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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28774
_________________
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 68-0070656
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
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
180 Harbor Drive, Suite 200, Sausalito, CA 94965
(Former Address)
_________________
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 July 31, 1998
- -------------------------------------- ----------------------------------
Common Stock, $0.01 Par Value 7,277,098
WILLIS LEASE FINANCE CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income 4
Three and six months ended June 30, 1998 and 1997
Consolidated Statements of Shareholders' Equity 5
Year ended December 31, 1997 and
six months ended June 30, 1998
Consolidated Statements of Cash Flows 6
Six months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II OTHER INFORMATION
Item 2. Changes in Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
2
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents $3,180,225 $13,095,303
Deposits 21,192,955 18,461,456
Equipment held for operating lease, less accumulated depreciation of
$12,866,029 at June 30, 1998 and $15,267,683 at December 31, 1997 225,922,086 138,535,643
Net investment in direct finance lease 9,536,640 9,821,854
Property, equipment and furnishings, less accumulated depreciation
of $345,116 at June 30, 1998 and $275,109 at December 31, 1997 1,315,268 540,856
Spare parts inventory 26,061,029 10,334,113
Maintenance billings receivable 894,777 1,547,765
Operating lease rentals receivable 718,269 520,466
Receivables from spare parts sales 3,500,643 2,908,175
Other receivables 100,008 375,878
Other assets 6,312,870 2,288,547
------------ ------------
Total assets $298,734,770 $198,430,056
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $3,490,133 $4,010,976
Salaries and commissions payable 712,649 1,070,051
Deferred income taxes 10,263,469 8,476,040
Deferred gain 170,030 183,278
Notes payable and accrued interest 192,758,266 101,433,200
Capital lease obligation 2,728,709 2,802,119
Residual share payable 2,215,282 2,092,140
Maintenance deposits 21,196,109 20,018,195
Security deposits 3,790,473 2,435,987
Unearned lease revenue 2,018,578 1,306,613
------------ ------------
Total liabilities 239,343,698 143,828,599
------------ ------------
Shareholders' equity:
Common stock, ($0.01 par value. 20,000,000 shares authorized;
7,269,598 and 7,177,320 shares issued and outstanding
as of June 30, 1998 and December 31,1997, respectively) 72,696 40,117,223
Paid-in capital in excess of par 40,936,247 -
Retained earnings 18,382,129 14,484,234
------------ ------------
Total shareholders' equity 59,391,072 54,601,457
------------ ------------
Total liabilities and shareholders' equity $298,734,770 $198,430,056
------------ ------------
------------ ------------
See accompanying notes to the consolidated financial statements
3
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUE
Lease revenue $ 7,128,925 $ 4,428,749 $13,565,173 $ 8,543,826
Gain on sale of leased equipment 2,431,226 - 5,539,078 397,379
Spare part sales 6,583,267 3,655,983 9,599,194 5,877,663
Sale of equipment acquired for resale 4,093,641 7,600,000 4,093,641 10,147,840
Interest and other income 433,845 201,315 619,232 452,839
----------- ----------- ----------- -----------
Total revenue 20,670,904 15,886,047 33,416,318 25,419,547
----------- ----------- ----------- -----------
EXPENSES
Interest expense 3,599,700 1,673,278 6,202,050 3,137,758
Depreciation expense 1,727,826 978,969 3,145,335 1,854,429
Residual share 167,747 180,914 400,259 371,466
Cost of spare part sales 4,831,464 2,402,830 6,886,008 3,706,982
Cost of equipment acquired for resale 3,573,499 6,385,464 3,573,499 8,637,981
General and administrative 3,184,325 2,156,920 6,368,162 3,942,835
----------- ----------- ----------- -----------
Total expenses 17,084,561 13,778,375 26,575,313 21,651,451
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item 3,586,343 2,107,672 6,841,005 3,768,096
Income taxes (1,437,800) (841,674) (2,742,626) (1,486,956)
----------- ----------- ----------- -----------
Income before extraordinary item 2,148,543 1,265,998 4,098,379 2,281,140
Extraordinary item less applicable income taxes - - (200,480) 2,007,929
----------- ----------- ----------- -----------
Net income $2,148,543 $1,265,998 $3,897,899 $4,289,069
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings per common share:
Income before extraordinary item $0.30 $0.23 $0.57 $0.42
Extraordinary item - - (0.03) 0.37
----------- ----------- ----------- -----------
Net income $0.30 $0.23 $0.54 $0.79
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per common share:
Income before extraordinary item $0.29 $0.23 $0.55 $0.41
Extraordinary item - - (0.03) 0.36
----------- ----------- ----------- -----------
Net income $0.29 $0.23 $0.52 $0.77
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding 7,263,268 5,433,498 7,227,754 5,431,490
Diluted weighted average common shares outstanding 7,488,397 5,528,898 7,465,967 5,548,010
See accompanying notes to the consolidated financial statements
4
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND SIX MONTHS ENDED JUNE 30, 1998
Issued and
outstanding Paid-in Total
shares of Common Capital in Retained shareholders'
common stock Stock Excess of Par earnings equity
------------ ----- ------------- -------- ------
Balances at December 31, 1996 5,426,793 $16,055,689 $ - $7,146,563 $23,202,252
Shares issued 25,527 221,244 - - 221,244
Common stock issued and
proceeds from secondary offering, net 1,725,000 23,840,290 - - 23,840,290
Net income - - - 7,337,667 7,337,667
--------- ------------ ----------- ----------- -----------
Balances at December 31, 1997 7,177,320 40,117,223 - 14,484,230 54,601,453
Shares issued 92,278 586,328 - - 586,328
Tax benefit from disqualified
dispositions of qualified shares - - 305,392 - 305,392
Conversion to par value stock - (40,630,855) 40,630,855 - -
Net income - - - 3,897,899 3,897,899
--------- ------------ ----------- ----------- -----------
Balances at June 30, 1998 (unaudited) 7,269,598 $72,696 $40,936,247 $18,382,129 $59,391,072
--------- ------------ ----------- ----------- -----------
--------- ------------ ----------- ----------- -----------
See accompanying notes to the consolidated financial statements
5
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
-------------------------------
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,897,899 $4,289,069
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of equipment held for lease 3,062,632 1,794,646
Depreciation of property, equipment and furnishings 82,703 59,783
(Gain) on sale of property, equipment and furnishings (1,964) (37,309)
(Gain) on sale of leased equipment (5,539,078) (397,379)
Increase in residual share payable 123,142 371,466
Changes in assets and liabilities:
Deposits (2,731,499) 2,173,816
Spare parts inventory (15,726,916) (2,802,088)
Receivables 138,587 (1,117,982)
Other assets (614,323) (347,308)
Accounts payable and accrued expenses (215,452) 1,143,188
Salaries and commission payable (357,402) 205,332
Deferred income taxes 1,787,430 2,816,367
Deferred gain (13,248) (13,248)
Accrued interest 19,715 (493,316)
Maintenance deposits 1,177,914 3,133,063
Security deposits 1,354,486 54,491
Unearned lease revenue 711,965 (2,484)
------------ -----------
Net cash (used in) provided by operating activities (12,843,409) 10,830,107
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for operating lease (net
of selling expenses) 16,487,299 1,000,000
Proceeds from sale of property, equipment and furnishings 16,300 80,500
Purchase of equipment held for operating lease (101,397,296) (13,291,479)
Deposits made in connection with inventory purchases (3,410,000) -
Purchase of property, equipment and furnishings (871,455) (109,530)
Principal payments received on direct finance lease 285,214 -
------------ -----------
Net cash used in investing activities (88,889,938) (12,320,509)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 109,984,205 66,888,374
Proceeds from issuance of common stock 586,328 108,257
Principal payments on notes payable (18,678,854) (57,107,899)
Principal payments on capital lease obligation (73,410) (87,897)
------------ -----------
Net cash provided by financing activities 91,818,269 9,800,835
(Decrease) increase in cash and cash equivalents (9,915,078) 8,310,433
Cash and cash equivalents at beginning of period 13,095,303 6,573,241
------------ -----------
Cash and cash equivalents at end of period $3,180,225 $14,883,674
------------ -----------
------------ -----------
SUPPLEMENTAL INFORMATION:
Net cash paid for: Interest $6,182,335 $3,631,075
------------ -----------
Income taxes $2,656,825 $156,400
------------ -----------
Non-cash financing activities: Disqualified disposition of
qualified shares resulted in a
$305,392 tax benefit.
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 to Shareholders incorporated by reference in the
Company's Annual Report on Forms 10-K and 10-KA for the fiscal year ended
December 31, 1997.
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 June 30, 1998, and December 31, 1997, and the results of its
operations for the three and six month periods ended June 30, 1998 and 1997 and
its cash flows for the six month periods ended June 30, 1998 and 1997. The
results of operations and cash flows for the periods ended June 30, 1998, are
not necessarily indicative of the results of operations or cash flows which may
be reported for the remainder of 1998.
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 changed its state of incorporation from California to Delaware
through a merger of Willis Lease Finance Corporation into its wholly-owned
Delaware subsidiary. The reincorporation, approved by the Company's
shareholders at the May 12, 1998 Annual Meeting of Shareholders, results in a
change only of the Company's legal domicile. It does not result in any change
in the Company's name, operations, locations, management, reporting
obligations, NASDAQ National Market trading symbol or assets and liabilities.
In connection with this reincorporation, the Company converted no par value
common stock to $0.01 par value common stock.
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 cash compensation to be deducted each pay period for
the purchase of common stock under the Purchase Plan, and participants may
purchase not more than $25,000 of common stock in any one calendar year. 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 six month
7
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
period ended June 30, 1998, the Company issued 8,040 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 shares have been set aside to provide eligible persons with the
opportunity to acquire a proprietary interest in the Company. The plan
includes a Discretionary Option Grant Program, a Stock Issuance Program, and an
Automatic Option Grant Program for eligible nonemployee Board Members. During
the six month period ended June 30, 1998, 59,000 options were exercised. In
connection with the exercise of these options, the Company recognized a
$305,392 tax benefit.
In conjunction with its initial public offering, the Company sold five-year
purchase warrants for $.01 per warrant covering an aggregate of 100,000 shares
of common stock exercisable at a price equal to 130% of the initial public
offering price. The warrants are exercisable commencing 24 months after the
effective date of the initial public offering or earlier, but not earlier than
12 months after the initial public offering, if and when the Company files a
registration statement for the sale by the Company of shares of common stock or
securities exercisable for, convertible into or exchangeable for shares of
common stock (other than pursuant to a stock option or other employee benefit
or similar plan, or in connection with a merger or an acquisition). The common
stock offering in December 1997 constituted such a registration. The warrants'
exercise price and the number of shares of Common Stock are subject to
adjustment to protect the warrant holders against dilution in certain events.
In February 1998, a holder of 50,000 of the warrants exercised the warrants
under the net issuance rights of the warrants. Based on the closing price on
such date, the exercise resulted in the issuance of 25,238 shares to the holder
of the warrants.
4. FINANCING
In June 1998, the Company increased the committed amount of its revolving
credit facility to $100 million. This credit facility is available to finance
the acquisition of aircraft engines, aircraft and high-value spare parts for
sale or lease. This facility expires on September 30, 1998. The Company
anticipates extending the maturity of the facility.
In March 1998, the Company repaid a loan that had residual sharing
provisions. The repayment resulted in an extraordinary expense of $0.2
million, net of tax.
5. COMMITMENTS
In June 1998, the Company commenced lease of office space for its Sausalito
operations. The initial term of this lease is 5 years and the annual rental
commitments under the lease are approximately $0.3 million. In April 1998, the
Company commenced lease of a warehouse and office facility for Willis
Aeronautical Services, Inc. ("WASI") in San Diego, California. WASI moved its
South San Francisco operations into this facility in June 1998. The initial
term of this lease is 6 years and the annual rental commitments under the lease
are approximately $0.4 million.
The Company has committed to purchase, during 1998 and 1999, additional used
aircraft and engines for its operations. Certain deposits were made in
connection with these commitments. The Company's current commitment to such
purchases is not more than $35.1 million. A portion of these purchases will
take place in 1998 and the remainder in 1999.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's core business is acquiring and leasing, primarily pursuant to
operating leases, commercial aircraft spare engines, aircraft and other
aircraft equipment. The Company, through WASI, also specializes in the
purchase and resale of aftermarket airframe and engine parts, engines,
modules and rotable components. In addition, the Company engages in the
selective purchase and resale of commercial aircraft engines.
The Company changed its state of incorporation from California to Delaware
through a merger of Willis Lease Finance Corporation into its wholly-owned
Delaware subsidiary. The reincorporation, approved by the Company's
shareholders at the May 12, 1998 Annual Meeting of Shareholders, results in a
change only of the Company's legal domicile. It does not result in any
change in the Company's name, operations, locations, management, reporting
obligations, NASDAQ National Market trading symbol or assets and liabilities.
Revenue consists primarily of operating lease revenue, income from the sale
of spare parts and components and income from the sale of engines and
equipment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997:
Revenue is summarized as follows:
Three Months Ended June 30,
------------------------------------------------------
1998 1997
---- ----
Amount % Amount %
------------------------------------------------------
(dollars in thousands)
Lease revenue............................. $ 7,129 34% $ 4,429 28%
Gain on sale of leased equipment.......... 2,431 12 - -
Spare parts sales......................... 6,583 32 3,656 23
Sale of equipment acquired for resale..... 4,094 20 7,600 48
Interest and other income................. 434 2 201 1
------------------------------------------------------
Total..................................... $20,671 100% $15,886 100%
------------------------------------------------------
LEASE PORTFOLIO. During the quarter ended June 30, 1998, eleven engines,
one aircraft and one spare parts package were added to the Company's lease
portfolio at a total cost of $54.5 million. Four engines and one spare parts
package were sold or transferred from the lease portfolio.
LEASING ACTIVITIES. Lease revenue for the quarter ended June 30, 1998
increased 61% to $7.1 million from $4.4 million for the comparable period in
1997. This increase reflects lease revenues from additional engines,
aircraft and spare parts packages.
GAIN ON SALE OF LEASED EQUIPMENT. During the quarter ended June 30, 1998,
the Company sold three engines from the lease portfolio which resulted in a
gain of $2.4 million. There were no such gains in the quarter ended June 30,
1997.
9
SPARE PARTS SALES. Revenues from spare parts sales in the quarter ended
June 30, 1998 increased 80% to $6.6 million from $3.7 million in the
comparable 1997 period. The gross margin decreased to 27% in the second
quarter of 1998, from 34% in the corresponding period in 1997. The decrease
in margin was primarily the result of the Company's decision to sell, shortly
after their acquisition, certain of the engines acquired under its agreement
with United Airlines to acquire used aircraft. In doing so, the Company
avoided disassembly, inventory and financing costs that would have been
incurred had the Company disassembled, inventoried and sold, over a period of
time, the engines in a piece part manner.
SALE OF EQUIPMENT ACQUIRED FOR RESALE. During the quarter ended June 30,
1998, the Company sold one engine for $4.1 million which resulted in a gain
of $0.5 million. During the comparable 1997 period, the Company sold four
engines for $7.6 million resulting in a gain of $1.2 million.
INTEREST AND OTHER INCOME. Interest and other income for the quarter ended
June 30, 1998 was $0.4 million compared to $0.2 million for the quarter ended
June 30, 1997. The increase was primarily due to ancillary fees generated in
connection with an existing lease arrangement.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 115% to $3.6 million for the quarter ended June 30,
1998, from the comparable period in 1997, due to an increase in average debt
outstanding during the period. Residual sharing expense decreased 7% to
$167,747 for the quarter ended June 30, 1998 from $180,914 for the
comparable period in 1997. The decline was due to the repayment, in March
1998, of one of the Company's loans which had residual sharing provisions.
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 to the appropriate amount representing the sharing
percentage of any excess of the net book value over the corresponding debt
balance for such engines.
DEPRECIATION EXPENSE. Depreciation expense increased 76% to $1.7 million
for the quarter ended June 30, 1998, from the comparable period in 1997, due
to the larger average asset base in the second quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 48% to $3.2 million for the quarter ended June 30, 1998 from $2.2
million in the comparable period in 1997. This increase reflects expenses
associated with staff additions, increased rent due to the expansion of the
Company's office and warehouse facilities, as well as increases in
professional fees, insurance expense and expenses related to promotional and
marketing activities.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the quarter ended June 30, 1998, increased to $1.4 million from $0.8 million
for the comparable period in 1997. This increase reflects an increase in the
Company's pre-tax earnings.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997:
Revenue is summarized as follows:
Six Months Ended June 30,
----------------------------------------------------
1998 1997
---- ----
Amount % Amount %
----------------------------------------------------
(dollars in thousands)
Lease revenue.............................. $13,565 41% $ 8,544 34%
Gain on sale of leased equipment........... 5,539 16 397 1
Spare parts sales.......................... 9,599 29 5,878 23
Sale of equipment acquired for resale...... 4,094 12 10,148 40
Interest and other income.................. 619 2 453 2
----------------------------------------------------
Total...................................... $33,416 100% $25,420 100%
----------------------------------------------------
10
LEASE PORTFOLIO. During the period ended June 30, 1998, twenty-one engines,
one spare parts package and two aircraft were added to the Company's lease
portfolio at a total cost of $101.4 million. Five engines and one spare
parts package were sold or transferred from the lease portfolio.
LEASING ACTIVITIES. Lease revenue for the period ended June 30, 1998
increased 59% to $13.6 million from $8.5 million for the comparable period in
1997. This increase reflects lease revenues from additional engines,
aircraft and spare parts packages.
GAIN ON SALE OF LEASED EQUIPMENT. During the period ended June 30, 1998,
the Company sold four engines from the lease portfolio which resulted in a
gain of $5.5 million. This compares with gains in the period ended June 30,
1997 of $0.4 million.
SPARE PARTS SALES. Revenues from spare parts sales in the period ended June
30, 1998 increased 63% to $9.6 million from $5.9 million in the comparable
1997 period. The gross margin decreased to 28% in the first six months of
1998, from 37% in the corresponding period in 1997. The decrease in margin
was primarily the result of the Company's decision to sell, shortly after
their acquisition, certain of the engines acquired under its agreement with
United Airlines to acquire used aircraft. In doing so, the Company avoided
disassembly, inventory and financing costs that would have been incurred had
the Company disassembled, inventoried and sold, over a period of time, the
engines in a piece part matter.
SALE OF EQUIPMENT ACQUIRED FOR RESALE. During the period ended June 30,
1998, the Company sold one engine for $4.1 million resulting in a gain of
$0.5 million. During the period ended June 30, 1997, the Company sold five
engines for $10.1 million which resulted in gains of $1.5 million.
INTEREST AND OTHER INCOME. Interest and other income for the period ended
June 30, 1998 was $0.6 million compared to $0.5 million for the period ended
June 30, 1997.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 98% to $6.2 million for the period ended June 30, 1998,
from the comparable period in 1997, due to an increase in average debt
outstanding during the period. Residual sharing expense increased 8% to
$400,259 for the period ended June 30, 1998 from the $371,466 for the
comparable period 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 to the appropriate amount
representing the sharing percentage of any excess of the net book value over
the corresponding debt balance for such engines. In March 1998, the Company
repaid one of its loans which had residual sharing provisions. (See
"Extraordinary Items" below).
DEPRECIATION EXPENSE. Depreciation expense increased 70% to $3.1 million
for the period ended June 30, 1998, from the comparable period in 1997, due
to the larger average asset base in the first six months of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 62% to $6.4 million for the period ended June 30, 1998 from $3.9
million in the comparable period in 1997. This increase reflects expenses
associated with staff additions, increased rent due to the expansion of the
Company's office and warehouse facilities, as well as increases in
professional fees, insurance expense and expenses related to promotional and
marketing activities.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the period ended June 30, 1998, increased to $2.7 million from $1.5 million
for the comparable period in 1997. This increase reflects an increase in the
Company's pre-tax earnings.
EXTRAORDINARY ITEMS. In March 1998, the Company repaid a loan that had
residual sharing provisions. The repayment resulted in an extraordinary
expense of $0.2 million, net of tax. 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 $2.0 million,
net of tax.
11
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued a new
statement: SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim reporting
standards for a public Company's operating segments and related disclosures
about its products, services, geographic areas, and major customers. This
statement is effective for the Company's fiscal year ended December 31, 1998,
with earlier application permitted. The effect of adoption of the statement
will be limited to the form and content of the Company's disclosures and will
not impact the Company's results of operations, cash flow, or financial
position.
In June 1998, the Financial Accounting Standards Board 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. This statement is
effective for all quarters of fiscal years beginning after June 15, 1999. As
of June 30, 1998, the Company is reviewing the effect this standard 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 $110.0
million and $66.9 million, in the six month periods ended June 30, 1998 and
1997, respectively, was derived from this activity. In these same time
periods $18.8 million and $57.2 million, respectively, was used to pay down
related debt or the capital lease. In December 1997, net proceeds from a
follow-on common stock offering were approximately $23.8 million. In
September 1996, net proceeds from the initial public offering were
approximately $15.9 million. Cash flow from operating activities used
approximately $12.8 million in the six month period ended June 30, 1998 and
cash flows from operating activities generated $10.8 million in the six month
period ended June 30, 1997. The deficit cash flow from operations was
primarily attributable to the acquisition of used aircraft for WASI's
inventory.
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $101.4 million and $13.3 million of funds were used for
this purpose in the six month periods ended June 30, 1998 and 1997,
respectively.
At June 30, 1998, the Company had a $100.0 million revolving credit
facility to finance the acquisition of aircraft engines, aircraft and spare
parts for sale or lease. Assuming compliance with the facility's terms,
including sufficiency of collateral, at June 30, 1998 and July 31, 1998,
$12.4 million and $11.3 million was available under this facility,
respectively. The facility expires on September 30, 1998. The Company
intends to extend and increase this facility.
The Company has an $80.0 million debt warehouse facility (the "WLFC
Funding Corp. Facility"), to a special purpose finance subsidiary of the
Company, for the financing of jet aircraft engines transferred by the Company
to such finance subsidiary. This transaction's structure facilitates future
public or private securitized note issuances by the special purpose finance
subsidiary. The facility has an eight year term and is partially guaranteed
by the Company. This facility requires the issuer to hedge 50% of the
facility against interest rate changes no later than September 30, 1998. In
May 1998, a three year $15 million interest rate swap was executed to hedge a
portion of the interest expense under this facility. Assuming compliance
with the facility's terms, including sufficiency of collateral, as of June
30, 1998 and July 31, 1998, $27.6 million was available under this facility.
Approximately $100.6 million of the Company's debt is repayable during
the remainder of 1998. The majority of such repayments consist of the
maturity of the revolving credit facility and the scheduled balloon payment
maturities on term loans. The balance of the repayments consist of scheduled
installments due under term loans. The Company anticipates that it will
extend the revolving credit facility and refinance the balloon payment
maturities during the remainder of 1998.
The Company believes that its current equity base and internally
generated funds are sufficient to fund the Company's anticipated equity
requirements and operations for the remainder of 1998, at which time
additional equity may be required to fund projected growth. The Company is
seeking to extend and expand its existing revolving credit facility as noted
above and make other borrowing arrangements to fund future growth.
12
As of June 30, 1998, the Company had eight engines and four spare parts
packages which had not been financed. The Company will likely seek financing
for this equipment, although no assurance can be given that such financing
will be available on favorable terms, if at all. In addition, certain of the
Company's engines have been financed under floating rate facilities. Until
fixed rate financing for these assets is in place, the Company is subject to
interest rate risk, since the underlying lease revenue is fixed. See
"Management - Interest Rate Exposure" below.
Between June 30, 1998 and July 31, 1998, the Company and WASI purchased
engines for the lease portfolio and aircraft for the parts operation. The
total cost of these purchases was approximately $2.6 million. These
purchases were funded with cash from operations, and borrowings under the
Company's revolving line of credit.
The Company has committed to purchase, during 1998 and 1999, additional
used aircraft and engines for its operations. Certain deposits were made in
connection with these commitments. The Company's current commitment to such
purchases is not more than $35.1 million. Some of these purchases will take
place in 1998 and some in 1999.
MANAGEMENT OF INTEREST RATE EXPOSURE
At June 30, 1998, $149.0 million of the Company's borrowings were on a
variable rate basis at various interest rates tied to either LIBOR or the
prime rate. The Company's equipment leases are generally structured at fixed
rental rates for specified terms. To date, this variable rate borrowing has
resulted in lower interest expense for the Company. Increases in interest
rates could narrow or eliminate the spread, or result in a negative spread,
between the rental revenue the Company realizes under its leases and the
interest rate that the Company pays under its borrowings.
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 June 30, 1998, the
notional principal amount of the cap was $34.3 million which will decline to
$26.0 million at the end of its term. The cost of the cap is being amortized
as an expense over its remaining term. In May 1998, WLFC-Funding Corp.
purchased a three year $15 million interest rate swap. The Company will be
exposed to credit 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 in the second half of 1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for historical information contained herein, the discussion in
this report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute
to such differences include those discussed below as well as those discussed
elsewhere herein and in the Company's report on Forms 10-K and 10-KA for the
year ended December 31, 1997. 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 Company leases its portfolio of aircraft engines, aircraft and spare
parts packages primarily under operating leases as opposed to finance 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 investment in the aircraft equipment.
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. 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 or
aircraft varies greatly depending upon its condition, the number of hours
remaining until the next major maintenance of the aircraft equipment is
required and general conditions in the airline industry. In addition, the
success of an operating lease depends in part upon having the
13
aircraft equipment returned by the lessee in marketable condition as required
by the lease. Consequently, there can be no assurance that the Company's
estimated residual value for the aircraft equipment will be realized. If the
Company is unable to lease, 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.
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 or results of
operations. A number of airlines have experienced financial difficulties,
certain airlines have filed for bankruptcy and a number of such airlines have
ceased operations. In most cases where a debtor seeks protection under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"),
creditors are automatically stayed from enforcing their rights. 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, 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.
A substantial portion of the Company's lease revenue was generated by
leases to foreign customers worldwide, including but not limited to Asian
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. In
addition, many foreign countries have currency and exchange laws regulating
the international transfer of currencies. The Company has experienced some
collection problems under certain leases with foreign airlines, and there can
be no assurance that the Company will not experience such collection problems
in the future. The Company may also experience collection problems related
to the enforcement of its lease agreements under foreign local laws and the
attendant remedies in such locales. Consequently, the Company is subject to
the timing and access to courts and the remedies local laws impose in order
to collect its lease payments and recover its assets. In addition, political
instability abroad and changes in international policy also present risk of
expropriation of the Company's leased engines.
The operating lease business is a capital intensive business.
Accordingly, the Company's ability to successfully execute its business
strategy and to sustain its operations is dependent, in a 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 were unable to continue to
obtain required financing on favorable terms, the Company's ability to add
new aircraft engines, aircraft and spare parts packages to its portfolio, add
inventory to support its spare parts sales 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. Furthermore, certain of the Company's debt facilities
mature, either in whole or part, during the current calendar year. Should
the Company be unable to meet the terms of repayment of these facilities,
and/or refinance or extend these facilities, it would have a material adverse
effect on the Company's financial condition and its ability to conduct
business. Factors that could cause equity or 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.
The Company's equipment leases are generally structured at fixed rental
rates for specified terms while many of the Company's borrowing arrangements
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 that the
Company pays under its lines of credit or loans.
The Company, through WASI, acquires aviation equipment such as whole
aircraft engines and aircraft which can be dismantled and sold as parts.
Before parts may be installed in an aircraft, they must meet certain
standards of condition established by the Federal Aviation Administration.
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 does not sell airframe and
engine
14
component parts that it purchases in the time frame contemplated at
acquisition, the Company may be subject to unanticipated inventory financing
costs as well as all the risks of ownership.
Certain of the Company's competitors have substantially greater
resources than the Company, including greater name recognition, larger
inventories, a broader range of material, complementary lines of business and
greater financial, marketing and other resources. In addition, original
equipment manufacturers ("OEMs"), aircraft maintenance providers, FAA
certified repair facilities and other aviation aftermarket suppliers may
vertically integrate into the aircraft engine/spare parts sales industry,
thereby significantly increasing industry competition. A variety of
potential actions by any of the Company's competitors, including a reduction
of product prices or the establishment by competitors of long-term
relationships with new or existing customers, could have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will continue to
compete effectively against present and future competitors or the competitive
pressures will not have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company has recently experienced significant growth in assets and
revenues. Such growth has placed, and is expected to continue to place, a
significant strain on the Company's 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. An inability to effectively manage growth could have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company's operations are not highly dependent on systems technology
and management believes the Company's exposure to loss as a result of year
2000 issues is minimal. The Company does not believe that the Year 2000
issue will have a bearing on lessees' ability to adhere to the terms of their
lease agreements with the Company. However, it has been reported in the
general press that airlines and the FAA may have material Year 2000 issues,
which could effect their operations. Such an effect could impact the ability
of lessees and other customers to meet the obligations to the Company.
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an
ongoing basis. In addition, the Company's lessees currently enjoy favorable
accounting and tax treatment by entering into operating leases. Any change
to current tax laws or accounting principles that make operating lease
financing less attractive could adversely affect the Company's business,
financial condition or results of operations
The Company may experience fluctuations in its quarterly operating
results. Such fluctuations may be due to a number of factors, including the
timing of sales of engines and spare parts, fluctuation in aircraft equipment
marketing activities, fluctuation of margins on such activities,
unanticipated early lease terminations, the timing of aircraft equipment
acquisitions or a default by a lessee. Downturns in the air transportation
industry affect the Company's business. In particular, substantial increases
in fuel costs or interest rates, increased fare competition, slower growth in
air traffic, or any significant downturn in the general economy could
adversely affect the air transportation industry and may therefore negatively
impact the Company's business, financial condition and results of operations.
As a result, the Company believes that comparisons to the results of its
operations for preceding quarters are not necessarily meaningful and that
results for any prior quarter should not be relied upon as an indication of
future performance. 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.
15
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Effective June 8, 1998, the Company changed its state of incorporation
from California to Delaware. The merger was accomplished through a merger
(the "Merger") of Willis Lease Finance Corporation, a California corporation
("Willis-California"), into its wholly-owned Delaware subsidiary of the same
name ("Willis-Delaware"). In connection with the reincorporation, the Company
adopted various features in its certificate of incorporation and bylaws which
are intended, among other things, to promote the stability of the Company's
shareholder base and to render more difficult certain unsolicited or hostile
attempts to take over the Company (the "Shareholder Protection Features")
including: (a) the division of the Board of Directors of the Company into
three classes to serve staggered terms of office as more fully set forth in
the Certificate of Incorporation; (b) the requirement that certain "Business
Combinations" (as defined in Article XIII of the Certificate of
Incorporation) be approved by the affirmative vote of the holders of not less
than 80% of the total voting power of all outstanding shares of voting stock
of the Company; and (c) the provision that Bylaws may be amended or repealed
only with the approval of the holders of 80% of the total voting power of the
outstanding shares of voting stock of the Company; and (d) the provision that
special meetings of shareholders of the Company may be called only by the
Board of Directors, the Chairman of the Board or the President.
The reincorporation proposal and each of the Shareholder Protection
Features were approved by the Company's shareholders at the Company's annual
meeting of shareholders on May 12, 1998. As a result of the Merger, each
outstanding share of Willis-California's common stock, no par value per
share, was converted into one share of Willis-Delaware common stock, par
value $0.01 per share. Each stock certificate representing issued and
outstanding shares of Willis-California common stock will continue to
represent the same number of shares of Willis-Delaware common stock.
Shareholders are not required to undertake a mandatory exchange of shares.
The common stock will continue to trade on the Nasdaq National Market under
the symbol WLFC.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 12, 1998 Annual Meeting of Shareholders of Willis Lease
Finance Corporation, the following matters were voted upon:
DESCRIPTION VOTES
----------- ------
1. Election of Directors
Charles F. Willis, IV (Class III) 6,775,584 For
7,917 Withheld
William L. McElfresh (Class I) 6,775,584 For
7,917 Withheld
Ross K. Anderson (Class II) 6,775,584 For
7,917 Withheld
William M. LeRoy (Class I) 6,775,584 For
7,917 Withheld
Willard H. Smith, Jr. (Class II) 6,775,584 For
7,917 Withheld
2. Approval of ratification of selection of KPMG Peat Marwick LLP as 6,781,851 For
independent public accountants for the Company for the fiscal year 950 Against
ended December 31, 1998 700 Abstain
3. Approval of change in the Company's state of incorporation from 4,896,744 For
California to Delaware 1,258,460 Against
1,680 Abstain
4. Approval of adoption of Classified Board Provisions in the 4,059,263 For
Certificate of Incorporation and Bylaws of the Company pursuant 2,090,841 Against
to which the Board will be classified into three classes and 6,780 Abstain
directors may only be removed for cause and only by the specified
vote of shareholders
5. Approval of adoption of a Shareholder Supermajority Vote Requirement 3,980,913 For
in the Certificate of Incorporation of the Company pursuant to which 2,167,171 Against
the affirmative vote of the holders of not less than 80% of the Company's 8,800 Abstain
outstanding Voting Stock is required to approve certain business
combinations
6. Approval of adoption of provisions in the Certificate of Incorporation 3,982,313 For
of the Company requiring an increased Shareholder Vote of 80% to amend 2,160,671 Against
any of the Bylaws and to amend certain antitakeover provisions in the 13,900 Abstain
Certificate of Incorporation of the Company
7. Approval to eliminate the right of holders of 10% or more of the 4,027,784 For
Company's Common Stock to all special shareholders' meetings 2,051,533 Against
77,567 Abstain
8. Approval of a series of amendments to the Company's 1996 Stock 4,975,342 For
Option/Stock Issuance Plan, including a 500,000 share increase in 1,168,675 Against
the number of shares of Common Stock authorized for issuance under 12,867 Abstain
the 1996 Plan
17
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.
10.1 Amendment No. 5 dated April 30, 1998 to Credit Agreement.
10.2* Amendment No. 6 dated May 4, 1998 to Credit Agreement.
10.3* Amended and Restated Credit Agreement dated June 2, 1998.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
- -----------------------------------------
*Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(b) Reports on Form 8-K
During the three months ended June 30, 1998, the Company filed the
following two reports on Form 8-K: (i) a Form 8-K filed on April 30, 1998
which reported on Item 5; and (ii) a Form 8-K filed on June 23, 1998 which
reported on Item 5.
18
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: August 10, 1998
Willis Lease Finance Corporation
By: /s/ James D. McBride
----------------------------------
James D. McBride
Chief Financial Officer
19