<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28774
-----------------
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 68-0070656
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2320 Marinship Way, Suite 300, Sausalito, CA 94965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 331-5281
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT OCTOBER 31, 1999
------------------- -------------------------------
Common Stock, $0.01 Par Value 7,397,877
1
<PAGE>
WILLIS LEASE FINANCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income 4
Three and nine months ended September 30, 1999 and 1998
Consolidated Statements of Shareholders' Equity 5
Year ended December 31, 1998 and
nine months ended September 30, 1999
Consolidated Statements of Cash Flows 6
Nine months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 2A. Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $14,692 $10,305
Restricted cash 15,420 13,738
Equipment held for operating lease, less accumulated depreciation
of $18,603 at September 30, 1999 and $15,455 at December 31, 1998 336,279 274,618
Net investment in direct finance lease 8,946 9,249
Property, equipment and furnishings, less accumulated depreciation
of $606 at September 30, 1999 and $509 at December 31, 1998 797 2,480
Spare parts inventory 23,247 35,858
Operating lease related receivables 3,304 2,492
Trade receivables, net 2,155 5,310
Note receivable 852 -
Investment in unconsolidated affiliate 5,265 -
Other receivables 209 757
Other assets 5,126 5,198
------------- ------------
Total assets $416,292 $360,005
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $3,468 $9,620
Salaries and commissions payable 571 977
Deferred income taxes 11,986 11,684
Deferred gain 137 157
Notes payable and accrued interest 300,513 245,581
Capital lease obligation 2,531 2,652
Residual share payable 3,253 2,618
Maintenance reserves 17,616 13,273
Security deposits 5,435 4,561
Unearned lease revenue 3,303 3,040
------------- ------------
Total liabilities 348,813 294,163
============= ============
Shareholders' equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; none
outstanding) - -
Common stock, ($0.01 par value, 20,000,000 shares authorized;
7,397,877 and 7,360,813 shares issued and outstanding
as of September 30, 1999 and December 31,1998, respectively) 74 74
Paid-in capital in excess of par 42,480 42,033
Retained earnings 24,925 23,735
------------- ------------
Total shareholders' equity 67,479 65,842
------------- ------------
Total liabilities and shareholders' equity $416,292 $360,005
============= ============
</TABLE>
See accompanying notes to the consolidated financial statements
3
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Lease revenue $12,779 $9,078 $34,426 $22,643
Gain on sale of leased equipment 2,202 3,640 9,462 9,179
Spare part sales 6,065 7,230 21,254 16,829
Sale of equipment acquired for resale - - 9,775 4,093
Interest and other income 334 133 911 753
------------ ------------ ------------ ------------
Total revenue $21,380 $20,081 $75,828 $53,497
------------ ------------ ------------ ------------
EXPENSES
Interest expense 6,048 4,215 16,054 10,417
Depreciation expense 3,501 2,180 9,485 5,325
Residual share 212 187 635 587
Cost of spare part sales 13,989 5,037 25,248 11,923
Cost of equipment acquired for resale - - 8,354 3,574
General and administrative 4,545 4,326 13,633 10,694
------------ ------------ ------------ ------------
Total expenses 28,295 15,945 73,409 42,520
------------ ------------ ------------ ------------
Income/(loss) from operations ($6,915) $4,136 $2,419 $10,977
Income/(loss) from unconsolidated affiliate (395) - (435) -
------------ ------------ ------------- -------------
Income/(loss) before income taxes and extraordinary item (7,310) 4,136 1,984 10,977
Income taxes 2,926 (1,652) (794) (4,394)
------------ ------------ ------------- -------------
Income/(loss) before extraordinary item (4,384) 2,484 1,190 6,583
Extraordinary item less applicable income taxes - - - (200)
------------ ------------ ------------- -------------
Net income/(loss) ($4,384) $2,484 $1,190 $6,383
============ ============ ============= =============
Basic earnings per common share:
Income/(loss) before extraordinary item ($0.59) $0.34 $0.16 $0.91
Extraordinary item - - - (0.03)
------------ ------------ ------------ ------------
Net income/(loss) ($0.59) $0.34 $0.16 $0.88
============ ============ ============ ============
Diluted earnings per common share:
Income/(loss) before extraordinary item ($0.59) $0.33 $0.16 $0.88
Extraordinary item - - - ($0.03)
------------ ------------ ------------ ------------
Net income/(loss) ($0.59) $0.33 $0.16 $0.85
============ ============ ============ ============
Average common shares outstanding 7,394 7,280 7,377 7,245
Diluted average common shares outstanding 7,448 7,495 7,447 7,466
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ISSUED AND
OUTSTANDING PAID-IN TOTAL
SHARES OF COMMON CAPITAL IN RETAINED SHAREHOLDERS'
COMMON STOCK STOCK EXCESS OF PAR EARNINGS EQUITY
------------ ----- ------------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,178 $40,117 $ - $14,484 $54,601
Shares issued 183 587 737 - 1,324
Tax benefit from disqualified
dispositions of qualified shares - - 666 - 666
Conversion to par value stock - (40,630) 40,630 - -
Net income - - - 9,251 9,251
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 (audited) 7,361 74 42,033 23,735 65,842
Shares issued 37 - 339 - 339
Tax benefit from disqualified
dispositions of qualified shares - - 108 - 108
Net income - - - 1,190 1,190
---------- ---------- ---------- ---------- ----------
Balances at September 30, 1999 (unaudited) 7,398 $74 $42,480 $24,925 $67,479
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements
5
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,190 $6,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of equipment held for lease 9,165 5,155
Depreciation of property, equipment and furnishings 320 170
(Loss)/gain on sale of property, equipment and furnishings (15) 16
Gain on sale of leased equipment (9,462) (9,179)
Increase in residual share payable 635 310
Loss from unconsolidated affiliate 435 -
Changes in assets and liabilities:
Restricted cash (1,682) 1,760
Spare parts inventory 11,758 (18,817)
Receivables 2,557 (1,377)
Other assets (2,313) (2,300)
Accounts payable and accrued expenses (5,400) 2,259
Salaries and commission payable (306) (609)
Deferred income taxes 410 3,050
Deferred gain (20) (20)
Accrued interest 621 (173)
Maintenance reserves 4,343 (5,658)
Security deposits 874 1,740
Unearned lease revenue 263 1,191
---------------- -----------------
Net cash provided by (used in) operating activities 13,373 (16,099)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for operating lease (net
of selling expenses) 45,730 28,676
Proceeds from sale of property, equipment and furnishings 1 16
Purchase of equipment held for operating lease (107,946) (132,430)
Deposits made in connection with inventory purchases - (3,375)
Purchase of property, equipment and furnishings (1,516) (1,935)
Investment in unconsolidated affiliate (87) -
Principal payments received on direct finance lease 303 431
---------------- -----------------
Net cash used in investing activities (63,515) (108,617)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 113,781 157,685
Proceeds from issuance of common stock 339 1,057
Principal payments on notes payable (59,470) (44,084)
Principal payments on capital lease obligation (121) (111)
---------------- -----------------
Net cash provided by financing activities 54,529 114,547
Increase/(decrease) in cash and cash equivalents 4,387 (10,169)
Cash and cash equivalents at beginning of period 10,305 13,095
---------------- -----------------
Cash and cash equivalents at end of period $14,692 $2,926
================ =================
Supplemental information:
Net cash paid for: Interest $15,251 $10,590
---------------- -----------------
Income Taxes $674 $3,013
---------------- -----------------
Non-cash investing activity:
Transfer of assets to unconsolidated affiliate (net) $5,630 $ -
---------------- -----------------
Non-cash financing activity:
Installment loan related to sale of equipment held for
operating lease $852 $ -
---------------- -----------------
</TABLE>
See accompanying notes to the consolidated financial statements
6
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Willis
Lease Finance Corporation and its subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
unaudited interim financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal and
recurring adjustments) necessary to present fairly the financial position of
the Company as of September 30, 1999 (unaudited), and December 31, 1998
(audited), and the unaudited results of its operations for the three and nine
month periods ended September 30, 1999 and 1998 and its cash flows for the
nine month periods ended September 30, 1999 and 1998. The results of
operations and cash flows for the periods ended September 30, 1999 are not
necessarily indicative of the results of operations or cash flows which may
be reported for the remainder of 1999.
2. MANAGEMENT ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
3. SHAREHOLDERS' EQUITY
Authorized capital shares of the Company include 5,000,000 shares of
preferred stock and 20,000,000 shares of common stock with a par value of $0.01
per share. As of September 30, 1999 and December 31, 1998, 7,397,877 and
7,360,813 shares, respectively, of common stock were issued and outstanding. The
rights and preferences of any preferred stock will be established by the
Company's Board of Directors upon issuance.
On September 14, 1999, the Company's Board of Directors declared a dividend
of one preferred stock purchase right (a "Right") for each outstanding share of
Common Stock. Each right entitles the holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock
("Series A Preferred Stock") at an exercise price of $70.
The Rights are not exercisable, or transferable apart from the Common
Stock, until the earlier to occur of (i) ten business days following a public
announcement that any person has become the beneficial owners of more than 15%
of the outstanding Common Stock of the Company (such person being referred to as
an "Acquiring Person" and such date being referred to as the "15% Ownership
Date"), (ii) ten business days following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer, the consummation of
which would result in the beneficial ownership by a person of 15% or more of the
outstanding Common Stock of the Company, or (iii) the first date, on or after
the 15% Ownership Date, upon which the Company is acquired in a merger or other
business combination in which the Company is not the surviving corporation or in
which the outstanding Common Stock is changed into or exchanged
7
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for stock or assets of another person, or upon which 50% or more of the
Company's consolidated assets or earning power are sold. In the event that
any person becomes an Acquiring Person, each holder of a Right, other than
Rights beneficially owned by the Acquiring Person (which will thereafter be
void), will thereafter have the right to receive, upon exercise, Common Stock
with a market value equal to two times the exercise price (initially $70.00).
Furthermore, if the Company enters into a consolidation, merger, or other
business combination, as defined, each Right would entitle the holder, upon
exercise, to receive shares of common stock of the acquiring company having a
market value of two times the exercise price (initially $70.00). The Rights
contain antidilutive provisions, are redeemable at the Company's option,
subject to certain restrictions, for $.001 per Right, and expire on October
12, 2009.
As a result of the Rights dividend, the Board designated 200,000 shares
of preferred stock as Series A Preferred Stock. Series A Preferred
Stockholders will be entitled to a preferential cumulative quarterly dividend
of the greater of $0.25 per share or 100 times the per share dividend
declared on the Company's Common Stock. The Series A Preferred Stock has a
liquidation preference, as defined. In addition, each share will have 100
votes and will vote together with the shares of Common Stock of the Company.
The Company has a 1996 Employee Stock Purchase Plan (the "Purchase
Plan") under which 75,000 shares of common stock have been reserved for
issuance. This plan became effective in September 1996. Eligible employees
may designate not more than 10% of their base salary to be deducted each pay
period for the purchase of common stock under the Purchase Plan, and
participants may purchase not more than 500 shares of common stock on any one
purchase date, subject to additional Internal Revenue Code limitations. Each
January 31 and July 31, shares of common stock are purchased with the
employees' payroll deductions over the immediately preceding six months at a
price per share of 85% of the lesser of the market price of the common stock
on the purchase date or the market price on the date of entry into an
offering period. During the nine month period ended September 30, 1999, the
Company issued 6,864 shares of Common Stock as a result of employee stock
purchases under the Purchase Plan.
Under the 1996 Stock Option/Stock Issuance Plan, as amended and restated
April 6, 1999, 1,025,000 shares of the Company's shares have been set aside
to provide eligible persons with the opportunity to acquire a proprietary
interest in the Company. The plan includes a Discretionary Option Grant
Program, a Stock Issuance Program, a Salary Investment Option Grant Program
for certain officers and employees, a Director Fee Option Grant Program and
an Automatic Option Grant Program for eligible nonemployee Board Members.
During the nine month period ended September 30, 1999, 30,000 options were
exercised. In connection with the exercise of a portion of these options, the
Company recognized a tax benefit of approximately $108,000.
In conjunction with its initial public offering, the Company sold
five-year purchase warrants for $0.01 per warrant covering an aggregate of
100,000 shares of common stock exercisable at a price equal to 130% of the
initial public offering price. The warrants became exercisable in December
1997. The warrants' exercise price and the number of shares of Common Stock
are subject to adjustment to protect the warrant holders against dilution in
certain events. In February 1998, a holder of 50,000 of the warrants
exercised the warrants under the net issuance rights of the warrants. Based
on the closing price on such date, the exercise resulted in the issuance of
25,238 shares to the holder of the warrants.
4. FINANCING
In May 1999, the Company increased its $80 million debt warehouse facility
to $125 million. The facility is available to a wholly-owned special purpose
finance subsidiary of the Company, WLFC Funding Corporation, for the financing
of jet aircraft engines transferred by the company to such finance subsidiary.
The facility has an eight-year initial term with a revolving period to February
2000 followed by a seven-year amortization period. At September 30, 1999, the
interest rate was a commercial paper based rate plus 1.6%. The facility is
renewable annually.
9
<PAGE>
In March 1998, the Company repaid a loan that had residual sharing
provisions. The repayment resulted in an extraordinary expense of $0.2 million,
net of tax.
5. COMMITMENTS
The Company has three leases for its office and warehouse space. The annual
or remaining lease rental commitments, as applicable, are $309,481, $21,000, and
$67,990 and the leases expire on May 31, 2003, December 31, 1999 and July 31,
2000, respectively.
The Company has committed to purchase during 1999, additional used aircraft
and new and used engines for its operations. Certain deposits were made in
connection with these commitments. The Company's current, remaining commitment
to such purchases is not more than $7.3 million.
In July 1999, the Company entered into an agreement to participate in a
joint venture - Sichuan Snecma Aero-engine Maintenance Co. Ltd. Sichuan Snecma
will focus on providing maintenance services for CFM56 series engines. Other
participants in the joint venture are China Southwest Airlines, Snecma Services
and Beijing Kailan Aviation Technology Development and Services Corporation.
Under the terms of the agreement, the Company expects to contribute $0.8 million
during 1999 and not more than $3 million to the joint venture over the next
three years. As of the quarter ended September 30, 1999, less than $20,000 has
been contributed.
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On May 28, 1999, the Company entered into an agreement with Chromalloy
Gas Turbine Corporation, a subsidiary of Sequa Corporation, to operate a
joint venture to perform maintenance, repair and overhaul of commercial jet
engines. Under the terms of the joint venture agreement, the Company and
Chromalloy formed a new company, Pacific Gas Turbine Center, LLC ("PGTC
LLC"). The Company contributed the operations and assets of its wholly owned
subsidiary Pacific Gas Turbine Center, Incorporated ("PGTC Inc.") (with a
book value of $5.7 million) and Chromalloy contributed working capital to the
joint venture. Both the Company and Chromalloy have a 50% interest in the
joint venture. The equity method of accounting is used for the Company's 50%
ownership in PGTC LLC. Under the equity method, the original contribution was
recorded at cost and is adjusted periodically to recognize the Company's
share of the earnings or losses of PGTC LLC after the date of formation. The
contribution is shown in the Company's Consolidated Balance Sheet as a single
amount and earnings or losses are shown in the Consolidated Statement of
Income as a single amount. All intercompany profits or losses are eliminated.
7. OPERATING SEGMENTS
The Company operates in two business segments: (i) Leasing and Related
Operations which involves acquiring and leasing, primarily pursuant to
operating leases, commercial aircraft, aircraft spare engines and other
aircraft equipment and the selective purchase and resale of commercial
aircraft engines and other aircraft equipment and (ii) Spare Parts Sales
which involves the purchase and resale of after-market engine and airframe
parts, whole engines, engine modules and rotable aircraft components and
leasing of engines destined for disassembly and sale of parts.
In July 1998, the Company formed PGTC Inc. to engage in engine
disassembly and maintenance, repair and overhaul services. At the end of May
1999, the Company's investment in and the operations of PGTC Inc. were
contributed to a joint venture, PGTC LLC (see note 6 above). During the five
months ended May 31, 1999, while PGTC Inc. was a wholly-owned subsidiary of
the Company, the majority of PGTC Inc.'s revenue was derived from services
provided to WASI. Revenue from third parties during this period was not
material. Accordingly, for the five months ended May 31, 1999 and for the
1998 periods, the operations of PGTC Inc. are included in the Spare Parts
Sales segment. Subsequent to the formation of PGTC LLC, because PGTC LLC is
an unconsolidated affiliate accounted for using the equity method of
accounting, PGTC LLC is not included in the operating segment analysis for
the three and nine months ended September 30, 1999.
9
<PAGE>
The Company evaluates the performance of each of the segments based on
profit or loss after general and administrative expenses and inter-company
allocation of interest expense. While the Company believes there are
synergies between the two business segments, the segments are managed
separately because each requires different business strategies.
The following tables present a summary of the operating segments (in
thousands):
<TABLE>
<CAPTION>
For the three months ended For the three months ended
September 30, 1999 September 30, 1998
---------------------------------------- ----------------------------------------
Leasing and Spare Leasing and Spare
Related Parts Related Parts
Operations Sales Total Operations Sales Total
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Lease revenue $11,229 $1,550 $12,779 $8,581 $497 $9,078
Gain on sale of leased equipment 2,202 - 2,202 3,640 - 3,640
Spare parts sales - 6,065 6,065 - 7,230 7,230
Sale of equipment acquired for resale - - - - - -
- -Interest and other income 252 82 334 125 8 133
---------------------------------------- ----------------------------------------
Total revenue 13,683 7,697 21,380 12,346 7,735 20,081
---------------------------------------- ----------------------------------------
Expenses
Interest expense 5,031 836 5,867 3,669 546 4,215
Depreciation expense 2,696 986 3,682 1,992 188 2,180
Residual share 212 - 212 187 - 187
Cost of spare parts - 13,989 13,989 - 5,037 5,037
Cost of equipment acquired for resale - - - - - -
General and administrative 3,499 1,046 4,545 2,781 1,545 4,326
---------------------------------------- ----------------------------------------
Total expenses 11,438 16,857 28,295 8,629 7,316 15,945
Income/(loss) from operations $2,245 ($9,160) ($6,915) $3,717 $419 $4,136
======================================== ========================================
Total assets as of September 30, 1999 and
1998* $367,671 $43,356 $411,027 $280,528 $40,921 $321,449
======================================== ========================================
</TABLE>
- -------------------------------------------------------------------------------
*Total assets as of September 30, 1999 does not include investment in
unconsolidated affiliate.
<TABLE>
<CAPTION>
For the nine months ended For the nine months ended
September 30, 1999 September 30, 1998
---------------------------------------- ----------------------------------------
Leasing Spare Leasing Spare
and Related Parts and Related Parts
Operations Sales Total Operations Sales Total
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Lease revenue $31,854 $2,572 $34,426 $22,146 $497 $22,643
Gain on sale of leased equipment 9,462 - 9,462 9,179 - 9,179
Spare parts sales - 21,254 21,254 - 16,829 16,829
Sale of equipment acquired for resale 9,775 - 9,775 4,093 - 4,093
Interest and other income 714 197 911 712 41 753
---------------------------------------- -----------------------------------------
Total revenue 51,805 24,023 75,828 36,130 17,367 53,497
---------------------------------------- -----------------------------------------
Expenses
Interest expense 13,588 2,285 15,873 9,380 1,037 10,417
Depreciation expense 8,118 1,548 9,666 5,105 220 5,325
Residual share 635 - 635 587 - 587
Cost of spare parts - 25,248 25,248 - 11,923 11,923
Cost of equipment acquired for resale 8,354 - 8,354 3,574 - 3,574
General and administrative 8,935 4,698 13,633 7,346 3,348 10,694
---------------------------------------- ----------------------------------------
Total expenses 39,630 33,779 73,409 25,992 16,528 42,520
Income/(loss) from operations $12,175 ($9,756) $2,419 $10,138 $839 $10,977
======================================== ========================================
Total assets as of September 30, 1999 and
1998* $367,671 $43,356 $411,027 $280,528 $40,921 $321,449
======================================== ========================================
</TABLE>
- -------------------------------------------------------------------------------
*Total assets as of September 30, 1999 does not include investment in
unconsolidated affiliate.
8. INVENTORY WRITE DOWN
In September 1999, the Company recognized an inventory write down due to a
revaluation of inventory at Willis Aeronautical Services, Inc. (WASI), the
Company's spare parts subsidiary. The write down, which totaled $7.4 million,
was taken as an expense for the quarter ended September 30, 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's core business is acquiring and leasing, primarily pursuant to
operating leases, commercial aircraft spare engines, aircraft and other aircraft
equipment. The Company, through WASI, also specializes in the purchase and
resale of aftermarket airframe and engine parts, engines, modules and rotable
components. In addition, the Company engages in the selective purchase and
resale of commercial aircraft engines. In July 1998, the Company formed PGTC
Inc. In May 1999, the Company contributed the operations and assets of PGTC Inc.
to a newly formed joint venture, PGTC LLC. PGTC Inc. and its successor, PGTC LLC
provide engine disassembly and maintenance, repair and overhaul services to the
Company and third parties from the its San Diego location.
Revenue consists primarily of lease revenue, income from the sale of spare
parts and components and income from the sale of engines and equipment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998:
Revenue is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------
1999 1998
---- ----
Amount % Amount %
----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Lease revenue............................... $12,779 60% $9,078 45%
Gain on sale of leased equipment............ 2,202 10 3,640 18
Spare parts sales........................... 6,065 28 7,230 36
Sale of equipment acquired for resale....... - - - -
Interest and other income................... 334 2 133 1
----------------------------------------------------
Total....................................... $21,380 100% $20,081 100%
----------------------------------------------------
</TABLE>
LEASING RELATED ACTIVITIES. Lease related revenue for the quarter ended
September 30, 1999, increased 41% to $12.8 million from $9.1 million for the
comparable period in 1998. This increase reflects lease related revenues from
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at September 30, 1999 and
1998 was $345.2 million and $255.7 million, respectively, an increase of 35%.
During the quarter ended September 30, 1999, 12 engines and one aircraft
were added to the Company's lease portfolio at a total cost of $27.6 million.
Five engines from the lease portfolio were sold or transferred to inventory for
sale. The engines sold from the lease portfolio had a total net book value of
$7.1 million and were sold for a gain of $2.2 million.
During the quarter ended September 30, 1998, the Company sold four engines
from the lease portfolio. The engines had a net book value of $8.2 million and
were sold for a gain of $3.6 million.
SPARE PARTS SALES. During the quarter ended September 30, 1999, revenue
from spare parts sales totaled $6.1 million of which $3.0 million was
associated with the sale of whole engines. The level of revenue during the
third quarter was 16% lower than the $7.2 million in the comparable period in
1998. Gross margin for the quarter were negative compared to positive 30% for
the corresponding period in 1998. The decrease in gross margin was due to an
inventory write down
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of $7.4 million, lower parts sales margins, scrappage of parts and other
inventory write downs in the normal course of business. Of the $7.4 million
write down, $6.1 million was related to 747-100 engine and airframe parts.
INTEREST AND OTHER INCOME. Interest and other income for each of the
quarters ended September 30, 1999 and 1998, were $0.3 million and $0.1 million,
respectively. Interest is earned on cash, deposits held and notes receivable.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 39% to $5.9 million for the quarter ended September 30,
1999, from the comparable period in 1998, due to an increase in average debt
outstanding. This increase in debt was primarily related to debt associated
with the increase in lease portfolio assets and to a lesser extent an
increase in spare parts inventories. Residual sharing expense related to debt
increased 13% to $212,000 for the quarter ended September 30, 1999 from
$187,000 for the comparable period in 1998. Residual sharing arrangements
apply to three of the Company's engines as of September 30, 1999 and are a
function of the difference between the debt associated with the residual
sharing arrangement and estimated residual proceeds. Because a greater
portion of the principal of such debt is amortized as debt ages, residual
sharing expense increases. The Company accrues for its residual sharing
obligations using net book value as an estimate for residual proceeds.
DEPRECIATION EXPENSE. Depreciation expense increased 69% to $3.7 million
for the quarter ended September 30, 1999, from the comparable period in 1998,
due primarily to the increase in lease portfolio assets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 5% to $4.5 million for the quarter ended September 30, 1999, from
the comparable period in 1998. This change reflects increased
non-capitalizable engine related expenses as well as an increase in
professional fees.
INCOME TAXES. Income tax benefit for the quarter ended September 30,
1999, was $2.9 million compared to income tax expense of $1.7 million for the
comparable period in 1998. This decrease reflects a decrease in the Company's
pre-tax earnings. The effective tax rate for the quarters ended September 30,
1999 and 1998 were 40%.
INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company
entered into a joint venture to perform maintenance, repair and overhaul of
commercial jet aircraft engines. The Company accounts for its 50% interest in
the joint venture using the equity method. During the three months ended
September 30, 1999, the Company's share of net losses from the joint venture,
after inter-company eliminations, were $395,000. The Company had no such
activity during the comparable 1998 period.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
Revenue is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------
1999 1998
---- ----
Amount % Amount %
----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Lease revenue............................... $34,426 45% $22,643 42%
Gain on sale of leased equipment............ 9,462 12 9,179 17
Spare parts sales........................... 21,254 28 16,829 32
Sale of equipment acquired for resale....... 9,775 13 4,093 8
Interest and other income................... 911 2 753 1
----------------------------------------------------
Total....................................... $75,828 100% $53,497 100%
----------------------------------------------------
</TABLE>
LEASING RELATED ACTIVITIES. Lease related revenue for the nine months ended
September 30, 1999, increased 52% to $34.4 million from $22.6 million for the
comparable period in 1998. This increase reflects lease related revenues from
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at September 30, 1999 and
1998 was $345.2 million and $255.7 million, respectively, an increase of 35%.
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During the nine months ended September 30, 1999, 42 engines and one
aircraft were added to the Company's lease portfolio at a total cost of
$104.7 million. Nineteen engines and three spare parts packages from the
lease portfolio were sold or transferred to inventory for sale. The engines
sold from the lease portfolio had a total net book value of $34.5 million and
were sold for a gain of $9.5 million.
During the nine months ended September 30, 1998, eight engines and one
spare parts package were sold or transferred to inventory for sale from the
lease portfolio. The engines had a net book value of $19.1 million and were
sold for a gain of $9.2 million.
During the nine months ended September 30, 1999, the Company sold three
engines acquired for resale for $9.8 million which resulted in a gain of $1.4
million.
SPARE PARTS SALES. During the nine months ended September 30, 1999,
revenue from spare parts sales totaled $21.3 million of which $3.0 million
was associated with the sale of whole engines. The level of revenue during
the nine months was 26% higher than the $16.8 million in the comparable
period in 1998. Gross margin for the nine months ended September 30, 1999,
were negative compared to positive 30% for the corresponding period in 1998.
The decrease in gross margin was due to an inventory write down of $7.4
million, lower parts sales margins, scrappage of parts and other inventory
write downs in the normal course of business. Of the $7.4 million write down,
$6.1 million was related to 747-100 engine and airframe parts.
INTEREST AND OTHER INCOME. Interest and other income for each of the nine
months ended September 30, 1999 and 1998, were $0.9 million and $0.8 million,
respectively. Interest is earned on cash, deposits held and notes receivable.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 52% to $15.9 million for the nine months ended September
30, 1999, from the comparable period in 1998, due to an increase in average
debt outstanding during the period. This increase in debt was primarily
related to debt associated with the increase in lease portfolio assets and to
a lesser extent an increase in spare parts inventories. Residual sharing
expense increased 8% to $635,000 for the nine months ended September 30, 1999
from $587,000 for the comparable period in 1998. Residual sharing
arrangements apply to three of the Company's engines as of September 30, 1999
and are a function of the difference between the debt associated with the
residual sharing arrangement and estimated residual proceeds. Because a
greater portion of the principal of such debt is amortized as debt ages,
residual sharing expense increases. The Company accrues for its residual
sharing obligations using net book value as an estimate for residual proceeds.
DEPRECIATION EXPENSE. Depreciation expense increased 82% to $9.7 million
for the nine months ended September 30, 1999, from the comparable period in
1998, due primarily to the increase in lease portfolio assets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 27% to $13.6 million for the nine months ended September 30, 1999,
from the comparable period in 1998. This change reflects increased expenses, in
all business segments, associated with staff additions, increased
non-capitalizable engine related expenses, as well as an increase in
professional fees. Five months of expenses related to PGTC Inc. are included in
the nine months ended September 30, 1999.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items,
for the nine months ended September 30, 1999, decreased to $0.8 million from
$4.4 million for the comparable period in 1998. This decrease reflects a
decrease in the Company's pre-tax earnings. The effective tax rate for the
nine months ended September 30, 1999 and 1998 were 40%.
INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company
entered into a joint venture to perform maintenance, repair and overhaul of
commercial jet aircraft engines. The Company accounts for its 50% interest in
the joint venture using the equity method. During the nine months ended
September 30, 1999, the Company's share of net losses from the joint venture,
after inter-company eliminations, were $435,000. The Company had no such
activity during the comparable 1998 period.
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<PAGE>
EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had
residual sharing provisions and an interest rate of 10%. The repayment
resulted in an extraordinary expense of $0.2 million, net of tax. The Company
had no such transactions during the comparable 1999 period.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value.
SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the effective
date of SFAS No. 133. SFAS No. 133, as amended, is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. As of September 30,
1999, the Company is reviewing the effect SFAS No. 133 will have on the
Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth through borrowings
secured by its equipment lease portfolio. Cash of approximately $113.8
million and $157.7 million, in the nine month periods ended September 30,
1999 and 1998, respectively, was derived from this activity. In these same
time periods $59.5 million and $44.1 million, respectively, was used to pay
down related debt. Cash flow from operating activities generated
approximately $13.4 million in the nine month period ended September 30, 1999
and cash flows from operating activities used $16.1 million in the nine month
period ended September 30, 1998. The deficit cash flow from operations for
the nine month period ended September 30, 1998 was primarily attributable to
the acquisition of used aircraft for WASI's inventory.
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $107.9 million and $132.4 million of funds were used for
this purpose in the nine month periods ended September 30, 1999 and 1998,
respectively.
At September 30, 1999, the Company had a $150.0 million revolving credit
facility to finance the acquisition of aircraft engines, aircraft and spare
parts for sale or lease as well as for general working capital purposes. As
of September 30, 1999, $7.8 million was available under this facility,
subject to the Company providing sufficient collateral. The facility has a
two-year revolving period ending September 2000 followed by a four-year
term-out period. The facility is renewable annually and the Company is in the
process of discussing such renewal with its banks. On October 28, 1999,
effective September 30, 1999, the Company wrote down the value of portions of
the spare parts inventory which serves as collateral for the Company's
revolving credit facility. Consistent with the terms of the revolving credit
facility, the Company reduced the level of borrowing under the revolving
credit facility in order to maintain the required relationship between
collateral and loans outstanding. As a result of this repayment and other
repayments unrelated to the inventory write-down, the Company had $14.9
million available under the revolving credit facility on October 31, 1999,
subject to the Company providing sufficient collateral. The interest rate on
this facility is currently a rate tied to LIBOR plus 2.0%.
In May 1999, the Company increased its $80 million debt warehouse
facility to $125 million. The facility is available to a wholly-owned special
purpose finance subsidiary of the Company, WLFC Funding Corporation, for the
financing of jet aircraft engines transferred by the Company to such finance
subsidiary. The facility is renewable annually. This transaction's structure
facilitates public or private securitized note issuances by the special
purpose finance subsidiary. The subsidiary is consolidated for financial
statement presentation purposes. The facility has an eight-year initial term
with a revolving period to February 2000 followed by a seven-year
amortization period. At September 30, 1999, the interest rate was a
commercial paper based rate plus a spread of 1.6%. On October 15, 1999 the
spread over the commercial paper based rate was increased to 1.8%. The Company
has guaranteed the obligations under the facility on a limited basis, up to
an amount equal to the greater of: (i) the lesser of $5 million and 20% of
the outstanding obligations or (ii) 10% of the outstanding obligations.
Assuming compliance with the facility's terms, including sufficiency of
collateral, as of September 30, 1999, $21.7 million was available under this
facility.
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<PAGE>
Approximately $4.9 million of the Company's debt is repayable during 1999.
Such repayments consist of scheduled installments due under term loans.
The Company believes that its current equity base, internally generated
funds and existing debt facilities are sufficient to maintain the Company's
current level of operations. A decline in the level of internally generated
funds or the availability under the Company's existing debt facilities would
impair the Company's ability to sustain its current level of operations. The
Company is currently discussing additions to its debt and equity capital bases
with its commercial and investment banks. If the Company is not able to access
additional debt and equity capital, its ability to continue to grow its asset
base consistent with historical trends will be impaired and its future growth
limited to that which can be funded from internally generated capital.
As of September 30, 1999, the Company had one spare parts package which
had not been financed. The Company may seek financing for unfinanced equipment,
although no assurance can be given that such financing will be available on
favorable terms, if at all. Certain of the Company's engines have been financed
under floating rate facilities. Accordingly, the Company is subject to interest
rate risk, since the underlying lease revenue is fixed. See "Management Of
Interest Rate Exposure" below.
The Company has committed to purchase, during 1999, additional used
aircraft and engines for its operations. Certain deposits were made, in 1998,
in connection with a portion of these commitments. As of September 30, 1999,
the Company's current commitment to such purchases is not more than $7.3
million, which includes $1.4 million of deposits in other assets.
MANAGEMENT OF INTEREST RATE EXPOSURE
At September 30, 1999, $247.1 million of the Company's borrowings were
on a variable rate basis at various interest rates tied to either LIBOR or
the prime rate. The Company's equipment leases are generally structured at
fixed rental rates for specified terms. Increases in interest rates could
narrow or eliminate the spread, or result in a negative spread, between the
rental revenue the Company realizes under its leases and the interest rate
that the Company pays under its borrowings.
In September 1996, the Company purchased an amortizing interest rate cap
in order to limit its exposure to increases in interest rates on a portion of
its variable rate borrowings. Pursuant to this cap, the counter party will
make payments to the Company, based on the notional amount of the cap, if the
three month LIBOR rate is in excess of 7.66%. As of September 30, 1999, the
notional principal amount of the cap was $30.3 million, which will decline to
$26.0 million at the end of its term. The cost of the cap is being amortized
as an expense over its remaining term. To further mitigate exposure to
interest rate changes, the Company has entered into interest rate swap
agreements which have notional outstanding amounts of $45.0 million, a
weighted average remaining term of 27 months and a weighted average fixed
rate of 5.78%.
Under its borrowing agreement, WLFC Funding Corporation is required to
hedge a certain portion of its $125 million warehouse facility against
changes in interest rates. WLFC Funding Corporation has entered into interest
rate swap agreements in order to meet such hedging requirements and to manage
the variable interest rate risk related to its debt. As of September 30,
1999, such swap agreements had notional outstanding amounts totaling $50
million, a weighted average remaining term of 42 months and a weighted
average fixed rate of 5.90%.
The Company will be exposed to risk in the event of non-performance of
the interest rate hedge counter parties. The Company anticipates that it will
hedge additional amounts of its floating rate debt during the next several
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for historical information contained herein, the discussion in
this report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute
to such differences include those discussed below as well as those discussed
elsewhere herein and in the Company's report on Form 10-K for the year ended
December 31, 1998. The cautionary statements made in this report should be
read as
15
<PAGE>
being applicable to all related forward-looking statements wherever they appear
in this report or in other written or oral statements by the Company.
The businesses in which the Company is engaged are capital intensive
businesses. Accordingly, the Company's ability to successfully execute its
business strategy and to sustain and continue its operations is dependent, in
large part, on the availability of third party debt and equity capital as
well as internally generated capital. There can be no assurance that the
necessary amount of such capital will continue to be available to the Company
on favorable terms or at all. If the Company is not successful in obtaining
or generating sufficient capital, the Company's ability to: (i) add new
aircraft engines, aircraft and spare parts packages to its portfolio, (ii)
add inventory to support its spare parts sales, (iii) fund its working
capital needs, (iv) develop the business of PGTC LLC, and (v) fund possible
future acquisitions, investments and joint ventures would be impaired. The
Company's inability to obtain sufficient capital would have a material
adverse effect on the Company's business, financial condition and/or results
of operations.
The Company retains title to the aircraft engines, aircraft and parts
packages that it leases to third parties. Upon termination of a lease, the
Company will seek to re-lease or sell the aircraft equipment or will
dismantle the equipment and will sell the parts. The Company also engages in
the selective purchase and resale of commercial aircraft engines and engine
components. On occasion, the Company purchases engines or components without
having a firm commitment for their sale. Numerous factors, many of which are
beyond the Company's control, may have an impact on the Company's ability to
re-lease or sell aircraft equipment on a timely basis, including the
following: (i) general market conditions, (ii) the condition of the aircraft
equipment upon termination of the lease, (iii) the maintenance services
performed during the lease term and, as applicable, the number of hours
remaining until the next major maintenance is required, (iv) regulatory
changes (particularly those imposing environmental, maintenance and other
requirements on the operation of aircraft engines), (v) changes in the supply
or cost of aircraft engines, and (vi) technological developments. There is no
assurance that the Company will be able to re-lease or sell aircraft
equipment on a timely basis or on favorable terms. The failure to re-lease or
sell aircraft equipment on a timely basis or on favorable terms could have a
material adverse effect on the Company's business, financial condition and/or
results of operations.
The Company experiences fluctuations in its operating results. Such
fluctuations may be due to a number of factors, including: (i) general
economic conditions, (ii) the timing of sales of engines and spare parts,
(iii) financial difficulties experienced by airlines, (iv) interest rates,
(v) fuel costs, (vi) downturns in the air transportation industry, (vii)
increased fare competition, (viii) decreases in growth of air traffic, (ix)
unanticipated early lease termination or a default by a lessee, (x) the
timing of engine acquisitions, (xi) engine marketing activities, and (xii)
fluctuations in market prices for the Company's assets. The Company
anticipates that fluctuations from period to period will continue in the
future. As a result, the Company believes that comparisons to results of
operations for preceding periods are not necessarily meaningful and that
results of prior periods should not be relied upon as an indication of future
performance.
A lessee may default in performance of its lease obligations and the
Company may be unable to enforce its remedies under a lease. The Company's
inability to collect receivables due under a lease or to repossess aircraft
equipment in the event of a default by a lessee could have a material adverse
effect on the Company's business, financial condition and/or results of
operations. Various airlines have experienced financial difficulties in the
past, certain airlines have filed for bankruptcy and a number of such
airlines have ceased operations. In most cases where a debtor seeks
protection under Chapter 11 of Title 11 of the United States Code, creditors
are automatically stayed from enforcing their rights. In the case of United
States certified airlines, Section 1110 of the Bankruptcy Code provides
certain relief to lessors of aircraft equipment. The scope of Section 1110
has been the subject of significant litigation and there is no assurance that
the provisions of Section 1110 will protect the Company's investment in an
aircraft, aircraft engines or parts in the event of a lessee's bankruptcy. In
addition, Section 1110 does not apply to lessees located outside of the
United States and applicable foreign laws may not provide comparable
protection. Leases of spare parts may involve additional risks. For example,
it is likely to be more difficult to recover parts in the event of a lessee
default and the residual value of parts may be less ascertainable than an
engine.
The Company's leases are generally structured at fixed rental rates for
specified terms while much of the Company's borrowings are at floating rates.
Increases in interest rates could narrow or eliminate the spread, or result
in a negative spread, between the rental revenue the Company realizes under
its leases and the interest rate the Company pays under its
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<PAGE>
borrowings, and have a material adverse effect on the Company's business,
financial condition and/or results of operations.
During the nine month period ended September 30, 1999, 75% of the
Company's lease revenue was generated by leases to foreign customers,
including 7% from Asian customers and 15% from South American customers. Such
international leases may present greater risks to the Company because certain
foreign laws, regulations and judicial procedures may not be as protective of
lessor rights as those which apply in the United States. The Company is
subject to the timing and access to courts and the remedies local laws impose
in order to collect its lease payments and recover its assets. In addition,
political instability abroad and changes in international policy also present
risk of expropriation of the Company's leased engines. Furthermore, many
foreign countries have currency and exchange laws regulating the
international transfer of currencies.
The Company generates a portion of its revenue from sale of leased
assets. The inability to execute transactions for gain on sale or a change in
the accounting guidelines related to such sales could have a material impact
on the Company's business, financial condition and/or results of operations.
The Company has experienced significant growth in revenues. The
Company's growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational and financial
resources. There is no assurance that the Company will be able to effectively
manage the expansion of its operations, or that the Company's systems,
procedures or controls will be adequate to support the Company's operations,
in which event the Company's business, financial condition and/or results of
operations could be adversely affected. The Company may also acquire
businesses that would complement or expand the Company's existing businesses.
Any acquisition or expansion made by the Company may result in one or more of
the following events: (i) the incurrence of additional debt, (ii) future
charges to earnings related to the amortization of goodwill and other
intangible assets, (iii) difficulties in the assimilation of operations,
services, products and personnel, (iv) an inability to sustain or improve
historical revenue levels, (v) diversion of management's attention from
ongoing business operations, and (vi) potential loss of key employees. Any of
the foregoing factors could have a material adverse effect on the Company's
business, financial condition and/or results of operations.
The markets for the Company's products and services are extremely
competitive, and the Company faces competition from a number of sources.
These include aircraft and aircraft part manufacturers, aircraft and aircraft
engine lessors, airline and aircraft service companies and aircraft spare
parts redistributors. Certain of the Company's competitors have substantially
greater resources than the Company, including greater name recognition,
larger inventories, a broader range of material, complementary lines of
business and greater financial, marketing and other resources. In addition,
equipment manufacturers, aircraft maintenance providers, FAA certified repair
facilities and other aviation aftermarket suppliers may vertically integrate
into the markets that the Company serves, thereby significantly increasing
industry competition. There can be no assurance that competitive pressures
will not materially and adversely affect the Company's business, financial
condition and/or results of operations.
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an
ongoing basis. In addition, the Company's lessees currently enjoy favorable
accounting and tax treatment by entering into operating leases. Any change to
current tax laws or accounting principles that make operating lease financing
less attractive or affect the Company's recognition of revenue or expense
would have a material impact on the Company's business, financial condition
and/or results of operations.
Before parts may be installed in an aircraft, they must meet certain
standards of documented condition established by the FAA and/or the
equivalent regulatory agencies in other countries. Specific regulations vary
from country to country, although regulatory requirements in other countries
are generally satisfied by compliance with FAA requirements. Parts must also
be traceable to sources deemed acceptable by the FAA or such equivalent
regulatory agencies. Such standards may change in the future, requiring
engine components already contained in the Company's inventory to be scrapped
or modified. In all such cases, to the extent the Company has such engine
components in its inventory, their value may be reduced and the Company's
business, financial condition and/or results of operations could be adversely
affected
17
<PAGE>
The Company obtains a substantial portion of its inventories of
aircraft, engines and engine parts from airlines, overhaul facilities and
other suppliers. There is no organized market for aircraft, engines and
engine parts, and the Company must rely on field representatives and
personnel, advertisements and its reputation as a buyer of surplus inventory
in order to generate opportunities to purchase such equipment. The market for
bulk sales of surplus aircraft, engines and engine parts is highly
competitive, in some instances involving a bidding process. While the Company
has been able to purchase surplus inventory in this manner successfully in
the past, there is no assurance that surplus aircraft, engines and engine
parts of the type required by the Company's customers will be available on
acceptable terms when needed in the future or that the Company will continue
to compete effectively in the purchase of such surplus equipment.
A change in the market for aircraft and engine parts could result in the
Company's inventory being overvalued and could require the Company to
write-down its inventory valuations in order to bring them into line with the
revised fair market value. Furthermore, when the Company purchases and
dismantles used aircraft, engines and parts, the Company assigns a value to
the parts based on market price. Airline manufacturers may also develop new
parts to be used in lieu of parts already contained in the Company's
inventory. There is no assurance that a write-down would not adversely affect
the Company's business, operating results or financial condition.
The Company uses computer systems in many areas of its operations. In
addition, various third parties that are important to the Company's business
(including lessees, customers, vendors and financial institutions) use
computer systems in their areas of operations. Should the Company or certain
of such third parties not be "Year 2000 compliant," certain of the Company's
operations could be disrupted for an indeterminate period of time,
potentially having a material adverse impact on the Company's results,
business, financial condition and/or results of operations. As is the case
with most companies, the Year 2000 computer problem creates risks for the
Company.
The Company has assessed the Year 2000 computer problem as it affects
the Company's computer systems and information technology. As a result of the
Company's assessment, the Company does not expect any material interruption
of internal operations arising from the Company's computer systems and
information technology not being Year 2000 compliant. The mission critical
systems of the Company identified during the assessment are all off the shelf
software packages with unmodified source codes which have been certified by
the manufacturer as Year 2000 compliant. All internal hardware and software
remediation was completed during the second quarter. Testing was initiated
during the third quarter and will be completed by November 15, 1999. The
Company is not aware of any significant Year 2000 issues with respect to the
airworthiness of the Company's aircraft, aircraft engines or spare parts;
however, should such issues result in Airworthiness Directives or other
manufacturer recommended maintenance for leased assets, the implementation
and the majority of the cost of such implementation would generally be the
responsibility of the lessee. Any resulting costs to the Company cannot be
estimated at this time.
Significant uncertainties remain about the effect on the Company's
operations of third parties that may not be Year 2000 compliant and with whom
the Company does business (including lessees, customers, vendors and
financial institutions). The Company is nearing completion of the assessment
of Year 2000 issues relating to such third parties and certain of the
Company's officers have oversight of these assessments. The Company has
circulated to significant third parties with whom the Company does business a
written request for their plans and progress in addressing the Year 2000
issue. As of September 30, 1999, approximately 95% of the third parties
polled had responded. A majority of the respondents are currently Y2K
compliant and the remaining respondents indicated compliance no later than
fourth quarter 1999. The Company will develop contingency plans to address
any material risk of non-compliance by non-respondents. The Company expects
to complete this process by November 1999. The costs associated with
assessing the Year 2000 issue, including developing and implementing the
above plan, are expected to be nominal. Non-compliance on the part of a third
party could result in lost revenue and an inability to make lease or other
payments to the Company. Non-compliance by the third party's financial
institution could also affect the ability to process payments.
A reasonable worst case scenario would be that a large number of third
parties (including lessees and spare parts customers) will be unable to
operate and generate revenues and as a result will be unable to make lease
payments or purchase parts. The Company is unable to estimate the likelihood
or the magnitude of the resulting lost revenue at this time. However, should
this occur, the Company would attempt to repossess leased engines, aircraft
and spare parts from non-compliant third parties and place such assets with
compliant third parties. The Company cannot assure you that it would be able
to re-lease such assets at favorable terms or at all. Similarly, the Company
would attempt to find compliant
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<PAGE>
customers for the Company's spare parts sales. If a significant number of
leased assets could not be re-leased on favorable terms or at all, or their
re-lease is delayed, or if compliant customers for spare parts sales were
unavailable, the Company's business, financial condition and/or results of
operations would be adversely affected.
Providers of casualty and liability insurance to the aviation industry
have indicated that they may exclude coverage for Year 2000 related risks
and/or may require aviation equipment operators to answer, to the insurance
provider's satisfaction, a questionnaire regarding the Year 2000 preparedness
of aviation equipment operators, in order to provide coverage for Year 2000
risks. The inability of a lessee to obtain or maintain coverage for Year 2000
related losses and/or the Company's inability to obtain or maintain any
contingent insurance for Year 2000 related risks would expose the Company to
material risk of loss. The Company has informed its lessees of Year 2000
related insurance issues and continues to monitor its lessees' ability to
obtain insurance coverage for Year 2000 related risks.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate
risk. A change in the U.S. prime interest rate, LIBOR rate, or cost of funds
based on commercial paper market rates, would affect the rate at which the
Company could borrow funds under its various borrowing facilities. Increases
in interest rates to the Company, which may cause the Company to raise the
implicit rates charged to its customers, could result in a reduction in
demand for the Company's leases. Certain of the Company's warehouse credit
facilities are variable rate debt. The Company estimates a one percent
increase or decrease in the Company's variable rate debt would result in an
increase or decrease, respectively, in interest expense of $1.1 million per
annum. The Company estimates a two percent increase or decrease in the
Company's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $2.1 million per annum. The foregoing
effect of interest rate changes, net of interest rate hedges, on per annum
interest expense is estimated as constant due to the terms of the Company's
variable rate borrowings, which generally provide for the maintenance of
borrowing levels given adequacy of collateral and compliance with other loan
conditions.
The Company hedges a portion of its borrowings, effectively fixing the
rate of these borrowings. The Company is currently required to hedge a
portion of debt of the WLFC Funding Corporation Facility. Such hedging
activities may limit the Company's ability to participate in the benefits of
any decrease in interest rates, but may also protect the Company from
increases in interest rates. A portion of the Company's leases provide that
lease payments be adjusted based on changes in interest rates. Furthermore,
since lease rates tend to vary with interest rate levels, it is likely that
the Company can adjust lease rates for the effect of change in interest rates
at the termination of leases. Other financial assets and liabilities are at
fixed rates.
The Company is also exposed to currency devaluation risk. During the
nine month period ended September 30, 1999, 75% of the Company's total lease
revenues came from non-United States domiciled lessees. All of the leases
require payment in United States (U.S.) currency. If these lessees' currency
devalues against the U.S. dollar, the lessees could potentially encounter
difficulty in making the U.S. dollar denominated lease payments.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
NUMBER
3.1 Certificate of Incorporation, filed on March 12, 1998 together with
Certificate of Amendment of Certificate of Incorporation filed on May
6, 1998. Incorporated by reference to Exhibits 4.01 and 4.02 of the
Company's report on Form 8-K filed on June 23, 1998.
3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the Company's
report on Form 8-K filed on June 23, 1998.
4.1 Specimen of Common Stock Certificate incorporated by reference to
Exhibit 4.1 of the Company's report on form 10-Q for the quarter ended
June 30, 1998.
4.2 Rights Agreement dated September 24, 1999, by and between the Company
and American Stock Transfer and Trust Company, as Rights Agent,
incorporated by reference to Exhibit 4.1 of the Company's report on
Form 8-K filed on October 4, 1999.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
- -----------------------------------------
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: November 15, 1999
Willis Lease Finance Corporation
By: /s/ JAMES D. MCBRIDE
----------------------
James D. McBride
Chief Financial Officer
<PAGE>
Exhibit 11.1
Computation of Earnings EXHIBIT XI
WILLIS LEASE FINANCE CORPORATION
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Income/(loss) before extraordinary item 1999 1998 1999 1998
-------------- -------------- -------------- --------------
(in thousands, (in thousands,
except per share data) except per share data)
<S> <C> <C> <C> <C>
Basic
Earnings:
Income/(loss) before extraordinary item ($4,384) $2,484 $1,190 $6,583
Shares:
Average common shares outstanding 7,394 7,280 7,377 7,245
-------------- -------------- -------------- --------------
Basic earnings/(loss) per common share before
extraordinary item ($0.59) $0.34 $0.16 $0.91
Assuming Full Dilution
Earnings:
Income/(loss) before extraordinary item ($4,384) $2,484 $1,190 $6,583
-------------- -------------- -------------- --------------
Shares:
Diluted average common shares outstanding 7,448 7,495 7,447 7,466
-------------- -------------- -------------- --------------
Earnings/(loss) per common share assuming full dilution,
before extraordinary item ($0.59) $0.33 $0.16 $0.88
-------------- -------------- -------------- --------------
Net income/(loss)
Basic
Earnings:
Net income/(loss) ($4,384) $2,484 $1,190 $6,383
-------------- -------------- -------------- --------------
Shares:
Average common shares outstanding 7,394 7,280 7,377 7,245
-------------- -------------- -------------- --------------
Basic earnings/(loss) per common share ($0.59) $0.34 $0.16 $0.88
Assuming Full Dilution
Earnings:
Net income/(loss) ($4,384) $2,484 $1,190 $6,383
-------------- -------------- -------------- --------------
Shares:
Diluted average common shares outstanding 7,448 7,495 7,447 7,466
-------------- -------------- -------------- --------------
Earnings/(loss) per common share assuming full dilution ($0.59) $0.33 $0.16 $0.85
-------------- -------------- -------------- --------------
</TABLE>
Supplemental information:
Difference between average common shares outstanding to calculate basic and
assuming full dilution is due to options outstanding under the 1996 Stock
Options/Stock Issuance Plan and warrants issued in conjunction with the
initial public offering
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,112
<SECURITIES> 0
<RECEIVABLES> 6,520
<ALLOWANCES> 0
<INVENTORY> 23,247
<CURRENT-ASSETS> 0
<PP&E> 337,076
<DEPRECIATION> 19,209
<TOTAL-ASSETS> 416,292
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 67,405
<TOTAL-LIABILITY-AND-EQUITY> 416,292
<SALES> 6,065
<TOTAL-REVENUES> 21,380
<CGS> 13,989
<TOTAL-COSTS> 28,295
<OTHER-EXPENSES> 4,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,048
<INCOME-PRETAX> (7,310)
<INCOME-TAX> (2,926)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,384)
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
