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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from December 1996 to March 1997
Commission File Number: 0-28774
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
California 68-0070656
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
180 Harbor Drive, Suite 200, Sausalito, CA 94965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 331-5281
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___No X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Title of each class Outstanding at May 13, 1997
------------------- ---------------------------
Common Stock, No Par Value 5,430,861
1
WILLIS LEASE FINANCE CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income
Three months ended March 31, 1997 and 1996 4
Consolidated Statements of Shareholders' Equity
Year Ended December 31, 1996 and three Months Ended March 31, 1997 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
And Results of Operations
PART 2. OTHER INFORMATION 14
Item 6. Exhibits and Reports on Form 8-K 14
2
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1997 1996
----------------------- --------------------
(Unaudited)
ASSETS
Cash and cash equivalents $7,803,582 $6,573,241
Deposits
13,217,831 13,600,204
Aircraft engines, less accumulated depreciation of $16,712,210
at March 31, 1997 and $16,372,418 at December 31, 1996
98,971,723 93,131,972
Aircraft engines on capital lease, less accumulated depreciation
of $22,203 at March 31, 1997 and $0 at December 31, 1996
2,938,254 2,960,457
Property, equipment and furnishings, less accumulated depreciation
of $181,957 at March 31, 1997 and $160,407 at December 31, 1996
481,072 458,780
Spare parts inventory
4,571,288 4,057,648
Maintenance billings receivable
891,502 1,107,283
Operating lease rentals receivable
325,570 405,601
Receivables from spare parts sales
1,440,310 854,566
Other receivables
1,443,706 829,522
Other assets
1,368,814 953,419
----------------------- ---------------------
Total assets $133,453,652 $124,932,693
======================= =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $2,255,599 $2,753,641
Salaries and commissions payable
587,212 538,658
Deferred income taxes
7,924,369 5,949,676
Deferred gain
203,150 209,774
Notes payable and accrued interest
75,045,065 73,185,657
Capital lease obligation
2,906,704 2,960,457
Residual share payable
1,389,831 1,199,279
Maintenance deposits
13,610,084 11,680,525
Security deposits
2,168,400 1,978,505
Unearned lease revenue
1,089,659 1,274,269
----------------------- ---------------------
Total liabilities $107,180,073 $101,730,441
Shareholders' equity:
Common stock, no par value. Authorized 20,000,000 shares;
5,430,861 and 5,426,793 issued and outstanding at March 31, 1997
and December 31,1996, respectively
16,103,946 16,055,689
Retained earnings
10,169,633 7,146,563
----------------------- ---------------------
Total shareholders' equity
26,273,579 23,202,252
----------------------- ---------------------
=====================
Total liabilities and shareholders' equity $133,453,652 $124,932,693
======================= =====================
<FN>
See accompanying notes to the consolidated financial statements
</FN>
3
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31,
------------------------------------------
1997 1996
-------------------- --------------------
REVENUE
Operating lease revenue $4,115,077 $3,453,727
Gain on sale of leased engines
397,379 -
Spare part sales
2,221,680 1,286,217
Sale of equipment acquired for resale
2,547,840 2,210,640
Interest and other income
251,525 321
-------------------- --------------------
Total revenue $9,533,501 $6,950,905
EXPENSES
Interest expense
1,464,480 1,147,071
Depreciation expense
875,460 1,100,174
Residual share
190,552 221,963
Cost of spare part sales
1,304,152 524,552
Cost of equipment acquired for resale
2,252,517 1,600,000
General and administrative
1,785,915 910,111
-------------------- --------------------
Total expenses $7,873,076 $5,503,871
-------------------- --------------------
Income before income taxes, minority interest and extraordinary item
1,660,425 1,447,034
Income taxes
(645,284) (583,484)
-------------------- --------------------
Income before minority interest and extraordinary item
1,015,141 863,550
Less: minority interest in net income of subsidiary
- (26,319)
-------------------- --------------------
Income before extraordinary item
1,015,141 837,231
Extraordinary item less applicable income taxes
2,007,929 -
-------------------- --------------------
Net Income $3,023,070 $837,231
==================== ====================
Earnings per common share:
Income before extraordinary item
0.18 0.27
Extraordinary item
0.36 -
-------------------- --------------------
Net Income
0.54 0.27
==================== ====================
Weighted average number of shares outstanding
5,577,377 3,110,657
==================== ====================
<FN>
See accompanying notes to the consolidated financial statements
</FN>
4
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Year Ended December 31, 1996 and Three Months Ended March 31, 1997
Issued and Total
outstanding Advances shareholders'
shares of Common Retained to equity
common stock stock earnings shareholders (deficit)
------------ ------ -------- ------------ -------------
Balances at December 31, 1995 1,500 $ 500 $ 5,293,566 ($ 481,789) $ 4,812,277
1,500
Common stock issue and
proceeds from IPO, net 5,425,293 16,055,189 -- -- 16,055,189
Repayments to shareholders, net -- -- -- 481,789 481,789
Dividends -- -- (951,475) -- (951,475)
Net income -- 2,804,472 -- -- 2,804,472
----------- ------------ ------------ ------------ ------------
Balance at December 31, 1996 5,426,793 16,055,689 7,146,563 -- 23,202,252
Shares issued 4,068 48,257 -- -- 48,257
Dividends -- -- -- -- --
Net income -- -- 3,023,070 -- 3,023,070
----------- ------------ ------------ ------------ ------------
Balances at March 31, 1997 (unaudited) 5,430,861 $ 16,103,946 $ 10,169,633 $ 26,273,579 --
=========== ============ ============ ============ ============
<FN>
See accompanying notes to the consolidated financial statements
</FN>
5
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
----------------------------------------
1997 1996
------------------- -------------------
Cash flows from operating activities:
Net income $3,023,070 $837,231
Adjustments to reconcile income to net cash
provided by (used in) operating activities:
Depreciation of aircraft engines held for lease
849,494 1,087,573
Depreciation of property, equipment and furnishings
25,966 12,601
Loss on sale of property, equipment and furnishings
885 4,556
(Gain) on sale of leased engines
(397,379) -
Increase in residual share payable
190,552 221,963
Minority interest in net income of subsidiary
- 26,319
Changes in assets and liabilities:
Decrease in deposits
382,373 674,765
(Increase) in spare parts inventory
(513,640) (176,657)
(Increase) in receivables
(904,116) (1,896,690)
(Increase) decrease in other assets
(415,395) 4,202
(Decrease) increase in accounts payable and accrued expenses
(498,042) 987,424
Increase in salaries and commission payable
48,554 19,017
Increase in deferred income taxes
1,974,693 561,961
(Decrease) in deferred gain on sale of aircraft engine
(6,624) -
(Decrease) increase in accrued interest
(378,470) 13,089
Increase in maintenance deposits
1,929,559 569,466
Increase in security deposits
189,895 222,396
(Decrease) in unearned lease revenue
(184,610) (146,885)
------------------- -------------------
Net cash provided by operating activities
5,316,765 3,022,331
Cash flows from investing activities:
Proceeds from sale of aircraft engines (net of selling expenses)
1,000,000 -
Proceeds from sale of property, equipment and furnishings
3,500 22,200
Purchase of aircraft engines held for operating lease
(7,269,663) (505,820)
Purchase of property, equipment and furnishings
(52,643) (106,544)
------------------- -------------------
Net cash used in investing activities
(6,318,806) (590,164)
Cash flows from financing activities:
Advances to shareholder, net
- (98,756)
Proceeds from issuance of notes payable
56,838,374 7,000
Proceeds from issuance of common stock
48,257 -
Principal payments on notes payable
(54,600,496) (2,545,258)
Principal payments on capital lease obligation
(53,753) -
------------------- -------------------
Net cash provided (used in) by financing activities
2,232,382 (2,637,014)
Increase (decrease) in cash and cash equivalents
1,230,341 (204,847)
Cash and cash equivalents at beginning of period
6,573,241 815,649
------------------- -------------------
Cash and cash equivalents at end of period $7,803,582 $610,802
=================== ===================
<FN>
See accompanying notes to the consolidated financial statements
</FN>
6
WILLIS LEASE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
In the opinion of Management, the accompanying unaudited consolidated financial
statements of Willis Lease Finance Corporation ("The Company") contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of March 31, 1997 and
the results of its operations for the three month periods ended March 31, 1997
and 1996 and cash flows for the three month periods ended March 31, 1997 and
1996. The results of operations and cash flows for the three month periods ended
March 31, 1997 and 1996 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1997.
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Pursuant to such rules and regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The accompanying unaudited interim financial statements
should be read in conjunction with the 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 to
Stockholders incorporated by reference in the Company's Annual Report on Form
10-KA for the fiscal year ended December 31, 1996.
2. Management Estimates
These financial statements have been prepared on the accrual basis of accounting
in accordance with generally accepted accounting principles. This requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("The Purchase Plan") was adopted by
the Board of Directors on June 1, 1996 and filed with the Securities and
Exchange Commission on November 1, 1996. The Purchase Plan is designed to allow
eligible employees of the Company and participating subsidiaries to purchase
shares of Common Stock, at semi-annual intervals, through their periodic payroll
deduction under the Purchase Plan. A reserve of 75,000 shares of common stock
has been established for this purpose. During the three month period ended March
31, 1997, the Company issued 4,068 shares of Common Stock as a result of
employee stock purchases under the plan.
7
4. Financing
In February 1997, the Company obtained a new loan agreement for $41.5 million to
replace the existing note of $44.2 million. The transaction resulted in an
extraordinary gain of $2 million or $0.36 per weighted average share, net of
tax. The new facility bears interest at LIBOR plus 2.5% and matures in February,
1998. At that time the Company has the option to extend the facility for an
additional six years.
In February 1997, an $8,742,376 bridge loan obtained to acquire two engines, two
auxiliary power units and a spare parts package was replaced with a term loan in
the amount of $11,010,875 at an interest rate of 10.23% for five years.
5. Subsequent event
On April 18, 1997, Target Airways, Ltd., dba Great American Airways (the
Debtor), filed a voluntary petition under Chapter 11 in the U.S. Bankruptcy
Court in the District of Nevada. Willis has two engines under lease to the
Debtor. The engines have a combined net book value of $5.4 million and a
combined rental rate of $86,000 per month. The Company has prepaid rent, a
letter of credit and security deposits totaling $288,000 relating to these
engines. It is not known at this time what the effect of the bankruptcy will be,
if any, on the Company's financial position or results of operations.
6. Pro Forma Net Income Per Share
Net income per share has been computed by dividing net income by the number of
shares of Willis Lease Finance Corporation common stock issued to the original
shareholder (3,110,657 shares), plus common stock issued in connection with the
Initial Public Offering (2,316,136 shares), warrants and options (400,000
shares) and shares issued in the three months ended March 31, 1997 (4,068
shares) diluted on a weighted average basis for the period. This calculation
results in a weighted average number of shares outstanding of 5,577,377 and
3,110,657 for the three months ended March 31, 1997 and March 31, 1996,
respectively.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company's primary businesses are the leasing of spare replacement aircraft
engines, spare parts packages and the strategic acquisition and resale of
aircraft engines and parts to the worldwide commercial airline aftermarket. The
Company commenced leasing operations in 1988 and established Willis Aeronautical
Services, Inc., ("WASI") to conduct its spare parts resale operation in October
1994. Revenue consists primarily of operating lease revenue, income from the
sale of leased engines, sales of spare parts and components and equipment sales.
Summary of Financial Results for the Quarter Ended March 31, 1997. Total
revenues for the quarter ending March 31, 1997 were $9.5 million, compared to
$7.0 million in the corresponding quarter of 1996. This increase resulted from
increased revenue due to a higher asset base, a higher volume of spare parts
sales and a modest increase in sale of equipment acquired for resale. Net income
for the quarter ending March 31, 1997, excluding extraordinary item, was $1.0
million, compared to $0.8 million in the corresponding quarter of 1996. This
increase resulted from higher operating lease revenue less related expenses,
higher gross profit margins from sale of spare parts offset by lower gain on
equipment acquired for resale.
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Revenue is summarized as follows:
- --------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------
Amount % Amount %
------ -- ------ --
(dollars in thousands)
Revenue
Operating lease revenue $4,115 43.2% $3,454 49.7%
Gain on sale of leased engines 397 4.2% -- --
Spare parts sales 2,222 23.2% 1,286 18.5%
Sale of equipment acquired for resale 2,548 26.7% 2,211 31.8%
Interest and other income 252 2.6% -- --
------ ------ ------ ------
Total $9,534 100.0% $6,951 100.0%
- --------------------------------------------------------------------------------
Lease Portfolio. During the quarter ended March 31, 1997, two engines and three
parts packages (primarily avionics) were added to the Company's lease portfolio
at a total cost of $7.1 million. One engine with a net book value of $603,000
was sold from the portfolio, resulting in a gain of $397,000.
Operating Leases. Operating lease revenue for the three months ended March 31,
1997 increased 19% to $4.1 million from $3.5 million from the comparable period
in 1996. This increase reflects lease revenues from engines acquired after March
31, 1996 ($0.9 million), one engine off-lease during the quarter ended March 31,
1996 but on lease during the quarter ended March 31, 1997 ($0.2 million) and net
increases in effective lease rates on the existing portfolio ($0.1 million).
Offsetting this increase is a decrease of lease revenue of $0.5 million from
engines on lease during the quarter ended March 31, 1996 and sold or otherwise
disposed of prior to January 1, 1997.
Lease revenue is not materially affected in the short term by lease volume. In
the early years of a lease, much of the lease revenue is offset by the higher
interest expense. Accordingly, the timing of new lease volume does not have a
material effect on the near-term quarterly net income.
9
Expenses directly related to operating lease activity increased 1% to $2.5
million for the three months ended March 31, 1997 from the comparable period in
1996. Interest expense increased 26% to $1.4 million for the three months ended
March 31, 1997 from the comparable period in 1996, due primarily to an increased
loan base and the replacement of the existing facility with a new loan agreement
bearing a higher interest rate in the first quarter of 1997. Residual sharing
expenses decreased 14% to $191,000 from the comparable period in 1996 due to
changes in the Company's portfolio of engines subject to such agreements.
Depreciation expense decreased 22% to $849,000 for the three months ended March
31, 1997 from comparable period in 1996, due to accelerated depreciation on one
engine in 1996, no longer applicable in 1997, offset by increased depreciation
due to the larger asset base.
Spare Parts Sales. Revenues from spare parts sales increased 73% to $2.2 million
and the gross margin decreased to 40% in 1997 from 59% in the corresponding
period in 1996. The increase in revenues resulted from increased acquisition of
inventory in the prior quarter. The change in margins resulted from a higher
percentage of parts sold in the current quarter which had a higher acquisition
cost.
Equipment Sales. During the three months ended March 31, 1997, the Company sold
one engine for $2.5 million which resulted in a gain of $0.3 million, compared
to the three months ended March 31, 1996, during which the Company sold one
engine for $2.2 million resulting in a gain of $0.6 million.
Interest and Other Income. Interest and other income for the three months ended
March 31, 1997 increased to $252,000 from zero for the three months ended March
31, 1996. This is a result of interest earned on deposits held, primarily the
proceeds from the Company's initial public offering.
General and Administrative Expenses. General and administrative expenses
increased 96% to $1.8 million for the three months ended March 31, 1997 from the
comparable period in 1996. This increase reflects additional compensation and
related benefits, telephone and travel costs due to staff additions, increased
rent due to the expansion of the WASI facility, an increase in professional fees
and insurance incurred by the Company and public company costs incurred in 1997.
In the past twelve months, the Company has increased its staff to 30 employees
from 18 employees a year ago to manage its growth in assets and increase in
transactions under consideration.
10
Liquidity and Capital Resources
In February 1997, the Company obtained a new loan agreement for $41.5 million to
replace the existing note of $44.2 million. The transaction resulted in an
extraordinary gain of $2 million or $0.36 per weighted average share, net of
tax. The new facility bears interest at LIBOR plus 2.5% and matures in February,
1998. At that time the Company has the option to extend the facility for an
additional six years.
In February 1997, an $8,742,376 bridge loan obtained to acquire two engines, two
auxiliary power units and a spare parts package was replaced with a term loan in
the amount of $11,010,875 at an interest rate of 10.23% for five years.
At March 31, 1997, $48.0 million of the Company's borrowings were on a variable
rate basis, substantially all of which bears interest at LIBOR plus 2.5%. The
Company's engine leases are generally structured at fixed rental rates for
specific terms. To date, this variable rate borrowing has resulted in lower
interest expense for the Company. The Company purchased an interest rate cap
from an investment grade financial institution in September, 1996, for $460,000
to limit its exposure to increases in interest rates on a portion of its
variable rate borrowings. The cap has a notional principal amount of $40.8
million and caps the Company's exposure to interest rate increases for a period
of four years to a maximum fixed interest rate of 8.66%. The cost of the cap is
being amortized over four years. The Company will be exposed to credit risk in
the event of non-performance by the counterparty to the cap.
Increases in interest rates could narrow or eliminate the spread, or result in a
negative spread, between the rental revenue the Company realizes under its
leases and the interest rate that the Company pays under its borrowings. In the
future, the Company does not expect to enter into any variable rate loans except
in those instances where it obtains a variable rate lease from its customers and
anticipates significantly reducing its remaining variable rate borrowings during
the next four years, after which the Company will re-evaluate its exposure to
interest rate variations.
As of March 31, 1997, the Company has two engines and three spare parts packages
which have not been financed. Until such permanent financing is in place, the
Company has interest rate risk if interest rates increase, since the underlying
lease revenue is fixed. The Company will seek permanent financing for the
engines, although no assurance can be given that permanent financing will be
available on favorable terms, if at all.
The Company believes that its current and anticipated credit facilities,
internally generated funds and the net proceeds of the Initial Public Offering
("the Offering"), will be sufficient to fund the Company's anticipated
operations until the first quarter of 1998, at which time, additional equity
capital is anticipated to be required to fund projected growth. The Company is
also exploring a possible securitization of its lease portfolio. The Company's
ability to successfully execute its business strategy, and to sustain its
operations, is dependent in part on its ability to obtain debt capital and to
raise equity capital. There can be no assurance that the necessary amount of
such capital or securitization will continue to be available to the Company on
favorable terms, or at all. If the Company were unable to obtain any portion of
required financing on favorable terms, the Company's ability to add new engines
to its portfolio or to conduct profitable operations with its existing asset
base would be impaired, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
11
Factors That May Affect Future Results
In addition to other information in this Report, the following risk factors
should be considered carefully by potential purchasers in evaluating an
investment in the Common Stock of the Company. 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 cautionary
statements made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear in this Report. 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-KA for the year ended December 31, 1996.
The Company leases its portfolio of aircraft engines primarily under operating
leases rather than finance leases. Operating leases require the Company to
re-lease or sell aircraft engines in its portfolio in a timely manner upon
termination of the lease in order to minimize off-lease time and recover its
original investment in the aircraft engine. Numerous factors, many of which are
beyond the control of the Company, may have an impact on the Company's ability
to re-lease or sell an aircraft engine on a timely basis. Among the factors are
general market conditions, regulatory changes (particularly those imposing
environmental, maintenance and other requirements on the operation of aircraft
engines), changes in the supply or cost of aircraft engines and technological
developments. Further, the value of a particular used aircraft engine varies
greatly depending upon its condition, the number of hours remaining until the
next major maintenance of the aircraft engine is required and general conditions
in the airline industry. In addition, the success of an operating lease depends
in part upon having the aircraft engine returned by the lessee in marketable
condition as required by the lease. Consequently, there can be no assurance that
the Company's estimated residual value for aircraft engines will be realized. If
the Company is unable to re-lease or resell aircraft engines on favorable terms,
its business, financial condition, cash flow, ability to service debt and
results of operations could be adversely affected.
The Company also engages in the short-term trading of commercial aircraft
engines in the aftermarket. Although it is the Company's general policy not to
purchase engines on speculation, the Company has and, if it deems appropriate,
may in the future occasionally purchase engines without having a commitment for
the engines' resale. If the Company were to purchase an engine without having a
firm commitment for its resale or if a firm commitment for resale were to exist
but not be consummated for whatever reason, the Company would be subject to all
the risks of ownership of the engine as described above.
The Company also engages in the purchase and resale of aftermarket airframe
rotable parts, engine parts, engines and modules. Before parts may be installed
in an aircraft, they must meet certain standards of condition established by the
Federal Aviation Administration ("FAA") and/or the equivalent regulatory
agencies in other countries. Parts must also be traceable to sources deemed
acceptable by such agencies. Parts owned by the Company may not meet applicable
standards or standards may change, causing parts which are already in the
Company's inventory to be scrapped or modified. Engine manufacturers may also
develop new parts to be used in lieu of parts already contained in the Company's
inventory. In all such cases, to the extent the Company has such parts in its
inventory, their value may be reduced.
The Company would be affected by downturns in the air transportation industry in
general. Substantial increases in fuel costs or interest rates, increasing fare
competition, slower growth in air traffic, or any significant downturn in the
general economy could adversely affect the air transportation industry and may
therefore negatively impact the Company's business, financial condition and
results of operations.
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 under a large dollar engine lease or to repossess engines in
the event of a default by a lessee could have a material adverse effect on the
Company's business, financial condition or results of operations. In most cases
where a debtor seeks protection under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code"), creditors are stayed automatically from enforcing
their rights. In the case of United States certified airlines, Section 1110 of
the Bankruptcy Code provides certain relief to lessors of the aircraft engines.
Specifically, the airline has 60 days from the date the lessor makes its claim
to agree to perform its obligations and to cure any defaults. If it does not do
so, the lessor may repossess the aircraft engine. The scope of Section 1110 has
been the subject of significant litigation and there can be no assurance that
the provisions of Section 1110 will protect the Company's investment in an
aircraft engine in the event of a lessee's bankruptcy.
On April 18, 1997, Target Airways, Ltd., dba Great American Airways (the
Debtor), filed a voluntary petition under Chapter 11 in the U.S. Bankruptcy
Court in the District of Nevada. Willis has two engines under lease to the
Debtor. The engines have a combined net book value of $5.4 million and a
combined rental rate of $86,000 per month. The Company has prepaid rent, a
letter of credit and security deposits totaling $288,000 relating to these
engines. It is not known at this time what the effect of the bankruptcy will be,
if any, on the Company's financial position or results of operations.
12
In 1996, approximately 61% of the Company's lease revenue was generated by
leases to foreign customers. Such leases may present greater risks to the
Company because certain foreign laws, regulations and judicial procedures may
not be as protective of lessor rights as those which apply in the United States.
In addition, many foreign countries have currency and exchange laws regulating
the international transfer of currencies. To date, the Company has experienced
some collection problems under certain leases with foreign airlines, and there
can be no assurance that the Company will not experience such collection
problems in the future. The Company may also experience collection problems
related to the enforcement of its lease agreements under foreign local laws and
the attendant remedies in such locales Section 1110 does not apply to lessees
located outside of the United States and applicable foreign laws may not provide
comparable protection. Consequently, the Company is subject to the timing and
access to courts and the remedies local laws impose in order to collect its
lease payments and recover its assets.
The Company has experienced fluctuations in its quarterly results and
anticipates that these fluctuations may continue. Such fluctuations may be due
to a number of factors, including the timing of acquisitions and sales of
engines and spare parts and engine marketing activities, unanticipated early
lease terminations or a default by a lessee. Given the possibility of such
fluctuations, the Company believes that comparisons of the results for preceding
quarters are not necessarily meaningful and that results for any one quarter
should not be relied upon as an indication of future performance. In the event
the Company's volume of transactions, revenues or earnings for any quarter are
less than the level expected by securities analysts or the market in general,
such shortfall could have an immediate and significant adverse impact on the
market price of the Company's Common Stock.
The Company has recently experienced significant growth in revenues. Such growth
has placed, and is expected to continue to place, a significant strain on its
managerial, operational and financial resources. There can be no assurance that
the Company will be able to effectively manage the expansion of its operations,
or that the Company's systems, procedures or controls will be adequate to
support the Company's operations. Any inability to effectively manage growth, if
any, could have a material adverse effect on the Company's business, financial
condition and results of operations. On February 6, 1997, William McElfresh,
formerly Executive Vice President-Marketing was named of Executive President of
Strategic Development. At the same time, Allan W. Nilsen, formerly President of
Airmotive, Inc., joined the Company as Senior Vice President of Sales and
Marketing. On April 25, 1997, John F. Votruba, General Counsel, resigned from
the Company effective June 9, 1997.
13
Part 2. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibit Number Description
-------------- -----------
3.1 Articles of Incorporation. Incorporated by reference to
Exhibit 3.1 to Registration Statement No. 333-5126-LA filed on
June 21, 1996
3.2 Amended and Restated Articles of Incorporation, filed
September 11, 1996, together with Certificate of Amendment of
Amended and Restated Articles of Incorporation filed on
September 24, 1996.
3.3 Bylaws. Incorporated by reference to Exhibit 3.3 to
Registration Statement No. 333-5126-LA filed on June 21, 1996.
4.1 Specimen of Common Stock Certificate. Incorporated by
reference to Exhibit 4.1 to Registration Statement No.
333-5126-LA filed on June 21, 1996.
10.5 Lease dated February 4, 1997, between Atlas Metal Spinning
Company and Willis Aeronautical Services, Inc., for an office
and a warehouse facility located in South San Francisco.
Incorporated by reference to Exhibit 10.5 of the Company's
report on Form 10K for the year ended December 31, 1996.
10.16 Loan Agreement dated January 28, 1997, together with related
documents. Incorporated by reference to Exhibit 10.16 of the
Company's report on Form 10K for the year ended December 31,
1996.
10.18 Loan agreement dated February 2, 1997 between the Company and
Finova Capital Corporation.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule
14
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.
Willis Lease Finance Corporation
Date: March 14, 1997
By: /s/ Elliot M. Fischer
..........................................
Elliot M. Fischer
Chief Financial Officer, Controller
15