affiliate 435 - Changes in assets and liabilities: Restricted cash (1,682) 1,760 Spare parts inventory 11,758 (18,817) Receivables 2,557 (1,377) Other assets (2,313) (2,300) Accounts payable and accrued expenses (5,400) 2,259 Salaries and commission payable (306) (609) Deferred income taxes 410 3,050 Deferred gain (20) (20) Accrued interest 621 (173) Maintenance reserves 4,343 (5,658) Security deposits 874 1,740 Unearned lease revenue 263 1,191 ---------------- ----------------- Net cash provided by (used in) operating activities 13,373 (16,099) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment held for operating lease (net of selling expenses) 45,730 28,676 Proceeds from sale of property, equipment and furnishings 1 16 Purchase of equipment held for operating lease (107,946) (132,430) Deposits made in connection with inventory purchases - (3,375) Purchase of property, equipment and furnishings (1,516) (1,935) Investment in unconsolidated affiliate (87) - Principal payments received on direct finance lease 303 431 ---------------- ----------------- Net cash used in investing activities (63,515) (108,617) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable 113,781 157,685 Proceeds from issuance of common stock 339 1,057 Principal payments on notes payable (59,470) (44,084) Principal payments on capital lease obligation (121) (111) ---------------- ----------------- Net cash provided by financing activities 54,529 114,547 Increase/(decrease) in cash and cash equivalents 4,387 (10,169) Cash and cash equivalents at beginning of period 10,305 13,095 ---------------- ----------------- Cash and cash equivalents at end of period $14,692 $2,926 ================ ================= Supplemental information: Net cash paid for: Interest $15,251 $10,590 ---------------- ----------------- Income Taxes $674 $3,013 ---------------- ----------------- Non-cash investing activity: Transfer of assets to unconsolidated affiliate (net) $5,630 $ - ---------------- ----------------- Non-cash financing activity: Installment loan related to sale of equipment held for operating lease $852 $ - ---------------- -----------------
See accompanying notes to the consolidated financial statements 6 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements of Willis Lease Finance Corporation and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 1999 (unaudited), and December 31, 1998 (audited), and the unaudited results of its operations for the three and nine month periods ended September 30, 1999 and 1998 and its cash flows for the nine month periods ended September 30, 1999 and 1998. The results of operations and cash flows for the periods ended September 30, 1999 are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 1999. 2. MANAGEMENT ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3. SHAREHOLDERS' EQUITY Authorized capital shares of the Company include 5,000,000 shares of preferred stock and 20,000,000 shares of common stock with a par value of $0.01 per share. As of September 30, 1999 and December 31, 1998, 7,397,877 and 7,360,813 shares, respectively, of common stock were issued and outstanding. The rights and preferences of any preferred stock will be established by the Company's Board of Directors upon issuance. On September 14, 1999, the Company's Board of Directors declared a dividend of one preferred stock purchase right (a "Right") for each outstanding share of Common Stock. Each right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock ("Series A Preferred Stock") at an exercise price of $70. The Rights are not exercisable, or transferable apart from the Common Stock, until the earlier to occur of (i) ten business days following a public announcement that any person has become the beneficial owners of more than 15% of the outstanding Common Stock of the Company (such person being referred to as an "Acquiring Person" and such date being referred to as the "15% Ownership Date"), (ii) ten business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person of 15% or more of the outstanding Common Stock of the Company, or (iii) the first date, on or after the 15% Ownership Date, upon which the Company is acquired in a merger or other business combination in which the Company is not the surviving corporation or in which the outstanding Common Stock is changed into or exchanged 7 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) for stock or assets of another person, or upon which 50% or more of the Company's consolidated assets or earning power are sold. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive, upon exercise, Common Stock with a market value equal to two times the exercise price (initially $70.00). Furthermore, if the Company enters into a consolidation, merger, or other business combination, as defined, each Right would entitle the holder, upon exercise, to receive shares of common stock of the acquiring company having a market value of two times the exercise price (initially $70.00). The Rights contain antidilutive provisions, are redeemable at the Company's option, subject to certain restrictions, for $.001 per Right, and expire on October 12, 2009. As a result of the Rights dividend, the Board designated 200,000 shares of preferred stock as Series A Preferred Stock. Series A Preferred Stockholders will be entitled to a preferential cumulative quarterly dividend of the greater of $0.25 per share or 100 times the per share dividend declared on the Company's Common Stock. The Series A Preferred Stock has a liquidation preference, as defined. In addition, each share will have 100 votes and will vote together with the shares of Common Stock of the Company. The Company has a 1996 Employee Stock Purchase Plan (the "Purchase Plan") under which 75,000 shares of common stock have been reserved for issuance. This plan became effective in September 1996. Eligible employees may designate not more than 10% of their base salary to be deducted each pay period for the purchase of common stock under the Purchase Plan, and participants may purchase not more than 500 shares of common stock on any one purchase date, subject to additional Internal Revenue Code limitations. Each January 31 and July 31, shares of common stock are purchased with the employees' payroll deductions over the immediately preceding six months at a price per share of 85% of the lesser of the market price of the common stock on the purchase date or the market price on the date of entry into an offering period. During the nine month period ended September 30, 1999, the Company issued 6,864 shares of Common Stock as a result of employee stock purchases under the Purchase Plan. Under the 1996 Stock Option/Stock Issuance Plan, as amended and restated April 6, 1999, 1,025,000 shares of the Company's shares have been set aside to provide eligible persons with the opportunity to acquire a proprietary interest in the Company. The plan includes a Discretionary Option Grant Program, a Stock Issuance Program, a Salary Investment Option Grant Program for certain officers and employees, a Director Fee Option Grant Program and an Automatic Option Grant Program for eligible nonemployee Board Members. During the nine month period ended September 30, 1999, 30,000 options were exercised. In connection with the exercise of a portion of these options, the Company recognized a tax benefit of approximately $108,000. In conjunction with its initial public offering, the Company sold five-year purchase warrants for $0.01 per warrant covering an aggregate of 100,000 shares of common stock exercisable at a price equal to 130% of the initial public offering price. The warrants became exercisable in December 1997. The warrants' exercise price and the number of shares of Common Stock are subject to adjustment to protect the warrant holders against dilution in certain events. In February 1998, a holder of 50,000 of the warrants exercised the warrants under the net issuance rights of the warrants. Based on the closing price on such date, the exercise resulted in the issuance of 25,238 shares to the holder of the warrants. 4. FINANCING 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 has an eight-year initial term with a revolving period to February 2000 followed by a seven-year amortization period. At September 30, 1999, the interest rate was a commercial paper based rate plus 1.6%. The facility is renewable annually. 9 In March 1998, the Company repaid a loan that had residual sharing provisions. The repayment resulted in an extraordinary expense of $0.2 million, net of tax. 5. COMMITMENTS The Company has three leases for its office and warehouse space. The annual or remaining lease rental commitments, as applicable, are $309,481, $21,000, and $67,990 and the leases expire on May 31, 2003, December 31, 1999 and July 31, 2000, respectively. The Company has committed to purchase during 1999, additional used aircraft and new and used engines for its operations. Certain deposits were made in connection with these commitments. The Company's current, remaining commitment to such purchases is not more than $7.3 million. In July 1999, the Company entered into an agreement to participate in a joint venture - Sichuan Snecma Aero-engine Maintenance Co. Ltd. Sichuan Snecma will focus on providing maintenance services for CFM56 series engines. Other participants in the joint venture are China Southwest Airlines, Snecma Services and Beijing Kailan Aviation Technology Development and Services Corporation. Under the terms of the agreement, the Company expects to contribute $0.8 million during 1999 and not more than $3 million to the joint venture over the next three years. As of the quarter ended September 30, 1999, less than $20,000 has been contributed. 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE On May 28, 1999, the Company entered into an agreement with Chromalloy Gas Turbine Corporation, a subsidiary of Sequa Corporation, to operate a joint venture to perform maintenance, repair and overhaul of commercial jet engines. Under the terms of the joint venture agreement, the Company and Chromalloy formed a new company, Pacific Gas Turbine Center, LLC ("PGTC LLC"). The Company contributed the operations and assets of its wholly owned subsidiary Pacific Gas Turbine Center, Incorporated ("PGTC Inc.") (with a book value of $5.7 million) and Chromalloy contributed working capital to the joint venture. Both the Company and Chromalloy have a 50% interest in the joint venture. The equity method of accounting is used for the Company's 50% ownership in PGTC LLC. Under the equity method, the original contribution was recorded at cost and is adjusted periodically to recognize the Company's share of the earnings or losses of PGTC LLC after the date of formation. The contribution is shown in the Company's Consolidated Balance Sheet as a single amount and earnings or losses are shown in the Consolidated Statement of Income as a single amount. All intercompany profits or losses are eliminated. 7. OPERATING SEGMENTS The Company operates in two business segments: (i) Leasing and Related Operations which involves acquiring and leasing, primarily pursuant to operating leases, commercial aircraft, aircraft spare engines and other aircraft equipment and the selective purchase and resale of commercial aircraft engines and other aircraft equipment and (ii) Spare Parts Sales which involves the purchase and resale of after-market engine and airframe parts, whole engines, engine modules and rotable aircraft components and leasing of engines destined for disassembly and sale of parts. In July 1998, the Company formed PGTC Inc. to engage in engine disassembly and maintenance, repair and overhaul services. At the end of May 1999, the Company's investment in and the operations of PGTC Inc. were contributed to a joint venture, PGTC LLC (see note 6 above). During the five months ended May 31, 1999, while PGTC Inc. was a wholly-owned subsidiary of the Company, the majority of PGTC Inc.'s revenue was derived from services provided to WASI. Revenue from third parties during this period was not material. Accordingly, for the five months ended May 31, 1999 and for the 1998 periods, the operations of PGTC Inc. are included in the Spare Parts Sales segment. Subsequent to the formation of PGTC LLC, because PGTC LLC is an unconsolidated affiliate accounted for using the equity method of accounting, PGTC LLC is not included in the operating segment analysis for the three and nine months ended September 30, 1999. 9 The Company evaluates the performance of each of the segments based on profit or loss after general and administrative expenses and inter-company allocation of interest expense. While the Company believes there are synergies between the two business segments, the segments are managed separately because each requires different business strategies. The following tables present a summary of the operating segments (in thousands):
For the three months ended For the three months ended September 30, 1999 September 30, 1998 ---------------------------------------- ---------------------------------------- Leasing and Spare Leasing and Spare Related Parts Related Parts Operations Sales Total Operations Sales Total ---------------------------------------- ---------------------------------------- Revenue Lease revenue $11,229 $1,550 $12,779 $8,581 $497 $9,078 Gain on sale of leased equipment 2,202 - 2,202 3,640 - 3,640 Spare parts sales - 6,065 6,065 - 7,230 7,230 Sale of equipment acquired for resale - - - - - - - -Interest and other income 252 82 334 125 8 133 ---------------------------------------- ---------------------------------------- Total revenue 13,683 7,697 21,380 12,346 7,735 20,081 ---------------------------------------- ---------------------------------------- Expenses Interest expense 5,031 836 5,867 3,669 546 4,215 Depreciation expense 2,696 986 3,682 1,992 188 2,180 Residual share 212 - 212 187 - 187 Cost of spare parts - 13,989 13,989 - 5,037 5,037 Cost of equipment acquired for resale - - - - - - General and administrative 3,499 1,046 4,545 2,781 1,545 4,326 ---------------------------------------- ---------------------------------------- Total expenses 11,438 16,857 28,295 8,629 7,316 15,945 Income/(loss) from operations $2,245 ($9,160) ($6,915) $3,717 $419 $4,136 ======================================== ======================================== Total assets as of September 30, 1999 and 1998* $367,671 $43,356 $411,027 $280,528 $40,921 $321,449 ======================================== ========================================
- ------------------------------------------------------------------------------- *Total assets as of September 30, 1999 does not include investment in unconsolidated affiliate.
For the nine months ended For the nine months ended September 30, 1999 September 30, 1998 ---------------------------------------- ---------------------------------------- Leasing Spare Leasing Spare and Related Parts and Related Parts Operations Sales Total Operations Sales Total ---------------------------------------- ---------------------------------------- Revenue Lease revenue $31,854 $2,572 $34,426 $22,146 $497 $22,643 Gain on sale of leased equipment 9,462 - 9,462 9,179 - 9,179 Spare parts sales - 21,254 21,254 - 16,829 16,829 Sale of equipment acquired for resale 9,775 - 9,775 4,093 - 4,093 Interest and other income 714 197 911 712 41 753 ---------------------------------------- ----------------------------------------- Total revenue 51,805 24,023 75,828 36,130 17,367 53,497 ---------------------------------------- ----------------------------------------- Expenses Interest expense 13,588 2,285 15,873 9,380 1,037 10,417 Depreciation expense 8,118 1,548 9,666 5,105 220 5,325 Residual share 635 - 635 587 - 587 Cost of spare parts - 25,248 25,248 - 11,923 11,923 Cost of equipment acquired for resale 8,354 - 8,354 3,574 - 3,574 General and administrative 8,935 4,698 13,633 7,346 3,348 10,694 ---------------------------------------- ---------------------------------------- Total expenses 39,630 33,779 73,409 25,992 16,528 42,520 Income/(loss) from operations $12,175 ($9,756) $2,419 $10,138 $839 $10,977 ======================================== ======================================== Total assets as of September 30, 1999 and 1998* $367,671 $43,356 $411,027 $280,528 $40,921 $321,449 ======================================== ========================================
- ------------------------------------------------------------------------------- *Total assets as of September 30, 1999 does not include investment in unconsolidated affiliate. 8. INVENTORY WRITE DOWN In September 1999, the Company recognized an inventory write down due to a revaluation of inventory at Willis Aeronautical Services, Inc. (WASI), the Company's spare parts subsidiary. The write down, which totaled $7.4 million, was taken as an expense for the quarter ended September 30, 1999. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's core business is acquiring and leasing, primarily pursuant to operating leases, commercial aircraft spare engines, aircraft and other aircraft equipment. The Company, through WASI, also specializes in the purchase and resale of aftermarket airframe and engine parts, engines, modules and rotable components. In addition, the Company engages in the selective purchase and resale of commercial aircraft engines. In July 1998, the Company formed PGTC Inc. In May 1999, the Company contributed the operations and assets of PGTC Inc. to a newly formed joint venture, PGTC LLC. PGTC Inc. and its successor, PGTC LLC provide engine disassembly and maintenance, repair and overhaul services to the Company and third parties from the its San Diego location. Revenue consists primarily of lease revenue, income from the sale of spare parts and components and income from the sale of engines and equipment. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998: Revenue is summarized as follows:
Three Months Ended September 30, ---------------------------------------------------- 1999 1998 ---- ---- Amount % Amount % ---------------------------------------------------- (dollars in thousands) Lease revenue............................... $12,779 60% $9,078 45% Gain on sale of leased equipment............ 2,202 10 3,640 18 Spare parts sales........................... 6,065 28 7,230 36 Sale of equipment acquired for resale....... - - - - Interest and other income................... 334 2 133 1 ---------------------------------------------------- Total....................................... $21,380 100% $20,081 100% ----------------------------------------------------
LEASING RELATED ACTIVITIES. Lease related revenue for the quarter ended September 30, 1999, increased 41% to $12.8 million from $9.1 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 September 30, 1999 and 1998 was $345.2 million and $255.7 million, respectively, an increase of 35%. During the quarter ended September 30, 1999, 12 engines and one aircraft were added to the Company's lease portfolio at a total cost of $27.6 million. Five engines from the lease portfolio were sold or transferred to inventory for sale. The engines sold from the lease portfolio had a total net book value of $7.1 million and were sold for a gain of $2.2 million. During the quarter ended September 30, 1998, the Company sold four engines from the lease portfolio. The engines had a net book value of $8.2 million and were sold for a gain of $3.6 million. SPARE PARTS SALES. During the quarter ended September 30, 1999, revenue from spare parts sales totaled $6.1 million of which $3.0 million was associated with the sale of whole engines. The level of revenue during the third quarter was 16% lower than the $7.2 million in the comparable period in 1998. Gross margin for the quarter were negative compared to positive 30% for the corresponding period in 1998. The decrease in gross margin was due to an inventory write down 11 of $7.4 million, lower parts sales margins, scrappage of parts and other inventory write downs in the normal course of business. Of the $7.4 million write down, $6.1 million was related to 747-100 engine and airframe parts. INTEREST AND OTHER INCOME. Interest and other income for each of the quarters ended September 30, 1999 and 1998, were $0.3 million and $0.1 million, respectively. Interest is earned on cash, deposits held and notes receivable. INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all activities increased 39% to $5.9 million for the quarter ended September 30, 1999, from the comparable period in 1998, due to an increase in average debt outstanding. 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. Residual sharing expense related to debt increased 13% to $212,000 for the quarter ended September 30, 1999 from $187,000 for the comparable period in 1998. Residual sharing arrangements apply to three of the Company's engines as of September 30, 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 69% to $3.7 million for the quarter ended September 30, 1999, from the comparable period in 1998, due primarily to the increase in lease portfolio assets. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 5% to $4.5 million for the quarter ended September 30, 1999, from the comparable period in 1998. This change reflects increased non-capitalizable engine related expenses as well as an increase in professional fees. INCOME TAXES. Income tax benefit for the quarter ended September 30, 1999, was $2.9 million compared to income tax expense of $1.7 million for the comparable period in 1998. This decrease reflects a decrease in the Company's pre-tax earnings. The effective tax rate for the quarters ended September 30, 1999 and 1998 were 40%. INCOME/(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. During the three months ended September 30, 1999, the Company's share of net losses from the joint venture, after inter-company eliminations, were $395,000. The Company had no such activity during the comparable 1998 period. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998: Revenue is summarized as follows:
Nine Months Ended September 30, ---------------------------------------------------- 1999 1998 ---- ---- Amount % Amount % ---------------------------------------------------- (dollars in thousands) Lease revenue............................... $34,426 45% $22,643 42% Gain on sale of leased equipment............ 9,462 12 9,179 17 Spare parts sales........................... 21,254 28 16,829 32 Sale of equipment acquired for resale....... 9,775 13 4,093 8 Interest and other income................... 911 2 753 1 ---------------------------------------------------- Total....................................... $75,828 100% $53,497 100% ----------------------------------------------------
LEASING RELATED ACTIVITIES. Lease related revenue for the nine months ended September 30, 1999, increased 52% to $34.4 million from $22.6 million for the comparable period in 1998. This increase reflects lease related revenues from additional engines and aircraft. The aggregate of net book value of leased equipment and net investment in direct finance lease at September 30, 1999 and 1998 was $345.2 million and $255.7 million, respectively, an increase of 35%. 12 During the nine months ended September 30, 1999, 42 engines and one aircraft were added to the Company's lease portfolio at a total cost of $104.7 million. Nineteen engines and three spare parts packages from the lease portfolio were sold or transferred to inventory for sale. The engines sold from the lease portfolio had a total net book value of $34.5 million and were sold for a gain of $9.5 million. During the nine months ended September 30, 1998, eight engines and one spare parts package were sold or transferred to inventory for sale from the lease portfolio. The engines had a net book value of $19.1 million and were sold for a gain of $9.2 million. During the nine months ended September 30, 1999, the Company sold three engines acquired for resale for $9.8 million which resulted in a gain of $1.4 million. SPARE PARTS SALES. During the nine months ended September 30, 1999, revenue from spare parts sales totaled $21.3 million of which $3.0 million was associated with the sale of whole engines. The level of revenue during the nine months was 26% higher than the $16.8 million in the comparable period in 1998. Gross margin for the nine months ended September 30, 1999, were negative compared to positive 30% for the corresponding period in 1998. The decrease in gross margin was due to an inventory write down of $7.4 million, lower parts sales margins, scrappage of parts and other inventory write downs in the normal course of business. Of the $7.4 million write down, $6.1 million was related to 747-100 engine and airframe parts. INTEREST AND OTHER INCOME. Interest and other income for each of the nine months ended September 30, 1999 and 1998, were $0.9 million and $0.8 million, respectively. Interest is earned on cash, deposits held and notes receivable. INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all activities increased 52% to $15.9 million for the nine months ended September 30, 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 and to a lesser extent an increase in spare parts inventories. Residual sharing expense increased 8% to $635,000 for the nine months ended September 30, 1999 from $587,000 for the comparable period in 1998. Residual sharing arrangements apply to three of the Company's engines as of September 30, 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 82% to $9.7 million for the nine months ended September 30, 1999, from the comparable period in 1998, due primarily to the increase in lease portfolio assets. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 27% to $13.6 million for the nine months ended September 30, 1999, from the comparable period in 1998. This change reflects increased expenses, in all business segments, associated with staff additions, increased non-capitalizable engine related expenses, as well as an increase in professional fees. Five months of expenses related to PGTC Inc. are included in the nine months ended September 30, 1999. INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for the nine months ended September 30, 1999, decreased to $0.8 million from $4.4 million for the comparable period in 1998. This decrease reflects a decrease in the Company's pre-tax earnings. The effective tax rate for the nine months ended September 30, 1999 and 1998 were 40%. INCOME/(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. During the nine months ended September 30, 1999, the Company's share of net losses from the joint venture, after inter-company eliminations, were $435,000. The Company had no such activity during the comparable 1998 period. 13 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. The Company had no such transactions during the comparable 1999 period. 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 September 30, 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 $113.8 million and $157.7 million, in the nine month periods ended September 30, 1999 and 1998, respectively, was derived from this activity. In these same time periods $59.5 million and $44.1 million, respectively, was used to pay down related debt. Cash flow from operating activities generated approximately $13.4 million in the nine month period ended September 30, 1999 and cash flows from operating activities used $16.1 million in the nine month period ended September 30, 1998. The deficit cash flow from operations for the nine month period ended September 30, 1998 was primarily attributable to the acquisition of used aircraft for WASI's inventory. The Company's primary use of funds is for the purchase of equipment for lease. Approximately $107.9 million and $132.4 million of funds were used for this purpose in the nine month periods ended September 30, 1999 and 1998, respectively. At September 30, 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 September 30, 1999, $7.8 million was available under this facility, subject to the Company providing sufficient collateral. The facility has a two-year revolving period ending September 2000 followed by a four-year term-out period. The facility is renewable annually and the Company is in the process of discussing such renewal with its banks. 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. As a result of this repayment and other repayments unrelated to the inventory write-down, the Company had $14.9 million available under the revolving credit facility on October 31, 1999, subject to the Company providing sufficient collateral. The interest rate on this facility is currently a rate tied to 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 2000 followed by a seven-year amortization period. At September 30, 1999, the interest rate was a commercial paper based rate plus a spread of 1.6%. On October 15, 1999 the spread over the commercial paper based rate was increased to 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 September 30, 1999, $21.7 million was available under this facility. 14 Approximately $4.9 million of the Company's debt is repayable during 1999. 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. As of September 30, 1999, the Company had one spare parts package which had not been financed. The Company may seek financing for unfinanced equipment, although no assurance can be given that such financing will be available on favorable terms, if at all. Certain of the Company's engines have been financed under floating rate facilities. Accordingly, the Company is subject to interest rate risk, since the underlying lease revenue is fixed. See "Management Of Interest Rate Exposure" below. The Company has committed to purchase, during 1999, additional used aircraft and engines for its operations. Certain deposits were made, in 1998, in connection with a portion of these commitments. As of September 30, 1999, the Company's current commitment to such purchases is not more than $7.3 million, which includes $1.4 million of deposits in other assets. MANAGEMENT OF INTEREST RATE EXPOSURE At September 30, 1999, $247.1 million of the Company's borrowings were on a variable rate basis at various interest rates tied to either LIBOR or the prime rate. The Company's equipment leases are generally structured at fixed rental rates for specified terms. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue the Company realizes under its leases and the interest rate that the Company pays under its borrowings. In September 1996, the Company purchased an amortizing interest rate cap in order to limit its exposure to increases in interest rates on a portion of its variable rate borrowings. Pursuant to this cap, the counter party will make payments to the Company, based on the notional amount of the cap, if the three month LIBOR rate is in excess of 7.66%. As of September 30, 1999, the notional principal amount of the cap was $30.3 million, which will decline to $26.0 million at the end of its term. 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 $45.0 million, a weighted average remaining term of 27 months and a weighted average fixed rate of 5.78%. 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 September 30, 1999, such swap agreements had notional outstanding amounts totaling $50 million, a weighted average remaining term of 42 months and a weighted average fixed rate of 5.90%. 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 Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed below as well as those discussed elsewhere herein 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 15 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 and continue its operations is dependent, in large part, on the availability of third party debt and equity capital as well as internally generated 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 or generating 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) fund possible future acquisitions, investments and joint ventures 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, and (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 much of the Company's borrowings are at floating rates. 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 16 borrowings, and have a material adverse effect on the Company's business, financial condition and/or results of operations. During the nine month period ended September 30, 1999, 75% of the Company's lease revenue was generated by leases to foreign customers, including 7% from Asian customers and 15% from South American customers. Such international leases may present greater risks to the Company because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. The Company is subject to the timing and access to courts and the remedies local laws impose in order to collect its lease payments and recover its assets. In addition, political instability abroad and changes in international policy also present risk of expropriation of the Company's leased engines. Furthermore, many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company generates a portion of its revenue from sale of leased assets. The inability to execute transactions for gain on sale or a change in the accounting guidelines related to such sales could have a material impact on the Company's business, financial condition and/or results of operations. The Company has 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 documented 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 17 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. Furthermore, when the Company purchases and dismantles used aircraft, engines and parts, the Company assigns a value to the parts based on market price. 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. The Company uses computer systems in many areas of its operations. In addition, various third parties that are important to the Company's business (including lessees, customers, vendors and financial institutions) use computer systems in their areas of operations. Should the Company or certain of such third parties not be "Year 2000 compliant," certain of the Company's operations could be disrupted for an indeterminate period of time, potentially having a material adverse impact on the Company's results, business, financial condition and/or results of operations. As is the case with most companies, the Year 2000 computer problem creates risks for the Company. The Company has assessed the Year 2000 computer problem as it affects the Company's computer systems and information technology. As a result of the Company's assessment, the Company does not expect any material interruption of internal operations arising from the Company's computer systems and information technology not being Year 2000 compliant. The mission critical systems of the Company identified during the assessment are all off the shelf software packages with unmodified source codes which have been certified by the manufacturer as Year 2000 compliant. All internal hardware and software remediation was completed during the second quarter. Testing was initiated during the third quarter and will be completed by November 15, 1999. The Company is not aware of any significant Year 2000 issues with respect to the airworthiness of the Company's aircraft, aircraft engines or spare parts; however, should such issues result in Airworthiness Directives or other manufacturer recommended maintenance for leased assets, the implementation and the majority of the cost of such implementation would generally be the responsibility of the lessee. Any resulting costs to the Company cannot be estimated at this time. Significant uncertainties remain about the effect on the Company's operations of third parties that may not be Year 2000 compliant and with whom the Company does business (including lessees, customers, vendors and financial institutions). The Company is nearing completion of the assessment of Year 2000 issues relating to such third parties and certain of the Company's officers have oversight of these assessments. The Company has circulated to significant third parties with whom the Company does business a written request for their plans and progress in addressing the Year 2000 issue. As of September 30, 1999, approximately 95% of the third parties polled had responded. A majority of the respondents are currently Y2K compliant and the remaining respondents indicated compliance no later than fourth quarter 1999. The Company will develop contingency plans to address any material risk of non-compliance by non-respondents. The Company expects to complete this process by November 1999. The costs associated with assessing the Year 2000 issue, including developing and implementing the above plan, are expected to be nominal. Non-compliance on the part of a third party could result in lost revenue and an inability to make lease or other payments to the Company. Non-compliance by the third party's financial institution could also affect the ability to process payments. A reasonable worst case scenario would be that a large number of third parties (including lessees and spare parts customers) will be unable to operate and generate revenues and as a result will be unable to make lease payments or purchase parts. The Company is unable to estimate the likelihood or the magnitude of the resulting lost revenue at this time. However, should this occur, the Company would attempt to repossess leased engines, aircraft and spare parts from non-compliant third parties and place such assets with compliant third parties. The Company cannot assure you that it would be able to re-lease such assets at favorable terms or at all. Similarly, the Company would attempt to find compliant 18 customers for the Company's spare parts sales. If a significant number of leased assets could not be re-leased on favorable terms or at all, or their re-lease is delayed, or if compliant customers for spare parts sales were unavailable, the Company's business, financial condition and/or results of operations would be adversely affected. Providers of casualty and liability insurance to the aviation industry have indicated that they may exclude coverage for Year 2000 related risks and/or may require aviation equipment operators to answer, to the insurance provider's satisfaction, a questionnaire regarding the Year 2000 preparedness of aviation equipment operators, in order to provide coverage for Year 2000 risks. The inability of a lessee to obtain or maintain coverage for Year 2000 related losses and/or the Company's inability to obtain or maintain any contingent insurance for Year 2000 related risks would expose the Company to material risk of loss. The Company has informed its lessees of Year 2000 related insurance issues and continues to monitor its lessees' ability to obtain insurance coverage for Year 2000 related risks. ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is that of interest rate risk. A change in the U.S. prime interest rate, LIBOR rate, or cost of funds based on commercial paper market rates, would affect the rate at which the Company could borrow funds under its various borrowing facilities. Increases in interest rates to the Company, which may cause the Company to raise the implicit rates charged to its customers, could result in a reduction in demand for the Company's leases. Certain of the Company's warehouse credit facilities are variable rate debt. The Company estimates a one percent increase or decrease in the Company's variable rate debt 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, net of interest rate hedges, 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 the nine month period ended September 30, 1999, 75% 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. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT DESCRIPTION NUMBER 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 24, 1999, by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, incorporated by reference to Exhibit 4.1 of the Company's report on Form 8-K filed on October 4, 1999. 11.1 Statement regarding computation of per share earnings. 27.1 Financial Data Schedule. - ----------------------------------------- (b) Reports on Form 8-K None 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. Date: November 15, 1999 Willis Lease Finance Corporation By: /s/ JAMES D. MCBRIDE ---------------------- James D. McBride Chief Financial Officer EX-11.1 2 EXHIBIT 11.1 Exhibit 11.1 Computation of Earnings EXHIBIT XI WILLIS LEASE FINANCE CORPORATION Computation of Earnings Per Share
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------ Income/(loss) before extraordinary item 1999 1998 1999 1998 -------------- -------------- -------------- -------------- (in thousands, (in thousands, except per share data) except per share data) Basic Earnings: Income/(loss) before extraordinary item ($4,384) $2,484 $1,190 $6,583 Shares: Average common shares outstanding 7,394 7,280 7,377 7,245 -------------- -------------- -------------- -------------- Basic earnings/(loss) per common share before extraordinary item ($0.59) $0.34 $0.16 $0.91 Assuming Full Dilution Earnings: Income/(loss) before extraordinary item ($4,384) $2,484 $1,190 $6,583 -------------- -------------- -------------- -------------- Shares: Diluted average common shares outstanding 7,448 7,495 7,447 7,466 -------------- -------------- -------------- -------------- Earnings/(loss) per common share assuming full dilution, before extraordinary item ($0.59) $0.33 $0.16 $0.88 -------------- -------------- -------------- -------------- Net income/(loss) Basic Earnings: Net income/(loss) ($4,384) $2,484 $1,190 $6,383 -------------- -------------- -------------- -------------- Shares: Average common shares outstanding 7,394 7,280 7,377 7,245 -------------- -------------- -------------- -------------- Basic earnings/(loss) per common share ($0.59) $0.34 $0.16 $0.88 Assuming Full Dilution Earnings: Net income/(loss) ($4,384) $2,484 $1,190 $6,383 -------------- -------------- -------------- -------------- Shares: Diluted average common shares outstanding 7,448 7,495 7,447 7,466 -------------- -------------- -------------- -------------- Earnings/(loss) per common share assuming full dilution ($0.59) $0.33 $0.16 $0.85 -------------- -------------- -------------- --------------
Supplemental information: Difference between average common shares outstanding to calculate basic and assuming full dilution is due to options outstanding under the 1996 Stock Options/Stock Issuance Plan and warrants issued in conjunction with the initial public offering EX-27.1 3 EXHIBIT 27.1
5 1,000 3-MOS DEC-31-1999 JUL-1-1999 SEP-30-1999 30,112 0 6,520 0 23,247 0 337,076 19,209 416,292 0 0 0 0 74 67,405 416,292 6,065 21,380 13,989 28,295 4,545 0 6,048 (7,310) (2,926) 0 0 0 0 (4,384) (0.59) (0.59)
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