1
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, 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 September 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 [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 NOVEMBER 5, 1997
------------------- -------------------------------
Common Stock, No Par Value 5,452,320
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WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION Page No.
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
As of September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income
Three months and nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Shareholders' Equity
Year ended December 31, 1996 and nine months ended September 30, 1997 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART 2. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
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3
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 6,603,045 $ 6,573,241
Deposits 14,220,403 13,600,204
Equipment held for operating lease, less accumulated
depreciation of $17,154,618 at September 30, 1997
and $16,372,418 at December 31, 1996 125,924,782 96,092,429
Net investment in direct finance lease 9,961,033 --
Property, equipment and furnishings, less accumulated
depreciation of $240,275 at September 30, 1997
and $160,407 at December 31, 1996 507,638 458,780
Spare parts inventory 9,569,416 4,057,648
Maintenance billings receivable 1,078,400 1,107,283
Operating lease rentals receivable 108,712 405,601
Receivables from spare parts sales 3,342,133 854,566
Other receivables 82,304 829,522
Other assets 1,620,590 953,419
------------ ------------
Total assets $173,018,456 $124,932,693
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 2,144,727 $ 2,753,641
Salaries and commissions payable 909,982 538,658
Deferred income taxes 8,980,369 5,949,676
Deferred gain 189,902 209,774
Notes payable and accrued interest 105,224,643 73,185,657
Capital lease obligation 2,837,703 2,960,457
Residual share payable 1,797,404 1,199,279
Maintenance deposits 17,925,155 11,680,525
Security deposits 2,480,392 1,978,505
Unearned lease revenue 1,364,679 1,274,269
------------ ------------
Total liabilities $143,854,956 $101,730,441
Shareholders' equity:
Common stock, no par value. Authorized 20,000,000
shares; 5,452,320 and 5,426,793 issued and
outstanding at September 30, 1997
and December 31, 1996, respectively 16,276,933 16,055,689
Retained earnings 12,886,567 7,146,563
------------ ------------
Total shareholders' equity 29,163,500 23,202,252
------------ ------------
Total liabilities and shareholders' equity $173,018,456 $124,932,693
============ ============
See accompanying notes to the consolidated financial statements
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4
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
REVENUE
Operating lease revenue $ 4,937,206 $ 3,544,111 $ 13,481,032 $ 10,379,013
Finance lease revenue 222,763 -- 222,763 --
Gain on sale of leased equipment 936,069 -- 1,333,448 --
Spare part sales 5,581,648 868,768 11,459,311 3,303,123
Sale of equipment acquired for resale 2,600,000 2,781,015 12,747,840 9,605,315
Interest and other income 90,821 149,887 543,660 196,702
------------ ------------ ------------ ------------
Total revenue $ 14,368,507 $ 7,343,781 $ 39,788,054 $ 23,484,153
EXPENSES
Interest expense 2,068,997 1,100,640 5,225,603 3,371,351
Depreciation expense 1,140,692 734,660 2,995,121 2,512,585
Residual share 226,659 161,813 598,125 535,795
Cost of spare part sales 4,044,196 217,649 7,751,179 1,603,609
Cost of equipment acquired for resale 2,033,687 3,017,625 10,671,668 8,551,229
General and administrative 2,434,013 1,332,830 6,358,000 3,434,216
------------ ------------ ------------ ------------
Total expenses 11,948,244 $ 6,565,217 33,599,696 $ 20,008,785
Income before income taxes, minority
interest and extraordinary item 2,420,263 778,564 6,188,358 3,475,368
Income taxes (969,327) (300,404) (2,456,283) (1,394,943)
------------ ------------ ------------ ------------
Income before minority interest and extraordinary item 1,450,936 478,160 3,732,075 2,080,425
Less: minority interest in net income of subsidiary -- (44,601) -- (79,053)
------------ ------------ ------------ ------------
Income before extraordinary item 1,450,936 433,559 3,732,075 2,001,372
Extraordinary item less applicable income taxes -- -- 2,007,929 --
------------ ------------ ------------ ------------
Net Income $ 1,450,936 $ 433,559 $ 5,740,004 $ 2,001,372
============ ============ ============ ============
Earnings per common share:
Income before extraordinary item 0.25 0.13 0.65 0.62
Extraordinary item -- -- 0.36 --
------------ ------------ ------------ ------------
Net Income 0.25 0.13 1.01 0.62
============ ============ ============ ============
Weighted average number of shares outstanding 5,741,448 3,425,287 5,708,569 3,215,148
============ ============ ============ ============
See accompanying notes to the consolidated financial statements
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WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997
Issued and
outstanding Advances Total
shares of Common Retained to shareholders'
common stock stock earnings shareholders equity
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995 1,500 $ 500 $ 5,293,566 $ (481,789) $ 4,812,277
Common stock issued 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 25,527 221,244 -- -- 221,244
Net income -- -- 5,740,004 -- 5,740,004
------------ ------------ ------------ ------------ ------------
Balances at September 30, 1997 (unaudited) 5,452,320 $ 16,276,933 $ 12,886,567 -- $ 29,163,500
============ ============ ============ ============ ============
See accompanying notes to the consolidated financial statements
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WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,740,004 $ 2,001,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of equipment held for lease 2,905,016 2,460,703
Depreciation of property, equipment and furnishings 90,105 51,882
(Gain) loss on sale of property, equipment and furnishings (45,122) 5,700
Gain on sale of leased equipment (1,333,448) --
Increase in residual share payable 598,125 535,795
Minority interest in net income of subsidiary -- (84,774)
Changes in assets and liabilities:
(Increase) decrease in deposits (620,199) 246,955
Increase in spare parts inventory (5,511,768) (681,650)
Increase in receivables (1,414,577) (771,175)
Increase in other assets (667,171) (1,281,508)
(Decrease) increase in accounts payable and accrued expenses (608,914) 5,198,453
Increase in salaries and commission payable 371,324 163,544
Increase in deferred income taxes 3,030,693 1,387,088
Decrease in deferred gain (19,872) --
(Decrease) increase in accrued interest (364,270) 25,045
Increase in maintenance deposits 6,244,630 952,088
Increase in security deposits 501,887 619,188
Increase (decrease) in unearned lease revenue 90,410 (95,785)
------------- -------------
Net cash provided by operating activities 8,986,853 10,732,921
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for operating lease (net of selling 12,083,807 997,350
expenses)
Proceeds from sale of property, equipment and furnishings 80,500 28,200
Purchase of equipment held for operating lease (43,487,728) (4,121,670)
Purchase of property, equipment and furnishings (174,341) (236,558)
Investment in direct finance lease (10,095,000) --
Principal payments received on direct finance lease 133,967 --
------------- -------------
Net cash used in investing activities (41,458,795) (3,332,678)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments from shareholder, net -- 476,204
Proceeds from issuance of notes payable 104,038,706 2,484,467
Proceeds from issuance of common stock 221,244 13,949,759
Principal payments on notes payable (71,635,450) (9,945,597)
Cash dividends paid on common stock -- (500,000)
Principal payments on capital lease obligation (122,754) --
------------- -------------
Net cash provided by financing activities 32,501,746 6,464,833
Increase in cash and cash equivalents 29,804 13,865,076
Cash and cash equivalents at beginning of period 6,573,241 815,649
------------- -------------
$ 6,603,045 $ 14,680,725
Cash and cash equivalents at end of period ============= =============
See accompanying notes to the consolidated financial statements
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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 to Shareholders incorporated by reference in the Company's Annual Report
on Form 10-KA for the fiscal year ended December 31, 1996.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal and recurring
adjustments) necessary to present fairly the financial position of the Company
as of September 30, 1997, and December 31, 1996, and the results of its
operations for the three month and nine month periods ended September 30, 1997
and 1996 and its cash flows for the nine month periods ended September 30, 1997
and 1996. The results of operations and cash flows for the nine month period
ended September 30, 1997, are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1997.
2. Management Estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
During the quarter ended September 30, 1997, the Company recorded an allowance
for estimated returns of spare parts based on recent experience. Such returns
occur in the ordinary course of the Company's business.
3. Shares Issued
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board of Directors on June 21, 1996. The Purchase Plan is designed to allow
eligible employees of the Company and participating subsidiaries to purchase
shares of Common Stock, at semi-annual intervals, through their periodic payroll
deduction under the Purchase Plan. The purchase price is the lesser of 85% of
the market price of the Common Stock at the beginning of each purchase interval
or 85% of the market price of the Common Stock at the end of each purchase
interval. A reserve of 75,000 shares of Common Stock has been established for
this purpose. During the nine month period ended September 30, 1997, the Company
issued 10,527 shares of Common Stock as a result of employee stock purchases
under the Purchase Plan.
Under the 1996 Stock Option/Stock Issuance Plan, 525,000 shares of the Company's
Common Stock were set aside to provide eligible persons with the opportunity to
acquire a proprietary interest in the Company. During the nine month period
ended September 30, 1997, 15,000 stock options were exercised in connection with
this agreement.
4. Financing
In February 1997, the Company obtained a new loan agreement for $41.5 million to
replace an existing loan of $44.2 million. The transaction resulted in an
extraordinary gain of $2 million or $0.36 per weighted average share, net of
tax. The new facility bears interest at LIBOR plus 2.5% and matures in February
1998. At that time, the Company has the option to extend the facility for an
additional six years.
In June 1997, the Company obtained a $15 million revolving credit facility to
finance the acquisition of engines and high-value spare parts for sale or lease.
In July 1997, the Company increased this facility to $30 million. This facility,
which expires on June 12, 1998, bears interest at prime plus 50 basis points and
may be renewed annually.
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5. Subsequent event
On October 5, 1997, Western Pacific Airlines, Inc., a domestic lessee of three
engines with a combined net book value of $8.7 million filed a petition under
Chapter 11 of the Bankruptcy Code in the District of Colorado. Western Pacific
has 60 days from October 5, 1997, to agree to perform its obligations and to
cure any defaults under its leases with the Company. If Western Pacific does not
cure its defaults, the Company intends to repossess its engines. Although the
Company has not received any payments from Western Pacific in October 1997, the
Company has security deposits and prepaid rents totaling $284,500 relating to
these engines. At this time, the Company does not anticipate that the bankruptcy
will have a material adverse effect on the Company's financial position or
results of operations.
6. Earnings Per Share
For the purposes of calculating earnings per share, weighted average shares
outstanding includes the effect, if any, of outstanding options and warrants.
7. Commitments
In June 1997, the Company committed to purchase nine aircraft engines. The
Company is obligated to purchase these engines by December 31, 1997. The
agreement provides that, to the extent that a purchased engine will be
overhauled by the seller, the payment of both the purchase price and the cost of
the overhauled engine will be deferred until the engine is overhauled and
delivered to the Company. It is not known at this time how many engines will be
overhauled. As of September 30, 1997, three of the nine engines subject to this
agreement have been purchased.
The Company has entered into commitments for the purchase of an aircraft for
disassembly by WASI, the purchase of two engines for the lease portfolio and the
purchase of three commuter aircraft with three spare engines for the lease
portfolio. The aggregate purchase price for these assets is $19.9 million and as
of September 30, 1997, deposits of $310,000 have been made in connection with
these purchases. The Company has arranged financing for one engine and is in the
process of arranging financing for the other purchases.
8. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" which requires the Company to replace its presentation of
primary earnings per share with a presentation of basic earnings per share and
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. The principal difference between primary earnings per
share under current accounting standards and basic earnings per share under the
new statement is that basic earnings per share does not consider common stock
equivalents such as stock options and warrants. Diluted earnings per share under
the new Statement will include potential dilution of convertible securities,
stock options and warrants. The Statement is effective for the Company's third
quarter of 1997 and requires restatement of all prior periods presented under
the new Statement. Basic earnings per share under the new Statement would have
been $.27 and $.13 for the three months ended September 30, 1997 and 1996, and
$1.05 and $.62 for the nine months ended September 30, 1997 and 1996. Diluted
earnings per share under the new Statement would have been $.26 and $.13 for the
three months ended September 30, 1997 and 1996, and $1.03 and $.62 for the nine
months ended September 30, 1997 and 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the business of providing operating leases of
commercial jet aircraft engines and aircraft equipment and selling aircraft
engines and parts to air carriers and overhaul/repair facilities worldwide. The
Company's core business is acquiring and leasing commercial aircraft spare
engines and other aircraft equipment, primarily pursuant to operating leases. As
a significant corollary to its core business, the Company, through its
wholly-owned subsidiary Willis Aeronautical Services, Inc., ("WASI"),
specializes in the purchase and resale of aftermarket airframe and engine parts,
engines, modules and rotable components. The Company also engages in the
selective purchase and resale of commercial aircraft engines
Summary of Financial Results for the Quarter Ended September 30, 1997. Total
revenues for the quarter ending September 30, 1997, were $14.4 million, compared
to $7.3 million in the corresponding quarter of 1996. This increase resulted
from increased revenue due to a higher asset base and significantly higher spare
parts sales, offset by a slight decrease in sale of equipment acquired for
resale. Net income for the quarter ending September 30, 1997, was $1.5 million,
compared to $434,000 in the corresponding quarter of 1996.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue is summarized as follows:
THREE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------------------- ---------------------
Amount % Amount %
-------- -------- -------- --------
(dollars in thousands)
Leasing activities 5,160 35.9% 3,544 48.3%
Gain on sale of leased equipment 936 6.5% -- --
Spare parts sales 5,582 38.8% 869 11.8%
Sale of equipment acquired for resale 2,600 18.1% 2,781 37.9%
Interest and other income 91 0.7% 150 2.0%
-------- -------- -------- --------
Total 14,369 100.0% 7,344 100.0%
======== ======== ======== ========
Gross Profit (net of cost of sales, allowance for sales returns, depreciation
and interest expense as applicable) before general and administrative expenses
and income taxes is summarized as follows:
THREE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------------------- ----------------------
Amount % Amount %
-------- -------- -------- --------
(dollars in thousands)
Leasing activities 1,834 37.5% 1,596 75.0%
Gain on sale of leased equipment 936 19.2% -- --
Spare parts sales 1,457 29.8% 620 29.1%
Sale of equipment acquired for resale 566 11.6% (237) (11.1%)
Interest and other income 91 1.9% 150 7.0%
-------- -------- -------- --------
Total 4,884 100.0% 2,129 100.0%
======== ======== ======== ========
Lease Portfolio. During the quarter ended September 30, 1997, eight engines were
added to the Company's lease portfolio at a total cost of $24.4 million and
three engines were sold.
Leasing Activities. Operating lease revenue for the three months ended September
30, 1997, increased 39% to $4.9 million from $3.5 million for the comparable
period in 1996. This increase reflects operating lease revenues from fourteen
additional engines and five spare parts packages acquired after September 30,
1996. In late June 1997, the Company entered into two finance leases. Finance
lease income generated from these transactions totaled $223,000 for the quarter
ended September 30, 1997. There were no comparable transactions as of September
30, 1996.
Expenses directly related to operating lease activity increased 71% to $3.3
million for the three months ended September 30, 1997, from the comparable
period in 1996. Interest expense increased 86% to $2.0 million for the three
months ended September 30, from the comparable period in 1996, due primarily to
an increased loan base and the replacement of the existing facility with a new
loan agreement in the first quarter of 1997 bearing a higher interest rate.
Residual sharing expenses increased 40% to $227,000 from the comparable period
in 1996. This expense is calculated by comparing the net book value of the
engines subject to such agreements to their related debt balances and adjusting
the residual share payable up or down to the appropriate amount representing the
sharing percentage of any excess of the net book value over the corresponding
debt balance for the five engines subject to residual sharing. Depreciation
expense increased 55% to $1.1 million for the three months ended September 30,
1997, from the comparable period in 1996, due to the larger asset base.
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Gain on Sale of Leased Engines. During the quarter ended September 30, 1997, the
Company sold two engines from the lease portfolio. These engines had a net book
value of $4.4 million and they were sold for a gain of $936,000. Maintenance
deposits collected on one of these engines were not required to be refunded to
the lessee or remitted to the seller and are included in the gain. There were no
sales of leased engines for the quarter ended September 30, 1996.
Spare Parts Sales. Revenues from spare parts sales increased 542% from $869,000
to $5.6 million compared to the three months ended September 30, 1996, due
primarily to the acquisition of three engines in the second and third quarters
of 1997 and the subsequent sale of parts from these engines. The gross profit,
before interest expense, decreased to 28% from 75% in the corresponding period
in 1996. The Company does not believe that the relatively high margin in 1996 is
indicative of future results.
Sale of Equipment Acquired for Resale. During the three months ended September
30, 1997, the Company sold one engine for $1.9 million which resulted in a gain
of $500,000, plus four engines acquired at a cost of $600,000 and sold for a
gain of $100,000. During the three months ended September 30, 1996, the Company
sold two engines for $2.8 million, resulting in a loss of $200,000 due to higher
than expected overhaul costs on the engines.
Interest and Other Income. Interest and other income decreased to $91,000 from
$150,000 for the three months ended September 30, 1996. This is a result of less
cash on deposit earning interest.
General and Administrative Expenses. General and administrative expenses
increased 83% to $2.4 million for the three months ended September 30, 1997,
from $1.3 million in the comparable period in 1996. This increase reflects
expenses associated with staff additions, increased rent due to the expansion of
the WASI facility, as well as an increase in professional fees, insurance
expense and public company costs incurred by the Company in 1997. As of
September 30, 1997, the Company has 40 full-time and 4 part-time employees,
compared to 1 part-time and 24 full-time employees as of September 30, 1996.
Income Taxes. Income taxes for the three months ended September 30, 1997,
increased to $970,000 from $300,000 in the comparable period in 1996. This
increase reflects an increase in the Company's pre-tax earnings.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue is summarized as follows:
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------------------- ---------------------
Amount % Amount %
-------- -------- -------- --------
(dollars in thousands)
Leasing activities 13,704 34.4% 10,379 44.2%
Gain on sale of leased equipment 1,333 3.4% -- --
Spare parts sales 11,459 28.8% 3,303 14.1%
Sale of equipment acquired for resale 12,748 32.0% 9,605 40.9%
Interest and other income 544 1.4% 197 0.8%
-------- -------- -------- --------
Total 39,788 100.0% 23,484 100.0%
======== ======== ======== ========
Gross Profit (net of cost of sales, allowance for sales returns, depreciation
and interest expense as applicable) before general and administrative expenses
and income taxes is summarized as follows:
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------------------- ---------------------
Amount % Amount %
-------- -------- -------- --------
(dollars in thousands)
Leasing activities 5,113 40.5% 4,103 59.0%
Gain on sale of leased equipment 1,333 10.5% -- --
Spare parts sales 3,570 28.3% 1,608 23.1%
Sale of equipment acquired for resale 2,076 16.4% 1,054 15.1%
Interest and other income 544 4.3% 197 2.8%
-------- -------- -------- --------
Total 12,636 100.0% 6,962 100.0%
======== ======== ======== ========
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Lease Portfolio. During the first nine months of 1997, sixteen engines and five
spare parts packages were added to the Company's lease portfolio at a total cost
of $52.8 million. Five engines were sold from the portfolio.
Leasing Activities. Operating lease revenue for the nine months ended September
30, 1997, increased 30% to $13.5 million from $10.4 million from the comparable
period in 1996. This increase reflects lease revenues from additional engines
and spare parts packages acquired after September 30, 1996. In late June 1997,
the Company entered into two finance leases. Finance lease income generated from
these transactions totaled $223,000 for the nine months ended September 30,
1997. There were no comparable transactions as of September 30, 1996.
Expenses directly related to operating lease activity increased 37% to $8.6
million. Interest expense increased 55% to $5.0 million for the nine months
ended September 30, 1997, from the comparable period in 1996, due primarily to
an increased loan base and the replacement of the existing facility with a new
loan agreement in the first quarter of 1997 bearing a higher interest rate.
Depreciation expense increased 18% to $2.9 million for the nine months ended
September 30, 1997, from the comparable period in 1996, due to the larger asset
base in 1997. Residual sharing expense increased 12% to $598,000 for the nine
months ended September 30, 1997, from the comparable period in 1996, due to the
larger asset base in 1997. This expense is calculated by comparing the net book
value of the engines subject to such agreements to their related debt balances
and adjusting the residual share payable up or down to the appropriate amount
representing the sharing percentage of any excess of the net book value over the
corresponding debt balance for the five engines subject to residual sharing.
Gain on Sale of Leased Engines. During the nine months ended September 30, 1997,
the Company sold three engines from the lease portfolio. These engines had a net
book value of $6.1 million and they were sold for a gain of $1.3 million. There
were no sales of leased engines for the nine months ended September 30, 1996.
Spare Parts Sales. Revenues from spare parts sales increased 247% to $11.5
million. The gross margin decreased to 32% in 1997 from 51% in the
corresponding period in 1996. The Company does not believe that the relatively
high margin in 1996 is indicative of future results.
Sale of Equipment Acquired for Resale. During the nine months ended September
30, 1997, the Company sold 10 engines for $12.7 million which resulted in a gain
of $2.1 million, compared to the nine months ended September 30, 1996, during
which the Company sold five engines for $9.6 million resulting in a gain of $1.1
million. Included in the 1997 sales was one transaction involving the sale of
four engines acquired at a cost of $600,000 and sold for a gain of $100,000.
Interest and Other Income. Interest and other income for the nine months ended
September 30, 1997, increased to $544,000 from $197,000 for the nine months
ended September 30, 1996. This is a result of interest earned on deposits held,
primarily the proceeds from the Company's initial public offering.
General and Administrative Expenses. General and administrative expenses
increased 85% to $6.4 million for the nine months ended September 30, 1997, from
the comparable period in 1996. This increase reflects expenses associated with
staff additions, increased rent due to the expansion of the WASI facility, as
well as an increase in professional fees, insurance expense and public company
costs.
Income Taxes. Income taxes for the nine months ended September 30, 1997,
increased to $2.5 million from $1.4 million for the comparable period in 1996.
This increase reflects an increase in the Company's pre-tax earnings.
Extraordinary Item. In February 1997, the Company obtained a new loan agreement
for $41.5 million to replace the existing note of $44.2 million. The transaction
resulted in an extraordinary gain of $2 million, net of tax, or $.36 per
weighted average share.
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LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company financed two engines using its $15 million
financial program with Fleet Capital Corporation. The total amount borrowed
was $6.3 million with interest rates varying from 8.9% to 10%.
At September 30, 1997, $66.6 million of the Company's borrowings were on a
variable rate basis, at various interest rates tied to either LIBOR or the Prime
rate. The Company's equipment leases are generally structured at fixed rental
rates for specified terms. To date, these variable rate borrowings have resulted
in lower interest expense for the Company. In September 1996, the Company
purchased an amortizing interest rate cap from an investment grade financial
institution (the "Counter Party") 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, 1997, the notional principal amount of the cap was $37.2 million and said
amount will decline to $26 million at the end of its term. The cost of the cap
is being amortized as an expense over a four year period. The Company will be
exposed to credit risk in the event of non-performance by the Counter Party.
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 debt service that the Company pays under its floating rate
borrowings.
As of September 30, 1997, the Company had four engines and three spare parts
packages which had not been financed. The Company will seek permanent
financing for this equipment, although no assurance can be given that such
financing will be available on favorable terms, if at all. In addition, certain
of the Company's engines have been financed under floating rate facilities.
Until fixed rate financing for these assets is in place, the Company is subject
to interest rate risk if interest rates increase, since the underlying lease
revenue is fixed.
The Company has received a letter of commitment from a financial institution to
provide an $80 million warehouse facility to a special purpose subsidiary of the
Company, for the financing of jet aircraft engines to be transferred by the
Company to such finance subsidiary. The facility will become available
immediately upon completion of definitive agreements. This transaction's
structure is intended to facilitate future public or private securitized note
issuances by the special purpose subsidiary. This facility is expected to have
an eight year term and to bear interest at LIBOR plus 225 basis points. This
facility requires the issuer to hedge 50% of this facility against interest rate
changes.
The Company believes that its current and anticipated credit facilities and
internally generated funds and cash on hand should be sufficient to fund the
Company's anticipated operations for the immediate future. The Company
anticipates that it will also need to raise additional equity capital to
continue its growth.
The Company's ability to successfully execute its business strategy is
dependent in part on its ability to raise equity capital and to obtain debt
capital. There can be no assurance that the necessary amount of such equity or
debt capital will continue to be available to the Company on favorable terms, or
at all. If the Company were unable to obtain any portion of required financing
on favorable terms, the Company's ability to add new engines and parts packages
to its portfolio or to conduct profitable operations with its existing asset
base would be impaired, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
In June 1997, the Company committed to purchase nine aircraft engines. The
Company is obligated to purchase these engines by December 31, 1997. The
agreement provides that, to the extent that a purchased engine will be
overhauled by the seller, the payment of both the purchase price and the cost of
the overhauled engine will be deferred until the engine is overhauled and
delivered to the Company. It is not known at this time how many engines will be
overhauled. As of September 30, 1997, three of the nine engines subject to this
agreement have been purchased.
The Company has entered into commitments for the purchase of an aircraft for
disassembly by WASI, the purchase of two engines for the lease portfolio and the
purchase of three commuter aircraft with three spare engines for the lease
portfolio. The aggregate purchase price for these assets is $19.9 million and as
of September 30, 1997, deposits of $310,000 have been made in connection with
these purchases. The Company has arranged financing for one engine and is in the
process of arranging financing for the other purchases.
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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 equipment and spare parts packages
(collectively "Aircraft Equipment") primarily under operating leases. Operating
leases require the Company to re-lease or sell Aircraft Equipment in its
portfolio in a timely manner upon termination of the lease in order to minimize
off-lease time and recover its original investment in the Aircraft Equipment.
Numerous factors, many of which are beyond the control of the Company, may have
an impact on the Company's ability to re-lease or sell Aircraft Equipment on a
timely basis. Among the factors are general market conditions, regulatory
changes (particularly those imposing environmental, maintenance and other
requirements on the operation of aircraft engines), changes in the supply or
cost of the Aircraft Equipment and technological developments. Further, the
value of a particular used aircraft engine varies greatly depending upon its
condition, the number of hours remaining until the next major maintenance of the
aircraft engine is required and general conditions in the airline industry. In
addition, the success of an operating lease depends in part upon having the
Aircraft Equipment returned by the lessee in marketable condition as required by
the lease. Consequently, there can be no assurance that the Company's estimated
residual value for the Aircraft Equipment would be realized. If the Company is
unable to re-lease or sell the Aircraft Equipment on favorable terms, its
business, financial condition, cash flow, ability to service debt and results of
operations could be adversely affected.
The Company through WASI, also acquires aviation equipment such as whole engines
or airframes which can dismantled and sold as parts. Before parts may be
installed in an aircraft, they must meet certain standards of condition
established by the Federal Aviation Administration ("FAA"). Parts must also be
traceable to sources deemed acceptable by the FAA. Parts owned by the Company
may not meet applicable standards or standards may change, causing parts which
are already in the Company's inventory to be scrapped or modified. Engine
manufacturers may also develop new parts to be used in lieu of parts already
contained in the Company's inventory. In all such cases, to the extent the
Company has such parts in its inventory, their value may be reduced. In
addition, if the Company did not sell airframe and engine component parts that
it purchases soon after acquisition, the Company would be subject to all the
risks of ownership described above.
The Company also engages in the selective purchase and resale of commercial
aircraft engines and engine components in the aftermarket. On occasion, the
Company purchases engines or components without having a commitment for their
sale or lease. If the Company purchased an engine or components
without having a firm commitment for their sale or if a firm commitment for sale
were to exist but not be consummated for whatever reason, the Company would be
subject to all the risks of ownership described above.
The Company would be affected by downturns in the air transportation industry in
general. In particular, 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 lease or to repossess Aircraft Equipment in the
event of a default by a lessee could have a material adverse effect on the
Company's business, financial condition or results of operations. In most cases
where a debtor seeks protection under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code"), creditors are automatically stayed from enforcing
their rights. In the case of United States certified airlines, Section 1110 of
the Bankruptcy Code provides certain relief to lessors of the aircraft
equipment. Specifically, the airline has 60 days from the date the airline seeks
protection under Chapter 11 of the Bankruptcy Code to agree to perform its
obligations and to cure any defaults. If it does not do so, the lessor may
repossess the aircraft equipment. The scope of Section 1110 has been the subject
of significant litigation and there can be no assurance that the provisions of
Section 1110 will protect the Company's investment in an aircraft engine in the
event of a lessee's bankruptcy. In addition, Section 1110 does not apply to
lessees located outside of the United States and applicable foreign laws may not
provide comparable protection.
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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 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 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.
In 1996, approximately 61% of the Company's lease revenue was generated by
leases to foreign customers. During the nine months ended September 30, 1997,
approximately 64% of the Company's lease revenue was generated by leases to
foreign customers. Such leases may present greater risks to the Company because
certain foreign laws, regulations and judicial procedures may not be as
protective of lessor rights as those which apply in the United States. In
addition, many foreign countries have currency and exchange laws regulating the
international transfer of currencies. To date, the Company has experienced some
collection problems under certain leases with foreign airlines, and there can be
no assurance that the Company will not experience such collection problems in
the future. The Company may also experience collection problems related to the
enforcement of its lease agreements under foreign local laws and the attendant
remedies in such locales. Consequently, the Company is subject to the timing and
access to courts and the remedies local laws impose in order to collect its
lease payments and recover its assets.
In some circumstances, the Company acquires and leases assets before it has
secured debt financing. There can be no assurance that debt financing will be
available after the asset has been acquired or, if available, at attractive
rates or terms. Factors that could cause debt financing to be more expensive or
unavailable include changes in interest rates, financial conditions of the
lessee or the Company, prospects for the airline industry or the asset type as
well as general economic conditions. If debt financing is not available, a like
amount of the Company's equity capital would be unavailable for use to acquire
additional assets, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has recently experienced significant growth in revenues. Such growth
has placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational and financial resources. Due to the Company's
rapid pace of growth over the past year, the Company hired three new officers
(an Executive Vice President and Chief Administrative Officer, an Executive Vice
President and Chief Financial Officer and a Senior Vice President and General
Counsel) during the four months prior to September 30, 1997. There can be no
assurance that the Company will be able to effectively manage the expansion of
its operations, or that the Company's systems, procedures or controls will be
adequate to support the Company's operations. An inability to effectively manage
growth could have a material adverse effect on the Company's business, financial
condition and results of operations.
One of the components of the Company's growth strategy is the selected
acquisition of businesses complementary to the Company's existing businesses and
possible expansion into new aviation-related activities. The inability of the
Company to identify suitable acquisition candidates or to complete acquisitions
on reasonable terms could adversely affect the Company's ability to grow. In
addition, any acquisition or expansion made by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and the amortization of expenses related to goodwill and other
intangible assets. The Company also may experience difficulties in the
assimilation of operations, services, products and personnel, an inability to
sustain or improve historical revenue levels, the diversion of management's
attention from ongoing business operations and the potential loss of key
employees. Any of the foregoing could have a material effect on the Company's
financial condition, results of operations and prospects.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number Description
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(a) Exhibits
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.
10.19 Engine Sales Agreement dated, August 14, 1997, together with
related documents, for a $47.022 million purchase from Pratt &
Whitney for nine bare Pratt & Whitney 4056 engines.
10.20 Loan Agreement dated September 8, 1997, together with related
documents, for a $2.025 million loan from Fleet Capital
Corporation relating to the financing of equipment leased to
Delta Air Lines.
10.21 Loan Agreement dated September 17, 1997, together with related
documents, for a $4.277 million loan from Fleet Capital
Corporation relating to the financing of equipment leased to GE
ESI.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule
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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: November 5, 1997
By: /s/ James D. McBride
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James D. McBride
Chief Financial Officer
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