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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from July to September 1996
Commission File Number 0-28774
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
California 68-0070656
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
180 Harbor Drive, Suite 200, Sausalito, CA 94965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 331-5281
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 No X
--- ---
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 November 14, 1996
--------------------- --------------------------------
Common Stock, No Par Value 5,426,793
<PAGE>
<TABLE>
WILLIS LEASE FINANCE CORPORATION
INDEX
<CAPTION>
PART 1. FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of September 30, 1996 and December 31, 1995 3
Consolidated Statement of Income
Three and Nine Months ended September 30, 1996 and 1995 4
Consolidated Statement of Shareholders' Equity
Year Ended December 31, 1995 and Nine Months Ended September 30, 1996 5
Consolidated Statement of Cash Flows
Nine Months ended September 30, 1996 and 1995 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
PART 2. OTHER INFORMATION 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
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<TABLE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,680,725 $ 815,649
Deposits 11,073,662 11,320,617
Aircraft engines held for operating lease, less accumulated 75,367,995 74,704,379
depreciation of $15,750,289 at 9/30/96 and $13,681,211 at 12/31/95
Property, equipment and furnishings, less accumulated 358,560 207,784
depreciation of $122,711 at 9/30/96 and $86,695 at 12/31/95
Spare parts inventory 3,597,653 2,916,003
Maintenance billings receivable 490,807 408,454
Administration fees receivable 9,900 4,734
Operating lease rentals receivable 310,596 73,658
Trade receivables 1,095,119 772,474
Other receivables 129,820 5,747
Other assets 1,489,402 207,894
------------- -------------
Total assets $ 108,604,239 $ 91,437,393
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 6,250,908 $ 1,052,455
Salaries and commissions payable 327,505 163,961
Dividends payable 451,475 --
Deferred income taxes 5,479,413 4,092,325
Notes payable and accrued interest 62,474,711 69,910,797
Residual share payable 1,012,321 476,526
Maintenance deposits 9,669,258 8,717,170
Security deposits 1,889,209 1,270,021
Unearned lease revenue 761,302 857,087
------------- -------------
Total liabilities 88,316,102 86,540,342
Minority interest in net assets of subsidiary -- 84,774
Shareholders' equity:
Common stock, no par value. Authorized 20,000,000 shares;
5,126,793 issued and outstanding 13,950,259 500
Retained earnings 6,343,463 5,293,566
Advances to shareholders (5,585) (481,789)
------------- -------------
Total shareholders' equity 20,288,137 4,812,277
------------- -------------
Total liabilities and shareholders' equity $ 108,604,239 $ 91,437,393
============= =============
<FN>
See accompanying notes to the consolidated financial statements
</FN>
</TABLE>
3
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<TABLE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Operating lease revenue $ 3,544,111 $ 3,865,495 $ 10,379,013 $ 9,931,232
Loss on sale of leased engines -- -- -- (110,065)
Spare part sales 868,768 793,642 3,303,123 2,204,353
Sale of equipment acquired for resale 2,781,015 5,372,362 9,605,315 5,372,362
Interest and other income 149,887 26,174 196,702 81,253
------------ ------------ ------------ ------------
Total revenue 7,343,781 10,057,673 23,484,153 17,479,135
EXPENSES
Interest expense 1,100,640 1,173,404 3,371,351 4,354,494
Depreciation expense 734,660 1,228,243 2,512,585 3,077,771
Residual share 161,813 118,024 535,795 282,488
Cost of spare part sales 217,649 493,770 1,603,609 1,387,722
Cost of equipment acquired for resale 3,017,625 2,740,177 8,551,229 2,740,177
General and administrative 1,332,830 999,298 3,434,216 2,322,668
------------ ------------ ------------ ------------
Total expenses 6,565,217 6,752,916 20,008,785 14,165,320
Gain on modification of credit facility -- -- -- 2,202,928
------------ ------------ ------------ ------------
Income before income taxes and minority interest 778,564 3,304,757 3,475,368 5,516,743
Income taxes (300,404) (1,315,576) (1,394,943) (2,206,752)
------------ ------------ ------------ ------------
Income before minority interest 478,160 1,989,181 2,080,425 3,309,991
Less: minority interest in net income of subsidiary (44,601) (8,191) (79,053) (29,388)
------------ ------------ ------------ ------------
Net income $ 433,559 $ 1,980,990 $ 2,001,372 $ 3,280,603
============ ============ ============ ============
Pro forma net income per share 0.13 0.58 0.62 1.02
============ ============ ============ ============
Shares used in computing pro forma net income 3,425,287 3,425,287 3,215,148 3,215,148
per share ============ ============ ============ ============
<FN>
See accompanying notes to the consolidated financial statements
</FN>
</TABLE>
4
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<TABLE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Year Ended December 31, 1995 and Nine Months Ended September 30, 1996
(Unaudited)
<CAPTION>
Issued and
outstanding Advances Total
shares of Common Retained to shareholders'
common stock stock earnings shareholders equity (deficit)
------------ ------ -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 1,500 $ 500 $ 2,332,149 ($ 373,845) $ 1,958,804
Advances to shareholder, net -- -- -- (107,944) (107,944)
of repayments
Dividends -- -- (255,000) -- (255,000)
Net income -- -- 3,216,417 -- 3,216,417
--------- ------------ ------------ ----------- ------------
Balances at December 31, 1995 1,500 500 5,293,566 (481,789) 4,812,277
Common stock issue and 5,125,293 13,949,759 -- -- 13,949,759
proceeds from IPO, net
Advances to shareholder, net -- -- -- 476,204 476,204
of repayments
Dividends (unaudited) -- -- (951,475) -- (951,475)
Net income (unaudited) -- -- 2,001,372 -- 2,001,372
--------- ------------ ------------ ------------ ------------
Balances at September 30, 1996 (unaudited) 5,126,793 $ 13,950,259 $ 6,343,463 ($ 5,585) $ 20,288,137
========= ============ ============ ============ ============
<FN>
See accompanying notes to the consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
<TABLE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
September 30,
-------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income 2,001,372 3,280,603
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of aircraft engines held for operating lease 2,460,703 3,054,901
Depreciation of property, equipment and furnishings 51,882 22,870
Gain on modification on credit facility -- (2,202,928)
Loss on sale of property, equipment and furnishings 5,700 --
Loss on sale of aircraft engines -- 110,065
Increase in residual share payable 535,795 282,488
Minority interest in net income of subsidiary (84,774) 29,388
Changes in assets and liabilities:
Decrease (increase) in deposits 246,955 (9,065,138)
(Increase) in spare parts inventory (681,650) (1,139,550)
(Increase) in receivables (771,175) (488,254)
(Increase) decrease in other assets (1,281,508) 193,711
Increase (decrease) in accounts payable and accrued expenses 5,198,453 (102,177)
Increase in salaries and commission payable 163,544 146,936
Increase in deferred income tax 1,387,088 2,206,752
Increase (decrease) in accrued interest 25,045 (363,476)
Increase in maintenance deposits 952,088 1,730,935
Increase (decrease) in security deposits 619,188 (181,052)
(Decrease) increase in unearned lease revenue (95,785) 324,560
------------ ------------
Net cash provided by (used in) operating activities 10,732,921 (2,159,366)
Cash flows from investing activities:
Proceeds from sale of aircraft engines (net of selling expenses) 997,350 2,600,000
Proceeds from sale of property, equipment and furnishings 28,200 7,000
Purchase of aircraft engines held for operating lease (4,121,670) (1,996,303)
Purchase of property, equipment and furnishings (236,558) (123,016)
------------ ------------
Net cash (used in) provided by investing activities (3,332,678) 487,681
Cash flows from financing activities:
Repayments from shareholder, net 476,204 3,246
Proceeds from issuance of notes payable 2,484,467 10,227,264
Proceeds from issuance of common stock 13,949,759 --
Principal payments on notes payable (9,945,597) (7,057,890)
Cash dividends paid on common stock (500,000) (255,000)
Minority interest in net assets of subsidiary
------------ ------------
Net cash provided by financing activities 6,464,833 2,917,620
Increase in cash and cash equivalents 13,865,076 1,245,935
Cash and cash equivalents at beginning of period 815,649 1,063,984
------------ ------------
Cash and cash equivalents at end of period $ 14,680,725 $ 2,309,919
============ ============
<FN>
See accompanying notes to the consolidated financial statements
</FN>
</TABLE>
6
<PAGE>
WILLIS LEASE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
In the opinion of Management, the accompanying unaudited consolidated financial
statements of Willis Lease Finance Corporation ("The Company") contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 30, 1996
and the results of its operations for the three and nine month periods ended
September 30, 1996 and 1995 and cash flows for the nine month periods ended
September 30, 1996 and 1995. The results of operations and cash flows for the
nine month period ended September 30, 1996 are not necessarily indicative of the
results of operations or cash flows which may be reported for the remainder of
1996.
The accompanying unaudited interim financial statements 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 Company's December 31, 1995 financial
statements and the notes thereto included in the Prospectus contained in the
Company's Form SB-2 Registration Statement, declared effective by the Securities
and Exchange Commission on September 18, 1996.
2. Management Estimates
These financial statements have been prepared on the accrual basis of accounting
in accordance with generally accepted accounting principles. This requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. Use of Proceeds
The net proceeds to the Company from the sale of the 2,300,000 shares of common
stock offered by the Company were approximately $16.17 million after deducting
underwriting discounts, commissions and expenses of the offering and including
the underwriters' overallotment option (note 4). Of the net proceeds, the
Company has used $1.3 million to prepay certain indebtedness outstanding under a
term loan in connection with the elimination of certain covenants of that term
loan, which currently bears interest at a rate of LIBOR plus 1%, and matures on
June 30, 2005, and approximately $460,000 to purchase an interest rate cap to
hedge a portion of its exposure to increases in interest rates on its variable
rate borrowings. The Company intends to use the remaining net proceeds, together
with debt financing, to acquire additional aircraft engines for lease, to
acquire airframe component inventory, and for working capital and other general
corporate purposes.
4. Over-allotment Option
On September 23, 1996, the Company closed its initial public offering of
2,000,000 shares of its authorized but unissued shares at a price to the public
of $8.00 per share. In addition, the Company granted the underwriters a 30-day
option to purchase up to 300,000 additional shares at the same price to cover
over-allotments. On October 16, 1996, the underwriters exercised the
overallotment and the Company received additional net proceeds of $2.22 million,
net of underwriters' commissions.
5. Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("The Purchase Plan") was adopted by
the Board of Directors on June 1, 1996 and filed with the Securities and
Exchange Commission on November 1, 1996. The Purchase Plan is designed to allow
eligible employees of the Company and participating subsidiaries to purchase
shares of Common Stock, at semi-annual intervals, through their periodic payroll
deduction under the Purchase Plan. A reserve of 75,000 shares of common stock
has been established for this purpose.
7
<PAGE>
6. Renewal of Credit Facility
The line of credit extended to WASI, not to exceed $1.5 million, expired on
October 31, 1996, and on that day, was extended to November 30, 1996.
7. Changes in Financial Condition of Lessee
On September 26, 1996, Air Liberte filed for protection of the court in an
insolvency procedure in France. Through French counsel, T-10, Inc., a
wholly-owned subsidiary of the Company, has filed a petition to the
Administrator requesting that Air Liberte disclose whether they intend to
continue the lease or return the engine. No formal response has been received to
date. The Company has been advised that Air Liberte is in negotiations with two
potential purchasers and, to date, payments have been made under the lease
terms, as agreed. In the Company's opinion, no losses are anticipated. The
Company anticipates that the engine will remain on lease either with Air Liberte
or an acquiring Company. Recovery of the engine or rental continuance will
depend upon the outcome of the insolvency proceedings.
8. Pro Forma Net Income Per Share
Pro forma net income per share has been computed by dividing pro forma net
income by the number of shares of Willis Lease Finance Corporation common stock
issued to the original shareholder (3,110,653 shares), plus common stock issued
in connection with the Initial Public Offering (2,016,136 shares) and warrants
and options (400,000 shares), diluted on a weighted average basis for the
period. This calculation results in a weighted average number of shares
outstanding of 3,425,287 and 3,215,148 for the three months and nine months
ended September 30, 1996, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, the effect of changing
economic conditions, trends in the airline industry, changes in interest rates,
liability risks associated with providing engines and services to aircraft, the
ability of the Company to profitably remarket or re-lease engines in a timely
manner, changes in maintenance requirements and safety regulations, and other
risks detailed in the Company's Registration Statement Form SB-2, as amended,
filed with the Securities and Exchange Commission in connection with the
Company's initial public offering of Common Stock and reports on Forms 10-Q,
10-K and 8-K filed by the Company with the Securities and Exchange Commission
from time to time.
Overview
Willis Lease Finance Corporation's primary businesses are the leasing of spare
replacement aircraft engines and the strategic acquisition and resale of
aircraft engines and parts to the worldwide commercial airline aftermarket. The
Company commenced leasing operations in 1988 and established WASI (Willis
Aeronautical Services, Inc.) to conduct its spare parts resale operation in
October 1994.
Summary of Financial Results for the Quarter and Nine Months Ended September 30,
1996: Total revenues for the quarter ending September 30, 1996 were $7.3
million, compared to $10.1 million in the corresponding quarter of 1995. For the
nine months ended September 30, 1996, revenues totaled $23.5 million, compared
to $17.5 million in the corresponding period in 1995.
Net income for the quarter ended September 30, 1996 was $434,000, compared to
$1,981,000 in the corresponding quarter of 1995, primarily due to a gain of
$2,632,000 on the sale of equipment in 1995. For the nine months ended September
30, 1996, net income totaled $2,001,000, compared to $3,281,000 in the
corresponding period in 1995, which was primarily due to a gain on the
modification of a credit facility amounting to $2,203,000.
8
<PAGE>
Leasing Operations: The Company accounts for its leases as operating leases.
Under an operating lease, the Company retains title to the engine, thereby
retaining the potential benefit and assuming the risk of the residual value of
the engine. Operating leases require the Company to re-lease or sell an engine
in a timely manner upon termination of a lease. Lease payments are recorded as
operating lease revenue and depreciation expense is recognized on a straight
line basis over 15 years to a 55% residual.
Third party lenders generally provide 80% to 85% of the financing for the
acquisition of engines to be leased on an operating lease basis. In some
instances, third party lenders have provided more than 85% of the financing of
engines, in which case the lenders have generally required a sharing of the
residual value of the engine upon the sale of the engine. The Company provides
for the residual sharing obligation as a charge or credit to income or expense
each period in an amount sufficient to adjust the residual share payable at the
balance sheet date to the amount that would be payable at the balance sheet date
if all engines subject to residual sharing were sold on the balance sheet date
at their net book value.
Prior to June 1995, the Company's loan agreement with Marine Midland Bank ("The
Marine Loan") provided, among other things, for interest payable at LIBOR plus
3.5% to 5%, required a specified percentage of lease payments to be applied to
debt service but required final payment only upon the sale of the subject
engine, and provided to the lender a share of the residual value of financed
engines. In June 1995, the Company modified the Marine Loan (the "Facility
Modification"). As part of the Facility Modification, the existing loan facility
was converted to a ten-year, full payout loan, the existing residual sharing
arrangement with the lender was terminated, the interest rate was reduced to
LIBOR plus 1%, and the lender acquired two engines from the Company with a net
book value of $5.7 million. The Facility Modification resulted in a net gain of
$2.2 million. As a result of the Facility Modification and the receipt of the
net proceeds of the Company's initial public offering of common stock, the
Company believes that residual sharing will be less common in future engine
financings.
The Company typically collects maintenance reserves and security deposits from
the lessee. Generally, the Company collects, in advance, a security deposit
equal to at least one month's lease payment, together with one month's estimated
maintenance reserve. The security deposit is returned to the lessee after all
return conditions have been met. Maintenance reserves are accumulated in
accounts maintained by the Company or its lenders and are used when normal
repairs associated with engine use or maintenance is required. In most cases, to
the extent that cumulative maintenance reserves are inadequate to fund normal
repairs required prior to the return of the engine to the Company, the lessee is
obligated to cover the shortfall. In most cases, any maintenance reserves
remaining in a restricted account after the lease has expired and the return
conditions have been met are retained by the Company unless the engine is
returned with no flight hours since the last refurbishment.
Spare Parts Sales: Through its subsidiary, Willis Aeronautical Services, Inc.
("WASI"), the Company purchases aircraft engines and other components typically
for resale as parts. The Company records the purchases at cost and capitalizes
additional costs relating to acquisition, overhaul, insurance and other direct
costs.
Equipment Sales: The Company purchases for resale engines, airframe components
and other assets. Assets acquired for resale are recorded at the lower of cost
or net realizable value. Gross revenue from the sale of equipment are reflected
as sale of equipment acquired for resale, with the associated costs reflected as
cost of sold equipment acquired for resale.
9
<PAGE>
<TABLE>
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Revenue is summarized as follows:
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------
1996 1995
----------------------- ----------------------
Amount % Amount %
------ --- ------ ---
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Operating lease revenue $ 3,544 48.3% $ 3,866 38.4%
Gain (loss) on sale of leased engines -- 0.0 -- 0.0
Spare parts sales 869 11.8 794 7.9
Sale of equipment acquired for resale 2,781 37.9 5,372 53.4
Interest and other income 150 2.0 26 0.3
------- ------ ------- ------
Total $ 7,344 100.% $10,058 100.%
</TABLE>
Lease Portfolio: During the quarter ended September 30, 1996, two engines were
transferred from the Company's lease portfolio to its equipment sale portfolio
and subsequently sold. One engine was transferred from the Company's lease
portfolio to WASI to be dismantled and sold. The Company acquired one engine
during the latter part of the quarter.
Operating Leases: Operating lease revenue for the three months ended September
30, 1996 decreased 8% to $3.5 million from $3.9 million over the corresponding
period in 1995. This decrease reflects a reduction in lease revenue from the
third quarter in 1995 of $1.1 million earned on three engines sold prior to the
third quarter of 1996 and an engine which was not on lease for part of the third
quarter of 1996. Offsetting this reduction is an increase in lease income of
$0.3 million on engines newly acquired since the third quarter of 1995, and an
increase in general lease income of $0.4 million.
Expenses directly related to operating lease activity decreased 22% to $2.0
million for the three months ended September 30, 1996 over the corresponding
period in 1995. The reduction in expenses was primarily due to lower
depreciation charges on engines held for lease, which decreased by $0.5 million
(40%) due to component depreciation of $0.3 million taken on one engine in 1995,
no longer applicable in 1996, and a $0.2 million net decrease in depreciation
resulting from the purchase and sale of engines since the third quarter of 1995.
Interest expense declined 9% to $1.1 million for the three months ended
September 30, 1996 over the corresponding period in 1995, due primarily to a
reduction in outstanding loans. Residual sharing expenses increased 37% to
$162,000 over the corresponding period in 1995 due to changes in the Company's
portfolio of engines subject to such agreements.
Spare Parts Sales: Revenues from spare parts sales increased 9.5% to $869,000
and the gross margin rose to 71% in 1996 from 38% in the corresponding period in
1995, primarily due to greater markups achieved due to a changed inventory mix.
Offsetting these higher margins were increased financing costs on larger
inventories held.
Equipment Sales: During the three months ended September 30, 1996, the Company
sold two engines for $2.7 million which resulted in a loss of $0.24 million as a
result of increased overhaul costs of $0.5 million on the engines, which were
necessary prior to sale completion. During the three months ended September 30,
1995, the Company sold 3 engines for $5.4 million resulting in a gain of $2.6
million.
Interest and Other Income: Interest and other income for the three months ended
September 30, 1996 increased to $150,000 from $26,000 for the three months ended
September 30, 1995. This is a result of increases in marketing fees primarily
relating to one engine and interest earned on deposits held, including the
proceeds from the Company's initial public offering.
General and Administrative Expenses: General and administrative expenses
increased 33% to $1.3 million for the three months ended September 30, 1996 over
the corresponding period in 1995. This increase reflects additional
compensation, telephone and travel costs due to staff additions, increased rent
due to the expansion of the WASI facility and an increase in professional fees
and insurance incurred by the Company. The Company anticipates that general and
administrative expenses will continue to increase in the future as a result of
increased levels of operations and additional overhead as a public company.
10
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<TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Revenue is summarized as follows:
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------
1996 1995
------------------------ ------------------------
Amount % Amount %
------ --- ------ ---
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Operating lease revenue 10,379 44.2% $ 9,931 56.8%
Gain (loss) on sale of leased engines -- 0.0 (110) -0.6
Spare parts sales 3,303 14.1 2,204 12.6
Sale of equipment acquired for resale 9,605 40.9 5,373 30.7
Interest and other income 197 0.8 81 0.5
-------- ------ -------- --------
Total 23,484 100.0% $ 17,479 100.0%
</TABLE>
Lease Portfolio: During the first nine months of 1996, three engines were
transferred from the Company's lease portfolio to its equipment sale portfolio
and subsequently sold. One engine was transferred from the Company's lease
portfolio to WASI to be dismantled and subsequently sold. The Company acquired
one engine during the latter part of the third quarter.
Operating Lease: Operating lease revenue for the nine months ended September
30, 1996 increased 4.5% to $10.4 million over the corresponding period in 1995.
This increase reflects additional lease revenue earned from the net increase of
five engines acquired by the Company in the latter half of 1995 and an engine
which was overhauled and placed on lease in the second quarter of 1996. The
engine acquired late in the third quarter of 1996 did not have a material effect
on lease income.
Expenses directly related to operating lease activity decreased 18% to $6.3
million for the nine months ended September 30, 1996 over the corresponding
period in 1995. The reduction in expenses was primarily due to lower interest
charges which declined nearly $1 million due to the facility modification.
Depreciation charges on engines held for lease decreased 18% to $2.5 million for
the nine months ended September 30, 1996 as a result of two engines coming off
component depreciation, and changes due to the net reduction of three engines
from the lease portfolio over the period. Residual sharing expenses increased
90% to $0.5 million for the nine months ended September 30, 1996 over the
corresponding period in 1995 due to changes in the Company's portfolio of
engines subject to such agreements.
Loss on Sale of Leased Engines: During the nine months ended September 30, 1995
the Company recorded a loss of $.01 million on one sale of one engine with a net
book value of $2.8 million. There were no such sales during the period ended
September 30, 1996.
Spare Parts Sales: Revenues from spare parts sales increased 50% to $3.3 million
in the nine months ended September 30, 1996 with gross margins increasing to 49%
from 36% in the corresponding period in 1995, despite increased inventory
financing costs of $0.1 million. Margins increased due to changes in the
inventory mix.
Equipment Sales: During the nine months ended September 30, 1996, the Company
sold five engines for proceeds of $9.6 million, recognizing a gain of $1.0
million. During the nine months ended September 30, 1995, the Company sold three
engines for proceeds of $5.4 million, recognizing a gain of $2.6 million. The
Company expects that equipment sales opportunities and profitability will
continue to vary materially from period to period.
Interest and Other Income: Interest and other income for the nine months ended
September 30, 1996 increased to $197,000 from $81,000 over the corresponding
period in 1995. This is due to increases in marketing fees primarily due to one
engine and interest earned on deposits held, including the proceeds of the
Company's initial public offering of common stock.
11
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased 48% to $3.4 million for the nine months ended September 30, 1996 over
the corresponding period in 1995. This increase reflects additional compensation
and travel costs due to staff additions, increased rent due to the expansion of
the WASI facility and an increase in professional fees incurred by the Company.
The Company anticipates that general and administrative expenses will continue
to increase in the future as a result of increased levels of operations and
additional overhead as a public company.
Variability of Results
The Company's quarterly operating results have fluctuated in the past and
Management anticipates that these fluctuations may continue. Such fluctuations
may be due to a number of factors, including the timing of sales of engines and
spare parts and engine marketing activities, unanticipated early lease
terminations, the timing of engine acquisitions or a default by a lessee. Given
the possibility of such fluctuations, the Company believes that comparisons of
the results of its operations for preceding quarters should not be relied upon
as an indication of future performance.
Liquidity and Capital Resources
As of September 30, 1996, the Company had received net proceeds from the initial
public offering of $13.95 million after deducting underwriting discounts and
commissions and expenses of the offering. The Company used $1.3 million to
prepay certain indebtedness outstanding under a term loan and approximately
$460,000 to purchase an interest rate cap. Subsequent to September 30, 1996, the
underwriters exercised an overallotment option and the Company received further
net proceeds of $2.22 million.
The Company believes that its current and anticipated credit facilities,
including the extension of its existing line of credit at WASI to November 30,
1996, internally generated funds and the net proceeds of the offering, will be
sufficient to fund the Company's anticipated operations until the first quarter
of 1998, at which time, additional equity capital is anticipated to be required
to fund projected growth. The Company is also exploring a possible
securitization of its lease portfolio. The Company's ability to successfully
execute its business strategy, and to sustain its operations, is dependent in
part on its ability to obtain debt capital and to raise equity capital. There
can be no assurance that the necessary amount of such capital or securitization
will continue to be available to the Company on favorable terms, or at all. If
the Company were unable to obtain any portion of required financing on favorable
terms, the Company's ability to add new engines to its portfolio or to conduct
profitable operations with its existing asset base would be impaired, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Management of Interest Rate Exposure
At September 30, 1996, $40.8 million of the Company's borrowings were on a
variable rate basis, substantially all of which bears interest at LIBOR plus 1%.
The Company's engine leases are generally structured at fixed rental rates for
specific terms. To date, this variable rate borrowing has resulted in lower
interest expense for the Company. The Company purchased an interest rate cap
from an investment grade financial institution in September, 1996, for $460,000
to limit its exposure to increases in interest rates on a portion of its
variable rate borrowings. The cap has a notional principal amount of $40.8
million and caps the Company's exposure to interest rate increases for a period
of four years to a maximum fixed interest rate of 8.66%. The cost of the cap
will be amortized over the lesser of four years or the life of the loan. The
Company will be exposed to credit risk in the event of non-performance by the
counterparty to the cap.
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 the
future, the Company does not expect to enter into any variable rate loans except
in those instances where it obtains a variable rate lease from its customers and
anticipates significantly reducing its remaining variable rate borrowings during
the next four years, after which the Company will re-evaluate its exposure to
interest rate variations.
In September, 1996, the Company purchased an engine, for cash, which it
subsequently placed on long term lease. To date, this engine has not been
financed. Until such permanent financing is in place, the Company has interest
rate risk to the extent that interest rates increase, although the underlying
lease revenue is fixed. The Company will seek permanent financing for this
engine, although no assurance can be given that permanent financing will be
available.
12
<PAGE>
Part 2. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.1 Press Release
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 1996
13
<PAGE>
Pursuant to the requirements 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.
Willis Lease Finance Corporation
Date: November 14, 1996
By: /s/ Charles F. Willis, IV
.......................................
Charles F. Willis, IV
Chief Executive Officer
By: /s/ Elliot M. Fischer
.......................................
Elliot M. Fischer
Chief Financial Officer, Controller
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 25,754,387
<SECURITIES> 0
<RECEIVABLES> 3,525,644
<ALLOWANCES> 0
<INVENTORY> 3,597,653
<CURRENT-ASSETS> 32,877,684
<PP&E> 91,599,555
<DEPRECIATION> 15,873,000
<TOTAL-ASSETS> 108,604,239
<CURRENT-LIABILITIES> 20,361,978
<BONDS> 62,474,711
<COMMON> 13,950,259
0
0
<OTHER-SE> 6,337,878
<TOTAL-LIABILITY-AND-EQUITY> 108,604,239
<SALES> 12,908,438
<TOTAL-REVENUES> 23,484,153
<CGS> 10,154,838
<TOTAL-COSTS> 13,203,218
<OTHER-EXPENSES> 3,434,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,371,351
<INCOME-PRETAX> 3,475,368
<INCOME-TAX> 1,394,943
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,001,372
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.62
</TABLE>
Len Cereghino & Co. CLIENT: WILLIS LEASE FINANCE
CORPORATE INVESTOR RELATIONS CONTACT: Elliot M. Fischer
2605 Western Ave., Seattle, WA 98121 Chief Financial Officer
(206) 448-1996 (415) 331-5281
NEWS RELEASE
- --------------------------------------------------------------------------------
WILLIS LEASE FINANCIAL NINE MONTH REVENUES GAIN 34% TO $24 MILLION;
-------------------------------------------------------------------
NET INCOME EQUALS $2 MILLION OR $.62 PER SHARE
----------------------------------------------
SAUSALITO, CA -- November 11, 1996 -- Willis Lease Finance Corporation
(NASDAQ: WLFC), today released its third quarter results, the company's first
earnings report since completing its Initial Public Offering of 2.3 million
shares. Willis reported total revenues of $7.3 million for the third quarter of
1996, compared to $10.1 million in the third quarter of last year. In the third
quarter of 1995, Willis' revenues were increased by sales of $5.4 million of jet
engines acquired for resale compared to $2.8 million in the third quarter this
year. Improved margins in its operating lease portfolio and spare parts business
helped offset lower equipment sales in the third quarter. For the first nine
months of 1996, Willis' total revenues increased 34% to $23.5 million, compared
to $17.5 million in the nine months ended September 30, 1995.
Net income for the third quarter of 1996 was $434,000, or $.13 per share,
compared to $1.98 million, or $.58 per share (pro forma), in the like quarter a
year ago. Net income for the first nine months of 1996 was $2.0 million, or $.62
per share, compared to $3.28 million, or $1.02 per share (pro forma), in the
like period of 1995. Earnings were higher in 1995 primarily because the company
had a $2.2 million gain on the modification of a credit facility, the
contribution from the third quarter equipment sales mentioned above, and lower
general and administrative expenses.
"We are beginning to use the proceeds from our IPO, which we received at
the end of the third quarter, to purchase additional engines for our operating
lease portfolio and additional inventory for WASI (Willis Aeronautical Services,
Inc.), our spare parts subsidiary. The offering was completed at the end of the
third quarter and had virtually no impact on our third quarter results," said
Charles F. Willis, President. For the trailing twelve month period ended
September 30, 1996, the return on weighted average assets was 2.2% and the
return on weighted average equity was 34.7%.
At September 30, 1996, Willis had 28 engines on lease with a book value of
$75.4 million compared to 27 engines with a book value of $69.4 million at the
end of 1995's third quarter. The operating lease portfolio generated $3.5
million in lease revenues in the third quarter of 1996 compared to $3.9 million
in the third quarter of 1995. For the first nine months of 1996, Willis
generated operating lease revenue of $10.4 million up 4.5% from $9.9 million in
the like period of 1995. Year-to-date, margins on the operating leases improved
to 39.0% compared to 22.5% in the like period of 1995.
"The number of engines dropped by a total of 2 engines during the quarter.
We will continue to purchase additional engines that meet our acquisition
criteria. We completed the acquisition of one engine in September. With the $17
million proceeds from our IPO used together with debt financing, we intend to
increase the size of our lease portfolio," Willis noted.
(more)
<PAGE>
WLFC - Third Quarter Earnings
November 11, 1996
Page Two
"WASI increased its contribution to sales and operating margins this year,"
Willis said. In the third quarter, spare parts sales increased 9.5% to $869,000
compared to sales of $794,000 in the third quarter a year ago. For the first
nine months of 1996, parts sales increased 55% to $3.3 million compared to $2.2
million in the like quarter a year ago. Nine month margins in 1996 also improved
to 50% compared to 36.1% in the like period of 1995. The company increased the
spare parts inventories by 23% since the beginning of the year."
"The small number and large transaction size of engine resales means that
our revenues and earnings can fluctuate widely from quarter to quarter," stated
Elliot Fischer, Chief Financial Officer. Third quarter sales of equipment
acquired for resale generated revenue of $2.8 million compared to $5.4 million
in the third quarter of 1995. In the first nine months of 1996 Willis generated
$9.6 million from engines acquired for resale compared to $5.4 million in the
first nine months of 1995.
In the third quarter of 1995, Willis completed three transactions
generating a gross margin of 49%. "We believe the margins on these transactions
were unusually high," Fischer explained. "So far this year, the gross margin on
resale transactions was 12%. The 1996 margin was adversely affected by a loss of
$237,000 on third quarter transactions due to higher than expected refurbishment
costs on two engines.
"General and administrative expenses were higher in 1996 by $333,000 in the
third quarter and $1.1 million for the nine months in order to support our
growth in assets and volume of transactions," Fischer explained.
"At September 30, Willis had 28 engines under lease to 20 airlines
operating in 11 countries," Willis noted. The company focuses on commercial jet
aircraft engines, particularly engines for the most commonly used Boeing,
McDonnell-Douglas, and Airbus aircraft.
According to The Boeing Report, 12,000 net new aircraft are forecast for
delivery worldwide over the next 20 years, requiring about 39,000 installed
engines. Assuming a ratio of approximately 17% spare engines to installed
engines, the Report estimates potential market demand for approximately 6,600
additional spare engines through the year 2015.
Willis' debt to equity ratio dropped to 3.1:1 due to the equity raised in
September. Willis' assets totaled $108.6 million at September 30, 1996, compared
to $85.8 million a year ago. Shareholder' equity was $20.3 million following the
IPO and tangible book value was $3.96 per share at quarter end.
Willis Lease Finance Corporation's primary businesses are the leasing of
spare replacement aircraft engines and the strategic acquisition and resale of
aircraft engines and parts to the worldwide commercial airline aftermarket. The
company commenced leasing operations in 1988 and established WASI (Willis
Aeronautical Services, Inc.) to conduct its spare parts resale operation in
October 1994. On Friday, November 7, the stock closed the trading day at $11.125
per share.
Except for historical information contained herein, the matters discussed
in this release contain forward looking statements that involve risks and
uncertainties. The company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, the effect of changing
economic conditions, trends in the airline industry, changes in interest rates,
liability risks associated with providing engines and services to aircraft, the
ability of the Company to profitably remarket or release engines in a timely
manner, changes in maintenance requirements and safety regulation, and other
risk detailed in the Company's Registration Statement and continuing reports
filed with the Securities and Exchange Commission.
(more)
<PAGE>
<TABLE>
WLFC - Third Quarter Earnings
November 11, 1996
Page Three
<CAPTION>
FINANCIAL HIGHLIGHTS Third Quarter Ended Nine Months Ended
- -------------------- September 30, September 30,
(in thousands except per share)(unaudited) 1996 1995 1996 1995
--------------------- --------------------
<S> <C> <C> <C> <C>
Revenues:
Operating lease revenue $3,544 $ 3,866 $10,379 $ 9,931
Gain (loss) on sale of leased engines $ 0 0 0 (110)
Spare parts sales $ 869 794 3,303 2,205
Sale of equipment acquired for resale $2,781 5,372 9,605 5,372
Interest and other income $ 150 26 197 82
------ ------- ------- -------
TOTAL REVENUE $7,344 $10,058 $23,484 $17,480
Expenses:
Interest $1,101 $1,174 $ 3,371 $ 4,355
Depreciation 735 1,228 2,513 3,078
Residual share 162 118 536 283
Cost of spare parts sales 218 494 1,604 1,388
Cost of equipment acquired for resale 3,018 2,740 8,551 2,740
General & administrative expense 1,331 999 3,434 2,322
------ ------- ------- -------
TOTAL EXPENSES $6,565 $6,753 $20,009 $14,166
Gain on modification of credit facility 0 0 0 2,203
------ ------- ------- -------
Income (loss) before income taxes and minority interest $ 779 3,305 3,475 5,517
Income taxes (300) (1,316) (1,395) (2,207)
------ ------- ------- -------
Income (loss) before minority interest 479 1,989 2,080 3,310
Less: minority interest in net income of subsidiary (45) (8) (79) (29)
------ ------- ------- -------
Net income (loss) $ 434 $ 1,981 $2,001 $3,281
Earnings per share (pro forma) $ 0.13 $ 0.58 $ 0.62 $ 1.02
Weighted average shares outstanding 3,425 3,425 3,215 3,215
Period Ended Year Ended Period Ended
Sept. 30, 1996 Dec. 31, 1995 Sept. 30, 1995
-------------- ------------- --------------
Cash and short term investments $ 14,681 $ 816 $ 2,310
Aircraft engines net $ 75,368 $ 74,704 $ 69,427
Spare parts inventory $ 3,598 $ 2,916 $ 3,115
Total receivables $ 2,036 $ 1,259 $ 1,394
Total assets $ 108,604 $ 91,437 $ 85,819
Total liabilities $ 88,316 $ 86,540 $ 80,774
Shareholders' equity $ 20,288 $ 4,812 $ 4,988
-0-
<FN>
NOTE: Transmitted on PR NewsWire at 1:59 p.m. PST, November 11, 1996.
</FN>
</TABLE>
