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 March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28774
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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 MAY 8, 2000
----------------------------- --------------------------
Common Stock, $0.01 Par Value 7,401,866
1
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income
Three months ended March 31, 2000 and 1999 4
Consolidated Statements of Shareholders' Equity
Year ended December 31, 1999 and
three months ended March 31, 2000 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
2
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
-------------------- -------------------
ASSETS
Cash and cash equivalents $9,247 $9,476
Restricted cash 16,911 15,992
Equipment held for operating lease, less accumulated depreciation
of $23,116 at March 31, 2000 and $21,592 at December 31, 1999 334,324 338,788
Net investment in direct finance lease 8,495 8,666
Property, equipment and furnishings, less accumulated depreciation
of $711 at March 31, 2000 and $674 at December 31, 1999 934 933
Spare parts inventory 27,716 22,237
Operating lease related receivable 3,131 3,236
Trade receivables, net 4,844 1,904
Notes receivable 653 650
Investment in unconsolidated affiliates 5,922 5,082
Other assets 6,003 5,351
-------------------- -------------------
Total assets $418,180 $412,315
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $3,029 $4,139
Salaries and commissions payable 534 359
Deferred income taxes 13,890 12,815
Deferred gain 187 338
Notes payable and accrued interest 299,616 291,318
Capital lease obligation - 2,489
Residual share payable 2,179 3,465
Maintenance reserves 19,042 18,555
Security deposits 4,670 5,522
Unearned lease revenue 3,790 3,777
-------------------- -------------------
Total liabilities 346,937 342,777
-------------------- -------------------
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;
7,401,866 and 7,397,877 shares issued and outstanding
as of March 31, 2000 and December 31, 1999, respectively) 74 74
Paid-in capital in excess of par 42,469 42,446
Retained earnings 28,700 27,018
-------------------- -------------------
Total shareholders' equity 71,243 69,538
-------------------- -------------------
Total liabilities and shareholders' equity $418,180 $412,315
==================== ===================
See accompanying notes to the consolidated financial statements
3
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2000 1999
------------------------- -------------------------
REVENUE
Lease revenue $12,626 $10,569
Gain on sale of leased equipment 2,005 3,411
Spare part sales 7,087 8,971
Sale of equipment acquired for resale - 5,775
Interest and other income 234 220
------------------------- -------------------------
Total revenue 21,952 28,946
------------------------- -------------------------
EXPENSES
Interest expense 6,233 4,893
Depreciation expense 3,449 3,115
Residual share 188 211
Cost of spare part sales 5,359 6,630
Cost of equipment acquired for resale - 4,784
General and administrative 3,536 4,668
------------------------- -------------------------
Total expenses 18,765 24,301
------------------------- -------------------------
Income from operations 3,187 4,645
Loss from unconsolidated affiliates (430) -
------------------------- -------------------------
Income before income taxes 2,757 4,645
Income taxes (1,075) (1,860)
------------------------- -------------------------
Net income $1,682 $2,785
========================= =========================
Basic earnings per common share:
Net income $0.23 $0.38
========================= =========================
Diluted earnings per common share:
Net income $0.22 $0.37
========================= =========================
Average common shares outstanding 7,402 7,363
Diluted average common shares outstanding 7,484 7,450
See accompanying notes to the consolidated financial statements
4
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
Issued and
Outstanding Paid-in Total
Shares of Common Capital in Retained Shareholders'
Common stock Stock Excess of par Earnings Equity
------------- ------------ ------------ ------------ -------------
Balance at December 31, 1998 7,361 $74 $42,033 $23,735 $65,842
Shares issued 37 - 339 - 339
Tax benefit from disqualified
dispositions of qualified shares - - 74 - 74
Net income - - - 3,283 3,283
------------- ------------ ------------ ------------ -------------
Balances at December 31, 1999 7,398 74 42,446 27,018 69,538
Shares issued 4 - 23 - 23
Tax benefit from disqualified
dispositions of qualified shares - - - - -
Net income - - - 1,682 1,682
------------- ------------ ------------ ------------ -------------
Balances at March 31, 2000 7,402 $74 $42,469 $28,700 $71,243
============= ============ ============ ============ =============
See accompanying notes to the consolidated financial statements
5
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,682 $2,785
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation of equipment held for lease 3,378 2,932
Depreciation of property, equipment and furnishings 71 183
Loss (gain) on sale of property, equipment and furnishings 9 (1)
Gain on sale of leased equipment (2,005) (3,411)
(Decrease) increase in residual share payable (1,286) 212
Loss from unconsolidated affiliate 430 -
Changes in assets and liabilities:
Restricted cash (919) 648
Spare parts inventory 1,673 1,690
Receivables (2,838) (4,128)
Other assets (652) (173)
Accounts payable and accrued expenses (1,110) (4,867)
Salaries and commission payable 175 (342)
Deferred income taxes 1,075 543
Deferred gain (151) 449
Accrued interest (281) 1,304
Maintenance reserves 487 1,042
Security deposits (852) (28)
Unearned lease revenue 13 50
--------------- ---------------
Net cash used in operating activities (1,101) (1,112)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for operating lease (net
of selling expenses) 7,595 8,318
Proceeds from sale of property, equipment and furnishings 40 1
Purchase of equipment held for operating lease (11,658) (22,917)
Purchase of property, equipment and furnishings (121) (1,037)
Investment in unconsolidated affiliates (1,270) -
Principal payments received on direct finance lease 171 135
--------------- ---------------
Net cash used in investing activities (5,243) (15,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 16,420 30,907
Proceeds from issuance of common stock 23 128
Principal payments on notes payable (7,839) (20,388)
Principal payments on capital lease obligation (2,489) (39)
--------------- ---------------
Net cash provided by financing activities 6,115 10,608
Decrease in cash and cash equivalents (229) (6,004)
Cash and cash equivalents at beginning of period 9,476 10,305
--------------- ---------------
Cash and cash equivalents at end of period $9,247 $4,301
=============== ===============
Supplemental information:
Net cash paid for: Interest $6,432 $3,590
--------------- ---------------
Income Taxes $0 $3
--------------- ---------------
See accompanying notes to the consolidated financial statements
6
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Willis
Lease Finance Corporation and its subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Pursuant to such rules and regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying unaudited interim financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto, together with Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
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 March 31, 2000 (unaudited), and December 31, 1999 (audited), and
the unaudited results of its operations for the three month periods ended March
31, 2000 and 1999 and its cash flows for the three month periods ended March 31,
2000 and 1999. The results of operations and cash flows for the period ended
March 31, 2000 are not necessarily indicative of the results of operations or
cash flows which may be reported for the remainder of 2000.
Effective January 1, 2000, the company revised its inventory cost
allocation methodology for whole engine and aircraft purchases. Under the
revised method, the Company estimates a period of time over which the Company
expects to liquidate its investment in such purchases. Periodically, the Company
compares its remaining investment in such purchases to its expected remaining
investment in such purchases and, to the extent necessary, recognizes an
additional amount of cost of spare parts sales to bring the remaining investment
in such purchases in line with the expected level of investment.
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
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 three month period
ended March 31, 2000, the Company issued 3,989 shares of Common Stock as a
result of employee stock purchases under the Purchase Plan.
7
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. COMMITMENTS
The Company has three leases for its office and warehouse space. The annual
or remaining lease rental commitments, as applicable, are $309,000, $45,000, and
$27,000 and the leases expire on May 31, 2003, June 30, 2000 and July 31, 2000,
respectively. In April 2000, the Company entered into a new lease for its WLFC
and WASI operations at San Diego, California. The lease covers approximately
40,500 square feet of office and warehouse space, with an annual lease
commitment of $364,000, and expires June 2005.
The Company has committed to purchase during 2000 additional used engines
for its operations. The Company's current, remaining commitment to such
purchases is not more than $4.5 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. As
of the quarter ended March 31, 2000, $0.8 million has been contributed. Under
the terms of the agreement, not more than an additional $2.2 million is expected
to be contributed to the joint venture over the next three years.
Under the terms of the Pacific Gas Turbine Center, LLC ("PGTC LLC") joint
venture (see note 5 below), to the extent that PGTC LLC requires additional
working capital and the Company and its partner in PGTC LLC agree to provide
such capital, each partner is required to contribute to such capital
requirement, equally. During the quarter ended March 31, 2000, the Company
contributed $0.5 million of additional capital to PGTC LLC and not more than an
additional $0.5 million is expected to be contributed during the remainder of
2000.
In January 2000, a suit was filed against the Company in connection with the
sale by the Company of an aircraft engine for cash consideration. The buyer of
the engine alleges that the sale was not validly consummated and amongst other
things requests that the purchase price of the engine, $3.2 million, be returned
to the buyer. The Company is vigorously contesting the suit and has filed a
cross complaint in connection with the suit. The Company believes that the loss,
if any, resulting from the suit will not have a material impact on the Company's
financial position, results of operations, or cash flows in future years.
5. INVESTMENT IN UNCONSOLIDATED AFFILIATES
In May 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, 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.
8
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. 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 5 above). During the three months ended March
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 three months ended March 31, 1999 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 months ended March 31, 2000.
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):
Spare
Parts
FOR THE QUARTER ENDED MARCH 31, 2000 Leasing Sales Total
-----------------------------------------
Revenue:
Lease revenue $11,531 $1,095 $12,626
Gain on sale of leased equipment 2,005 - 2,005
Spare parts sales - 7,087 7,087
Sale of equipment acquired for resale - - -
Other 219 15 234
-----------------------------------------
Total revenue 13,755 8,197 21,952
Expenses:
Interest expense 5,255 978 6,233
Depreciation expense 2,720 729 3,449
Residual share 188 - 188
Cost of spare parts - 5,359 5,359
Cost of equipment acquired for
resale - - -
General and administrative 2,526 1,010 3,536
-----------------------------------------
Total expenses 10,689 8,076 18,765
-----------------------------------------
Income from operations * $3,066 $121 $3,187
=========================================
Total assets as of March 31, 2000 * $367,954 $44,304 $412,258
=========================================
* Income from operations for the period ended March 31, 2000 and total assets
as of March 31, 2000 do not include results from or investment in
unconsolidated affiliate.
9
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Spare
Parts
FOR THE QUARTER ENDED MARCH 31, 1999 Leasing Sales Total
-----------------------------------------
Revenue:
Lease revenue $10,065 $504 $10,569
Gain on sale of leased equipment 3,411 - 3,411
Spare parts sales - 8,971 8,971
Sale of equipment acquired for resale 5,775 - 5,775
Other 219 1 220
-----------------------------------------
Total revenue 19,470 9,476 28,946
Expenses:
Interest expense 4,216 677 4,893
Depreciation expense 2,836 279 3,115
Residual share 211 - 211
Cost of spare parts - 6,630 6,630
Cost of equipment acquired for resale 4,784 - 4,784
General and administrative 2,557 2,111 4,668
-----------------------------------------
Total expenses 14,604 9,697 24,301
-----------------------------------------
Income from operations $4,866 ($221)(1) $4,645
=========================================
Total assets as of March 31, 1999 $321,812 $49,948 $371,760
=========================================
(1) The Company estimates that income from operations would have been $0.4
million if the effect of PGTC's operations, after intercompany
eliminations, were eliminated from the results of the Spare Parts Sales
segment.
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 Willis Aeronautical Services, Inc. ("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.
10
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999:
Revenue is summarized as follows:
Three Months Ended March 31,
----------------------------------------------
2000 1999
------- -------
Amount % Amount %
----------------------------------------------
(dollars in thousands)
Lease revenue $12,626 58% $10,569 36%
Gain on sale of leased equipment 2,005 9 3,411 12
Spare parts sales 7,087 32 8,971 31
Sale of equipment acquired for resale - - 5,775 20
Interest and other income 234 1 220 1
------- ------- ------- -------
Total $21,952 100% $28,946 100%
======= ======= ======= =======
LEASING RELATED ACTIVITIES. Lease related revenue for the quarter ended
March 31, 2000, increased 19% to $12.6 million from $10.6 million for the
comparable period in 1999. 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 March 31, 2000 and 1999
was $342.8 million and $289.8 million, respectively, an increase of 18%.
During the quarter ended March 31, 2000, three engines were added to the
Company's lease portfolio at a total cost of $11.5 million. Eight engines and
two aircraft 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
$5.6 million and were sold for a gain of $2.0 million.
During the quarter ended March 31, 1999, the Company sold eight engines from
the lease portfolio. The engines had a net book value of $11.2 million and were
sold for a gain of $3.4 million.
SPARE PARTS SALES. During the quarter ended March 31, 2000, revenue from
spare parts sales totaled $7.1 million of which $1.6 million was associated with
the sale of whole engines. The level of revenue during the first quarter was 21%
lower than the $9.0 million in the comparable period in 1999. Gross margin
decreased to 24% from 26% in the corresponding period in 1999. The decrease in
gross margin was due to lower parts sales margins and additional cost of spare
parts sales under the revised inventory cost allocation method (see note 1
above).
INTEREST AND OTHER INCOME. Interest and other income for each of the
quarters ended March 31, 2000 and 1999, were $0.2 million, respectively.
Interest is earned on cash, deposits held and notes receivable.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 27% to $6.2 million for the quarter ended March 31, 2000,
from the comparable period in 1999, 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. Residual sharing expense related to debt
decreased 11% to $188,000 for the quarter ended March 31, 2000 from $211,000 for
the comparable period in 1999. Residual sharing arrangements apply to two of the
Company's engines as of March 31, 2000 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 for each engine increases. The
Company accrues for its residual sharing obligations using net book value as an
estimate for residual proceeds.
11
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
DEPRECIATION EXPENSE. Depreciation expense increased 11% to $3.4 million for
the quarter ended March 31, 2000, from the comparable period in 1999, due
primarily to the increase in lease portfolio assets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 24% to $3.5 million for the quarter ended March 31, 2000, from the
comparable period in 1999. This change was primarily due to the three months of
expenses related to PGTC Inc. included in the period ended March 31, 1999
whereas, under the equity method of accounting, no expenses from PGTC LLC's
operations are included in period ended March 31, 2000. Additionally, the
decrease reflects reductions in general and administrative expenses associated
with the leasing and spare parts business segments.
INCOME TAXES. Income tax expense for the quarter ended March 31, 2000, was
$1.1 million compared to income tax expense of $1.9 million for the comparable
period in 1999. This decrease reflects a decrease in the Company's pre-tax
earnings. The effective tax rate for the quarters ended March 31, 2000 and 1999
were 39% and 40%, respectively.
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 March 31, 2000, the
Company's share of net losses from the joint venture, after inter-company
eliminations, was $430,000. The Company had no such activity 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 March 31,
2000, 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 $16.4 million
and $30.9 million, in the three month periods ended March 31, 2000 and 1999,
respectively, was derived from this activity. In these same time periods, $7.8
million and $20.4 million, respectively, of cash was used to pay down related
debt. Cash flow from operating activities used $1.1 million in the three month
periods ended March 31, 2000 and 1999.
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $11.7 million and $22.9 million of funds were used for this
purpose in the three month periods ended March 31, 2000 and 1999, respectively.
At March 31, 2000, 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
March 31, 2000, $6.1 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. The interest rate on this facility is currently a
rate tied to LIBOR plus 2.0%.
12
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
At March 31, 2000, the Company had a $125.0 million debt warehouse
facility. 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
2001 followed by a seven-year amortization period. At March 31, 2000, the
interest rate was a commercial paper based rate plus 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
March 31, 2000, $14.9 million was available under this facility.
Approximately $13.5 million of the Company's debt is repayable during the
remainder of 2000. 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.
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 the remainder of 2000,
additional used engines for its operations. As of March 31, 2000, the Company's
current commitment to such purchases is not more than $4.5 million.
MANAGEMENT OF INTEREST RATE EXPOSURE
At March 31, 2000, $255.1 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 March 31, 2000, the notional
principal amount of the cap was $28.2 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 $60.0 million, a weighted average remaining term
of 21 months and a weighted average fixed rate of 5.90%.
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 March 31, 2000, such swap
agreements had notional outstanding amounts totaling $65 million, a weighted
average remaining term of 35 months and a weighted average fixed rate of 6.02%.
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.
13
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
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 herein. 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, 1999. The
cautionary statements made in this report should be read as 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 its operations is dependent, in large 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 is not successful in obtaining
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) finance possible future acquisitions,
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, (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
14
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
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 many of the Company's borrowings are at a floating rate.
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 borrowings, and have a
material adverse effect on the Company's business, financial condition and/or
results of operations.
During the three month period ended March 31, 2000, 76% of the Company's
lease revenue was generated by leases to foreign 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 has recently 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 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.
15
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
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. 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.
To date, the Company has not experienced any material Year 2000 issues with
its purchased software. In addition, to date, the Company has not been impacted
by any Year 2000 problems that may have impacted various third parties that are
important to the Company's business, including lessees, customers, vendors and
financial institutions. The amount the Company has spent related to Year 2000
issues has not been material. The Company continues to monitor its computer
systems for any potential Year 2000 issues.
ITEM 3. 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 $2.4 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 provides 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 three
month period ended March 31, 2000, 76% 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.
16
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
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.
10.1 Second Amendment to Amended and Restated Series 1997-1
Supplement.*
10.2 Amended and Restated Credit Agreement as of February 10,
2000.*
11.1 Statement regarding computations of per share earnings.
27.1 Financial Data Schedule.
- -----------------------------------------
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment and the redacted material has been filed separately
with the Commission.
(b) Reports on Form 8-K
None.
17
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
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: May 12, 2000
Willis Lease Finance Corporation
By: /s/ James D. McBride
--------------------------------------
James D. McBride
Chief Financial Officer
18