ITEM 1. BUSINESS
INTRODUCTION
Willis Lease Finance
Corporation and its subsidiaries (the “Company”) is a provider of aviation
services focusing on leasing aftermarket commercial aircraft engines and other
aircraft-related equipment. The Company
provides this service to passenger airlines, air cargo carriers and Maintenance
and Repair Organizations (“MROs”).
Aircraft operators require engines and parts beyond those installed in
the aircraft that they operate. These
“spare” aircraft engines and parts are required for various reasons including
requirements that engines and parts be inspected and repaired at regular intervals
based on equipment utilization.
Furthermore, unscheduled events such as mechanical failure, and Federal
Aviation Administration (“FAA”) directives or manufacturer recommended actions
for maintenance, repair and overhaul of engines and parts can give rise to
demand for spare engines.
The Company’s core focus has
been on providing operating leases of aftermarket commercial aircraft engines
and other aircraft-related equipment.
As of December 31, 2001, the Company had a total lease portfolio (including
4 engines classified as discontinued operations) of 57 lessees in 28 countries
and the Company’s total lease portfolio (including net investments in direct
finance leases) consisted of 114 engines, six aircraft and four spare parts
packages with an aggregate net book value of $495.3 million. The Company actively manages its portfolio
and structures its leases in order to enhance residual values of leased
assets. The Company’s leasing business
focuses on popular Stage III commercial jet aircraft engines manufactured by
CFM International, General Electric, Pratt & Whitney, Rolls Royce and
International Aero Engines. These
engines are the most widely used aircraft engines in the world, powering
Boeing, McDonnell Douglas and Airbus aircraft.
In 1994, the Company began
selling aircraft parts and components through a subsidiary, Willis Aeronautical
Services, Inc. (“WASI”). WASI’s
strategy was to focus on the acquisition of aviation equipment, such as whole
engines and aircraft, which could be dismantled and sold as parts at a greater
profit. WASI also supplied certain
parts and components used in the maintenance, repair and overhaul of the
Company’s portfolio of aircraft and engines. WASI was sold in November 2000, as
described below.
In 1998, the Company began
disassembling commercial jet engines and providing parts cleaning, testing and
classification services through Pacific Gas Turbine Center, Incorporated (“PGTC
Inc.”). PGTC Inc. received
certification in November 1998 from the FAA to perform maintenance, repair and
overhaul services for Pratt & Whitney JT8D and JT9D engines. PGTC Inc. commenced repair of JT8D engines
shortly after receiving FAA certification.
In May 1999, the Company contributed the operations and assets of PGTC
Inc. to a newly formed joint venture with Chromalloy Gas Turbine Corporation,
Pacific Gas Turbine Center, LLC (“PGTC LLC”). PGTC Inc. and its successor, PGTC
LLC provided engine disassembly and maintenance, repair and overhaul services
to the Company and third parties. The
Company sold its interest in PGTC LLC in November 2000, as described below.
On November 7, 2000,
the Company entered into agreements for a series of strategic transactions,
each of which closed on November 30, 2000, with Flightlease AG, a corporation
organized under the laws of Switzerland (“Flightlease”), SR Technics Group, a
corporation organized under the laws of Switzerland (“SRT”), FlightTechnics,
LLC, a Delaware limited liability company (“FlightTechnics”) and SR Technics
Group America, Inc., a Delaware corporation (“SRT Group America”), each of
which are affiliated companies.
The Company sold WASI and
its membership interest in its engine repair joint venture with Chromalloy Gas
Turbine Corporation, PGTC LLC and the Company sold its aircraft parts and
components subsidiary, WASI, to SRT Group America for $37.6 million (as
adjusted). The Company acquired five
aircraft engines from SRT for $43.0 million drawn from the proceeds of the sale
of WASI and its membership interests in PGTC LLC and subsequently leased them
back to SRT for periods of four and ten years.
The Company entered into a
business cooperation period with Flightlease and SRT ending on November 30,
2003, by which Flightlease and SRT have price discounts and lowest price
guarantees on engine leases from the Company.
Flightlease and SRT in turn provide the Company with access to spare
engines, promote the Company’s engine leasing efforts and the development of
other products, and will facilitate business opportunities among the Company
and Flightlease’s and SRT’s other business partners (including SRT Group
America). During the year ended December 31, 2001 there were no transactions
completed by either party under the cooperation agreement. The Company has also
entered into put option arrangements regarding certain engines scheduled to be
run to the end of their useful lives to sell them at the Company’s discretion,
to SRT Group America at pre-determined prices.
At December 31, 2001 there were five remaining engines (three in
discontinued operation) with put options having a book value of $1.2
million. The Company gave notice of its
intention to exercise two of these put options in January 2002 and intends to
close the puts during the second quarter.
The Company sold 1,300,000
newly issued shares of its common stock to FlightTechnics and an option,
exercisable within 18 months of November 30, 2000 to purchase newly issued
shares of its common stock in a private placement in an amount between 1,700,000
shares and up to an amount that would give FlightTechnics 34.9% of the
Company’s issued and outstanding common stock.
The price per share for the first additional 1,700,000 shares purchased
pursuant to this option will be $15.00, and the price per share for any shares
purchased in excess of the first additional 1,700,000 shares will be
$16.50. FlightTechnics has two demand
registration rights which are exercisable beginning three years after the
closing date. The Company amended its
Rights Agreement dated September 24, 1999 between the Company and American
Stock Transfer & Trust Company to include FlightTechnics and its affiliates
under the definition of an “Exempt Person”, subject to FlightTechnics and its
affiliates owning a certain percentage of the Company’s common stock.
FlightTechnics also may
purchase more shares of the Company’s common stock in the open market or from
existing stockholders upon the occurrence of certain conditions, but in no
event may FlightTechnics and its affiliates collectively own more than 49.9% of
the Company’s issued and outstanding common stock before the fifth anniversary
of the closing date. Certain
stockholders, including Charles F. Willis IV, and FlightTechnics have also
agreed to certain voting provisions and to
certain restrictions on their abilities to sell their shares of the
Company’s common stock.
As part of these
transactions, Donald A. Nunemaker resigned as a member of the Company’s board
of directors, although he remains the Company’s Executive Vice President and
Chief Operating Officer. In his place,
the Company’s board of directors appointed Hans Jorg Hunziker, President of
Flightlease, to the board.
FlightTechnics has the right to appoint an additional director to the
Company’s board of directors upon the exercise of its option, at which time the
board membership will be increased from five directors to seven directors.
SAir Group, the parent
company of SRT Flightlease and FlightTechnics, filed for bankruptcy in
Switzerland in October, 2001. SRT is not subject to the bankruptcy filing and
as of the date of this report is current on all rental obligations to the
Company. See “Managements Discussion
and Analysis of Financial Condition and Results of Operations - Factors That
May Affect Future Results."
The terrorist attacks of
September 11, 2001 and the general economic slowdown has resulted in an
increase in the number of engines off-lease with an associated impact on
revenue and has also led to the bankruptcy of one of the Company’s largest customers,
Canada 3000 in November 2001. See
“Managements Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results."
The Company is a Delaware
corporation. Its executive offices are
located at 2320 Marinship Way, Suite 300, Sausalito, California 94965. The Company transacts business directly and
through its subsidiaries unless otherwise indicated.
Management considers the
continuing operation of the Company to operate in one reportable segment.
AIRCRAFT EQUIPMENT LEASING
Leases. The vast majority of the Company’s current leases to air
carriers, manufacturers and overhaul/repair facilities are operating leases as
opposed to finance leases. Under an operating
lease, the Company retains title to the aircraft equipment thereby retaining
the benefit and assuming the risk of the residual value of the aircraft
equipment. Operating leases allow airlines greater fleet and financial
flexibility due to their shorter-term nature and the relatively small initial
capital outlay necessary to obtain use of the aircraft equipment. Operating
lease rates are generally priced higher than finance lease rates, in part
because of the risks associated with the residual value. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Results.”
All of the Company’s lease
transactions are triple-net leases. A
triple-net lease requires the lessee to make the full lease payment and pay any
other expenses associated with the use of the equipment, such as maintenance,
casualty and liability insurance, sales or use taxes and personal property
taxes. The leases contain detailed provisions specifying maintenance standards
and the required condition of the aircraft equipment upon return at the end of
the lease. During the term of the lease, the Company generally requires the
lessee to maintain the aircraft engine in accordance with an approved
maintenance program designed to ensure that the aircraft engine meets applicable
regulatory requirements in the jurisdictions in which the lessee operates.
Under short-term leases and certain medium-term leases, the Company may
undertake a portion of the maintenance and regulatory compliance risk.
The Company attempts to
mitigate risk where possible. For
example, the Company typically makes an independent analysis of the credit risk
associated with each lessee before entering into a lease transaction. The Company’s credit analysis generally
consists of evaluating the prospective lessee’s financial standing utilizing
financial statements and trade and/or banking references. In certain circumstances, where the Company
or its lenders believe necessary, the Company may require its lessees to obtain
a partial letter of credit or a guarantee from a bank or a third party. The Company also evaluates
insurance and expropriation risk and
evaluates and monitors the political and legal climate of the country in which
a particular lessee is located in order to determine the Company’s ability to
repossess its equipment should the need arise.
The Company often collects
maintenance reserves and security deposits from engine and aircraft lessees and
security deposits from aircraft parts lessees.
Generally, the Company collects, in advance, a security deposit equal to
at least one month’s lease payment, together with one month’s estimated
maintenance reserve. The security
deposit is returned to the lessee after all return conditions have been met. Maintenance reserves are accumulated in
accounts maintained by the Company or its lenders and are used when normal
repairs associated with engine use or maintenance are required. In many cases, to the extent that cumulative
maintenance reserves are inadequate to fund normal repairs required prior to
return of the engine to the Company, the lessee is obligated to cover the
shortfall. Parts leases generally
require that the parts be returned in the condition the parts were in at lease
inception.
During the lease period, the
Company’s leases require that the leased equipment undergo maintenance and
inspection at qualified maintenance facilities certified by the FAA or its
foreign equivalent. In addition, when
equipment comes off-lease, it undergoes inspection to verify compliance with
lease return conditions.
Despite these guidelines,
the Company cannot assure that it will not experience collection problems or
significant losses in the future. In
addition, while the Company cannot assure that its maintenance and inspection
requirements will result in a realized return upon termination of a lease, the
Company believes that its attention to its lessees and its emphasis on
maintenance and inspection contributes to residual values and generally helps
the Company to recover its investment in its leased equipment. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May Affect Future
Results.”
Upon termination of a lease,
the Company will re-lease or sell the aircraft equipment. The demand for
aftermarket aircraft equipment for either sale or re-lease may be affected by a
number of variables including general market conditions, regulatory changes
(particularly those imposing environmental, maintenance and other requirements
on the operation of aircraft engines), changes in demand for air travel,
changes in the supply and cost of aircraft equipment and technological
developments. In addition, the value of
particular used aircraft, spare parts or aircraft engines varies greatly
depending upon their condition, the maintenance services performed during the
lease term and as applicable the number of hours remaining until the next major
maintenance is required. If the Company is unable to re-lease or sell aircraft
equipment on favorable terms, its financial results and its ability to service
debt may be adversely affected. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May Affect Future
Results.”
Aircraft Equipment Held For Lease. The Company’s
management frequently reviews opportunities to acquire suitable aircraft
equipment based on market demand, customer airline requirements and in
accordance with the Company’s lease portfolio mix criteria and planning strategies
for leasing. Before committing to purchase specific equipment, the Company
generally takes into consideration such factors as estimates of future values,
potential for remarketing, trends in supply and demand for the particular make,
model and configuration of the equipment and the anticipated obsolescence of
the equipment. As a result, certain
types and configurations of equipment do not necessarily fit the profile for
inclusion in the Company’s portfolio of equipment owned and used in its leasing
operation.
The Company focuses
particularly on the noise compliant Stage III aircraft engines manufactured by
CFM International (“CFM”), General Electric, Pratt & Whitney (“PW”), Rolls
Royce and International Aero Engines.
As of December 31, 2001, all but 6 (2 of which are classified as
discontinued operations) of the engines in the Company’s lease portfolio were
Stage III or Stage II engines that have been fitted with “hush-kits” and were
generally suitable for use on one or more commonly used aircraft. The Company’s
parts packages consist of rotable parts for use on commercial aircraft or the
engines appurtenant to such aircraft.
The Company’s investments in aircraft have primarily involved the
purchase of de Havilland DHC-8 commuter aircraft which are Stage III
compliant. The Company may make further
investments in aircraft for lease in the future.
As of December 31, 2001, the
Company had a total portfolio of 114 aircraft engines and related equipment
(including 4 engines classified as discontinued operations), four spare parts
packages and six aircraft with an aggregate original cost of $529.9 million in
its lease portfolio. As of December 31,
2000, the Company had a total portfolio (including 10 engines classified as
discontinued operations) of 110 aircraft engines and related equipment, four
spare parts packages and six aircraft with an aggregate original cost of $451.9
million in its lease portfolio.
As of December 31, 2001,
minimum future rentals for continuing operations under the noncancelable leases
(both operating and direct finance leases) of these engines, parts and aircraft
assets was as follows:
Lessees. As of December 31, 2001, for continuing operations, the Company
had 54 lessees of commercial aircraft engines and other aircraft-related
equipment in 27 countries.
The following table displays
the regional profile of the Company’s lease customer base for continuing
operations for the years ended December 31, 2001, 2000 and 1999. No single country other than the United
States accounted for more than 10%, 8% and 10% of the Company’s lease revenue
for the years ended December 31, 2001, 2000 and 1999, respectively.
See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Factors that May Affect Future
Results.”
EQUIPMENT ACQUIRED FOR RESALE
The Company engages in the selective purchase
and resale of commercial aircraft engines and engine components in the
aftermarket to complement its engine and parts leasing business. The Company
may purchase engines and components without having a commitment for their sale.
The Company assesses the supply and demand of target engines and components
through its sales force and relies, to a lesser extent, on referrals and
advertising in industry publications. The Company also subscribes to a data
package that provides it with access to lists composed of operators and their
specific engine inventories and engines on order.
DISCONTINUED OPERATIONS
Equipment Held for Lease
As part of the transaction
with SRT and its affiliates, the Company sold its parts subsidiary, WASI, and
its interest in its engine repair joint venture, PGTC LLC, and agreed to retain
a lease portfolio of aircraft engines previously maintained and managed by
WASI. Certain of these engines are
subject to put option arrangements where, at the option of the Company, these
engines can be sold to SRT Group America.
To the extent that the
engines in the portfolio retained are subject to put options and do not fit
within the Company’s main portfolio or are identified as likely to be sold, the
assets and the results of operation are included in discontinued operations.
As of December 31, 2001, for
discontinued operations, the Company had three lessees of commercial aircraft
engines in three countries, the USA, Mexico and Venezuela. The portfolio consists of 4 engines with a
book value of $1.2 million, 3 of which having a book value of $1.0 million are
subject to put option agreements with SRT Group America.
FINANCING/SOURCE OF FUNDS
The Company typically
acquires the engines it leases with a combination of equity capital and funds
borrowed from financial institutions. The Company can typically borrow 80% to
100% of an engine purchase price and 50% to 80% of an aircraft or spare parts
purchase price on a recourse, non-recourse or partial recourse basis. Under
several of the Company’s term loans, the lender is entitled to receive most of
the lease payments associated with the financed equipment to apply to debt
service. Generally, lenders take a
security interest in the equipment. The Company retains ownership of the
equipment, subject to such security interest. Loan interest rates often reflect
the financial condition of the underlying lessees, the terms of the lease and
percentage of purchase price advanced, and the financial condition of the
Company. The Company obtains the balance of the purchase price of the
equipment, the “equity” portion, from internally generated funds, cash-on-hand,
and the net proceeds of prior common stock offerings and private
placements. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.”
COMPETITION
The markets for the
Company’s products and services are very competitive, and the Company faces
competition from a number of sources.
These include aircraft, engine and aircraft parts manufacturers,
aircraft and aircraft engine lessors, airline and aircraft service and repair
companies and aircraft spare parts redistributors. Certain of the Company’s competitors have substantially greater
resources than the Company, including greater name recognition, larger and more
diverse inventories, complementary
lines of business and greater financial, marketing, information systems 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. The Company can give no
assurance that competitive pressures will not materially and adversely affect
the Company’s business, financial condition or results of operations. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May Affect Future
Results.”
INSURANCE
The Company requires its
lessees to carry the types of insurance customary in the air transportation
industry, including comprehensive third party liability insurance and physical
damage and casualty insurance. In addition to requiring full indemnification
under the terms of the lease, the Company is named as an additional insured on
liability insurance policies carried by lessees, with the Company or its
lenders normally identified as the payee for loss and damage to the equipment.
The Company monitors compliance with the insurance provisions of the leases.
The Company also carries contingent physical damage and third party liability
insurance as well as product liability insurance.
GOVERNMENT REGULATION
The Company’s customers are
subject to a high degree of regulation in the jurisdictions in which they
operate. For example, the FAA regulates
the manufacture, repair and operation of all aircraft operated in the United
States and equivalent regulatory agencies in other countries regulate aircraft operated
in those countries. Such regulations
also indirectly affect the Company’s business operations. All aircraft operated in the United States
must be maintained under a continuous condition monitoring program and must
periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair proce­dures
for commercial aircraft are prescribed by regulatory authorities and can be
performed only by certified
repair facilities utilizing certified
technicians. The FAA can suspend or
revoke the authority of air carriers or their licensed personnel for failure to
comply with regulations and ground aircraft if their airworthiness is in
question.
While the Company’s leasing
and reselling business is not regulated, the aircraft, engines and engine parts
that the Company leases and sells to its customers must be accompanied by
documentation that enables the customer to comply with applicable regulatory
requirements. Furthermore, 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. Presently, whenever necessary, with respect
to a particular engine or engine component, the Company utilizes FAA and/or
Joint Aviation Authority certified repair stations to repair and certify
engines and components to ensure marketability.
Effective January 1, 2000,
federal regulations stipulate that all aircraft engines hold, or be capable of
holding, a noise certificate issued under Chapter 3 of Volume 1, Part II of
Annex 16 of the Chicago Convention, or have been shown to comply with Stage III
noise levels set out in Section 36.5 of Appendix C of Part 36 of the FAA
Regulations of the United States if the engines are to be used in the
continental United States. Additionally,
much of Europe has adopted similar regulations. As of December 31, 2001, all but 6 (2 of which are classified as
discontinued operations) of the engines in the Company’s lease portfolio were
Stage III engines or Stage II engines that have been fitted with “hush-kits”
and were generally suitable for use on one or more commonly used aircraft. The 6 engines that do not meet Stage III
noise level requirements or are not “hush-kitted” are on-lease or available for
lease to customers located in countries which have not adopted Stage III noise
regulations such as Mexico and the countries of South America.
The Company believes that
the aviation industry will be subject to continued regulatory activity.
Additionally, increased oversight has and will continue to originate from the
quality assurance departments of airline operators. The Company has been able to meet all such requirements to date,
and believes that it will be able meet any additional requirements that may be
imposed. The Company cannot assure,
however, that new, more stringent government regulations will not be adopted in
the future or that any such new regulations, if enacted, would not have a
material adverse impact on the Company.
EMPLOYEES
As of December 31, 2001, the
Company had 40 full-time employees (excluding consultants), in sales and
marketing, technical service and administration. None of the Company’s
employees is covered by a collective bargaining agreement and the Company
believes its employee relations are satisfactory.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s principal
offices are located at 2320 Marinship Way, Suite 300, Sausalito, California
94965. The Company occupies space in Sausalito under a lease that covers
approximately 9,300 square feet of office space and expires on May 31,
2003. Aircraft asset leasing,
financing, sales and general administrative activities are conducted from the
Sausalito location. The Company also
sub-leases from its former parts subsidiary approximately 2,800 square feet of
office and warehouse space for the Company’s operations at San Diego, California. This lease expires November 30, 2002.
ITEM 3.
ITEM 3. LEGAL
PROCEEDINGS
The Company is not a party
to any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to
a vote of stockholders during the fourth quarter of the fiscal year 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR
THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information
relates to the Company’s Common Stock, which is listed on the NASDAQ National
Market under the symbol WLFC. As of
March 11, 2002 there were approximately 982 stockholders of record of the
Company’s Common Stock.
The high and low sales price
of the Common Stock for each quarter of 2001 and 2000, as reported by NASDAQ,
are set forth below:
During the years ended
December 31, 2001 and 2000 the Company did not pay cash dividends to Company
stockholders.
ITEM 6.
ITEM 6. SELECTED
FINANCIAL DATA
The following table
summarizes selected consolidated financial data and operating information of
the Company. The selected consolidated
financial and operating data should be read in conjunction with the
Consolidated Financial Statements and notes thereto and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
General. The Company’s core focus is providing operating leases of
aftermarket commercial aircraft engines and other aircraft-related
equipment. As of December 31, 2001, the
Company had a total portfolio (including 4 engines counted as discontinued
operations) of 57 lessees in 28 countries and its total lease portfolio consisted
of 114 engines, six commuter aircraft and four spare parts packages with an
aggregate net book value of $495.3 million.
The Company actively manages its portfolio and structures its leases in
order to enhance residual values of leased assets. The Company’s leasing business focuses on popular Stage III
commercial jet aircraft engines manufactured by CFM, General Electric, Pratt
& Whitney, Rolls Royce and International Aero Engines. These engines are the most widely used
aircraft engines in the world, powering Boeing, McDonnell Douglas and Airbus
aircraft.
On November 30, 2000, the
Company sold its parts subsidiary, WASI, and its interest in its engine repair
joint venture, PGTC LLC. With the sale of these two businesses, the Company no
longer engages in the business of parts sales or in disassembly, repair,
maintenance and overhaul of aircraft engines, and its core focus is its leasing
portfolio, including sales of leased equipment and equipment acquired for
resale.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of
consolidated financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates
its estimates, including those related to residual values, estimated asset
lives, bad debts, income taxes, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the
following critical accounting policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Leasing Related Activities. Revenue from leasing of aircraft equipment
is recognized as operating lease or finance lease revenue over the terms of the
applicable lease agreements. Where
collection cannot be reasonably assured, for example, upon a lessee bankruptcy,
the Company does not recognize revenue.
The Company also estimates and charges to income a provision for bad
debts based on its experience in the business and with each specific customer
and the level of past due accounts. The
financial condition of the Company’s customers may deteriorate and result in
actual losses exceeding the estimated allowances. In addition, any deterioration in the financial condition of the
Company’s customers may adversely effect future lease revenues. The vast majority
of the Company’s leases are accounted for as operating leases. Under an operating lease, the Company
retains title to the leased equipment, thereby retaining the potential benefit
and assuming the risk of the residual value of the leased equipment.
The Company generally
depreciates engines on a straight-line basis over 15 years to a 55% residual
value. Spare parts packages are
generally depreciated on a straight-line basis over 15 years to a 25% residual
value. Aircraft are generally
depreciated on a straight-line basis over 13-20 years to a 15%-17% residual
value. For assets that are leased with
an intent to disassemble upon lease termination, the Company depreciates the
assets over their estimated lease term to a residual value based on an estimate
of the wholesale value of the parts after disassembly. If useful lives or residual values are lower
than those estimated by the Company, upon sale of the asset, a loss may be
realized.
At the commencement of a
lease, the Company often collects security deposits (normally equal to at least
one month’s lease payment) and maintenance reserves (normally equal to one
month’s estimated maintenance expenses) from the lessee based on the
creditworthiness of the lessee. The
security deposit is returned to the lessee after all lease conditions have been
met. Maintenance reserves are
accumulated in accounts maintained by the Company or the Company’s lenders and
are used when normal repair associated with engine use or maintenance is
required. In many cases, to the extent
that cumulative maintenance reserves are inadequate to fund normal repairs
required prior to return of the engine to the Company, the lessee is obligated
to cover the shortfall. Recovery is
dependant on the financial condition of the lessee.
Sales Related Activities. For equipment sold out of the Company’s lease
portfolio or which was acquired for resale, the Company recognizes the gain or
loss associated with the sale or the gross proceeds from equipment acquired for
resale as revenue. Gain consists of
sales proceeds less the net book value of the equipment sold and any costs
directly associated with the sale.
Additionally, to the extent that any deposits or reserves are not
included in the sale and
the purchaser of the equipment assumes any
liabilities associated therewith, such deposits and reserves are included in
the gain on sale.
Asset Valuation.
The Company periodically reviews its portfolio of assets for impairment
in accordance with SFAS121, "Accounting for the Impairment of Long-Lived
Assets and For Long-Lived Assets to be disposed of." Such review necessitates estimates of
current market values, residual values and component values. The estimates are based on currently
available market data and are subject to fluctuation from time to time. The Company initiates its review whenever
events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable.
Recoverability of an asset is measured by comparison of its carrying amount
to the expected future undiscounted cash flows (without interest charges) that
the asset is expected to generate. Any
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds it fair market value. Significant management judgment is required in the forecasting of
future operating results which are used in the preparation of projected
undiscounted cash flows and should different conditions prevail, material write
downs may occur.
For further information on
these and other accounting policies adopted by the Company, refer to Note 1 of
the Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 2001
COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Revenue from continuing
operations is summarized as follows:
Leasing Related Activities. Lease related
revenue for the year ended December 31, 2001, increased 23% to $60.5 million
from $49.0 million for the comparable period in 2000. This increase primarily
reflects lease related revenues from additional engines partially offset by
reduced utilization. The aggregate of
net book value of leased equipment and net investment in direct finance lease
at December 31, 2001 and 2000 was $495.3 million and $416.7 million, respectively,
an increase of 19%. Utilization, based
on net book value, was 85% at December 31, 2001 compared to 93% at December 31,
2000.
During the year ended
December 31, 2001, 21 engines were added to the Company’s lease portfolio at a
total cost of $127.6 million (including capitalized costs). Eleven engines from the lease portfolio were
sold. The engines sold had a total net
book value of $31.3 million and were sold for a gain of $5.6 million. Included in the disposals were 7 engines
sold to avioserv (a subsidiary of SRT Group America), a related party, for
part-out at a loss of $0.9 million.
During the year ended
December 31, 2000, 18 engines from the lease portfolio were sold to third
parties or transferred to WASI for sale as parts. These engines had a total net book value of $36.5 million and
were sold for a gain of $8.1 million.
Other Income. Other income for the year ended December 31, 2000, relates to a
one-time event associated with the recognition of a lease incentive for office and warehouse space on assignment of
the lease.
Depreciation Expense. Depreciation expense increased 41% to $17.4 million for the year
ended December 31, 2001, from the comparable period in 2000, due primarily to
the increase in lease portfolio assets in 2001 and write-downs of impaired
assets to their estimated fair values of $1.2 million ($0.1 million in 2000).
General and Administrative Expenses. General and administrative expenses
increased 10% to $13.1 million for the year ended December 31, 2001, from the
comparable period in 2000 due to increases in staffing and related costs and
other items including increases in insurance premiums resulting from the
terrorist events of September 11, 2001.
Interest Expense and Residual Sharing. Interest expense related to continuing
activities decreased 2% to $24.1 million for the year ended December 31, 2001,
from the comparable period in 2000, due to a decrease in interest rates
partially offset by
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. Residual sharing
expense decreased 44% to $0.4 million for the year ended December 31, 2001,
from $0.6 million for the comparable period in 2000. In 2001, the Company
settled its outstanding residual share obligations. In 2000, residual sharing arrangements applied to two of the
Company’s engines and were a function of the difference between the debt
associated with the residual sharing arrangement and estimated residual
proceeds. The Company accrued for its residual sharing obligations using net
book value as an estimate for residual proceeds.
Interest Income. Interest income for the
years ended December 31, 2001 and 2000 was $0.9 million.
Income Taxes. Income taxes, exclusive of
tax on discontinued operations for the year ended December 31, 2001, increased
to $4.4 million from $3.5 million for the comparable period in 2000. This increase reflects an increase in the
Company’s income from continuing operations for the year ended December 31,
2001. The Company’s tax rate is subject to change based on changes in the mix
of domestic and foreign leased assets, the proportions of revenue generated
within and outside of California and numerous other factors, including changes
in tax law. The effective tax rate in
2001 was 36% compared to 39% in 2000 due to the Company’s election for
Extraterritorial Income Exclusion relief in 2001 relating to certain qualifying
leases.
Discontinued Operations. In November 2000, the
Company agreed to sell its engine parts and components subsidiary (WASI) and
its membership interest in its engine repair joint venture (PGTC LLC). The sale was completed on November 30, 2000.
Accordingly, the Company’s parts operations and its equity share of the results
of the joint venture are accounted for as discontinued operations.
Net earnings from
discontinued operations for the years ended December 31, 2001 and 2000 are as
follows (in thousands of dollars):
The gain on disposal of discontinued
operations for the year ended December 31, 2001 and 2000 is as follows (in
thousands of dollars):
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1999.
Revenue from continuing
operations is summarized as follows:
Leasing Related Activities. Lease related
revenue for the year ended December 31, 2000, increased 11% to $49.0 million
from $44.1 million for the comparable period in 1999. This increase reflects
lease related revenues from additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at December 31, 2000 and
1999 was $416.7 million and $338.6 million, respectively, an increase of 23%.
During the year ended
December 31, 2000, 27 engines were added to the Company’s lease portfolio at a
total cost of $137.9 million. Eighteen
engines from the lease portfolio were sold to third parties or transferred to
WASI for sale as parts. The engines
sold had a total net book value of $36.5 million and were sold for a gain of
$8.1 million.
During the year ended
December 31, 1999, 24 engines and three spare parts package from the lease
portfolio were sold to third parties or transferred to WASI for sale as
parts. These engines and the parts
packages had a total net book value of $39.2 million and were sold for a gain
of $11.4 million.
During the year ended
December 31, 1999, the Company sold three engines acquired for resale for $9.8
million which resulted in a gain of $1.4 million.
Depreciation Expense. Depreciation expense increased 8% to $12.4 million for the year
ended December 31, 2000, from the comparable period in 1999, due primarily to
the increase in lease portfolio assets in 2000.
General and Administrative Expenses. General and administrative expenses
decreased 1% to $11.9 million for the year ended December 31, 2000, from the
comparable period in 1999. Five months of expenses related to PGTC Inc. are
included in the year ended December 31, 1999.
Interest Expense and Residual Sharing. Interest expense increased 22% to $24.6
million for the year ended December 31, 2000, from the comparable period in
1999, due to an increase in average debt outstanding during the period and
increases in interest rates. This
increase in debt was primarily related to debt associated with the increase in
lease portfolio assets. Residual
sharing expense decreased 25% to $0.6 million for the year ended December 31,
2000, from $0.8 million for the
comparable period in 1999. Residual sharing arrangements applied to two of the
Company’s engines as of December 31, 2000, (three at December 31, 1999) and are
a function of the difference between the debt associated with the residual
sharing arrangement and estimated residual proceeds. The Company accrues for its residual sharing obligations using
net book value as an estimate for residual proceeds.
Interest Income.
Interest income for the year ended December 31, 2000, decreased to $0.9
million from $1.0 million for the year ended December 31, 1999.
Income Taxes. Income taxes, exclusive of
tax on discontinued operations and extraordinary items, for the year ended
December 31, 2000, increased to $3.5 million from $3.2 million for the
comparable period in 1999. This
increase mainly reflects an increase in the Company’s effective tax rate for
the year ended December 31, 2000 to 39% from approximately 24% in 1999 due to
adjustments of state tax apportionment credited in 1999. The Company’s tax rate is subject to change
based on changes in the mix of domestic and foreign leased assets, the
proportions of revenue generated within and outside of California and numerous
other factors, including changes in tax law.
Discontinued Operations. In November 2000, the Company agreed to sell its
engine parts and components subsidiary (WASI) and its membership interest in
its joint venture (PGTC LLC). The sale
was completed on November 30, 2000.
Accordingly, the Company’s
parts operations and its equity share of the results of the joint venture are
accounted for as discontinued operations and prior periods financial statements
have been reclassified accordingly.
Net earnings (loss) from
discontinued operations for the years ended December 31, 2000 and 1999 are as follows
(in thousands of dollars):
ACCOUNTING PRONOUNCEMENTS
In September 2000, FASB
issued SFAS No. 140, “Accounting for transfers and servicing of financial
assets and extinguishment of liabilities, an amendment of FASB Statement No.
125.” Statement 140 provides guidance
on the following topics: securitization transactions involving financial
assets, sales of financial assets such as receivables, loans and securities,
collateralized borrowing arrangements, repurchase agreements, and
extinguishments of liabilities. The
provisions of Statement 140 became effective for transactions entered into
after March 31, 2001. Statement 140 did
not have a material impact on the Company’s consolidated financial statements
during the year ended December 31, 2001.
In June 2001, FASB issued
SFAS 141, “Business Combinations,” SFAS 142, “Goodwill and Other Intangible
Assets” and SFAS 143 “Accounting for Asset Retirement Obligations.” Statement 141 addresses financial accounting
and reporting for business combinations and supercedes APB Opinion No. 16,
“Business Combinations,” and SFAS 38, “Accounting for Preacquisition
Contingencies of Purchased Enterprises.”
Under Statement 141, all business combinations are to be accounted for
using one method, the purchase method.
The provisions of Statement 141 apply to all business combinations
instituted after June 30, 2001.
Statement 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supercedes APB Opinion No. 17, “Intangible Assets.” Statement 142 addresses how intangible
assets that are acquired individually or with a group of other assets
(excluding those acquired in a business combination) should be accounted for on
their acquisition and also how they should be accounted for after they have
been initially recognized. The
provisions of Statement 142 will become effective the fiscal year beginning
after December 15, 2001, except for goodwill and intangible assets acquired
after June 30, 2001 which became immediately subject to the non-amortization
and amortization provisions of the Statement. Statement 142 will require that
goodwill and all identifiable intangible assets that have an indeterminable
life be recognized as assets but not amortized. These assets will be assessed
for impairment annually.
Statement 143 addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated retirement costs. The Statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be
made. The Statement in effect is for
fiscal years beginning after June 15, 2002.
The Company did not
undertake any transactions during the period nor has any assets that are
affected by any of these Statements.
In August 2001, FASB issued
SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” This Statement supercedes SFAS
121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of” and elements of APB 30 “Reporting the Results of
Operations-Reporting the Effects on Disposal of a Segment of a Business, and
Extraordinary, Unusual or Infrequently Occurring Events and Transactions.”
Statement 144 establishes a
single-accounting model for long-lived assets to be disposed of while
maintaining many of the provisions relating to impairment testing and
valuation. The Statement will be
effective on January 1, 2002 and the Company is currently assessing the impact
its adoption will have on the financial condition and operating results of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company
has financed its growth through borrowings secured by its equipment lease
portfolio. Cash of approximately $142.8
million, $104.4 million and $118.2 million, in the years ended December 31,
2001, 2000 and 1999, respectively, was derived from this activity. In these same time periods $84.6 million,
$95.3 million and $73.0 million, respectively, was used to pay down related
debt or capital lease obligations. On
November 30, 2000, net proceeds from a private placement of common stock and
options were approximately $18.2 million.
Cash flow from operating activities generated $33.3 million, $27.7
million and $25.1 million in the years ended December 31, 2001, 2000 and 1999
respectively.
The Company’s primary use of
funds is for the purchase of equipment for lease. Approximately $127.6 million, $137.9 million and $119.8 million
of funds were used for this purpose in the years ended December 31, 2001, 2000
and 1999, respectively.
Cash flows from operations
are driven significantly by changes in revenue. While the Company has experienced some deterioration in lease
rates, these have been offset by reductions in interest rates such that the
spread between lease rates and interest rates has remained relatively constant
throughout the period. The lease revenue stream, in the short-term, is at fixed
rates while a substantial amount of the Company's debt is at variable rates. If
interest rates increase it is unlikely the Company could increase lease rates
in the short term and this would cause a reduction in the Company's earnings.
However, utilization has decreased with approximately 15%, by book value, of
the Company’s assets off-lease at December 31, 2001, compared to approximately
7% at December 31, 2000. Increases in
off-lease rates as well as deterioration in lease rates that are not offset by
reduction in interest rates, will have a negative impact in earnings and cash
flows from operations. It is likely in
the short-term that off-lease rates may increase.
At December 31, 2001, the
Company had a $125.0 million revolving credit facility to finance the
acquisition of aircraft engines, aircraft and spare parts for lease as well as
for general working capital purposes.
As of December 31, 2001, $16.8 million was available under this
facility. The facility matures in May 2004. The interest rate on this facility
at December 31, 2001 is LIBOR plus 1.75%.
At December 31, 2001, the
Company had a $35.0 million revolving credit facility with a financial
institution. Borrowings under the facility accrue interest at a rate of LIBOR
plus 2.00% per annum and are secured by specific engines and leases pledged to
the lender. The facility has a 12-month
revolving period which may be renewed annually by agreement between the Company
and the lender. Borrowings under the
facility have maturities that coincide with the maturities of the individual
leases serving as collateral. At December 31, 2001, the Company had $12.2
million available under this facility.
At December 31, 2001, the
Company had a $190.0 million debt warehouse facility. The facility is available
to a wholly-owned special purpose finance subsidiary of the Company, WLFC
Funding Corporation, for the financing of jet aircraft engines acquired by or
transferred to such finance subsidiary by the Company. The facility is renewable annually. This
facility’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 that originally expired on February, 2002 and has been
extended to April 2002 followed by a seven-year amortization period. During the extension period the Company is
not permitted to borrow against this facility. The Company is currently in
negotiations to renew this facility. At
December 31, 2001, the interest rate was a commercial paper based rate plus a
spread of 1.55%. At December 31, 2001
the commercial paper rate was 2.04%.
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 $5.0
million and 20% of the outstanding obligations or (ii) 10% of the outstanding
obligations. At December 31, 2001, $6.3
million was available under this facility.
At December 31, 2001 the
Company had a $26.7 million term loan facility available to a wholly-owned
consolidated special purpose subsidiary of the Company, WLFC AC1 Corporation,
for the financing of jet aircraft engines transferred by the Company to such
subsidiary. The facility is a five year
term loan with final maturity of June 30, 2005. The interest rate is currently LIBOR plus 2.05%. This facility is fully drawn.
Approximately $23.8 million
of the Company’s debt is repayable during 2002. Such repayments consist of scheduled installments due under term
loans. The table below summarizes the
Company’s contractual commitments at December 31, 2001.
Approximately $315 million
of the above debt is subject to the Company continuing to comply with the
covenants of each financing, including debt/equity ratios, minimum tangible net
worth and minimum interest coverage ratios, and other eligibility criteria
including customer and geographic concentration restrictions. In addition, the Company can typically
borrow between 80% to 100% of an engine purchase price and only between 50% to
80% of an aircraft or spare parts purchase price under these facilities, so the
Company must have other available funds for the balance of the purchase price
of any new equipment to be purchased or it will not be permitted to draw on
these facilities for a particular purchase.
The facilities are also cross-defaulted. If the Company does not comply with the covenants or eligibility
requirements, the Company may not be permitted to borrow additional funds and
accelerated payments may become necessary.
Additionally, debt is secured by engines on lease to customers and to
the extent that engines are returned from lease early or are sold, repayment of
that portion of the debt could be accelerated.
As a result of the floating
rate structure of the majority of the Company’s borrowings, the Company’s
interest expense associated with borrowings will vary with market rates. In addition, commitment fees are payable on
the unused portion of the facilities.
The Company also holds a 7%
interest, accounted for under the Cost method, in a joint venture in China,
Sichuan Snecma Aero-Engine Maintenance Co. Ltd. The Company has invested $1.5 million to date and has a
commitment to fund not more than an
additional $1.5 million over the next three years.
The Company believes that
its current equity base, internally generated funds and existing debt
facilities are sufficient to maintain the Company’s current level of
operations. A decline in the level of internally generated funds such as could
result if off-lease rates continue to increase or the availability under the
Company’s existing debt facilities would impair the Company’s ability to
sustain its current level of operations.
The Company is currently discussing additions to its debt base with its
commercial and investment banks. If the
Company is not able to access additional debt, its ability to continue to grow
its asset base consistent with historical trends will be impaired and its
future growth limited to that which can be funded from internally generated
capital.
MANAGEMENT OF INTEREST RATE EXPOSURE
To mitigate exposure to
interest rate changes, the Company has entered into interest rate swap
agreements which have notional outstanding amounts of $80.0 million, remaining
terms of between 6 and 29 months and fixed rates of between 5.8% and 6.6%. Interest expense for the year ended December
31, 2001 has increased by approximately $1.9 million due to the interest rate
hedges. As a result of the adoption of
SFAS 133 the Company recorded liabilities under derivative investments of $2.9
million and a charge to other comprehensive loss of $1.8 million (net of tax) -
see Note 5 of the Notes to the Consolidated Financial Statements.
The Company will be exposed
to risk in the event of non-performance of the interest rate hedge counter
parties. The Company may hedge additional
amounts of its floating rate debt during the next year.
RELATED PARTY AND SIMILAR TRANSACTIONS
The Company continues to use
PGTC LLC’s services to repair/refurbish
engines prior to sale or re-lease. The
Company also sold 7 engines to avioserv during 2001 and has notified its
intention in January, 2002 to exercise put options with respect to 2 further
engines and intends to close the puts during the second quarter.
The Company entered into a
business cooperation period with Flightlease and SRT ending on November 30,
2003 by which Flightlease and SRT have price discounts and lowest price
guarantees on short-term and long-term engine leases from the Company. Flightlease and SRT in turn will provide the
Company with access to spare engines, will promote the Company’s engine leasing
efforts and the development of other products, and will facilitate business
opportunities among the Company and Flightlease’s and SRT’s other business
partners. During the year ended December 31, 2001 there were no transactions
initiated by either party under the cooperation agreement. The Company has also
entered into put option arrangements regarding certain engines scheduled to be
run to the end of their useful lives to sell them at the Company’s discretion,
to SRT at pre-determined prices.
Flightlease and SRT are members of FlightTechnics, LLC an entity which
owns 15% of the Company’s common stock.
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. Forward-looking statements
give the Company’s expectations about the future and are not guarantees. Forward-looking statements speak only as of
the date they are made, and the Company does not undertake any obligation to
update them to reflect changes that occur after that date. The Company’s actual results could differ
materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below. 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 capital will
continue to be available to the Company on favorable terms or at all. The Company’s inability to obtain sufficient
capital, or to renew its credit facilities could result in increased funding
costs and would limit the Company’s ability to: (i) add new aircraft
engines, aircraft and spare parts packages to its portfolio,
(ii) fund its working capital needs, and (iii) finance possible
future acquisitions. 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 or aircraft equipment. The Company also engages in the selective
purchase and resale of commercial aircraft engines. On occasion, the Company purchases engines 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 of, or demand for, 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,
(iii) financial difficulties experienced by airlines, (iv) interest
rates, (v) downturns in the air transportation industry, (vi) decreases
in growth or decline of air traffic, (vii) unanticipated early lease
termination or a default by a lessee, (viii) the timing of engine
acquisitions, (ix) engine marketing activities, (x) 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.
The Company’s future
operating results may be adversely impacted by the unparalleled challenges
faced by the airline industry due to a combination of the terrorist attacks in
New York and Washington D.C. on September 11, 2001 and the current worldwide
economic slowdown that has occurred both before and after the attacks. Airlines are facing various
increased costs, including insurance premiums
and security costs, while at the same time suffering from reduction in demand
by air travelers. Financially weaker
airlines are likely to be subject to the greatest negative impacts, and many
airlines have taken some of their aircraft out of service in response to the
fall or could be forced off in air travel.
Older aircraft have been grounded since they usually have higher
operating costs. Some airlines have
been forced or could be forced to take more drastic measures that include debt
rescheduling, deferral of lease payments or even filing for protection from
creditors. The airlines various
cutbacks have had some trickle-down effects on the Company, and may have
increasingly negative effects on the Company.
The ultimate effects will, in part, depend upon the ability of
individual airlines to meet their obligations when due. Some of the negative impacts on the
Company’s business may include the following: (i) financing sources may be less
willing to lend additional money to the Company because of the uncertainty
currently surrounding the airline industry, (ii) the Company’s current decrease
in equipment utilization levels may continue because it takes more time for the
Company to remarket “off lease” engines when airlines demand for spare engines
decreases, (iii) the Company may be subject to payment delays if the Company
grants airlines’ requests that the Company allow payment deferrals and offer
other forms of payment relief, (iv) prices that the Company receives for sales
of engines could be negatively impacted, or the Company may be unable to sell
engines at prices that it deems acceptable, as the demand for certain spare
engines decreases and (v) values of engines retained in the portfolio may be
negatively impacted. Because of the
foregoing risks and the uncertainties surrounding the airline industry the
Company cannot forecast with any degree of accuracy what the future impacts on
it will be.
SR Technics, the Company’s
largest customer, unlike its parent SAirGroup and certain other SAirGroup
entities, is not presently under protection from creditors. In addition, SR Technics is for sale and
presently attempting to locate additional investors to ensure its long term
future through a new ownership structure.
If SR Technics’ financial condition deteriorates, this will increase the
likelihood of defaults by SR Technics on its obligations to the Company. SR Technics has leased five engines with a
book value of approximately $42 million from the Company with lease terms
expiring in up to nine years. If SR Technics becomes insolvent or otherwise
stops making its rent payments, the Company’s leases allow the Company to
repossess the engines. If such a
situation were to occur, the Company faces a variety of risks and
uncertainties, including the following:
(a) the Company may experience delays imposed by Swiss bankruptcy courts
as it seeks to repossess the engines, (b) the Company’s percentage of
“off-lease” engines may increase if the Company attempts to re-lease or
remarket the SR Technics engines, (c) the other risks discussed in this section
with respect to off-lease equipment and (d) the Company may not be able to
exercise its put options with SR Technics affiliates. All of the foregoing risks and uncertainties could have a
material adverse impact on the Company’s results of operations.
On November 11, 2001, Canada
3000 Inc., a lessee that leased engines and parts packages with a total net
book value of $36.0 million and lease terms of up to 10 years, was placed into
bankruptcy and ceased operation. The revenue since November 2001 from these
leases has not been recognized by the Company for all uncollectible
amounts. At December 31, 2001, the net
amount of accounts receivable recorded on the balance sheet was $0. The Company has retained Canadian counsel to
assist in the recovery of its assets, and all 5 engines and approximately
two-thirds of the parts package have been returned to date. Two engines with a book value of $10.6
million were recovered during the fourth quarter and were successfully
re-leased to other customers, and the remaining 3 engines were recovered in
January 2002 for which the Company is actively seeking re-leasing
opportunities. Approximately two-thirds
of the parts package has been recovered to date with the remainder expected to
be returned in the coming months. The
Company holds security deposits, prepaid rents and a letter of credit that may
be used to partially recoup costs and expenses associated with the early
termination of the leases with Canada 3000, subject to the final approval of
the Canadian bankruptcy court. In
connection with Canada 3000’s bankruptcy, the Company faces a variety of risks
and uncertainties, including the following: (a) the Company may experience delays
imposed by the Canadian bankruptcy court as it seeks to repossess the remaining
equipment, (b) the Company’s percentage of “off-lease” equipment may increase
while the Company attempts to re-lease or remarket the Canada 3000 equipment,
(c) the Company could incur transportation and storage expenses in connection
with retrieving the equipment and may not be able to lease the equipment at the
same lease rates as were being paid by Canada 3000, and (d) the other risks
discussed in this section with respect to off-lease equipment.
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
(the Bankruptcy Code), creditors are automatically stayed from enforcing their
rights. In the case of United States
certified airlines, Section 1110 of the Bankruptcy Code provides certain relief
to lessors of 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 many 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.
In 2001, 79% of the
Company’s lease revenue was generated by leases to foreign customers. Such international leases may present
greater risks to the Company because certain foreign laws, regulations and
judicial procedures may not be as protective of lessor rights as those which
apply in the United States. All 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 payment. The Company is also subject to the timing
and access to courts and the remedies local laws impose in order to collect its
lease payments and recover its assets.
In addition, political instability abroad and changes in international policy
also present risk of expropriation of the Company’s leased engines. Furthermore, many foreign countries have
currency and exchange laws regulating the international transfer of currencies.
The Company has experienced
significant growth in lease revenues during the past year. 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, engine and aircraft parts manufacturers,
aircraft and aircraft engine lessors and airline and aircraft service and
repair companies. Certain of the
Company’s competitors have substantially greater resources than the Company,
including greater name recognition, a broader range of material, complementary
lines of business and greater financial, marketing and other resources. In addition, equipment manufacturers, 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.
The Company obtains a
substantial portion of its inventories of aircraft and engines from airlines,
overhaul facilities and other suppliers.
There is no organized market for aircraft and engines, 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 and engines 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
and engines 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.
California continues to
experience problems with the supply of power to its residents. So far the Company has been unaffected by
rolling blackouts either directly or indirectly, however, there can be no
guarantee that the Company will not be adversely affected in the future.
ITEM 7A.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s primary market
risk exposure is that of interest rate risk.
A change in the U.S. prime interest rate, LIBOR rate, or cost of funds
based on commercial paper market rates, would affect the rate at which the
Company could borrow funds under its various borrowing facilities. Increases in interest rates to the Company,
which may cause the Company to raise the implicit rates charged to its
customers, could result in a reduction in demand for the Company’s leases. Certain of the Company’s credit facilities
are variable rate debt. The Company estimates
a one percent increase or decrease in the Company’s variable rate debt (net of
hedges) would result in an increase or decrease, respectively, in interest
expense of $3.2 million per annum (in 2000, $1.6 million per annum). The Company estimates a two percent increase
or decrease in the Company’s variable rate debt (net of hedges) would result in
an increase or decrease, respectively, in interest expense of $6.4 million per
annum (in 2000, $3.3 million per annum).
The foregoing effect of interest rate changes 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. 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
2001, 79% 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.
ITEM 8.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The information required by
this item is submitted as a separate section of this report.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by
this item is incorporated by reference to the Company’s Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE
COMPENSATION
The information required by
this item is incorporated by reference to the Company’s Proxy Statement.
ITEM 12.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by
this item is incorporated by reference to the Company’s Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by
this item is incorporated by reference to the Company’s Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1) Financial Statements
The response to this portion
of Item 14 is submitted as a separate section of this report beginning on page
27.
(a)
(2) Financial Statement Schedules
Schedule II Valuation
Accounts
All other financial
statement schedules have been omitted as the required information is not
pertinent to the Registrant or is not material or because the information
required is included in the financial statements and notes thereto.
(a)
(3) and (c): Exhibits: The response to this portion of Item 14 is
submitted as a separate section of this report beginning on page 53.
EXHIBITS
10.6
Settlement
Agreement dated August 10, 2000 between the Company and Robert Rau.
Incorporated by reference to Exhibit 10.6 of the Company’s report on Form
10-K for the year ended December 31, 2000.
10.7*
Indenture dated as of
September 1, 1997, between WLFC Funding Corporation and The Bank of New York,
as Indenture Trustee. Incorporated by
reference to Exhibit 10.16 to the Company’s Report on Form 10-K for the year
ended December 31, 1997.
10.8
Note Purchase Agreement
(Series 1997-1 Notes) dated February 11, 1999.Incorporated by reference to
Exhibit 10.1 of the Company’s report on Form 10-Q for the quarter ended March
31, 1999.
10.9*
Amended and Restated
Series 1997-1 Supplement dated February 11, 1999. Incorporated by reference to Exhibit 10.2 to the Company’s
report on Form 10-Q for the quarter ended March 31, 1999.
10.10*
Administration Agreement
dated as of September 1, 1997 between WLFC Funding Corporation, the Company,
First Union Capital Markets Corp. and The Bank of New York. Incorporated by reference to Exhibit 10.19
to the Company’s Report on Form 10-K for the year ended December 31, 1997.
10.11
The Company’s 1996 Stock
Option/Stock Issuance Plan, as amended and restated as of April 24,
2000. Incorporated by reference to
the Company’s Proxy Statement dated April 27, 2000.
10.12*
Operating Agreement of
PGTC LLC dated May 28, 1999 among the Company, Chromalloy Gas Turbine
Corporation and Pacific Gas Turbine Center, Incorporated. Incorporated by reference to Exhibit 10.1
to the Company’s Report on Form 10-Q for the quarter ended June 30, 1999.
10.13*
Contribution and
Assumption Agreement dated May 28, 1999 among Pacific Gas Turbine Center
Incorporated, the Company and Pacific Gas Turbine Center LLC. Incorporated by reference to Exhibit 10.2
to the Company’s Report on Form 10-Q for the quarter ended June 30, 1999.
10.14
Second Amendment to
Amended and Restated Series 1997-1 Supplement. Incorporated by reference to Exhibit 10.1 of the Company’s
report on Form 10-Q for the quarter ended March 31, 2000.*
10.15
Amended and Restated
Credit Agreement as of February 10, 2000.
Incorporated by reference to Exhibit 10.2 of the Company’s report on
Form 10-Q for the quarter ended March 31, 2000.
10.16
Investment Agreement,
dated as of November 7, 2000, by and among the Company, FlightTechnics LLC,
Flightlease AG, SR Technics Group and SR Technics Group America, Inc. Incorporated by reference to Exhibit 10.1
of the Company’s report on Form 8-K filed on November 13, 2000.
10.17
Membership Interest
Purchase Agreement, dated as of November 7, 2000, by and between the Company
and SR Technics Group America, Inc.
Incorporated by reference to Exhibit 10.3 of the Company’s report on
Form 8-K filed on November 13, 2000.
10.18
Share Purchase Agreement,
dated as of November 7, 2000, by and between the Company and SR Technics
Group America, Inc. Incorporated by
reference to Exhibit 10.4 of the Company’s report on Form 8-K filed on
November 13, 2000.
10.19*
Cooperation Agreement,
dated as of November 7, 2000, by and among the Company, Flightlease AG and SR
Technics Group. Incorporated by
reference to Exhibit 10.6 of the Company’s report on Form 8-K filed on
November 13, 2000.
10.20
Stockholders’ Agreement,
dated as of November 7, 2000, by and among the Company, Charles F. Willis,
IV, CFW Partners, L.P., Austin Chandler Willis 1995 Irrevocable Trust and
FlightTechnics LLC. Incorporated by
reference to Exhibit 10.8 on Form 8-K filed on November 13, 2000.
10.21
Third Amendment to Note
Purchase Agreement dated February 7, 2001. Incorporated by reference to
Exhibit 10.21 of the Company’s report on Form 10-Q for the quarter ended
March 31, 2001.
10.22*
Third Amended and Restated
Series 1997-1 Supplement dated February 7, 2001. Incorporated by reference to
Exhibit 10.22 of the Company’s report on Form 10-Q for the quarter ended
March 31, 2001.
10.23
Fourth Amendment to
Amended and Restated Series 1997-1 Supplement dated May 31, 2001.
Incorporated by reference to Exhibit 10.23 of the Company’s report on Form
10-Q for the quarter ended June 20, 2001.
10.24*
Credit Agreement dated May
1, 2001 among Willis Lease Finance Corporation, certain banking institutions,
National City Bank and Fortis Bank (Netherland) N.V. Incorporated by
reference to Exhibit 10.24 of the Company’s report on Form 10-Q for the
quarter ended June 30, 2001.
10.25*
Credit Agreement dated
September 21, 2001 between Willis Lease Finance Corporation and ABB Credit
Finance AB (publ.). Incorporated by
reference to Exhibit 10.25 to the Company’s report on Form 10-Q for the
quarter ended September 30, 2001.
11.1
Statement regarding
computation of per share earnings.
21.1
Subsidiaries of the
Company.
23.1
Consent and Report on
Schedule II of KPMG LLP, Independent Auditors
* Portions of these exhibits
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
No report on Form 8-K were
filed during the fourth quarter of 2001.
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.
Dated: March 26, 2002
Pursuant to the requirements
of the Securities Exchange Act of 1934, this Report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent
Auditors
Consolidated Balance
Sheets as of December 31, 2001 and December 31, 2000.
Consolidated
Statements of Income for the years ended December 31, 2001, December 31, 2000
and December 31, 1999.
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the years
ended December 31, 2001, December 31,
2000 and December 31, 1999.
Consolidated
Statements of Cash Flows for the years ended December 31, 2001, December 31, 2000 and December 31, 1999.
Notes to
Consolidated Financial Statements.
REPORT OF
INDEPENDENT AUDITORS
To the
Board of Directors of Willis Lease Finance Corporation and Subsidiaries:
We have audited the
accompanying consolidated financial statements of Willis Lease Finance
Corporation and subsidiaries (the “Company”)
as listed in the accompanying index.
These consolidated financial statements are the responsibility of the
Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits
in accordance with auditing standards generally accepted in the United States
of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Willis Lease Finance Corporation
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
San
Francisco, California
February
21, 2002
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except
share data)
See accompanying notes to the consolidated
financial statements.
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated
Statements of Income
(In thousands, except per share data)
See accompanying notes to the consolidated
financial statements.
WILLS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive
Income
Years Ended December 31, 2001, 2000 and 1999
(In thousands)
See accompanying notes to the consolidated
financial statements.
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
See accompanying notes to the consolidated
financial statements.
WILLS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements
(1) Organization
and Summary of Significant Accounting Policies
(a) Organization
Willis Lease Finance
Corporation (“Willis”) is a provider of aviation services whose primary focus
has been on providing operating leases of aftermarket commercial aircraft
engines and other aircraft-related equipment to air carriers, manufacturers and
overhaul/repair facilities worldwide.
Willis also engages in the selective purchase and resale of commercial
aircraft engines.
Terandon Leasing Corporation
(Terandon), T-2 Inc. (T-2), T-4 Inc. (T-4), T-5 Inc. (T-5), T-7 Inc. (T-7), T-8
Inc. (T-8), T-10 Inc. (T-10) and T-11 Inc. (T-11) are wholly-owned consolidated
subsidiaries of Willis. They are all California
corporations and were established to purchase and lease and resell commercial
aircraft engines and parts.
WLFC Funding Corporation
(“WLFC-FC”) is a wholly owned subsidiary of Willis. WLFC-FC is a Delaware corporation and was established in 1997 for
the purpose of financing aircraft engines.
WLFC Engine Pooling Company (“WLFC - Pooling”) is a wholly-owned
subsidiary of Willis. WLFC-Pooling is a
California Corporation and was established in 1997 for the purpose of acquiring
and leasing aircraft engines. WLFC
(Ireland) Limited is a wholly-owned subsidiary of Willis. WLFC (Ireland) Limited was formed in 1998 to
facilitate certain of Willis’ international leasing activities. WLFC-AC1 Inc. is a wholly owned subsidiary
of Willis Lease Finance Corp. WLFC-AC1
Inc. is a Delaware corporation and was established in 2000 for the purpose of
acquiring and leasing aircraft engines.
Willis Aeronautical
Services, Inc. (“WASI”) was a wholly owned subsidiary of Willis. WASI is a California corporation established
in 1994 for the purpose of marketing and selling aircraft parts and components
and was sold in November 2000. In May
1999 the Company contributed the operations and assets of its engine
disassembly services business, Pacific Gas Turbine Center Incorporated (“PGTC.
Inc.”), to a newly formed joint venture, Pacific Gas Turbine Center, LLC (“PGTC
LLC”). The Company sold its interest in
PGTC LLC in November 2000.
Management considers the
continuing operations of the Company to operate in one reportable segment.
(b) Principles of Consolidation
The consolidated financial
statements include the accounts of Willis, Terandon, T-2, T-4, T-5, T-7, T-8,
T-10, T-11, WASI (11 months ended November 2000), WLFC-FC, WLFC-Pooling, PGTC
Inc. (five months ended May 1999), WLFC AC1 Corporation and WLFC (Ireland)
Limited (together, the “Company”). All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Revenue Recognition
Revenue from leasing of
aircraft equipment is recognized as operating lease or finance lease revenue
over the terms of the applicable lease agreements. Revenue is not recognized
when cash collection is not reasonably assured. The Company includes in
operating lease revenue non-refundable maintenance payments received from
lessees to the extent that, in the Company’s opinion, it would not be
economically advantageous to overhaul the engine the next time the life-limited
parts need to be replaced. In this
circumstance, the engines are normally sold for dismantling.
(d) Equipment Held for Operating Lease
Aircraft assets held for
operating lease are stated at cost, less accumulated depreciation. Certain professional fees incurred in
connection with the acquisition and leasing of aircraft assets are capitalized
as part of the cost of such assets.
Major overhauls paid for by the Company which add economic value are
capitalized and depreciated over the estimated remaining useful life of the
engine.
The Company generally
depreciates engines on a straight-line basis over a 15 year period from the
acquisition date to a 55% residual value.
The Company believes that this methodology accurately reflects the
Company’s typical holding period for the assets and, further, that the residual
value assumption reasonably approximates the selling price of the assets 15
years from date of acquisition.
For engines or aircraft that
are leased with an intent to disassemble upon ultimate lease termination, the
Company depreciates the engines or aircraft over their estimated lease term to
a residual value based on an estimate of the wholesale value of the parts after
disassembly.
The spare parts packages
owned by the Company are depreciated on a straight-line basis over an estimated
useful life of 15 years to a 25% residual value.
The aircraft owned by the
Company are depreciated on a straight-line basis over an estimated useful life
of 13 to 20 years to a 15% to 17% residual value.
Statement of Financial
Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of,” (SFAS 121) requires that (i) long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and (ii) long-lived assets
and certain identifiable intangibles to be disposed of generally be reported at
the lower of carrying amount or fair value less cost to sell. The Company reviews at least quarterly the
carrying value of long-lived assets.
Such reviews resulted in a write-down of assets of $962,000 and $147,000
in continuing operations (included with depreciation expense in the Income
Statement) and $266,000 and $471,000 in discontinued operations (included with
(Loss)/Gain on Disposal of Discontinued Operations in the Income Statement) in
2001 and 2000, respectively. There were
no such losses on revaluation in 1999.
In August 2001, FASB issued
SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” This Statement supercedes SFAS
121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of” and elements of APB 30 “Reporting the Results of
Operations-Reporting the Effects on Disposal of a Segment of a Business, and
Extraordinary, Unusual or Infrequently Occurring Events and Transactions.”
Statement 144 establishes a
single-accounting model for long-lived assets to be disposed of while maintaining
many of the provisions relating to impairment testing and valuation. The Statement will be effective on January
1, 2002 and the Company is currently assessing the impact adoption will have on
the financial condition and operating results of the Company.
(e) Loan Commitment and Related Fees
To the extent that the
Company is required to pay fees in order to secure debt, such fees are
amortized over the life of the related loan on a straight-line basis which
approximates the interest method.
(f) Maintenance Costs
Maintenance costs under the
Company’s leases are generally the responsibility of the lessees. Additionally, under many of the Company’s
leases, lessees pay fees to the Company based on the usage of the asset. Upon the completion of approved maintenance
of an asset, such fees are returned to the lessee up to the amount of repair
but not exceeding the use fees paid by the lessee. The Company records a Maintenance Reserve liability in connection
with the obligation to reimburse lessees for approved maintenance. Under certain of the Company’s leases, the
lessee is not obligated to perform maintenance on the asset. To the extent that such leases require the
lessee to make payments to the Company based on the usage of the asset and the
Company does not plan to apply such payments to the repair of the asset, the
usage payments are included in lease revenue.
(g) Interest Rate Hedging
The Company has entered into
interest rate swap agreements to mitigate its exposure on its variable rate
borrowings. The differential to be paid
or received under the swap agreements is charged or credited to interest
expense.
The Company adopted SFAS
133, “Accounting for Derivative Instruments and Hedging Activities” (as amended
by SFAS 137 and 138), and under these Statements the Company’s interest rate
swaps were designated as cash flow hedges.
Cash flow hedges are recognized on the balance sheet at their fair
value. The Company formally documents
all relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various hedge
transactions. This process includes
linking all cash-flow hedges to liabilities on the balance sheet. The Company also formally assesses, both at
the hedge’s inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, the Company discontinues hedge accounting
prospectively.
Changes in the fair value of
a derivative that is highly effective and that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income, until earnings are
affected by the variability in cash flows of the designated hedged item.
The Company discontinues
hedge accounting prospectively when it is determined that the derivative is no
longer effective in offsetting changes in the cash flows of the hedged item,
the derivative expires or is sold, terminated, or exercised or management
determines that designation of the derivative as a hedging instrument is no
longer appropriate. On January 1, 2001,
the Company recorded a transition adjustment of $464,000 (net of tax of
$279,000), representing the net unrealized loss on interest rate swap
agreements.
For the year ended December
31, 2000, prior to the adoption of SFAS No. 133, the Company entered into interest
rate swap agreements to reduce its exposure to market risks from changing
interest rates. For interest rate
swaps, the differential to be paid or received is accrued and recognized in
interest expense and may change as market interest rates change. If a swap was terminated prior to its
maturity, the gain or loss is recognized over the remaining original life of
the swap if the item hedged remains outstanding, or immediately, if the item
hedged does not remain outstanding. If
the swap was not terminated prior to maturity, but the underlying hedged items
is no longer outstanding, the interest rate swap was marked to market and any
unrealized gain or loss is recognized immediately.
(h) Income Taxes
The Company uses the asset
and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of “temporary differences” by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred
taxes of a change in the tax rates is recognized in income in the period that
includes the enactment date.
(i) Property, Equipment and Furnishings
Property, equipment and
furnishings are recorded at cost and depreciated by the straight-line method
over the estimated useful lives of the related assets, which range from three
to seven years. Leasehold improvements
are recorded at cost and depreciated by the straight-line method over the lease
term and are included as other assets in the balance sheets.
(j) Residual Sharing with Lenders
Certain of the Company’s
credit agreements required the Company to share “residual proceeds” as defined
in the agreements with the lenders upon sale of engines held for operating
lease. The Company provided for its
residual sharing obligation with respect to each engine by a charge or credit
to income or expense, each period, sufficient to adjust the residual share payable
at the balance sheet date to the amount that would be payable at that date if
all engines under said agreements were sold on the balance sheet date at their
net book values.
As of December 31, 2001, no
engines were subject to residual sharing arrangements (as of December 31, 2000,
two engines with a net book value of $7.4 million were subject to such
arrangements) as during the year the engines were sold and/or loans repaid and
residual share obligations settled in full.
(k) Sale of Leased Equipment and Equipment Acquired for Resale
The Company regularly sells
equipment from its lease portfolio.
This equipment may or may not be subject to a lease at time of
sale. The gain or loss on such sales is
recognized as revenue and consists of proceeds associated with the sale less
the net book value of the asset sold and any direct costs associated with the
sale. To the extent that deposits or
maintenance reserves are not included in the sale and the liability associated
with such items is transferred to the purchaser of the equipment, the Company
includes such items in its calculation of gain. The Company also engages in engine exchanges and where the cash
element of the exchange exceeds 25% of the fair value of the transaction the
exchange is treated as a monetary one and the gain on sale is recognized.
The Company periodically
engages in transactions involving the purchase and resale of aircraft
equipment. Assets acquired for resale
are recorded at the lower of cost or net realizable value. Gross revenue from the sale of equipment is
reflected as sale of equipment acquired for resale with the corresponding cost
of the equipment shown as an expense item.
(l) Cash and Cash Equivalents
The Company considers highly
liquid investments readily convertible into known amounts of cash, with
original maturities of 90 days or less, as cash equivalents.
(m) Reclassifications
Certain items in the
consolidated financial statements of prior years have been reclassified to
conform to the current year’s presentation.
(n) Management Estimates
These financial statements
have been prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles.
The preparation of consolidated
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to residual
values, estimated asset lives, bad debts, income taxes, and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes that the
following accounting policies and estimates are critical to the results of
operations: useful life of equipment, residual values and asset impairment.
If the useful lives or
residual values are lower than those estimated by the Company, upon sale of the
asset, a loss may be realized. Significant management judgement is required in
the forecasting of future operating results which are used in the preparation
of projected undiscounted cashflows and should different conditions prevail,
material impairment write downs may occur.
(o) Comprehensive Income
The Company reports changes
in equity from all sources. For the
year ended December 31, 2001, comprehensive income includes net income and the
net loss on the change in fair value of cash flow hedges. For the years ended December 31, 2000 and
1999, comprehensive income equaled net income.
(p) Per share information
Basic earnings per common
share is computed by dividing net income to common shares by weighted-average
number of shares outstanding during the period. The computation of fully diluted earnings per share is similar to
the computation of basic earnings per share, except for the inclusion of all potentially
dilutive common shares. The reconciliation
between basic common shares and fully diluted common shares is presented below:
(q) Investments
Investments are in
non-marketable securities where management does not have significant influence
and are recorded at cost. Management evaluates the investments for impairment
quarterly and at December 31, 2001, no adjustment to the carrying value was
required.
(r) Stock Options
The Company accounts for its
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, as allowed under SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly compensation
expense is measured as the excess, if any, of the fair value of the company's
stock at the date of grant over the price the employee must pay to acquire the
stock.
(2) Discontinued Operations
On November 7, 2000,
the Company entered into agreements for a series of strategic transactions,
each of which closed on November 30, 2000, with Flightlease AG, a corporation
organized under the laws of Switzerland (“Flightlease”), SR Technics Group, a
corporation organized under the laws of Switzerland (“SRT”), FlightTechnics,
LLC, a Delaware limited liability company (“FlightTechnics”) and SR Technics
Group America, Inc., a Delaware corporation (“SRT Group America”), each of
which are affiliated companies.
The Company sold its
aircraft parts and components subsidiary, Willis Aeronautical Services, Inc.
("WASI") and its membership interest in its engine repair joint
venture with Chromalloy Gas Turbine Corporation, Pacific Gas Turbine Center LLC
(“PGTC LLC”) to SRT Group America.
As part of the transaction,
the Company agreed to retain the lease portfolio of engines maintained and
managed by WASI. Certain of these
engines are subject to put option arrangements where, at the option of the
Company, these engines can be sold to SRT Group America for part-out.
To the extent that the
engines in the portfolio retained are subject to put options or are identified
as likely to be sold, the assets and the results of operation are included in
discontinued operations.
Net earnings (loss) from discontinued
operations for the years ended December 31, 2001, 2000 and 1999 are as follows
(in thousands of dollars):
The (loss) gain on disposal of discontinued
operations for the year ended December 31, 2001 and 2000 is as follows (in
thousands of dollars):
Net assets of discontinued operations on the
balance sheet as of December 31, 2001 and 2000 are as follows (in thousands of
dollars):
Interest Expense. To the extent that engines have been financed, interest expense
has been allocated based on the principal outstanding during the year.
Equipment held for Operating Lease. At December 31, 2001, discontinued
operations had 4 engines with an aggregate engine cost of $1.7 million in its
operating lease portfolio. At December
31, 2000, discontinued operations had 10 engines with an aggregate original
cost of $5.7 million in its operating lease portfolio.
Investment in unconsolidated affiliate. In May 1999,
the Company entered into an agreement with Chromalloy Gas Turbine Corporation
(“Chromalloy”), a subsidiary of Sequa Corporation, to operate a joint venture
to perform maintenance, repair and overhaul of commercial jet engines. Under the terms of the joint venture
agreement, the Company and Chromalloy formed a new company, PGTC LLC. The Company contributed the operations and
assets of its wholly owned subsidiary PGTC Inc. (with a book value of $5.7
million) and Chromalloy contributed working capital to the joint venture. The Company and Chromalloy each had a 50%
interest in the joint venture. The
equity method of accounting was used for the Company’s 50% ownership in PGTC
LLC. Under the equity method, the
original contribution was recorded at cost and was adjusted periodically to
recognize the Company’s share of the earnings or losses of PGTC LLC after the
date of formation. For the year ended
December 31, 2000, up to the date of the sale of the Company’s interest, the
Company and WASI purchased $1.3 million (1999 $1.1 million) of services from
PGTC LLC and PGTC LLC purchased $4.8 million (1999 $1.0 million) of engine parts from WASI. All intercompany profits or losses have been
eliminated. The Company sold its
interest in PGTC LLC in November 2000.
Stock compensation. In conjunction with the sale of its shares in WASI, the Company
accelerated the vesting of options granted to employees of WASI and recognized
an expense of approximately $144,000 for the year ended December 31, 2000.
Concentrations and Credit Risk. During the 11 months prior to November 30,
2000, the top 5 customers of the spare parts business accounted for
approximately 52% of total parts revenue (1999 37%).
(3) Equipment Held For Lease
At December 31, 2001 for
continuing operations, the Company had 110 aircraft engines and related
equipment with an aggregate original cost of
$499.8 million, 4 spare parts packages with an aggregate original cost
of $14.8 million and 6 aircraft with an aggregate original cost of $23.6 million
in its operating and finance lease portfolio.
At December 31, 2000, the Company had 100 aircraft engines and related
equipment with an aggregate original cost of $407.9 million, 4 spare parts
packages with an aggregate original cost of $14.8 million and 6 aircraft with
an aggregate original cost of $23.5 million in its operating and finance lease
portfolio.
Certain of the Company’s
aircraft equipment is leased and operated internationally. All leases relating to this equipment are
denominated and payable in U.S. dollars.
The Company leases its
aircraft equipment to lessees domiciled in 7 geographic regions. The tables below set forth geographic
information about the Company’s operating leased aircraft equipment for
continuing operations grouped by domicile of the lessee:
Finance
leased assets generated $674,000 and $738,000 of revenue in 2001 and 2000,
respectively. After estimated interest
expense such assets generated $178,000 and $53,000, respectively. The net investment in direct finance leases
on December 31, 2001 and 2000 was as follows:
As
of December 31, 2001, minimum future payments under noncancelable leases were
as follows:
As of December 31, 2001, the
lease status of the equipment held for operating lease was as follows:
(4) Notes
Payable
Notes payable consisted of
the following:
At December 31, 2001 LIBOR
was 1.37% and the Commercial Paper rate was 2.04%.
The fair value of the
Company’s long-term debt is estimated based on quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. The
fair value of the Company’s debt is estimated by the Company to be $357.5 million
at December 31, 2001.
Principal outstanding at
December 31, 2001, is repayable as follows:
Certain of the debt
instruments above also have covenant requirements such as a minimum tangible
net worth. As of December 31, 2001, the
Company was in compliance with all covenant requirements.
At December 31, 2001 and
2000, the Company held deposits in the amount of $20.4 million and $16.7
million, respectively, consisting of bank accounts that are subject to
withdrawal restrictions as per lease or loan agreements. Included in these amounts are payments to
the Company required by certain lease agreements for periodic engine
maintenance. These accounts also
include security deposits held.
Substantially all of the deposits bear interest for the Company’s
benefit.
(5) Derivative Instruments
The Company holds a number
of interest rate swaps to mitigate its exposure to changes in interest rates,
in particular LIBOR, as a large portion of the Company’s borrowings are at
variable rates. In addition, WLFC
Funding Corporation is required under its credit agreements to hedge a portion
of its borrowings. At December 31, 2001,
the Company was a party to interest rate swap agreements with notional
outstanding amounts of $80 million, remaining terms of between 6 and 29 months
and fixed rates of between 5.8% and 6.7%.
The fair value of these swaps at December 31, 2001 was $2,906,000 and
represented the estimated amount the Company would have to pay to terminate the
swaps.
The Company reviews the
effectiveness of these hedges on a quarterly basis and adjusts the fair value
of the swaps through either Other Comprehensive Loss and/or Earnings for the
period. For the year ended December 31,
2001, the change in fair value of the swaps recorded to Other Comprehensive
Loss was $1,351,000 (net of tax of $812,000) and there was no change in fair
value recognized in Earnings. Interest expense for the year ended December 31,
2001 increased by approximately $1.9 million due to the Company’s interest rate hedges. Reclassification into Income
in future periods may occur if the effectiveness of the interest rate swaps is
reduced or they are terminated ahead of their maturity. It is not possible to
estimate the amount that may be reclassified into the earnings during the next
12 months.
At December 31, 2000 prior
to the adoption of SFAS 133, the Company estimated that it would have to pay a net
settlement of $743,000 to terminate the swap agreements that existed at that
date. At December 31, 2000, the Company
was a party to interest rate swap agreements with notional outstanding amounts
of $95 million, remaining terms of between 4 and 41 months and fixed rates of
between 5.8% and 6.7%.
(6) Income
Taxes
The components of income tax
for continuing operations for the years ended December 31, 2001, 2000 and
1999, included in the accompanying
statements of income were as follows:
The following is a
reconciliation of the federal income tax expense at the statutory rate of 34%
to the effective income tax expense on continuing operations:
In 2001, the Company has determined that a
number of assets and their associated leases qualify for exclusion from taxable
income under the Extraterritorial Income Exclusion rules, resulting in a
reduction in the federal effective tax rate.
(6) Income
Taxes (Continued)
The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and liabilities are presented below:
As of December 31, 2001, the
Company had net operating loss carryforwards of approximately $46.6 million for
federal tax purposes and $8.3 million for state tax purposes. The federal net operating loss carryforwards
will expire through the years 2021 and the state net operating loss carry
forwards will expire through 2011. Net
operating losses can be used as a deduction against future income arising from
the U.S. consolidated filing group. As
of December 31, 2001, the Company also had alternative minimum tax credits of
approximately $0.3 million for federal income tax purposes which have no
expiration date and which should be available to offset future tax
liabilities. Management believes that
no valuation allowance is required on deferred tax assets as it is more likely
than not that all amounts are recoverable through future taxable income.
(7) Risk
Management Issues
Risk Concentrations
Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of cash deposits and receivables.
The Company places its cash
deposits with financial institutions and other creditworthy issuers and limits
the amount of credit exposure to any one party. Concentrations of credit risk with respect to lease receivables
are limited due to the large number of customers comprising the Company’s
customer base, and their dispersion across different geographic areas.
SR Technics, the Company’s
largest customer, unlike its parent SAirGroup and certain other SAirGroup
entities, is not presently under protection from creditors. In addition, SR Technics is for sale and
presently attempting to locate additional investors to ensure its long term
future through a new ownership structure.
If SR Technics’ financial condition deteriorates, this will increase the
likelihood of defaults by SR Technics on its obligations to the Company. SR Technics has leased five engines with a
book value of approximately $42 million from the Company with lease terms
expiring in up to nine years. If SR Technics becomes insolvent or otherwise
stops making its rent payments, the Company’s leases allow the Company to
repossess the engines. If such a
situation were to occur, the Company faces a variety of risks and
uncertainties, including the following:
(a) the Company may experience delays imposed by Swiss bankruptcy courts
as it seeks to repossess the engines, (b) the Company’s percentage of
“off-lease” engines may increase if the Company attempts to re-lease or
remarket the SR Technics engines, (c) the other risks discussed in this section
with respect to off-lease equipment and (d) the Company may not be able to
exercise its put options with SR Technics affiliates. All of the foregoing risks and uncertainties could have a
material adverse impact on the Company’s results of operations.
On November 11, 2001, Canada
3000 Inc., a lessee that leased engines and parts packages with a total net
book value of $36.0 million and lease terms of up to 10 years, was placed into
bankruptcy and ceased operation. The revenue since November 2001 from these
leases has not been recognized by the Company for all uncollectible
amounts. At December 31, 2001, the net
amount of accounts receivable recorded on the balance sheet was $0. The Company has retained Canadian counsel to
assist in the recovery of its assets, and all 5 engines and approximately
two-thirds of the parts package have been returned to date. Two engines with a book value of $10.6
million were recovered during the fourth quarter and were successfully
re-leased to other customers, and the remaining 3 engines were recovered in
January 2002 for which the Company is actively seeking re-leasing
opportunities. Approximately two-thirds
of the parts package has been recovered to date with the remainder expected to
be returned in the coming months. The
Company holds security deposits, prepaid rents and a letter of credit that may
be used to partially recoup costs and expenses associated with the early
termination of the leases with Canada 3000, subject to the final approval of
the Canadian bankruptcy court. In
connection with Canada 3000’s bankruptcy, the Company faces a variety of risks
and uncertainties, including the following: (a) the Company may experience delays
imposed by the Canadian bankruptcy court as it seeks to repossess the remaining
equipment, (b) the Company’s percentage of “off-lease” equipment may increase
while the Company attempts to re-lease or remarket the Canada 3000 equipment,
(c) the Company could incur transportation and storage expenses in connection
with retrieving the equipment and may not be able to lease the equipment at the
same lease rates as were being paid by Canada 3000, and (d) the other risks
associated with off-lease equipment.
Interest Rate Risk Management
To mitigate exposure to
interest rate changes, the Company has entered into interest rate swap
agreements. As of December 31, 2001,
such swap agreements had notional outstanding amounts of $80 million, average
remaining terms of between 6 and 29 months and average fixed rates of between
5.8% and 6.6%.
As a result of these swap
arrangements, interest expense was increased in 2001 and 1999 by $1.9 million
and $307,000, respectively, and decreased by $484,000 in 2000. For further
information see note 1(g) and note 5.
(8) Commitments
and Contingencies
The Company has two leases
for its office space. The annual lease
rental commitments for the Sausalito office is approximately $365,000 and the
lease expires on May 31, 2003. The annual lease rental commitment, for premises
subleased from WASI, is approximately $71,000 and the lease expires on November
30, 2002.
The Company is in the
process of recovering a parts package that was on lease to a now bankrupt
customer. The Company holds a letter of credit for $1.0 million that it
believes will be enforceable against costs that may be incurred in recovering
the parts. The Company believes that there may be additional costs greater than
the amount available under the letter
of credit and has estimated and accrued a
provision of $200,000 (recorded as depreciation in the Income Statement). The
recovery process is likely to take several months and the final costs may be
different from that accrued.
One of the Company's engines
is subject to a mechanic's lien as a result of the non-payment of debts
incurred by the lessee of that engine.
The Company is actively seeking resolution of this issue.
(9) Investments
In July 1999, the Company
entered into an agreement to participate in a joint venture formed as a limited
company - Sichuan Snecma Aero-engine Maintenance Co. Ltd. The Company’s investment is 7% in the
venture. Sichuan Snecma will focus on
providing maintenance services for CFM56 series engines. Other participants in the joint venture are
China Southwest Airlines, Snecma Services and Beijing Kailan Aviation
Technology Development and Services Corporation. As of the year ended December 31, 2001, $1.5 million has been
contributed. This investment is recorded at cost. Under the terms of the agreement, the Company contributed $0.7
million in January 2001 and not more than an additional $1.5 million is
expected to be contributed to the joint venture over the next three years.
(10) Employee
Benefit Plans
Employee Stock Purchase Plan
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 was 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 1,000
shares or $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 of the
common stock on the date of entry into an offering period. In fiscal 2001 and 2000, 7,092 and 6,761
shares of common stock, respectively were issued under the Purchase Plan.
The weighted average per
share fair value of the employee’s purchase rights under the Purchase Plan for
the rights granted in 2001 and 2000
were $3.22 and $3.55, respectively.
1996 Stock Option/Stock Issuance Plan
In June 1996, the Board of
Directors approved the 1996 Stock Option/Stock Issuance Plan (the “Plan”). The
Plan was amended by the Stockholders and restated in May 2001, to provide for
an increase in the number of shares reserved for issuance under the Plan from
1,525,000 shares to 2,525,000 shares.
The plan includes a Discretionary Option Grant Program, a Stock Issuance
Program and an Automatic Option Grant Program for eligible non-employee Board
members. The stock options vest over a
period determined by the Plan administrator (usually 4 years), have a life of
up to 10 years and the exercise price on grant is equal to the market value of
the shares on that date.
A summary of the activity
under the plan is as follows:
A summary of the
outstanding, exercisable options and their weighted average exercise prices is
as follows:
The following table
summarizes information concerning outstanding and exercisable options at
December 31, 2001:
In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS 123). SFAS 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. SFAS 123 encourages all entities to adopt a
fair value based method of accounting for stock based compensation plans in
which compensation cost is measured at the date the award is granted based on
the value of the award and is recognized over the employee service period. However, SFAS 123 allows an entity to
continue to use the method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), with pro forma
disclosures of net income and earnings per share as if the fair value based
method had been applied. APB 25
requires compensation expense to be recognized over the employee service period
based on the excess, if any, of the quoted market price of the stock at the date
the award is granted or other measurement date, as applicable, over an amount
an employee must pay to acquire the stock.
SFAS 123 is effective for financial statements for fiscal years
beginning after December 15, 1995.
At December 31, 2001, 2000
and 1999, the Company had two stock-based compensation plans, as described
above. The Company applies APB 25 in
accounting for its plans. Accordingly,
no compensation cost for continuing operations has been recognized for its
Purchase Plan and Plan. Had
compensation cost for the Company’s two stock-based compensation plans and
warrants been determined consistent with SFAS 123, the Company’s net income and
earnings per share would have been as follows:
The fair value of the
purchase rights under the Purchase Plan, the Plan and the warrants is estimated
using the Black-Scholes option pricing model.
The assumptions underlying
the estimates derived using the Black-Scholes model are as follows:
The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company’s
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s opinion the existing
models do not necessarily provide a reliable single measure of the fair value
of the Company’s options.
Employee 401(k) Plan
The Company adopted The
Willis 401(k) Plan (the “401(k) Plan”) effective as of January 1997. The 401(k) Plan provides for deferred
compensation as described in Section 401(k) of the Internal Revenue Code. The 401(k) Plan is a contributory plan
available to essentially all full-time and part-time employees of the Company
in the United States. In 2001,
employees who participated in the 401(k) Plan could elect to defer and
contribute to the 401(k) Plan up to 20% of pretax salary or wages up to
$10,500. The Company matches employee
contributions up to 50% of 8% of the employee’s salary (2000 50% of 6%) which
totaled $99,000 in 2001 and $96,000 in 2000.
(11) Warrants
In conjunction with the
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 expired on September 18, 2001.
(12) Equity
During the year ended
December 31, 2000, the Company sold 1,300,000 newly issued shares of its common
stock to FlightTechnics and an option, exercisable within 18 months of the
closing date, to purchase newly issued shares of its common stock in a private
placement in an amount between 1,700,000 shares and up to an amount that would
give FlightTechnics 34.9% of the Company’s issued and outstanding common
stock. The price per share for the
first additional 1,700,000 shares purchased pursuant to this option will be
$15.00, and the price per share for any shares purchased in excess of the first
additional 1,700,000 shares will be $16.50.
Total proceeds of the transaction were $19.5 million before transaction
costs of $1.3 million. Proceeds are
allocated $14.8 million to shares and $3.3 million to options based upon the
relative fair values at the issuance date, November 30, 2000.
(13) Quarterly
Consolidated Financial Information (Unaudited)
The following is a summary of the unaudited
quarterly results of operations for the years ended December 31, 2001 and 2000
(in thousands, except per share data):
Schedule II
Valuation Accounts (in thousands)
Willis Lease Finance Corporation
Valuation
Accounts
(in
thousands)
Index of Exhibits
10.10*
Administration Agreement
dated as of September 1, 1997 between WLFC Funding Corporation, the Company,
First Union Capital Markets Corp. and The Bank of New York. Incorporated by reference to Exhibit 10.19
to the Company’s Report on Form 10-K for the year ended December 31, 1997.
10.11
The Company’s 1996 Stock
Option/Stock Issuance Plan, as amended and restated as of April 24,
2000. Incorporated by reference to
the Company’s Proxy Statement dated April 27, 2000.
10.12*
Operating Agreement of
PGTC LLC dated May 28, 1999 among the Company, Chromalloy Gas Turbine
Corporation and Pacific Gas Turbine Center, Incorporated. Incorporated by reference to Exhibit 10.1
to the Company’s Report on Form 10-Q for the quarter ended June 30, 1999.
10.13*
Contribution and
Assumption Agreement dated May 28, 1999 among Pacific Gas Turbine Center
Incorporated, the Company and Pacific Gas Turbine Center LLC. Incorporated by reference to Exhibit 10.2
to the Company’s Report on Form 10-Q for the quarter ended June 30, 1999.
10.14
Second Amendment to
Amended and Restated Series 1997-1 Supplement. Incorporated by reference to Exhibit 10.1 of the Company’s
report on Form 10-Q for the quarter ended March 31, 2000.*
10.15
Amended and Restated
Credit Agreement as of February 10, 2000.
Incorporated by reference to Exhibit 10.2 of the Company’s report on
Form 10-Q for the quarter ended March 31, 2000.
10.16
Investment Agreement,
dated as of November 7, 2000, by and among the Company, FlightTechnics LLC,
Flightlease AG, SR Technics Group and SR Technics Group America, Inc. Incorporated by reference to Exhibit 10.1
of the Company’s report on Form 8-K filed on November 13, 2000.
10.17
Membership Interest
Purchase Agreement, dated as of November 7, 2000, by and between the Company
and SR Technics Group America, Inc.
Incorporated by reference to Exhibit 10.3 of the Company’s report on
Form 8-K filed on November 13, 2000.
10.18
Share Purchase Agreement,
dated as of November 7, 2000, by and between the Company and SR Technics
Group America, Inc. Incorporated by
reference to Exhibit 10.4 of the Company’s report on Form 8-K filed on
November 13, 2000.
10.19*
Cooperation Agreement,
dated as of November 7, 2000, by and among the Company, Flightlease AG and SR
Technics Group. Incorporated by
reference to Exhibit 10.6 of the Company’s report on Form 8-K filed on
November 13, 2000.
10.20
Stockholders’ Agreement,
dated as of November 7, 2000, by and among the Company, Charles F. Willis,
IV, CFW Partners, L.P., Austin Chandler Willis 1995 Irrevocable Trust and
FlightTechnics LLC. Incorporated by
reference to Exhibit 10.8 on Form 8-K filed on November 13, 2000.
10.21
Third Amendment to Note
Purchase Agreement dated February 7, 2001. Incorporated by reference to
Exhibit 10.21 of the Company’s report on Form 10-Q for the quarter ended
March 31, 2001.
10.22*
Third Amended and Restated
Series 1997-1 Supplement dated February 7, 2001. Incorporated by reference to
Exhibit 10.22 of the Company’s report on Form 10-Q for the quarter ended
March 31, 2001.
10.23
Fourth Amendment to
Amended and Restated Series 1997-1 Supplement dated May 31, 2001.
Incorporated by reference to Exhibit 10.23 of the Company’s report on Form
10-Q for the quarter ended June 20, 2001.
10.24*
Credit Agreement dated May
1, 2001 among Willis Lease Finance Corporation, certain banking institutions,
National City Bank and Fortis Bank (Netherland N.V. Incorporated by reference
to Exhibit 10.24 of the Company’s report on Form 10-Q for the quarter ended
June 30, 2001.)
10.25*
Credit Agreement dated
September 21, 2001 between Willis Lease Finance Corporation and ABB Credit
Finance AB (publ.. Incorporated by reference to Exhibit 10.25 to the
Company’s report on Form 10-Q for the quarter ended September 30, 2001.)