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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28774
----------------------
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 68-0070656
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2320 Marinship Way, Suite 300, Sausalito, CA 94965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 331-5281
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT JULY 31, 1999
------------------- ----------------------------
Common Stock, $0.01 Par Value 7,393,145
1
WILLIS LEASE FINANCE CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity
Year ended December 31, 1998 and
six months ended June 30, 1999 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 2A. Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
2
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) (AUDITED)
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
ASSETS
Cash and cash equivalents $ 15,557 $ 10,305
Restricted cash 16,327 13,738
Equipment held for operating lease, less accumulated depreciation
of $15,645 at June 30, 1999 and $15,455 at December 31, 1998 316,427 274,618
Net investment in direct finance lease 8,977 9,249
Property, equipment and furnishings, less accumulated depreciation
of $544 at June 30, 1999 and $509 at December 31, 1998 782 2,480
Spare parts inventory 35,340 35,858
Lease related receivables 3,523 2,492
Trade receivables, net 5,164 5,310
Notes receivable 3,122 -
Investment in unconsolidated affiliate 5,643 -
Other receivables 30 757
Other assets 5,743 5,198
-------- --------
Total assets $416,635 $360,005
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 6,973 $ 9,620
Salaries and commissions payable 862 977
Deferred income taxes 14,912 11,684
Deferred gain 497 157
Notes payable and accrued interest 287,479 245,581
Capital lease obligation 2,572 2,652
Residual share payable 3,041 2,618
Maintenance reserves 18,811 13,273
Security deposits 5,309 4,561
Unearned lease revenue 4,378 3,040
-------- --------
Total liabilities 344,834 294,163
-------- --------
Shareholders' equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; none
outstanding) - -
Common stock, ($0.01 par value, 20,000,000 shares authorized;
7,393,145 and 7,360,813 shares issued and outstanding
as of June 30, 1999 and December 31,1998, respectively) 74 74
Paid-in capital in excess of par 42,419 42,033
Retained earnings 29,308 23,735
-------- --------
Total shareholders' equity 71,801 65,842
-------- --------
Total liabilities and shareholders' equity $416,635 $360,005
-------- --------
-------- --------
See accompanying notes to the consolidated financial statements
3
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- ------------ ------------
REVENUE
Lease revenue $11,078 $7,129 $21,647 $13,565
Gain on sale of leased equipment 3,849 2,431 7,260 5,539
Spare part sales 6,217 6,583 15,189 9,599
Sale of equipment acquired for resale 4,000 4,094 9,775 4,094
Interest and other income 357 434 577 619
------------ ------------- ------------ ------------
Total revenue $25,501 $20,671 $54,448 $33,416
------------ ------------- ------------ ------------
EXPENSES
Interest expense 5,113 3,600 10,006 6,202
Depreciation expense 2,868 1,728 5,983 3,145
Residual share 212 168 423 400
Cost of spare part sales 4,629 4,831 11,259 6,886
Cost of equipment acquired for resale 3,570 3,573 8,354 3,573
General and administrative 4,421 3,184 9,089 6,368
------------ ------------- ------------ ------------
Total expenses 20,813 17,084 45,114 26,574
------------ ------------- ------------ ------------
Income from operations $4,688 $3,587 $9,334 $6,842
Income/(loss) from unconsolidated affiliate (40) - (40) -
------------ ------------- ------------ ------------
Income before income taxes and extraordinary item 4,648 3,587 9,294 6,842
Income taxes (1,861) (1,438) (3,721) (2,743)
------------ ------------- ------------ ------------
Income before extraordinary item 2,787 2,149 5,573 4,099
Extraordinary item less applicable income taxes - - - (200)
------------ ------------- ------------ ------------
Net income $2,787 $2,149 $5,573 $3,899
============ ============= ============ ============
Basic earnings per common share:
Income before extraordinary item $0.38 $0.30 $0.76 $0.57
Extraordinary item - - - (0.04)
------------ ------------- ------------ ------------
Net income $0.38 $0.30 $0.76 $0.53
============ ============= ============ ============
Diluted earnings per common share:
Income before extraordinary item $0.37 $0.29 $0.75 $0.55
Extraordinary item - - - (0.03)
------------ ------------- ------------ ------------
Net income $0.37 $0.29 $0.75 $0.52
============ ============= ============ ============
Average common shares outstanding 7,374 7,263 7,368 7,228
Diluted average common shares outstanding 7,453 7,488 7,455 7,466
See accompanying notes to the consolidated financial statements
4
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Year Ended December 31, 1998 and Six Months Ended June 30, 1999
(In thousands, except share data)
Issued and
outstanding Paid-in Total
shares of Common Capital in Retained shareholders'
common stock Stock Excess of par earnings equity
------------ ----- ------------- -------- ------
Balance at December 31, 1997 7,178 $40,117 $ - $14,484 $54,601
Shares issued 183 587 737 - 1,324
Tax benefit from disqualified
dispositions of qualified shares - - 666 - 666
Conversion to par value stock - (40,630) 40,630 - -
Net income - - - 9,251 9,251
---------------- ------------- ------------ ------------ -------------
Balances at December 31, 1998 (audited) 7,361 74 42,033 23,735 65,842
Shares issued 32 - 278 - 278
Tax benefit from disqualified
dispositions of qualified shares - - 108 - 108
Net income - - - 5,573 5,573
---------------- ------------- ------------ ------------ -------------
Balances at June 30, 1999 (unaudited) 7,393 $74 $42,419 $29,308 $71,801
================ ============= ============ ============ =============
5
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,573 $3,898
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of equipment held for lease 5,724 3,063
Depreciation of property, equipment and furnishings 259 83
Gain on sale of property, equipment and furnishings (1) (2)
Gain on sale of leased equipment (7,260) (5,539)
Increase in residual share payable 423 123
Loss from unconsolidated affiliate 40 -
Changes in assets and liabilities:
Restricted Cash (2,589) (2,731)
Spare parts inventory (335) (15,727)
Receivables (493) 139
Other assets (2,929) (614)
Accounts payable and accrued expenses (1,895) (215)
Salaries and commission payable (15) (357)
Deferred income taxes 3,336 1,787
Deferred gain 340 (13)
Accrued interest (178) 20
Maintenance reserves 5,538 1,178
Security deposits 748 1,354
Unearned lease revenue 1,338 712
---------------- ----------------
Net cash provided (used in) by operating activities 7,624 (12,841)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for lease (net of
selling expenses) 33,908 16,487
Proceeds from sale of property, equipment and furnishings 1 16
Purchase of equipment held for operating lease (77,303) (101,397)
Deposits made in connection with inventory purchases - (3,410)
Purchase of property, equipment and furnishings (1,454) (871)
Investment in unconsolidated affiliate (70) -
Principal payments received on direct finance lease 272 285
---------------- ----------------
Net cash used in investing activities (44,646) (88,890)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 81,513 109,984
Proceeds from issuance of common stock 278 586
Principal payments on notes payable (39,437) (18,679)
Principal payments on capital lease obligation (80) (73)
---------------- ----------------
Net cash provided by financing activities 42,274 91,818
(Decrease) increase in cash and cash equivalents 5,252 (9,913)
Cash and cash equivalents at beginning of period 10,305 13,095
---------------- ----------------
Cash and cash equivalents at end of period 15,557 $3,182
================ ================
Supplemental information:
Net cash paid for: Interest $10,185 $6,182
---------------- ----------------
Income Taxes $654 $2,657
---------------- ----------------
Non-cash investing activities:
Transfer of assets to unconsolidated affiliate (net) $5,613 $ -
---------------- ----------------
Non-cash financing activities:
Short term loan related to sale of equipment held
for operating lease $1,500 $ -
---------------- ----------------
Installment loan related to sale of equipment held for
operating lease $1,622 $ -
---------------- ----------------
See accompanying notes to the consolidated financial statements
6
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Willis
Lease Finance Corporation and its subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Pursuant to such rules and regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying unaudited interim financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto, together with Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal and
recurring adjustments) necessary to present fairly the financial position of the
Company as of June 30, 1999 unaudited, and December 31, 1998 audited, and the
unaudited results of its operations for the three and six month periods ended
June 30, 1999 and 1998 and its cash flows for the six month periods ended June
30, 1999 and 1998. The results of operations and cash flows for the periods
ended June 30, 1999 are not necessarily indicative of the results of operations
or cash flows which may be reported for the remainder of 1999.
2. MANAGEMENT ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
3. SHAREHOLDERS' EQUITY
Authorized capital shares of the Company include 5,000,000 shares of
preferred stock and 20,000,000 shares of common stock with a par value of $0.01
per share. As of June 30, 1999 and December 31, 1998, 7,393,145 and 7,360,813
shares, respectively, of common stock were issued and outstanding. No preferred
stock was issued or outstanding as of June 30, 1999 or December 31, 1998. The
rights and preferences of any preferred stock will be established by the
Company's Board of Directors upon issuance.
The Company has a 1996 Employee Stock Purchase Plan (the "Purchase Plan")
under which 75,000 shares of common stock have been reserved for issuance. This
plan became effective in September 1996. Eligible employees may designate not
more than 10% of their base salary to be deducted each pay period for the
purchase of common stock under the Purchase Plan, and participants may purchase
not more than 500 shares of common stock on any one purchase date, subject to
additional Internal Revenue Code limitations. Each January 31 and July 31,
shares of common stock are purchased with the employees' payroll deductions over
the immediately preceding six months at a price per share of 85% of the lesser
of the market price of the common stock on the purchase date or the market price
on the date of entry into an offering period. During the six month period ended
June 30, 1999, the Company issued 4,382 shares of Common Stock as a result of
employee stock purchases under the Purchase Plan.
7
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the 1996 Stock Option/Stock Issuance Plan, as amended and restated
April 6, 1999, 1,025,000 shares of the Company's shares have been set aside to
provide eligible persons with the opportunity to acquire a proprietary interest
in the Company. The plan includes a Discretionary Option Grant Program, a Stock
Issuance Program, a Salary Investment Option Grant Program for certain officers
and employees, a Director Fee Option Grant Program and an Automatic Option Grant
Program for eligible nonemployee Board Members. During the six month period
ended June 30, 1999, 30,000 options were exercised. In connection with the
exercise of a portion of these options, the Company recognized a tax benefit of
approximately $108,000.
In conjunction with its initial public offering, the Company sold five-year
purchase warrants for $0.01 per warrant covering an aggregate of 100,000 shares
of common stock exercisable at a price equal to 130% of the initial public
offering price. The warrants became exercisable in December 1997. The warrants'
exercise price and the number of shares of Common Stock are subject to
adjustment to protect the warrant holders against dilution in certain events. In
February 1998, a holder of 50,000 of the warrants exercised the warrants under
the net issuance rights of the warrants. Based on the closing price on such
date, the exercise resulted in the issuance of 25,238 shares to the holder of
the warrants.
4. FINANCING
In May 1999, the Company increased its $80 million debt warehouse facility
to $125 million. The facility is available to a wholly-owned special purpose
finance subsidiary of the Company, WLFC Funding Corporation, for the financing
of jet aircraft engines transferred by the company to such finance subsidiary.
The facility has an eight-year initial term with a revolving period to February
2000 followed by a seven-year amortization period. At June 30, 1999, the
interest rate was a commercial paper based rate plus 1.6%. The facility is
renewable annually.
In March 1998, the Company repaid a loan that had residual sharing
provisions. The repayment resulted in an extraordinary expense of $0.2 million,
net of tax.
5. COMMITMENTS
The Company has three leases for its office and warehouse space. The annual
lease rental commitments are $309,481, $56,000, and $80,829 and the leases
expire on May 31, 2003, December 31, 1999 and July 31, 2000, respectively.
The Company has committed to purchase during 1999, additional used aircraft
and new and used engines for its operations. Certain deposits were made in
connection with these commitments. The Company's current, remaining commitment
to such purchases is not more than $11.7 million.
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On May 28, 1999, the Company entered into an agreement with Chromalloy Gas
Turbine Corporation, a subsidiary of Sequa Corporation, to operate a joint
venture to perform maintenance, repair and overhaul of commercial jet engines.
Under the terms of the joint venture agreement, the Company and Chromalloy
formed a new company, Pacific Gas Turbine Center, LLC ("PGTC LLC"). The Company
contributed the operations and assets of its wholly owned subsidiary Pacific Gas
Turbine Center, Incorporated ("PGTC Inc.") (with a book value of $5.7 million)
and Chromalloy contributed working capital to the joint venture. Both the
Company and Chromalloy have a 50% interest in the joint venture. The equity
method of accounting is used for the Company's 50% ownership in PGTC LLC. Under
the equity method, the original contribution was recorded at cost and is
adjusted periodically to recognize the Company's share of the earnings or losses
of PGTC LLC after the date of formation. The contribution is shown in the
Company's Consolidated Balance
8
Sheet as a single amount and earnings or losses are shown in the Consolidated
Statement of Income as a single amount. All intercompany profits or losses are
eliminated.
7. OPERATING SEGMENTS
The Company operates in two business segments: (i) Leasing and Related
Operations which involves acquiring and leasing, primarily pursuant to operating
leases, commercial aircraft, aircraft spare engines and other aircraft equipment
and the selective purchase and resale of commercial aircraft engines and other
aircraft equipment and (ii) Spare Parts Sales which involves the purchase and
resale of after-market engine and airframe parts, whole engines, engine modules
and rotable aircraft components and leasing of engines destined for disassembly
and sale of parts.
In 1998, the Company formed PGTC Inc. to engage in engine disassembly and
maintenance, repair and overhaul services. At the end of May 1999, the Company's
investment in and the operations of PGTC Inc. were contributed to a joint
venture, PGTC LLC (see note 6 above). During the five months ended May 31, 1999,
while PGTC Inc. was a wholly-owned subsidiary of the Company, the majority of
PGTC Inc.'s revenue was derived from services provided to WASI. Revenue from
third parties during this period was not material. Accordingly, for the five
months ended May 31, 1999, the operations of PGTC Inc. are included in the Spare
Parts Sales segment. Subsequent to the formation of PGTC LLC, because the
results of PGTC LLC were immaterial, PGTC LLC is not included in the operating
segment analysis for the three and six months ended June 30, 1999. PGTC Inc. was
not in operation during the three and six months ended June 30, 1998.
The Company evaluates the performance of each of the segments based on
profit or loss after general and administrative expenses and inter-company
allocation of interest expense. While the Company believes there are synergies
between the two business segments, the segments are managed separately because
each requires different business strategies.
The following tables present a summary of the operating segments (in
thousands):
For the three months ended June 30, 1999 For the three months ended June 30, 1998
-------------------------------------------- --------------------------------------------
Leasing Spare Leasing Spare
and Related Parts and Related Parts
Operations Sales Total Operations Sales Total
----------------------------------------- --------------------------------------------
Revenue:
Lease revenue $10,560 $518 $11,078 $7,129 $ - $7,129
Gain on sale of leased equipment 3,849 - 3,849 2,431 - 2,431
Spare parts sales - 6,217 6,217 - 6,583 6,583
Sale of equipment acquired for resale 4,000 - 4,000 4,094 - 4,094
Interest and Other Income 243 114 357 409 25 434
----------------------------------------- --------------------------------------------
Total revenue 18,652 6,849 25,501 14,063 6,608 20,671
----------------------------------------- --------------------------------------------
Expenses:
Interest expense 4,341 772 5,113 3,227 373 3,600
Depreciation expense 2,585 283 2,868 1,711 17 1,728
Residual share 212 - 212 168 - 168
Cost of spare parts - 4,629 4,629 - 4,831 4,831
Cost of equipment acquired for resale 3,570 - 3,570 3,573 - 3,573
General and administrative 2,880 1,541 4,421 2,186 998 3,184
----------------------------------------- ---------------------------------------------
Total expenses 13,588 7,225 20,813 10,865 6,219 17,084
----------------------------------------- ---------------------------------------------
Income from operations $5,064 ($376)(1) $4,688 $3,198 $389 $3,587
========================================= =============================================
Total assets as of June 30, 1999 and
1998 $356,995 $53,997 $410,992 $291,960 $6,775 $298,735
========================================= =============================================
- ------------------------------------------------------------------------------------
(1) The Company estimates that income from operations would have been $0.1
million if the effect of PGTC Inc.'s operations, after intercompany
eliminations, were eliminated from the results of the Spare Parts Sales
segment.
9
For the six months ended June 30, 1999 For the six months ended June 30, 1998
------------------------------------------ ----------------------------------------------
Leasing Spare Leasing Spare
and Related Parts and Related Parts
Operations Sales Total Operations Sales Total
------------------------------------------ ----------------------------------------------
Revenue:
Lease revenue $20,625 $1,022 $21,647 $13,565 $ - $13,565
Gain on sale of leased equipment 7,260 - 7,260 5,539 - 5,539
Spare parts sales - 15,189 15,189 - 9,599 9,599
Sale of equipment acquired for resale 9,775 - 9,775 4,094 - 4,094
Interest and other income 462 115 577 586 33 619
------------------------------------------ ------------------------------------------------
Total revenue 38,122 16,326 54,448 23,784 9,632 33,416
------------------------------------------ ------------------------------------------------
Expenses:
Interest expense 8,557 1,449 10,006 5,711 491 6,202
Depreciation expense 5,421 562 5,983 3,113 32 3,145
Residual share 423 - 423 400 - 400
Cost of spare parts - 11,259 11,259 - 6,886 6,886
Cost of equipment acquired for resale 8,354 - 8,354 3,573 - 3,573
General and administrative 5,437 3,652 9,089 4,565 1,803 6,368
----------------------------------------- ------------------------------------------------
Total expenses 28,192 16,922 45,114 17,362 9,212 26,574
----------------------------------------- ------------------------------------------------
Income from operations $9,930 ($596)(2) $9,334 $6,422 $420 $6,842
========================================= ================================================
Total assets as of June 30, 1999
and 1998 $356,995 $53,997 $410,992 $291,960 $6,775 $298,735
========================================= ================================================
- -------------------------------------------------------------------------------------
(2) The Company estimates that income from operations would have been $0.5
million if the effect of PGTC Inc.'s operations, after intercompany
eliminations, were eliminated from the results of the Spare Parts Sales
segment.
8. SUBSEQUENT EVENT
In July, 1999, the Company entered into an agreement to participate in a
joint venture - Sichuan Snecma Aero-engine Maintenance Co. Ltd. Sichuan Snecma
will focus on providing maintenance services for CFM56 series engines. Other
participants in the joint venture are China Southwest Airlines, Snecma Services
and Beijing Kailan Aviation Technology Development and Services Corporation.
Under the terms of the agreement, the Company expects to contribute not more
than $3 million to the joint venture over the next three years.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's core business is acquiring and leasing, primarily pursuant
to operating leases, commercial aircraft spare engines, aircraft and other
aircraft equipment. The Company, through WASI, also specializes in the
purchase and resale of aftermarket airframe and engine parts, engines,
modules and rotable components. In addition, the Company engages in the
selective purchase and resale of commercial aircraft engines. In July 1998,
the Company formed Pacific Gas Turbine Center, Incorporated ("PGTC Inc."). In
May 1999, the Company contributed the operations and assets of PGTC Inc. to a
newly formed joint venture, Pacific Gas Turbine Center, LLC ("PGTC LLC").
PGTC Inc. and its successor, PGTC LLC provide engine disassembly and
maintenance, repair and overhaul services to the Company and third parties
from the its San Diego location.
Revenue consists primarily of lease revenue, income from the sale of
spare parts and components and income from the sale of engines and equipment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998:
Revenue is summarized as follows:
Three Months Ended June 30,
----------------------------------------------------
1999 1998
---- ----
Amount % Amount %
----------------------------------------------------
(dollars in thousands)
Lease revenue................................................. $11,078 43% $7,129 34%
Gain on sale of leased equipment.............................. 3,849 15 2,431 12
Spare parts sales............................................. 6,217 24 6,583 32
Sale of equipment acquired for resale......................... 4,000 16 4,094 20
Interest and other income..................................... 357 2 434 2
----------------------------------------------------
Total......................................................... $25,501 100% $20,671 100%
====================================================
LEASING RELATED ACTIVITIES. Lease related revenue for the quarter ended
June 30, 1999, increased 55% to $11.1 million from $7.1 million for the
comparable period in 1998. This increase reflects lease related revenues from
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at June 30, 1999 and
1998 was $325.4 million and $235.5 million, respectively, an increase of 38%.
During the quarter ended June 30, 1999, 24 engines and two aircraft were
added to the Company's lease portfolio at a total cost of $57.0 million. Six
engines and three spare parts packages from the lease portfolio were sold or
transferred to inventory for sale. The engines sold from the lease portfolio
had a total net book value of $16.2 million and were sold for a gain of $3.8
million.
During the quarter ended June 30, 1998, the Company sold three engines
from the lease portfolio. The engines had a net book value of $7.6 million
and were sold for a gain of $2.4 million.
During the quarter ended June 30, 1999, the Company sold one engine
acquired for resale for $4.0 million which resulted in a gain of $430,000.
During the comparable 1998 period, the Company sold one engine for $4.1
million which resulted in a gain of $0.5 million.
11
SPARE PARTS SALES. Revenues from spare parts sales decreased 6% to $6.2
million as compared to $6.6 million in the quarter ended June 30, 1998. The
gross margin decreased to 26% from 27% in the corresponding period in 1998.
This decrease was due to changes in the mix of parts sold during the periods.
INTEREST AND OTHER INCOME. Interest and other income for each of the
quarters ended June 30, 1999 and 1998, were $0.4 million. Interest is earned
on cash and deposits held.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 42% to $5.1 million for the quarter ended June 30, 1999,
from the comparable period in 1998, due to an increase in average debt
outstanding. This increase in debt was primarily related to debt associated
with the increase in lease portfolio assets and to a lesser extent an
increase in spare parts inventories. Residual sharing expense related to debt
increased 26% to $212,000 for the quarter ended June 30, 1999 from $168,000
for the comparable period in 1998. Residual sharing arrangements apply to
three of the Company's engines as of June 30, 1999 and are a function of the
difference between the debt associated with the residual sharing arrangement
and estimated residual proceeds. Because a greater portion of the principal
of such debt is amortized as debt ages, residual sharing expense increases.
The Company accrues for its residual sharing obligations using net book value
as an estimate for residual proceeds.
DEPRECIATION EXPENSE. Depreciation expense increased 66% to $2.9 million
for the quarter ended June 30, 1999, from the comparable period in 1998, due
primarily to the increase in lease portfolio assets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 39% to $4.4 million for the quarter ended June 30, 1999, from the
comparable period in 1998. This change reflects increased expenses, in all
business segments associated with staff additions, increased rent due to the
expansion of the facilities, as well as an increase in professional fees. Two
months of expenses related to PGTC Inc. are included in the quarter ended
June 30, 1999.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the quarter ended June 30, 1999, increased to $1.9 million from $1.4 million
for the comparable period in 1998. This increase reflects an increase in the
Company's pre-tax earnings. The effective tax rate for the quarters ended
June 30, 1999 and 1998 were 40%.
INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company
entered into a joint venture to perform maintenance, repair and overhaul of
commercial jet aircraft engines. The Company accounts for its 50% interest in
the joint venture using the equity method. During the three months ended June
30, 1999, net losses from the joint venture, after inter-company
eliminations, were $40,000. The Company had no such activity during the
comparable 1998 period.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998:
Revenue is summarized as follows:
Six Months Ended June 30,
-------------------------------------------------
1999 1998
---- ----
Amount % Amount %
------------ ------------- ------------ ---------
(dollars in thousands)
Lease revenue........................................................... $21,647 40% $13,565 41%
Gain on sale of leased equipment........................................ 7,260 13 5,539 16
Spare parts sales....................................................... 15,189 28 9,599 29
Sale of equipment acquired for resale................................... 9,775 18 4,094 12
Interest and other income............................................... 577 1 619 2
------------ ------------- ------------ ---------
Total................................................................... $54,448 100% $33,416 100%
============ ============= ============ =========
LEASING RELATED ACTIVITIES. Lease related revenue for the six months
ended June 30, 1999, increased 59% to $21.6 million from $13.6 million for
the comparable period in 1998. This increase reflects lease related revenues
from
12
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at June 30, 1999 and
1998 was $325.4 million and $235.5 million, respectively, an increase of 38%.
During the six months ended June 30, 1999, 30 engines were added to the
Company's lease portfolio at a total cost of $77.1 million. Fourteen engines
and three spare parts packages from the lease portfolio were sold or
transferred to inventory for sale. The engines sold from the lease portfolio
had a total net book value of $27.4 million and were sold for a gain of $7.2
million.
During the six months ended June 30, 1998, four engines and one spare
parts package were sold or transferred to inventory for sale from the lease
portfolio. The engines had a net book value of $10.9 million and were sold
for a gain of $5.5 million.
During the six months ended June 30, 1999, the Company sold three
engines acquired for resale for $9.8 million which resulted in a gain of $1.4
million.
SPARE PARTS SALES. Revenues from spare parts sales increased 58% to
$15.2 million as compared to $9.6 million in the six months ended June 30,
1998. The gross margin decreased to 26% from 28% in the corresponding period
in 1998. This decrease was due to changes in the mix of parts being sold
during the periods.
INTEREST AND OTHER INCOME. Interest and other income for each of the six
months ended June 30, 1999 and 1998, were $0.6 million. Interest is earned on
cash and deposits held.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 61% to $10.0 million for the six months ended June 30,
1999, from the comparable period in 1998, due to an increase in average debt
outstanding during the period. This increase in debt was primarily related to
debt associated with the increase in lease portfolio assets and to a lesser
extent an increase in spare parts inventories. Residual sharing expense
increased 6% to $423,000 for the six months ended June 30, 1999 from $400,000
for the comparable period in 1998. Residual sharing arrangements apply to
three of the Company's engines as of June 30, 1999 and are a function of the
difference between the debt associated with the residual sharing arrangement
and estimated residual proceeds. Because a greater portion of the principal
of such debt is amortized as debt ages, residual sharing expense increases.
The Company accrues for its residual sharing obligations using net book value
as an estimate for residual proceeds.
DEPRECIATION EXPENSE. Depreciation expense increased 90% to $6.0 million
for the six months ended June 30, 1999, from the comparable period in 1998,
due primarily to the increase in lease portfolio assets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 43% to $9.1 million for the six months ended June 30, 1999, from
the comparable period in 1998. This change reflects increased expenses, in
all business segments, associated with staff additions, increased rent due to
the expansion of the facilities, as well as an increase in professional fees.
Five months of expenses related to PGTC Inc. are included in the quarter
ended June 30, 1999.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the six months ended June 30, 1999, increased to $3.7 million from $2.7
million for the comparable period in 1998. This increase reflects an increase
in the Company's pre-tax earnings. The effective tax rate for the six months
ended June 30, 1999 and 1998 were 40%.
INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company
entered into a joint venture to perform maintenance, repair and overhaul of
commercial jet aircraft engines. The Company accounts for its 50% interest in
the joint venture using the equity method. During the six months ended June
30, 1999, net losses from the joint venture, after inter-company
eliminations, were $40,000. The Company had no such activity during the
comparable 1998 period.
EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had
residual sharing provisions and an interest rate of 10%. The repayment
resulted in an extraordinary expense of $0.2 million, net of tax. The Company
had no such transactions during the comparable 1999 period.
13
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that
an entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value.
SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the
effective date of SFAS No. 133. SFAS No. 133, as amended, is now effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. As
of June 30, 1999, the Company is reviewing the effect SFAS No. 133 will have
on the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth through borrowings
secured by its equipment lease portfolio. Cash of approximately $81.5 million
and $110.0 million, in the six month periods ended June 30, 1999 and 1998,
respectively, was derived from this activity. In these same time periods
$39.4 million and $18.7 million, respectively, was used to pay down related
debt. Cash flow from operating activities generated approximately $7.6
million in the six month period ended June 30, 1999 and cash flows from
operating activities used $12.8 million in the six month period ended June
30, 1998. The deficit cash flow from operations for the six month period
ended June 30, 1998 was primarily attributable to the acquisition of used
aircraft for WASI's inventory.
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $77.3 million and $101.4 million of funds were used for
this purpose in the six month periods ended June 30, 1999 and 1998,
respectively.
At June 30, 1999, the Company had a $150.0 million revolving credit
facility to finance the acquisition of aircraft engines, aircraft and spare
parts for sale or lease as well as for general working capital purposes. As
of June 30, 1999, $0.1 million was available under this facility, subject to
the Company providing sufficient collateral. The facility has a two-year
revolving period followed by a four-year term-out period. The facility is
renewable annually.
In May 1999, the Company increased its $80 million debt warehouse
facility to $125 million. The facility is available to a wholly-owned special
purpose finance subsidiary of the Company, WLFC Funding Corporation, for the
financing of jet aircraft engines transferred by the Company to such finance
subsidiary. The facility is renewable annually. This transaction's structure
facilitates public or private securitized note issuances by the special
purpose finance subsidiary. The subsidiary is consolidated for financial
statement presentation purposes. The facility has an eight-year initial term
with a revolving period to February 2000 followed by a seven-year
amortization period. At June 30, 1999, the interest rate was a commercial
paper based rate plus 1.6%. The Company has guaranteed the obligations under
the facility on a limited basis, up to an amount equal to the greater of: (i)
the lesser of $5 million and 20% of the outstanding obligations or (ii) 10%
of the outstanding obligations. Assuming compliance with the facility's
terms, including sufficiency of collateral, as of June 30, 1999, $38.7
million was available under this facility.
Approximately $6.5 million of the Company's debt is repayable during
1999. Such repayments consist of scheduled installments due under term loans.
The Company believes that its current equity base, internally generated
funds and existing and contemplated debt facilities are sufficient to fund
the Company's anticipated operations into the third quarter of 1999, at which
time additional capital will be required to fund projected growth. The
Company is currently discussing additions to its debt and equity capital
bases with its commercial and investment banks. If the Company is not able to
access additional debt and equity capital, its ability to continue to grow
its asset base consistent with historical trends will be impaired.
As of June 30, 1999, the Company had eight engines, two aircraft and
one spare parts package which had not been financed. Subsequent to June 30,
1999, the Company's revolving credit lenders agreed that six engines and the
two aircraft could be used as collateral for borrowing purposes. The Company
may seek financing for unfinanced equipment,
14
although no assurance can be given that such financing will be available on
favorable terms, if at all. Certain of the Company's engines have been
financed under floating rate facilities. Accordingly, the Company is subject
to interest rate risk, since the underlying lease revenue is fixed. See
"Management Of Interest Rate Exposure" below.
The Company has committed to purchase, during 1999, additional used
aircraft and used and new engines for its operations. Certain deposits were
made, in 1998, in connection with a portion of these commitments. As of June 30,
1999, the Company's current commitment to such purchases is not more than $11.7
million, which includes $1.4 million of deposits in other assets.
MANAGEMENT OF INTEREST RATE EXPOSURE
At June 30, 1999, $237.8 million of the Company's borrowings were on a
variable rate basis at various interest rates tied to either LIBOR or the
prime rate. The Company's equipment leases are generally structured at fixed
rental rates for specified terms. Increases in interest rates could narrow or
eliminate the spread, or result in a negative spread, between the rental
revenue the Company realizes under its leases and the interest rate that the
Company pays under its borrowings.
In September 1996, the Company purchased an amortizing interest rate cap
in order to limit its exposure to increases in interest rates on a portion of
its variable rate borrowings. Pursuant to this cap, the counter party will
make payments to the Company, based on the notional amount of the cap, if the
three month LIBOR rate is in excess of 7.66%. As of June 30, 1999, the
notional principal amount of the cap was $33.3 million, which will decline to
$26.0 million at the end of its term. The cost of the cap is being amortized
as an expense over its remaining term. To further mitigate exposure to
interest rate changes, the Company has entered into interest rate swap
agreements which have notional outstanding amounts of $30.0 million, a
weighted average remaining term of 26 months and a weighted average fixed
rate of 5.48%. Under its borrowing agreement, WLFC Funding Corporation is
required to hedge a certain portion of its $125 million warehouse facility
against changes in interest rates. WLFC Funding Corporation has entered into
interest rate swap agreements in order to meet such hedging requirements and
to manage the variable interest rate risk related to its debt. As of June 30,
1999, such swap agreements had notional outstanding amounts totaling $50
million, a weighted average remaining term of 45 months and a weighted
average fixed rate of 5.90%.
The Company will be exposed to risk in the event of non-performance of
the interest rate hedge counter parties. The Company anticipates that it will
hedge additional amounts of its floating rate debt during the next several
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for historical information contained herein, the discussion in
this report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute
to such differences include those discussed below as well as those discussed
elsewhere herein and in the Company's report on Form 10-K for the year ended
December 31, 1998. The cautionary statements made in this report should be
read as being applicable to all related forward-looking statements wherever
they appear in this report or in other written or oral statements by the
Company.
The businesses in which the Company is engaged are capital intensive
businesses. Accordingly, the Company's ability to successfully execute its
business strategy and to sustain its operations is dependent, in large part,
on the availability of debt and equity capital. There can be no assurance
that the necessary amount of such capital will continue to be available to
the Company on favorable terms or at all. If the Company is not successful in
obtaining sufficient capital, the Company's ability to: (i) add new aircraft
engines, aircraft and spare parts packages to its portfolio, (ii) add
inventory to support its spare parts sales, (iii) fund its working capital
needs, (iv) develop the business of PGTC LLC, and (v) finance possible future
acquisitions, would be impaired. The Company's inability to obtain sufficient
capital would have a material adverse effect on the Company's business,
financial condition and/or results of operations.
The Company retains title to the aircraft engines, aircraft and parts
packages that it leases to third parties. Upon termination of a lease, the
Company will seek to re-lease or sell the aircraft equipment or will
dismantle the equipment
15
and will sell the parts. The Company also engages in the selective purchase
and resale of commercial aircraft engines and engine components. On occasion,
the Company purchases engines or components without having a firm commitment
for their sale. Numerous factors, many of which are beyond the Company's
control, may have an impact on the Company's ability to re-lease or sell
aircraft equipment on a timely basis, including the following: (i) general
market conditions, (ii) the condition of the aircraft equipment upon
termination of the lease, (iii) the maintenance services performed during the
lease term and, as applicable, the number of hours remaining until the next
major maintenance is required, (iv) regulatory changes (particularly those
imposing environmental, maintenance and other requirements on the operation
of aircraft engines), (v) changes in the supply or cost of aircraft engines,
and (vi) technological developments. There is no assurance that the Company
will be able to re-lease or sell aircraft equipment on a timely basis or on
favorable terms. The failure to re-lease or sell aircraft equipment on a
timely basis or on favorable terms could have a material adverse effect on
the Company's business, financial condition and/or results of operations.
The Company experiences fluctuations in its operating results. Such
fluctuations may be due to a number of factors, including: (i) general
economic conditions, (ii) the timing of sales of engines and spare parts,
(iii) financial difficulties experienced by airlines, (iv) interest rates,
(v) fuel costs, (vi) downturns in the air transportation industry, (vii)
increased fare competition, (viii) decreases in growth of air traffic, (ix)
unanticipated early lease termination or a default by a lessee, (x) the
timing of engine acquisitions, (xi) engine marketing activities, and (xii)
fluctuations in market prices for the Company's assets. The Company
anticipates that fluctuations from period to period will continue in the
future. As a result, the Company believes that comparisons to results of
operations for preceding periods are not necessarily meaningful and that
results of prior periods should not be relied upon as an indication of future
performance.
A lessee may default in performance of its lease obligations and the
Company may be unable to enforce its remedies under a lease. The Company's
inability to collect receivables due under a lease or to repossess aircraft
equipment in the event of a default by a lessee could have a material adverse
effect on the Company's business, financial condition and/or results of
operations. Various airlines have experienced financial difficulties in the
past, certain airlines have filed for bankruptcy and a number of such
airlines have ceased operations. In most cases where a debtor seeks
protection under Chapter 11 of Title 11 of the United States Code, creditors
are automatically stayed from enforcing their rights. In the case of United
States certified airlines, Section 1110 of the Bankruptcy Code provides
certain relief to lessors of aircraft equipment. The scope of Section 1110
has been the subject of significant litigation and there is no assurance that
the provisions of Section 1110 will protect the Company's investment in an
aircraft, aircraft engines or parts in the event of a lessee's bankruptcy. In
addition, Section 1110 does not apply to lessees located outside of the
United States and applicable foreign laws may not provide comparable
protection. Leases of spare parts may involve additional risks. For example,
it is likely to be more difficult to recover parts in the event of a lessee
default and the residual value of parts may be less ascertainable than an
engine.
The Company's leases are generally structured at fixed rental rates for
specified terms while much of the Company's borrowings are at floating rates.
Increases in interest rates could narrow or eliminate the spread, or result
in a negative spread, between the rental revenue the Company realizes under
its leases and the interest rate the Company pays under its borrowings, and
have a material adverse effect on the Company's business, financial condition
and/or results of operations.
During the six month period ended June 30, 1999, 77% of the Company's
lease revenue was generated by leases to foreign customers, including 9% from
Asian customers and 16% from South American customers. Such international
leases may present greater risks to the Company because certain foreign laws,
regulations and judicial procedures may not be as protective of lessor rights
as those which apply in the United States. The Company is subject to the
timing and access to courts and the remedies local laws impose in order to
collect its lease payments and recover its assets. In addition, political
instability abroad and changes in international policy also present risk of
expropriation of the Company's leased engines. Furthermore, many foreign
countries have currency and exchange laws regulating the international
transfer of currencies.
The Company generates a portion of its revenue from sale of leased
assets. The inability to execute transactions for gain on sale or a change in
the accounting guidelines related to such sales could have a material impact
on the Company's business, financial condition and/or results of operations.
16
The Company has recently experienced significant growth in revenues. The
Company's growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational and financial
resources. There is no assurance that the Company will be able to effectively
manage the expansion of its operations, or that the Company's systems,
procedures or controls will be adequate to support the Company's operations,
in which event the Company's business, financial condition and/or results of
operations could be adversely affected. The Company may also acquire
businesses that would complement or expand the Company's existing businesses.
Any acquisition or expansion made by the Company may result in one or more of
the following events: (i) the incurrence of additional debt, (ii) future
charges to earnings related to the amortization of goodwill and other
intangible assets, (iii) difficulties in the assimilation of operations,
services, products and personnel, (iv) an inability to sustain or improve
historical revenue levels, (v) diversion of management's attention from
ongoing business operations, and (vi) potential loss of key employees. Any of
the foregoing factors could have a material adverse effect on the Company's
business, financial condition and/or results of operations.
The markets for the Company's products and services are extremely
competitive, and the Company faces competition from a number of sources.
These include aircraft and aircraft part manufacturers, aircraft and aircraft
engine lessors, airline and aircraft service companies and aircraft spare
parts redistributors. Certain of the Company's competitors have substantially
greater resources than the Company, including greater name recognition,
larger inventories, a broader range of material, complementary lines of
business and greater financial, marketing and other resources. In addition,
equipment manufacturers, aircraft maintenance providers, FAA certified repair
facilities and other aviation aftermarket suppliers may vertically integrate
into the markets that the Company serves, thereby significantly increasing
industry competition. There can be no assurance that competitive pressures
will not materially and adversely affect the Company's business, financial
condition and/or results of operations.
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an
ongoing basis. In addition, the Company's lessees currently enjoy favorable
accounting and tax treatment by entering into operating leases. Any change to
current tax laws or accounting principles that make operating lease financing
less attractive or affect the Company's recognition of revenue or expense
would have a material impact on the Company's business, financial condition
and/or results of operations.
Before parts may be installed in an aircraft, they must meet certain
standards of condition established by the FAA and/or the equivalent
regulatory agencies in other countries. Specific regulations vary from
country to country, although regulatory requirements in other countries are
generally satisfied by compliance with FAA requirements. Parts must also be
traceable to sources deemed acceptable by the FAA or such equivalent
regulatory agencies. Such standards may change in the future, requiring
engine components already contained in the Company's inventory to be scrapped
or modified. In all such cases, to the extent the Company has such engine
components in its inventory, their value may be reduced and the Company's
business, financial condition and/or results of operations could be adversely
affected
The Company obtains a substantial portion of its inventories of
aircraft, engines and engine parts from airlines, overhaul facilities and
other suppliers. There is no organized market for aircraft, engines and
engine parts, and the Company must rely on field representatives and
personnel, advertisements and its reputation as a buyer of surplus inventory
in order to generate opportunities to purchase such equipment. The market for
bulk sales of surplus aircraft, engines and engine parts is highly
competitive, in some instances involving a bidding process. While the Company
has been able to purchase surplus inventory in this manner successfully in
the past, there is no assurance that surplus aircraft, engines and engine
parts of the type required by the Company's customers will be available on
acceptable terms when needed in the future or that the Company will continue
to compete effectively in the purchase of such surplus equipment.
A change in the market for aircraft and engine parts could result in the
Company's inventory being overvalued and could require the Company to
write-down its inventory valuations in order to bring them into line with the
revised fair market value. Furthermore, when the Company purchases and
dismantles used aircraft, engines and parts, the Company assigns a value to
the parts based on market price. Airline manufacturers may also develop new
parts to be used in lieu of parts already contained in the Company's
inventory. There is no assurance that a write-down would not adversely affect
the Company's business, operating results or financial condition.
17
The Company uses computer systems in many areas of its operations. In
addition, various third parties that are important to the Company's business
(including lessees, customers, vendors and financial institutions) use
computer systems in their areas of operations. Should the Company or certain
of such third parties not be "Year 2000 compliant," certain of the Company's
operations could be disrupted for an indeterminate period of time,
potentially having a material adverse impact on the Company's results,
business, financial condition and/or results of operations. As is the case
with most companies, the Year 2000 computer problem creates risks for the
Company.
The Company has assessed the Year 2000 computer problem as it affects
the Company's computer systems and information technology. As a result of the
Company's assessment, the Company does not expect any material interruption
of internal operations arising from the Company's computer systems and
information technology not being Year 2000 compliant. The mission critical
systems of the Company identified during the assessment are all off the shelf
software packages with unmodified source codes which have been certified by
the manufacturer as Year 2000 compliant. All internal hardware and software
remediation was completed during the second quarter and testing will be
conducted during the third quarter. The Company is not aware of any
significant Year 2000 issues with respect to the airworthiness of the
Company's aircraft, aircraft engines or spare parts; however, should such
issues result in Airworthiness Directives or other manufacturer recommended
maintenance for leased assets, the implementation and the majority of the
cost of such implementation would generally be the responsibility of the
lessee. Any resulting costs to the Company cannot be estimated at this time.
Significant uncertainties remain about the effect on the Company's
operations of third parties that may not be Year 2000 compliant and with whom
the Company does business (including lessees, customers, vendors and
financial institutions). The Company is in the process of assessing Year 2000
issues relating to such third parties and certain of the Company's officers
have oversight of these assessments. The Company has circulated to
significant third parties with whom the Company does business a written
request for their plans and progress in addressing the Year 2000 issue. As of
June 30, 1999, approximately two-thirds of the third parties polled had
responded. A majority of the respondents are currently Y2K compliant and the
remaining respondents indicated compliance no later than fourth quarter 1999.
The Company will develop contingency plans to address any material risk of
non-compliance by non-respondents. The Company expects to complete this
process by October 1999. The costs associated with assessing the Year 2000
issue, including developing and implementing the above plan, are expected to
be nominal. Non-compliance on the part of a third party could result in lost
revenue and an inability to make lease or other payments to the Company.
Non-compliance by the third party's financial institution could also affect
the ability to process payments.
A reasonable worst case scenario would be that a large number of third
parties (including lessees and spare parts customers) will be unable to
operate and generate revenues and as a result will be unable to make lease
payments or purchase parts. The Company is unable to estimate the likelihood
or the magnitude of the resulting lost revenue at this time. However, should
this occur, the Company would attempt to repossess leased engines, aircraft
and spare parts from non-compliant third parties and place such assets with
compliant third parties. The Company cannot assure you that it would be able
to re-lease such assets at favorable terms or at all. Similarly, the Company
would attempt to find compliant customers for the Company's spare parts
sales. If a significant number of leased assets could not be re-leased on
favorable terms or at all, or their re-lease is delayed, or if compliant
customers for spare parts sales were unavailable, the Company's business,
financial condition and/or results of operations would be adversely affected.
Providers of casualty and liability insurance to the aviation industry
have indicated that they may exclude coverage for Year 2000 related risks
and/or may require aviation equipment operators to answer, to the insurance
provider's satisfaction, a questionnaire regarding the Year 2000 preparedness
of aviation equipment operators, in order to provide coverage for Year 2000
risks. The inability of a lessee to obtain or maintain coverage for Year 2000
related losses and/or the Company's inability to obtain or maintain any
contingent insurance for Year 2000 related risks would expose the Company to
material risk of loss. The Company is in the process of informing its lessees
of Year 2000 related insurance issues and is monitoring its lessees' ability
to obtain insurance coverage for Year 2000 related risks.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate
risk. A change in the U.S. prime interest rate, LIBOR rate, or cost of funds
based on commercial paper market rates, would affect the rate at which the
Company could
18
borrow funds under its various borrowing facilities. Increases in interest
rates to the Company, which may cause the Company to raise the implicit rates
charged to its customers, could result in a reduction in demand for the
Company's leases. Certain of the Company's warehouse credit facilities are
variable rate debt. The Company estimates a one percent increase or decrease
in the Company's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $1.5 million per annum. The Company
estimates a two percent increase or decrease in the Company's variable rate
debt would result in an increase or decrease, respectively, in interest
expense of $3.0 million per annum. The foregoing effect of interest rate
changes, net of interest rate hedges, on per annum interest expense is
estimated as constant due to the terms of the Company's variable rate
borrowings, which generally provide for the maintenance of borrowing levels
given adequacy of collateral and compliance with other loan conditions.
The Company hedges a portion of its borrowings, effectively fixing the
rate of these borrowings. The Company is currently required to hedge a
portion of debt of the WLFC Funding Corporation Facility. Such hedging
activities may limit the Company's ability to participate in the benefits of
any decrease in interest rates, but may also protect the Company from
increases in interest rates. A portion of the Company's leases provide that
lease payments be adjusted based on changes in interest rates. Furthermore,
since lease rates tend to vary with interest rate levels, it is likely that
the Company can adjust lease rates for the effect of change in interest rates
at the termination of leases. Other financial assets and liabilities are at
fixed rates.
The Company is also exposed to currency devaluation risk. During the six
month period ended June 30, 1999, 77% of the Company's total lease revenues
came from non-United States domiciled lessees. All of the leases require
payment in United States (U.S.) currency. If these lessees' currency devalues
against the U.S. dollar, the lessees could potentially encounter difficulty
in making the U.S. dollar denominated lease payments.
19
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 25, 1999 Annual Meeting of Shareholders of Willis Lease Finance
Corporation, the following matters were voted upon:
DESCRIPTION VOTES
----------- -----
1. Election of Class I Directors
William M. LeRoy 6,959,617 For
14,800 Withheld
Robert H. Rau 6,959,617 For
14,800 Withheld
2. Approval of ratification of two
amendments to the Company's 5,912,616 For
1996 Stock Option/Stock 1,044,881 Against
Issuance Plan (the "1996 Plan"). 16,920 Abstain
3. Approval of ratification of selection 6,971,797 For
of KPMG LLP as independent 1,600 Against
public accountants for the 1,020 Abstain
Company for the fiscal year
ended December 31, 1999
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
NUMBER
3.1 Certificate of Incorporation, filed on March 12, 1998 together
with Certificate of Amendment of Certificate of Incorporation
filed on May 6, 1998. Incorporated by reference to Exhibits 4.01
and 4.02 of the Company's report on Form 8-K filed on June 23,
1998.
3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the
Company's report on Form 8-K filed on June 23, 1998.
4.1 Specimen of Common Stock Certificate incorporated by reference to
Exhibit 4.1 of the Company's report on form 10-Q for the quarter
ended June 30, 1998.
10.1* Operating Agreement of PGTC LLC dated May 28, 1999
10.2* Contribution and Assumption Agreement dated May 28, 1999
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 and the redacted material has been filed separately
with the Commission.
(b) Reports on Form 8-K
None
21
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 13, 1999
Willis Lease Finance Corporation
By: /s/ James D. McBride
----------------------
James D. McBride
Chief Financial Officer