<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997.
REGISTRATION NO. 333-39865
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WILLIS LEASE FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 5088 68-0070656
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
</TABLE>
180 HARBOR DRIVE, SUITE 200
SAUSALITO, CALIFORNIA 94965
(415) 331-5281
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES F. WILLIS, IV
CHIEF EXECUTIVE OFFICER
WILLIS LEASE FINANCE CORPORATION
180 HARBOR DRIVE, SUITE 200
SAUSALITO, CALIFORNIA 94965
(415) 331-5281
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DOUGLAS D. SMITH, ESQ. RICHARD A. BOEHMER, ESQ.
GIBSON, DUNN & CRUTCHER LLP O'MELVENY & MYERS LLP
ONE MONTGOMERY STREET 400 SOUTH HOPE STREET
TELESIS TOWER LOS ANGELES, CALIFORNIA 90071
SAN FRANCISCO, CALIFORNIA 94104 TELEPHONE NO. (213) 669-6000
TELEPHONE NO. (415) 393-8200 TELECOPIER NO. (212) 669-6407
TELECOPIER NO. (415) 986-5309
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997
PROSPECTUS
1,500,000 SHARES
LOGO
COMMON STOCK
---------------------------
All of the 1,500,000 shares of Common Stock, no par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Willis Lease
Finance Corporation (the "Company"). The Common Stock is traded on the Nasdaq
National Market under the symbol "WLFC." On November 14, 1997 the last sale
price of the Common Stock as reported by the Nasdaq National Market was $18.75
per share. See "Price Range of Common Stock."
---------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
===============================================================================================
Underwriting
Price to Discounts Proceeds to
Public(1) and Commissions(2) Company(2)
- -----------------------------------------------------------------------------------------------
Per Share.......................... $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)........................... $ $ $
===============================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $510,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 225,000 shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
all such shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively.
---------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters, subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that the delivery of
certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York, on or about December , 1997.
---------------------------
LEHMAN BROTHERS DAIN BOSWORTH
INCORPORATED
December , 1997
<PAGE> 3
[PHOTOS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON
STOCK PRIOR TO THE PRICING OF THIS OFFERING FOR THE PURPOSE OF MAINTAINING THE
PRICE OF THE COMMON STOCK AND THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THIS OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A
DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes included elsewhere in this
Prospectus, including the unaudited consolidated financial statements for the
nine month periods ended September 30, 1997 and 1996 (the "Unaudited Financial
Statements") and the audited consolidated financial statements for the years
ended December 31, 1996 and 1995 (the "Audited Financial Statements"). Unless
otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised.
THE COMPANY
Willis Lease Finance Corporation (the "Company") provides operating leases
of commercial jet aircraft engines and aircraft equipment and sells aircraft
engines and parts to air carriers, manufacturers and overhaul/repair facilities
worldwide. The Company's core business is acquiring and leasing, primarily
pursuant to operating leases, commercial aircraft spare engines and other
aircraft equipment. As a significant corollary to its core business, the
Company, through its wholly-owned subsidiary Willis Aeronautical Services, Inc.
("WASI"), specializes in the purchase and resale of aftermarket airframe and
engine parts, engines, modules and rotable components. The Company also engages
in the selective purchase and resale of commercial aircraft engines. Integrating
these three activities improves the Company's ability to maximize the residual
and resale values of its engines, equipment and parts. The Company's senior
management has extensive expertise in the commercial jet aircraft engine
industry, a business which is not the focus of the major commercial aircraft
lessors.
As of September 30, 1997, the Company had 42 engines and eight aircraft
parts packages under lease to 34 customers in 20 countries. The Company's
strategy for its leasing business is to focus primarily on marketing operating
leases of commercial aircraft engines and related equipment to a diversified
base of customers worldwide. With operating leases, the Company retains the
potential benefit and assumes the risk of the residual value of the leased
asset, as distinct from finance leases where the entire cost of the asset is
generally recovered over the term of the lease. In order to maximize residual
values, the Company focuses on popular Stage III commercial jet aircraft
engines. As of September 30, 1997, all of the engines in the Company's lease
portfolio were Stage III engines and were generally suitable for use on one or
more commonly used aircraft.
Through WASI, the Company purchases and resells various aircraft equipment
in the aftermarket. WASI's strategy is to focus on the acquisition of aviation
equipment, such as whole engines and aircraft, which can be dismantled and sold
as parts at a greater profit. After the completion of an extensive facilities
audit and numerous meetings with the Company's management, the Airline Suppliers
Association, an FAA recognized independent quality assurance organization,
accredited WASI as an aftermarket parts supplier. WASI recently expanded its
operations by opening a new facility in Arizona to facilitate the disassembly of
aircraft into parts for sale.
The Company also engages in the selective purchase and resale of commercial
aircraft engines and engine components in the aftermarket. It is the Company's
general objective to minimize risk by not purchasing engines or components on
speculation; however, on occasion, the Company purchases engines and components
without having a commitment for their sale. To date, these engines and
components have been successfully sold or leased by the Company shortly after
acquisition.
Management believes the Company's market offers attractive growth
opportunities. Industry analysts estimate that the worldwide fleet of
approximately 11,500 commercial aircraft utilizes approximately 30,000 engines,
including approximately 5,000 spare engines valued at over $11 billion. The
Company's engine portfolio represents approximately 1% of the current market for
spare engines. Based on industry analysts' projections of growth in the
commercial aircraft fleet, the Company expects commercial airlines to acquire
approximately 5,300 additional spare engines over the next 20 years.
Airlines have increasingly turned to operating leases as an alternative to
traditional financing of their aircraft, engines and spare parts. Operating
leases allow airlines greater fleet and financial flexibility due to
3
<PAGE> 5
their shorter term nature and relatively small initial capital outlay. Aviation
Week and Space Technology ("Aviation Week") reports that leasing will be the
primary means by which the global air transport industry acquires new aircraft
between now and 1999, and probably beyond. According to Aviation Week, based
upon data provided by GE Capital Aviation Services, 84% of the world's airlines
leased all or a portion of their equipment in 1996, up from 59% in 1986.
As part of its growth stategy, the Company intends to expand its existing
operations to include leasing and selling similar assets in additional markets
such as the corporate, commuter and cogeneration markets. For example, the
Company recently made its first investment in the commuter market by purchasing
three de Havilland DHC-8-102 commuter aircraft and three spare engines, which
are currently on lease to a domestic commuter carrier.
The Company is a California corporation which commenced its leasing
business in 1988. Its executive offices are located at 180 Harbor Drive, Suite
200, Sausalito, California 94965 and its telephone and facsimile numbers are
(415) 331-5281 and (415) 331-0607, respectively. The Company transacts business
directly and through its subsidiaries. Unless otherwise indicated, references in
this Prospectus to the Company refer to Willis Lease Finance Corporation and its
subsidiaries.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 1,500,000 shares
Common Stock to be outstanding after
the Offering....................... 6,952,320 shares(1)
Use of proceeds...................... To finance the acquisition of additional equipment for
lease or sale, potential acquisitions of businesses
complementary to the Company's existing businesses and
the possible expansion into other aviation-related
activities and businesses, as well as for working
capital and other general corporate purposes. Pending
such uses, the net proceeds will be used to reduce the
outstanding borrowings under the Company's revolving
line of credit. See "Use of Proceeds."
Nasdaq National Market Symbol........ WLFC
</TABLE>
- ---------------
(1) Excludes (i) 438,500 shares of Common Stock issuable upon exercise of
options granted under the Company's 1996 Stock Option/Stock Issuance Plan
(the "1996 Plan") and 71,500 additional shares of Common Stock reserved for
issuance under the 1996 Plan, (ii) 64,473 shares of Common Stock reserved
for issuance under the Company's Employee Stock Purchase Plan and (iii)
100,000 shares of Common Stock issuable upon exercise of outstanding
warrants. See "Management -- 1996 Stock Option/Stock Issuance Plan," and
"Employee Stock Purchase Plan."
------------------------------------
The Company's design logo is a service mark of the Company for which
registration has been applied. All other service marks, trademarks or trade
names referred to in this Prospectus are the property of their respective
owners.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Operating lease revenue.................. $ 8,744 $10,323 $13,636 $13,771 $13,740 $10,379 $13,481
Finance lease revenue.................... -- -- -- -- -- -- 223
Gain (loss) on sale of leased
equipment.............................. 659 (281) 633 (483) 2 -- 1,333
Spare parts sales........................ -- -- 795 3,859 5,843 3,303 11,459
Sale of equipment acquired for resale.... 3,598 -- 2,184 5,472 12,105 9,605 12,748
Interest and other income................ 70 938 542 119 618 197 544
------- ------- ------- ------- ------- ------- -------
Total revenue.......................... 13,071 10,980 17,790 22,738 32,308 23,484 39,788
Expenses:
Interest expense......................... 4,815 4,809 5,948 5,722 4,323 3,371 5,226
Depreciation expense..................... 2,666 3,070 4,447 4,703 3,181 2,513 2,995
Residual share(1)........................ 279 445 1,284 408 723 536 598
Cost of spare parts sales................ -- -- 659 2,546 3,308 1,604 7,751
Cost of equipment acquired for resale.... 3,140 -- 1,863 2,742 10,789 8,551 10,672
General and administrative expense....... 1,357 1,533 1,616 3,335 5,124 3,434 6,358
------- ------- ------- ------- ------- ------- -------
Total expenses......................... 12,257 9,857 15,817 19,456 27,448 20,009 33,600
Gain on modification of credit
facility(2).............................. -- -- -- 2,203 -- -- --
------- ------- ------- ------- ------- ------- -------
Income before income taxes, minority
interest and extraordinary item.......... 814 1,123 1,973 5,485 4,860 3,475 6,188
Income taxes............................... (327) (454) (797) (2,212) (1,976) (1,395) (2,456)
------- ------- ------- ------- ------- ------- -------
Income before minority interest and
extraordinary item....................... 487 669 1,176 3,273 2,884 2,080 3,732
Less: minority interest in net income of
subsidiary............................... -- -- 4 57 79 79 --
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item........... 487 669 1,172 3,216 2,805 2,001 3,732
Extraordinary item less applicable income
taxes(3)................................. -- -- -- -- -- -- 2,008
------- ------- ------- ------- ------- ------- -------
Net income................................. $ 487 $ 669 $ 1,172 $ 3,216 $ 2,805 $ 2,001 $ 5,740
======= ======= ======= ======= ======= ======= =======
Earnings per share before extraordinary
item..................................... $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $0.65
Extraordinary item......................... -- -- -- -- -- -- 0.36
------- ------- ------- ------- ------- ------- -------
Earnings per share......................... $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $1.01
======= ======= ======= ======= ======= ======= =======
Weighted average number of shares
outstanding.............................. 3,111 3,111 3,111 3,111 3,796 3,215 5,709
Return on average assets(4)................ 0.79% 0.97% 1.54% 3.68% 2.59% 2.67% 3.34%
Return on average equity(4)................ 172.39% 82.90% 75.37% 94.99% 20.02% 21.26% 19.01%
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------
AS
ACTUAL ADJUSTED(5)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets................................................................................ $173,018 $ 178,018
Equipment under lease, net.................................................................. 135,886 135,886
Debt financing(6)........................................................................... 108,062 82,134
Shareholders' equity........................................................................ 29,164 55,092
Debt to equity ratio........................................................................ 3.7x 1.5x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
LEASE PORTFOLIO:
Engines in lease portfolio at end of the period(7).......... 26 25 26 31 32 43
</TABLE>
(footnotes on following page)
5
<PAGE> 7
(1) The Company has negotiated a sharing of residual proceeds with certain
lenders in exchange for a higher percentage financing of certain aircraft
engines. Residual sharing arrangements apply to five of the Company's
engines (representing $15.5 million of book value) as of September 30, 1997.
The Company accrues for its residual sharing obligations using net book
value as a proxy for residual proceeds. See "Business -- Financing/Source of
Funds" and Note 1 to the Audited Financial Statements.
(2) Gain on modification of credit facility of $2.2 million represents the
elimination of residual share payable of $2.4 million less the net loss on
the sale of two engines to the lender of $199,000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 4 to the Audited Financial Statements.
(3) In February 1997, the Company obtained a new loan agreement for $41.5
million to replace an existing loan of $44.2 million. The transaction
resulted in an extraordinary gain of $2 million or $0.36 per weighted
average share, net of tax. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 4 to the Unaudited
Financial Statements.
(4) Calculations are based on the average of beginning and end of period
balances. Nine month results are annualized and exclude the extraordinary
item.
(5) As adjusted to give effect to the sale of 1,500,000 shares of Common Stock
offered hereby at an assumed price of $18.75 per share (the closing price
per share of the Common Stock on November 14, 1997), less underwriting
discounts and estimated expenses of the Offering and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
(6) Inclusive of accrued interest and capital lease obligation and exclusive of
residual share payable.
(7) At September 30, 1997, 42 of the 43 engines in the lease portfolio were on
lease. In addition, at September 30, 1997, eight parts packages with a net
book value of $7.0 million were on lease.
6
<PAGE> 8
RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to other information in this Prospectus, the
following risk factors should be considered carefully by potential purchasers in
evaluating an investment in the Common Stock offered hereby. Except for
historical information contained herein, this Prospectus contains
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed below as well as those discussed elsewhere herein.
OWNERSHIP RISKS
The Company leases its portfolio of aircraft engines and spare parts
packages (collectively, "Aircraft Equipment") primarily under operating leases
as opposed to finance leases. Under an operating lease, the Company retains
title to the Aircraft Equipment and assumes the risk of not recovering its
entire investment in the Aircraft Equipment through the re-leasing and
remarketing process. Operating leases require the Company to re-lease or sell
Aircraft Equipment in its portfolio in a timely manner upon termination of the
lease in order to minimize off-lease time and recover its investment in the
Aircraft Equipment. Numerous factors, many of which are beyond the control of
the Company, may have an impact on the Company's ability to re-lease or sell
Aircraft Equipment on a timely basis. Among the factors are general market
conditions, regulatory changes (particularly those imposing environmental,
maintenance and other requirements on the operation of aircraft engines),
changes in the supply or cost of the Aircraft Equipment and technological
developments. Further, the value of a particular used aircraft engine varies
greatly depending upon its condition, the number of hours remaining until the
next major maintenance of the aircraft engine is required and general conditions
in the airline industry. In addition, the success of an operating lease depends
in part upon having the Aircraft Equipment returned by the lessee in marketable
condition as required by the lease. Consequently, there can be no assurance that
the Company's estimated residual value for the Aircraft Equipment will be
realized. As of September 30, 1997, the Company had 42 engines and eight parts
packages under lease to 34 customers in 20 countries (one additional engine is
off lease and is being actively marketed by the Company). If the Company is
unable to re-lease or sell the Aircraft Equipment on favorable terms, its
business, financial condition, cash flow, ability to service debt and results of
operations could be adversely affected.
The Company, through WASI, also acquires aviation equipment such as whole
engines and aircraft which can be dismantled and sold as parts. Before parts may
be installed in an aircraft, they must meet certain standards of condition
established by the Federal Aviation Administration ("FAA"). See "Government
Regulations" below. Parts must also be traceable to sources deemed acceptable by
the FAA. See "Business -- Spare Parts Sales." Parts owned by the Company may not
meet applicable standards or standards may change, causing parts which are
already in the Company's inventory to be scrapped or modified. Engine
manufacturers may also develop new parts to be used in lieu of parts already
contained in the Company's inventory. In all such cases, to the extent the
Company has such parts in its inventory, their value may be reduced. In
addition, if the Company does not sell airframe and engine component parts that
it purchases in the time frame contemplated at acquisition, the Company may be
subject to unanticipated inventory financing costs as well as all the risks of
ownership described above.
The Company also engages in the selective purchase and resale of commercial
aircraft engines and engine components in the aftermarket. On occasion, the
Company purchases engines or components without having a commitment for their
sale. If the Company were to purchase an engine or component without having a
firm commitment for its sale or if a firm commitment for sale were to exist but
not be consummated for whatever reason, the Company would be subject to all the
risks of ownership described above.
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<PAGE> 9
INDUSTRY RISKS
Downturns in the air transportation industry affect each of the three
components of the Company's business. In particular, substantial increases in
fuel costs or interest rates, increased fare competition, slower growth in air
traffic, or any significant downturn in the general economy could adversely
affect the air transportation industry and may therefore negatively impact the
Company's business, financial condition and results of operations.
While the Company believes that its lease terms protect its Aircraft
Equipment and the Company's investment in such Aircraft Equipment, there can be
no assurance that the financial difficulties experienced by a number of airlines
will not have an adverse effect on the Company's business, financial condition
or results of operations. In recent years and as discussed in "Customer Credit
Risks" below, a number of commercial airlines have experienced financial
difficulties, in some cases resulting in bankruptcy proceedings.
CUSTOMER CREDIT RISKS
A lessee may default in performance of its lease obligations and the
Company may be unable to enforce its remedies under a lease. The Company's
existing and prospective customers include smaller domestic and foreign
passenger airlines, freight and package carriers and charter airlines, which,
together with major passenger airlines, may suffer from the factors which have
historically affected the airline industry. As a result, certain of these
customers may pose credit risks to the Company. The Company's inability to
collect receivables due under a lease or to repossess Aircraft Equipment in the
event of a default by a lessee could have a material adverse effect on the
Company's business, financial condition or results of operations. A number of
airlines have experienced financial difficulties, certain airlines have filed
for bankruptcy and a number of such airlines have ceased operations. In most
cases where a debtor seeks protection under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code"), creditors are automatically stayed from
enforcing their rights. In the case of United States certified airlines, Section
1110 of the Bankruptcy Code provides certain relief to lessors of the aircraft
equipment. Specifically, the debtor airline has 60 days from the date the
airline seeks protection under Chapter 11 of the Bankruptcy Code to agree to
perform its obligations and to cure any defaults. If it does not do so, the
lessor may repossess the aircraft equipment. The scope of Section 1110 has been
the subject of significant litigation and there can be no assurance that the
provisions of Section 1110 will protect the Company's investment in an aircraft
engine in the event of a lessee's bankruptcy. In addition, Section 1110 does not
apply to lessees located outside of the United States and applicable foreign
laws may not provide comparable protection.
During the three years ended September 30, 1997, three lessees of the
Company filed for bankruptcy protection or otherwise became insolvent or ceased
operations. In two of these cases (Great American Airways and Mark Air), the
Company's engines were returned and re-leased. In the third case, Air Liberte
S.A. was acquired by British Airways and the lease continues. On October 5,
1997, Western Pacific Airlines, Inc., a domestic lessee of three of the
Company's engines with a combined net book value of $8.7 million, filed a
petition under Chapter 11 of the Bankruptcy Code in the District of Colorado.
Western Pacific has cured all defaults under its leases with the Company. There
can be no assurances that Western Pacific will remain current in its lease
payments in the future.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced fluctuations in its quarterly operating results
and anticipates that these fluctuations may continue. Such fluctuations may be
due to a number of factors, including the timing of sales of engines and spare
parts and engine marketing activities, unanticipated early lease terminations,
the timing of engine acquisitions or a default by a lessee. Given the
possibility of such fluctuations, the Company believes that comparisons of the
results of its operations for preceding quarters are not necessarily meaningful
and that results for any prior quarter should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Quarterly Results of Operations."
In the event the Company's revenues or earnings for any quarter are less than
the level
8
<PAGE> 10
expected by securities analysts or the market in general, such shortfall could
have an immediate and significant adverse impact on the market price of the
Company's Common Stock.
INTERNATIONAL RISKS
In 1996, approximately 61% of the Company's lease revenue was generated by
leases to foreign customers. During the nine months ended September 30, 1997,
approximately 64% of the Company's lease revenue was generated by leases to
foreign customers. Such leases may present greater risks to the Company because
certain foreign laws, regulations and judicial procedures may not be as
protective of lessor rights as those which apply in the United States. In
addition, many foreign countries have currency and exchange laws regulating the
international transfer of currencies. The Company attempts to minimize its
currency and exchange risks by negotiating all of its lease transactions in U.S.
Dollars and all guarantees obtained to support various lease agreements are
denominated for payment in U.S. Dollars. To date, the Company has experienced
some collection problems under certain leases with foreign airlines, and there
can be no assurance that the Company will not experience such collection
problems in the future. The Company may also experience collection problems
related to the enforcement of its lease agreements under foreign local laws and
the attendant remedies in such locales. Consequently, the Company is subject to
the timing and access to courts and the remedies local laws impose in order to
collect its lease payments and recover its assets. In addition, political
instability abroad and changes in international policy also present risks
associated with expropriation of the Company's leased engines. To date, the
Company has experienced limited problems in reacquiring assets; however, there
can be no assurance that the Company will not experience more serious problems
in the future.
Certain countries have no registration or other recording system with which
to locally establish the Company's or its lender's interest in the engines and
related leases, potentially making it more difficult for the Company to prove
its interest in an engine in the event that it needs to recover an engine
located in such a country.
The Company's engines and the aircraft on which they are installed can be
subject to certain foreign taxes and airport fees. Consequently, unexpected
liens on an engine or the aircraft on which it is installed could be imposed in
favor of a foreign entity, such as Eurocontrol or the airports of the United
Kingdom.
DEPENDENCE UPON AVAILABILITY OF FINANCING
The operating lease business is a capital intensive business. The Company's
typical operating lease transaction requires a cash investment by the Company of
approximately 15% to 20% of the aircraft engine purchase price, commonly known
as an "equity investment." The Company's equity investments have historically
been financed from internally generated cash and the net proceeds of the
Company's initial public offering which was completed on September 18, 1996 at a
price of $8.00 per share (the "Initial Public Offering"), and in the future will
include a substantial portion of the net proceeds of this Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The balance of the purchase
price is typically financed with the proceeds of secured borrowings.
Accordingly, the Company's ability to successfully execute its business strategy
and to sustain its operations is dependent, in part, on the availability of debt
and equity capital. There can be no assurance that the necessary amount of such
capital will continue to be available to the Company on favorable terms, or at
all. If the Company were unable to continue to obtain required financing on
favorable terms, the Company's ability to add new leases to its portfolio and
parts inventory would be limited, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
BACK LEVERAGING
The Company typically acquires the engines it leases with a combination of
equity capital and funds borrowed from financial institutions. In some
circumstances, the Company acquires assets before it has obtained debt
financing. There can be no assurance that debt financing will be available after
the asset has been acquired or, if available, at attractive rates or terms.
Factors that could cause debt financing to be more
9
<PAGE> 11
expensive or unavailable include changes in interest rates, financial conditions
of the lessee or the Company, prospects for the airline industry or the asset
type as well as general economic conditions. If debt financing is not available,
a like amount of the Company's equity capital would be unavailable for use to
acquire additional assets, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
INTEREST RATE RISKS
The Company's engine leases are generally structured at fixed rental rates
for specified terms. As of September 30, 1997, borrowings subject to interest
rate risk totaled $66.6 million or 64% of the Company's total borrowings.
Increases in interest rates could narrow or eliminate the spread, or result in a
negative, spread between the rental revenue the Company realizes under its
leases and the interest rate that the Company pays under its lines of credit or
loans. The Company has purchased an amortizing interest rate cap with a notional
principal amount of $37.2 million as of September 30, 1997, to reduce its
interest rate exposure; however, there can be no assurance that the Company's
business, operating results or financial condition will not be adversely
affected during any period of increases in interest rates. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Exposure."
COMPETITION
In the medium-term engine lease market segment, which is the Company's
target market, the Company principally competes with Shannon Engine Services,
headquartered in Shannon, Ireland, which is owned in part by CFM International
("CFM") and Rolls Royce Finance Ltd. ("Rolls Royce"). Rolls Royce limits its
leasing activities to products of its parent company and related parties. The
Bank of Tokyo-Mitsubishi, through its affiliate Engine Lease Finance in Shannon,
Ireland, also competes with the Company. Each of these competitors is
substantially larger and has greater financial resources than the Company which
may permit, among other things, greater access to capital markets at more
favorable terms. In addition, major aircraft lessors, including International
Lease Finance Corporation and General Electric Capital Aviation Services,
compete with the Company to the extent that they include spare engine leases
with their aircraft leases.
With respect to engine marketing and spare parts and component sales, the
Company competes with airlines, aircraft manufacturers, aircraft, engine and
parts brokers, and parts distributors. The Company's major competitors include
the Allen Aircraft division of AAR Corp., The AGES Group, The Memphis Group,
Aviation Sales Company, Kellstrom Industries and AVTEAM, Inc. Certain of these
competitors may have, or may have access to, financial resources substantially
greater than the Company. Significant competition encountered by the Company in
the future may limit the Company's ability to expand its business, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Certain of the Company's competitors have substantially greater resources
than the Company, including greater name recognition, larger inventories, a
broader range of material, complementary lines of business and greater
financial, marketing and other resources. In addition, original equipment
manufacturers ("OEMs"), aircraft maintenance providers, FAA certified repair
facilities and other aviation aftermarket suppliers may vertically integrate
into the aircraft engine leasing or aircraft engine/spare parts sales industry,
thereby significantly increasing industry competition. A variety of potential
actions by any of the Company's competitors, including a reduction of product
prices or the establishment by competitors of long-term relationships with new
or existing customers, could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will continue to compete effectively against present
and future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
10
<PAGE> 12
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth in revenues. Such
growth has placed, and is expected to continue to place, a significant strain on
the Company's managerial, operational and financial resources. Due to the
Company's rapid pace of growth over the past year, the Company hired three new
officers (an Executive Vice President and Chief Administrative Officer, an
Executive Vice President and Chief Financial Officer and a Senior Vice President
and General Counsel) during the four months prior to September 30, 1997. There
can be no assurance that the Company will be able to effectively manage the
expansion of its operations, or that the Company's systems, procedures or
controls will be adequate to support the Company's operations. An inability to
effectively manage growth could have a material adverse effect on the Company's
business, financial condition or results of operations.
ACQUISITION AND EXPANSION RISKS
One of the components of the Company's growth strategy is the select
acquisition of businesses complementary to the Company's existing businesses and
possible expansion into new aviation-related activities. The inability of the
Company to identify suitable acquisition candidates or to complete acquisitions
or expansions on reasonable terms could adversely affect the Company's ability
to grow. In addition, any acquisition or expansion made by the Company may
result in potentially dilutive issuances of equity securities, the incurrence of
additional debt and future charges to earnings related to the amortization of
goodwill and other intangible assets. The Company also may experience
difficulties in the assimilation of operations, services, products and
personnel, an inability to sustain or improve historical revenue levels, the
diversion of management's attention from ongoing business operations and the
potential loss of key employees. Any of the foregoing could have a material
adverse effect on the Company's business, financial condition or results of
operations. The acquisition of other equipment leasing companies or portfolios
creates certain additional risks. For example, because acquired leases have been
originated by other companies, they are not subject to the Company's
underwriting policies and procedures and, therefore, may be subject to greater
risks of payment delinquencies and charge-offs. In addition, acquired leases may
consist of products not currently offered by the Company, or offered only on a
limited basis. Acquired leases may also increase the concentration of the
Company's portfolio of leases serviced in certain geographical regions or change
the relative concentration of such portfolio among geographical regions.
Acquired leases may not contain the same indemnification provisions, maintenance
provisions, equipment residual value assumptions and other material terms as the
Company's current leases. Finally, the provisions of acquired leases may not
adequately protect the Company from claims arising out of the lessee's use of
the acquired lease equipment.
PRODUCT LIABILITY RISKS
The Company is exposed to product liability claims in the event that the
use of its aircraft engines or parts is alleged to have resulted in bodily
injury or property damage. In addition to requiring indemnification under the
terms of the lease, the Company requires its lessees to carry the types of
insurance customary in the air transportation industry, including comprehensive
liability insurance and casualty insurance. The Company and, if applicable its
lenders, are named as an additional insured on liability insurance policies
carried by lessees, with the Company or its lenders normally identified as the
payee for loss and damage to the equipment. The Company monitors compliance with
the insurance provisions of the leases. To date, the Company has not experienced
any significant uninsured or insured aviation-related claims and has not
experienced any product liability claims related to its aircraft engines or
parts. However, an uninsured or partially insured claim, or claim for which
third-party indemnification is not available, could have a material adverse
effect upon the Company's business, financial condition or results of
operations.
11
<PAGE> 13
RISK OF CHANGES IN TAX LAWS OR ACCOUNTING PRINCIPLES
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an ongoing
basis. In addition, the Company's lessees currently enjoy favorable accounting
and tax treatment by entering into operating leases. Any change to current tax
laws or accounting principles that make operating lease financing less
attractive could adversely affect the Company's business, financial condition or
results of operations.
DEPENDENCE ON KEY MANAGEMENT
The Company's business operations are dependent in part upon the expertise
of certain key employees. Loss of the services of such employees, particularly
Charles F. Willis, IV, Chief Executive Officer or Edwin F. Dibble, the President
of WASI, would have a material adverse effect on the Company's business. The
Company has entered into an employment agreement with Mr. Dibble and the Company
maintains key man life insurance of $2.5 million on Mr. Willis and $1.5 million
on Mr. Dibble. See "Management."
GOVERNMENT REGULATION
The Company's customers are generally subject to a high degree of
regulation in the various jurisdictions in which they operate. Such regulations
also indirectly affect the Company's business operations. Under the provisions
of the Transportation Act, as amended, the FAA exercises regulatory authority
over the air transportation industry. The FAA regulates the manufacture, repair
and operation of all aircraft engines operated in the United States. Its
regulations are designed to insure that all aircraft and aviation equipment are
continuously maintained in proper condition to ensure safe operation of the
aircraft. Similar rules apply in other countries. All aircraft must be
maintained under a continuous condition monitoring program and must periodically
undergo thorough inspection and maintenance. The inspection, maintenance and
repair procedures for the various types of commercial aircraft equipment are
prescribed by regulatory authorities and can be performed only by certified
repair facilities utilizing certified technicians. Certification and conformance
is required prior to installation of a part on an aircraft. Presently, whenever
necessary with respect to a particular engine or engine component, the Company
utilizes FAA and/or Joint Aviation Authority certified repair stations to repair
and certify engines and components to ensure worldwide marketability. The FAA
can suspend or revoke the authority of air carriers or their licensed personnel
for failure to comply with regulations and ground aircraft if their
airworthiness is in question. In addition, by the year 2000, federal regulations
will stipulate that all aircraft engines hold, or be capable of holding, a noise
certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the
Chicago Convention, or have been shown to comply with Stage III noise levels set
out in Section 36.5 of Appendix C of Part 36 of the Federal Aviation Regulations
of the United States. As of September 30, 1997, all of the engines in the
Company's lease portfolio were Stage III engines. See "Business -- Government
Regulation."
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of the Offering, the Company's principal shareholder, Mr.
Willis, will beneficially own approximately 44% of the outstanding shares of
Common Stock of the Company and therefore effectively control the Company.
Accordingly, Mr. Willis will have the power to contest the outcome of
substantially all matters, including the election of the Board of Directors of
the Company, submitted to the shareholders for approval. In addition, future
sales by the Company's principal shareholder of substantial amounts of Common
Stock, or the potential for such sales, could adversely affect the prevailing
market price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Principal Shareholders,"
"Description of Capital Stock" and "Shares Eligible for Future Sale."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to operating results of the Company, changes in general
conditions in the economy, the financial markets, the airline industry, changes
in accounting principles or tax laws applicable to the Company or its lessees,
or other
12
<PAGE> 14
developments affecting the Company, its customers or its competitors, some of
which may be unrelated to the Company's performance, and changes in earnings
estimates or recommendations by securities analysts.
ANTI-TAKEOVER PROVISIONS
Certain provisions of law, and the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") and Bylaws could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise, and the removal of incumbent officers and directors. These
provisions include authorization of the issuance of up to 5,000,000 shares of
Preferred Stock, with such characteristics that may render it more difficult or
tend to discourage a merger, tender offer or proxy contest. The Articles of
Incorporation also provide that, for as long as the Company has a class of stock
registered pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), shareholder action can be taken only at an annual or special
meeting of shareholders and may not be taken by written consent. The Company's
Bylaws also limit the ability of shareholders to raise matters at a meeting of
shareholders without giving advance notice. In addition, the Company has
qualified as a "listed corporation" as defined in Section 301.5(d) of the
California Corporation Code and cumulative voting has been eliminated. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids, and to encourage persons seeking to
acquire control of the Company to negotiate first with the Company. See
"Description of Capital Stock -- Certain Anti-Takeover Provisions."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$25.9 million, assuming an offering price of $18.75 per share (the closing price
per share of the Common Stock on November 14, 1997), less underwriting
discounts, commissions and estimated expenses of the Offering. The Company
intends to use the net proceeds of the Offering, together with debt financing:
(a) to finance the continued growth of the Company, including the acquisition of
additional aircraft engines and aircraft equipment for lease or sale as well as
the acquisition of engine and airframe component inventory, (b) to finance
potential acquisitions of businesses complementary to the Company's existing
businesses, (c) to finance the possible expansion into other aviation-related
activities and businesses, and (d) for working capital and other general
corporate purposes. The Company is continually engaged in discussions regarding
possible acquisitions of businesses complementary to the Company's existing
businesses and possible expansion into new aviation-related activities and such
growth may involve acquisitions of existing companies or asset portfolios. There
are no present agreements to acquire any existing companies or asset portfolios.
There can be no assurance that any such acquisitions or expansions can be
consummated on terms favorable to the Company, if at all. See "Risk
Factors -- Acquisition and Expansion Risks." Pending the above-described uses,
the Company will reduce its outstanding borrowing under its $45 million
revolving credit facility with CoreStates Bank which bears interest at prime
plus 50 basis points and expires on June 12, 1998.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK
The Initial Public Offering was completed on September 18, 1996 at a price
of $8.00 per share. The Company's Common Stock is quoted on the Nasdaq National
Market System under the symbol "WLFC." The following table sets forth, for the
periods indicated, the high and low sale prices per share of the Common Stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996:
Third Quarter...................................... $10.00 $ 8.50
Fourth Quarter..................................... 12.88 8.75
1997:
First Quarter...................................... $14.50 $12.25
Second Quarter..................................... 12.50 10.38
Third Quarter...................................... 23.50 12.25
Fourth Quarter (through November 14, 1997)......... 24.13 17.50
</TABLE>
On November 14, 1997 the last reported sale price for the Common Stock was
$18.75 per share. As of September 30, 1997, there were approximately eight
record holders of the Common Stock, which number does not reflect the number of
individuals and institutional investors holding stocks in nominee name through
banks, brokerage firms and others.
DIVIDEND POLICY
The Company intends to retain all available funds for use in its business.
Accordingly, the Company does not anticipate declaring or paying any dividends
on the Common Stock in the foreseeable future. The payment of cash dividends in
the future would be made at the discretion of the Board of Directors of the
Company and would depend on a number of factors, including future earnings,
capital requirements, financial condition and future prospects of the Company
and such other factors as the Board of Directors may deem relevant. See
"Capitalization."
In 1995 and 1996, the Company declared dividends to its sole shareholder in
the amounts of $255,000 and $951,475, respectively. Since the Initial Public
Offering, the Company has not declared any dividends. See Note 8 to the Audited
Financial Statements.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, on an actual basis, and as adjusted to give effect to the
sale of the 1,500,000 shares of Common Stock offered by the Company hereby
(assuming an offering price of $18.75 per share, which was the closing price per
share of the Common Stock on November 14, 1997), after deducting underwriting
discounts and commissions and estimated expenses of the Offering, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Debt financing(1)................................................... $108,062 $ 82,134
Shareholders' equity:
Preferred stock, no par value per share; 5,000,000 shares
authorized; none issued........................................... -- --
Common stock, no par value per share; 20,000,000 shares authorized;
5,452,320 shares outstanding, actual and 6,952,320 shares
outstanding, as adjusted(2)....................................... 16,277 42,205
Retained earnings................................................... 12,887 12,887
------- -------
Total shareholders' equity........................................ 29,164 55,092
------- -------
Total capitalization...................................... $137,226 $ 137,226
======= =======
</TABLE>
- ---------------
(1) Inclusive of accrued interest and capital lease obligation and exclusive of
residual share payable.
(2) Excludes (i) 438,500 shares of Common Stock issuable upon exercise of
options granted under the 1996 Plan and 71,500 additional shares of Common
Stock reserved for issuance under the 1996 Plan, (ii) 64,473 shares of
Common Stock reserved for issuance under the Company's Employee Stock
Purchase Plan and (iii) 100,000 shares of Common Stock issuable upon
exercise of outstanding warrants. See "Management -- 1996 Stock Option/Stock
Issuance Plan," and "Employee Stock Purchase Plan."
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data should be
read in conjunction with the accompanying Unaudited Financial Statements and the
related Notes thereto and the accompanying Audited Financial Statements and the
related Notes thereto included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
consolidated financial data set forth below as of and for the fiscal years ended
December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the
consolidated financial statements of the Company audited by KPMG Peat Marwick
LLP. The consolidated financial data as of and for the nine months ended
September 30, 1996 and September 30, 1997 are unaudited, but have been prepared
on the same basis as the audited financial statements and, in the opinion of
management, reflect all adjustments, which consist only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations for these periods. Consolidated operating results for the
nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE AND LEASE PORTFOLIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Operating lease revenue..................... $ 8,744 $10,323 $13,636 $13,771 $ 13,740 $ 10,379 $ 13,481
Finance lease revenue....................... -- -- -- -- -- -- 223
Gain (loss) on sale of leased engines....... 659 (281) 633 (483) 2 -- 1,333
Spare parts sales........................... -- -- 795 3,859 5,843 3,303 11,459
Sale of equipment acquired for resale....... 3,598 -- 2,184 5,472 12,105 9,605 12,748
Interest and other income................... 70 938 542 119 618 197 544
------- ------- ------- ------- ------- ------- -------
Total revenue............................. 13,071 10,980 17,790 22,738 32,308 23,484 39,788
Expenses:
Interest expense............................ 4,815 4,809 5,948 5,722 4,323 3,371 5,226
Depreciation expense........................ 2,666 3,070 4,447 4,703 3,181 2,513 2,995
Residual share(1)........................... 279 445 1,284 408 723 536 598
Cost of spare parts sales................... -- -- 659 2,546 3,308 1,604 7,751
Cost of equipment acquired for resale....... 3,140 -- 1,863 2,742 10,789 8,551 10,672
General and administrative expense.......... 1,357 1,533 1,616 3,335 5,124 3,434 6,358
------- ------- ------- ------- ------- ------- -------
Total expenses............................ 12,257 9,857 15,817 19,456 27,448 20,009 33,600
Gain on modification of credit facility(2).... -- -- -- 2,203 -- -- --
------- ------- ------- ------- ------- ------- -------
Income before income taxes, minority interest
and extraordinary item...................... 814 1,123 1,973 5,485 4,860 3,475 6,188
Income taxes.................................. (327) (454) (797) (2,212) (1,976) (1,395) (2,456)
------- ------- ------- ------- ------- ------- -------
Income before minority interest and
extraordinary item.......................... 487 669 1,176 3,273 2,884 2,080 3,732
Less: minority interest in net income of
subsidiary.................................. -- -- 4 57 79 79 --
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item.............. 487 669 1,172 3,216 2,805 2,001 3,732
Extraordinary item less applicable income
taxes(3).................................... -- -- -- -- -- -- 2,008
------- ------- ------- ------- ------- ------- -------
Net income.................................... $ 487 $ 669 $ 1,172 $ 3,216 $ 2,805 $ 2,001 $ 5,740
======= ======= ======= ======= ======= ======= =======
Earnings per share before extraordinary
item........................................ $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $0.65
Extraordinary item............................ -- -- -- -- -- -- $0.36
------- ------- ------- ------- ------- ------- -------
Earnings per share............................ $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $1.01
======= ======= ======= ======= ======= ======= =======
Weighted average number of shares
outstanding................................. 3,111 3,111 3,111 3,111 3,796 3,215 5,709
Return on average assets(4)................... 0.79% 0.97% 1.54% 3.68% 2.59% 2.67% 3.34%
Return on average equity(4)................... 172.39% 82.90% 75.37% 94.99% 20.02% 21.26% 19.01%
BALANCE SHEET DATA:
Total assets................................ $69,711 $68,632 $83,542 $91,437 $124,933 $108,604 $173,018
Aircraft engines under lease, net........... 69,166 67,499 78,989 74,704 92,943 75,368 128,930
Other equipment under lease, net............ -- -- -- -- 3,149 -- 6,956
Debt financing(5)........................... 64,349 59,840 69,456 69,911 76,146 62,475 108,062
Shareholders' equity........................ 463 1,151 1,959 4,812 23,202 20,288 29,164
Debt to equity ratio........................ 139.0x 52.0x 35.5x 14.5x 3.3x 3.1x 3.7x
LEASE PORTFOLIO:
Engines in lease portfolio at end of the
period(6)................................. 26 25 26 31 32 28 43
</TABLE>
(footnotes on following page)
16
<PAGE> 18
- ---------------
(1) The Company has negotiated a sharing of residual proceeds with certain
lenders in exchange for a higher percentage financing of certain aircraft
engines. Residual sharing arrangements apply to five of the Company's
engines (representing $15.5 million of book value) as of September 30, 1997.
The Company accrues for its residual sharing obligations using net book
value as a proxy for residual proceeds. See "Business -- Financing/Source of
Funds" and Note 1 to the Audited Financial Statements.
(2) Gain on modification of credit facility of $2.2 million represents the
elimination of residual share payable of $2.4 million less the net loss on
the sale of two engines to the lender of $199,000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 4 to the Audited Financial Statements.
(3) In February 1997, the Company obtained a new loan agreement for $41.5
million to replace an existing loan of $44.2 million. The transaction
resulted in an extraordinary gain of $2 million or $0.36 per weighted
average share, net of tax.
(4) Calculations are based on the average of beginning and end of period
balances. Results for periods less than one year are annualized and exclude
the extraordinary item.
(5) Inclusive of accrued interest and capital lease obligation and exclusive of
residual share payable.
(6) At September 30, 1997, 42 of the 43 engines in the lease portfolio were on
lease. In addition, at September 30, 1997, eight parts packages with a net
book value of $7.0 million were on lease.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations
of the Company should be read in conjunction with the Unaudited Financial
Statements and the related Notes thereto and the Audited Financial Statements
and the related Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
OVERVIEW
The Company's core business is acquiring and leasing, primarily pursuant to
operating leases, commercial aircraft spare engines and other aircraft
equipment. The Company, through WASI, also specializes in the purchase and
resale of aftermarket airframe and engine parts, engines, modules and rotable
components. In addition, the Company engages in the selective purchase and
resale of commercial aircraft engines.
Revenue consists primarily of operating lease revenue, income from the
leasing and sale of spare parts and components and income from the sale of
engines and equipment.
Leasing Operations. Most of the Company's leases are operating leases for
accounting purposes. 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 for engines is
generally recognized on a straight line basis over 15 years to a 55% residual
value.
In a typical term loan transaction, third party lenders will provide 80% to
85% of the financing for the acquisition of engines to be leased on an operating
lease basis, the lease payments and the underlying engine or parts package are
pledged as collateral, and most of the lease payments associated with the
financed engines are used to retire the underlying debt with the balance of the
cash retained by the Company for operating purposes. Generally, the loans
provide financing for the initial term of a lease but do not extend through the
period of any lease renewal; however, financing extensions can generally be
negotiated. Since the typical lease will have a term of approximately five
years, the term loan facility will generally require payment of the balance of
the loan at the end of the lease term. Thus, at the end of the lease term, the
Company must either re-lease and refinance the engine or sell the engine.
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 accrues for its residual sharing obligations using net book value as a
proxy for residual proceeds. Residual sharing arrangements apply to five of the
Company's engines (representing $15.5 million of book value) as of September 30,
1997.
At the commencement of each lease, the Company typically collects security
deposits (normally equal to at least one month's lease payment) and maintenance
reserves (normally equal to one month's estimated maintenance reserve) from the
lessee. The security deposit is returned to the lessee after all return
conditions have been met. Maintenance reserves are accumulated in accounts
maintained by the Company or its lenders and are used when normal repair
associated with engine use or maintenance is required. In many cases, to the
extent that cumulative maintenance reserves are inadequate to fund normal
repairs required prior to return of the engine to the Company, the lessee is
obligated to cover the shortfall.
Spare Parts Sales. Through its subsidiary, WASI, the Company acquires
aviation equipment, such as whole engines and aircraft, which can be dismantled
and sold as parts at a greater profit. The Company records the purchases at cost
and capitalizes additional costs relating to acquisition, overhaul, insurance
and other direct costs. Gross revenue from the sale of parts is reflected as
spare parts sales with the associated costs reflected as cost of spare parts
sales.
18
<PAGE> 20
Equipment Sales. The Company engages in the selective purchase and sale of
commercial aircraft engines and engine components. Assets acquired for resale
are recorded at the lower of cost or net realizable value. Gross revenue from
the sale of equipment is reflected as sale of equipment acquired for resale with
the associated costs reflected as cost of equipment acquired for resale.
See "Risk Factors" for various factors that may have an impact on the
Company's results of operations and condition.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenue is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996
----------------- -----------------
AMOUNT % AMOUNT %
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Leasing activities............................. $13,704 34.4 % $10,379 44.2 %
Gain on sale of leased equipment............... 1,333 3.4 -- --
Spare parts sales.............................. 11,459 28.8 3,303 14.1
Sale of equipment acquired for resale.......... 12,748 32.0 9,605 40.9
Interest and other income...................... 544 1.4 197 0.8
------- ----- ------- -----
Total................................ $39,788 100.0% $23,484 100.0%
======= ===== ======= =====
</TABLE>
Gross profit (net of cost of sales, allowance for sales returns,
depreciation and interest expense as applicable) before general and
administrative expenses and income taxes is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996
----------------- -----------------
AMOUNT % AMOUNT %
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Leasing activities............................. $ 5,113 40.5 % $ 4,103 59.0 %
Gain on sale of leased equipment............... 1,333 10.5 -- --
Spare parts sales.............................. 3,570 28.3 1,608 23.1
Sale of equipment acquired for resale.......... 2,076 16.4 1,054 15.1
Interest and other income...................... 544 4.3 197 2.8
------- ----- ------- -----
Total................................ $12,636 100.0% $ 6,962 100.0%
======= ===== ======= =====
</TABLE>
Lease Portfolio. During the first nine months of 1997, sixteen engines and
five spare parts packages were added to the Company's lease portfolio at a total
cost of $52.8 million. Five engines were sold from the portfolio.
Leasing Activities. Operating lease revenue for the nine months ended
September 30, 1997, increased 30% to $13.5 million from $10.4 million from the
comparable period in 1996. This increase reflects lease revenues from additional
engines and spare parts packages acquired after September 30, 1996. In late June
1997, the Company entered into two finance leases. Finance lease income
generated from these transactions totaled $223,000 for the nine months ended
September 30, 1997. There were no comparable transactions as of September 30,
1996.
Expenses directly related to operating lease activity increased 37% to $8.6
million. Interest expense increased 55% to $5.0 million for the nine months
ended September 30, 1997, from the comparable period in 1996, due primarily to
an increased loan base and the replacement of the existing facility with a new
loan agreement in the first quarter of 1997 bearing a higher interest rate.
Depreciation expense increased 18% to $2.9 million for the nine months ended
September 30, 1997, from the comparable period in 1996, due to the larger asset
base in 1997. Residual sharing expense increased 12% to $598,000 for the nine
months ended September 30, 1997, from the comparable period in 1996. This
expense is calculated by comparing the net book value of the engines subject to
such agreements to their related debt balances and adjusting the residual
19
<PAGE> 21
share payable up or down to the appropriate amount representing the sharing
percentage of any excess of the net book value over the corresponding debt
balance for the five engines subject to residual sharing.
Gain on Sale of Leased Engines. During the nine months ended September 30,
1997, the Company sold three engines from the lease portfolio. These engines had
a net book value of $6.1 million and they were sold for a gain of $1.3 million.
There were no sales of leased engines for the nine months ended September 30,
1996.
Spare Parts Sales. Revenues from spare parts sales increased 247% to $11.5
million. The gross margin, decreased to 32% in 1997, from 51% in the
corresponding period in 1996. The Company does not believe that the relatively
high margin in 1996 is indicative of future results.
Sale of Equipment Acquired for Resale. During the nine months ended
September 30, 1997, the Company sold 10 engines for $12.7 million which resulted
in a gain of $2.1 million, compared to the nine months ended September 30, 1996,
during which the Company sold five engines for $9.6 million resulting in a gain
of $1.1 million. Included in the 1997 sales was one transaction involving the
sale of four engines acquired at a cost of $600,000 and sold for a gain of
$100,000.
Interest and Other Income. Interest and other income for the nine months
ended September 30, 1997, increased to $544,000 from $197,000 for the nine
months ended September 30, 1996. This is a result of interest earned on deposits
held, primarily the proceeds from the Initial Public Offering.
General and Administrative Expenses. General and administrative expenses
increased 85% to $6.4 million for the nine months ended September 30, 1997, from
the comparable period in 1996. This increase reflects expenses associated with
staff additions, increased rent due to the expansion of the WASI facility, as
well as an increase in professional fees, insurance expense and public company
costs.
Income Taxes. Income taxes for the nine months ended September 30, 1997,
increased to $2.5 million from $1.4 million for the comparable period in 1996.
This increase reflects an increase in the Company's pre-tax earnings.
Extraordinary Item. In February 1997, the Company obtained a new loan
agreement for $41.5 million to replace an existing loan of $44.2 million. The
transaction resulted in an extraordinary gain of $2 million, net of tax, or
$0.36 per weighted average share.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995
----------------- -----------------
AMOUNT % AMOUNT %
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Leasing activities............................ $13,740 42.5% $13,771 60.6%
Gain (loss) on sale of leased equipment....... 2 -- (483) (2.1)
Spare parts sales............................. 5,843 18.1 3,859 17.0
Sale of equipment acquired for resale......... 12,105 37.5 5,472 24.0
Interest and other income..................... 618 1.9 119 0.5
------- ----- ------- ----
Total............................... $32,308 100.0% $22,738 100.0%
======= ===== ======= =====
</TABLE>
20
<PAGE> 22
Gross profit (net of cost of sales, allowance for sales returns,
depreciation and interest expense as applicable) before general and
administrative expenses and income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995
----------------- ----------------
AMOUNT % AMOUNT %
------- ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Leasing activities............................. $ 5,605 55.7% $3,126 47.2%
Gain (loss) on sale of leased equipment........ 2 -- (483) (7.3)
Spare parts sales.............................. 2,521 25.1 1,126 17.0
Sale of equipment acquired for resale.......... 1,316 13.1 2,730 41.3
Interest and other income...................... 617 6.1 119 1.8
------- ----- ------- -----
Total................................ $10,061 100.0% $6,618 100.0%
======= ===== ======= =====
</TABLE>
Lease Portfolio. At December 31, 1995, the Company had 31 engines in its
operating lease portfolio. During 1996, four engines were either transferred or
sold from the lease portfolio. One of the four engines was transferred at its
net book value to WASI and dismantled for spare parts sales. The remaining three
engines were sold to third parties. In addition, another engine from the lease
portfolio was sold under a sale and leaseback agreement and is now reflected on
the Company's balance sheet as an engine on capital lease. In the third quarter
of 1996, the Company acquired one engine for $2.8 million and in the fourth
quarter of 1996, the Company acquired four engines for a total cost of
approximately $16.3 million, as well as two auxiliary power units (APU's) and a
spare parts package for a total cost of approximately $3.2 million. At December
31, 1996, the Company held 32 engines in its lease portfolio.
Operating Leases. Operating lease revenue for the year ended December 31,
1996 decreased to $13.7 million from $13.8 million for the corresponding period
in 1995. This decrease is primarily due to a decrease in revenue from one engine
which was off-lease and in a repair facility for eight months in 1996 and two
engines which were sold in 1996, offset slightly by five engines purchased and
leased late in 1996.
In 1996, expenses directly related to operating lease activity dropped 23%
to $8.1 million from $10.6 million in 1995. The reduction in expenses in 1996
was due to a reduction in depreciation expenses of $1.6 million (33%) as a
result of two engines in 1995 that were fully depreciated and the sale of two
engines in the third quarter of 1996. Interest expense dropped $1.2 million
(22%) in 1996 from 1995, due primarily to the modification of the then-existing
term loan with Marine Midland Bank (the "Midland Loan") in June 1995 resulting
in more favorable interest rates. Residual sharing expenses, however, increased
77% to $723,000 in 1996 from the corresponding period in 1995 due to changes in
the Company's portfolio of engines subject to such agreements. This expense is
calculated by comparing the net book value of these engines to their related
debt balances and adjusting the residual share payable up or down to the
appropriate amount representing the sharing percentage of any excess of the net
book value over the corresponding debt balance for the five engines subject to
residual sharing.
Gain (Loss) on Sale of Leased Engines. The loss in 1995 was attributable to
unanticipated overhaul expenses of $373,000 required in order to prepare an
engine for resale and a $110,000 loss on the sale of the engine.
Spare Parts Sales. Revenues from spare parts sales increased 51% to $5.8
million primarily due to increased volume. Gross margin rose to 43% in 1996 from
34% in the corresponding period in 1995, primarily due to a change in the mix of
parts sold and the gross margins related thereto.
Equipment Sales. During the year ended December 31, 1996, the Company sold
four engines for proceeds of $12.1 million, generating gains of $1.3 million. In
1995, the Company sold three engines for $4.8 million, a fuselage and
miscellaneous components it acquired in connection with an aircraft purchase for
$572,000 and other components for $100,000. The aggregate cost of the equipment
sold was $10.8 million and $2.7 million in 1996 and 1995, respectively. The
Company expects that equipment sales opportunities and profitability will
continue to vary materially from period to period.
21
<PAGE> 23
Interest and Other Income. Interest and other income for 1996 increased to
$617,000 from $119,000 in 1995, an increase of 418%. This increase was due
primarily to increased marketing/brokerage fee income earned on one engine,
nonrecurring credits due the Company regarding excessive engine overhaul costs
and an increase in interest earned on the net proceeds from the Initial Public
Offering, as well as interest earned on certain engine security deposits.
General and Administrative Expenses. General and administrative expenses
increased 53% to $5.1 million in 1996, up from $3.3 million in 1995. This
increase reflects additional compensation due to an increased workforce and
increased bonus payments; increased telephone and travel costs due to increased
marketing personnel and activity; increased rent due to the expansion of the
WASI facility and an increase in professional fees and insurance as a result of
the Initial Public Offering.
Gain on Modification of Credit Facility. In 1995, the Company modified the
terms of the Midland Loan. The gain of $2.2 million in 1995 on the modification
of credit facility reflects a gain from the removal of residual sharing
provisions of $2.4 million and a $199,000 loss on the sale of two engines to the
lender.
Income Taxes. Income taxes decreased to $2 million in 1996 from $2.2
million in 1995. The Company's effective tax rates for Federal and state taxes
was approximately 41% and 40% in 1996 and 1995, respectively. Therefore, the
decrease in tax expense was due to the decrease in the Company's income before
taxes and minority interest offset by a slight increase in the effective tax
rate.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994
---------------- ---------------
AMOUNT % AMOUNT %
------- ------ ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Leasing activities................................. $13,771 60.6% $13,636 76.7%
Gain (loss) on sale of leased equipment............ (483) (2.1) 633 3.6
Spare parts sales.................................. 3,859 17.0 795 4.4
Sale of equipment acquired for resale.............. 5,472 24.0 2,184 12.3
Interest and other income.......................... 119 0.5 542 3.0
------- ----- ------- -----
Total.................................... $22,738 100.0% $17,790 100.0%
======= ===== ======= =====
</TABLE>
Gross profit (net of cost of sales, allowance for sales returns,
depreciation and interest expense as applicable) before general and
administrative expenses and income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994
--------------- --------------
AMOUNT % AMOUNT %
------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Leasing activities................................... $3,126 47.2% $2,007 56.0%
Gain (loss) on sale of leased equipment.............. (483) (7.3) 633 17.6
Spare parts sales.................................... 1,126 17.0 85 2.4
Sale of equipment acquired for resale................ 2,730 41.3 321 8.9
Interest and other income............................ 119 1.8 542 15.1
------ ----- ------ -----
Total...................................... $6,618 100.0% $3,588 100.0%
====== ===== ====== =====
</TABLE>
Lease Portfolio. During 1995, the Company acquired a total of eight engines
and sold three, for a net increase of five. Two of the acquired engines were
overhauled in 1995 and became available for sale or lease in 1996 and two
additional engines were purchased in late December 1995, both subject to
existing leases. Thus, these four engines did not impact results in 1995. The
four remaining engines were acquired in July 1995 and were leased on a
short-term basis. At December 31, 1995, two of these remaining four engines were
on lease and the other two engines were being refurbished for ultimate sale. See
"Business -- Aircraft Engine
22
<PAGE> 24
Portfolio." Two of the engines sold during 1995 were sold as part of the 1995
modification of the Midland Loan and the third engine was sold in June 1995.
Operating Leases. Operating lease revenue increased to $13.8 million in
1995 from $13.6 million in 1994, an increase of 1.5%. Although the Company's
lease portfolio increased by a net of five engines in 1995, as discussed above a
number of the engines acquired did not impact revenue during 1995 and the lease
revenue from the engines acquired in July 1995 were offset by the reduction in
lease revenue from the engines sold in 1995.
Expenses directly related to operating lease activities declined to $10.6
million in 1995 from $11.6 million in 1994, a 9% decrease. The reduction in
expenses was largely due to a $877,000 reduction in residual sharing in
conjunction with the 1995 modification of the Midland Loan. A decrease in
interest expense to $5.5 million in 1995 from $5.9 million in 1994 as a result
of lower interest rates due to the 1995 modification of the Midland Loan
contributed to the overall expense decrease. These decreases in expenses were
partially offset by a $256,000 increase in depreciation as a result of a
$300,000 write-down of one of the Company's engines in 1995 due to the Company's
implementation of Statement of Financial Accounting Standard No. 121 as of
December 31, 1995 and increases in the lease portfolio discussed above.
Gain (Loss) on Sale of Leased Engines. The Company recorded a loss on the
sale of an engine at lease termination of $483,000 in 1995 compared to a gain of
$633,000 recorded in 1994, resulting in a $1.1 million reduction in total
revenue. The loss in 1995 was attributable to unanticipated overhaul expenses of
$373,000 required in order to prepare an engine for resale and a $110,000 loss
on the sale of the engine.
Spare Parts Sales. Revenue from spare parts sales increased to $3.9 million
in 1995 from $795,000 in 1994, a 385% increase, while costs of sales increased
to $2.5 million from $659,000, a 286% increase. Gross margin increased to 34% in
1995 from 17% in 1994. Interest expense related to spare parts sales activities
was $187,000 in 1995 as compared to $51,000 in 1994, an increase of 267%. These
increases resulted primarily from the commencement of operations by WASI in
October of 1994.
Equipment Sales. In 1995, the Company sold three engines for $4.8 million,
a fuselage and miscellaneous components it acquired in connection with an
aircraft purchase for $572,000 and other components for $100,000. The aggregate
cost of this equipment was $2.7 million. In 1994, the Company sold an engine for
$2.2 million with a related cost of equipment acquired for resale of $1.9
million.
Interest and Other Income. Interest and other income decreased to $119,000
in 1995 from $542,000 in 1994 primarily due to the termination of a remarketing
fee arrangement with the lender in connection with the 1995 modification of the
Midland Loan. In addition, the Company earned broker fees of $137,000 in 1994
which will not reoccur as the related agreement was terminated in 1994. The
remaining decrease was due to management fees earned in 1994 for which no
similar services were performed in 1995.
General and Administrative Expense. General and administrative expense
increased to $3.3 million in 1995 from $1.6 million in 1994, an increase of
106%. The increase resulted primarily from an increase in compensation and
related benefits as a result of a full year of operations at WASI and the
addition of staff in marketing and finance as well as increased travel,
promotional and insurance expenses.
Gain on Modification of Credit Facility. In 1995, the Company modified the
terms of the Midland Loan. The gain of $2.2 million on modification of credit
facility reflects a gain from the removal of residual sharing provisions of $2.4
million and a $199,000 loss on the sale of two engines to the lender.
Income Taxes. Income tax expense increased to $2.2 million in 1995 from
$797,000 in 1994, an increase of 178%. The Company's effective tax rate for
Federal and state taxes is approximately 40% for both 1995 and 1994; therefore,
the increase in tax expense is directly related to the increase in the Company's
income before taxes and minority interest to $5.5 million in 1995 from $2.0
million in 1994.
23
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected quarterly financial information for
each of the ten quarters ended September 30, 1997 both in dollars and as a
percentage of total revenue. This information is unaudited, but, in the opinion
of the Company's management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the selected
quarterly information when read in conjunction with the Unaudited Financial
Statements and Notes thereto and Audited Financial Statements and Notes thereto
included elsewhere herein. The operating results for any quarter are not
necessarily indicative of results for any subsequent period or for the entire
fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
JUN SEPT DEC MAR JUN SEP DEC MAR JUN SEP
30, 30, 31, 31, 30, 30, 31, 31, 30, 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Operating lease revenue...... $2,990 $3,865 $3,840 $3,454 $3,381 $3,544 $3,362 $4,115 $4,429 $4,937
Finance lease revenue........ -- -- -- -- -- -- -- -- -- 223
Gain (loss) on sale of leased
engines.................... (110) -- (373) -- -- -- 2 397 -- 936
Spare parts sales............ 761 794 1,654 1,286 1,148 869 2,540 2,222 3,656 5,582
Sale of equipment acquired
for resale................. -- 5,372 100 2,211 4,613 2,781 2,500 2,548 7,600 2,600
Interest and other income.... 15 27 37 -- 47 150 420 251 201 91
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 3,656 10,058 5,258 6,951 9,189 7,344 8,824 9,533 15,886 14,369
Expenses:
Interest expense............. 1,544 1,174 1,367 1,147 1,124 1,101 951 1,472 1,684 2,069
Depreciation expense......... 938 1,228 1,625 1,100 678 735 668 875 979 1,141
Residual share............... (45) 118 125 222 152 161 188 191 181 227
Cost of spare parts sales.... 495 494 1,158 525 861 218 1,704 1,304 2,403 4,044
Cost of equipment acquired
for resale................. -- 2,740 2 1,600 3,933 3,018 2,238 2,253 6,385 2,034
General and administrative
expense.................... 777 999 1,013 910 1,191 1,332 1,691 1,778 2,146 2,434
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total expenses......... 3,709 6,753 5,290 5,504 7,939 6,565 7,440 7,873 13,778 11,949
Gain on modification of credit
facility..................... 2,203 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes,
minority interest and
extraordinary item........... 2,150 3,305 (32) 1,447 1,250 779 1,384 1,660 2,108 2,420
Income taxes................... (864) (1,316) (5) (583) (512) (301) (581) (645) (842) (969)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income before minority interest
and extraordinary item....... 1,286.. 1,989 (37) 864 738 478 803 1,015 1,266 1,451
Less: minority interest in net
income of subsidiary......... 10 8 28 27 7 45 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income before extraordinary
item......................... 1,276 1,981 (65) 837 731 433 803 1,015 1,266 1,451
Extraordinary item less
applicable income taxes...... -- -- -- -- -- -- -- 2,008 -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income............. $1,276 $1,981 $ (65) $ 837 $ 731 $ 433 $ 803 $3,023 $1,266 $1,451
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
INCOME STATEMENT DATA AS A
PERCENTAGE OF REVENUE:
Revenue:
Operating lease revenue...... 81.8% 38.4% 73.0% 49.7% 36.8% 48.3% 38.1% 43.2% 27.9% 34.4%
Finance lease income......... -- -- -- -- -- -- -- -- -- 1.6
Gain (loss) on sale of leased
engines.................... (3.0) -- (7.1) -- -- -- -- 4.2 -- 6.5
Spare parts sales............ 20.8 7.9 31.5 18.5 12.5 11.8 28.8 23.3 23.0 38.8
Sale of equipment acquired
for resale................. -- 53.4 1.9 31.8 50.2 37.9 28.3 26.7 47.8 18.1
Interest and other income.... 0.4 0.3 0.7 -- 0.5 2.0 4.8 2.6 1.3 0.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Expenses:
Interest expense............. 42.2 11.7 26.0 16.5 12.1 15.0 10.8 15.4 10.5 14.4
Depreciation expense......... 25.7 12.2 30.9 15.8 7.4 10.0 7.6 9.2 6.2 7.9
Residual share............... (1.2) 1.2 2.4 3.2 1.7 2.2 2.1 2.0 1.1 1.6
Cost of spare parts sales.... 13.5 4.9 22.0 7.6 9.4 3.0 19.3 13.7 15.1 28.1
Cost of equipment acquired
for resale................. -- 27.2 -- 23.0 42.8 41.1 25.4 23.6 40.2 14.2
General and administrative
expense.................... 21.2 9.9 19.3 13.1 13.0 18.1 19.2 18.7 13.6 16.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total expenses......... 101.4 67.1 100.6 79.2 86.4 89.4 84.4 82.6 86.7 83.1
Gain on modification of credit
facility..................... 60.2 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes,
minority interest and
extraordinary item........... 58.8 32.9 (0.6) 20.8 13.6 10.6 15.7 17.4 13.3 16.8
Income taxes................... (23.6) (13.1) (0.1) (8.4) (5.6) (4.1) (6.6) (6.8) (5.3) (6.7)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income before minority interest
and extraordinary item....... 35.2 19.8 (0.7) 12.4 8.0 6.5 9.1 10.6 8.0 10.1
Less: minority interest in net
income of subsidiary......... 0.3 0.1 0.5 0.4 0.1 0.6 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income before extraordinary
item......................... 34.9 19.7 (1.2) 12.0 7.9 5.9 9.1 10.6 8.0 10.1
Extraordinary item less
applicable income taxes...... -- -- -- -- -- -- -- 21.1 -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income............. 34.9% 19.7% (1.2)% 12.0% 7.9% 5.9% 9.1% 31.7% 8.0% 10.1%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
24
<PAGE> 26
The Company has experienced fluctuations in its quarterly operating results
and anticipates that these fluctuations may continue. Such fluctuations may be
due to a number of factors, including the timing of sales of engines and spare
parts and engine remarketing activities, an unanticipated early lease
termination, the timing of engine acquisitions or a default by a lessee. See
"Risk Factors -- Quarterly Fluctuations in Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth through borrowings
secured by its lease portfolio. See "Overview" above and
"Business -- Financing/Source of Funds." Cash of approximately $104.0 million,
$16.1 million, $15.7 million and $19.3 million in the nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively, was derived from this activity. In these same time periods, $71.6
million, $13.5 million, $9.3 million and $11.5 million, respectively, was used
to pay down related debt. In 1996, proceeds from the Initial Public Offering
were approximately $15.9 million as discussed below. Cash flows from operating
activities generated approximately $9.0 million, $9.6 million, $0.5 million and
$8.9 million in the nine months ended September 30, 1997, and the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $43.5 million, $25.3 million, $9.3 million and $17.6
million of funds were used for this purpose in the nine months ended September
30, 1997 and the years ended December 31, 1996, 1995 and 1994, respectively.
Additional funds were used in these periods to finance the growth of inventories
to support parts sales.
The Initial Public Offering was for 2,300,000 shares of Common Stock at
$8.00 per share. The proceeds to the Company, net of all expenses, was $15.9
million. These proceeds were used to prepay $1.3 million of indebtedness under
an existing term facility, and to purchase an amortizing interest rate cap to
hedge a portion of the Company's exposure to increases in interest rates on its
variable rate borrowings for a cost of $469,000. The balance of the proceeds,
together with debt financing, were used to acquire additional engines for lease,
to acquire engine and airframe component inventory, and for working capital and
other general corporate purposes.
Until February 1997, the Company's primary lender was Marine Midland Bank.
Prior to June 1995, the Midland Loan provided, among other things, for interest
payable at LIBOR plus 3.5% to 5%, required a specified percentage of lease
payments to be applied to debt service but required final payment only upon the
sale of the subject engine, and provided to the lender a share of the residual
value of financed engines. In June 1995, the Company modified the Midland Loan.
As part of the modification, the Midland Loan was converted to a ten-year, full
payout loan, the existing residual sharing arrangement with the lender was
terminated, the interest rate was reduced to LIBOR plus 1%, and the lender
acquired two engines from the Company with a net book value of $5.7 million.
This modification resulted in a gain to the Company of $2.2 million. In
February, 1997, the Company repaid the Midland Loan at a discount which resulted
in an extraordinary book gain, net of tax and related costs, of approximately
$2.0 million. The transaction was financed through a loan of $41.5 million from
U.S. Bancorp Leasing & Financial at an interest rate of LIBOR plus 2.5%. This
loan matures in February 1998. At that time, the Company has the option to
extend the facility for an additional six years. As of September 30, 1997, $6.4
million was available under this facility.
The Company has a $30 million revolving credit facility with CoreStates
Bank, N.A. to finance the acquisition of engines and high-value spare parts for
sale or lease. At September 30, 1997, $3.8 million was available under this
facility. This facility, which expires on June 12, 1998, bears interest at prime
plus 50 basis points and may be renewed annually. On November 18, 1997, the
amount of this facility was increased to $45 million through February 28, 1998
(at which time it will revert to $30 million).
The Company has a $15 million secured term facility with Finova Capital
Corporation for the acquisition of engines for lease. At September 30, 1997,
approximately $2.4 million was available under this facility. This term
facility, which expires on December 29, 2001, bears interest on each drawdown at
a rate equal to the rate on five-year Treasury notes at the date of drawdown
plus 5.55%. Advances against this facility are for not more than 80% of the
appraised value of the engine. The loan is repaid by applying not less than 90%
of the
25
<PAGE> 27
underlying lease payment to debt service, and at the end of 60 months, the loan
must have amortized at least 40% of its original balance.
The Company also has a $15.0 million financial program with Fleet Capital
Corporation for the financing of the acquisition of engines for lease to U.S.
domestic entities. Fleet Capital Corporation evaluates each proposed engine
financing to determine whether it will participate. The interest rate under this
program is dependent upon the quality of the credit and the underlying
collateral. Advances under the program are for an amount up to 80% of the fair
market value of the equipment, not to exceed 100% of the purchase price.
Advances are repaid from the lease payments associated with the financed
engines. In September 1997, the Company financed two engines using this program.
The amount borrowed was $6.3 million with interest rates varying from 8.9% to
10%. As of September 30, 1997, approximately $8.7 million was available under
this program.
The Company also has a $3 million secured working capital facility with The
Pacific Bank, N.A. for the acquisition of engines to be dismantled and sold for
parts through WASI. This facility provides for 80% advances against the purchase
price of parts for resale and bears interest at prime plus 1%. This facility
requires interest-only payments for the first five months with the principal
balance due six months after drawdown and expires on January 31, 1998. The
Company directly guarantees WASI's obligations under this facility. As of
September 30, 1997, approximately $1.2 million was available under this
facility.
The Company has received a letter of commitment from a financial
institution to provide an $80 million warehouse facility to a special purpose
finance subsidiary of the Company, for the financing of jet aircraft engines to
be transferred by the Company to such finance subsidiary. The facility will
become available immediately upon completion of definitive agreements. This
transaction's structure is intended to facilitate future public or private
securitized note issuances by the special purpose finance subsidiary. This
facility is expected to have an eight year term and to bear interest at LIBOR
plus 225 basis points. This facility requires the issuer to hedge 50% of the
facility against interest rate changes. The Company expects to use some of the
proceeds of the facility distributed to it by its finance subsidiary to pay down
a portion of the U.S. Bancorp Leasing & Financial loan and the CoreStates Bank
loan.
The Company believes that its current and anticipated credit facilities,
internally generated funds, cash-on-hand and the net proceeds of this Offering
will be sufficient to fund the Company's anticipated operations for at least 12
months, at which time additional equity or debt capital is anticipated to be
required to fund projected growth.
The Company's ability to successfully execute its business strategy is
dependent in part on its ability to raise equity capital and to obtain debt
capital. There can be no assurance that the necessary amount of such equity or
debt capital will continue to be available to the Company on favorable terms, or
at all. If the Company were unable to continue to obtain required financing on
favorable terms, the Company's ability to add new engines and parts packages to
its portfolio or to conduct profitable operations with its existing asset base
would be impaired, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
On October 7, 1997, the Company purchased an engine for the lease portfolio
at a cost of $4.25 million. This engine is subject to an existing lease in favor
of Lufthansa and interim financing for this purchase was arranged through
CoreStates Bank, N.A. On October 24, 1997, the Company purchased an aircraft for
dissembly by WASI at a cost of $1.05 million. Financing for this purchase was
arranged through The Pacific Bank, N.A.
In late November and early December of 1997, the Company purchased three de
Havilland DHC-8-102 commuter aircraft (equipped with six Pratt & Whitney Model
PW120A aircraft engines) and three Pratt & Whitney Model PW120A spare aircraft
engines from Finova Capital Corporation. Said aircraft and engines are subject
to existing leases in favor of Horizon Air Industries, Inc. The aggregate
purchase price for the foregoing assets was $12.3 million and interim financing
for these purchases was arranged through CoreStates Bank, N.A.
26
<PAGE> 28
The Company has entered into a commitment for the purchase of a CFM56-3B1
engine and a CFM56-3B2 engine for the lease portfolio. The aggregate purchase
price for these engines is $5.7 million, including a nonrefundable deposit of
$150,000 which has been paid by the Company. The Company is in the process of
arranging financing for this purchase. In addition, as of December 9, 1997, the
Company had four engines and three spare parts packages which had not been
financed. The Company will seek permanent financing for this equipment, although
no assurance can be given that such financing will be available on favorable
terms, if at all. In addition, certain of the Company's engines have been
financed under floating rate facilities. Until fixed rate financing for these
assets is in place, the Company is subject to interest rate risk, since the
underlying lease revenue is fixed.
MANAGEMENT OF INTEREST RATE EXPOSURE
At September 30, 1997, $66.6 million of the Company's borrowings were on a
variable rate basis at various interest rates tied to either LIBOR or the prime
rate. The Company's equipment leases are generally structured at fixed rental
rates for specified terms. To date, this variable rate borrowing has resulted in
lower interest expense for the Company. Increases in interest rates could narrow
or eliminate the spread, or result in a negative spread, between the rental
revenue the Company realizes under its leases and the interest rate that the
Company pays under its borrowings. See "Risk Factors -- Interest Rate Risks."
In September 1996, the Company purchased an amortizing interest rate cap at
a cost of $469,000 from an investment grade financial institution (the "Counter
Party") in order to limit its exposure to increases in interest rates on a
portion of its current 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, 1997, the notional principal amount of the cap was $37.2 million and said
amount will decline to $26 million at the end of its term. The cost of the cap
is being amortized as an expense over a four-year period. The Company will be
exposed to credit risk in the event of non-performance by the Counter Party.
27
<PAGE> 29
BUSINESS
The Company is a leading provider of operating leases of Aircraft Equipment
worldwide. The Company's core business is acquiring and leasing Aircraft
Equipment to domestic and international airlines, manufacturers and
overhaul/repair facilities pursuant to operating leases. As of September 30,
1997, the Company had 42 engines under lease to 29 customers in 17 countries and
eight spare parts packages under lease to seven customers in seven countries
(for a net total of 34 customers in 20 countries). Through WASI, the Company
also acquires engine parts and other aviation equipment, such as whole engines
and aircraft, which can be dismantled and sold as parts at a greater profit. In
addition, the Company engages in the selective purchase and resale of commercial
aircraft engines and engine components in the aftermarket. Integrating these
three activities improves the Company's ability to maximize the residual and
resale values of its engines, equipment and parts.
INDUSTRY BACKGROUND
Commercial airlines typically maintain a number of spare aircraft engines
to ensure that their aircraft are not grounded when engines or parts are removed
for normal maintenance or as a result of failure. Industry analysts estimate
that the worldwide fleet of approximately 11,500 commercial aircraft utilizes
approximately 30,000 engines, including approximately 5,000 spare engines valued
at over $11 billion. The Boeing Report estimates 16,160 new commercial aircraft
will be added over the next 20 years, resulting in a projected worldwide fleet
of approximately 23,600 commercial aircraft in 2016, net of retired aircraft.
These 16,160 new deliveries, which represent a mixture of two-, three- and
four-engined aircraft, will require approximately 35,000 installed engines and,
assuming a ratio of approximately 15% spare engines to installed engines,
approximately 5,300 additional spare engine acquisitions over the next 20 years.
Moreover, the Boeing Report, and the foregoing numbers, do not address the
additional number of aircraft and engines which will be required to service the
commuter or corporate markets.
Airlines have increasingly turned to operating leases as an alternative to
traditional financing of their aircraft, engines and spare parts. Aviation Week
reports that leasing will be the primary means by which the global air transport
industry acquires new aircraft between now and 1999, and probably beyond.
Aviation Week, based upon data provided by GE Capital Aviation Services, states
that in 1986, 41% of the world's airlines owned all of their equipment, 15%
leased all of their equipment and 44% used a mix of the two (with 80% owned and
20% leased). By contrast, in 1996, only 16% owned all of their equipment, while
42% leased all of their equipment and 42% used a mix of the two (with 40% owned
and 60% leased).
Advantages to airlines of leasing include greater flexibility in fleet
management, off-balance sheet treatment of operating leases, the ability to
employ funds without affecting debt-to-equity ratios, and the shifting of
residual value risk to a third party. The Company believes that airlines are
increasingly considering their spare aircraft engines as significant capital
assets suitable for lease. Due to the increasing cost of newer aircraft engines,
the anticipated modernization of the worldwide aircraft fleet and the
significant cost associated therewith, and the emergence of new niche-focused
airlines which generally use leasing for capital asset acquisitions, the Company
believes this trend toward operating leases will continue.
STRATEGY
The Company's strategy for its leasing business is to focus primarily on
operating leases of commercial aircraft engines and parts worldwide while
maximizing residual values. Key elements of the Company's business strategy
include the following:
Focus on Aftermarket Commercial Aircraft Engines. The Company purchases
primarily aftermarket commercial aircraft engines and parts for lease and
resale. By focusing on this market, the Company is able to take advantage of the
background and capability of its management, most of whom have extensive
expertise in the aircraft engine industry, and to service a niche which is not
the focus of the major commercial aircraft lessors.
28
<PAGE> 30
Focus on Operating Leases. The Company believes that airlines are becoming
increasingly aware of the benefits of financing their fleet equipment on an
operating lease basis, including preservation of cash flow, off balance sheet
financing, shifting residual risk to a third party and flexibility in managing
fleet size and composition.
Maximize Residual Value. In order to maximize the value of engines when
they are re-leased or sold at the end of a lease, the Company focuses on noise
compliant Stage III commercial jet aircraft engines. As of September 30, 1997,
all of the Company's engines were Stage III engines and were generally suitable
for use on one or more commonly used aircraft. The Company also believes that
its attention to maintenance and inspection of engines contributes to residual
values.
Capitalize on Complementary Spare Parts Business. Through the spare parts
and component sales operations of its WASI subsidiary, the Company sells
aircraft spare parts to commercial passenger airlines, air cargo carriers,
overhaul/repair facilities and other spare parts distributors. The Company
believes that WASI complements the Company's core business of leasing
aftermarket commercial aircraft engines and parts. WASI can provide some parts
for maintenance and overhaul of the Company's engines at prices lower than the
Company could obtain from third parties. As engines in the Company's leasing
portfolio age and reach the point at which they are more valuable as component
parts, the Company expects that WASI will be able to salvage valuable components
and thereby maximize the residual value of the engines.
Access a Diversified Global Client Base. For 1996 and the first nine months
of 1997, approximately 61% and 64%, respectively, of the Company's lease revenue
was from foreign customers, with no one customer or country (other than the
United States) accounting for more than 14% of lease revenue. The Company
believes that this diversity reduces the risks associated with dependence on one
or more significant customers in one country. To date, all of the Company's
leases and sales contracts are denominated and payable in U.S. Dollars.
Capitalize on Complementary Aviation-Related Businesses. The Company
believes that there are numerous opportunities to expand into aviation-related
niche businesses representing growth prospects for the Company. The Company
intends to expand its existing businesses to include similar assets in
additional markets such as the corporate, commuter and cogeneration markets. In
late November and early December of 1997, the Company purchased three commuter
aircraft and three spare engines which are subject to existing leases in favor
of Horizon Air Industries, Inc. for $12.3 million (interim financing for this
purchase was arranged through CoreStates Bank, N.A.) The Company may engage in
the selective purchase of additional aircraft in the future. The Company is also
continually engaged in discussions regarding possible acquisitions of companies
and asset portfolios relating and complementary to the Company's existing
businesses. In addition, the Company constantly evaluates de novo expansion
opportunities. There can be no assurance that any such acquisitions or
expansions can be consummated on terms favorable to the Company, if at all. See
"Risk Factors Acquisition and Expansion Risks."
AIRCRAFT ENGINE LEASING
Most of the Company's current leases to air carriers, manufacturers and
overhaul/repair facilities are operating leases as opposed to finance leases.
Under an operating lease, the Company retains title to the aircraft engine
thereby retaining the benefit and assuming the risk of the residual value of the
aircraft engine. Operating leases allow airlines greater fleet and financial
flexibility due to their shorter-term nature and the relatively small initial
capital outlay necessary to obtain use of the aircraft engine. Operating lease
rates are generally priced higher than finance lease rates, in part because of
the risks associated with the residual value. See "Risk Factors -- Ownership
Risks."
The Company targets the medium-term engine lease market, which generally
consists of leases with three to ten year lease terms. Airlines, manufacturers
and overhaul/repair facilities leasing for this term generally do so when their
projected utilization of a specific engine is deemed to be less than its useful
life, or when they seek to manage their cash flow more efficiently while
strengthening their balance sheets. All of the Company's engine lease
transactions with three to ten year lease terms are triple-net leases. A
triple-net lease requires the lessee to make the full lease payment and pay any
other expenses associated with the use of the engine, such
29
<PAGE> 31
as maintenance, casualty and liability insurance, sales or use taxes and
personal property taxes. The leases contain detailed provisions specifying
maintenance standards and the required condition of the aircraft engine upon
return at the end of the lease. During the term of the lease, the Company
generally requires the lessee to maintain the aircraft engine in accordance with
an approved maintenance program designed to ensure that the aircraft engine
meets applicable regulatory requirements in the jurisdictions in which the
lessee operates. Under short-term leases and certain medium-term leases, the
Company undertakes a portion of the maintenance and regulatory compliance risk.
To date, the Company has attempted to minimize its currency and exchange risks
by negotiating all of its aircraft engine lease transactions in U.S. Dollars. In
addition, to date, all guarantees obtained to support various lease agreements
are denominated and payable in U.S. Dollars. See "Risk Factors -- International
Risks."
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
repair associated with engine use or maintenance is required. In many cases, to
the extent that cumulative maintenance reserves are inadequate to fund normal
repairs required prior to return of the engine to the Company, the lessee is
obligated to cover the shortfall.
The Company makes an independent analysis of the credit risk associated
with each lessee before entering into a lease transaction. The Company's credit
analysis generally consists of evaluating the prospective lessee's financial
standing utilizing financial statements and trade and banking references. In
certain circumstances, where the Company or its lenders believe necessary, the
Company may require its lessees to obtain a partial letter of credit or a
guarantee from a bank or a third party. The Company also evaluates insurance and
expropriation risk and evaluates and monitors the political and legal climate of
the country in which a particular lessee is located in order to determine its
ability to repossess its collateral should the need arise. While the Company has
experienced some collection problems, including delay in lease rental payments,
to date the Company has not experienced material losses attributable to such
problems; however, there can be no assurance that the Company will not
experience collection problems or significant losses in the future. See "Risk
Factors -- Customer Credit Risks."
During a given lease period, the Company's leases require that the leased
engines undergo regular maintenance and inspection at pre-approved engine
maintenance facilities certified by the FAA or its foreign equivalent. In
addition, when engines come off-lease, they undergo thorough inspections to
verify compliance with lease return conditions. Regular maintenance and thorough
inspections during and after the lease term help ensure that the Company's
leased engines maintain their residual value. While there can be no assurance
that the Company's maintenance and inspection requirements will result in a
realized return to the Company upon termination of a lease, the Company believes
that its emphasis on maintenance and inspection generally helps it to recover
its investment in the engines.
Upon termination of a lease, the Company will re-lease or sell the aircraft
engine or will have the engine dismantled and will sell the parts. The demand
for aftermarket aircraft engines and parts for either sale or re-lease may be
affected by a number of variables including general market conditions,
regulatory changes (particularly those imposing environmental, maintenance and
other requirements on the operation of aircraft engines), changes in the supply
and cost of aircraft engines and technological developments. In addition, the
value of a particular used aircraft engine varies greatly depending upon its
condition, the maintenance services performed during the lease term and the
number of hours remaining until the next major maintenance of the engine is
required. If the Company is unable to re-lease or sell an engine on favorable
terms, its ability to service debt may be adversely affected. See "Risk
Factors -- Ownership Risks" and "Business -- Aircraft Engine Portfolio."
ENGINE LESSEES
As of September 30, 1997, the Company had 42 engines under lease to 29
customers in 17 countries. As of September 30, 1997: (a) the Company's domestic
engine lessees were Alaska Airlines, Inc., Continental
30
<PAGE> 32
Airlines, Inc., Delta Air Lines, Inc., Evergreen International Airlines, Inc.,
Frontier Airlines, Inc., General Electric Engine Services, Inc., Reno Air, Inc.,
Tower Air, Western Pacific Airlines, Inc. and World Airways, Inc., and (b) the
Company's foreign engine lessees were AerLingus (Ireland), Aerovias de Mexico,
S.A. de C.V., Air Atlanta Icelandic (Iceland), Air Canada, Air Liberte S.A.
(France), Air 2000 Ltd. (United Kingdom), Air New Zealand Limited, Asiana
Airlines, Inc. (Korea), Avianca (Colombia), BWIA International Airways Limited
(Trinidad & Tobago), Canada 3000 Airlines Limited, Gulf Aircraft Maintenance
Company (United Arab Emirates), P.T. Garuda Indonesia, General Electric Capital
Aviation Services, Inc. (United Kingdom), Scandinavian Airlines System (Sweden),
Spanair (Spain), Jet Airways (India), Ltd., Transportes Aeroes Portugueses, S.A.
(Portugal) and Virgin Atlantic Airways, Limited (United Kingdom).
The following table displays the regional profile of the Company's engine
lessee customer base by operating lease revenue for the year ended December 31,
1996 and the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------ ------------------------------
OPERATING LEASE OPERATING LEASE
REVENUE PERCENTAGE REVENUE PERCENTAGE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
United States................... $ 4,878,121 36% $ 5,295,084 39%
Europe.......................... 4,099,725 30 2,840,428 21
Mexico.......................... 1,855,994 14 1,865,118 14
Canada.......................... 1,030,785 8 1,291,000 9
Australia/New Zealand........... 772,200 6 1,029,600 7
Asia............................ 512,832 4 889,208 6
South America................... 275,042 2 530,000 4
Middle East..................... 56,333 -- -- --
----------- ----- ----------- -----
Total operating lease revenue... $13,481,032 100% $13,740,438 100%
=========== ===== =========== =====
</TABLE>
For the year ended 1996 and for the nine-months ended September 30, 1997,
Aerovias de Mexico, S.A. de C.V., a lessee customer of the Company, contributed
approximately 14% of operating lease revenue.
AIRCRAFT ENGINE PORTFOLIO
The Company's management frequently reviews opportunities to acquire
suitable aircraft engines based on market demand, customer airline requirements
and in accordance with the Company's engine portfolio mix criteria and planning
strategies for leasing. Before committing to purchase specific engines, the
Company generally takes into consideration such factors as estimates of future
values, potential for remarketing, trends in supply and demand for the
particular make, model and configuration of the engines and their anticipated
obsolescence. As a result, certain types and configurations of engines do not
necessarily fit the profile for inclusion in the Company's portfolio of engines
owned and used in its leasing operation. The Company focuses particularly on the
noise compliant Stage III aircraft engines. As of September 30, 1997, all of the
engines in the Company's lease portfolio were Stage III engines and were
generally suitable for use on one or more commonly used aircraft. The Company
purchases a majority of its engines in the aftermarket, primarily from airlines
or other leasing companies.
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<PAGE> 33
The Company's commercial aircraft engine portfolio consists of aircraft
engines manufactured by CFM, General Electric (CF), Pratt & Whitney (JT and PW)
and Rolls Royce (RB). The following tables show by engine type the number of
engines owned by the Company, the aircraft type on which each engine type is
generally used, and the scheduled lease terminations of the Company's lease
portfolio at September 30, 1997:
ENGINE TYPE AND AIRCRAFT APPLICATION
<TABLE>
<CAPTION>
ENGINE TYPE AIRCRAFT APPLICATION QUANTITY
- ------------ ----------------------------- --------
<S> <C> <C>
CF6-50 C2 A300, DC10-30 3
CF6-80 C2A2 A310-300/-200 Advanced 1
CF6-80 C2B6 767-300ER 1
CF6-80 C2B6F 767-300ER 1
CF6-80E1 A330-300 1
CFM56-3B1 737-300/-500 2
CFM56-3B2 737-300/-400 5
CFM56-3C1 737-300/-400/-500 6
CFM56-5A3 A320/100/200, A319 2
CFM56-5C4 A340/300 1
JT8D-217C MD82/83/87/88 1
JT8D-219 MD82/83/87/88 10
JT9D-7AH 747-100/-200 1
JT9D-7A 747-100/-200 1
JT9D-7J 747-100/-200/SP 1
PW2037 757-200 1
PW2040 757-200 1
PW4060 747-400, 767-300ER 2
RB211-535E4 757-200/-200PF/-200CB 2
-----
Total 43
=====
</TABLE>
32
<PAGE> 34
SCHEDULE OF ENGINE LEASE TERMINATIONS
<TABLE>
<CAPTION>
ENGINE NET BOOK VALUE
---------------- ----------------
NUMBER % AMOUNT %
------ ----- ------ -----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C>
1997.......................... 5 11.6% $ 12.2 9.5%
1998.......................... 12 28.0 33.1 25.7
1999.......................... 4 9.3 9.1 7.1
2000.......................... 4 9.3 11.0 8.5
2001.......................... 4 9.3 14.5 11.2
2002.......................... 5 11.6 15.3 11.9
2003.......................... 3 7.0 7.9 6.1
2004.......................... 3 7.0 14.1 10.9
2005.......................... 1 2.3 6.0 4.7
2006.......................... 1 2.3 2.9 2.2
Off Lease..................... 1 2.3 2.8 2.2
--
----- ------ -----
Total............... 43 100.0% $128.9 100.0%
== ===== ====== =====
</TABLE>
The Company anticipates that current lessees will extend three of the five
leases which terminate in 1997 and is negotiating with a different lessee to
lease an engine which is the subject of another lease which terminates in 1997.
The fifth 1997 lease terminated in early October 1997, and the engine (a
JT9D-7AH engine with a book value of $431,250) has been relocated to the WASI
facility for the sale of its parts. The Company is actively marketing the engine
which is off lease.
ENGINE PORTFOLIO VALUE
The Company has obtained an updated appraisal of its engines from Aircraft
Information Services, Inc. ("AISI"), a recognized appraiser of aircraft engines.
A copy of the appraisal begins at page A-1 of this Prospectus and should be
reviewed for a discussion of the assumptions utilized and various factors
considered by AISI. AISI has rendered its opinion that the aggregate "Current
Market Value" of the Company's aircraft engine portfolio (excluding the JT9D-7AH
engine relocated to WASI), assuming the engines are in average half-life
condition, is $143.1 million, which compares favorably to the aggregate net book
value at September 30, 1997 of $128.5 million of the Company's appraised engine
portfolio. "Current Market Value" is the appraiser's opinion as to the value of
the aircraft engines under market conditions that are perceived to exist at a
specific point in time for a sale between equally willing and informed buyers
and sellers, neither under compulsion to buy or sell, in a single unit cash
transaction with no hidden value or liability and with supply and demand of the
sale item roughly in balance. "Average half-life" condition assumes that every
component or maintenance service which has a prescribed interval that determines
its service life, overhaul interval or interval between maintenance services is
at a condition which is one-half of the total interval.
The Company, through the return conditions required by its leases and the
maintenance reserves collected by the Company from its lessees, attempts to put
its engines in the equivalent of a "freshly refurbished" condition, after
application of the maintenance reserves. "Freshly refurbished" condition is
defined to be that of an engine immediately after a major shop visit which
refurbished all engine modules or all engine compressor and combustor/turbine
stages, as appropriate, with all life-limited components at half-life. AISI has
rendered its opinion that the "Current Market Value" of the Company's aircraft
engines appraised, assuming the engines are in freshly refurbished condition, is
$157.1 million.
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<PAGE> 35
The following table sets forth the opinion of AISI as to the aggregate
"Future Value Forecast" for the aircraft engines appraised as of October 28,
1997, for the periods indicated below:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
- ------- ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
$139.4 $135.8 $132.4 $128.9 $125.7
</TABLE>
"Future Value Forecast" is the appraiser's opinion as to the expected value
of an asset at a specific date in the future and assumes "Base Value" criteria,
half-life condition and an assumed annual inflation rate of 3.0%. "Base Value"
is similar to Current Fair Market Value; however it assumes theoretically
balanced market conditions rather than actual present market conditions or
assumed market conditions at a specified future date.
Since appraisals are only estimates of residual values, there can be no
assurance that the appraised value is accurate or that it will not materially
change due to factors beyond the Company's control, including but not limited
to, obsolescence and changing market conditions, lack of support by relevant
airframe, engine or component manufacturers. Nor can there be assurance that,
upon expiration of the leases, the Company will realize the then book or
appraised value through either sale or re-leasing of the engines in the event of
an absence of purchasers or re-lease demand.
AISI was paid $10,350, plus out-of-pocket expenses, for its services to the
Company in connection with its appraisal.
In the future, the Company does not intend to include the appraised value
of its engines in its reports and registration statements filed with the SEC.
FINANCING/SOURCE OF FUNDS
The Company typically acquires the engines it leases with a combination of
equity capital and funds borrowed from financial institutions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Risk Factors -- Back
Leveraging." The Company can typically borrow 80% to 100% of the engine purchase
price on a recourse, non-recourse or partial recourse basis. Under most of the
Company's term loans, the lender is entitled to receive most of the lease
payments associated with the financed engines to apply to debt service. Under
the Company's warehouse facilities, the lender is paid interest only until such
time as loans under the facilities become due. Generally, lenders take a
security interest in the engines. The Company retains ownership of the engines,
subject to such security interest. Loan interest rates often reflect the
financial condition of the underlying lessees, the terms of the lease and
percentage of purchase price advanced, and for full or partial recourse loans,
the financial condition of the Company. The Company obtains the balance of the
purchase price of the engine, the "equity" portion, from internally generated
funds, cash-on-hand, and going forward, the net proceeds of this Offering.
The loans available to the Company under recourse arrangements are secured
by the financed engines and the assignment of lease payments due under the
related leases. Upon default under a loan covering equipment financed through
recourse borrowings, the lender providing the financing can foreclose on the
equipment, repossess and sell such equipment and seek any balance due on such
financing from the Company to the extent of the recourse.
The credit standing of certain of the Company's customers and the long
operating life of aircraft engines allows the Company to finance some of its
equipment on a non-recourse basis. Certain of the Company's engines are owned in
wholly-owned subsidiaries set up for financing purposes. Non-recourse loans
represent loans to the Company's subsidiaries which own only the assets securing
the loan and as to which the Company has not guaranteed the loan. The Company
and its subsidiaries at September 30, 1997 had borrowings of $7.8 million of
non-recourse loans and $96.9 million of full or partial recourse loans. The
Company is not liable for the repayment of the non-recourse loans unless the
Company breaches certain limited representations and warranties under the
applicable pledge agreement. The lender assumes the credit risk of each such
lease, and its only recourse, upon a default under a lease, is against the
lessee and the leased engine.
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<PAGE> 36
The Company has negotiated a sharing of residual proceeds with certain
lenders in exchange for a higher percentage financing of certain aircraft
engines. Residual sharing arrangements apply to five of the Company's engines
(representing $15.5 million of book value) as of September 30, 1997. The Company
accrues for its residual sharing obligations using net book value as a proxy for
residual proceeds.
SPARE PARTS SALES
As a significant corollary to its core business, the Company, through WASI,
specializes in the purchase and resale of aftermarket engine parts, engines,
modules and rotable components. WASI purchases individual engine parts from
airlines and others in the aftermarket or acquires whole airframes or engines
and contracts to have the airframes or engines dismantled into their component
parts for resale by WASI. Some of the acquired component parts are overhauled
for WASI by FAA-authorized repair agencies and then offered for sale to
airlines, maintenance and repair facilities, and distributors. To date, WASI has
targeted primarily General Electric CF6-50, Pratt & Whitney JT9D, PW 4000 and
JT8D aircraft engines and components. These engines are the most widely used
aircraft engines in the world, powering the Boeing 747, 727 and 737, McDonnell
Douglas DC10 and DC9 and Airbus A-300 series of aircraft. WASI has begun to
expand into engine components for the CFM-56, a high thrust engine used on the
popular Boeing 737.
The Company believes that the operations of WASI complement the Company's
core leasing business. To date, WASI's operations have afforded the Company
additional contacts and opportunities in the aircraft engine market. WASI can
provide some parts for maintenance and overhaul of the Company's engines at
prices lower than the Company could obtain from third parties. As engines in the
Company's leasing portfolio age and reach the point at which they are more
valuable as component parts, the Company expects that WASI will be able to have
them dismantled, salvage valuable components and thereby maximize the residual
value of the engines.
WASI has strict guidelines regulating how parts are procured and
overhauled. After the completion of an extensive facilities audit and numerous
meetings with the Company's management, the Airline Suppliers Association, an
FAA recognized independent quality assurance organization, accredited WASI as an
aftermarket parts supplier. When procuring aircraft parts, great emphasis is
placed on source and traceability. At September 30, 1997, at least 95% of WASI's
inventory on hand was acquired from a certified commercial air carrier or others
operating under recognized regulatory agencies accepted by the FAA. Less than 5%
of the inventory was acquired from trading companies and in all such cases the
parts are certified by the seller as to origin. WASI does not trade in
consumable parts such as hardware/fasteners. Hardware/fasteners are the most
difficult to identify as unapproved material and in many cases are impossible to
identify as unapproved material without conducting detailed analysis. WASI's
trades in life-limited parts are restricted to parts that have complete
traceability back to the OEM or in few cases traceability from a commercial air
carrier back to the OEM. See "Risk Factors -- Government Regulation."
WASI advertises its aircraft engine parts availability on the Inventory
Locator Service ("ILS") electronic database. Users of ILS can access the
database and determine which companies have the desired inventory. The Company
also advertises in industry publications and receives a number of customers
through referrals.
WASI may from time to time enter into consignment agreements with airlines
or related companies to acquire surplus inventories for the purpose of marketing
and selling such consigned parts. Consignment allows WASI to access inventory
for sale without the cost and risk of ownership.
EQUIPMENT ACQUIRED FOR RESALE
The Company engages in the selective purchase and resale of commercial
aircraft engines and engine components in the aftermarket to complement its
engine and parts leasing business. It is the Company's general policy to
minimize risk by not purchasing engines or components on speculation; however,
on occasion, the Company purchases engines and components without having a
commitment for their sale. The Company normally makes a contractual commitment
to purchase specific engines or components for its own account only after, or
concurrently with, obtaining a firm customer purchase commitment. Although the
35
<PAGE> 37
Company usually has purchase commitments at delivery, it would have financial
exposure if it purchased an engine or components which could not immediately be
resold. The Company assesses the supply and demand of target engines and
components through its sales force and relies, to a lesser extent, on referrals
and advertising in industry publications. The Company also subscribes to a data
package that provides it with access to lists composed of operators and their
specific engine inventories and engines on order. The Company does not refurbish
or perform other maintenance on the engines or components it sells; however,
from time to time, the Company has hired third party contractors to refurbish or
repair such engines and components.
COMPETITION
In the medium-term engine lease market segment, which is the Company's
target market, the Company principally competes with Shannon Engine Services,
headquartered in Shannon, Ireland, which is owned by CFM and Rolls Royce. Rolls
Royce limits its leasing activities to products of its parent company and
related parties. The Bank of Tokyo-Mitsibishi, through its affiliate Engine
Lease Finance in Shannon, Ireland, also competes with the Company. Each of these
competitors is substantially larger and has greater financial resources than the
Company which may permit, among other things, greater access to capital markets
at more favorable terms. In addition, major aircraft lessors, including
International Lease Finance Corporation and General Electric Capital Aviation
Services, compete with the Company to the extent that they include spare engine
leases with their aircraft leases.
With respect to engine marketing and spare parts and component sales, the
Company competes with airlines, aircraft manufacturers, aircraft, engine and
parts brokers, and parts distributors. The Company's major competitors include
the Allen Aircraft division of AAR Corp., The AGES Group, The Memphis Group,
Aviation Sales Company, Kellstrom Industries and AVTEAM, Inc. Certain of these
competitors may have, or may have access to, financial resources substantially
greater than the Company. Significant increases in competition encountered by
the Company in the future may limit the Company's ability to expand its
business, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company believes that the primary competitive factors in the aircraft
engine leasing industry are flexibility in leasing terms, including price,
return conditions and term of lease, and availability of engines. The Company
believes that it is able to compete favorably in leasing commercial aircraft
engines and parts due to its experience in the industry and reputation and
expertise in acquiring and leasing commercial aircraft engines at economical
prices which allows the Company to re-lease or sell such engines and parts at a
competitive price. See "Risk Factors -- Competition."
INSURANCE
The Company requires its lessees to carry the types of insurance customary
in the air transportation industry, including comprehensive liability insurance
and casualty insurance. In addition to requiring full indemnification under the
terms of the lease, the Company is named as an additional insured on liability
insurance policies carried by lessees, with the Company or its lenders normally
identified as the payee for loss and damage to the equipment. All policies
contain a breach of warranty endorsement or severability of interest clause so
that the Company continues to be protected even if the operator/lessee violates
one or more of the warranties or conditions of the insurance policy. The Company
monitors compliance with the insurance provisions of the leases. The Company
also carries contingency and product liability insurance.
GOVERNMENT REGULATION
The Company's customers are generally subject to a high degree of
regulation in the various jurisdictions in which they operate. Such regulations
also indirectly affect the Company's business operations. Under the provisions
of the Transportation Act, as amended, the FAA exercises regulatory authority
over the air transportation industry. The FAA regulates the manufacture, repair
and operation of all aircraft engines operated in the United States. Its
regulations are designed to insure that all aircraft and aviation equipment are
continuously maintained in proper condition to ensure safe operation of the
aircraft. Similar rules apply in
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<PAGE> 38
other countries. All aircraft must be maintained under a continuous condition
monitoring program and must periodically undergo thorough inspection and
maintenance. The inspection, maintenance and repair procedures for the various
types of commercial aircraft equipment are prescribed by regulatory authorities
and can be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Presently, whenever necessary, with respect to a
particular engine or engine component, the Company utilizes FAA and/or Joint
Aviation Authority certified repair stations to repair and certify engines and
components to ensure worldwide marketability. The FAA can suspend or revoke the
authority of air carriers or their licensed personnel for failure to comply with
regulations and ground aircraft if their airworthiness is in question. In
addition, by the year 2000, federal regulations will stipulate that all aircraft
engines hold, or be capable of holding, a noise certificate issued under Chapter
3 of Volume 1, Part II of Annex 16 of the Chicago Convention, or have been shown
to comply with Stage III noise levels set out in Section 36.5 of Appendix C of
Part 36 of the Federal Aviation Regulations of the United States. As of
September 30, 1997, all of the engines in the Company's lease portfolio were
Stage III engines.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
EMPLOYEES
As of September 30, 1997, the Company had 40 full-time employees and four
part-time employees (excluding consultants), including 22 employees in equipment
leasing and trading and 22 employees in airframe and engine component sales.
None of the Company's employees is covered by a collective bargaining agreement
and the Company believes its employee relations are good.
FACILITIES
The Company's principal offices are located at 180 Harbor Drive, Suite 200,
Sausalito, California 94965. The Company occupies space in Sausalito under a
lease that covers approximately 5,500 square feet of office space and expires on
March 14, 1999. Engine financing, sales, trading and general administrative
activities are conducted from the Sausalito location. The Company also leases
approximately 22,800 square feet of office and warehouse space for WASI's
operations at 291 Harbor Way, South San Francisco, California 94080. This lease
expires on May 31, 1998. See Note 10 to the Audited Financial Statements. In
addition, the Company leases approximately 10,730 square feet of space at 1769
West University Drive, Suite 177, Tempe, Arizona 85821, which is used for parts
storage and distribution. This lease expires on July 31, 1999. The Company
believes that its current facilities may not be adequate for its needs and
anticipates acquiring additional facilities as needed.
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<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
person who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE* POSITION
----------------------------------- ----- ------------------------------------------
<S> <C> <C>
Charles F. Willis, IV 49 President and Chief Executive Officer,
Chairman of the Board of Directors
Donald A. Nunemaker 50 Executive Vice President and Chief
Administrative Officer
James D. McBride 41 Executive Vice President and Chief
Financial Officer
William L. McElfresh 51 Director and Executive Vice President --
Strategic Development
Steven D. Oldenburg 48 Senior Vice President -- Sales and
Marketing
Rae A. Capps 45 Senior Vice President and General Counsel
Elliot M. Fischer 49 Vice President -- Syndications
Edwin F. Dibble 54 President -- WASI
Ross K. Anderson (1) 56 Director
William M. LeRoy (1) 55 Director
Willard H. Smith, Jr. (1) 60 Director
</TABLE>
- ---------------
*Age listed as of September 30, 1997
(1) Member of the Audit and Compensation Committees of the Board of Directors
Set forth below is certain information with respect to each director and
executive officer of the Company.
CHARLES F. WILLIS, IV is the founder of the Company, has served as Chief
Executive Officer, President and a Director since its incorporation in 1985 and
has served as Chairman of the Board of Directors since 1996. Mr. Willis has 31
years of experience in the aviation industry. He has provided a wide range of
consulting services for the aviation industry, including fleet planning, cost of
recertification estimation, assistance with purchase and lease documentation,
appraisal of competing equipment and evaluation of financing proposals. From
1975 to 1985, Mr. Willis served as President of the Company's predecessor,
Charles F. Willis Company, which purchased, financed and/or sold a variety of
large commercial transport aircraft and provided consulting services to the
aviation industry. During 1974, Mr. Willis operated a small business not
involved in the aviation industry. From 1972 through 1973, Mr. Willis was
Assistant Vice President of Sales at Seaboard World Airlines, a freight carrier.
From 1965 through 1972, he held various positions at Alaska Airlines, including
positions in the departments of flight operations, sales and marketing.
DONALD A. NUNEMAKER has served as the Company's Executive Vice President
and Chief Administrative Officer since July of 1997. Mr. Nunemaker is
responsible for managing the day-to-day operation of the Company and has been
extensively involved in the equipment leasing industry since 1973. From 1995 to
1996, Mr. Nunemaker was President and Chief Executive Officer of LeasePartners,
Inc., a small ticket vendor leasing company based in Burlingame, California,
which was acquired by Newcourt Credit Group. From 1990 to 1994, Mr. Nunemaker
was Executive Vice President of Concord Asset Management, Inc., an aircraft and
computer leasing subsidiary of Concord Leasing, Inc., which was owned by the
HSBC Group. Before joining Concord in 1990, Mr. Nunemaker was President of Banc
One Leasing Corporation of New Jersey, which was Banc One's small ticket leasing
subsidiary. Prior to that he spent thirteen years with Chase Manhattan Leasing
Company in a variety of senior line and staff positions. His last position at
Chase was that of Senior Vice President & Division Executive -- Special Products
Division, which included management responsibility for Chase Aircraft Finance
Company, Chase/Horizon Creditcorp and the AT&T Finance Group. Mr. Nunemaker has
an M.B.A. from Indiana University.
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<PAGE> 40
JAMES D. MCBRIDE has served as the Company's Executive Vice President and
Chief Financial Officer since September of 1997. Prior to joining the Company,
Mr. McBride was Senior Vice President and the Chief Financial Officer of Triton
Container International Limited, an international lessor serving intermodal
shipping companies worldwide. During his twelve year tenure at Triton, in
addition to the position of Senior Vice President, Mr. McBride held the
positions of Vice President, Finance; Vice President, Treasurer; and Director of
Finance. Prior to joining Triton, Mr. McBride held various positions at Crocker
National Bank and Bank of America. Mr. McBride has been involved in leasing and
financial services for over twenty years. He has significant experience in the
areas of capital formation, accounting and control, domestic and international
operations, information systems and risk management. Mr. McBride holds a M.B.A.
from the Haas School of Business at the University of California, Berkeley.
WILLIAM L. MCELFRESH was named as the Company's Executive Vice President of
Strategic Development in February 1997. Prior to that, he served as the
Company's Executive Vice President-Marketing since 1989 and was named a Director
of the Company in 1996. For approximately 29 years, Mr. McElfresh has been
involved with commercial jet engine sales and support. From 1987 through 1989,
he was a partner with Turbine Engine Support Co., Inc. and provided sales,
brokerage, exchange and monitoring programs for aircraft engines and parts. As
Vice President, Sales and Marketing for International Aircraft Support, Inc.
from 1983 through 1987, Mr. McElfresh found and exploited new market
opportunities for commercial jet aircraft engines and spare parts. From 1977
through 1983, he developed and managed the worldwide spares support and overall
operations for the Power Accessories Division of TRW, Inc. From 1972 to 1983, he
established a marketing program in Asia and Pacific island markets to support
the growth for the new Component Repair Group of TRW Inc., which manufactured
the major aircraft engine components for Pratt and Whitney, General Electric and
CFM. From 1968 to 1972, he was an Aircraft Maintenance Officer in the United
States Air Force assigned to VIP and NASA Operations Support. Mr. McElfresh
holds a B.A. from the University of Kansas and an M.B.A. from Pepperdine
University.
STEVEN D. OLDENBURG was named as the Company's Senior Vice
President -- Sales and Marketing in August 1997. Prior to that, he served as the
Company's Senior Vice President -- Capital Markets since November 1995. For over
19 years, Mr. Oldenburg has been involved in the leasing industry, providing and
arranging debt and equity. Mr. Oldenburg has structured and negotiated several
hundred millions of dollars in equipment financings for national and
international leveraged and single investor leases. As Vice President,
Syndications, for Marine Midland Business Loans, Inc. (formerly Concord Leasing,
Inc.) from 1991 through 1994, he specialized in financing commercial aircraft
and other transportation-related equipment. From 1976 through 1991, he also
managed the financing for high tech equipment, medical equipment, rail equipment
and corporate aircraft for other international lessors. Mr. Oldenburg holds a
B.S. in Management from the University of Vermont and a Certificate in
Accounting from Bentley College in Boston.
RAE A. CAPPS has served as the Company's Senior Vice President and General
Counsel since June of 1997 and is responsible for overseeing the legal affairs
of the Company. Ms. Capps was Vice President, General Counsel and Corporate
Secretary of Hawaiian Airlines from 1993 to June of 1997. She was an attorney in
the law firm of Goodsill Anderson Quinn & Stifel in Honolulu, Hawaii from 1990
to 1993 and an attorney in the law firm of Gendel, Raskoff, Shapiro & Quittner
in Los Angeles from 1987 to 1990. Ms. Capps holds a B.A. from the University of
Texas and a J.D. from the University of Utah.
ELLIOT M. FISCHER has served as the Company's Vice
President -- Syndications since September of 1997. From March of 1995 to
September of 1997, he served as the Company's Chief Financial Officer and
Controller. During the 15 years prior to joining the Company, Mr. Fischer held
senior level finance positions at several leasing companies, including
LeasePartners, Inc. from 1994 to 1995; USL Capital from 1990-1994; and Chrysler
Capital Corporation from 1980 to 1987. During 1994, Mr. Fischer was Corporate
Controller at LeasePartners, a vendor leasing company in Burlingame, California.
His experience includes financial reporting and controls, forecasting,
budgeting, strategic planning and reporting systems. Prior experience includes
financial reporting in manufacturing environments, and a three-year assignment
with International Paper Company as Chief Financial Officer of a paper
converting facility in Japan. Mr. Fischer worked in public accounting for three
years and is a Certified Public Accountant, holding a B.B.A. in accounting from
Pace University in New York.
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<PAGE> 41
EDWIN F. DIBBLE has served as President of WASI since May of 1997 and was a
Vice President of WASI from October of 1994 to May of 1997. From 1986 to 1994,
Mr. Dibble served as Vice President of engines and parts sales for Turbine
Engine Support Co., Inc. From 1984 to 1986, Mr. Dibble worked in purchasing for
International Aircraft Support, Inc. From 1964 to 1984, Mr. Dibble held various
positions with United Airlines in the areas of maintenance sales and services.
Mr. Dibble also worked in the Powerplant Planning Department, coordinating the
support for all types of aircraft engines operated by United Airlines.
ROSS K. ANDERSON has served as a Director of the Company since 1996. Since
1993, Mr. Anderson has been President and Chief Executive Officer of Astech
Manufacturing, Inc. ("Astech"), an aerospace company manufacturing proprietary
metal honeycomb products using high temperature alloys. Astech's principal
customers include Boeing, Pratt & Whitney and General Electric for commercial
aircraft engines. From 1991 to 1993, Mr. Anderson was employed at Teledyne
Aircraft Group as Group Executive. From 1987 to 1991, Mr. Anderson served as
President of Teledyne Picco. Mr. Anderson received his M.S. in Aeronautical
Engineering from California Institute of Technology, his M.B.A. from Stanford
Graduate School of Business and his B.S. from the United States Naval Academy.
WILLIAM M. LEROY has served as a Director of the Company since 1996. In
1993, Mr. LeRoy established the LeRoy Accountancy Corporation, an audit firm
specializing in the audits of employee benefit plans. From 1965 to 1993, Mr.
LeRoy served in various positions at Ernst & Young LLP an independent accounting
firm, in the Chicago, San Jose and San Francisco offices including as audit
partner responsible for the financial institution and leasing company practice
in northern California. Mr. LeRoy received his M.B.A. from Golden Gate
University and his B.S. in Accounting from Northern Illinois University.
WILLARD H. SMITH, JR. has served as a Director of the Company since 1996.
From 1979 through 1995, Mr. Smith was employed at Merrill Lynch, Pierce Fenner &
Smith Incorporated ("Merrill Lynch") and served as Managing Director since 1983
in their Equity Capital Markets Division. From 1992 through 1995, Mr. Smith's
primary focus was the real estate investment trust industry. His duties as
Managing Director at Merrill Lynch included evaluating companies' structure and
equity requirements, coordinating the placement of equity offerings with Merrill
Lynch's retail and institutional client base, and assessing the market's demand
for potential offerings. Mr. Smith is also a Board Member of the Cohen & Steers
Realty Shares, Cohen & Steers Realty Income Fund, the Cohen & Steers Total
Return Realty Fund, the Cohen & Steers Special Equity Fund, Inc., Cohen & Steers
Equity Income Fund, Essex Property Trust, Inc., Highwoods Properties, Inc. and
Realty Income Corporation. Prior to joining Merrill Lynch, Mr. Smith worked at
F. Eberstadt & Co. from 1971 to 1979. Mr. Smith received his B.S. in Business
Administration, and B.S. in Industrial Engineering from the University of North
Dakota in 1959 and 1960, respectively.
All directors hold office until the next annual meeting of shareholders or
until their successors have been elected. Executive officers serve at the
discretion of the Board. There are no family relationships between any of the
directors or executive officers of the Company.
DIRECTOR COMPENSATION
Non-employee members of the Board are each paid an annual fee of $10,000
and are reimbursed for their out-of-pocket expenses incurred to attend Board of
Directors or Committee meetings. They also receive $1,000 for each Board meeting
and $500 for each Committee meeting which they attend in person, and $500 for
each Board and Committee meeting held by telephone. Pursuant to the automatic
option grant program under the 1996 Plan, each individual who first becomes a
non-employee Board member after the effective date of the Plan is eligible to
receive an option grant for 5,000 shares of Common Stock at an exercise price
per share equal to 100% of the fair market value on the date of grant. In
addition, at each annual shareholders meeting, beginning with the 1997 Annual
Meeting, each individual who is to continue to serve as a non-employee Board
member after the meeting will receive an additional option grant to purchase
1,000 shares of Common Stock whether or not such individual has been in the
prior employ of the Company.
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<PAGE> 42
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company has adopted provisions in its Articles of Incorporation that
eliminate the personal liability of its directors for monetary damages arising
from a breach of their fiduciary duties in certain circumstances to the fullest
extent permitted by law and that authorize the Company to indemnify its
directors and officers to the fullest extent permitted by law. Such limitation
of liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company has entered into indemnification agreements with its directors
and certain officers containing provisions which are in some respects broader
than the specific indemnification provisions contained in the California
Corporation Code. The indemnification agreements may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors and
officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim for such indemnification.
AUDIT COMMITTEE
The Audit Committee, whose members are Ross K. Anderson, William M. LeRoy
and Willard H. Smith, Jr., meets with the Company's financial management and its
independent public accountants to review internal financial information, audit
plans and results, and financial reporting procedures.
COMPENSATION COMMITTEE
The Compensation Committee, whose members are Ross K. Anderson, William M.
LeRoy and Willard H. Smith, Jr., reviews and approves the Company's compensation
arrangements for senior management and administers the Company's 1996 Plan.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned by (i) the Company's Chief Executive Officer and (ii) each
of the four other most highly compensated executive officers of the Company
serving as such as of the end of the last fiscal year whose total annual salary
and bonus exceeded $100,000 for the fiscal year ended December 31, 1996. Such
individuals will be hereafter referred to as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- --------------------------------- ------ -------- -------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Charles F. Willis, IV 1996 $448,488 $175,000 -- --
Chief Executive Officer 1995 $577,704 -- -- --
William L. McElfresh 1996 $150,000 $ 63,265 -- 150,000
Executive Vice President 1995 $116,000 $134,892 -- --
John F. Votruba 1996 $164,956 $ 40,000 -- 30,000
General Counsel (1) 1995 $141,908 -- -- --
Edwin F. Dibble 1996 $100,000 $264,615(2) -- 30,000
Vice President-WASI 1995 $100,000 $ 94,485(2) -- --
Steven D. Oldenburg 1996 $125,000 $ 43,000 $23,387(3) 30,000
Senior Vice President 1995 $ 90,240(4) $ 30,000 -- --
</TABLE>
- ---------------
(1) Mr. Votruba resigned from the Company in June of 1997.
(2) Mr. Dibble's bonus is determined as a percentage of pre-tax profits of WASI.
(3) Represents relocation expenses paid by the Company.
(4) Includes $73,995 in consulting fees paid by the Company to Mr. Oldenburg
before he became an employee of the Company.
COMPENSATION ARRANGEMENTS AND EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE
OFFICERS
CHARLES F. WILLIS, IV. Mr. Willis' base salary for 1997 will be $250,000
and his maximum bonus will be $350,000.
WILLIAM L. MCELFRESH. Effective July 1, 1996, Mr. McElfresh signed a
five-year employment agreement with the Company. The agreement automatically
renews for additional one year terms unless either party gives notice of
nonrenewal six months prior to expiration of the current term. Mr. McElfresh's
base salary is $150,000 per year, subject to adjustment by the Company's Board
of Directors. Mr. McElfresh is entitled to receive bonuses under the Company's
Incentive Compensation Plan.
STEVEN D. OLDENBURG. Effective July 1, 1996, Mr. Oldenburg signed a
five-year employment agreement with the Company. The agreement automatically
renews for additional one year terms unless either party gives notice of
nonrenewal six months prior to expiration of the current term. Mr. Oldenburg's
base salary is $150,000 per year, subject to adjustment by the Company's Board
of Directors. Mr. Oldenburg is entitled to receive bonuses under the Company's
Incentive Compensation Plan. The Company must provide Mr. Oldenburg with at
least six months' notice prior to termination of his employment.
EDWIN F. DIBBLE. Effective January 1, 1997, Mr. Dibble has signed a
five-year employment agreement with WASI. The agreement automatically renews for
an additional year unless WASI gives notice of termination sixty days prior to
the expiration of the employment period. Mr. Dibble's base salary is $100,000
per year, subject to adjustment by WASI's Board of Directors.
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<PAGE> 44
INCENTIVE COMPENSATION PLAN
The Company has established an incentive compensation plan for executive
officers, certain independent contractors and sales personnel (the "Incentive
Compensation Plan"). This plan became effective as of July 1, 1996 and generally
provides for payments expressed as a percentage of a participant's base
compensation upon achievement of pre-agreed financial and qualitative
objectives. The bonus percentages are established annually by the Compensation
Committee of the Board of Directors. Bonuses can be tiered depending upon
individual, profit center and Company performance. Generally, performance
criteria are based on achievements of annual budgets, return on equity and
assets and, to a lesser degree, on subjective evaluations of performance and
individual relative contribution to the Company's goals and objectives. A
portion of any bonus over a specific amount will be paid out by the Company over
a one year period and is subject to forfeiture if the participant terminates his
relationship with the Company prior to the scheduled payment date.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1996 Plan was adopted by the Board of Directors on June 21,
1996. 525,000 shares of Common Stock have been authorized for issuance under the
1996 Plan.
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price not less than 100% of their fair market value
on the grant date, (ii) the Stock Issuance Program under which such individuals
may, in the Plan Administrator's discretion, be issued shares of Common Stock
directly, through the purchase of such shares at an exercise price equal to 100%
of their fair market value at the time of issuance or as a bonus tied to the
performance of services and (iii) the Automatic Option Grant Program under which
option grants will automatically be made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to 100% of their fair market value on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Compensation Committee. The Compensation Committee as Plan
Administrator has complete discretion to determine which eligible individuals
are to receive option grants or stock issuances, the time or times when such
option grants or stock issuances are to be made, the number of shares subject to
each such grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the Federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding. However, in no event may any one participant in the 1996 Plan
receive option grants or direct stock issuances for more than 250,000 shares per
calendar year.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program, which is not to
be assumed or replaced by the successor corporation, will automatically
accelerate in full, and all unvested shares under the Stock Issuance Program
will immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are to be assigned to the successor corporation. The
Plan Administrator has the authority under the Discretionary Option Grant and
Stock Issuance Programs to grant options and to structure repurchase rights so
that the shares subject to those options or repurchase rights will automatically
vest in the event of a change in control of the Company effected by a successful
tender offer for more than 50% of the outstanding voting stock or by proxy
contest for the election of Board members. The Plan Administrator also has the
authority to provide for automatic vesting of options and unvested shares upon
the individual's service being terminated, whether involuntarily or through a
resignation for good reason, within twelve (12) months following either a merger
or asset sale or a change in control.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. The Plan
43
<PAGE> 45
Administrator also has discretion to issue limited stock appreciation rights
under the Discretionary Option Grant Program to certain officers and directors
of the Company which will provide the holders with the election, upon the
successful completion of a hostile tender offer for more than 50% of the
Company's outstanding voting securities, to surrender their outstanding options
for a cash distribution from the Company in an amount per surrendered option
share equal to the excess of (i) the highest reported price per share paid in
effecting the take-over (ii) the option exercise price payable per share.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
Under the Automatic Option Grant Program, each individual who becomes a
non-employee Board member after the effective date of the Plan will receive an
option grant on such date for 5,000 shares of Common Stock exercisable at an
exercise price per share equal to 100% of the fair market value on the date of
grant, provided such individual has not otherwise been in the prior employ of
the Company. In addition, at each annual shareholders meeting, beginning with
the 1997 Annual Meeting, each individual who is to continue to serve as a
non-employee Board member after the meeting will receive an additional option
grant to purchase 1,000 shares of Common Stock whether or not such individual
has been in the prior employ of the Company.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable; however, any shares purchased upon
exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting of the shares. The
initial 5,000-share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional 1,000-
share grant will vest upon the optionee's completion of one year of Board
service measured from the grant date. However, each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on June 20, 2006, unless sooner terminated by the Board.
The following table sets forth information concerning the stock options
granted by the Company during the 1996 fiscal year to the Named Executive
Officers. No stock appreciation rights were granted during the 1996 fiscal year
to the Named Executive Officers.
OPTIONS GRANTS IN 1996 FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER TOTAL STOCK
OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED EXERCISE FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(1)
OPTIONS IN FISCAL PRICE PER EXPIRATION -----------------------
NAME GRANTED YEAR 1996 SHARE (2) DATE 5% 10%
- ------------------------ -------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles F. Willis, IV... -- NA NA NA $ -- $ --
William L. McElfresh.... 150,000 47.6% $8.00 9/16/06 754,673 1,912,491
John F. Votruba......... 30,000 9.5% $8.00 9/16/06 150,935 382,498
Edwin F. Dibble......... 30,000 9.5% $8.00 9/16/06 150,935 382,498
Steven D. Oldenburg..... 30,000 9.5% $8.00 9/16/06 150,935 382,498
</TABLE>
- ---------------
(1) There is no assurance provided to the option holder or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the 5% and 10% assumed annual rates of
compounded stock price appreciation.
44
<PAGE> 46
(2) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company may
also finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the Federal and state
income and employment tax liability incurred by the optionee in connection
with such exercise.
The following table sets forth certain information with respect to the
Named Executive Officers concerning shares of the Company's Common Stock subject
to exercisable and unexercisable stock options which the Named Executive
Officers held at the end of the 1996 fiscal year. No options or SARs were
exercised by any Named Executive Officer during the 1996 fiscal year. Except to
the extent of any limited stock appreciation rights awarded in connection with
outstanding options, none of the Named Executive Officers held any stock
appreciation rights at the end of that fiscal year.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles F. Willis, IV.................... -- -- $ -- $ --
William L. McElfresh..................... 37,500 112,500 182,813 548,438
John F. Votruba.......................... 7,500 22,500 36,563 109,688
Edwin F. Dibble.......................... 7,500 22,500 36,563 109,688
Steven D. Oldenburg...................... 7,500 22,500 36,563 109,688
</TABLE>
- ---------------
(1) Based on the fair market value of the shares at the end of the 1996 fiscal
year ($12.875 per share) less the option exercise price payable for those
shares.
As of September 30, 1997, 453,500 options have been awarded (15,000 of
which have been exercised) and 71,500 shares of Common Stock were reserved for
issuance under the 1996 Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on June 21, 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 deductions. A reserve of 75,000 shares of Common
Stock was established for this purpose.
Individuals who are eligible employees on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (the first business day of February and August each
year). Individuals who first become eligible employees after the start date of
the offering period may join the Purchase Plan on any subsequent semi-annual
entry date within that period.
Payroll deductions may not exceed 10% of base salary, and the accumulated
payroll deductions of each participant will be applied to the purchase of shares
on his or her behalf on each semi-annual purchase date (the last business day in
January and July) at a purchase price per share equal to eighty-five percent
(85%) of the lower of (i) the fair market value of the Common Stock on the
participant's entry date into the offering period or (ii) the fair market value
on the semi-annual purchase date. In no event, however, may any participant
purchase more than 500 shares on any one semi-annual purchase date.
The Purchase Plan will terminate on the earlier of (i) the last business
day of July 2006, (ii) an earlier date determined by the Board or (iii) the date
all shares available for issuance have been sold.
As of September 30, 1997, 10,527 shares of Common Stock had been issued by
the Company as a result of employee stock purchases under the Purchase Plan and
64,473 shares of Common Stock remain reserved for issuance under the Purchase
Plan.
45
<PAGE> 47
CERTAIN TRANSACTIONS
Related Party Transactions. In September 1993, the Company entered into a
management agreement with T-4 Inc. ("T-4"), an entity owned by Mr. Willis, to
provide administrative and management services for the relative cost of such
services. For the years ended December 31, 1994 and 1995, the Company recognized
$120,000 and $30,000 in management fee income under this agreement. At December
31, 1995, the Company wrote off its $30,000 receivable. Effective July 1, 1996,
the Company purchased T-4 for a nominal cash amount.
Loans to Shareholder. During 1994 and 1995, the Company made loans totaling
$19,600 and $165,635, respectively, to Mr. Willis. Between January 1, 1996 and
July 31, 1996 the Company made loans totaling $265,478 to Mr. Willis. The
outstanding balance on loans from the Company to Mr. Willis was $373,845 as of
December 31, 1994, $481,789 as of December 31, 1995 and $743,731 as of July 31,
1996. Of such loans, $10,000 were represented by a promissory note that bears
interest at 8% per annum. The remainder of such loans are non-interest bearing.
Immediately prior to the consummation of the Initial Public Offering, the
Company declared a cash dividend to Mr. Willis in the amount of approximately
$951,475 in order to facilitate the repayment in full of the loans described
above and to pay related income tax liabilities.
Contribution of Minority Interest in WASI. Upon consummation of the Initial
Public Offering, Mr. Dibble, Vice President of WASI, together with his wife,
contributed all of the shares owned by them in WASI (approximately a 20%
interest) to the Company in exchange for 16,136 shares of Common Stock of the
Company. The number of shares of Common Stock was determined by dividing
$129,091 by the initial price to the public in the Initial Public Offering. The
Company believes that this method of valuation was no less favorable to the
Company than would otherwise have been received in a similar transaction with an
unaffiliated third party.
Any future transactions between the Company and its officers, directors,
and affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties. Such transactions with such persons
will be subject to approval by a majority of the Company's outside directors or
will be consistent with policies approved by such outside directors.
46
<PAGE> 48
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997 by: (i) each
person who is known to the Company to own beneficially more than five percent of
the outstanding shares of the Company's Common Stock; (ii) each director; (iii)
each officer listed on the Summary Compensation Table; and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------
PERCENTAGE OF PERCENTAGE OF
CLASS BEFORE CLASS AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OFFERING OFFERING
----------------------------------------------- --------- ------------- -------------
<S> <C> <C> <C>
Charles F. Willis, IV(2)....................... 3,060,657(3) 56.1% 44.0%
William L. McElfresh(2)........................ 77,939 1.4 1.1
Steven D. Oldenburg(2)......................... 15,849 * *
Edwin F. Dibble(2)(4).......................... 37,760 * *
Ross K. Anderson(2)............................ 7,000 * *
William M. LeRoy(2)............................ 6,000 * *
Willard H. Smith, Jr.(2)....................... 7,000 * *
All directors and executive officers as a group
(11 persons)................................. 3,244,205 59.5% 46.7%
</TABLE>
- ---------------
* Less than one percent
(1) Except as indicated in the footnotes to this table, the shareholders named
in the table are known to the Company to have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them, subject to community property laws where applicable. The number of
shares beneficially owned includes Common Stock of which such individual has
the right to acquire beneficial ownership either currently or within 60 days
after September 30, 1997 including, but not limited to, shares beneficially
owned upon the exercise of an option.
(2) The mailing address for each individual is c/o Willis Lease Finance
Corporation, 180 Harbor Drive, Suite 200, Sausalito, CA 94965.
(3) All of the 3,060,657 shares are held by CFW Partners, L.P., a California
Limited Partnership of which Charles F. Willis, IV holds a one percent (1%)
interest as the sole general partner and of which he holds an eighty percent
(80%) interest as a limited partner. A trust for the benefit of Mr. Willis'
son holds the remaining nineteen percent (19%) interest as a limited
partner.
(4) 16,136 of the shares were received in exchange for a minority interest in
WASI, and are held by Mr. Dibble and his wife.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par
value. After giving effect to the Offering, there will be 6,952,320 shares of
Common Stock outstanding. No shares of the Company's Preferred Stock will be
outstanding upon consummation of the Offering.
COMMON STOCK
Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation, to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of shareholders. Holders of Common Stock have no preemptive
rights to purchase or subscribe for any stock or
47
<PAGE> 49
other securities and there are no conversion rights or redemption or sinking
fund provisions with respect to such Common Stock. All outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby will be when
issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock in
one or more series, and to designate the rights, preferences, limitations,
restrictions of and upon shares of each series, including voting, redemption and
conversion rights. The Board of Directors may also designate dividend rights and
preferences in liquidation. It is not possible to state the effect of the
authorization and issuance of any series of Preferred Stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
terms, rights and preferences of such a series of Preferred Stock. However, such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock or impairing the
liquidation rights of such shares without further action by holders of Common
Stock. In addition, under certain circumstances, the issuance of Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management, which could thereby depress
the market price of the Company's Common Stock. At present, the Company has no
plans to issue any shares of Preferred Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of law and the Company's Articles of Incorporation and
Bylaws could make more difficult the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise, and the removal of incumbent
officers and directors. These provisions include authorization of the issuance
of up to 5,000,000 shares of Preferred Stock, with such characteristics that may
render it more difficult or tend to discourage a merger, tender offer or proxy
contest, as described in "Preferred Stock" above. The Company's Articles of
Incorporation also provide that, for as long as the Company has a class of stock
registered pursuant to the Exchange Act, shareholder action can be taken only at
an annual or special meeting of shareholders and may not be taken by written
consent. The Company's Bylaws also limit the ability of shareholders to raise
matters at a meeting of shareholders without giving advance notice. In addition,
cumulative voting has been eliminated. These provisions are expected to
discourage certain types of coercive takeover practices and inadequate takeover
bids, and to encourage persons seeking to acquire control of the Company to
negotiate first with the Company. The Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure the
Company, outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an improvement
of their terms.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock is American Stock
Transfer & Trust Company.
48
<PAGE> 50
UNDERWRITING
Under the terms of, and subject to the conditions in, the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below,
for whom Lehman Brothers Inc. and Dain Bosworth Incorporated are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
---------
<S> <C>
Lehman Brothers Inc...............................................
Dain Bosworth Incorporated........................................
---------
Total................................................... 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase shares of Common Stock are subject to certain
conditions, and that if any of the foregoing shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all the
shares of Common Stock agreed to be purchased by the Underwriters must be so
purchased.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain selected dealers (who
may include the Underwriters) at such public offering price less a selling
concession not in excess of $ per share. The selected dealers may
reallow a concession not in excess of $ per share to certain brokers
and dealers. After the public offering, the offering price, the concession to
selected dealers and the reallowance may be changed by the Representatives.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act") and to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 225,000 shares of Common Stock, on the same terms and
conditions as set forth above to cover over-allotments, if any. To the extent
that the option is exercised, each Underwriter will be committed, subject to
certain conditions, to purchase a number of the additional shares of Common
Stock proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
CFW Partners, L.P., and all the directors and executive officers of the
Company have agreed that they will not, subject to certain limited exceptions,
directly or indirectly, offer, sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for any
such shares for a period of 90 days after the effective date of the Offering
without the prior written consent of Lehman Brothers Inc. In addition, the
Company has agreed that it will not, subject to certain limited exceptions,
directly or indirectly, offer, sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable for such shares without
the prior written consent of Lehman Brothers Inc. for 90 days after the
effective date of the Offering.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
In addition, if the Representatives over-allot (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this Prospectus),
and thereby create a short position in the Common Stock in connection with the
Offering, the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
49
<PAGE> 51
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Dain Bosworth Incorporated holds a warrant to acquire 50,000 shares of
Common Stock exercisable at a price of $10.40 per share. The warrant was
acquired in connection with the participation by Dain Bosworth Incorporated in
the Initial Public Offering.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, San Francisco, California. Certain legal
matters in connection with the sale of the securities offered hereby will be
passed upon for the Underwriters by O'Melveny & Myers LLP, Los Angeles,
California. An attorney with Gibson, Dunn & Crutcher LLP participating in the
preparation of this Prospectus beneficially owns shares of Common Stock, in an
amount less than 0.1% of the outstanding Common Stock of the Company, that were
purchased after the Initial Public Offering in an open market transaction.
EXPERTS
The Consolidated Financial Statements as of December 31, 1995 and December
31, 1996 and for each of the years in the three-year period ended December 31,
1996 have been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company can be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Northwest Atrium Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade
Center, New York, New York 10048 and may be copied at prescribed rates. The
Commission also maintains a site on the World Wide Web that contains reports,
proxy and information statements and other information regarding the Company.
The address for this site is: http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act (together with all amendments and exhibits thereto,
the "Registration Statement") with respect to the securities offered hereby.
This Prospectus, filed as part of such Registration Statement, does not contain
all of the information set forth in the Registration Statement, certain portions
of which have been omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete
and are qualified in their entirety by reference to each such contract,
agreement or other document which is filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected without charge at the
Commission's principal office in Washington, D.C. or at the Commission's
Regional Offices described above, and copies of such materials can be obtained
from the Commission's Public Reference Section referred to above at prescribed
rates.
50
<PAGE> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet as of September 30, 1997 (unaudited)....................... F-2
Consolidated Statements of Income for the nine months ended September 30, 1997 and the
nine months ended September 30, 1996 (unaudited).................................... F-3
Consolidated Statements of Shareholders' Equity for the nine months ended September
30, 1997 (unaudited)................................................................ F-4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and
September 30, 1996 (unaudited)...................................................... F-5
Notes to Unaudited Consolidated Financial Statements.................................. F-6
Report of Independent Accountants dated March 6, 1997................................. F-8
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995............. F-9
Consolidated Statements of Income for the years ended December 31, 1996, December 31,
1995 and December 31, 1994.......................................................... F-10
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996,
December 31, 1995 and December 31, 1994............................................. F-11
Consolidated Statements of Cash Flows for the years ended December 31, 1996, December
31, 1995 and December 31, 1994...................................................... F-12
Notes to Consolidated Financial Statements............................................ F-13
</TABLE>
F-1
<PAGE> 53
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
(UNAUDITED)
<S> <C>
Cash and cash equivalents................................................... $ 6,603,045
Deposits.................................................................... 14,220,403
Equipment held for operating lease, less accumulated depreciation of
$17,154,618 at September 30, 1997......................................... 125,924,782
Net investment in direct finance lease...................................... 9,961,033
Property, equipment and furnishings, less accumulated depreciation of
$240,275 at September 30, 1997............................................ 507,638
Spare parts inventory....................................................... 9,569,416
Maintenance billings receivable............................................. 1,078,400
Operating lease rentals receivable.......................................... 108,712
Receivables from spare parts sales.......................................... 3,342,133
Other receivables........................................................... 82,304
Other assets................................................................ 1,620,590
------------
Total assets...................................................... $173,018,456
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................................... $ 2,144,727
Salaries and commissions payable.......................................... 909,982
Deferred income taxes..................................................... 8,980,369
Deferred gain............................................................. 189,902
Notes payable and accrued interest........................................ 105,224,643
Capital lease obligation.................................................. 2,837,703
Residual share payable.................................................... 1,797,404
Maintenance deposits...................................................... 17,925,155
Security deposits......................................................... 2,480,392
Unearned lease revenue.................................................... 1,364,679
------------
Total liabilities................................................. 143,854,956
Shareholders' equity:
Common stock, no par value. Authorized 20,000,000 shares; 5,452,320 issued
and outstanding at September 30, 1997.................................. 16,276,933
Retained earnings......................................................... 12,886,567
------------
Total shareholders' equity........................................ 29,163,500
------------
Total liabilities and shareholders' equity........................ $173,018,456
============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F-2
<PAGE> 54
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Operating lease revenue......................................... $13,481,032 $10,379,013
Finance lease revenue........................................... 222,763 --
Gain on sale of leased equipment................................ 1,333,448 --
Spare part sales................................................ 11,459,311 3,303,123
Sale of equipment acquired for resale........................... 12,747,840 9,605,315
Interest and other income....................................... 543,660 196,702
----------- -----------
Total revenue........................................... 39,788,054 23,484,153
EXPENSES:
Interest expense................................................ 5,225,603 3,371,351
Depreciation expense............................................ 2,995,121 2,512,585
Residual share.................................................. 598,125 535,795
Cost of spare part sales........................................ 7,751,179 1,603,609
Cost of equipment acquired for resale........................... 10,671,668 8,551,229
General and administrative...................................... 6,358,000 3,434,216
----------- -----------
Total expenses.......................................... 33,599,696 20,008,785
Income before income taxes, minority interest and extraordinary
item............................................................ 6,188,358 3,475,368
Income taxes...................................................... (2,456,283) (1,394,943)
----------- -----------
Income before minority interest and extraordinary item............ 3,732,075 2,080,425
Less: minority interest in net income of subsidiary............... -- (79,053)
----------- -----------
Income before extraordinary item.................................. 3,732,075 2,001,372
Extraordinary item less applicable income taxes................... 2,007,929 --
----------- -----------
Net income.............................................. $ 5,740,004 $ 2,001,372
=========== ===========
Earnings per common share:
Income before extraordinary item.................................. $0.65 $0.62
Extraordinary item................................................ 0.36 --
----------- -----------
Net income.............................................. $1.01 $0.62
=========== ===========
Weighted average number of shares outstanding..................... 5,708,569 3,215,148
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F-3
<PAGE> 55
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ISSUED AND
OUTSTANDING TOTAL
SHARES OF COMMON RETAINED SHAREHOLDERS'
COMMON STOCK STOCK EARNINGS EQUITY
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996.............. 5,426,793 $16,055,689 $ 7,146,563 $ 23,202,252
Shares issued.............................. 25,527 221,244 -- 221,244
Net income................................. -- -- 5,740,004 5,740,004
--------- ----------- ----------- -----------
Balances at September 30, 1997............. 5,452,320 $16,276,933 $12,886,567 $ 29,163,500
========= =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-4
<PAGE> 56
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
------------------------------
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 5,740,004 $ 2,001,372
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of equipment held for lease..................... 2,905,016 2,460,703
Depreciation of property, equipment and furnishings.......... 90,105 51,882
(Gain) loss on sale of property, equipment and furnishings... (45,122) 5,700
Gain on sale of leased equipment............................. (1,333,448) --
Increase in residual share payable........................... 598,125 535,795
Minority interest in net income of subsidiary................ -- (84,774)
Changes in assets and liabilities:
(Increase) decrease in deposits.............................. (620,199) 246,955
Increase in spare parts inventory............................ (5,511,768) (681,650)
Increase in receivables...................................... (1,414,577) (771,175)
Increase in other assets..................................... (667,171) (1,281,508)
(Decrease) increase in accounts payable and accrued
expenses.................................................. (608,914) 5,198,453
Increase in salaries and commission payable.................. 371,324 163,544
Increase in deferred income taxes............................ 3,030,693 1,387,088
Decrease in deferred gain.................................... (19,872) --
(Decrease) increase in accrued interest...................... (364,270) 25,045
Increase in maintenance deposits............................. 6,244,630 952,088
Increase in security deposits................................ 501,887 619,188
Increase (decrease) in unearned lease revenue................ 90,410 (95,785)
----------- -----------
Net cash provided by operating activities.................... 8,986,853 10,732,921
Cash flows from investing activities:
Proceeds from sale of equipment held for operating lease (net
of selling expenses)...................................... 12,083,807 997,350
Proceeds from sale of property, equipment and furnishings
.......................................................... 80,500 28,200
Purchase of equipment held for operating lease............... (43,487,728) (4,121,670)
Purchase of property, equipment and furnishings.............. (174,341) (236,558)
Investment in direct finance lease........................... (10,095,000) --
Principal payments received on direct finance lease.......... 133,967 --
----------- -----------
Net cash used in investing activities........................ (41,458,795) (3,332,678)
Cash flows from financing activities:
Repayments from shareholder, net............................. -- 476,204
Proceeds from issuance of notes payable...................... 104,038,706 2,484,467
Proceeds from issuance of common stock....................... 221,244 13,949,759
Principal payments on notes payable.......................... (71,635,450) (9,945,597)
Cash dividends paid on common stock.......................... -- (500,000)
Principal payments on capital lease obligation............... (122,754) --
----------- -----------
Net cash provided by financing activities...................... 32,501,746 6,464,833
Increase in cash and cash equivalents.......................... 29,804 13,865,076
Cash and cash equivalents at beginning of period............... 6,573,241 815,649
----------- -----------
Cash and cash equivalents at end of period..................... $ 6,603,045 $14,680,725
=========== ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F-5
<PAGE> 57
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
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. 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 included elsewhere in this Prospectus, together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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, 1997, and the results of its operations for the nine
month periods ended September 30, 1997 and 1996 and its cash flows for the nine
month periods ended September 30, 1997 and 1996. The results of operations and
cash flows for the nine month period ended September 30, 1997, are not
necessarily indicative of the results of operations or cash flows which may be
reported for the remainder of 1997.
(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.
During the quarter ended September 30, 1997, the Company recorded an
allowance for estimated returns of spare parts based on recent experience. Such
returns occur in the ordinary course of the Company's business.
(3) SHARES ISSUED
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on June 21, 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. The purchase
price is the lesser of 85% of the market price of the Common Stock at the
beginning of each purchase interval or 85% of the market price of the Common
Stock at the end of each purchase interval. A reserve of 75,000 shares of Common
Stock has been established for this purpose. During the nine month period ended
September 30, 1997, the Company issued 10,527 shares of Common Stock as a result
of employee stock purchases under the Purchase Plan.
Under the 1996 Stock Option/Stock Issuance Plan, 525,000 shares of the
Company's Common Stock were set aside to provide eligible persons with the
opportunity to acquire a proprietary interest in the Company. During the nine
month period ended September 30, 1997, 15,000 stock options were exercised in
connection with this agreement.
(4) FINANCING
In February 1997, the Company obtained a new loan agreement for $41.5
million to replace an existing loan of $44.2 million. The transaction resulted
in an extraordinary gain of $2 million or $0.36 per weighted average share, net
of tax. The new facility bears interest at LIBOR plus 2.5% and matures in
February, 1998. At that time, the Company has the option to extend the facility
for an additional six years.
F-6
<PAGE> 58
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the Company obtained a $15 million revolving credit facility
to finance the acquisition of engines and high-value spare parts for sale or
lease. In July 1997, the Company increased this facility to $30 million. This
facility, which expires on June 12, 1998, bears interest at prime plus 50 basis
points and may be renewed annually.
(5) SUBSEQUENT EVENT
On October 5, 1997, Western Pacific Airlines, Inc., a domestic lessee of
three engines with a combined net book value of $8.7 million filed a petition
under Chapter 11 of the Bankruptcy Code in the District of Colorado. On December
4, 1997, Western Pacific cured all defaults under its leases with the Company.
In addition, the Company has security deposits and prepaid rents totaling
$284,500 relating to the leased engines. At this time, the Company does not
anticipate that the bankruptcy will have a material adverse effect on the
Company's financial position or results of operations.
(6) EARNINGS PER SHARE
For the purposes of calculating earnings per share, weighted average shares
outstanding includes the effect, if any, of outstanding options and warrants.
(7) COMMITMENTS
In June 1997, the Company committed to purchase nine aircraft engines. The
Company is obligated to purchase these engines by December 31, 1997. The
agreement provides that, to the extent that a purchased engine will be
overhauled by the seller, the payment of both the purchase price and the cost of
the overhauled engine will be deferred until the engine is overhauled and
delivered to the Company. It is not known at this time how many engines will be
overhauled. As of September 30, 1997, three of the nine engines subject to this
agreement have been purchased.
The Company has entered into commitments for the purchase of an aircraft
for disassembly by WASI, the purchase of two engines for the lease portfolio and
the purchase of three commuter aircraft with three spare engines for the lease
portfolio. The aggregate purchase price for these assets is $19.9 million and as
of September 30, 1997, deposits of $310,000 have been made in connection with
these purchases. The Company has arranged financing for one engine and is in the
process of arranging financing for the other purchases.
(8) NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" which requires the Company to replace its presentation
of primary earnings per share with a presentation of basic earnings per share
and requires dual presentation of basic and diluted earnings per share on the
face of the income statement. The principal difference between primary earnings
per share under current accounting standards and basic earnings per share under
the new statement is that basic earnings per share does not consider common
stock equivalents such as stock options and warrants. Diluted earnings per share
under the new Statement will include potential dilution of convertible
securities, stock options and warrants. The Statement is effective for the
Company's third quarter of 1997 and requires restatement of all prior periods
presented under the new Statement. Basic earnings per share under the new
Statement would have been $1.05 and $.62 for the nine months ended September 30,
1997 and 1996. Diluted earnings per share under the new Statement would have
been $1.03 and $.62 for the nine months ended September 30, 1997 and 1996.
F-7
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Willis Lease Finance Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Willis
Lease Finance Corporation and subsidiaries (formerly Charles F. Willis Company)
(the "Company") as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Willis Lease
Finance Corporation and subsidiaries (formerly Charles F. Willis Company) as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company changed its method of computing depreciation in 1995.
KPMG PEAT MARWICK LLP
San Francisco, California
March 6, 1997
F-8
<PAGE> 60
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents....................................... $ 6,573,241 $ 815,649
Deposits........................................................ 13,600,204 11,320,617
Aircraft engines held for operating lease, less accumulated
depreciation of $16,372,418 in 1996 and $13,681,211 in 1995... 93,131,972 74,704,379
Aircraft engines on capital leases.............................. 2,960,457 --
Property, equipment and furnishings, less accumulated
depreciation of $160,407 in 1996 and $86,695 in 1995.......... 458,780 207,784
Spare parts inventory........................................... 4,057,648 2,916,003
Maintenance billings receivable................................. 1,107,283 408,454
Operating lease rentals receivable.............................. 405,601 73,658
Receivables from spare parts sales.............................. 854,566 772,474
Other receivables............................................... 829,522 10,481
Other assets.................................................... 953,419 207,894
------------ ------------
Total assets.......................................... $124,932,693 $ 91,437,393
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses......................... $ 2,753,641 $ 1,052,455
Salaries and commissions payable.............................. 538,658 163,961
Deferred income taxes......................................... 5,949,676 4,092,325
Deferred gain................................................. 209,774 --
Notes payable and accrued interest............................ 73,185,657 69,910,797
Capital lease obligation...................................... 2,960,457 --
Residual share payable........................................ 1,199,279 476,526
Maintenance deposits.......................................... 11,680,525 8,717,170
Security deposits............................................. 1,978,505 1,270,021
Unearned lease revenue........................................ 1,274,269 857,087
------------ ------------
Total liabilities..................................... 101,730,441 86,540,342
Minority interest in net assets of subsidiary................... -- 84,774
Shareholders' equity:
Common stock, no par value. Authorized 20,000,000 and 10,000
shares, 5,426,793 and 1,500 issued and outstanding at
December 31, 1996 and 1995, respectively................... 16,055,689 500
Retained earnings............................................. 7,146,563 5,293,566
Advances to shareholder....................................... -- (481,789)
------------ ------------
Total shareholders' equity............................ 23,202,252 4,812,277
------------ ------------
Total liabilities and shareholders' equity............ $124,932,693 $ 91,437,393
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 61
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Operating lease revenue......................... $13,740,438 $13,770,730 $13,635,934
Gain (loss) on sale of leased engines........... 2,208 (482,894) 632,578
Spare part sales................................ 5,842,607 3,858,610 795,262
Sale of equipment acquired for resale........... 12,105,315 5,472,362 2,184,000
Interest and other income....................... 617,144 119,188 541,900
----------- ----------- -----------
Total revenue........................... 32,307,712 22,737,996 17,789,674
EXPENSES:
Interest expense................................ 4,323,276 5,721,811 5,947,843
Depreciation expense............................ 3,181,216 4,703,487 4,447,082
Residual share.................................. 722,753 407,684 1,284,523
Cost of spare part sales........................ 3,307,928 2,545,872 658,864
Cost of sold equipment acquired for resale...... 10,788,730 2,742,262 1,863,000
General and administrative...................... 5,123,813 3,334,768 1,615,585
----------- ----------- -----------
Total expenses.......................... 27,447,716 19,455,884 15,816,897
Gain on modification of credit facility........... -- 2,202,928 --
----------- ----------- -----------
Income before income taxes and minority
interest........................................ 4,859,996 5,485,040 1,972,777
Income taxes...................................... (1,976,471) (2,212,280) (797,159)
----------- ----------- -----------
Income before minority interest................... 2,883,525 3,272,760 1,175,618
Less: minority interest in net income of
subsidiary...................................... (79,053) (56,343) (3,431)
----------- ----------- -----------
Net income.............................. $ 2,804,472 $ 3,216,417 $ 1,172,187
=========== =========== ===========
Net income per share (pro forma for 1995
and 1994)............................. $ 0.74 $ 1.03 $ 0.38
=========== =========== ===========
Weighted average number of shares outstanding..... 3,796,182 3,110,657 3,110,657
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 62
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ISSUED AND
OUTSTANDING TOTAL
SHARES OF COMMON RETAINED ADVANCES TO SHAREHOLDERS'
COMMON STOCK STOCK EARNINGS SHAREHOLDER EQUITY
------------ ----------- ---------- ----------- -------------
<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 of
repayments...................... -- -- -- (107,944) (107,944)
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 proceeds
from IPO, net................... 5,425,293 16,055,189 -- -- 16,055,189
Repayments to shareholders, net... -- -- -- 481,789 481,789
Dividends......................... -- -- (951,475) -- (951,475)
Net income........................ -- -- 2,804,472 -- 2,804,472
--------- ----------- ---------- --------- -----------
Balances at December 31, 1996..... 5,426,793 $16,055,689 $7,146,563 $ -- $ 23,202,252
========= =========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 63
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 2,804,472 $ 3,216,417 $ 1,172,187
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation of aircraft engines held for operating
lease................................................ 3,103,601 4,663,949 4,431,039
Depreciation of property, equipment and furnishings.... 77,615 39,538 16,043
Gain on modification of credit facility................ -- (2,202,928) --
Loss (gain) on sale of property, equipment,
furnishings.......................................... 5,701 (5,536) (1,530)
Loss (gain) on sale of leased aircraft engines......... (2,208) 482,894 (632,578)
Increase in residual share payable..................... 722,753 407,684 1,284,523
Minority interest in net income of subsidiary.......... 79,053 56,343 3,431
Changes in assets and liabilities:
(Increase) in deposits................................. (2,279,587) (11,061,221) (56,564)
(Increase) in spare parts inventory.................... (1,176,384) (940,494) (100,871)
(Increase) in receivables.............................. (1,931,905) (359,173) (538,921)
(Increase) decrease in other assets.................... (745,525) 54,785 (67,248)
Increase in accounts payable and accrued expenses...... 1,701,186 606,656 239,797
Increase in salaries and commission payable............ 374,697 77,201 46,760
Increase in deferred income taxes...................... 1,857,351 2,179,381 791,559
Increase in deferred gain on sale of aircraft engine... 209,774 -- --
Increase (decrease) in accrued interest................ 666,571 (341,379) 259,918
Increase in maintenance deposits....................... 2,963,355 3,294,179 1,637,050
Increase in security deposits.......................... 708,484 124,444 407,697
Increase in unearned lease revenue..................... 417,182 243,726 44,702
----------- ----------- -----------
Net cash provided by operating activities.............. 9,556,186 536,466 8,936,994
Cash flows from investing activities:
Proceeds from sale of aircraft engines (net of selling
expenses)............................................ 3,748,035 2,600,000 2,000,644
Proceeds from sale of property, equipment and
furnishings.......................................... 28,198 38,500 3,000
Purchase of aircraft engines held for operating
lease................................................ (25,277,021) (9,258,379) (17,634,027)
Purchase of property, equipment and furnishings........ (362,510) (194,403) (62,603)
----------- ----------- -----------
Net cash (used in) investing activities................ (21,863,298) (6,814,282) (15,692,986)
----------- ----------- -----------
Cash flows from financing activities:
Repayments from (advances to) shareholder, net......... 481,789 (107,944) (18,827)
Proceeds from issuance of notes payable................ 16,086,621 15,730,277 19,300,445
Proceeds from issuance of common stock................. 15,926,101 -- --
Principal payments on notes payable.................... (13,478,332) (9,337,852) (11,473,474)
Cash dividends paid on common stock.................... (951,475) (255,000) (345,280)
Minority interest in net assets of subsidiary.......... -- -- 25,000
----------- ----------- -----------
Net cash provided by financing activities................ 18,064,704 6,029,481 7,487,864
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents......... 5,757,592 (248,335) 731,872
Cash and cash equivalents beginning of period............ 815,649 1,063,984 332,112
----------- ----------- -----------
Cash and cash equivalents end of period.................. $ 6,573,241 $ 815,649 $ 1,063,984
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 64
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Willis Lease Finance Corporation (formerly Charles F. Willis Company)
(Willis) is a California corporation which began leasing operations in 1988.
Willis is a provider of operating leases of spare commercial aircraft engines
worldwide. Willis is primarily engaged in acquiring aftermarket commercial
aircraft spare engines and providing operating leases of such engines to foreign
and domestic airlines, manufacturers and overhaul/repair facilities.
Terandon Leasing Corporation (Terandon), T-2 Inc. (T-2), T-4 Inc. (T-4),
T-5 Inc. (T-5), T-7 Inc. (T-7), T-8 Inc. (T-8) and T-10 Inc. (T-10) are
wholly-owned subsidiaries of Willis. They are all California corporations and
were established to purchase and lease commercial aircraft engines. Terandon,
T-2 and T-5 were incorporated in 1986, 1991 and 1993, respectively, T-7 and T-8
were both incorporated in 1994, and T-10 was incorporated in 1995. T-4 was
acquired by Willis in 1996 and was incorporated in 1993.
Willis Aeronautical Services, Inc. (WASI) is a wholly-owned subsidiary of
Willis. WASI is a California corporation established in 1994 for the purpose of
commercial aircraft, airframe and powerplant component marketing and sales.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Willis,
Terandon, T-2, T-4, T-5, T-7, T-8, T-10, and WASI (together, the Company).
Minority interest includes a twenty percent minority interest in WASI which was
acquired by the Company on September 18, 1996 through the issuance of $129,088
in common stock. All significant intercompany balances and transactions have
been eliminated in consolidation.
(c) Advances to Shareholder
The advances to the sole shareholder are noninterest bearing (except for a
$10,000 interest bearing note). All such notes were repaid in 1996. Advances are
accounted for through a reduction of shareholders' equity.
(d) Revenue Recognition
Revenue from leasing of aircraft engines is recognized as operating lease
revenue over the terms of the applicable lease agreements. The Company includes
in operating lease revenue non-refundable maintenance payments received from
lessees to the extent that, in the Company's opinion, it would not be
economically advantageous to overhaul the engine the next time the life-limited
parts need to be replaced. In this circumstance, the engines are normally
dismantled and sold as parts.
(e) Aircraft Engines Held for Operating Lease and Capital Lease
Aircraft engines held for operating lease are stated at cost, less
accumulated depreciation. Certain professional fees incurred in connection with
the acquisition of aircraft engines are capitalized as part of the cost of the
engines.
Effective January 1, 1995, the Company changed its depreciation policy with
respect to engines on long-term lease and has restated its previously issued
financial statements. Previously, the Company depreciated such assets on a
straight line basis over their estimated useful life of 25 years to a salvage
value of 15%. The Company has changed its methodology to depreciate the engine
on a straight line basis over a 15 year period from the acquisition date to a
55% residual value. The Company believes that this methodology more accurately
reflects the Company's typical holding period for the assets and, further, that
the residual value assumption reasonably approximates the selling price of the
assets in 15 years from date of acquisition. The
F-13
<PAGE> 65
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect of this change in accounting principle was a reduction of depreciation
expense of $357,999 and $405,657 for the years ended December 31, 1995 and 1994,
respectively.
This change in accounting principle also resulted in an increase in net
loss on sale of leased aircraft engines of $48,237 in 1995 and a reduction in
net gain on sale of leased aircraft engines of $176,788 in 1994.
Engines that in the Company's opinion would not be economically
advantageous to overhaul the next time the life-limited parts need to be
replaced, are depreciated over the remaining life using component depreciation
based on usage as reported monthly by the lessees.
In March of 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," (SFAS 121). SFAS
121 requires that (i) long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable and (ii) long-lived assets and certain identifiable intangibles
to be disposed of generally be reported at the lower of carrying amount or fair
value less cost to sell. The Company adopted SFAS 121 in 1995 and reviewed the
carrying value of its equipment considering residual values and release rates.
This review resulted in a loss on revaluation related to one engine of $300,000
in 1995, which has been included in depreciation expense. There were no
write-downs required during 1996.
(f) Spare Parts Inventory
The Company, through one or more of its subsidiaries, buys used aircraft
spare parts for resale. This inventory is valued at the lower of cost or market
value. Costs of such sales are specifically identified.
(g) Loan Commitment and Related Fees
To the extent that the Company is required to pay loan commitment fees in
order to secure debt, such fees are amortized over the life of the related loan
on a straight-line basis.
(h) Maintenance Costs
Maintenance costs under the Company's long-term leases are generally the
responsibility of the lessees. Maintenance deposits in the accompanying balance
sheet include refundable maintenance payments and certain non-refundable
maintenance payments received from the lessees. If in the Company's opinion, it
would not be economically advantageous to overhaul the engine the next time the
life-limited parts need to be replaced, the maintenance fees are included in
operating lease revenue. Major overhauls paid for by the Company are capitalized
and depreciated over the estimated remaining useful life of the engine.
(i) Interest Rate Hedge
In 1996, the Company purchased an interest rate cap in order to hedge its
exposure to increases in interest rates on a portion of its variable rate
borrowings. The instrument minimizes the Company's exposure to interest rate
fluctuations for a period of four years. The cost of this instrument is
amortized on a straight-line basis over the four year period.
(j) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement
F-14
<PAGE> 66
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in the tax rates is recognized in income in
the period that includes the enactment date.
(k) Property, Equipment and Furnishings
Property, equipment and furnishings are recorded at cost and depreciated by
the straight-line method over the estimated useful lives of the related assets,
which range from three to seven years.
(l) Residual Sharing with Lenders
Certain of the Company's credit agreements require the Company to share
"residual proceeds" as defined in the agreements with the lenders upon sale of
engines held for operating lease. The Company provides for its residual sharing
obligation with respect to each engine by a charge or credit to income or
expense, each period, sufficient to adjust the residual share payable at the
balance sheet date to the amount that would be payable at that date if all
engines under said agreements were sold on the balance sheet date at their net
book values.
Residual share payable totaled $1,199,279 and $476,526 as of December 31,
1996 and 1995, respectively. As of December 31, 1996 and 1995, a total of six
and nine engines, respectively, with a net book value of $16,457,439 and
$17,866,935, respectively, were subject to residual value arrangements (notes 4,
5 and 14).
(m) Equipment Acquired for Resale
The Company periodically engages in transactions involving the purchase and
immediate resale of aircraft engines. Generally, the Company makes a contractual
commitment to purchase specific assets for its own account for resale only after
or concurrently with obtaining a firm order from a customer. All aircraft
engines purchased by the Company for such transactions during 1996 and 1995 were
sold in the year acquired.
(n) Reclassifications
Certain items in the consolidated financial statements of prior years have
been reclassified to conform to the current year's presentation.
(o) 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.
(p) Per share information
Per share information is computed using the weighted average number of
common and diluted common equivalent shares outstanding. For primary and fully
diluted earnings per share, common equivalent shares consist of the incremental
shares issued upon the assumed exercise of diluted stock options, using the
treasury stock method.
(2) AIRCRAFT ENGINES HELD FOR OPERATING LEASE
At December 31, 1996, the Company owned 31 aircraft engines and related
equipment with an aggregate original cost of $109,504,390. At December 31, 1995,
the Company owned 31 aircraft engines with an aggregate original cost of
$88,385,590.
F-15
<PAGE> 67
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1996, minimum future rentals under the noncancelable
operating leases of these aircraft engines are as follows:
<TABLE>
<S> <C>
1997.......................... $13,845,290
1998.......................... 10,828,463
1999.......................... 7,423,338
2000.......................... 5,736,712
2001.......................... 2,926,444
Thereafter.................... 2,021,000
-----------
$42,781,247
===========
</TABLE>
Approximately 90% of these future rentals will be applied to service
principal and interest payments on outstanding notes payable (notes 5 and 14).
Contingent rentals included in operating lease revenue totaled $266,000,
$362,000 and $145,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Certain of the Company's aircraft engines are leased and operated
internationally. All leases relating to this equipment are denominated and
payable in U.S. dollars.
The Company leases its aircraft engines to lessees domiciled in seven
geographic regions: United States, Canada, Mexico, Australia/New Zealand,
Europe, South America and Asia. The tables below set forth geographic
information about the Company's aircraft engines grouped by domicile of the
lessee.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
REGION: 1996 1995 1994
---------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Operating lease revenue:
United States..................... $ 5,295,084 $ 4,560,472 $ 4,851,286
Canada............................ 1,291,000 1,080,000 964,666
Mexico............................ 1,865,118 1,900,699 1,178,474
Australia/New Zealand............. 1,029,600 1,339,433 1,689,600
Europe............................ 2,840,428 3,858,792 2,762,629
South America..................... 530,000 308,316 716,575
Asia.............................. 889,208 723,018 1,472,704
---------- ---------- ----------
Total operating lease
revenue............... $13,740,438 $13,770,730 $13,635,934
========== ========== ==========
</TABLE>
F-16
<PAGE> 68
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
REGION: 1996 1995 1994
------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Operating lease revenue less
depreciation, interest, spare parts
interest and residual share:
United States...................... $2,405,061 $ 463,336 $ 275,681
Canada............................. 548,769 301,039 185,746
Mexico............................. 306,007 348,900 307,843
Australia/New Zealand.............. 471,293 271,355 410,112
Europe............................. 1,409,631 1,521,563 675,408
South America...................... 185,297 77,569 82,059
Asia............................... 339,545 185,196 125,121
Off-lease and other................ (60,711) (231,210) (105,484)
---------- ---------- ---------
Total operating lease revenue less
depreciation, interest, spare parts
interest and residual share........ $5,604,892 $2,937,748 $1,956,486
========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
REGION: 1996 1995 1994
------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Net book value of engines:
United States..................... $31,332,388 $24,138,266 $23,601,123
Canada............................ 7,115,984 7,356,011 7,596,038
Mexico............................ 13,441,445 9,255,029 9,506,072
Australia/New Zealand............. 5,509,070 5,706,410 9,332,036
Europe............................ 30,051,738 19,056,190 16,921,539
South America..................... 2,033,831 1,951,012 4,829,647
Asia.............................. 4,109,446 4,243,830 7,202,126
Off-lease......................... 2,498,527 2,997,631 --
------------ ------------ ------------
Total net book value of engines
owned and a capital lease......... $96,092,429 $74,704,379 $78,988,581
============ ============ ============
</TABLE>
(3) PROPERTY, EQUIPMENT AND FURNISHINGS
Property, equipment and furnishings consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Automobiles............................................ $140,297 $ 36,049
Computer equipment..................................... 186,272 93,726
Furniture and equipment................................ 292,618 164,704
-------- --------
619,187 294,479
Accumulated depreciation............................... (160,407) (86,695)
-------- --------
Net book value......................................... $458,780 $207,784
======== ========
</TABLE>
F-17
<PAGE> 69
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) GAIN ON MODIFICATION OF CREDIT FACILITY
In June 1995, the Company's primary credit facility was modified into a 10
year full payout loan. As part of this transaction, the residual sharing
agreement was terminated. Furthermore, the lender agreed to acquire two engines
from the portfolio, with a net book value of $5,724,045, as payment in full for
the respective outstanding loan balance on each of the engines. The modification
resulted in a net gain of $2,202,928.
(5) NOTES PAYABLE AND ACCRUED INTEREST
Notes payable consisted of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Notes payable with an interest rate of LIBOR plus 1.0%. Secured by
aircraft engines and rental payments on leased aircraft engines.
The loan requires quarterly payments in arrears, through June 30,
2005. This note is the result of the credit facility modification
(notes 4 and 14).................................................. $44,221,306 $48,400,889
Notes payable with fixed interest rates ranging between 8% and
10%. Secured by aircraft engines and rental payments on leased
aircraft engines. These notes mature in 1998 or are due upon the
sale of the collateral property................................... 5,982,236 6,513,190
Notes payable with an interest rate of LIBOR plus 5%. Secured by
aircraft engines and rental payments on leased aircraft engines.
The notes mature in the year 2001 or are due upon the sale of the
collateral property............................................... 5,189,286 6,617,509
Note payable for a spare parts purchase. Interest accrued at 8% on
the unpaid balance. This note was secured by the spare parts. The
note matured in August 1996....................................... -- 1,332,641
Notes payable at an interest rate of 11.03%. Secured by aircraft
engines. The notes mature on December 29, 2000.................... 3,128,943 3,360,000
Note payable at an interest rate of 11.68%. Secured by an aircraft
engine. The note matures on December 31, 2001. This note and the
preceding 11.03% notes are part of a $15 million secured term
facility for the acquisition of engines........................... 2,368,242 --
Note payable at a fixed interest rate of 9.0%. Secured by aircraft
engines and subordinated to the $3,128,943 note discussed above... -- 420,000
Notes payable with a variable interest rate of LIBOR plus 1.5%
secured by four engines. Fixed principal payments plus interest
are made monthly, and the notes have maturity dates ranging from
August 1996 through July 1997..................................... 325,000 1,358,333
Note payable, secured by two engines. This note was non-interest
bearing until August, 1996 and thereafter, interest bearing at the
Paris Interbanking Operations Rate plus 2%. The note was paid on
December 30, 1996................................................. -- 1,395,874
Capital line of credit extended to WASI not to exceed $1,000,000.
Interest accrued at prime plus 1%, with repayment terms of
interest only for 6 months. The loan was secured by all of the
assets of WASI. This facility expired on October 31,1996.......... -- 282,139
</TABLE>
F-18
<PAGE> 70
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Capital line of credit extended to WASI for $3,000,000. Interest
accrues at prime plus 1%, with repayment terms of interest only
for 6 months. The loan is secured by all of the assets of WASI.
This facility expires on October 31, 1997......................... 661,000 --
Notes payable to two employees of the Company ($25,000 of the
notes bears interest at 8%). The remaining balance was noninterest
bearing and both notes were paid on September 18, 1996............ -- 50,000
Short-term bridge note with an interest rate of 7%. Secured by
aircraft engines and spare parts purchased 12/31/96. The note
matures on January 31, 1997 (note 14)............................. 8,632,313 --
Note payable at a fixed interest rate of 7%. Secured by aircraft
engines and spare parts. This note is subordinated to the bridge
note discussed above and also to the permanent notes replacing the
bridge note. The note matures on June 30, 2004.................... 1,830,538 --
----------- -----------
$72,338,864 $69,730,575
=========== ===========
</TABLE>
The Company also has a $15.0 million term facility for the acquisition of
engines for lease. This term facility allows for an advance rate of 80% of fair
market value of the equipment, not to exceed 100% of the purchase price. The
facility is to be used for domestic lessees. Interest rate under this facility
will be dependent upon the quality of the credit and the underlying collateral.
As of December 31, 1996, no drawdowns had taken place under this facility.
The fair value of the Company's long-term debt is estimated based on quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The fair value of the
Company's debt is estimated by the Company to be $72,202,487 at December 31,
1996.
The fair value of the interest rate cap, as estimated by the financial
institution providing the instrument is $266,257 at December 31, 1996.
In accordance with three of the loan agreements, the Company must maintain
certain net worth levels and, additionally, with respect to one of these loans,
must maintain a certain current ratio and certain earnings levels. In addition,
the Company must prepay loan amounts in the event a collateral engine is sold or
otherwise disposed of. Repayment schedules as of December 31, 1996 for the notes
payable for each of the next five years are presented below. A substantial
amount of operating lease revenue is applied to the repayment of principal and
interest. Principal outstanding at December 31, 1996 is repayable as follows:
<TABLE>
<CAPTION>
YEAR
--------------------------------
<S> <C>
1997............................ $14,516,505
1998............................ 10,194,820
1999............................ 4,492,805
2000............................ 7,920,608
2001............................ 12,667,933
Thereafter...................... 22,546,193
-----------
Total................. $72,338,864
===========
</TABLE>
As of December 31, 1996 and 1995, accrued interest in the amounts of
$846,793 and $180,222, respectively, is included in notes payable and accrued
interest. At December 31, 1996 and 1995, the Company held deposits in the amount
of $13,600,204 and $11,320,617, respectively, consisting of bank accounts that
are
F-19
<PAGE> 71
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subject to withdrawal restrictions as per lease or loan agreements. The deposits
received in prior years are reflected as a reduction of the note payable balance
in accordance with the terms of the previous loan agreement (note 4). Certain
lease agreements require prepayments to the Company for periodic engine
maintenance. In addition, this account includes security deposits held.
Substantially all of the deposits bear interest for the Company's benefit.
In February 1997, the Company obtained a new credit facility for $41.5
million and repaid the $44.2 million existing note payable (note 14).
In February 1997, the Bridge Loan noted above was replaced with permanent
financing in the amount of $11,010,875. This financing has an interest rate of
10.52% and has a maturity date of January 30, 2002 (note 14).
(6) INCOME TAXES
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
December 31, 1996:
Current............................. $ 93,864 $ 25,256 $ 119,120
Deferred............................ 1,580,360 276,991 1,857,351
---------- -------- ----------
$1,674,224 $302,247 $1,976,471
========== ======== ==========
December 31, 1995:
Current............................. $ 25,833 $ 7,066 $ 32,899
Deferred............................ 1,670,220 509,161 2,179,381
---------- -------- ----------
$1,696,053 $516,227 $2,212,280
========== ======== ==========
December 31, 1994:
Current............................. $ -- $ 5,600 $ 5,600
Deferred............................ 612,877 178,682 791,559
---------- -------- ----------
$ 612,877 $184,282 $ 797,159
========== ======== ==========
</TABLE>
The following is a reconciliation of the statutory federal income tax
expense to the effective income tax expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Statutory federal income tax
expense............................. $1,652,397 $1,864,914 $670,744
State taxes, net of federal benefit... 298,307 340,710 121,626
Other................................. 25,767 6,656 4,789
---------- ---------- --------
Effective income tax expense.......... $1,976,471 $2,212,280 $797,159
========== ========== ========
</TABLE>
F-20
<PAGE> 72
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Deferred tax assets:
Prepaid rent................................... $ 511,466 $ 344,018
Residual sharing expenses...................... 481,367 191,268
Uniform capitalization expenses................ 48,166 26,394
Other.......................................... 7,462 2,403
Passive activity loss carryforwards............ 6,185,615 4,325,565
----------- ----------
Total gross deferred tax assets............. 7,234,076 4,889,648
Less valuation allowances................... -- --
----------- ----------
Net deferred tax assets..................... 7,234,076 4,889,648
Deferred tax liabilities:
Depreciation on aircraft engines............... (13,183,752) (8,981,973)
----------- ----------
Net deferred tax liability.................. $ (5,949,676) $(4,092,325)
=========== ==========
</TABLE>
As of December 31, 1996 the Company has passive activity loss carryforwards
totaling $17,706,748 for federal and $2,693,391 for state income tax purposes
which have no expiration date and will be available to offset future passive
revenue.
(7) SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
During the years ended December 31, 1996 and 1995, the Company paid
interest totaling $3,656,707 and $6,063,190, respectively. Income taxes paid
were $31,552 and $13,218 for the years ended December 31, 1996 and 1995.
During the years ended December 31, 1996, 1995 and 1994, the Company made
loans of $265,478, $165,635 and $19,600 to a Company shareholder. Repayments on
such loans for the years ended December 31, 1996, 1995 and 1994 were $747,267,
$57,691 and $773, respectively. The outstanding balance as of December 31, 1996
and 1995 were $0 and $481,789, respectively.
(8) DIVIDENDS
During the years ended December 31, 1996 and 1995, the Company paid
dividends totaling $951,475 and $255,000 to a Company shareholder, respectively.
(9) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits and
receivables.
The Company places its cash deposits with financial institutions and other
creditworthy issuers and limits the amount of credit exposure to any one party.
Concentrations of credit risk with respect to lease receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across different geographic areas.
As of December 31, 1996 and 1995, management believes the Company had no
significant concentrations of credit risk.
F-21
<PAGE> 73
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the year ended December 31, 1996, the Company had one significant
customer, Aerovias Mexico, S.A. de C.V., which accounted for approximately 14%
of lease revenue. The Company does not believe that the loss of this customer
would have a material impact on its operations.
(10) COMMITMENTS
The Company has two leases for its office and warehouse space. The annual
lease rental commitments are $123,408 and $124,692 and the leases expire on
March 14, 1999 and May 31, 1998, respectively.
Maturities of capital lease obligation as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR
-----------------------------------------
<S> <C>
1997..................................... $ 376,536
1998..................................... 376,536
1999..................................... 376,536
2000..................................... 376,536
2001..................................... 376,536
Thereafter............................... 2,568,841
-----------
Net Minimum Lease Payments............... 4,451,521
Less: Amount Representing Interest....... (1,491,064)
-----------
Present Value of Net Minimum Lease
Payments............................... $2,960,457
===========
</TABLE>
(11) RELATED PARTY TRANSACTIONS
During 1996, the Company had a note payable to two employees of the
Company, who were minority shareholders of a subsidiary of the Company. This
amount was repaid in September 1996.
(12) SECURITY DEPOSIT AND MAINTENANCE RESERVE
In connection with the Bridge Loan (note 4) for the purchase of an engine
and parts package, the Company recorded a liability for maintenance reserves and
security deposits relating to such equipment and a corresponding receivable from
the seller. These funds continued to be held by the seller until permanent
financing was in place. Upon completion of permanent financing in February 1997,
these funds were transferred from the seller to the new lender.
(13) ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS 123)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123). SFAS 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 encourages all
entities to adopt a fair value based method of accounting for stock based
compensation plans in which compensation cost is measured at the date the award
is granted based on the value of the award and is recognized over the employee
service period. However, SFAS 123 allows an entity to continue to use the method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), with pro forma disclosures of net income and
earnings per share as if the fair value based method had been applied. APB 25
requires compensation expense to be recognized over the employee service period
based on the excess, if any, of the quoted market price of the stock at the date
the award is granted or other measurement date, as applicable, over an amount an
employee must pay to acquire the stock. SFAS 123 is effective for financial
statements for fiscal years beginning after December 31, 1995.
F-22
<PAGE> 74
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, the Company has two stock-based compensation plans
and has issued warrants, which are described below. The Company applies APB 25
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans and its stock purchase plan. Had
compensation cost for the Company's two stock-based compensation plans been
determined consistent with SFAS 123, the Company's net income and earnings per
share would have been reduced to $2,398,699 and $.63, respectively.
Employee Stock Purchase Plan
Under the 1996 Stock Purchase Plan, the Company is authorized to issue up
to 75,000 shares of its Common Stock to its full-time employees, nearly all of
whom are eligible to participate. Under the terms of the Plan, the employees may
elect to have up to 10% of their annual base salary, to a maximum of $25,000 per
year, withheld for the purchase of the Company's Common Stock. Purchase
intervals are six months each, ending on January 31 and July 31. The purchase
price is the lesser of 85% of the market price of the Common Stock at the
beginning of each purchase interval or 85% of the market price of the Common
Stock at the end of each purchase interval. The first stock purchase date was
January 31, 1997; accordingly, the Company had sold no shares to employees under
the plan through December 31, 1996.
Under FASB Statement 123, compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the Black
Scholes model with the following assumptions for 1996: Dividend yield of zero;
an expected life of 1.25 years; expected volatility of 84 percent; and weighted
average risk-free interest rate of 6.22 percent. The weighted average fair value
of those purchase rights granted in 1996 was $3.08.
1996 Stock Option/Stock Issuance Plan
Under the 1996 Plan, 525,000 shares of the Company's shares have been set
aside to provide eligible persons with the opportunity to acquire a proprietary
interest in the Company. The plan includes a Discretionary Option Grant Program,
a Stock Issuance Program, and an Automatic Option Grant Program for eligible
non-employee Board members.
The fair value of each option granted was estimated on the date of grant
using the Black Scholes option-pricing model with the following assumptions for
1996: weighted average risk-free interest rate of 6.22 percent; dividend yield
of zero; expected life of 2.43 years; and volatility of 84 percent.
A summary of the status of the Company's Stock Option/Stock Issuance Plan
as of December 31, 1996, and changes during the year then ended is as follows:
<TABLE>
<CAPTION>
1996
--------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at beginning of year......................... -- --
Granted.................................................. 315,000 $ 8.00
Exercised................................................ -- --
Forfeited................................................ -- --
Outstanding at end of year............................... 315,000 $ 8.00
Options exercisable at end of year....................... 90,000 $ 8.00
Weighted average fair value of options granted during the
year................................................... $ 4.19
</TABLE>
F-23
<PAGE> 75
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1996, the 315,000 options outstanding under the Plan are
all exercisable at $8.00 per share, and have a weighted average remaining
contractual life of 9.71 years. The Company expects that approximately 90
percent of the non-vested options awarded at December 31, 1996 will eventually
vest.
Warrants
In conjunction with the Initial Public Offering, the Company sold five-year
purchase warrants for $.0l per warrant covering an aggregate of 100,000 shares
of Common Stock exercisable at a price equal to 130% of the Initial Public
Offering price. The warrants are exercisable commencing 24 months after the
effective date of the Initial Public Offering or earlier, but not earlier than
12 months after the effective date of the Initial Public Offering, if and when
the Company files a registration for the sale by the Company of shares of Common
Stock or securities exercisable for, convertible into or exchangeable for shares
of Common Stock (other than pursuant to a stock option or other employee benefit
or similar plan, or in connection with a merger or an acquisition). The
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.
(14) SUBSEQUENT EVENTS
In February 1997, the Company obtained a new credit facility for $41.5
million to replace the existing note of $44.2 million. The transaction resulted
in an extraordinary gain of approximately $2.9 million (pre-tax) (note 5).
In February 1997, the Company's Bridge Loan was replaced with permanent
financing in the amount of $11,010,875 (note 5).
F-24
<PAGE> 76
LOGO
28 October 1997
Willis Lease Finance Corporation
180 Harbor Drive Suite 200
Sausalito CA 94965
Attention: Charles F. Willis, IV
Chief Executive Officer
Subject: ENGINE: PORTFOLIO APPRAISAL
AISI REPORT NO. A7S029BVO
Gentlemen:
AIRCRAFT INFORMATION SERVICES, INC. (AISI), was requested by Willis Lease
Finance Corporation to perform a sight unseen current market value appraisal,
both in half life and in freshly refurbished condition, and a five year future
value forecast of a portfolio of engines as identified in Table I (the
"Engines").
After studying the past, present and anticipated future market and
consulting with knowledgeable engine brokers, lessors and financiers, we have
formed the opinion that the Engines have the following aggregate values:
<TABLE>
<S> <C> <C>
Current Market Value Half Life $143,050,000
Current Market Value Freshly Refurbished $157,100,000
Future Value Forecast 1998 $139,410,000
1999 $135,760,000
2000 $132,350,000
2001 $128,870,000
2002 $125,650,000
</TABLE>
The Future Value Forecast above assumes an annual inflation rate at 3.0%,
half life condition and is based upon base market value (as defined below).
These values are subject to the assumptions, definitions and disclaimers
herein. Because of the nature of the used engine market, AISI normally considers
a 610% variation of the given value to define the range of the market values for
a given engine.
METHODOLOGY AND DEFINITIONS
The historical standard term of reference for commercial engine value has
been 'half-life fair market value' of an 'average' engine. However, 'market
value' could mean a fair value in the given market or a value in a hypothetical
'fair' or balanced market, and the two definitions are not equivalent. Recently,
the term 'base value' has been created to describe the theoretical balanced
market condition and to avoid the potentially misleading term 'fair market
value' which has now become synonymous with the term 'current market value' or a
'fair' value in the actual current market. AISI value definitions arc consistent
with those of the International Society of Transport Aircraft Trading (ISTAT) of
0l January 1994; AISI is a member of that organization and employs an ISTAT
Certified Senior Aircraft Appraiser.
AISI defines a 'base market' value as that of a transaction between equally
willing and informed buyer and seller, neither under compulsion to buy or sell,
for a single unit cash transaction with no hidden value or liability and with
supply and demand of the sale item roughly in balance. Base values are typically
given for engines in 'new' condition, 'average half-life' condition, or in a
specifically described condition unique to a
A-1
<PAGE> 77
single engine at a specific time. New base engine values are typically
manufacturers list prices and do not include the deep discounts for volume
purchases. An 'average' engine is an operable airworthy engine in average
physical condition and with average accumulated flight hours and cycles, with no
damage history and with level of modification which is normal for its intended
use and age. AISI considers average condition unless otherwise stated.
'Half-life' condition assumes that every component or maintenance service which
has a prescribed interval that determines its service life, overhaul interval or
interval between maintenance services, is at a condition which is one-half of
the total interval. AISI defines engine 'freshly refurbished' condition to be
that of an engine fresh from an engine heavy maintenance shop visit which
refurbished all engine modules or all engine compressor and combustor/turbine
stages as appropriate, with all life-limited components at half-life. It should
be noted that AISI and ISTAT value definitions apply to a transaction involving
a single engine, and that transactions involving more than one engine are often
executed at considerable and highly variable discounts to a single engine price,
for a variety of reasons relating to an individual buyer or seller.
AISI defines a 'current market value' or 'fair market value' as that value
which reflects the real market conditions, whether at, above or below the base
value conditions. Assumption of a single unit sale and definitions of engine
condition, buyer/seller qualifications and type of transaction remain unchanged
from that of base value. Current market value takes into consideration the
status of the economy in which the engine is used, the status of supply and
demand for the particular engine type, the value of recent transactions and the
opinions or informed buyers and sellers. Current market value assumes that there
is no short term time constraint to buy or sell.
Given the relatively thin used engine market and the relatively broad range
of values for transactions for an engine type, the meaning of 'base value' for
used engines is open to broad interpretation. Normally base value is derived
from historical normalized current market values with manufacturer's list price
as a start point, while current market value is deduced directly from recent
transactions. For used engines there are seldom sufficient historical
transactions to permit the same derivation of engine base values as is possible
for aircraft base values. In our opinion the used engine market is currently a
relatively hard market, and base value will be close to current market values
for most engine types.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future value
considerations, or to consider how actual market values vary from theoretical
base values. Base values are less volatile than current market values and tend
to diminish regularly with time. Base values are normally inappropriate to
determine near term values. AISI encourages the use of current market values to
consider the probable near term value of an engine.
AISI defines a BARE ENGINE as an engine without accessories, but complete
with all air, hydraulic and electrical lines which are not directly part of
accessories.
AISI defines a BASIC QEC engine as including all accessories, connecting
lines and engine mounts but not including engine inlet cowl, fan cowl or thrust
reverser.
AISI defines a FULL QEC engine as a basic QEC engine plus inlet cowl, fan
cowl and thrust reverser. There will be some variation in full QEC inventory
from engine type to type, and from position to position.
FUTURE VALUE FORECAST
AISI was requested to provide an aggregate base market future value
forecast of the Engines for the next five years, in half-life condition,
assuming 3.0% inflation.
Our future value forecast is based on the premise that the Engines will be
in defined condition, that they have and will be well maintained and that they
will suffer no design, material defect, accident, incident or foreign object
damage that would impact their future value.
We further assume that the Engines will continue to enjoy the active
support of the airframe, engine and component manufacturers, and there will be
no major war or economic recession throughout the forecast period.
A-2
<PAGE> 78
Unless otherwise agreed by AISI in writing, this report shall be for the
sole use of the client/addressee This report is offered as a fair and unbiased
assessment of the subject engines. AISI has no past, present, or anticipated
future interest in the subject engines. The conclusions and opinions expressed
in this report are based on published information, information provided by
others, reasonable interpretations and calculations thereof and are given in
good faith. Such conclusions and opinions are judgments that reflect conditions
and values which are current at the time of this report. The values and
conditions reported upon are subject to any subsequent change. AISI shall not be
liable to any party for damages arising out of reliance or alleged reliance on
this report, or for any parties action or failure to act as a result of reliance
or alleged reliance on this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ FRED E. BEARDEN
Fred E. Bearden
President
A-3
<PAGE> 79
TABLE I - LIST OF ENGINES
<TABLE>
<CAPTION>
ENGINE TYPE CONFIGURATION ENGINE TYPE CONFIGURATION
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1) CF6-50C2 Basic QEC 22) CFM56-5A3 Basic QEC
2) CF6-50C2 Basic QEC 23) CFM56-5C4 Bare
3) CF6-50C2 Basic QEC 24) JT8D-217C Basic QEC
4) CF6-80C2A2 Full 25) JT8D-219 Bare
5) CF6-80C2B6 Basic QEC 26) JT8D-219 Bare
6) CF6-80C2B6 Basic QEC 27) JT8D-219 Bare
7) CF6-80E1 Bare 28) JT8D-219 Bare
8) CFM56-3B1 Bare 29) JT8D-219 Basic QEC
9) CFM56-3B1 Bare 30) JT8D-219 Basic QEC
10) CFM56-3B2 Bare 31) JT8D-219 Basic QEC
11) CFM56-3B2 Bare 32) JT8D-219 Basic QEC
12) CFM56-3B2 Bare 33) JT8D-219 Basic QEC
13) CFM56-3B2 Basic QEC 34) JT8D-219A Bare
14) CFM56-3B2 Basic QEC 35) JT9D-7A Basic QEC
15) CFM56-3C1 Bare 36) JT9D-7J Full
16) CFM56-3C1 Bare 37) PW2037 Bare
17) CFM56-3C1 Bare 38) PW2040 Basic QEC
18) CFM56-3C1 Basic QEC 39) PW4060 Bare
19) CFM56-3C1 Basic QEC 40) PW4060 Full
20) CFM56-3C1 Basic QEC 41) RB211-535E4 Basic QEC
21) CFM56-5A3 Bare 42) RB211-535E4 Basic QEC
</TABLE>
A-4
<PAGE> 80
=========================================================
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
Use of Proceeds........................... 13
Price Range of Common Stock............... 14
Dividend Policy........................... 14
Capitalization............................ 15
Selected Consolidated Financial and
Operating Data.......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 18
Business.................................. 28
Management................................ 38
Certain Transactions...................... 46
Principal Shareholders.................... 47
Description of Capital Stock.............. 47
Underwriting.............................. 49
Legal Matters............................. 50
Experts................................... 50
Additional Information.................... 50
Index to Consolidated Financial
Statements.............................. F-1
Appraisal................................. A-1
</TABLE>
=========================================================
=========================================================
1,500,000 SHARES
LOGO
COMMON STOCK
---------------------------
PROSPECTUS
December , 1997
---------------------------
LEHMAN BROTHERS
DAIN BOSWORTH
INCORPORATED
=========================================================
LOGO
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 9,867
NASD filing fee................................................... 3,756
Nasdaq listing fee................................................ 17,500
Transfer Agent fees and expenses.................................. 5,000
Printing expenses................................................. 175,000
Legal fees and expenses........................................... 175,000
Blue Sky fees and expenses........................................ 10,000
Accounting fees and expenses...................................... 80,000
Appraisal fee..................................................... 10,350
Directors and Officers insurance premiums......................... 20,000
Miscellaneous..................................................... 3,527
--------
Total................................................... $510,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporation Law (the "California
Law") and Article III of the Company's Articles of Incorporation (the
"Articles"), provide for the indemnification of directors, officers, and
"agents" (as defined in Section 317 of the California Law) under certain
circumstances. The Articles grant the Company the power to indemnify its
directors, officers, and agents under certain circumstances to the extent
permitted by California Law against certain expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of his or her position as a director,
officer, employee or agent.
Section 317 of the California Law provides that a corporation has the power
to purchase and maintain insurance on behalf of any agent of the corporation
against any liabilities asserted against or incurred by the agent in such
capacity. The Company has procured a directors' and officers' liability
insurance policy insuring the Company's directors and officers against certain
liabilities and expenses incurred by them in their capacities as such, and
insuring the Company under certain circumstances, in the event that
indemnification payments are made by the Company to such directors and officers.
Section 204(a)(11) of the California Law provides for the indemnification,
subject to certain limitations, of directors, officers and agents for breach of
their duty to a corporation and its shareholders in excess of that expressly
permitted by Section 317 of the California Law.
The Company has entered into indemnification agreements with its directors
and officers. These agreements provide substantially broader indemnity rights
than those provided under the California Law and the Company's Bylaws. The
indemnification agreements are not intended to deny or otherwise limit third-
party or derivative suits against the Company or its directors or officers, but
if a director or officer were entitled to indemnity or contribution under the
indemnification agreement, the financial burden of a third-party suit would be
borne by the Company, and the Company would not benefit from derivative
recoveries against the director or officer. Such recoveries would accrue to the
benefit of the Company but would be offset by the Company's obligations to the
director or officer under the indemnification agreement.
II-1
<PAGE> 82
The above discussion of the Company's Articles and indemnification
agreements and of Sections 204(a)(11) and 317 of the California Law is not
intended to be exhaustive and is respectively qualified in its entirety by such
Articles, indemnification agreements and statutes.
In addition, the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the Underwriters of the
Registrant and its officers and directors, and by the Registrant of the
Underwriters, for certain liabilities arising under the Securities Act or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Except as set forth below, the Registrant did not sell any securities which
were not registered under the Securities Act during the three year period ended
September 30, 1997.
On September 18, 1996, the Company issued 14,343 shares of the Company's
Common Stock valued at $121,091 to Mr. Dibble, President-Willis Aeronautical
Services Inc. and his wife, in exchange for the contribution of all of the
shares of the capital stock owned by them in Willis Aeronautical Services Inc.,
a subsidiary of the Company. The issuance of shares was undertaken pursuant to
the exemption from the registration requirements of the Securities Act provided
under Section 4(2) thereof.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation, filed September 11, 1996
together with Certificate of Amendment of Amended and Restated Articles of
Incorporation filed on September 24, 1996. Incorporated by reference to
Exhibit 3.2 of the Company's report on Form 10-K for the year ended
December 31, 1996.
3.2 Bylaws, Incorporated by reference to Exhibit 3.3 to Registration Statement
No. 333-5126-LA filed on June 21, 1996.
4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit
4.1 to Registration Statement No. 333-5126 filed on June 21, 1996.
5.1 Opinion of Gibson, Dunn & Crutcher LLP.
10.1 1996 Stock Option/Stock Issuance Plan and form of agreement thereunder.
Incorporated by reference to Exhibit 10.1 to Registration Statement No.
333-5126 filed on June 21, 1996.
10.2 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.2 to
Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.3 Form of Indemnification Agreement entered into between the Company and its
directors and officers. Incorporated by reference to Exhibit 10.3 to
Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.4 Lease dated May 23, 1995 for facilities located in South San Francisco,
California, together with amendment thereto dated March 18, 1996.
Incorporated by reference to Exhibit 10.4 to Registration Statement No.
333-5126-LA filed on June 21, 1996.
10.5 Lease dated February 4, 1997, between Atlas Metal Spinning Company and
Willis Aeronautical Services, Inc., for an office and warehouse facility
located in South San Francisco. Incorporated by reference to Exhibit 10.5
of the Company's report on Form 10-K for the year ended December 31, 1996.
10.6 Lease dated March 16, 1992 for facilities located in Sausalito,
California, together with amendment thereto. Incorporated by reference to
Exhibit 10.6 of the Company's report on Form 10-K for the year ended
December 31, 1996.
10.7 Employment Agreement between the Company and William McElfresh.
Incorporated by reference to Exhibit 10.5 to Registration Statement No.
333-5126 LA filed on June 21, 1996.
</TABLE>
II-2
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------------------
<C> <S>
10.8 Employment Agreement between the Company and Steven Oldenburg.
Incorporated by reference to Exhibit 10.6 to Registration Statement No.
333-5126-LA filed on June 21, 1996.
10.9 Employment Agreement between the Company and Edwin Dibble.*
10.10 Assignment and Assumption of Leases and Purchase and Sale of Engines
Agreement, dated September 11, 1992 between Terandon Leasing Corporation
and International Lease Finance Corporation. Incorporated by reference to
Exhibit 10.8 to Registration Statement No. 333-5126-LA filed on June 21,
1996.
10.11 Engine Loan Agreement dated April 22, 1994, between T-5, Inc. and Ryoshin
Leasing (USA) Inc. Incorporated by reference to Exhibit 10.11 to
Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.12 Loan Agreement dated March 1, 1994 between T-7, Inc. and Heller Financial
Inc. Incorporated by reference to Exhibit 10.12 to Registration Statement
No. 333-5126-LA filed on June 21, 1996.
10.13 Loan Agreement dated April 1, 1994 between T-7, Inc. and Heller Financial
Inc. Incorporated by reference to Exhibit 10.13 to Registration Statement
No. 333-5126-LA filed on June 21, 1996.
10.14 Secured Loan Agreement dated December 29, 1995 between T-10, Inc. and
Finova Capital Corporation. Incorporated by reference to Exhibit 10.14 to
Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.15 Credit Agreement dated June 30, 1995 between the Company and Svenska
Finans International BV. Incorporated by reference to Exhibit 10.15 to
Registration Statement No. 333-5126-LA filed on June 21, 1996.
10.16 Loan Agreement dated January 28, 1997, together with related documents.
Incorporated by reference to Exhibit 10.16 of the Company's Report on Form
10K for the year ended December 31, 1996.
10.17 Loan Agreement dated November 6, 1996 between Willis Aeronautical
Services, Inc. and The Pacific Bank, N.A., together with related
documents. Incorporated by reference to Exhibit 10.17 of the Company's
Report on Form 10-K for the year ended December 31, 1996.
10.18 Loan Agreement dated February 2, 1997 between the Company and Finova
Capital Corporation. Incorporated by reference to Exhibit 10.18 to the
Company's Report on Form 10-Q for the period ended March 31, 1997.
10.19 Loan Agreement dated June 12, 1997 with CoreStates Bank, together with
related documents for a $15 million revolving credit facility.
Incorporated by reference to Exhibit 10.19 to the Company's Report on Form
10-Q for the period ended June 30, 1997.
10.20 Amendment dated July 28, 1997, to loan agreement dated June 12, 1997, for
the increasing of the revolving credit facility to $30 million from $15
million. Incorporated by reference to Exhibit 10.20 to the Company's
Report on Form 10-Q for the period ended June 30, 1997.
10.21 Amendment dated November 18, 1997, to loan agreement dated June 12, 1997,
for the increasing of the revolving credit facility to $45 million from
$30 million.
10.22 Engine Sales Agreement dated August 14, 1997, together with related
documents, for a $47 million purchase from Pratt & Whitney for nine bare
Pratt & Whitney 4056 engines. Incorporated by reference to Exhibit 10.19
to the Company's Report on Form 10-Q for the period ended September 30,
1997.
</TABLE>
II-3
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------------------
<C> <S>
10.23 Loan Agreement dated September 8, 1997, together with related documents,
for a $2 million loan from Fleet Capital Corporation relating to the
financing of equipment leased to Delta Air Lines. Incorporated by
reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the
period ended September 30, 1997.
10.24 Loan Agreement dated September 17, 1997, together with related documents,
for a $4.3 million loan from Fleet Capital Corporation relating to the
financing of equipment leased to GE ESI. Incorporated by reference to
Exhibit 10.21 to the Company's Report on Form 10-Q for the period ended
September 30, 1997.
10.25 Aircraft Sale Agreement dated as of November 17, 1997, between Finova
Capital Corporation as seller and Willis Lease Finance Corporation as
buyer.
11.1 Statement regarding computation of per share earnings. Incorporated by
reference to Exhibit 11.1 to the Company's Report on Form 10-Q for the
period ended September 30, 1997.
21.1 Subsidiaries of the Company. Incorporated by reference to Exhibit 21.1 to
Registration Statement No. 333-5126-LA filed on June 21, 1996.
23.1 Consent of KPMG Peat Marwick, LLP.
23.2 Consent of Gibson, Dunn & Crutcher LLP (see Exhibit 5.1)
23.3 Consent of Aircraft Information Services, Inc.*
24.1 Powers of Attorney.*
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to any arrangement, provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than that payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement for the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned in the City
of Sausalito, State of California, on the 10th day of December, 1997.
WILLIS LEASE FINANCE CORPORATION
BY: /s/ CHARLES F. WILLIS, IV
------------------------------------
Charles F. Willis, IV
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement on Form S-1 has been signed below
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- -------------------------------------- ---------------------------------- --------------------
<S> <C> <C>
/s/ CHARLES F. WILLIS, IV Chairman of the Board; President December 10, 1997
- -------------------------------------- and Chief Executive Officer
Charles F. Willis, IV
/s/ DONALD A. NUNEMAKER Executive Vice President and Chief December 10, 1997
- -------------------------------------- Administrative Officer
Donald A. Nunemaker
/s/ JAMES D. MCBRIDE Executive Vice President and Chief December 10, 1997
- -------------------------------------- Financial Officer
James D. McBride
/s/ WILLIAM L. MCELFRESH Director and Executive Vice December 10, 1997
- -------------------------------------- President -- Strategic Development
William L. McElfresh
* Director December 10, 1997
- --------------------------------------
Ross K. Anderson
* Director December 10, 1997
- --------------------------------------
William M. LeRoy
* Director December 10, 1997
- --------------------------------------
Willard H. Smith, Jr.
</TABLE>
*By: /s/ CHARLES F. WILLIS, IV
---------------------------------
Charles F. Willis, IV
Attorney-in-Fact
II-5
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement...............................
3.1 Amended and Restated Articles of Incorporation, filed
September 11, 1996 together with Certificate of Amendment of
Amended and Restated Articles of Incorporation filed on
September 24, 1996. Incorporated by reference to Exhibit 3.2
of the Company's report on Form 10-K for the year ended
December 31, 1996............................................
3.2 Bylaws, Incorporated by reference to Exhibit 3.3 to
Registration Statement No. 333-5126-LA filed on June 21,
1996.........................................................
4.1 Specimen of Common Stock Certificate. Incorporated by
reference to Exhibit 4.1 to Registration Statement No.
333-5126 filed on June 21, 1996..............................
5.1 Opinion of Gibson, Dunn & Crutcher LLP.......................
10.1 1996 Stock Option/Stock Issuance Plan and form of agreement
thereunder. Incorporated by reference to Exhibit 10.1 to
Registration Statement No. 333-5126 filed on June 21, 1996...
10.2 Employee Stock Purchase Plan. Incorporated by reference to
Exhibit 10.2 to Registration Statement No. 333-5126-LA filed
on June 21, 1996.............................................
10.3 Form of Indemnification Agreement entered into between the
Company and its directors and officers. Incorporated by
reference to Exhibit 10.3 to Registration Statement No.
333-5126-LA filed on June 21, 1996...........................
10.4 Lease dated May 23, 1995 for facilities located in South San
Francisco, California, together with amendment thereto dated
March 18, 1996. Incorporated by reference to Exhibit 10.4 to
Registration Statement No. 333-5126-LA filed on June 21,
1996.........................................................
10.5 Lease dated February 4, 1997, between Atlas Metal Spinning
Company and Willis Aeronautical Services, Inc., for an office
and warehouse facility located in South San Francisco.
Incorporated by reference to Exhibit 10.5 of the Company's
report on Form 10-K for the year ended December 31, 1996.....
10.6 Lease dated March 16, 1992 for facilities located in
Sausalito, California, together with amendment thereto.
Incorporated by reference to Exhibit 10.6 of the Company's
report on Form 10-K for the year ended December 31, 1996.....
10.7 Employment Agreement between the Company and William
McElfresh. Incorporated by reference to Exhibit 10.5 to
Registration Statement No. 333-5126 LA filed on June 21,
1996.........................................................
10.8 Employment Agreement between the Company and Steven
Oldenburg. Incorporated by reference to Exhibit 10.6 to
Registration Statement No. 333-5126-LA filed on June 21,
1996.........................................................
10.9 Employment Agreement between the Company and Edwin Dibble*...
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------------- ------------
<C> <S> <C>
10.10 Assignment and Assumption of Leases and Purchase and Sale of
Engines Agreement, dated September 11, 1992 between Terandon
Leasing Corporation and International Lease Finance
Corporation. Incorporated by reference to Exhibit 10.8 to
Registration Statement No. 333-5126-LA filed on June 21,
1996.........................................................
10.11 Engine Loan Agreement dated April 22, 1994, between T-5, Inc.
and Ryoshin Leasing (USA) Inc. Incorporated by reference to
Exhibit 10.11 to Registration Statement No. 333-5126-LA filed
on June 21, 1996.............................................
10.12 Loan Agreement dated March 1, 1994 between T-7, Inc. and
Heller Financial Inc. Incorporated by reference to Exhibit
10.12 to Registration Statement No. 333-5126-LA filed on June
21, 1996.....................................................
10.13 Loan Agreement dated April 1, 1994 between T-7, Inc. and
Heller Financial Inc. Incorporated by reference to Exhibit
10.13 to Registration Statement No. 333-5126-LA filed on June
21, 1996.....................................................
10.14 Secured Loan Agreement dated December 29, 1995 between T-10,
Inc. and Finova Capital Corporation. Incorporated by
reference to Exhibit 10.14 to Registration Statement No.
333-5126-LA filed on June 21, 1996...........................
10.15 Credit Agreement dated June 30, 1995 between the Company and
Svenska Finans International BV. Incorporated by reference to
Exhibit 10.15 to Registration Statement No. 333-5126-LA filed
on June 21, 1996.............................................
10.16 Loan Agreement dated January 28, 1997, together with related
documents. Incorporated by reference to Exhibit 10.16 of the
Company's Report on Form 10K for the year ended December 31,
1996.........................................................
10.17 Loan Agreement dated November 6, 1996 between Willis
Aeronautical Services, Inc. and The Pacific Bank, N.A.,
together with related documents. Incorporated by reference to
Exhibit 10.17 of the Company's Report on Form 10-K for the
year ended December 31, 1996.................................
10.18 Loan Agreement dated February 2, 1997 between the Company and
Finova Capital Corporation. Incorporated by reference to
Exhibit 10.18 to the Company's Report on Form 10-Q for the
period ended March 31, 1997..................................
10.19 Loan Agreement dated June 12, 1997 with CoreStates Bank,
together with related documents for a $15 million revolving
credit facility. Incorporated by reference to Exhibit 10.19
to the Company's Report on Form 10-Q for the period ended
June 30, 1997................................................
10.20 Amendment dated July 28, 1997, to loan agreement dated June
12, 1997, for the increasing of the revolving credit facility
to $30 million from $15 million. Incorporated by reference to
Exhibit 10.20 to the Company's Report on Form 10-Q for the
period ended June 30, 1997...................................
10.21 Amendment dated November 18, 1997, to loan agreement dated
June 12, 1997, for the increasing of the revolving credit
facility to $45 million from $30 million.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------------- ------------
<C> <S> <C>
10.22 Engine Sales Agreement dated August 14, 1997, together with
related documents, for a $47 million purchase from Pratt &
Whitney for nine bare Pratt & Whitney 4056 engines.
Incorporated by reference to Exhibit 10.19 to the Company's
Report on Form 10-Q for the period ended September 30,
1997.........................................................
10.23 Loan Agreement dated September 8, 1997, together with related
documents, for a $2 million loan from Fleet Capital
Corporation relating to the financing of equipment leased to
Delta Air Lines. Incorporated by reference to Exhibit 10.20
to the Company's Report on Form 10-Q for the period ended
September 30, 1997...........................................
10.24 Loan Agreement dated September 17, 1997, together with
related documents, for a $4.3 million loan from Fleet Capital
Corporation relating to the financing of equipment leased to
GE ESI. Incorporated by reference to Exhibit 10.21 to the
Company's Report on Form 10-Q for the period ended September
30, 1997.....................................................
10.25 Aircraft Sale Agreement dated as of November 17, 1997,
between Finova Capital Corporation as seller and Willis Lease
Finance Corporation as buyer.................................
11.1 Statement regarding computation of per share earnings.
Incorporated by reference to Exhibit 11.1 to the Company's
Report on Form 10-Q for the period ended September 30,
1997.........................................................
21.1 Subsidiaries of the Company. Incorporated by reference to
Exhibit 21.1 to Registration Statement No. 333-5126-LA filed
on June 21, 1996.............................................
23.1 Consent of KPMG Peat Marwick, LLP............................
23.2 Consent of Gibson, Dunn & Crutcher LLP (see Exhibit 5.1).....
23.3 Consent of Aircraft Information Services, Inc.*..............
24.1 Powers of Attorney*..........................................
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
1,500,000 SHARES
WILLIS LEASE FINANCE CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
December __, 1997
LEHMAN BROTHERS INC.
DAIN BOSWORTH INCORPORATED,
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Willis Lease Finance Corporation, a California corporation (the
"Company"), proposes to sell 1,500,000 shares (the "Firm Stock") of the
Company's Common Stock, no par value per share (the "Common Stock"). In
addition, the Company proposes to grant to the Underwriters named in Schedule 1
hereto (the "Underwriters") an option to purchase up to an additional 225,000
shares of the Common Stock on the terms and for the purposes set forth in
Section 2 (the "Option Stock"). The Firm Stock and the Option Stock, if
purchased, are hereinafter collectively called the "Stock." This is to confirm
the agreement concerning the purchase of the Stock from the Company by the
Underwriters.
1. Representations, Warranties and Agreements of the Company.
The Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and an amendment
thereto, with respect to the Stock has (i) been prepared by the
Company in conformity with the requirements of the United States
Securities Act of 1933 (the "Securities Act") and the rules and
regulations (the "Rules and Regulations") of the United States
Securities and Exchange Commission (the "Commission") thereunder,
(ii) been filed with the Commission under the Securities Act and
(iii) become effective under the Securities Act. Copies of such
registration statement and the amendment thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared effective
by the Commission; "Effective Date" means the date of the
Effective Time; "Preliminary
1
<PAGE> 2
Prospectus" means each prospectus included in such registration
statement, or amendments thereof, before it became effective
under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations
in accordance with Section 5(a) hereof and deemed to be a part
of the registration statement as of the Effective Time pursuant
to paragraph (b) of Rule 430A of the Rules and Regulations; and
"Prospectus" means such final prospectus, as first filed with
the Commission pursuant to paragraph (1) or (4) of Rule 424(b)
of the Rules and Regulations. The Commission has not issued any
order preventing or suspending the use of any Preliminary
Prospectus.
(b) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will, when they become
effective or are filed with the Commission, as the case may be,
conform in all respects to the requirements of the Securities Act
and the Rules and Regulations and do not and will not, as of the
applicable effective date (as to the Registration Statement and
any amendment thereto) and as of the applicable filing date (as
to the Prospectus and any amendment or supplement thereto)
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that no
representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined
in Section 15) have been duly incorporated and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation, are duly qualified to
do business and are in good standing as foreign corporations in
each jurisdiction in which their respective ownership or lease of
property or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified
or in good standing would not have a material adverse effect on
the consolidated financial position, results of operations,
business or prospects of the Company and its subsidiaries, taken
as a whole, and have all power and authority necessary to own or
hold their respective properties and to conduct the businesses in
which they are engaged; and none of the subsidiaries of the
Company (other than Willis Aeronautical Services, Inc. and WLFC
Funding Corporation) is a "significant subsidiary", as such term
is defined in Rule 405 of the Rules and Regulations.
2
<PAGE> 3
(d) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; and all of the
issued shares of capital stock of each subsidiary of the Company
have been duly and validly authorized and issued and are fully
paid and non-assessable and (except for directors' qualifying
shares) are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims, except such
as are existing under loan agreements existing on the date of
this Agreement.
(e) The shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment
therefor as provided herein will be duly and validly issued,
fully paid and non-assessable; and the Stock will conform to the
description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries is bound or to which any of the property
or assets of the Company or any of its subsidiaries is subject,
nor will such actions result in any violation of the provisions
of the charter or by-laws of the Company or any of its
subsidiaries or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties
or assets; and except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection
with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby.
(h) With the exception of the Warrants dated September 23,
1996 issued to Wedbush Morgan Securities Inc. and Dain Bosworth
Incorporated, respectively, in connection with the Company's
initial public offering, there are no contracts, agreements or
understandings between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities
of the Company owned or to be owned
3
<PAGE> 4
by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Securities Act.
(i) Except as described in the Registration Statement, the
Company has not sold or issued any shares of Common Stock during
the six-month period preceding the date of the Prospectus,
including any sales pursuant to Rule 144A under, or Regulations D
or S of, the Securities Act, other than shares issued pursuant to
employee benefit plans, qualified stock options plans or other
employee compensation plans or pursuant to outstanding options,
rights or warrants.
(j) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial
statements included in the Prospectus, any material loss or
interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus;
and, since such date, there has not been any material change in
the capital stock or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting
the consolidated financial position, or results of operations,
business or prospects of the Company and its subsidiaries, taken
as a whole, otherwise than as set forth or contemplated in the
Prospectus.
(k) The financial statements (including the related notes
and supporting schedules) filed as part of the Registration
Statement or included in the Prospectus present fairly, in all
material respects, the consolidated financial condition and
results of operations of the Company and its subsidiaries, at the
dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied
on a consistent basis throughout the periods involved.
(l) KPMG Peat Marwick LLP, who have certified certain
financial statements of the Company, whose report appears in the
Prospectus and who have delivered the initial letter referred to
in Section 7(f) hereof, are independent public accountants as
required by the Securities Act and the Rules and Regulations.
(m) Aircraft Information Services, Inc., whose report
appears in the Prospectus, was, as of the date of such report,
and is, as of the date hereof, an independent appraiser with
respect to the Company.
(n) The Company and each of its subsidiaries have good and
marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except
such as are existing under loan agreements existing on the date
of this Agreement, described in the Prospectus or do not
4
<PAGE> 5
materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and all real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and
do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries.
(o) The Company and each of its subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as
is adequate for the conduct of their respective businesses and
the value of their respective properties and as is customary for
companies engaged in similar businesses.
(p) The Company and each of its subsidiaries own or
possess adequate rights to use all material patents, patent
applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights and
licenses necessary for the conduct of their respective businesses
and have no reason to believe that the conduct of their
respective businesses will conflict with, and have not received
any notice of any claim of conflict with, any such rights of
others.
(q) Except as described in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or
any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its
subsidiaries, might have a material adverse effect on the
consolidated financial position, results of operations, business
or prospects of the Company and its subsidiaries, taken as a
whole; and to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(r) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits
to the Registration Statement by the Securities Act or by the
Rules and Regulations which have not been described in the
Prospectus or filed as exhibits to the Registration Statement or
incorporated therein by reference as permitted by the Rules and
Regulations.
(s) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other
hand, which is required to be described in the Prospectus which
is not so described.
(t) No labor disturbance by the employees of the Company
exists or, to the knowledge of the Company, is imminent which
might be expected to have a
5
<PAGE> 6
material adverse effect on the consolidated financial position,
results of operations, business or prospects of the Company and
its subsidiaries, taken as a whole.
(u) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA");
no "reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which the
Company would have any liability; the Company has not incurred
and does not expect to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any
"pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(v) The Company has filed all federal, state and local
income and franchise tax returns required to be filed through the
date hereof (or obtained valid extensions on a timely basis) and
has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company or any of its subsidiaries
which has had (nor does the Company have any knowledge of any tax
deficiency which, if determined adversely to the Company or any
of its subsidiaries, might have) a material adverse effect on the
consolidated financial position, results of operations, business
or prospects of the Company and its subsidiaries, taken as a
whole.
(w) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise
be disclosed in the Prospectus, the Company has not (i) issued or
granted any securities, (ii) incurred any liability or
obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on its
capital stock.
(x) The Company (i) makes and keeps accurate books and
records and (ii) maintains internal accounting controls which
provide reasonable assurance that (A) transactions are executed
in accordance with management's authorization, (B) transactions
are recorded as necessary to permit preparation of its financial
statements and to maintain accountability for its assets, and (C)
the reported accountability for its assets is compared with
existing assets at reasonable intervals.
(y) Neither the Company nor any of its subsidiaries (i) is
in violation of its charter or by-laws, (ii) is in default in any
material respect, and no event has occurred which, with notice or
lapse of time or both, would constitute such a default, in the
due performance or observance of any term, covenant or condition
6
<PAGE> 7
contained in any material indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which it is a
party or by which it is bound or to which any of its properties
or assets is subject or (iii) is in violation in any material
respect of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject
or has failed to obtain any material license, permit,
certificate, franchise or other governmental authorization or
permit necessary to the ownership of its property or to the
conduct of its business.
(z) Neither the Company nor any of its subsidiaries, nor
any director, officer, agent, employee or other person associated
with or acting on behalf of the Company or any of its
subsidiaries, has used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977; or
made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(aa) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of
toxic wastes, medical wastes, hazardous wastes or hazardous
substances by the Company or any of its subsidiaries (or, to the
knowledge of the Company, any of their predecessors in interest)
at, upon or from any of the property now or previously owned or
leased by the Company or its subsidiaries in violation of any
applicable law, ordinance, rule, regulation, order, judgment,
decree or permit or which would require remedial action under any
applicable law, ordinance, rule, regulation, order, judgment,
decree or permit, except for any violation or remedial action
which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and
remedial actions, a material adverse effect on the consolidated
financial position, results of operations, business or prospects
of the Company and its subsidiaries, taken as a whole; there has
been no material spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or
into the environment surrounding such property of any toxic
wastes, medical wastes, solid wastes, hazardous wastes or
hazardous substances due to or caused by the Company or any of
its subsidiaries or with respect to which the Company or any of
its subsidiaries have knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release
which would not have or would not be reasonably likely to have,
singularly or in the aggregate with all such spills, discharges,
leaks, emissions, injections, escapes, dumpings and releases, a
material adverse effect on the consolidated financial position,
results of operations, business or prospects of the Company and
its subsidiaries, taken as a whole; and the terms "hazardous
wastes", "toxic wastes", "hazardous substances" and "medical
wastes" shall have the meanings specified in any applicable
local, state, federal and foreign laws or regulations with
respect to environmental protection.
7
<PAGE> 8
(ab) Neither the Company nor any subsidiary is an
"investment company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and regulations of
the Commission thereunder.
2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell the Firm Stock to the
several Underwriters and each of the Underwriters, severally and not jointly,
agrees to purchase the number of shares of the Firm Stock set opposite that
Underwriter's name in Schedule 1 hereto. The respective purchase obligations of
the Underwriters with respect to the Firm Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 225,000 shares of Option Stock. Such option is granted solely for
the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 3 hereof. Shares of Option Stock shall be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts. The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company shall not be obligated to deliver any of the Stock to
be delivered on the First Delivery Date or the Second Delivery Date (as
hereinafter defined), as the case may be, except upon payment for all the Stock
to be purchased on such Delivery Date as provided herein.
3. Offering of Stock by the Underwriters. Upon authorization by
the Representatives of the release of the Firm Stock, the several Underwriters
propose to offer the Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the offices of Gibson, Dunn & Crutcher LLP,
One Montgomery Street, Telesis Tower, San Francisco, California, 94104, at 10:00
A.M., New York City time, on the [fourth] full business day following the date
of this Agreement or at such other date or place as shall be determined by
agreement between the Representatives and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Representatives for the account of each Underwriter against
payment to or upon the order of the Company of the purchase price by certified
or official bank check or checks or wire transfer payable in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be
registered in such names and in such denominations as the Representatives shall
request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the
8
<PAGE> 9
Firm Stock, the Company shall make the certificates representing the Firm Stock
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to the First
Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement, the option granted in Section 2 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by certified or official bank
check or checks or wire transfer payable in immediately available funds. Time
shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Option Stock shall be registered in such names and
in such denominations as the Representatives shall request in the aforesaid
written notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the Option Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the Second Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule
424(b) under the Securities Act not later than Commission's close
of business on the second business day following the execution
and delivery of this Agreement or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Securities
Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted
herein; to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to the
Registration Statement has
9
<PAGE> 10
been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to
furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of
the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus
or the Prospectus, of the suspension of the qualification of the
Stock for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or
for additional information; and, in the event of the issuance of
any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus or suspending
any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and
to counsel for the Underwriters a signed copy of the Registration
Statement as originally filed with the Commission, and each
amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number
of the following documents as the Representatives shall
reasonably request: (i) conformed copies of the Registration
Statement as originally filed with the Commission and each
amendment thereto (in each case excluding exhibits other than
this Agreement and the computation of per share earnings) and
(ii) each Preliminary Prospectus, the Prospectus and any amended
or supplemented Prospectus; and, if the delivery of a prospectus
is required at any time after the Effective Time in connection
with the offering or sale of the Stock or any other securities
relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities
Act, to notify the Representatives and, upon their request, to
prepare and furnish without charge to each Underwriter as many
copies as the Representatives may from time to time reasonably
request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance.
(d) To file promptly with the Commission any amendment to
the Registration Statement or the Prospectus or any supplement to
the Prospectus that may, in the reasonable judgment of the
Company or the Representatives, be required by the Securities Act
or requested by the Commission;
(e) Prior to filing with the Commission any amendment to
the Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424
10
<PAGE> 11
of the Rules and Regulations, to furnish a copy thereof to the
Representatives and counsel for the Underwriters and obtain the
consent of the Representatives to the filing, which consent will
not be unreasonably withheld;
(f) As soon as practicable after the Effective Date, to
make generally available to the Company's security holders an
earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the
Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions
as the Representatives may request and to comply with such laws
so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete
the distribution of the Stock; provided, however, that the
Company shall not be required to file any general consent to
service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so
qualified or to subject itself to taxation as doing business in
any jurisdiction;
(h) For a period of 90 days from the date of the
Prospectus, not to, directly or indirectly, (1) offer for sale,
sell, pledge or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected
to, result in the disposition by any person at any time in the
future of) any shares of Common Stock or securities convertible
into or exchangeable for Common Stock (other than the Stock and
shares issued pursuant to employee benefit plans, qualified stock
option plans or other employee compensation plans existing on the
date hereof or pursuant to currently outstanding options,
warrants or rights), or sell or grant options, rights or warrants
with respect to any shares of Common Stock or securities
convertible into or exchangeable for Common Stock (other than the
grant of options pursuant to option plans existing on the date
hereof), or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any
of the economic benefits or risks of ownership of such shares of
Common Stock; whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or
other securities, in cash or otherwise, in each case without the
prior written consent of Lehman Brothers Inc.;
(i) Prior to the Effective Date, to apply for the
inclusion of the Stock on the National Market System and to use
its best efforts to complete that inclusion, subject only to
official notice of issuance, prior to the First Delivery Date;
(j) To apply the net proceeds from the sale of the Stock
being sold by the Company as set forth in the Prospectus; and
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<PAGE> 12
(k) To take such steps as shall be necessary to ensure
that neither the Company nor any subsidiary shall become an
"investment company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and regulations of
the Commission thereunder.
6. Expenses. The Company agrees to pay (a) the costs incident to
the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of producing and distributing
this Agreement and any other related documents in connection with the offering,
purchase, sale and delivery of the stock; (e) the filing fees incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of sale of the Stock; (f) any applicable listing or other
fees; (g) the fees and expenses of qualifying the Stock under the securities
laws of the several jurisdictions as provided in Section 5; (h) the costs of
preparing, printing and distributing a Blue Sky Memorandum (including related
fees and expenses of counsel to the Underwriters); and (i) all other costs and
expenses incident to the performance of the obligations of the Company under
this Agreement; provided that, except as provided in this Section 6 and in
Section 11 the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, in all
material respects, when made and on each Delivery Date, of the representations
and warranties of the Company contained herein, to the performance by the
Company of its obligations hereunder, and to each of the following additional
terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 5(a); no stop order
suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to
the Company on or prior to such Delivery Date that the
Registration Statement or the Prospectus or any amendment or
supplement thereto contains an untrue statement of a fact which,
in the opinion of O'Melveny & Myers LLP, counsel for the
Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is
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<PAGE> 13
required to be stated therein or is necessary to make the
statements therein not misleading.
(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this
Agreement, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for
the Underwriters, and the Company shall have furnished to such
counsel all documents and information that they may reasonably
request to enable them to pass upon such matters.
(d) Gibson, Dunn & Crutcher LLP shall have furnished to
the Representatives its written opinion, subject to reasonable
exceptions and reliances, as counsel to the Company, addressed to
the Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to the
effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation and has
the corporate power and authority to own its property and
to conduct its business as described in the Prospectus;
(ii) the shares of Common Stock outstanding prior
to the issuance of the Stock to be sold by the Company
have been duly authorized and are validly issued, fully
paid and nonassessable;
(iii) the Stock to be sold by the Company has been
duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, and the
issuance of the Stock will not be subject to any
preemptive or similar rights contained in the Articles of
Incorporation or Bylaws of the Company;
(iv) this Agreement has been duly authorized,
executed and delivered by the Company;
(v) the execution and delivery by the Company of,
and the performance by the Company of its obligations
under, this Agreement will not contravene any provision of
applicable law or the articles of incorporation or by-laws
of the Company or any of its subsidiaries or, to the best
of such counsel's knowledge, any agreement or other
instrument binding upon the Company or any of its
subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or, to the best of such
counsel's knowledge, any material judgment, or material
decree of any governmental body, agency or court having
jurisdiction over the Company
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<PAGE> 14
or any of its subsidiaries, and no material consent,
approval, authorization or order of or qualification
with any governmental body or agency is required for the
performance by the Company of its obligations under this
Agreement, except such as may be required by the
securities or "blue sky" laws of the various states in
connection with the offer and sale of the Stock by the
Underwriters;
(vi) the statements (1) in the Prospectus under the
captions "Business - Government Regulation," "Management -
Compensation Arrangements and Employee Agreements with
Named Executive Officers," "Management - Incentive
Compensation Plan," "Management - 1996 Stock Option/Stock
Issuance Plan," "Management - Employee Stock Purchase
Plan" and "Description of Capital Stock" and (2) in the
Registration Statement in Items 24 and 26, in each case
insofar as such statements constitute summaries of the
legal matters, documents or proceedings referred to
therein, fairly present the information called for with
respect to such legal matters, documents and proceedings
and fairly summarize the matters referred to therein in
all material respects;
(vii) such counsel does not know of any statutes,
regulations, contracts or other documents that are
required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as
required;
(viii) the Company is not an "investment company"
or an entity "controlled" by an investment company," as
such terms are defined in the Investment Company Act of
1940, and the rules and regulations of the Commission
thereunder;
(ix) such counsel (1) believes that the
Registration Statement and Prospectus (except for
financial statements and schedules included therein as to
which such counsel need not express any opinion) comply as
to form in all material respects with the Securities Act
and the Rules and Regulations, (2) believes that (except
for financial statements or other financial data as to
which such counsel need not express any belief) the
Registration Statement and the prospectus included therein
at the time the Registration Statement became effective
did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading and (3) believes that (except for financial
statements or other financial data as to which such
counsel need not express any belief) the Prospectus, as of
its date and as of the date of the
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<PAGE> 15
opinion, did not and does not contain any untrue
statement of a material fact or omitted or omit to state
a material fact necessary in order to make the
statements therein, in light of the circumstances under
which they were made, not misleading;
(x) the certificates for the Stock comply with the
provisions of California law and have been duly approved
by the Board of Directors of the Company; and
(xi) the Registration Statement has become
effective under the Securities Act and, to the best
knowledge of such counsel, no stop order proceedings
suspending the effectiveness of the Registration Statement
have been instituted or threatened or are pending under
the Securities Act.
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the Federal laws of the
United States of America and the laws of the States of New York
and California.
(e) The General Counsel of the Company shall have
furnished to the Representatives her written opinion, subject to
reasonable exceptions and reliances, addressed to the
Underwriters and dated such Delivery Date, in form and substance
reasonably satisfactory to the Representatives, to the effect
that:
(i) the Company is duly qualified to transact
business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or
leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to
own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or
leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on
the Company and its subsidiaries taken as a whole; and
(iii) the issuance of the Stock will not be subject
to any preemptive or similar rights created by the
Company;
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<PAGE> 16
(iv) such counsel does not know of any legal or
governmental proceeding pending or threatened to which the
Company or any of its subsidiaries is a party or to which
any of the properties of the Company or any of its
subsidiaries is subject that are required to be
described in the Registration Statement or the
Prospectus and are not so described; and
(v) there are no outstanding options, warrants or
other rights calling for the issuance of, and no
commitments, plans or arrangements of the Company to
issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital
stock of the Company, except as disclosed in the
Prospectus.
(f) The Representatives shall have received from O'Melveny
& Myers LLP, counsel for the Underwriters, such opinion or
opinions, dated such Delivery Date, with respect to the issuance
and sale of the Stock, the Registration Statement, the Prospectus
and other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel
such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from KPMG Peat Marwick LLP a
letter, in form and substance satisfactory to the
Representatives, addressed to the Underwriters and dated the date
hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date hereof (or, with
respect to matters involving changes or developments since the
respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days
prior to the date hereof), the conclusions and findings of such
firm with respect to the financial information and other matters
ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(h) With respect to the letter of KPMG Peat Marwick LLP
referred to in the preceding paragraph and delivered to the
Representatives concurrently with the execution of this Agreement
(the "initial letter"), the Company shall have furnished to the
Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such
Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date of the bring-down
letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date
not more than five days prior to the date of
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<PAGE> 17
the bring-down letter), the conclusions and findings of such firm
with respect to the financial information and other matters
covered by the initial letter and (iii) confirming in all
material respects the conclusions and findings set forth in the
initial letter.
(i) The Company shall have furnished to the
Representatives a certificate, dated such Delivery Date, of its
Chairman of the Board, its President and its Chief Financial
Officer stating that:
(i) The representations, warranties and agreements
of the Company in Section 1 are true and correct in all
material respects as of such Delivery Date; the Company
has complied with all its agreements contained herein; and
the conditions set forth in Sections 7(a) and 7(j) have
been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as
of the Effective Date, the Registration Statement and
Prospectus did not include any untrue statement of a
material fact and did not omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading, and (B) since the
Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the
Registration Statement or the Prospectus.
(j) (i) Neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest audited
financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus or
(ii) since such date there shall not have been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a
prospective change, in or affecting the consolidated financial
position, results of operations or business of the Company and
its subsidiaries, taken as a whole, otherwise than as set forth
or contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is, in the judgment of
the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering
or the delivery of the Stock being delivered on such Delivery
Date on the terms and in the manner contemplated in the
Prospectus.
(k) Subsequent to the execution and delivery of this
Agreement there shall not have occurred any of the following: (i)
trading in securities generally on the New York Stock Exchange or
the American Stock Exchange or in the over-the-counter market,
or trading in any securities of the Company on any exchange or
in the over-
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<PAGE> 18
the-counter market, shall have been suspended or minimum prices
shall have been established on any such exchange or such market
by the Commission, by such exchange or by any other regulatory
body or governmental authority having jurisdiction, (ii) a
banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged
in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been
a declaration of a national emergency or war by the United
States or (iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions
(or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in
the judgment of a majority in interest of the several
Underwriters, impracticable or inadvisable to proceed with the
public offering or delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(l) The National Market System shall have approved the
Stock for inclusion, subject only to official notice of
issuance.
All opinions, letters, evidence and certificates mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter, its officers and employees and each person, if any, who controls
any Underwriter within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Stock), to which that Underwriter,
officer, employee or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto or (B) in any blue sky application or other document prepared or
executed by the Company (or based upon any written information furnished by the
Company) specifically for the purpose of qualifying any or all of the Stock
under the securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a "Blue Sky
Application"), (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading or
(iii) any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Stock or the
offering contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based upon
matters covered by clause (i) or (ii) above (provided that the Company shall not
be liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that
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<PAGE> 19
such loss, claim, damage, liability or action resulted directly from any such
acts or failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct), and shall reimburse each
Underwriter and each such officer, employee or controlling person promptly upon
demand for any legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or in
any such amendment or supplement, or in any Blue Sky Application, in reliance
upon and in conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein, and further, provided, however,
that the Company shall not be liable to an Underwriter in respect of any
Preliminary Prospectus, or any amendment or supplement thereto, to the extent
that both (i) all of the untrue statements or alleged untrue statements or
omissions or alleged omissions of a material fact contained in any Preliminary
Prospectus or any amendment or supplement thereto were fully corrected in the
Prospectus or in an amendment or supplement thereto and (ii) the Prospectus,
together with such amendment or supplement, if any, was provided to such
Underwriter by the Company prior to the time the written confirmation of the
sale of Stock to such person was sent and was not sent or given to the purchaser
of the stock in question by such Underwriter at or prior to the written
confirmation of the sale of Stock to such person. The foregoing indemnity
agreement is in addition to any liability which the Company may otherwise have
to any Underwriter or to any officer, employee or controlling person of that
Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify
and hold harmless the Company, its officers and employees, each of its
directors, and each person, if any, who controls the Company within the meaning
of the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or any
such director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to
make the statements therein not misleading, but in each case only to the extent
that the untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of that Underwriter specifically for inclusion therein, and
shall reimburse the Company and any such director, officer or controlling person
for any legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing
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<PAGE> 20
indemnity agreement is in addition to any liability which any Underwriter may
otherwise have to the Company or any such director, officer, employee or
controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment of the
Representatives, it is advisable for the Representatives and those Underwriters,
officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall
for any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the
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<PAGE> 21
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Stock or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Underwriters on the other with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect thereof,
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company, on the one hand, and the
total underwriting discounts and commissions received by the Underwriters with
respect to the shares of the Stock purchased under this Agreement, on the other
hand, bear to the total gross proceeds from the offering of the shares of the
Stock under this Agreement, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this Section 8 were to be
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim, damage
or liability, or action in respect thereof, referred to above in this Section 8
shall be deemed to include, for purposes of this Section 8(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Stock
underwritten by it and distributed to the public was offered to the public
exceeds the amount of any damages which such Underwriter has otherwise paid or
become liable to pay by reason of any untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 8(d) are several in proportion to their respective
underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public offering of the
Stock by the Underwriters set forth on the cover page of, the legends in bold
face on the inside front cover page of and the concession and reallowance
figures appearing under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the Prospectus.
9. Defaulting Underwriters.
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If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of shares of the Stock which it agreed to purchase on such Delivery
Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded,
the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representatives
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such Delivery Date, this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase, and of the Company to sell, the Option Stock) shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company, except that the Company will continue to be liable for the payment of
expenses to the extent set forth in Section 6. As used in this Agreement, the
term "Underwriter" includes, for all purposes of this Agreement unless the
context requires otherwise, any party not listed in Schedule 1 hereto who,
pursuant to this Section 9, purchases Firm Stock which a defaulting Underwriter
agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter
of any liability it may have to the Company for damages caused by its default.
If other underwriters are obligated or agree to purchase the Stock of a
defaulting or withdrawing Underwriter, either the Representatives or the Company
may postpone the Delivery Date for up to seven full business days in order to
effect any changes that in the opinion of counsel for the Company or counsel for
the Underwriters may be necessary in the Registration Statement, the Prospectus
or in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(j) or 7(k), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder, other than the condition set forth in
Section
22
<PAGE> 23
7(k), is not fulfilled, the Company will reimburse the Underwriters for
all reasonable out-of-pocket expenses (including fees and disbursements of
counsel) incurred by the Underwriters in connection with this Agreement and the
proposed purchase of the Stock, and upon demand the Company shall pay the full
amount thereof to the Representatives. If this Agreement is terminated pursuant
to Section 9 by reason of the default of one or more Underwriters, the Company
shall not be obligated to reimburse any defaulting Underwriter on account of
those expenses.
12. Notices, etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc.,
Three World Financial Center, New York, New York 10285,
Attention: Syndicate Department (Fax: 212-526-6588), with a copy,
in the case of any notice pursuant to Section 8(c), to the
Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY
10285; and
(b) if to the Company, shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set
forth in the Registration Statement, Attention: Rae A. Capps,
Esq. (Fax: (415) 331-5167);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the
Representatives.
13. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company,
and their respective successors. This Agreement and the terms and provisions
hereof are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on
23
<PAGE> 24
behalf on them, respectively, pursuant to this Agreement, shall survive the
delivery of and payment for the Stock and shall remain in full force and effect,
regardless of any investigation made by or on behalf of any of them or any
person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
24
<PAGE> 25
If the foregoing correctly sets forth the agreement among the
Company, its subsidiaries and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
WILLIS LEASE FINANCE CORPORATION
By_______________________________
Name:
Title:
Accepted:
LEHMAN BROTHERS INC.
DAIN BOSWORTH INCORPORATED
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By______________________________
Authorized Representative
25
<PAGE> 26
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Underwriters Shares
----------- ---------
<S> <C>
Lehman Brothers Inc. ................................................
Dain Bosworth Incorporated ..............................................
---------
Total 1,500,000
=========
</TABLE>
26
<PAGE> 1
EXHIBIT 5.1
December 10, 1997
(415) 393-8200 C 97785-00008
Willis Lease Finance Corporation
180 Harbor Drive, Suite 200
Sausalito, California 94965
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of the
Registration Statement on Form S-1 (the "Registration Statement"), which
registers 1,725,000 shares of common stock, no par value per share (the "Common
Stock"), of Willis Lease Finance Corporation, a California corporation (the
"Company").
For purposes of rendering this opinion, we have made such legal and
factual examinations as we have deemed necessary under the circumstances and, as
part of such examination, we have examined, among other things, originals and
copies, certified or otherwise, identified to our satisfaction, of such
documents, corporate records and other instruments as we have deemed necessary
or appropriate. For the purposes of such examination, we have assumed the
genuineness of all signatures on original documents and the conformity to
original documents of all copies submitted to us.
On the basis of and in reliance upon the foregoing examinations and
assumptions, we are of the opinion that, assuming the Registration Statement has
become effective pursuant to the provisions of the Securities Act of 1933, as
amended, the shares of Common Stock being sold by the Company, when issued in
accordance with the Registration Statement, will be validly issued, fully paid
and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
<PAGE> 1
EXHIBIT 10.21
AMENDMENT NO. 2
TO
CREDIT AGREEMENT
Amendment No. 2, dated November 18, 1997, (the "Amendment") to Credit
Agreement, dated June 12, 1997 as amended prior to this date, (the "Agreement")
by and between WILLIS LEASE FINANCE CORPORATION, a California corporation
("Willis") and CORESTATES BANK, N.A., a national banking association
("CORESTATES BANK", "CORESTATES" or the "BANK"). All capitalized terms used
herein and not otherwise defined shall have the respective meanings ascribed to
them in the Agreement.
PRELIMINARY STATEMENT
WHEREAS, Willis has requested that CoreStates Bank temporarily increase
the Revolving Loan Commitment from $30,000,000 to $45,000,000 and make certain
other modifications to the Agreement.
WHEREAS, CoreStates Bank is willing to agree to such request on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and promises hereinafter
set forth and intending to be legally bound hereby, the parties hereto agree as
follows:
1. SECTION 1.1 TO THE AGREEMENT. The definitions "Category A Equipment"
is hereby amended and restated in its entirety to read as follows:
" "CATEGORY A EQUIPMENT" shall mean equipment purchased by Willis from
unaffiliated Persons and which is either (1) the subject of an Eligible
Lease or (2) held for sale or lease to unaffiliated Persons. Category A
Equipment shall be composed of Stage III compliant jet engines which are
less than 15 years from the date of manufacture and are suitable for use
in major aircraft manufactured by The Boeing Co., McDonnell Douglas Corp.
or Airbus Industrie. Category A Equipment also shall include three de
Havilland DHC-8-102 turbo prop aircraft, six Pratt & Whitney Model PW120A
aircraft engines, six Hamilton Standard Model 14SF four-blade propellers
and three Pratt & Whitney Model PW120A spare engines, each as more fully
described in Exhibit F attached hereto, all of which will be purchased
from FINOVA Capital Corporation and all of which are subject to existing
leases to Horizon Air Industries, Inc."
2. SECTION 2.1 OF THE AGREEMENT. The first paragraph of Section 2.1 of
the Agreement is hereby amended and restated in its entirety to read as follows:
"Subject to the terms and conditions herein set forth and in reliance upon
the representations, warranties and covenants contained herein, CoreStates
Bank agrees to make revolving credit loans ("REVOLVING CREDIT LOANS") to
Willis upon receipt of loan requests therefor in amounts not to exceed at
any time outstanding,
<PAGE> 2
in the aggregate, $45,000,000 through February 28, 1998 and $30,000,000
thereafter (such amount, as the same may be reduced pursuant to Section
2.7 hereof being hereinafter called the "REVOLVING LOAN COMMITMENT"). For
purposes of determining the amount of Revolving Credit Loans outstanding,
the Standby Letters of Credit issued pursuant to Section 2.2 hereof shall
be deemed Revolving Credit Loans and shall be added to the Revolving
Credit Loans outstanding to determine the aggregate Revolving Credit Loans
outstanding. As provided below, Revolving Credit Loans may be requested by
Willis, and made from time to time prior to the Revolver Termination Date.
All Loans shall be made to Willis at the main office of the Bank, Broad
and Chestnut Streets, Philadelphia, Pennsylvania 19101."
3. SECTION 2.2 OF THE AGREEMENT. The dollar amount set forth in the
first paragraph of Section 2.2 of the Agreement as "$30,000,000" is hereby
deleted and shall be and is hereby replaced by the dollar amount of
$45,000,000."
4. SECTION 5.7 OF THE AGREEMENT. Section 5.7 of the Agreement is hereby
amended and restated in its entirety to read as follows:
"5.7 OWNERSHIP; MANAGEMENT. This section deleted by Amendment No. 2,
dated November 18, 1997."
5. SECTION 8.1(H) OF THE AGREEMENT. Section 8.1(h) of the Agreement is
hereby amended and restated in its entirety to read as follows:
"(h) CHANGE OF CONTROL. Charles F. Willis or the CFW Partners, L.P.
limited partnership, shall cease to be the record and beneficial owner of
at least 34% of the issued and outstanding voting and capital stock of
Willis."
6. SECTION 8.1(J) OF THE AGREEMENT. A new Section, Section 8.1(j) shall
be and is hereby added to the Agreement as follows:
"(j) CHANGES IN SENIOR MANAGEMENT. Charles F. Willis shall cease to
be a member of senior management or both Donald A. Nunemaker and James
McBride shall cease to be members of senior management within any period
of twelve consecutive months."
7. EXHIBIT A TO THE CREDIT AGREEMENT. Exhibit A to the Agreement shall
be and is hereby amended and restated in its entirety to be as set forth in
Exhibit A attached hereto. Upon delivery of the $45,000,000 Revolving Credit
Note, dated November 18, 1997, to the Bank, the Bank shall mark the $30,000,000
Revolving Credit Note, dated July 28, 1997, "canceled and replaced by
$45,000,000 Revolving Credit Note, dated November 18, 1997."
8. EXHIBIT B TO THE CREDIT AGREEMENT. Exhibit B to the Agreement shall
be and is hereby amended and restated in its entirety to be set forth in Exhibit
B attached hereto.
-2-
<PAGE> 3
9. REPRESENTATIONS AND WARRANTIES. Willis hereby restates the
representations and warranties made in the Agreement, including but not limited
to Article 3 thereof, on and as of the date hereof as if originally given on
this date.
10. COVENANTS. Willis hereby represents and warrants that it is in
compliance and has complied with each and every covenant set forth in the
Agreement, including but not limited to Articles 5 and 6 thereof, on and as of
the date hereof.
11. CORPORATE AUTHORIZATION AND DELIVERY OF DOCUMENTS. CoreStates shall
have received copies, certified as of the date hereof, of all action taken by
Willis and any other necessary Person to authorize this Amendment and such other
papers as CoreStates shall require.
12. AFFIRMATION. Willis hereby affirms its absolute and unconditional
promise to pay CoreStates Bank the Loans and all other amounts due under the
Agreement and any other Loan Document on the maturity date(s) provided in the
Agreement or any other Loan Document, as such documents may be amended hereby.
13. EFFECT OF AMENDMENT. This Amendment amends the Agreement only to the
extent and in the manner herein set forth, and in all other respects the
Agreement is ratified and confirmed.
14. COUNTERPARTS. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have each caused this Amendment to
be duly executed by their duly authorized representatives as of the date first
above written.
WILLIS LEASE FINANCE CORPORATION
By:_____________________________
Name:
Title:
CORESTATES BANK, N.A.
By:_____________________________
Hugh W. Connelly
Vice President
-3-
<PAGE> 4
EXHIBIT A
REVOLVING CREDIT NOTE
$45,000,000 Philadelphia, PA
November 18, 1997
For Value Received, WILLIS LEASE FINANCE CORPORATION, a California corporation
("WILLIS") hereby promises to pay to the order of CORESTATES BANK, N.A. (the
"BANK"), in lawful currency of the United States of America in immediately
available funds at the Bank's offices located at Broad and Chestnut Streets,
Philadelphia, Pennsylvania, on the Revolver Termination Date, or on such earlier
date or dates as provided in the Credit Agreement described below, the principal
sum of FORTY FIVE MILLION DOLLARS ($45,000,000) or, if less, the then unpaid
principal amount of all Revolving Credit Loans made by the Bank pursuant to the
Credit Agreement.
Willis promises also to pay interest on the unpaid principal amount hereof in
like money at such office from the date hereof until paid at the rates and at
the times provided in the Credit Agreement.
This Note is the Revolving Credit Note referred to in, is entitled to the
benefits of and is secured by security interests referred to in the Credit
Agreement, dated June 12, 1997 by and between Willis and the Bank (as such has
been or may be amended, modified, supplemented, restated or replaced from time
to time, the "CREDIT AGREEMENT"). This Note is subject to voluntary prepayment
and mandatory repayment prior to the Revolver Termination Date, in whole or in
part, as provided in the Credit Agreement.
In case an Event of Default shall occur and be continuing, the principal of and
the accrued interest on this Note may be declared to be due and payable in the
manner and with the effect provided in the Credit Agreement.
Willis hereby waives presentment, demand, protest or notice of any kind in
connection with this Note.
Notwithstanding the face amount of this Note, the undersigned's liability
hereunder shall be limited at all times to the actual aggregate outstanding
indebtedness to the Bank relating to such Bank's Revolving Credit Loans,
including all principal and interest, together with all fees and expenses as
provided in the Credit Agreement, as established by the Bank's books and records
which shall be conclusive absent manifest error.
Capitalized terms used but not defined herein shall have the respective meanings
assigned to them in the Credit Agreement.
-i-
<PAGE> 5
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF
THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO PENNSYLVANIA OR FEDERAL
PRINCIPLES OF CONFLICT LAWS.
WILLIS LEASE FINANCE CORPORATION
By: ________________________________
Name:
Title:
-ii-
<PAGE> 6
EXHIBIT B
BORROWING BASE CERTIFICATE
Date of Certificate: ___________________________
Date of Information: ___________________________
TO: CORESTATES BANK, N.A.
Gentlemen:
This Borrowing Base Certificate is delivered to you pursuant to the terms of
Section 5.1 of the Credit Agreement, dated as of June 12 1997, as currently in
effect. Capitalized terms used without definition below have the same meanings
as they have in the Credit Agreement.
We hereby certify that:
1. No Potential Default or Event of Default has occurred and is continuing as
of the date of this Borrowing Base Certificate.
2. There has been no Material Adverse Change since [insert the date of the
most recent financial statements delivered to the Bank pursuant to the
terms of Section 5.1 of the Credit Agreement], except as disclosed on the
attached schedules.
3. The information set forth on the attached schedules is true, current and
complete as of the date of this Borrowing Base Certificate.
Willis Lease Finance Corporation
By: ____________________________
Name:
Title:
-i-
<PAGE> 7
WILLIS LEASE FINANCE CORPORATION
COMPUTATION OF BORROWING BASE AVAILABILITY
------------------------------
COLLATERAL LOAN VALUE
<TABLE>
<S> <C>
1(a). Equipment (from Schedule A, attached hereto) $_______________
(b) Borrowing Base Percentage x 85%
(c) Collateral Loan Value [(a) x (b)] - $1,375,000 (difference
$_______________ between 85% LTV and LC on Jet Air S/N 725522)
MAXIMUM LOANS
2. Maximum Loans: $45,000,000 $ 45,000.00
CREDIT USAGE
3. Aggregate Loan Balance (principal) at date of certificate $_______________
LOAN AVAILABILITY
4. Line 1(c) minus Line 3 $_______________
5. Line 2 minus Line 3 $_______________
6. Availability (Line 4 or Line 5 whichever is less) $_______________
7. Amount of Loan Requested This Date (if any) $_______________
(Not to exceed line 6)
Certification: Willis Lease Finance Corporation
Date: ______________________ By: _____________________________
</TABLE>
-ii-
<PAGE> 8
WILLIS LEASE FINANCE CORPORATION
NEW COLLATERAL INFORMATION SCHEDULE
FOR BORROWING ON
------------------------------
Willis Lease Finance Corporation has requested this date that a Loan be made to
it by CoreStates Bank, N.A. The following table sets forth information with
respect to items being added to the Collateral with this Request for Loan.
Willis Lease Finance Corporation has delivered the original counterpart of each
lease to CoreStates Bank, N./A. and it represents and warrants hereby that all
other copies of each lease are clearly marked to indicate that each is not the
lessor's original counterpart of that lease.
<TABLE>
<CAPTION>
Physical
Customer Contract Monthly Lease Remaining Gross Equipment Location
Name Number Payment Term(1) Term(2) Remaining(3) Cost(4) of Equipment
- ----------- ---------- ---------- ---------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
----------- ----------
Totals
Willis Lease Finance Corporation
By _____________________________
</TABLE>
- --------
(1) This is the original term of months of the lease.
(2) This the number of months remaining on the lease at the date of this
Schedule.
(3) This is the gross amount remaining payable in respect of the lease minus
the unearned finance charge.
(4) This is the purchase price of the equipment to Willis Corporation as shown
on the invoice of the manufacturer or distributor of the equipment.
<PAGE> 9
EXHIBIT F
DESCRIPTION OF AIRCRAFT, ENGINES AND PROPELLERS
Airframes: Three (3) de Havilland DHC-8-102 turboprop passenger aircraft
bearing U.S. Registration Nos. N811PH, N812PH and N813PH and
Manufacturer's Serial Nos. 023, 026 and 032, respectively.
Engines: Six (6) Pratt & Whitney Model PW120A aircraft engines bearing
Manufacturer's Serial Nos. PC-E120077, PC-E120096, PC-E120086,
PC-120088, PC-E120102 and PC-E120107.
Propellers: Six (6) Hamilton Standard Model 14SF four-blade propellers
bearing Manufacturer's Serial Nos. 861016, 850911, 890711,
851114, 860201 and 860202.
Spare Engines: Three (3) Pratt & Whitney Model PW120A aircraft engines bearing
Manufacturer's Serial Nos. PC-E120140, PC-E120141 and
PC-E120142.
<PAGE> 1
EXHIBIT 10.25
AIRCRAFT SALE AGREEMENT
dated as of November 17, 1997
- between -
FINOVA CAPITAL CORPORATION,
Seller,
- and -
WILLIS LEASE FINANCE CORPORATION,
Buyer.
-----------------
Three (3) de Havilland DHC-8-102 Aircraft
six (6) Pratt & Whitney PW120A Engines
and three (3) Pratt & Whitney PW120A Spare Engines
AIRCRAFT SALE AGREEMENT
-----------------------
<PAGE> 2
THIS AIRCRAFT SALE AGREEMENT, dated as of November17, 1997 (this
"Agreement"), between FINOVA CAPITAL CORPORATION, a Delaware corporation
("Seller"), and WILLIS LEASE FINANCE CORPORATION, a California corporation
("Buyer").
W I T N E S S E T H:
WHEREAS, Seller owns (i) three de Havilland DHC-8-102 airframes (as more
fully identified on Schedule A hereto and in the Leases (as defined below), the
"Airframes"), together with six Pratt & Whitney PW120A engines (as more fully
identified on Schedule A hereto and in the Leases, the "Engines") and six
Hamilton Standard 14SF four blade propellers (as more fully identified on
Schedule A hereto and in the Leases, the" Propellers", and, together with the
Airframes and the Engines, collectively, the "Aircraft"); and (ii) three Pratt &
Whitney 120A engines (as more fully identified on Schedule A hereto and in the
Leases, the "Spare Engines", and the Spare Engines, together with the Aircraft,
collectively the "Equipment");
WHEREAS, the Equipment is leased by Seller to Horizon Air Industries,
Inc., a
<PAGE> 3
Washington corporation ("Lessee") pursuant to four Lease Agreements (as more
fully described in Schedule B hereto, the "Leases"); and
WHEREAS, Seller wishes to sell the Equipment to Buyer and Buyer wishes
to purchase the Equipment from Seller, and simultaneously therewith Seller
wishes to assign to Buyer all right, title and interest of Seller under the
Leases and Buyer wishes to assume all of the obligations of Seller under the
Leases in accordance with the terms and conditions of this Agreement and the
Assignments.
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:
Section 1. Definitions. The following terms, when capitalized, shall
have the following meanings for all purposes of this Agreement, except where the
context otherwise requires:
"811 Aircraft" shall mean the de Havilland DHC-8-102 turboprop
passenger aircraft bearing U.S. Registration N811PH and Manufacturer's Serial
No. 023.
"812 Aircraft" shall mean the de Havilland DHC-8-102 turboprop
passenger
<PAGE> 4
aircraft bearing U.S. Registration N812PH and Manufacturer's Serial No. 026.
"813 Aircraft" shall mean the de Havilland DHC-8-102 turboprop
passenger aircraft bearing U.S. Registration N813PH and Manufacturer's Serial
No. 032.
"Agreed Aircraft Value" shall mean, for the 811 Aircraft, $3,500.000.00,
for the 812 Aircraft, $3,850,000.00, and for the 813 Aircraft, $3,850,000.00.
"Aircraft" shall have the meaning set forth in the first recital hereto.
"Airframe" shall have the meaning set forth in the first recital hereto.
"Acknowledgments of Delivery and Sale" shall mean the four
acknowledgments of sale, each in the form attached hereto as Exhibit "A."
"Assignments" means the four Assignment and Assumption Agreements
between Buyer and Seller each in the form attached hereto as Exhibit "C."
"Bills of Sale" shall mean the four AC Form 8050-2 Bills of Sale (the
"FAA Bills of Sale") and the long form Warranty Bills of Sale, each in the form
attached hereto as Exhibit "B."
"Business Day" shall mean any day other than a Saturday, Sunday or day
on which commercial banking institutions are required or authorized by law to
close in New York City, New York, or Phoenix, Arizona or San Francisco,
California.
"Certificates and Agreements" means the Four Certificates and Agreements
executed and delivered by Lessee, Seller and Buyer, each in the form attached
hereto as Exhibit "D".
<PAGE> 5
"Certificates of Loss and Indemnity Agreements" means the two
Certificates of Loss and Indemnity Agreements executed and delivered by Seller,
each in the form attached hereto as Exhibit "E".
"Closing Date" shall have the meaning set forth in Section 2 hereof.
"Consents and Acknowledgments" means the four Consents and
Acknowledgments, executed and delivered by Lessee, each in the form attached
hereto as Exhibit "F".
"Engines" shall have the meaning set forth in the first recital hereto.
"Equipment" shall have the meaning set forth in the first recital
hereto.
"FAA" shall mean the Federal Aviation Administration of the Department
of Transportation of the United States and any successor agencies and
authorities.
"Leases" shall have the meaning set forth in the second recital hereto.
"Lease Documents" means the Leases, together with each document listed
on Schedule II to the Assignments, in each case as amended and supplemented
through the date hereof, but only as applicable to the Leases.
"Manuals" shall mean the logs, manuals and data, and inspection,
modification and overhaul required to be maintained and actually maintained by
Lessee under the Leases.
"Operative Documents" shall mean this Agreement, the Bills of Sale, the
Acknowledgments of Delivery and Sale, the Assignments, the Consents and
<PAGE> 6
Acknowledgments, the Certificates and Agreements and the Certificates of Loss
and Indemnity Agreements.
"Propellers" shall have the meaning set forth in the first recital
hereto.
"Purchase Price" shall have the meaning set forth in Section 2 hereof.
"140 Spare Engine" shall mean the Pratt & Whitney Model PW 120A aircraft
engine bearing Manufacturer's Serial No. PC-E120140.
"141 Spare Engine" shall mean the Pratt & Whitney Model PW 120A aircraft
engine bearing Manufacturer's Serial No. PC-E120141.
"142 Spare Engine" shall mean the Pratt & Whitney Model PW 120A aircraft
engine bearing Manufacturer's Serial No. PC-E120142.
"Spare Engine Agreed Value" shall mean, for the 140 Spare Engine,
$366,666.67, for the 141 Spare Engine, $366,666.67, for the 142 Spare Engine,
$366,666.67.
"Spare Engines" shall have the meaning set forth in the first recital
hereto.
Terms defined in the Leases, unless otherwise defined herein, shall be
used herein as therein defined.
Section 2. Sale of Equipment; Purchase Price; Inspection and Deposit.
(a) Sale of Equipment. Subject to the terms of this Agreement, in no
event later than November 25, 1997 (the "Closing Date"), Seller shall sell the
Equipment and
<PAGE> 7
Manuals to Buyer, and Buyer hereby shall purchase the Equipment and Manuals from
Seller; provided, however, that in the event that the closing of the sale of any
Aircraft or the Spare Engines on the scheduled date could, due to the location
of such Aircraft and Spare Engines on such date, impose on the Buyer liability
for Taxes pursuant to Section 6 or for any other reason mutually agreeable to
the parties hereto, Buyer may by notice given to Seller before the scheduled
closing for any Aircraft and Spare Engines, reschedule the Closing Date for such
Aircraft and Spare Engines to the next Business Days on which the subject
Aircraft or Spare Engine shall be in a location which does not impose on the
Buyer liability for Taxes pursuant to Section 6 or are otherwise mutually
agreeable to Buyer and Seller. The obligation of Seller and Buyer to effect such
sale and purchase shall be subject only to the compliance or waiver of their
respective conditions precedent set forth in Section 3 hereof. Time is of the
essence concerning the Closing Date. In no event shall the Closing Date be
rescheduled beyond December 8, 1997. The Spare Engines shall be sold by the
Seller to the Buyer at one Closing.
(b) Purchase Price. The purchase price for the Equipment and Manuals
shall be $12,300,000.00 (the "Purchase Price"). The Purchase Price or the Agreed
Aircraft Value or Spare Engine Agreed Value, if less than all of the Equipment
is sold on the Closing Date, less the Deposit required to be paid as described
in Section 2(d) hereof, shall be paid by Buyer to the Seller on the Closing Date
for such Aircraft and Spare
<PAGE> 8
Engines in immediately available funds by wire or intrabank transfer for deposit
to the account specified by Seller in writing. The Purchase Price or the Agreed
Aircraft Value or Spare Engine Agreed Value shall be paid simultaneously with
compliance with the other conditions precedent set forth in Section 3 hereof. If
the Closing Date with respect to any Aircraft or Spare Engine is rescheduled in
accordance with the proviso of the first sentence of Section 2(a) hereof, then
the Purchase Price to be paid for such Aircraft or Spare Engine shall be
respectively, the Agreed Aircraft Value and the Spare Engine Agreed Value.
(c) Inspection. Seller has contacted Lessee and arranged for the
Equipment and the manuals to be made available to Buyer, and/or Buyer's
representatives in order for the Buyer to inspect the Equipment and the Manuals.
The inspection has been completed, and Buyer has notified Seller that
the Equipment is in satisfactory condition and that the Buyer's Board of
Directors has approved this transaction.
(d) Deposit. Buyer has previously furnished to the Seller a deposit in
the sum of $100,000.00 (the "Deposit"). The Deposit shall be refundable only if
the conditions precedent set forth in Section 3(b) below have not been satisfied
or waived by the Buyer on or before the Closing Date. The Deposit shall be
applied by the Seller towards the payment of the Purchase Price or Agreed
Aircraft Value and Spare Engine Agreed Values as set forth in Section 2(b) above
or, if the Buyer fails to
<PAGE> 9
perform its obligations to purchase the Equipment in accordance with this
Agreement, retained by Seller.
Section 3. Conditions Precedent.
(a) The obligation of the Seller to sell each respective Aircraft or the
Spare Engines on each respective Closing Date therefor, pursuant to Section 2
hereof shall be subject only to the following conditions precedent, unless, in
any case, waived by the Seller in its sole discretion.
(i) Buyer shall have paid in full the Purchase Price or the
respective Aircraft Agreed Value and the respective Spare Engine Agreed
Value in the manner provided in Section 2 hereof.
(ii) Buyer shall have executed and delivered the Assignments.
(iii) Lessee shall have executed and delivered the Consents and
Acknowledgments.
(iv) No Event of Loss, or event which, with the passing of time
would become an Event of Loss under the Leases shall have occurred and
be continuing.
(v) The representations and warranties of Buyer contained in
Section 5 hereof shall be true and accurate in all material respects on
and as of the respective Closing Date.
(vi) Buyer shall have executed and delivered the
<PAGE> 10
Acknowledgments of Delivery and Sale.
(vii) Buyer shall have delivered to Seller a certificate of its
Secretary or Assistant Secretary with respect to the incumbency of the
officers who executed the Operative Documents and any other document
required to be executed on behalf of it pursuant to this Agreement.
(viii) Buyer shall have delivered to Seller evidence of due
authorization for the purchase of the Equipment by the Board of
Directors of the Buyer.
(ix) Seller shall have received a Certificate of Insurance in
accordance with Section 11 hereof and in accordance with the Consents
and Acknowledgments.
(x) Seller shall have received the consents of DeHavilland, .
Inc. and Pratt & Whitney Canada, Inc. in substantially the forms
attached hereto as Exhibit "G."
(b) The obligation of Buyer to purchase each respective Aircraft
and the Spare Engines and to pay the respective Aircraft Agreed Value and Spare
Engine Agreed Value thereof on the respective Closing Date therefor, pursuant to
Section 2 hereof, shall be subject only to the following conditions precedent
unless, in any case, waived by Buyer in its sole discretion:
<PAGE> 11
(i) Seller shall have executed and tendered to Buyer the Bills
of Sale.
(ii) No Event of Loss, or event which, with the passing of time
would become an Event of Loss shall have occurred and be continuing
under the Leases.
(iii) Lessee shall have executed and delivered the Consents and
Acknowledgments.
(iv) Seller shall have executed and delivered the Assignments.
(v) The representations and warranties of the Seller contained
in Section 5 hereof shall be true and accurate in all material respects
on and as of the respective Closing Date.
(vi) Buyer shall have received evidence of all necessary
approvals of the FAA and any other governmental or nongovernmental
consents, approvals, permits or licenses of any nature whatsoever
necessary for the consummation of the transaction contemplated hereby.
(vii) Seller shall have executed and delivered the
Acknowledgments of Delivery and Sale.
(viii) Lessee shall not on the respective Closing Date be in
default in making any payment under the Leases and no Event of Default,
or event which, with the giving of notice or the passage of time would
<PAGE> 12
become an Event of Default, under the Leases shall have occurred and be
continuing.
(ix) Buyer shall have received a report of the Lessee's
independent insurance brokers or other evidence reasonably satisfactory
to Buyer that Buyer and its Lender are, or effective upon the respective
Closing Date will become, additional insureds and to the extent provided
for in the Leases, the Lender and the Buyer shall be named as loss
payee, as their interests may appear, on the public liability and
property damage insurance maintained by Lessee in accordance with
Section 11 of the Leases.
(x) Buyer shall have received Form UCC-3s executed by Seller
assigning the precautionary UCC-1 financing statements filed in
Washington with respect to the Equipment.
(xi) Buyer shall have received an opinion from Daugherty, Fowler
& Peregrin, special aviation counsel to Seller and Buyer, addressed to
Buyer.
(xii) Buyer shall have received an original executed copy of the
Leases, except for the Lease for the 811 Aircraft, and the 813 Aircraft,
as to which Seller will have provided a Certificate of Loss and
Indemnity Agreement.
<PAGE> 13
(xiii) Buyer shall have received a Certificate and Agreement in
respect of the respective Leases.
(xiv) Seller shall have delivered to Buyer a certificate of its
Assistant Secretary with respect to the incumbency of the officers who
executed the Operative Documents and any other document required to be
executed on behalf of it pursuant to this Agreement.
(xv) Seller shall have delivered to Buyer evidence of due
authorization for the sale of the Equipment by the Board of Directors of
the Buyer.
(xvi) Buyer shall have obtained a certificate of total loss
insurance for the Equipment in form and substance satisfactory to the
Buyer. (xvii) Buyer shall have received the consents of DeHavilland,
Inc. and Pratt & Whitney Canada, Inc. in substantially the forms
attached hereto as Exhibit "G".
Section 4. Allocation of Payments. Following each Closing Date, upon the
consummation of the transactions contemplated hereby the Buyer shall be entitled
to all of the benefits to which the Seller would have otherwise been entitled as
the owner of the Equipment being sold and as lessor under the Leases being
assigned, on
<PAGE> 14
such Closing Date in connection with any payment of Basic Rent or Supplemental
Rent which shall be paid under the Leases; provided, however, that Buyer shall,
on the Closing Date, be entitled to a pro rata portion of the Basic Rent payable
by Lessee for the Basic Rent paid on November 1, 1997, in advance for the month
of November, 1997. The Buyer acknowledges that under the Assignments, the Seller
excluded from the rights assigned thereunder, and retained, rights to any
liability insurance proceeds or indemnification under any Lease Document to
which Seller is entitled with respect to claims or matters occurring prior to
each Closing Date, and the Seller acknowledges that except for such specifically
retained rights, upon the consummation of the transactions contemplated hereby
it will have transferred to the Buyer all of its right, title and interest with
respect to the Equipment and the Leases, as more fully set forth in the
Assignments. Accordingly, to the extent that any party hereto shall receive any
payment arising in connection with the Equipment or the Leases to which any
other party hereto is entitled (in whole or in part) because of such allocation
of rights, such payments (or portion thereof) shall be held in trust for the
benefit of, and promptly delivered to, the party entitled thereto.
Section 5. Representations and Warranties.
(a) Representations and Warranties of Seller. Seller hereby represents
and warrants to Buyer that:
<PAGE> 15
(i) Seller is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware and has the
full power and authority to enter into, legally bind itself by, and
perform its obligations under, each Operative Document to which it is a
party;
(ii) each Operative Document to which it is a party has been
duly authorized by Seller;
(iii) this Agreement has been duly executed and delivered by
Seller and constitutes, and each other Operative Document to which it is
a party when executed and delivered by Seller will constitute, the
legal, valid and binding obligation of Seller, enforceable in accordance
with their respective terms, subject only to bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally and to general equitable principles;
(iv) the execution, delivery and performance by Seller of each
Operative Document to which it is a party are not in violation of its
certificate of incorporation or by-laws or of any indenture, mortgage,
contract or other agreement to which Seller is a party or by which it is
bound or of any order or judgment applicable to Seller or any law,
government rule or regulation of the United States or any state thereof
applicable to its business generally and, except for the filing for
<PAGE> 16
recordation of the FAA Bills of Sale and the Assignments, do not require
the consent or approval of, or the giving of notice to, the registration
with, or the taking of any other action in respect of, any governmental
authority;
(v) as of each Closing Date, Seller will be the legal and
beneficial owner of the Equipment being sold on such date and will
transfer to Buyer good and marketable title to such Equipment, free and
clear of all Liens other than the Lien of the Leases and Liens permitted
under Section 6 thereof (other than Lessor Liens);
(vi) Seller has delivered to Buyer complete and correct
originals, original counterparts of the Leases, except of the Lease for
the 811 Aircraft and the 813 Aircraft, as to which Seller will have
provided a Certificate of Loss and Indemnity Agreement, and no other
agreements, instruments or documents exist between Seller and the Lessee
relating to the Equipment and the Leases that are in force and effect.
The Leases constitute the entire agreements between the Lessee and the
Seller with respect to the Equipment and no other assignments,
amendments, modifications, waivers or consents have been entered into
with respect to the Leases and Seller is not, and on each Closing Date
will not be, in default of any provisions binding on it contained in the
Lease being
<PAGE> 17
assigned on such date.
(viii) Seller has delivered to Buyer a Certificate and Agreement
with respect to the respective Leases.
(vii) To the best knowledge of Seller, no Event of Loss has
occurred with respect to the Equipment, and no Event of Default has
occurred and is continuing under the Leases.
(viii) Seller has not previously sold, assigned, pledged or
otherwise transferred, or purported to sell, assign, pledge or otherwise
transfer, any of its right, title and interest in the Equipment or the
Leases.
(ix) No suits or proceedings are pending or, to the knowledge of
Seller, threatened against or affecting Seller or the Equipment in any
court that might have a material adverse effect on the Equipment or on
the ability of Seller to perform its obligations hereunder.
(x) The Seller has not registered in Canada for goods and sales
tax purposes.
(b) Representations and Warranties of Buyer. Buyer hereby represents and
warrants to Seller that:
(i) Buyer is a corporation duly organized and validly existing
in good standing under the laws of the State of California and has full
<PAGE> 18
power and authority to enter into, legally bind itself by, and perform
its obligations under, each Operative Document to which it is a party;
(ii) each Operative Document to which it is a party has been
duly authorized by Buyer;
(iii) this Agreement has been duly executed and delivered by
Buyer and constitutes, and each other Operative Document to which it is
a party when executed and delivered by Buyer will constitute, the legal,
valid and binding obligation of Buyer, enforceable in accordance with
their respective terms, subject only to bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally and to general equitable principles; and
(iv) the execution, delivery and performance by Buyer of each
Operative Document to which it is a party are not in violation of its
certificate of incorporation or by-laws or of any indenture, mortgage,
contract or other agreement to which Buyer is a party or by which it is
bound or of any order or judgment applicable to Buyer or any law,
government rule or regulation of the United States or any state thereof
applicable to its business generally and do not require the consent or
approval of, or the giving of notice to, the registration with or the
taking of any other action in respect of any governmental authority.
<PAGE> 19
(v) Buyer is a "citizen of the United States" within the meaning
of 49 U.S.C.Section 40102 (a)(15).
(vi) No suits or proceedings are pending or, to the knowledge of
Buyer, threatened against or affecting Buyer in any court that might
have a material adverse effect on the ability of Buyer to perform its
obligations hereunder.
(c) Seller confirms that acceptance by it of payment of the Purchase
Price or the Aircraft Agreed Value for each such Aircraft or the Spare Engine
Agreed Value for the Spare Engines pursuant to Section 2 hereof on the Closing
Date, will constitute a certification by Seller that its representations and
warranties contained in this Section 5 are true and accurate on and as of the
Closing Date for each such Aircraft and the Spare Engines. Buyer confirms that
payment by it of such Purchase Price or the respective Agreed Aircraft Value and
Spare Engine Agreed Value on such Closing Date will constitute a certification
by Buyer that its representations and warranties contained in this Section 5 are
true and accurate on and as of the Closing Date for each such Aircraft and the
Spare Engines.
(d) The representations and warranties contained in this Section 5 shall
survive the sale of the Equipment hereunder and the execution and delivery of
the agreements contemplated hereby.
<PAGE> 20
(e) Disclaimer. Other than the express representations and warranties of
Seller set forth above in this Section 5 and in the Bills of Sale, the Equipment
and the Manuals are sold, "AS IS, WHERE IS" and "WITH ALL FAULTS," AND BUYER
WAIVES, RELEASES AND RENOUNCES ALL OTHER WARRANTIES, CONDITIONS, OBLIGATIONS AND
LIABILITIES OF SELLER AND ALL RIGHTS, CLAIMS AND REMEDIES OF BUYER AGAINST
SELLER, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO ANY
NON-CONFORMANCE, OR DEFECT IN THE EQUIPMENT INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
AIRWORTHINESS OR CONDITION OF THE EQUIPMENT OR THE SUITABILITY OF THE EQUIPMENT
FOR USE OR FOR A SPECIFIC PURPOSE, OPERATION OR PERFORMANCE, OR ANY LIABILITY,
RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM THE ACTIVE, PASSIVE
OR IMPUTED NEGLIGENCE OR STRICT PRODUCTS LIABILITY OF SELLER, WHETHER ARISING BY
OPERATION OF LAW, COURSE OF DEALING OR USAGE OF TRADE OR OTHERWISE.
Section 6. Taxes. (a) Buyer and Seller shall endeavor to complete this
<PAGE> 21
transaction in a manner to avoid or minimize any transaction taxes. However, if
such taxes are unavoidable Buyer shall be responsible for the payment of any and
all sales, use, excise, transfer, gross receipts or any other similar taxes,
fees or charges (individually a "Tax", and collectively called "Taxes"), imposed
by any taxing jurisdiction or authority arising out of the sale and delivery of
the Equipment hereunder. Notwithstanding anything herein to the contrary, Buyer
shall not be responsible for the payment of: (i) taxes based upon, measured by
or with respect to the net or gross income, items of tax preference or minimum
tax or excess profits, receipts, capital, franchise, net worth or conduct of
business or other similarly-based Taxes of Seller; (ii) taxes resulting from any
act or omission of Seller prohibited by or constituting a default under the
Operative Documents, and (iii) taxes resulting from the willful misconduct or
gross negligence of Seller.
Section 7. Assignment of Manufacturer's Warranties. On each Closing
Date, pursuant to the terms of this Agreement, Seller irrevocably assigns to
Buyer all of Seller's rights under any warranty, express or implied, service
policy or product agreement of any manufacturer, of any maintenance and overhaul
agency or of any subcontractor, supplier or vendor of any item of the Equipment
being sold on such date to the extent that such rights relate to any time period
after such Closing Date, are assignable and are not extinguished as a result of
this Agreement or such
<PAGE> 22
assignment. From time to time upon the reasonable request of Buyer, Seller shall
give notice to any such manufacturer, maintenance and overhaul agency,
subcontractor, supplier or vendor of the assignment of such warranties to Buyer.
Seller shall enforce on Buyer's behalf all such rights that are not assignable
or would be extinguished as a result of this Agreement or such assignment,
provided that Buyer shall pay in advance any third party costs and expenses
incurred by Seller in rendering such assistance.
Section 8. Indemnification. (i) Seller shall indemnify, defend and hold
the Buyer, its successors and assigns, and its and their respective directors,
officers and employees, harmless from and against the payment of any and all
liabilities, obligations, claims, demands, judgments, penalties, causes of
action, damages, costs, losses and expenses (including, but not limited to,
attorneys' fees and court costs) (collectively, "Losses") arising out of or
pertaining to (a) the failure of Seller to perform or observe any of its
obligations as Lessor under any of the Leases at any time before any Closing
Date on which such lease is being assigned hereunder, or under any other
agreement entered into by Seller in connection with the transactions
contemplated hereby or (b) the breach of any representation or warranty of
Seller set forth in or incorporated by reference in any Operative Document. (ii)
The Buyer shall indemnify, defend and hold Seller, its successors and assigns,
and its and their respective directors, officers, and employees harmless from
and against the payment of
<PAGE> 23
any and all Losses arising out of or pertaining to (a) the failure of the Buyer
to perform or observe any of its obligations as Lessor under any of the Leases
at any time after any Closing Date on which such lease is being assigned
hereunder, or under any other agreement entered into by the Buyer in connection
with the transactions contemplated hereby or (b) the breach of any
representations or warranty of Buyer set forth in or incorporated by reference
in any Operative Document.
Section 9. Broker's Commissions. Seller and Buyer each represent that,
it has not directly or indirectly employed or otherwise procured any broker in
connection with the sale of the Equipment hereunder. Accordingly, each party
hereto agrees that should any claim be made for commissions or other amounts by
any other broker or brokers by or through or on account of actions of that
party, that party shall hold the other party free and harmless from any and all
claims and liabilities and expenses in connection therewith.
Section 10. Expenses. Except as provided in Section 8 of this Agreement,
each party hereto will bear and be responsible for all costs and expenses
incurred or to be incurred by it in connection with this Agreement and the
transactions contemplated hereby, including but not limited to outside legal
counsel, accounting advisors, equipment appraisers and employee incurred
expenses, if any, associated with
<PAGE> 24
consummating the purchase contemplated herein. Buyer agrees with Seller that as
between Seller and Buyer, fees and expenses of FAA Counsel shall be shared
equally.
Section 11. Insurance. Buyer shall use reasonable efforts to cause
Lessee and any other operator of the Aircraft to continue, at no cost to Seller
or Buyer, to name Seller as an additional named insured under the liability
insurance policy or policies required to be maintained by Lessee in accordance
with the terms of the Leases provided that Seller shall not be required to be
named as an additional named insured after the later of (i) two years and three
months after the respective Closing Date or (ii) completion of the most
comprehensive scheduled airframe overhaul or "D" check of the Aircraft under
Lessee's maintenance program next occurring after the Closing Date.
Section 12. Miscellaneous.
(a) Notice. All notices required or permitted hereunder shall be in
writing and may be sent either by personal delivery or internationally
recognized overnight courier service, addressed as follows:
If to Buyer:
Willis Lease Finance Corporation
180 Harbor Drive, Suite 200
Sausalito, California 94965
Attn: General Counsel
<PAGE> 25
If to Seller:
FINOVA Capital Corporation
1850 North Central Avenue
Phoenix, Arizona 85002
Attention: Vice President of Operations, Transportation Finance
or to such other address as either party advises the other from time to time
through a notice given in accordance with the provisions of this Section 12(a).
Any such notice shall be effective and shall be deemed to have been given when
received at the address as set forth above, or as such address is modified by
notice given as set forth above.
(b) Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall be an original, and all counterparts together shall be
but one and the same Agreement.
(c) Applicable Law; Jurisdiction. THIS AGREEMENT SHALL BE DEEMED TO HAVE
BEEN NEGOTIATED AND MADE IN, AND SHALL BE GOVERNED AND INTERPRETED UNDER THE
LAWS OF, THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE BY RESIDENTS
THEREOF TO BE ENTIRELY PERFORMED THEREIN. The parties hereto hereby agree that
all actions or proceedings arising directly or indirectly out of this Agreement
may be litigated in any of the United States District Court for the Southern
District of New York, or the Supreme Court of the State of New York,
<PAGE> 26
New York County. The parties hereto hereby expressly submit and consent in
advance to any of such jurisdictions and venue in any action or proceeding
commenced by either party in any of such courts, agree that jurisdiction and
venue is proper in such courts, and hereby waive personal service of the summons
and complaint, or other process or papers issued therein, and agree that such
service of the summons and complaint may be made by registered mail, return
receipt requested, addressed to either party, at the address set forth in
Section 12(a) hereof. Each party waives any claim that any such jurisdiction, is
an inconvenient forum or an improper forum based on lack of venue. Should either
party, after being so served, fail to appear or answer any summons, complaint,
process or paper so served within 30 days after the mailing thereof, such party
acknowledges that, as a result thereof, an order and/or judgment may be entered
by the other party against it as demanded or pleaded for in such summons,
complaint, process or papers. The choice of forum set forth herein shall not be
deemed to preclude the enforcement by either party of any judgment in any other
appropriate jurisdiction or the bringing of an action in any other appropriate
jurisdiction.
(d) Waiver of Trial by Jury. BUYER AND SELLER IRREVOCABLY WAIVE THE
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE ANY
PROVISION OF THIS AGREEMENT, ANY OPERATIVE DOCUMENT OR ANY
<PAGE> 27
AGREEMENT EXECUTED IN CONNECTION HEREWITH.
(e) Captions and Paragraph Headings. Captions and paragraph headings
used herein are for convenience only and are not a part of this Agreement and
shall not be used in construing it.
(f) Severability. In the event that any one or more of the provisions of
this Agreement shall be invalid, illegal or unenforceable in any respect or in
any jurisdiction, the validity, legality and enforceability of the remaining
provisions contained herein or of the same provisions in any other jurisdiction
shall not, in any way, be affected or impaired thereby.
(g) Further Assurances. Seller and Buyer will promptly, at any time and
from time to time, execute and deliver to each other such further instruments
and documents and take such further action as may be required by law or as they
may each reasonably request to establish, maintain and protect their respective
rights and remedies and to carry out the intent of the parties under this
Agreement.
(h) Written Changes Only. No term or provision of this Agreement may be
changed or waived orally, but only by an instrument in writing signed by the
parties hereto.
(i) Exclusiveness. This Agreement and the Operative Documents are the
complete and exclusive statement of the parties hereto with respect to the
subject matter hereof and supersede all prior oral and written communications,
proposals,
<PAGE> 28
agreements, representations, statements, negotiations and undertakings, whether
express or implied, between the parties hereto with respect to the subject
matter hereof.
(j) Terms and Definitions. The terms and definitions, as herein
contained, shall include the singular and/or plural, masculine, feminine and/or
neuter, successors and/or permitted assigns wherever the context so requires or
admits.
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement through their respective duly authorized officers, all as of the day
and year first above written.
FINOVA CAPITAL CORPORATION
By: ______________________________________
Title: ___________________________________
WILLIS LEASE FINANCE CORPORATION
By: ______________________________________
Title: ___________________________________
<PAGE> 30
SCHEDULE A
Description of Aircraft
Airframes: Three (3) de Havilland DHC-8-102 turboprop passenger aircraft
bearing U.S. Registration Nos. N811PH, N812PH and N813PH,
respectively, and Manufacturer's Serial Nos. 023, 026, and
032, respectively.
Engines: Six (6) Pratt & Whitney Model PW120A aircraft engines bearing
Manufacturer's Serial No. PC-E120077, PC-E120096, PC-E120086,
PC-120088, PC-E120102 and PC-E120107.
Propellers: Six (6) Hamilton Standard Model 14SF four-Blade propellers
bearing Manufacturer's Serial Nos. 861016, 850911, 890711,
851114, 860201 and 860202.
Spare Engines: Three (3) Pratt & Whitney Model PW120A aircraft engines
bearing Manufacturer's Serial Nos. PC-E120140, PC-E120141 and
PC-E120142.
<PAGE> 31
SCHEDULE B
Description of Lease Agreements set forth on Annex 1 hereto
<PAGE> 32
EXHIBIT A
ACKNOWLEDGMENT OF DELIVERY AND SALE
By this Acknowledgment FINOVA Capital Corporation, a Delaware
corporation ("Seller"), and Willis Lease Finance Corporation, a California
corporation ("Buyer"), acknowledge that pursuant to the Aircraft Sale Agreement
dated as of November ___, 1997 between Seller and Buyer (the "Sale Agreement"),
Seller did on November __, 1997 deliver to Buyer and Buyer did accept and make
payment for the [Aircraft and Spare Engines] (capitalized terms not defined
herein shall have the meanings specified therefore in the Sale Agreement) and
that accordingly as of the date hereof Seller's title to such property has by
delivery passed from Seller to Buyer and that the Closing Date as defined and
set forth in the Sale Agreement has occurred.
This Acknowledgment of Delivery and Sale may be signed in one or more
counterparts with the same effect as if the signatures to each counterpart were
upon a single instrument. All counterparts shall be considered an original.
IN WITNESS WHEREOF, the undersigned have duly executed this
Acknowledgment of Delivery and Sale as of this ___, day of November, 1997.
WILLIS LEASE FINANCE FINOVA CAPITAL CORPORATION
CORPORATION
By: ________________________ By: __________________________
Title: _____________________ Title: _______________________
<PAGE> 33
EXHIBIT B
WARRANTY BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS:
THAT FINOVA CAPITAL CORPORATION ("Seller"), a Delaware corporation, is the owner
of the full legal and beneficial title to the equipment (the "Assets") described
on Annex I hereto:
THAT Seller, in consideration of the sum of $10.00 and other good and valuable
consideration in hand paid by Willis Lease Finance Corporation, a California
corporation ("Buyer"), the receipt and sufficiency of which are hereby
acknowledged, hereby grants, bargains, sells, conveys, transfers and sets over
unto said Buyer pursuant to the Aircraft Sale Agreement dated as of November __,
1997, between Seller and Buyer, all of the Seller's right, title and interest in
the Assets with all rights and privileges of ownership thereof.
THAT Seller hereby warrants to Buyer, its successors and assigns, that there is
hereby conveyed to Buyer on the date hereof good and marketable title to the
Assets, free and clear from all liens, charges and encumbrances of any nature
whatsoever, other than the Lease and Liens permitted under Section 6 of the
Lease (other than Lessor Liens). Seller agrees with Buyer and its successors and
assigns that it will warrant and defend such title forever against all claims
and demands whatsoever.
This Bill of Sale shall be governed by the laws of the State of New York
(without regard to any conflicts of law rules which might result in the
application of the laws of any other jurisdiction).
<PAGE> 34
IN WITNESS WHEREOF, this Bill of Sale has been duly executed this day of
November, 1997.
FINOVA CAPITAL CORPORATION
By: __________________________________
Title: _______________________________
<PAGE> 35
ANNEX I TO BILL OF SALE
THE EQUIPMENT
I. AIRCRAFT
--------
Description: DHC-8-102
Serial No.: 023
Registration No.: N811PH
Engine Description: PW120A
Engine Serial Nos.: PC-E120077
PC-E120096
Propeller Description: 14SF-7
Propellers Serial Nos.: 861016
850911
<PAGE> 36
ANNEX I TO BILL OF SALE
THE EQUIPMENT
I. AIRCRAFT
--------
Description: DHC-8-102
Serial No.: 026
Registration No.: N812PH
Engine Description: PW120A
Engine Serial Nos.: PC-E120086
PC-E120088
Propeller Description: 14SF-7
Propellers Serial Nos.: 851114
890711
<PAGE> 37
ANNEX I TO BILL OF SALE
THE EQUIPMENT
I. AIRCRAFT
--------
Description: DHC-8-102
Serial No.: 032
Registration No.: N813PH
Engine Description: PW120A
Engine Serial Nos.: PC-E120102
PC-E120107
Propeller Description: 14SF-7
Propellers Serial Nos.: 860202
860201
<PAGE> 38
ANNEX I TO BILL OF SALE
THE EQUIPMENT
I. SPARE ENGINES
-------------
Description: Pratt & Whitney Model PW120A
Serial No.: PC-E120140
Description: Pratt & Whitney Model PW120A
Serial No.: PC-E120141
Description: Pratt & Whitney Model PW120A
Serial No.: PC-E120142
<PAGE> 39
EXHIBIT C
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Assignment Agreement"), dated
as of November , 1997, by FINOVA CAPITAL CORPORATION, a Delaware corporation
("Assignor"), and WILLIS LEASE FINANCE CORPORATION, a California Corporation
("Assignee").
WHEREAS, Assignor and Assignee are parties to an Aircraft Sale
Agreement, dated as of November , 1997 (the "Aircraft Sale Agreement"),
providing for the purchase and sale of certain assets described therein; and
WHEREAS, the Aircraft Sale Agreement provides, among other things, for
the execution and delivery of an assignment and assumption to effect the sale by
Assignor to Assignee of the right, title and interest of Assignor in and to, and
the assumption by Assignee of the obligations of Assignor under the Lease and
other Lease Documents;
NOW, THEREFORE, in consideration of the promises herein made and subject
to the terms and conditions herein set forth, the parties hereto agree as
follows:
1. Definitions Capitalized terms used herein without definition shall
have the meanings ascribed thereto in the Aircraft Sale Agreement. The following
terms, as used herein, have the following respective meanings:
"Aircraft Sale Agreement" shall have the meaning ascribed thereto in the
first "WHEREAS" clause to this Agreement.
"Lease" means each Lease described on Schedule 1 hereto.
"Lease Documents" means the Lease, together with each document listed on
Schedule II hereto, in each case as amended and supplemented through the date
hereof, but only as applicable to the Lease.
"Lessee" means Horizon Air Industries, Inc., a Washington corporation.
"Lessor's Liens" shall have the meaning ascribed thereto in the Leases.
"Transaction" means, collectively, the transactions contemplated by the
Lease Documents.
<PAGE> 40
"Transferred Rights" means all of Assignor's right, title and interest
in and to the following: (i) Assignor's interest in the Lease, (ii) Assignor's
interest in the other Lease Documents, and (iii) Assignor's interest in the
Transaction, but excluding any rights of Assignor to any liability insurance
proceeds or indemnification under any Lease Document to which Assignor is
entitled with respect to claims or matters occurring prior to the Closing Date.
2. Assignment As of the date hereof, Assignor irrevocably hereby sells,
assigns, transfers and conveys to Assignee all of Assignor's right, title and
interest in and to the Transferred Rights free and clear of liens other than the
Leases and Liens permitted under Section 6 of the Leases (other than Lessor
Liens).
3. Assumption As of the date hereof, Assignee hereby accepts the
foregoing assignment and, on and after such date, agrees: (a) to assume and be
bound by all of the terms of, and to undertake all of the obligations and
liabilities of a Lessor arising on or after the date hereof which are expressly
set forth in, the respective Lease Documents to which the Lessor is a party to
the same extent as if Assignee were a party to such Lease Documents, and (b)
that is shall be deemed to be a party to the Lease Documents to which the Lessor
is a party, and all references to the Lessor in the Lease Documents shall be
deemed to include Assignee. Assignor shall not be responsible to any person for
the discharge or performance of any duties or obligations to be performed or
discharged by Assignor pursuant to or in connection with the Lease Documents on
or after the date hereof except as otherwise specified in the Aircraft Sale
Agreement. Assignee shall not be responsible to any person for the discharge or
performance of any duties or obligations to be performed or discharged by
Assignor pursuant to or in connection with the Lease Documents prior to the date
hereof.
4. Counterparts This Agreement may be executed in or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
5. Successor and Assigns The terms of this Agreement shall be binding
upon, and inure to the benefit of, the parties hereto and their respective
successor and assign.
6. Governing Law This Agreement shall be construed and enforced in
accordance with the laws of the State of New York.
7. Amendment No waiver, modification or amendment of any provision of
this Agreement shall be effective unless it is in writing and signed by the
party against which it is sought to be enforced.
8. Further Assurances Each party agrees that from time to time after the
<PAGE> 41
date hereof, it shall execute and deliver or cause to be executed and delivered
such instruments, documents and papers, and take all such further action as may
be reasonably required in order to consummate fully the purposes of the
Agreement and to implement the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered on the day and year first above written.
ASSIGNOR: FINOVA CAPITAL CORPORATION
By: ____________________________________
Name: __________________________________
Title: _________________________________
ASSIGNEE: WILLIS LEASE FINANCE CORPORATION
By: ____________________________________
Name: __________________________________
Title: _________________________________
<PAGE> 42
SCHEDULE I
Description of Lease Agreements set forth on Annex 1 hereto
<PAGE> 43
SCHEDULE II
1. Acquisition Agreement, dated as of December 26, 1985, between UTFS and
Horizon (N811PH).
2. Purchase Agreement Assignment, dated as of December 26, 1985, between UTFS
and Lessee, with the Consent and Agreement of The de Havilland Aircraft of
Canada, Limited ("de Havilland") in respect thereof attached thereto
(N811PH) (Spare Engines).
3. Acquisition Agreement, dated as of February 10, 1986, between UTFS and
Horizon (N812PH).
4. Purchase Agreement Assignment, dated as of February 10, 1986, between UTFS
and Lessee, with Consent and Agreement of de Havilland in respect thereof
attached thereto (N812PH).
5. Acquisition Agreement, dated as of March 27, 1986, between UTFS and
Horizon (N813PH)
6. Purchase Agreement Assignment, dated as of March 27, 1986, between UTFS
and Lessee, with the Consent and Agreement of de Havilland in respect
thereof attached thereto (N813PH)
7. Acquisition Agreement, dated as of December 26, 1985, between UTFS and
Horizon (Spare Engines)
8. Engine Purchase Agreement Assignment, dated as of December 27, 1985,
between UTFS and Lessee, with the Consent and Agreement of de Pratt &
Whitney Canada Inc. in respect thereof attached thereto (Spare Engines)
9. Purchase Agreement consisting of that certain telex order dated December
19, 1985 from Horizon Air Industries, Inc. ("Horizon") to the Manufacturer
and that certain Acknowledgment of Order No. A20083 dated December 20,
1985 from the Manufacturer to Horizon as amended modified or supplemented
("Spare Engines")
10. Assignment and Assumption Agreement dated as of September 15, 1988 between
Zapata Financial Services, Inc. and Citicorp North America, Inc. with the
Consent and Acknowledgment of the Manufacturer (the "Zapata Assignment"),
as it relates to the Lease being assigned on the date hereof.
11. Assignment and Assumption Agreement dated as of November 20, 1992 by and
between Citicorp North America Inc. and CLI Financial Services Inc. with
the Consent and Acknowledgment of the Manufacturer
<PAGE> 44
(the "Citicorp Assignment"), as it relates to the Lease being assigned on
the date hereof.
12. Assignment and Assumption Agreement dated as of November 20, 1992 by and
between CLI Financial Services Inc. and Greyhound Financial Corporation
with the Consent and Acknowledgment of the Manufacturer (the "CLI
Assignment"), as it relates to the Lease being assigned on the date
hereof.
13. Purchase Contract No. 8-10DSM-0057 dated August 30, 1985 between the De
Havilland Aircraft of Canada, Limited ("DHC") and Horizon Air Industries,
Inc. ("Horizon"), as amended, modified or supplemented, as it relates to
the Aircraft being sold on the date hereof.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use of our report included herein and to the
reference to our firm under the headings "Experts" and
"Selected Consolidated Financial and Operating Data" in the prospectus.
San Francisco, California
December 10, 1997
