-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DH01BZ/dkoRmYx2mniyu9CmxuWOXMQOliI47YdlOq+yqmO9ts8HvGcqzy3W2e387 zMim94WSWHyWz4NRKSaiwQ== 0000912057-00-014159.txt : 20000411 0000912057-00-014159.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014159 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIS LEASE FINANCE CORP CENTRAL INDEX KEY: 0001018164 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 680070656 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15369 FILM NUMBER: 581813 BUSINESS ADDRESS: STREET 1: 2320 MARINSHIP WAY STREET 2: STE 300 CITY: SAUSALITO STATE: CA ZIP: 94965 BUSINESS PHONE: 4153315281 MAIL ADDRESS: STREET 1: 2320 MARINSHIP WAY STREET 2: SUITE 300 CITY: SAUSALITO STATE: CA ZIP: 94965 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: WILLIS LEASE FINANCE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 68-0070656 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2320 MARINSHIP WAY, SUITE 300, SAUSALITO, CA 94965 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 331-5281 TITLE OF EACH CLASS ------------------- COMMON STOCK Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 23, 2000 was approximately $21,106,907 million (based on a closing sale price of $8.8125 per share as reported on the NASDAQ National Market). The number of shares of the registrant's Common Stock outstanding as of March 23, 2000 was 7,401,866. The Company's Proxy Statement for the 2000 Annual Meeting of Stockholders is incorporated by reference into Part III of this 10-K. 1 WILLIS LEASE FINANCE CORPORATION 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I Page ---- Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III Item 10. Directors and Executives Officers of the Registrant 17 Item 11. Executive Compensation 17 Item 12. Security Ownership of Certain Beneficial Owners and Management 17 Item 13. Certain Relationships and Related Transactions 17 PART IV Item 14. Exhibits, Financial Schedules and Reports on Form 8-K 18
2 PART I ITEM 1. BUSINESS INTRODUCTION Willis Lease Finance Corporation and its subsidiaries (the "Company") is a provider of aviation services including: (i) leasing aftermarket commercial aircraft engines and other aircraft-related equipment, (ii) selling aftermarket aircraft engines and aircraft spare parts, and (iii) maintaining, repairing and overhauling engines. The Company provides these services to passenger airlines, air cargo carriers, aircraft maintenance, repair and overhaul ("MRO") facilities and to other distributors of aircraft spare parts worldwide. 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 and parts and services. 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, 1999, the Company had 55 lessees in 26 countries and the Company's lease portfolio consisted of 101 engines, eight aircraft and four spare parts packages with an aggregate net book value of $347.4 million. The Company targets medium-term operating leases, typically with initial lease terms of three to seven years, where the Company retains the risks and benefits associated with the residual value of the leased asset. The Company actively manages its portfolio and structures its leases in order to enhance these residual values. 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 its subsidiary Willis Aeronautical Services, Inc. ("WASI"). WASI's strategy is to focus on the acquisition of aviation equipment, such as whole engines and aircraft, which can be dismantled and sold as parts at a greater profit. WASI also supplies certain parts and components used in the maintenance, repair and overhaul of the Company's portfolio of aircraft and engines. Finally, WASI provides an alternate method for realizing the maximum value from an engine in our lease portfolio through dismantling the engine and selling the individual parts and components. 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 provide engine disassembly and maintenance, repair and overhaul services to the Company and third parties. PGTC Inc. purchased and its successor, PGTC LLC has and will purchase parts from WASI for use during the maintenance, repair, and overhaul of engines. 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. 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." The Company targets the medium-term lease market, typically with initial lease terms of three to seven years. All of the Company's lease transactions with initial lease terms of three to seven years 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 3 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. As a result of these guidelines, the Company has not experienced any material losses attributable to credit or collection problems. However, 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 or will dismantle or have equipment dismantled and will sell the parts. 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 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 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, 1999, all but eighteen 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, 1999, the Company had 101 aircraft engines and related equipment, four spare parts packages and eight aircraft with an aggregate original cost of $370.5 million in its lease portfolio. As of December 31, 1998, the Company 4 had 74 aircraft engines and related equipment, seven spare parts packages and five aircraft with an aggregate original cost of $300.2 million in its lease portfolio. As of December 31, 1999, minimum future rentals under the noncancelable leases of these aircraft assets was as follows:
Year (in thousands) ---- 2000................................................ $38,857 2001................................................ 26,558 2002................................................ 22,082 2003................................................ 14,420 2004................................................ 8,979 Thereafter.......................................... 6,615 -------- $117,511 ========
LESSEES. As of December 31, 1999, the Company had 55 lessees of commercial aircraft engines and other aircraft-related equipment in 26 countries. The following table displays the regional profile of the Company's lease customer base by revenue for the years ended December 31, 1999 and December 31, 1998. No single country other than the United States accounted for more than 13% and 12% of the Company's lease revenue for the years ended December 31, 1999 and December 31, 1998, respectively.
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998 ---------------------------- ---------------------------- (dollars in thousands) LEASE LEASE REVENUE PERCENTAGE REVENUE PERCENTAGE ------- ---------- ------- ---------- United States $12,547 26% $10,540 33% Europe 13,557 28 6,704 20 Mexico 6,118 13 3,780 11 Canada 3,329 7 2,071 6 Australia/New Zealand 551 1 926 3 Asia 4,147 9 2,710 8 South America 6,910 14 5,399 16 Middle East 1,008 2 917 3 --------------------------------------- --------------------------------------- Total $48,167 100% $33,047 100% ======================================= =======================================
SPARE PARTS SALES In 1994, the Company began selling aircraft parts and components to airlines, air cargo carriers, MRO facilities and other aircraft parts distributors through WASI. WASI purchases and resells aftermarket engine parts, engines, modules, airframes and rotable components. WASI purchases individual engine parts from airlines and others in the aftermarket or acquires whole engines and aircraft. WASI has contracted with PGTC Inc. and currently contracts with PGTC LLC as well as third parties to have the engines dismantled and with third parties to have the aircraft dismantled into their component parts for resale. Some of the parts are overhauled for WASI by FAA-authorized repair agencies and then offered for sale to airlines, maintenance and repair facilities, and distributors. To date, WASI has targeted primarily General Electric CF6-50, Pratt & Whitney JT8D, JT9D and PW4000 aircraft engines and components. These engines are amongst the most widely used aircraft engines in the world, powering Boeing, McDonnell Douglas and Airbus aircraft, including the Boeing 727, 737, 747, 757 and 767, the McDonnell Douglas MD-80 series and the Airbus A300, A310, A320, A330 and A340 aircraft. WASI has begun to expand into engine components for the CFM-56, a high thrust engine used on the popular Boeing 737. The Company believes that the operations of WASI complement the Company's leasing and maintenance, repair, and overhaul businesses. WASI's operations have afforded the Company additional contacts and opportunities in the aircraft engine market. WASI was and is a major supplier of parts to PGTC Inc. and PGTC LLC, respectively. WASI also supplies certain parts and components used in the maintenance, repair and overhaul of the Company's portfolio of aircraft and engines. In addition, WASI provides an alternate method for realizing the maximum value from an engine in the lease portfolio through dismantling the engine and selling the individual parts and components. 5 ENGINE REPAIR, DISASSEMBLY, AND RELATED ACTIVITIES In 1998, the Company began disassembling large commercial jet engines and providing parts cleaning, testing and classification services through PGTC Inc. PGTC Inc. was formed initially to provide such disassembly services to WASI. In November 1998, PGTC Inc. received its FAR 145 Repair Station Air Agency Certification from the FAA. The FAA certification allows PGTC Inc. and its successor PGTC LLC to perform maintenance, repair and overhaul services for the Pratt & Whitney JT8D and JT9D engines as well as clean, perform non-destructive testing of and classify, as to condition, certain Pratt & Whitney engine parts. PGTC Inc. commenced repair of JT8D engines shortly after receiving FAA certification. In May 1999, the Company entered into an agreement with Chromalloy Gas Turbine Corporation, a subsidiary of Sequa Corporation ("Chromalloy"), 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. and Chromalloy contributed working capital to the joint venture. Both the Company and Chromalloy have a 50% interest in the joint venture. PGTC Inc. and its successor PGTC LLC have and will provide services to WASI and to third party customers. PGTC Inc. and PGTC LLC have and will purchase parts from WASI since spare parts are used extensively during the maintenance, repair and overhaul of engines. PGTC Inc. and PGTC LLC's services have and will continue to allow the Company to reduce the cost and improve the timeliness of engine disassemblies, component overhaul services and parts classification. 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. 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 many 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. Under the Company's warehouse facilities, the lender is paid interest plus principal as a function of the book value of assets pledged as collateral under the facilities. 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. 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 inventories, a broader range of material, 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. 6 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. Parts must also be traceable to sources deemed acceptable by the FAA or such equivalent regulatory agencies. Such standards may change in the future, requiring engine components already contained in the Company's inventory to be scrapped or modified. Aircraft engine manufacturers may also develop new engine components to be used in lieu of engine components already contained in the Company's inventory. In all such cases, to the extent the Company has such engine components in its inventory, their value may be reduced. 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, 1999, all but eighteen of the engines in the Company's lease portfolio were Stage III engines. The eighteen engines that do not meet Stage III noise level requirements (Stage II engines) 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. Additionally, Stage II engines may be "hush-kitted" so as to meet Stage III noise regulations. 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, 1999, the Company had 59 full-time employees and four part-time employees (excluding consultants), including 36 employees in equipment acquisition, leasing, sales and administration and 27 employees in airframe and engine component sales 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. 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 leases approximately 43,000 square feet of office and warehouse space for WLFC's and WASI's operations at San Diego, California. This lease expires on March 31, 2000 and may be extended on a month-to-month basis. The Company plans to move the San Diego operation to a new facility within the San Diego area during 2000. In addition, the Company leases approximately 10,730 square feet of warehouse and office space at 1769 West University Drive, Suite 177, Tempe, Arizona 85821, which is used for parts storage and distribution. This lease expires on July 31, 2000 and it is expected that the Company will not renew this lease. See Note 8 to the audited consolidated Financial Statements. 7 ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year 1999. 8 PART II 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 23, 2000 there were approximately 1,265 stockholders of record of the Company's Common Stock. The high and low sales price of the Common Stock for each quarter of 1999 and 1998, as reported by NASDAQ, are set forth below:
1999 1998 ---- ---- HIGH LOW HIGH LOW First Quarter $19.25 $14.87 $22.62 $16.25 Second Quarter 18.25 14.50 24.37 19.25 Third Quarter 17.37 13.19 25.25 13.75 Fourth Quarter 7.31 3.81 19.50 14.62
During the years ended December 31, 1999, 1998 and 1997 the Company did not pay cash dividends to Company stockholders. 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.
YEARS ENDED DECEMBER 31, ------------------------ (dollars in thousands) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- REVENUE: Lease revenue $48,167 $33,047 $19,456 $13,740 $13,771 Gain (loss) on sale of leased equipment 11,371 13,413 4,165 2 (483) Spare parts sales 25,436 24,088 14,110 5,843 3,859 Sale of equipment acquired for resale 9,775 4,093 12,748 12,105 5,472 Interest and other income 1,182 1,439 728 618 119 Total Revenue $95,931 $76,080 $51,207 $32,308 $22,738 EXPENSES: Cost of spare parts sales $28,317 $17,298 $9,469 $3,308 $2,546 Cost of equipment acquired for resale 8,354 3,574 10,678 10,789 2,742 All other expenses 54,309 39,447 22,245 13,351 14,168 Gain on modification of credit facility - - - - (2,203) Loss from unconsolidated affiliate 622 - - - - ----------------------------------------------------------------- Income before income taxes, minority interest and extra ordinary item $4,329 $15,761 $8,815 $4,860 $5,485 Net income $3,283 $9,251 $7,338 $2,804 $3,216 BALANCE SHEET DATA: Total assets $412,315 $360,005 $198,430 $124,933 $91,437 Debt (includes capital lease obligation) 293,807 248,233 104,235 76,146 69,911 Shareholders' equity 69,538 65,842 54,601 23,202 4,812 LEASE PORTFOLIO: Engines at the end of the period 101 74 44 32 31 Spare parts packages at the end of the period 4 7 7 2 - Aircraft at the end of the period 8 5 3 - -
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW GENERAL. 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, 1999, the Company had 55 lessees in 26 countries and its lease portfolio consisted of 101 engines, eight commuter aircraft and four spare parts packages with an aggregate net book value of $347.4 million. The Company targets medium-term operating leases, typically with initial lease terms of three to seven years, where the Company retains the risks and benefits associated with the residual value of the leased asset. The Company actively manages its portfolio and structures its leases in order to enhance these residual values. 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. In 1994, the Company began selling aircraft parts and components through WASI. WASI's strategy is to focus on the acquisition of aviation equipment, such as whole engines and aircraft, which can be dismantled and sold as parts at a greater profit. WASI also supplies certain parts and components used in the maintenance, repair and overhaul of the Company's portfolio of aircraft and engines. Finally, WASI provides an alternate method for realizing the maximum value from an engine in the lease portfolio through dismantling the engine and selling the individual parts and components. 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, Pacific Gas Turbine Center, LLC ("PGTC LLC"). PGTC Inc. provided and its successor, PGTC LLC provides engine disassembly and maintenance, repair and overhaul services to the Company and third parties. PGTC Inc. purchased and its successor, PGTC LLC purchases parts from WASI for use during the maintenance, repair, and overhaul of engines. 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. 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 13-17 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. 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. 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. For equipment sold out of the Company's lease portfolio, the Company recognizes the gain associated with the sale 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. The Company engages in the selective purchase and sale of commercial aircraft engines and engine components. 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. SPARE PARTS SALES. WASI acquires aviation equipment, such as whole engines and aircraft, which can be dismantled and sold as parts at a greater profit. The Company records the purchases at cost and capitalizes additional costs relating to acquisition, overhaul, insurance and other direct costs. Gross revenue from the sale of parts is reflected as spare parts sales. WASI may also engage in the short term leasing of engines destined for disassembly and sale of parts. 10 YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Revenue is summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1999 1998 ---------------------------------------------------------- AMOUNT % AMOUNT % -------- --- -------- --- (DOLLARS IN THOUSANDS) Lease revenue $48,167 50.2% $33,047 43.4% Gain on sale of leased equipment 11,371 11.9 13,413 17.6 Spare parts sales 25,436 26.5 24,088 31.7 Sale of equipment acquired for resale 9,775 10.2 4,093 5.4 Interest and other income 1,182 1.2 1,439 1.9 ---------------------------------------------------------- Total $95,931 100.0% $76,080 100.0% ==========================================================
LEASING RELATED ACTIVITIES. Lease related revenue for the year ended December 31, 1999, increased 46% to $48.2 million from $33.0 million for the comparable period in 1998. This increase reflects lease related revenues from additional engines and aircraft. The aggregate of net book value of leased equipment and net investment in direct finance lease at December 31, 1999 and 1998 was $347.4 million and $283.9 million, respectively, an increase of 22%. During the year ended December 31, 1999, 51 engines and three aircraft were added to the Company's lease portfolio at a total cost of $115.2 million. Twenty-four engines and three spare parts packages from the lease portfolio were sold or transferred to WASI for sale as parts. The engines sold 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, 1998, ten engines, one spare parts package and one aircraft from the lease portfolio were sold or transferred to WASI for sale as parts. These engines and the aircraft had a total net book value of $27.1 million and were sold for a gain of $13.4 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, compared to the year ended December 31, 1998, during which the Company sold one engine acquired for resale for $4.1 million resulting in a gain of $0.5 million. SPARE PARTS SALES. Revenues from spare parts sales for the year ended December 31, 1999 increased 6% to $25.4 million from $24.1 million for the comparable period in 1998. The gross margin for the year ended December 31, 1999 was negative 11% compared to positive 28% for the corresponding period in 1998. The decrease in gross margin was primarily due to a third quarter 1999 inventory write-down expense of $7.4 million, lower parts sales margins, scrappage of parts and other inventory write-downs in the normal course of business. INTEREST AND OTHER INCOME. Interest and other income for the year ended December 31, 1999, decreased to $1.2 million from $1.4 million for the year ended December 31, 1998. The decrease was primarily due to ancillary fees generated in connection with a lease arrangement during the year ended December 31, 1998. The Company had no such fee activity during the comparable 1999 period. INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all activities increased 47% to $22.4 million for the year ended December 31, 1999, from the comparable period in 1998, due to an increase in average debt outstanding during the period. This increase in debt was primarily related to debt associated with the increase in lease portfolio assets. Residual sharing expense increased 5% to $847,000 for the year ended December 31, 1999 from $803,000 for the comparable period in 1998. Residual sharing arrangements apply to three of the Company's engines as of December 31, 1999 and are a function of the difference between the debt associated with the residual sharing arrangement and estimated residual proceeds. Because a greater portion of the principal of such debt is amortized as debt ages, residual sharing expense increases. The Company accrues for its residual sharing obligations using net book value as an estimate for residual proceeds. DEPRECIATION EXPENSE. Depreciation expense increased 65% to $13.6 million for the year ended December 31, 1999, from the comparable period in 1998, due primarily to the increase in lease portfolio assets in 1999. 11 GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 15% to $17.5 million for the year ended December 31, 1999, from the comparable period in 1998. This change reflects increased expenses, in all business segments, associated with staff additions, increased non-capitalizable engine maintenance related expenses, as well as an increase in professional fees. Five months of expenses related to PGTC Inc. are included in the year ended December 31, 1999. INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for the year ended December 31, 1999, decreased to $1.0 million from $6.3 million for the comparable period in 1998. This decrease reflects a decrease in the Company's pre-tax earnings and effective tax rate for the year ended December 31, 1999. The decrease in the effective tax rate was related to state taxes. 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. LOSS FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company entered into a joint venture to perform maintenance, repair and overhaul of commercial jet aircraft engines. The Company accounts for its 50% interest in the joint venture using the equity method. For the year ended December 31, 1999, the Company's share of net losses from the joint venture, after inter-company eliminations, was $622,000. The Company had no such activity during the comparable 1998 period. In accordance with APB18, "The Equity Method for Investments in Common Stock", an amount representing the difference between the book value of the Company's investment in its unconsolidated affiliate and the amount of underlying equity in net assets of PGTC LLC is being accreted into income over the estimated life of the asset. For the year ended December 31, 1999, the Company recorded $172,000 in income from unconsolidated affiliate related to this asset. EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had residual sharing provisions and an interest rate of 10%. The repayment resulted in an extraordinary expense of $0.2 million, net of tax. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Revenue is summarized as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1998 1997 ----------------------------------------------------------- AMOUNT % AMOUNT % -------- --- -------- --- (DOLLARS IN THOUSANDS) Lease revenue $33,047 43.4% $19,456 38.0% Gain on sale of leased equipment 13,413 17.6 4,165 8.1 Spare parts sales 24,088 31.7 14,110 27.6 Sale of equipment acquired for resale 4,093 5.4 12,748 24.9 Interest and other income 1,439 1.9 728 1.4 ----------------------------------------------------------- Total $76,080 100.0% $51,207 100.0% ===========================================================
LEASING RELATED ACTIVITIES. Lease related revenue for the year ended December 31, 1998, increased 70% to $33.0 million from $19.5 million for the comparable period in 1997. This increase reflects lease related revenues from additional engines, aircraft and spare parts packages. The aggregate of net book value of leased equipment and net investment in direct finance lease at December 31, 1998 and 1997 was $283.9 million and $148.4 million, respectively, an increase of 91%. During the year ended December 31, 1998, 40 engines, three aircraft, and one spare parts package were added to the Company's lease portfolio at a total cost of $171.1 million. Ten engines, one spare parts package and one aircraft from the lease portfolio were sold or transferred to WASI for sale as parts. The engines and the aircraft had a total net book value of $27.1 million and were sold for a gain of $13.4 million. During the year ended December 31, 1997, the Company sold six engines from the lease portfolio. These engines had a net book value of $11.5 million and were sold for a gain of $4.2 million. During the year ended December 31, 1998, the Company sold one engine acquired for resale for $4.1 million which resulted in a gain of $0.5 million, compared to the year ended December 31, 1997, during which the Company sold ten 12 engines acquired for resale for $12.7 million resulting in a gain of $2.1 million. Included in the 1997 sales was one transaction involving the sale of four engines acquired at a cost of $600,000 and sold for a gain of $100,000. SPARE PARTS SALES. Revenues from spare parts sales increased 71% to $24.1 million for the year ended December 31, 1998 compared to the year ended December 31, 1997. The gross margin, decreased to 28% in 1998, from 33% in the corresponding period in 1997. This decrease was due to increased provisions for write-downs of inventory, the Company's decision to sell, shortly after their acquisition, certain of the engines acquired under its agreement with United Airlines, thus avoiding carrying costs and a change in the mix of engine type parts sold. INTEREST AND OTHER INCOME. Interest and other income for the year ended December 31, 1998, increased to $1.4 million from $0.7 million for the year ended December 31, 1997. This is a result of interest earned on cash and deposits held. INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all activities increased 95% to $15.2 million for the year ended December 31, 1998, from the comparable period in 1997, due to an increase in average debt outstanding during the period. This increase in debt was primarily related to debt associated with the increase in lease portfolio assets and to a lesser extent an increase in spare parts inventories. The Company accrues for residual sharing obligations using net book value as a proxy for residual proceeds. Residual sharing expense decreased 10% to $803,328 for the year ended December 31, 1998 from $892,861 for the comparable period in 1997. The decline was due to the repayment, in March 1998, of one of the Company's loans which had residual sharing provisions. Residual sharing arrangements apply to three of the Company's engines as of December 31, 1998. DEPRECIATION EXPENSE. Depreciation expense increased 95% to $8.3 million for the year ended December 31, 1998, from the comparable period in 1997, due primarily to the increase in lease portfolio assets in 1998. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 63% to $15.2 million for the year ended December 31, 1998, from the comparable period in 1997. This increase reflects expenses, in all business segments, associated with staff additions, increased rent due to the expansion of the facilities, as well as an increase in professional fees and insurance expense. INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for the year ended December 31, 1998, increased to $6.3 million from $3.5 million for the comparable period in 1997. This increase reflects an increase in the Company's pre-tax earnings. EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had residual sharing provisions and an interest rate of 10%. The repayment resulted in an extraordinary expense of $0.2 million, net of tax. In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2.0 million, net of tax. ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133," issued in June 1999, defers the effective date of SFAS No. 133. SFAS No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. As of December 31, 1999, the Company is reviewing the effect SFAS No. 133 will have on the Company's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its growth through borrowings secured by its equipment lease portfolio. Cash of approximately $118.2 million, $194.7 million and $165.6 million, in the years ended December 31, 1999, 1998 and 1997, respectively, was derived from this activity. In these same time periods $73.0 million, $51.4 million and $137.2 million, respectively, was used to pay down related debt or capital lease obligations. In December 1997, net proceeds from a follow-on common stock offering were approximately $23.8 million. Cash flow from operating activities used approximately $18.9 million in the year ended December 31, 1998 and cash flows from operating activities generated $22.0 million and $6.5 million in the years ended December 31, 1999 and 1997, respectively. The deficit cash flow from operations in 1998 was primarily attributable to the acquisition of used aircraft assets for WASI's inventory and deposits made in connection with future, committed inventory purchases. Such deposits are carried as other assets on the Company's consolidated balance sheet. 13 The Company's primary use of funds is for the purchase of equipment for lease. Approximately $119.8 million, $171.1 million and $68.1 million of funds were used for this purpose in the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the Company had a $150.0 million revolving credit facility to finance the acquisition of aircraft engines, aircraft and spare parts for sale or lease as well as for general working capital purposes. As of December 31, 1999, $14.9 million was available under this facility, subject to the Company providing sufficient collateral. On October 28, 1999, effective September 30, 1999, the Company wrote down the value of portions of the spare parts inventory which serves as collateral for the Company's revolving credit facility. Consistent with the terms of the revolving credit facility, the Company reduced the level of borrowing under the revolving credit facility in order to maintain the required relationship between collateral and loans outstanding. The facility has a revolving period ending September 2000 followed by a four-year term-out period. The facility is renewable and the Company expects to begin discussing such renewal with its banks in mid-2000. The interest rate on this facility is currently LIBOR plus 2.0%. In May 1999, the Company increased its $80 million debt warehouse facility to $125 million. The facility is available to a wholly-owned special purpose finance subsidiary of the Company, WLFC Funding Corporation, for the financing of jet aircraft engines transferred by the Company to such finance subsidiary. The facility is renewable annually. This transaction's structure facilitates public or private securitized note issuances by the special purpose finance subsidiary. The subsidiary is consolidated for financial statement presentation purposes. The facility has an eight-year initial term with a revolving period to February 2001 followed by a seven-year amortization period. At December 31, 1999, the interest rate was a commercial paper based rate plus a spread of 1.8%. The Company has guaranteed the obligations under the facility on a limited basis, up to an amount equal to the greater of: (i) the lesser of $5 million and 20% of the outstanding obligations or (ii) 10% of the outstanding obligations. Assuming compliance with the facility's terms, including sufficiency of collateral, as of December 31, 1999, $18.1 million was available under this facility. Approximately $17.0 million of the Company's debt is repayable during 2000. Such repayments consist of scheduled installments due under term loans. 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 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 and equity capital bases with its commercial and investment banks. If the Company is not able to access additional debt and equity capital, its ability to continue to grow its asset base consistent with historical trends will be impaired and its future growth limited to that which can be funded from internally generated capital. The Company has committed to purchase, during 2000, additional used aircraft and used engines for its operations. In 1998, certain deposits were made in connection with these commitments. As of December 31, 1999, the Company's current commitment to such purchases is not more than $6.4 million, which includes $1.0 million of deposits in other assets. MANAGEMENT OF INTEREST RATE EXPOSURE In September 1996, the Company purchased an amortizing interest rate cap in order to limit its exposure to increases in interest rates on a portion of its variable rate borrowings. Pursuant to this cap, the counter party will make payments to the Company, based on the notional amount of the cap, if the three month LIBOR rate is in excess of 7.7%. As of December 31, 1999, the notional principal amount of the cap was $29.3 million, which will decline to $26.0 million at the end of its term, October 2000. The cost of the cap is being amortized as an expense over its remaining term. To further mitigate exposure to interest rate changes, the Company has entered into interest rate swap agreements which have notional outstanding amounts of $60.0 million, a weighted average remaining term of 24 months and a weighted average fixed rate of 5.9%. Under its borrowing agreement, WLFC Funding Corporation is required to hedge a certain portion of its $125 million warehouse facility against changes in interest rates. WLFC Funding Corporation has entered into interest rate swap agreements in order to meet such hedging requirements and to manage the variable interest rate risk related to its debt. As of December 31, 1999, such swap agreements had notional outstanding amounts totaling $65 million, a weighted average remaining term of 38 months and a weighted average fixed rate of 6.0%. The Company will be exposed to risk in the event of non-performance of the interest rate hedge counter parties. The Company anticipates that it will hedge additional amounts of its floating rate debt during the next several months. FACTORS THAT MAY AFFECT FUTURE RESULTS Except for historical information contained herein, the discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The 14 Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below as well as those discussed elsewhere herein and in the Company's report on Form 10-K for the year ended December 31, 1998. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they appear in this report or in other written or oral statements by the Company. The businesses in which the Company is engaged are capital intensive businesses. Accordingly, the Company's ability to successfully execute its business strategy and to sustain its operations is dependent, in large part, on the availability of debt and equity capital. There can be no assurance that the necessary amount of such capital will continue to be available to the Company on favorable terms or at all. If the Company is not successful in obtaining sufficient capital, the Company's ability to: (i) add new aircraft engines, aircraft and spare parts packages to its portfolio, (ii) add inventory to support its spare parts sales, (iii) fund its working capital needs, (iv) develop the business of PGTC LLC, and (v) finance possible future acquisitions, would be impaired. The Company's inability to obtain sufficient capital would have a material adverse effect on the Company's business, financial condition and/or results of operations. The Company retains title to the aircraft engines, aircraft and parts packages that it leases to third parties. Upon termination of a lease, the Company will seek to re-lease or sell the aircraft equipment or will dismantle the equipment and will sell the parts. The Company also engages in the selective purchase and resale of commercial aircraft engines and engine components. On occasion, the Company purchases engines or components without having a firm commitment for their sale. Numerous factors, many of which are beyond the Company's control, may have an impact on the Company's ability to re-lease or sell aircraft equipment on a timely basis, including the following: (i) general market conditions, (ii) the condition of the aircraft equipment upon termination of the lease, (iii) the maintenance services performed during the lease term and, as applicable, the number of hours remaining until the next major maintenance is required, (iv) regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft engines), (v) changes in the supply or cost of aircraft engines, and (vi) technological developments. There is no assurance that the Company will be able to re-lease or sell aircraft equipment on a timely basis or on favorable terms. The failure to re-lease or sell aircraft equipment on a timely basis or on favorable terms could have a material adverse effect on the Company's business, financial condition and/or results of operations. The Company experiences fluctuations in its operating results. Such fluctuations may be due to a number of factors, including: (i) general economic conditions, (ii) the timing of sales of engines and spare parts, (iii) financial difficulties experienced by airlines, (iv) interest rates, (v) fuel costs, (vi) downturns in the air transportation industry, (vii) increased fare competition, (viii) decreases in growth of air traffic, (ix) unanticipated early lease termination or a default by a lessee, (x) the timing of engine acquisitions, (xi) engine marketing activities, (xii) fluctuations in market prices for the Company's assets. The Company anticipates that fluctuations from period to period will continue in the future. As a result, the Company believes that comparisons to results of operations for preceding periods are not necessarily meaningful and that results of prior periods should not be relied upon as an indication of future performance. A lessee may default in performance of its lease obligations and the Company may be unable to enforce its remedies under a lease. The Company's inability to collect receivables due under a lease or to repossess aircraft equipment in the event of a default by a lessee could have a material adverse effect on the Company's business, financial condition and/or results of operations. Various airlines have experienced financial difficulties in the past, certain airlines have filed for bankruptcy and a number of such airlines have ceased operations. In most cases where a debtor seeks protection under Chapter 11 of Title 11 of the United States Code, creditors are automatically stayed from enforcing their rights. In the case of United States certified airlines, Section 1110 of the Bankruptcy Code provides certain relief to lessors of aircraft equipment. The scope of Section 1110 has been the subject of significant litigation and there is no assurance that the provisions of Section 1110 will protect the Company's investment in an aircraft, aircraft engines or parts in the event of a lessee's bankruptcy. In addition, Section 1110 does not apply to lessees located outside of the United States and applicable foreign laws may not provide comparable protection. Leases of spare parts may involve additional risks. For example, it is likely to be more difficult to recover parts in the event of a lessee default and the residual value of parts may be less ascertainable than an engine. The Company's leases are generally structured at fixed rental rates for specified terms while many of the Company's borrowings are at a floating rate. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue the Company realizes under its leases and the interest rate 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 1999, 74% 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. The Company is subject to the timing and access to courts and the remedies local laws impose in order to collect its lease payments and recover its assets. In addition, political instability abroad and changes in international policy also present risk of expropriation of the Company's leased engines. Furthermore, many foreign countries have currency and exchange laws regulating the international transfer of currencies. 15 The Company has recently experienced significant growth in revenues. The Company's growth has placed, and is expected to continue to place, a significant strain on the Company's managerial, operational and financial resources. There is no assurance that the Company will be able to effectively manage the expansion of its operations, or that the Company's systems, procedures or controls will be adequate to support the Company's operations, in which event the Company's business, financial condition and/or results of operations could be adversely affected. The Company may also acquire businesses that would complement or expand the Company's existing businesses. Any acquisition or expansion made by the Company may result in one or more of the following events: (i) the incurrence of additional debt, (ii) future charges to earnings related to the amortization of goodwill and other intangible assets, (iii) difficulties in the assimilation of operations, services, products and personnel, (iv) an inability to sustain or improve historical revenue levels, (v) diversion of management's attention from ongoing business operations, and (vi) potential loss of key employees. Any of the foregoing factors could have a material adverse effect on the Company's business, financial condition and/or results of operations. The markets for the Company's products and services are extremely competitive, and the Company faces competition from a number of sources. These include aircraft and aircraft part manufacturers, aircraft and aircraft engine lessors, airline and aircraft service companies and aircraft spare parts redistributors. Certain of the Company's competitors have substantially greater resources than the Company, including greater name recognition, larger inventories, a broader range of material, complementary lines of business and greater financial, marketing and other resources. In addition, equipment manufacturers, aircraft maintenance providers, FAA certified repair facilities and other aviation aftermarket suppliers may vertically integrate into the markets that the Company serves, thereby significantly increasing industry competition. There can be no assurance that competitive pressures will not materially and adversely affect the Company's business, financial condition and/or results of operations. The Company's leasing activities generate significant depreciation allowances that provide the Company with substantial tax benefits on an ongoing basis. In addition, the Company's lessees currently enjoy favorable accounting and tax treatment by entering into operating leases. Any change to current tax laws or accounting principles that make operating lease financing less attractive or affect the Company's recognition of revenue or expense would have a material impact on the Company's business, financial condition and/or results of operations. Before parts may be installed in an aircraft, they must meet certain standards of condition established by the FAA and/or the equivalent regulatory agencies in other countries. Specific regulations vary from country to country, although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. Parts must also be traceable to sources deemed acceptable by the FAA or such equivalent regulatory agencies. Such standards may change in the future, requiring engine components already contained in the Company's inventory to be scrapped or modified. In all such cases, to the extent the Company has such engine components in its inventory, their value may be reduced and the Company's business, financial condition and/or results of operations could be adversely affected. The Company obtains a substantial portion of its inventories of aircraft, engines and engine parts from airlines, overhaul facilities and other suppliers. There is no organized market for aircraft, engines and engine parts, and the Company must rely on field representatives and personnel, advertisements and its reputation as a buyer of surplus inventory in order to generate opportunities to purchase such equipment. The market for bulk sales of surplus aircraft, engines and engine parts is highly competitive, in some instances involving a bidding process. While the Company has been able to purchase surplus inventory in this manner successfully in the past, there is no assurance that surplus aircraft, engines and engine parts of the type required by the Company's customers will be available on acceptable terms when needed in the future or that the Company will continue to compete effectively in the purchase of such surplus equipment. A change in the market for aircraft and engine parts could result in the Company's inventory being overvalued and could require the Company to write-down its inventory valuations in order to bring them into line with the revised fair market value. Airline manufacturers may also develop new parts to be used in lieu of parts already contained in the Company's inventory. There is no assurance that a write-down would not adversely affect the Company's business, operating results or financial condition. To date, the Company has not experienced any material Year 2000 issues with its purchased software. In addition, to date, the Company has not been impacted by any Year 2000 problems that may have impacted various third parties that are important to the Company's business, including lessees, customers, vendors and financial institutions. The amount the Company has spent related to Year 2000 issues has not been material. The Company continues to monitor its computer systems for any potential Year 2000 issues. 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 16 Company to raise the implicit rates charged to its customers, could result in a reduction in demand for the Company's leases. Certain of the Company's warehouse credit facilities are variable rate debt. The Company estimates a one percent increase or decrease in the Company's variable rate debt would result in an increase or decrease, respectively, in interest expense of $1.1 million per annum. The Company estimates a two percent increase or decrease in the Company's variable rate debt would result in an increase or decrease, respectively, in interest expense of $2.1 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. A portion of the Company's leases provide that lease payments be adjusted based on changes in interest rates. Furthermore, since lease rates tend to vary with interest rate levels, it is likely that the Company can adjust lease rates for the effect of change in interest rates at the termination of leases. Other financial assets and liabilities are at fixed rates. The Company is also exposed to currency devaluation risk. During 1999, 74% 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is submitted as a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement. 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement. 17 PART IV 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 21. (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 49. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------- ----------- 3.1 Certificate of Incorporation, filed on March 12, 1998 together with Certificate of Amendment of Certificate of Incorporation filed on May 6, 1998. Incorporated by reference to Exhibits 4.01 and 4.02 of the Company's report on Form 8-K filed on June 23, 1998. 3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the Company's report on Form 8-K filed on June 23, 1998. 4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 of the Company's report on Form 10-Q for the quarter ended June 30, 1998. 4.2 Rights Agreement dated September 30, 1999, by and between the Company and American Stock Transfer Company, as Rights Agent incorporated by reference to Exhibit 4.1 of the Company's report on Form 8-K filed on October 4, 1999. 10.1 Form of Indemnification Agreement entered into between the Company and its directors and officers. Incorporated by reference to Exhibit 10.3 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.2 Employment Agreement between the Company and Edwin Dibble. Incorporated by reference to Exhibit 10.9 to Registration Statement No. 333-39865 filed on December 11, 1997. 10.3 Settlement Agreement and General Release of Claims dated October 29, 1999 between the Company and Edwin F. Dibble. 10.4 Employment Agreement between the Company and Donald Nunemaker dated July 16, 1997. Incorporated by reference to Exhibit 10.10 to the Company's Report on Form 10-K for the year ended December 31, 1997. 10.5 Employment Agreement between the Company and James D. McBride dated September 9, 1997. Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-K for the year ended December 31, 1998. 10.6 Employment Agreement between the Company and David J. Hopkins dated August 16, 1999. 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. 18 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* Aircraft Purchase and Sale Agreement dated as of March 24, 1998 between the Company and United Air Lines, Inc. Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended March 31, 1998. 10.12* Amended and Restated Credit Agreement dated September 30, 1998. Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1998. 10.13 The Company's 1996 Stock Option/Stock Issuance Plan, as amended and restated as of April 6, 1999. 10.14* 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. 10.15* 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. 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 Accountants 27.1 Financial Data Schedule.
* 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 The Company filed one report on Form 8-K during the fourth quarter of 1999. This report was filed on October 4, 1999 and reported the fact that the Company entered into a Rights Agreement with American Stock Transfer and Trust Company in connection with the adoption by the Company of a Stockholder Rights Plan. No financial statements were included in the Report on Form 8-K. 19 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. March 29, 2000 Willis Lease Finance Corporation By: /S/ CHARLES F. WILLIS, IV -------------------------------------- Charles F. Willis, IV Chairman of the Board, President, and Chief Executive Officer 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.
DATE TITLE SIGNATURE ---- ----- --------- Date: March 29, 2000 Chief Executive Officer and Director /S/ CHARLES F. WILLIS, IV (Principal Executive Officer) --------------------------- Charles F. Willis, IV Date: March 29, 2000 Chief Financial Officer /S/ JAMES D. McBRIDE (Principal Financial and ---------------------- Accounting Officer) James D. McBride Date: March 29, 2000 Director /S/ WILLIAM M. LEROY ---------------------- William M. LeRoy Date: March 29, 2000 Director /S/ DONALD E. MOFFITT ----------------------- Donald E. Moffitt Date: March 29, 2000 Director /S/ ROBERT H. RAU ------------------- Robert H. Rau Date: March 29, 2000 Director /S/ WILLARD H. SMITH, JR. --------------------------- Willard H. Smith, Jr.
20 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants Page 22 Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998. Page 23 Consolidated Statements of Income for the years ended December 31, 1999, December 31, 1998 and December 31, 1997. Page 24 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, December 31, 1998 and December 31, 1997. Page 25 Consolidated Statements of Cash Flows for the years ended December 31, 1999, December 31, 1998 and December 31, 1997. Page 26 Notes to Consolidated Financial Statements. Page 27
21 REPORT OF INDEPENDENT ACCOUNTANTS 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 generally accepted auditing standards. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. SAN FRANCISCO, CALIFORNIA FEBRUARY 17, 2000 22 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1999 1998 ------------------ ----------------- ASSETS Cash and cash equivalents $9,476 $10,305 Restricted cash 15,992 13,738 Equipment held for operating lease, less accumulated depreciation of $21,592 at December 31, 1999 and $15,455 at December 31, 1998 338,788 274,618 Net investment in direct finance lease 8,666 9,249 Property, equipment and furnishings, less accumulated depreciation of $674 at December 31, 1999 and $577 at December 31, 1998 933 2,480 Spare parts inventory 22,237 35,858 Operating lease related receivable 3,236 2,492 Trade receivables, net 1,904 5,310 Note receivable 650 - Investment in unconsolidated affiliates 5,082 - Other receivables 8 757 Other assets 5,343 5,198 ------------------ ----------------- Total assets $412,315 $360,005 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $4,139 $9,620 Salaries and commissions payable 359 977 Deferred income taxes 12,815 11,684 Deferred gain 338 157 Notes payable and accrued interest 291,318 245,581 Capital lease obligation 2,489 2,652 Residual share payable 3,465 2,618 Maintenance reserves 18,555 13,273 Security deposits 5,522 4,561 Unearned lease revenue 3,777 3,040 ------------------ ----------------- Total liabilities 342,777 294,163 ------------------ ----------------- Shareholders' equity: Preferred stock ($0.01 par value, 5,000,000 shares authorized; none outstanding) - - Common stock, ($0.01 par value, 20,000,000 shares authorized; 7,397,877 and 7,360,813 shares issued and outstanding as of December 31, 1999 and December 31, 1998, respectively) 74 74 Paid-in capital in excess of par 42,446 42,033 Retained earnings 27,018 23,735 ------------------ ----------------- Total shareholders' equity 69,538 65,842 ------------------ ----------------- Total liabilities and shareholders' equity $412,315 $360,005 ================== =================
See accompanying notes to the consolidated financial statements 23 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------- REVENUE Lease revenue $48,167 $33,047 $19,456 Gain on sale of leased equipment 11,371 13,413 4,165 Spare part sales 25,436 24,088 14,110 Sale of equipment acquired for resale 9,775 4,093 12,748 Interest and other income 1,182 1,439 728 ------------ ------------ ------------- Total revenue 95,931 76,080 51,207 ------------ ------------ ------------- EXPENSES Interest expense 22,357 15,209 7,797 Depreciation expense 13,639 8,251 4,223 Residual share 847 803 893 Cost of spare part sales 28,317 17,298 9,469 Cost of equipment acquired for resale 8,354 3,574 10,678 General and administrative 17,466 15,184 9,332 ------------ ------------ ------------- Total expenses 90,980 60,319 42,392 ------------ ------------ ------------- Income from operations 4,951 15,761 8,815 Loss from unconsolidated affiliate (622) - - ------------ ------------ ------------- Income before income taxes and extraordinary item 4,329 15,761 8815 Income taxes (1,046) (6,310) (3,485) ------------ ------------ ------------- Income before extraordinary item 3,283 9,451 5,330 Extraordinary item less applicable income taxes - (200) 2,008 ------------ ------------ ------------- Net income $3,283 $9,251 $7,338 ============ ============ ============= Basic earnings per common share: Income before extraordinary item $0.44 $1.30 $0.97 Extraordinary item - (0.03) 0.36 ------------ ------------ ------------- Net income $0.44 $1.27 $1.33 ============ ============ ============= Diluted earnings per common share: Income before extraordinary item $0.44 $1.27 $0.94 Extraordinary item - (0.03) 0.35 ------------ ------------ ------------- Net income $0.44 $1.24 $1.29 ============ ============ ============= Average common shares outstanding 7,382 7,266 5,497 Diluted average common shares outstanding 7,447 7,461 5,673
See accompanying notes to the consolidated financial statements 24 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 (IN THOUSANDS)
Issued and outstanding Paid-in Total shares of Common Capital in Retained shareholders' common stock Stock Excess of par earnings equity ------------ ------ ------------- -------- ------ Balance at December 31, 1996 5,427 $16,056 $ - $7,147 $23,203 Shares issued 26 221 - - 221 Common stock issued and proceeds from follow-on offering, net 1,725 23,840 - - 23,840 Net income - - - 7,337 7,337 ------------ ------------- ------------- ------------ ------------- Balance at December 31, 1997 7,178 $40,117 $ - $14,484 $54,601 Shares issued 183 587 737 - 1,324 Tax benefit from disqualified dispositions of qualified shares - - 666 - 666 Conversion to par value stock - (40,630) 40,630 - - Net income - - - 9,251 9,251 ------------ ------------- ------------- ------------ ------------- Balances at December 31, 1998 7,361 $74 $ 42,033 $23,735 $65,842 Shares issued 37 - 339 - 339 Tax benefit from disqualified dispositions of qualified shares - - 74 - 74 Net income - - - 3,283 3,283 ------------ ------------- ------------- ------------ ------------- Balances at December 31, 1999 7,398 $74 $ 42,446 $27,018 $69,538 ============ ============= ============= ============ =============
See accompanying notes to the consolidated financial statements 25 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------------------------- 1999 1998 1997 -------------- ----------------- ----------------- Cash flows from operating activities: Net income $3,283 $9,251 $7,338 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of equipment held for lease 13,251 7,945 4,098 Depreciation of property, equipment and furnishings 388 306 125 (Loss) gain on sale of property, equipment and furnishings (15) 24 (45) Gain on sale of leased equipment (11,371) (13,413) (4,165) Increase in residual share payable 847 526 893 Loss from unconsolidated affiliate 622 - - Changes in assets and liabilities: Restricted cash (2,254) (303) (4,861) Spare parts inventory 13,293 (25,524) (6,276) Receivables 3,076 (3,206) (2,155) Other assets (2,455) (986) (1,335) Accounts payable and accrued expenses (4,729) 5,608 1,257 Salaries and commission payable (518) (93) 531 Deferred income taxes 1,131 3,208 2,526 Deferred gain 181 (26) (26) Accrued interest 337 704 (248) Maintenance reserves 5,282 (6,745) 8,337 Security deposits 961 2,125 457 Unearned lease revenue 737 1,733 32 -------------- ----------------- ----------------- Net cash provided by (used in) operating activities 22,047 (18,866) 6,483 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment held for operating lease (net of selling expenses) 52,523 40,486 15,673 Proceeds from sale of property, equipment and furnishings 1 16 81 Purchase of equipment held for operating lease (119,752) (171,101) (68,144) Deposits made in connection with inventory purchases - (1,923) - Purchase of property, equipment and furnishings (1,720) (2,285) (242) Investment in unconsolidated affiliate (87) - - Principal payments received on direct finance lease 583 573 273 -------------- ----------------- ----------------- Net cash used in investing activities (68,452) (134,234) (52,359) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable 118,202 194,703 165,591 Proceeds from issuance of common stock 339 1,990 24,062 Principal payments on notes payable (72,802) (51,260) (137,096) Principal payments on capital lease obligation (163) (150) (158) -------------- ----------------- ----------------- Net cash provided by financing activities 45,576 145,283 52,399 (Decrease) increase in cash and cash equivalents (829) (7,817) 6,523 Cash and cash equivalents at beginning of period 10,305 18,122 11,599 -------------- ----------------- ----------------- Cash and cash equivalents at end of period $9,476 $10,305 $18,122 ============== ================= ================= Supplemental information: Net cash paid for: Interest $21,658 $14,505 $7,951 -------------- ----------------- ----------------- Income Taxes $675 $4,839 $197 -------------- ----------------- ----------------- Non-investing activity: Transfer of assets to unconsolidated affiliate (net) $5,630 - - -------------- ----------------- ----------------- Non-cash financing activity: Short term loan related to sale of equipment $650 - - -------------- ----------------- -----------------
See accompanying notes to the consolidated financial statements 26 WILLIS 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), T-11 Inc. (T-11), and T-12 Inc. (T-12) are wholly-owned subsidiaries of Willis. They are all California corporations and were established to purchase and lease and resell commercial aircraft engines and parts. Willis Aeronautical Services, Inc. ("WASI") is 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. 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. Pacific Gas Turbine Center Incorporated ("PGTC Inc.") was a wholly owned subsidiary of Willis. PGTC Inc. was formed in 1998 to provide, among other things, engine disassembly services and was dissolved in May 1999 upon the Company contributing the operations and assets to a newly formed joint venture, Pacific Gas Turbine Center, LLC ("PGTC LLC"). 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. (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, T-12, WASI, WLFC-FC, WLFC-Pooling, PGTC Inc. (five months ended May 1999) 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. 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 dismantled and sold as parts. The Company records an allowance for estimated returns of spare parts based on recent experience. Such returns occur in the ordinary course of the Company's business. (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. 27 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For engines or aircraft that are leased with an intent to disassemble upon 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 17 years to a 15% to 17% residual value. In March 1995, the Financial Accounting Standards Board issued 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). 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 adopted SFAS 121 in 1995 and reviews at least quarterly the carrying value of long-lived assets. Such reviews resulted in no losses on revaluation in 1999, 1998 or 1997. (e) SPARE PARTS INVENTORY The Company, through one or more of its subsidiaries, buys used aircraft spare parts for resale. This inventory is valued at the lower of cost or market value. Costs of such sales are: (i) specifically identified based on actual purchase price; or (ii) the cost of parts purchased in a pool or from dismantled engines or aircraft based on estimated relative sales price. (f) 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. (g) MAINTENANCE COSTS Maintenance costs under the Company's long-term leases are generally the responsibility of the lessees. Additionally, under many of the Company's long-term 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. 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. (h) INTEREST RATE HEDGING In 1996, the Company purchased an interest rate cap in order to mitigate its exposure to increases in interest rates on a portion of its variable rate borrowings. The instrument minimizes the Company's exposure to interest rate fluctuations for a period of four years. The cost of this instrument is amortized on a straight-line basis over the four year period. Additionally, the Company has entered into interest rate swap agreements to mitigate its exposure on its variable rate borrowings. The durations of the swap agreements are set consistent with the duration of the Company's leases. The differential to be paid or received under the swap agreements is charged or credited to interest expense. 28 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (i) 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. (j) 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. (k) RESIDUAL SHARING WITH LENDERS Certain of the Company's credit agreements require the Company to share "residual proceeds" as defined in the agreements with the lenders upon sale of engines held for operating lease. The Company provides 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. Residual share payable totaled $3.5 million and $2.6 million as of December 31, 1999 and 1998, respectively. As of December 31, 1999 and 1998, three engines, with a total net book value of $10.6 million and $11.0 million, respectively, were subject to residual sharing arrangements (notes 4 and 5). (l) 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 lease at time of sale. The gain 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 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. (m) 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. (n) RECLASSIFICATIONS Certain items in the consolidated financial statements of prior years have been reclassified to conform to the current year's presentation. (o) MANAGEMENT ESTIMATES These financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 29 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (p) PER SHARE INFORMATION In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which required the Company to replace its presentation of primary earnings per share with a presentation of basic and fully diluted earnings per share on the face of the income statement, effective December 15, 1997. The principal difference between primary earnings per share and basic earnings per share under the new statement is that basic earnings per share does not consider common stock equivalents such as stock options and warrants. 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 statement required restatement of all prior periods presented. Basic and fully diluted earnings per share are presented below:
YEARS ENDED DECEMBER 31, (in thousands, except per share data) ---------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Basic: Net Income $3,283 $9,251 $7,338 Weighted-average number of common shares outstanding 7,382 7,266 5,497 Basic earnings per common share $0.44 $1.27 $1.33 ------------------ -------------------- ------------------ Fully diluted: Net income $3,283 $9,251 $7,338 Shares: Weighted-average number of common shares outstanding 7,382 7,266 5,497 Potentially dilutive common shares 65 195 176 ------------------ -------------------- ------------------ Total Shares 7,447 7,461 5,673 Fully diluted earnings per weighted-average common share $0.44 $1.24 $1.29
(q) ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133," issued in June 1999, defers the effective date of SFAS No. 133. SFAS No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. As of December 31, 1999, the Company is reviewing the effect SFAS No. 133 will have on the Company's consolidated financial statements. (r) COMPREHENSIVE INCOME The Company's net income is equal to comprehensive income for the years ended December 31, 1999, 1998 and 1997. 30 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) EQUIPMENT HELD FOR LEASE At December 31, 1999, the Company had 101 aircraft engines and related equipment with an aggregate original cost of $329.5 million, four spare parts packages with an aggregate original cost of $14.8 million and eight aircraft with an aggregate original cost of $26.2 million in its operating and finance lease portfolio. At December 31, 1998, the Company had 74 aircraft engines and related equipment with an aggregate original cost of $260.2 million, seven spare parts packages with an aggregate original cost of $17.8 million and five aircraft with an aggregate original cost of $22.2 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 eight geographic regions. The tables below set forth geographic information about the Company's operating leased aircraft equipment grouped by domicile of the lessee:
YEARS ENDED DECEMBER 31, REGION (in thousands) ------ ------------------------------------------------- 1999 1998 1997 ---- ---- ---- Operating lease revenue: United States $12,547 $10,540 $6,718 Canada 3,329 2,071 1,521 Mexico 6,118 3,780 2,479 Australia/New Zealand 551 926 1,027 Europe 13,557 6,704 5,432 South America 6,910 5,399 778 Asia 3,350 1,862 807 Middle East 1,008 917 251 ------------------------------------------------- Totals $47,370 $32,199 $19,013 =================================================
31 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, REGION (in thousands) - ------ -------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Operating lease revenue less applicable depreciation, interest and residual share: United States $4,309 $3,801 $2,751 Canada 669 517 580 Mexico 2,749 1,954 554 Australia/New Zealand 379 276 402 Europe 3,535 1,824 2,076 South America 1,659 2,198 267 Asia 1,200 755 123 Middle East 385 321 100 Off-lease and other (1,650) (419) (70) -------------------------------------------------------- Totals $13,235 $11,227 $6,783 ========================================================
YEARS ENDED DECEMBER 31, REGION (in thousands) - ------ -------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Net book value of operating leased assets: United States $77,759 $61,266 $46,853 Canada 27,645 17,753 11,167 Mexico 29,154 30,366 13,032 Australia/New Zealand 5,373 6,281 5,312 Europe 103,821 75,179 35,964 South America 41,885 44,169 11,205 Asia 23,689 15,348 7,437 Middle East 7,521 4,188 4,833 Off-lease and other 21,941 20,068 2,733 -------------------------------------------------------- Totals $338,788 $274,618 $138,536 ========================================================
32 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Finance leased assets, generated $797,000 and $840,000 of revenue in 1999 and 1998, respectively. After estimated interest expense such assets generated $127,000 and $480,000, respectively. The net investment in direct finance leases on December 31, 1999 and 1998 was as follows:
(in thousands) 1999 1998 ---- ---- Minimum payments receivable $6,426 $7,852 Estimated residual value of leased assets 4,950 4,950 Unearned income (2,710) (3,553) -------- -------- Net investment in finance lease $8,666 $9,249 ======== ========
As of December 31, 1999, minimum future payments under noncancelable leases were as follows:
(in thousands) YEAR OPERATING FINANCE ---- --------- ------- 2000.................................... $37,350 $1,507 2001.................................... 25,051 1,507 2002.................................... 20,575 1,507 2003.................................... 12,913 1,507 2004.................................... 8,226 753 Thereafter.............................. 6,615 - ------------------------ $110,730 $6,781 =========================
33 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) PROPERTY, EQUIPMENT AND FURNISHINGS Property, equipment and furnishings consist of the following:
AS OF DECEMBER 31, (in thousands) ---------------------------- 1999 1998 ---- ---- Vehicles $156 $156 Computer equipment 604 526 Furniture and equipment 818 1,450 Leasehold improvements 29 925 ---------------------------- 1,607 3,057 Accumulated depreciation (674) (577) ---------------------------- Net book value $933 $2,480 ============================
(4) EXTRAORDINARY EXPENSE/GAIN In March 1998, the Company repaid a loan that had residual sharing provisions and an interest rate of 10%. The repayment resulted in an extraordinary expense of $0.2 million, net of tax. In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2.0 million, net of tax. (5) NOTES PAYABLE AND ACCRUED INTEREST Notes payable consisted of the following:
AS OF DECEMBER 31, (in thousands) ------------------------------ 1999 1998 ---- ---- Notes payable at fixed interest rates of 11.03%. Secured by aircraft engines and the proceeds thereof. The note was repaid in December 1999. $ - $1,339 Note payable at a floating interest rate of LIBOR plus 5%. Secured by aircraft engines and the proceeds thereof. The note matures in April 2001 or upon sale of such engines. 250 2,661 Note payable at a floating interest rate of LIBOR plus 2.3%. Secured by aircraft engines and the proceeds thereof. The note matures in October 2006. 802 - Subordinated note payable at a fixed interest rate of 7%. Secured by aircraft engines, spare parts and the proceeds thereof. The note matures in June 2004. 1,098 1,342 Note payable at a fixed interest rate of 11.68%. Secured by an aircraft engine and the proceeds thereof. The note matures in December 2001. 1,783 1,980 Note payable at a fixed interest rate of 7.8%. Secured by aircraft engines and proceeds thereof. This note matures in April 2006. 2,400 - Note payable at a fixed interest rate of 8.05%. Secured by an aircraft engine and the proceeds thereof. The note matures in May 2003. 2,458 2,600 34 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Notes payable at a fixed interest rate of 8.63%. Secured by aircraft engines and the proceeds thereof. The note matures in October 2006. 3,846 - Note payable at a fixed interest rate of 8.89%. Secured by aircraft engines and the proceeds thereof. The note matures in August 2002. 4,012 4,128 Note payable at a fixed interest rate of 8.18% secured by aircraft and the proceeds thereof. The note matures in November 2002. 8,419 9,545 Note payable at a fixed interest rate of 6.95% secured by aircraft and the proceeds thereof. The note matures in September 2005. 9,137 9,813 Notes payable at fixed interest rates ranging from 10.23% to 10.77%. Secured by aircraft engines and parts and the proceeds thereof. The notes mature between December 2001 and February 2002. 13,488 17,288 Note payable at a floating rate of interest based on commercial paper rates plus 1.8% secured by engines, the proceeds thereof and certain deposits. The facility has a committed amount of $125 million. At December 31, 1999, $18.1 million was available under the facility subject to the Company providing additional collateral. The facility matures in February 2008. 106,931 64,479 Notes payable at a floating rate of interest of LIBOR plus 2.0%. Secured by engines, parts and the proceeds thereof. The facility has a committed amount of $150 million. At December 31, 1999, $14.9 million was available under the facility subject to the Company providing additional collateral. The facility has a two-year revolving period ending September 2000 followed by a four-year term-out period. The facility is renewable and the Company expects to begin discussing such renewal with its banks in mid-2000. 135,054 129,100 ------------------------------ Total notes payable $289,678 $244,275 ==============================
35 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $289.6 million at December 31, 1999. The fair value of the interest rate cap, as estimated by the financial institution providing the instrument, was $362 at December 31, 1999. The fair value of the interest rate swaps, as estimated by the financial institutions providing the swaps, was $1,761,000 at December 31, 1999. Principal outstanding at December 31, 1999 is repayable as follows:
Year (in thousands) ---- 2000.............................................. $17,048 2001.............................................. 39,017 2002.............................................. 47,708 2003.............................................. 36,589 2004.............................................. 72,511 Thereafter........................................ 76,805 ---------- $289,678 ==========
As of December 31, 1999 and 1998, accrued interest in the amounts of $1.6 million and $1.3 million, respectively, is included in notes payable and accrued interest. At December 31, 1999 and 1998, the Company held deposits in the amount of $16.0 million and $13.7 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. 36 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) INCOME TAXES The components of income tax expense (net of tax benefit or expense related to the extraordinary items of $134,000 and $(1,329,000)) for the years ended December 31, 1998 and 1997, respectively, included in the accompanying statement of income were as follows:
(in thousands) FEDERAL STATE TOTAL ------- ----- ----- December 31, 1999 Current $ - $ (85) $ (85) Deferred 1,459 (328) 1,131 ---------------------------------------------------- $1,459 $ (413) $1,046 ==================================================== December 31, 1998 Current $2,118 $850 $2,968 Deferred 2,850 358 3,208 ---------------------------------------------------- $4,968 $1,208 $6,176 ==================================================== December 31, 1997 Current $1,683 $604 $2,288 Deferred 2,252 274 2,526 ---------------------------------------------------- $3,935 $ 878 $4,814 ====================================================
The following is a reconciliation of the statutory federal income tax expense (net of income tax benefit related to the extraordinary item) to the effective income tax expense:
YEARS ENDED DECEMBER 31, (in thousands) ----------------------------------------------------- 1999 1998 1997 ---- ---- ---- Statutory federal income tax expense $1,472 $5,245 $4,132 State taxes, net of federal benefit 153 901 710 Adjustment of state tax apportionment rates (756) - - Other 177 30 (28) ----------------------------------------------------- Effective income tax expense $1,046 $6,176 $4,814 =====================================================
37 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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, (in thousands) 1999 1998 ---- ---- Deferred tax assets: Charitable contribution $ 15 $ - Prepaid rent 1,418 1,211 Residual sharing expenses 1,301 1,043 Uniform capitalization expenses 726 945 State Taxes 5 235 Reserves 527 390 Alternative minimum tax credit 2,844 2,803 Passive activity loss carryforwards - 286 Net operating loss carryforward 6,023 - ----------------------------------- Total gross deferred tax assets 12,859 6,913 Less valuation allowances - - ----------------------------------- Net deferred tax assets $12,859 $6,913 Deferred tax liabilities: Depreciation on aircraft equipment (25,554) (18,597) Investment in PGTC LLC (107) - Goodwill income amortization (13) - ----------------------------------- Net deferred tax liability ($12,815) ($11,684) ===================================
As of December 31, 1999, the Company had net operating loss carryforwards of approximately $5.9 million for federal tax purposes and approximately $0.2 million for state tax purposes. The federal net operating loss carryforwards will expire in the year 2019 and the state net operating loss carryforwards will expire in the year 2004. Net operating losses can be used as a deduction against future income arising from any source. As of December 31, 1999, the Company also had alternative minimum tax credits of approximately $2.8 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 previously paid taxes and/or 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. 38 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1999 and 1998, management believes the Company had no significant concentrations of credit risk. For the year ended December 31, 1998, the Company had one significant customer, Kellstrom Industries, Inc., which accounted for approximately 13% of total revenue and 74% of gain on sale of leased equipment. The Company had no such customer concentrations during the comparable 1999 and 1997 periods. INTEREST RATE RISK MANAGEMENT In September 1996, Willis Lease Finance Corporation purchased an amortizing interest rate cap in order to limit its exposure to increases in interest rates on a portion of its variable rate borrowings. Pursuant to this cap, the counter party will make payments to the Company, based on the notional amount of the cap, if the three month LIBOR rate is in excess of 7.66%. As of December 31, 1999, the notional principal amount of the cap was $29.3 million, which will decline to $26.0 million at the end of its term. The cost of the cap is being amortized as an expense over its remaining term. To further mitigate exposure to interest rate changes, Willis Lease Finance Corporation has entered into interest rate swap agreements. As of December 31, 1999, such swap agreements had notional outstanding amounts of $60 million, a weighted average remaining duration of 24 months and a weighted average fixed rate of 5.90%. Under its borrowing agreement, WLFC Funding Corporation is required to hedge a certain portion of its $125 million debt warehouse facility against changes in interest rates. WLFC Funding Corporation has entered into interest rate swap agreements in order to meet the hedging requirements and to manage the variable rate interest risk related to WLFC Funding Corporation's debt. As of December 31, 1999, such swap agreements had notional outstanding amounts of $65 million, a weighted average remaining duration of 38 months and a weighted average fixed rate of 6.0%. As a result of these swap arrangements, interest expense was increased by $307,000, $28,000 and $0 in 1999, 1998 and 1997, respectively. (8) COMMITMENTS AND CONTINGENCIES The Company has three leases for its office and warehouse space. The annual lease rental commitments are $309,000, $75,000, and $48,000 and the leases expire on May 31, 2003, March 31, 2000 and July 31, 2000, respectively. The Company finances one of its engines under a capital lease. The maturities of the capital lease obligation as of December 31, 1999 are as follows:
Year (in thousands) ---- 2000................................................. $377 2001................................................. 376 2002................................................. 377 2003................................................. 376 2004................................................. 1,816 -------- Net Minimum Lease Payment............................ 3,322 Less: Amount Representing Interest.................. (832) -------- Present Value of Net Minimum Lease Payment........... $2,490 ========
39 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In March 1998, the Company committed, subject to documentation, to purchase, during 1998 and 1999, certain aircraft and engines for its WASI parts operation. The agreement was amended in October 1999 to extend the remaining aircraft and engine deliveries to the first quarter 2000. A $1.0 million deposit is held by the seller of the aircraft and engines in connection with this commitment and is included in other assets as of December 31, 1999. Including this commitment, total purchase commitments as of December 31, 1999 are not more than $6.4 million. In July 1999, the Company entered into an agreement to participate in a joint venture - Sichuan Snecma Aero-engine Maintenance Co. Ltd. Sichuan Snecma will focus on providing maintenance services for CFM56 series engines. Other participants in the joint venture are China Southwest Airlines, Snecma Services and Beijing Kailan Aviation Technology Development and Services Corporation. As of the year ended December 31, 1999, less than $20,000 has been contributed. Under the terms of the agreement, the Company contributed an additional $0.8 million in January 2000 and not more than an additional $2.2 million is expected to be contributed to the joint venture over the next three years. Under the terms of the PGTC LLC joint venture, to the extent that PGTC LLC requires additional working capital and the Company and its partner in PGTC LLC agree to provide such capital, each partner is required to contribute to such capital requirement equally. At present, during the year 2000, the Company does not anticipate that its share of additional capital to be contributed to PGTC LLC will exceed $1.0 million. In January 2000, a suit was filed against the Company in connection with the sale by the Company of an aircraft engine for cash consideration. The buyer of the engine alleges that the sale was not validly consummated and amongst other things requests that the purchase price of the engine, $3.2 million, be returned to the buyer. The Company is vigorously contesting the suit and has filed a cross complaint in connection with the suit. The Company believes that the loss, if any, resulting from the suit will not have a material impact on the Company's financial position, results of operations, or cash flows in future years. (9) 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. Both the Company and Chromalloy have a 50% interest in the joint venture. The equity method of accounting is used for the Company's 50% ownership in PGTC LLC. Under the equity method, the original contribution was recorded at cost and is adjusted periodically to recognize the Company's share of the earnings or losses of PGTC LLC after the date of formation. For the year ended December 31, 1999, WASI purchased $1,054,000 of services from PGTC LLC and PGTC LLC purchased $982,000 of engine parts from WASI. All intercompany profits or losses have been eliminated. The Company had no such activity during the comparable 1998 and 1997 periods. (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 $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 1999 and 1998, 6,864 and 15,755 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 1999 and 1998 were $7.36 and $6.37, respectively. 40 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 Shareholders and restated in February 1998, to provide for an increase in the number of shares reserved for issuance under the Plan from 525,000 shares to 1,025,000 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. A summary of the activity under the plan is as follows:
OPTIONS OUTSTANDING ------------------------------------------------ OPTIONS WEIGHTED WEIGHTED AVAILABLE AVERAGE AVERAGE FOR GRANT OPTIONS EXERCISE PRICE FAIR VALUE -------------- -------------- ----------------- -------------- Balances at December 31, 1996 210,000 315,000 $8.00 Options Granted (191,000) 191,000 $13.99 $5.83 Options Exercised - (15,000) $8.00 Options Canceled 52,500 (52,500) $10.86 -------------- -------------- ----------------- Balances at December 31, 1997 71,500 438,500 $10.27 Additional Options Made Available 500,000 - - Options Granted (302,000) 302,000 $14.98 $5.32 Options Exercised - (150,000) $8.28 Options Canceled 70,000 (70,000) $10.47 -------------- -------------- ----------------- Balances at December 31, 1998 339,500 520,500 $13.51 Options Granted (480,185) 480,185 $8.79 $4.28 Options Exercised - (32,250) $8.10 Options Canceled 238,000 (238,000) $14.17 -------------- -------------- ----------------- Balance at December 31, 1999 97,315 730,435 $10.43
In connection with the exercise of a portion of these options during the year ended December 31, 1999, the Company recognized a $74,000 tax benefit. A summary of the outstanding, exercisable options and their weighted average exercise prices is as follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------- -------------- At December 31, 1997 192,500 $9.33 At December 31, 1998 162,500 $11.76 At December 31, 1999 198,760 $13.06
41 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information concerning outstanding and exercisable options at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER REMAINING AVERAGE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING PRICE --------------------------------------------------------------------------------------------- From $2.15 to $8.00 316,795 9.46 $ 4.60 42,795 $7.22 From $10.63 to $14.75 250,840 8.40 13.68 116,965 13.10 From $15.56 to $22.13 162,800 8.93 16.77 39,000 19.37 --------------------------------------------------------------------------------------------- From $2.15 to $22.13 730,435 8.98 $10.43 198,760 $13.06 =============================================================================================
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, 1999, 1998 and 1997, 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 has been recognized for its fixed stock option plans and its stock purchase 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:
1999 1998 1997 ---- ---- ---- Net Income as reported $3,283 $9,251 $7,338 Net Income pro forma $2,393 $8,644 $6,900 Basic Earnings per Common Share as reported $0.44 $1.27 $1.33 Basic Earnings per Common Share pro forma $0.32 $1.19 $1.25 Diluted Earnings per Common Share as reported $0.44 $1.24 $1.29 Diluted Earnings per Common Share pro forma $0.32 $1.16 $1.22
The fair value of the purchase rights under the Purchase Plan, the options 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:
1996 STOCK OPTION/ EMPLOYEE STOCK STOCK ISSUANCE PLAN PURCHASE PLAN ------------------- -------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Expected Dividend Yield 0% 0% 0% 0% 0% 0% Risk-free Interest Rate 5.7% 4.5% 6.2% 5.4% 5.4% 5.1% Expected Volatility 67% 48% 54% 67% 48% 54% Expected Life (in years) 3.0 2.9 3.0 0.5-2.0 0.5-2.0 0.5-2.0
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 42 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 1999, 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 $10,000. The Company made no 401(k) contributions during the years ended December 31, 1999 and 1998. (11) WARRANTS In conjunction with the initial public offering, the Company sold five-year purchase warrants for $.01 per warrant covering an aggregate of 100,000 shares of Common Stock exercisable at a price equal to 130% of the initial public offering price. The warrants are exercisable commencing 24 months after the effective date of the offering or earlier, but not earlier than 12 months after the initial public offering, if and when the Company files a registration statement for the sale by the Company of shares of Common Stock or securities exercisable for, convertible into or exchangeable for shares of Common Stock (other than pursuant to a stock option or other employee benefit or similar plan, or in connection with a merger or an acquisition). The secondary offering in December 1997 constituted such a registration. The warrants' exercise price and the number of shares of Common Stock are subject to adjustment to protect the warrant holders against dilution in certain events. On February 26, 1998, a holder of 50,000 of the warrants exercised the warrants under the net issuance rights of the warrants. Based on the closing price on such date, the exercise resulted in the issuance of 25,238 shares to the holder of the warrants. 43 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) OPERATING SEGMENTS The Company operates in two business segments: (i) Leasing and Related Operations which involves acquiring and leasing, primarily pursuant to operating leases, commercial aircraft, aircraft spare engines and other aircraft equipment and the selective purchase and resale of commercial aircraft engines and other aircraft equipment and (ii) Spare Parts Sales which involves the purchase and resale of after-market engine and airframe parts, whole engines, engine modules and rotable aircraft components and leasing of engines destined for disassembly and sale of parts. In July 1998, the Company formed PGTC Inc. to engage in engine disassembly and maintenance, repair and overhaul services. At the end of May 1999, the Company's investment in and the operations of PGTC Inc. were contributed to a joint venture, PGTC LLC (see note 9 above). During the five months ended May 31, 1999, while PGTC Inc. was a wholly-owned subsidiary of the Company, the majority of PGTC Inc.'s revenue was derived from services provided to WASI. Revenue from third parties during this period was not material. Accordingly, for the five months ended May 31, 1999 and for the 1998 period, the operations of PGTC Inc. are included in the Spare Parts Sales segment. Subsequent to the formation of PGTC LLC, because PGTC LLC is an unconsolidated affiliate accounted for using the equity method of accounting, PGTC LLC is not included in the operating segment analysis for the year ended December 31, 1999. The Company evaluates the performance of each of the segments based on profit or loss after general and administrative expenses and inter-company allocation of interest expense. While the Company believes there are synergies between the two business segments, the segments are managed separately because each requires different business strategies. 44 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables present a summary of the operating segments (in thousands):
Leasing and Spare Related Parts FOR THE YEAR ENDED DECEMBER 31, 1999 Operations Sales Total ----------------- -------------- --------------- Revenue Lease revenue $43,547 $4,620 $48,167 Gain on sale of leased equipment 11,371 - 11,371 Spare parts sales - 25,436 25,436 Sale of equipment acquired for resale 9,775 - 9,775 Interest and other income 951 231 1,182 ----------------- -------------- --------------- Total revenue 65,644 30,287 95,931 ----------------- -------------- --------------- Expenses Interest expense 19,247 3,110 22,357 Depreciation expense 10,559 3,080 13,639 Residual share 847 - 847 Cost of spare parts - 28,317 28,317 Cost of equipment acquired for resale 8,354 - 8,354 General and administrative 11,536 5,930 17,466 ----------------- -------------- --------------- Total expenses 50,543 40,437 90,980 Income (loss) from operations $15,101 ($10,150)(1) $4,951 ================= ============== =============== Total assets as of December 31, 1999 (2) $365,343 $41,890 $407,233 ================= ============== ===============
- --------------- (1) The Company estimates that loss from operations would have been ($8,974) if the effect of PGTC Inc.'s operations after intercompany elimination, were eliminated from the results of the spare parts sales segment. (2) Total assets as of December 31, 1999 does not include investment in unconsolidated affiliate. 45 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASING AND SPARE RELATED PARTS FOR THE YEAR ENDED DECEMBER 31, 1998 OPERATIONS SALES TOTAL ----------------- -------------- --------------- Revenue Lease revenue $ 31,607 $ 1,439 $ 33,046 Gain on sale of leased equipment 12,628 785 13,413 Spare parts sales - 24,088 24,088 Sale of equipment acquired for resale 4,094 - 4,094 Interest and other income 1,393 46 1,439 ----------------- -------------- --------------- Total Revenue 49,722 26,358 76,080 Expense Interest expense 13,535 1,674 15,209 Depreciation expense 7,377 874 8,251 Residual share 803 - 803 Cost of spare parts - 17,298 17,298 Cost of equipment acquired for resale 3,574 - 3,574 General and administrative 9,772 5,412 15,184 ----------------- -------------- --------------- Total Expenses 35,061 25,258 60,319 ----------------- -------------- --------------- Income before income tax and extraordinary item $ 14,661 $ 1,100(1) $ 15,761 ================= ============== =============== Total assets as of December 31, 1998 $ 316,855 $ 43,150 $ 360,005 ================= ============== ===============
- --------------- (1) The Company estimates that income before income tax and extraordinary item would have been $2.5 million if the effect of PGTC's operations, after intercompany eliminations, were eliminated from the results of the Spare Parts Sales segment.
LEASING AND SPARE RELATED PARTS FOR THE YEAR ENDED DECEMBER 31, 1997 OPERATIONS SALES TOTAL ----------------- -------------- --------------- Revenue Lease revenue $ 19,304 $ 151 $ 19,455 Gain on sale of leased equipment 4,166 - 4,166 Spare parts sales - 14,110 14,110 Sale of equipment acquired for resale 12,748 - 12,748 Interest and other income 612 116 728 ----------------- -------------- --------------- Total Revenue 36,830 14,377 51,207 Expense Interest expense 7,508 289 7,797 Depreciation expense 4,123 100 4,223 Residual share 893 - 893 Cost of spare parts - 9,469 9,469 Cost of equipment acquired for resale 10,678 - 10,678 General and administrative 7,057 2,275 9,332 ----------------- -------------- --------------- Total Expenses 30,259 12,133 42,392 ----------------- -------------- --------------- Income before income tax and extraordinary item $ 6,571 $ 2,244 $ 8,815 ================= ============== =============== Total assets as of December 31, 1997 $ 189,701 $ 8,729 $ 198,430 ================= ============== ===============
46 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (13) QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1999 and 1998 (in thousands, except per share data):
Fiscal 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year - ---------------------------------------------------------------------------------------------------------------------------- Total revenue $ 28,946 $ 25,501 $ 21,380 $ 20,104 $ 95,931 Income (loss) from operations 4,645 4,688 (6,915) 2,533 4,951 Net income (loss) 2,785 2,787 (4,384) 2,095 3,283 Basic earnings per common share 0.38 0.38 (0.59) 0.28 0.44 Diluted earnings per common share 0.37 0.37 (0.59) 0.28 0.44 Average common shares outstanding 7,363 7,374 7,394 7,398 7,382 Diluted average common shares outstanding 7,450 7,453 7,448 7,443 7,447
Fiscal 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year - ---------------------------------------------------------------------------------------------------------------------------- Total revenue $ 12,745 $ 20,671 $ 20,081 $ 22,583 $ 76,080 Income from operations 3,254 3,587 4,136 4,784 15,761 Net income 1,749 2,149 2,484 2,869 9,251 Basic earnings per common share 0.24 0.30 0.34 0.39 1.27 Diluted earnings per common share 0.23 0.29 0.33 0.38 1.24 Average common shares outstanding 7,192 7,263 7,280 7,327 7,266 Diluted average common shares outstanding 7,440 7,488 7,495 7,478 7,461
During the fourth quarter of 1999, WLFC recorded a reduction to its income tax expense of approximately $756,000 related to state taxes. The adjustment lowered the Company's effective tax rate for 1999 to 24%. The reduction in the income tax expense arose from a review of the Company's sources of revenue during 1998 and 1999. Based on this review, the effective tax rate applicable for deferred tax liability recognition during 1998 and 1999 was reduced. 47 SCHEDULE II Valuation Accounts (in thousands) WILLIS LEASE FINANCE CORPORATION Valuation Accounts (in thousands)
BALANCE AT ADDITIONS BEGINNING CHARGED TO BALANCE AT OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD --------- ------- ---------- ------------- December 31, 1997 Accounts receivable, allowance for doubtful accounts $ - $ 28 $ (6) $ 22 December 31, 1998 Accounts receivable, allowance for doubtful accounts 22 12 - 34 December 31, 1999 Accounts receivable, allowance for doubtful accounts 34 105 (92) 47 December 31, 1997 Reserve for sales returns $ - $ 223 $ - $ 223 December 31, 1998 Reserve for sales returns 223 550 $ (428) $ 345 December 31, 1999 Reserve for sales returns 345 389 $ (29) $ 705
48 INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation, filed on March 12, 1998 together with Certificate of Amendment of Certificate of Incorporation filed on May 6, 1998. Incorporated by reference to Exhibits 4.01 and 4.02 of the Company's report on Form 8-K filed on June 23, 1998. 3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the Company's report on Form 8-K filed on June 23, 1998. 4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 of the Company's report on Form 10-Q for the quarter ended June 30, 1998. 4.2 Rights Agreement dated September 30, 1999, by and between the Company and American Stock Transfer Company, as Rights Agent incorporated by reference to Exhibit 4.1 of the Company's report on Form 8-K filed on October 4, 1999. 10.1 Form of Indemnification Agreement entered into between the Company and its directors and officers. Incorporated by reference to Exhibit 10.3 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.2 Employment Agreement between the Company and Edwin Dibble. Incorporated by reference to Exhibit 10.9 to Registration Statement No. 333-39865 filed on December 11, 1997. 10.3 Settlement Agreement and General Release of Claims dated October 29, 1999 between the Company and Edwin F. Dibble. 10.4 Employment Agreement between the Company and Donald Nunemaker dated July 16, 1997. Incorporated by reference to Exhibit 10.10 to the Company's Report on Form 10-K for the year ended December 31, 1997. 10.5 Employment Agreement between the Company and James D. McBride dated September 9, 1997. Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-K for the year ended December 31, 1998. 10.6 Employment Agreement between the Company and David J. Hopkins dated August 16, 1999. 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* Aircraft Purchase and Sale Agreement dated as of March 24, 1998 between the Company and United Air Lines, Inc. Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended March 31, 1998. 10.12* Amended and Restated Credit Agreement dated September 30, 1998. Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1998. 49 10.13 The Company's 1996 Stock Option/Stock Issuance Plan, as amended and restated as of April 16, 1999. 10.14* 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. 10.15* 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. 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 Accountants. 27.1 Financial Data Schedule.
50 EX-10.3 2 EXHIBIT 10.3 EX 10.3 SETTLEMENT AGREEMENT AND GENERAL RELEASE OF CLAIMS This Settlement Agreement and General Release of Claims ("Release"), with an effective date of October 29, 1999, is entered into by and among Edwin F. Dibble, an individual (the "Employee"), and Willis Lease Finance Corporation, a corporation, and Willis Aeronautical Services, Inc., a corporation, (collectively hereinafter "the Company") (hereinafter, the Employee and the Company may sometimes be referred to collectively as "the Parties"), and is based upon the following: RECITALS WHEREAS, Employee has been employed by the Company since 1994; WHEREAS, Employee entered into an Employment Agreement with Willis Aeronautical Services, Inc., effective January 1, 1997, as well as a First Amendment to said Employment Agreement, which was entered into on July 28, 1997, and effective January 1, 1998; WHEREAS, Employee and the Company have concluded that it would be in the best interests of all concerned for Employee to leave his employment with the Company to pursue other interests; WHEREAS, the Parties wish to permanently resolve all claims that exist or may exist in the future arising out of Employee's relationship with the Company, his employment with the Company, and his resignation therefrom, and the Parties desire to formalize the terms of their agreement in this Release, which, by its own terms, will supersede the Employment Agreement and First Amendment to Employment Agreement referred to above; NOW, THEREFORE, in consideration of the premises and promises contained herein, and the payments described below, the Parties agree as follows: AGREEMENT 1. RESIGNATION. Employee has resigned his employment with the Company, effective September 30, 1999. 2. SEPARATION PAYMENT. The Company agrees that it when it receives the fully executed original of this Release and the revocation period set forth in paragraph 23 has expired, it shall provide Employee with a check in the gross amount of One Hundred Fifty Thousand Dollars ($150,000.00) (representing ten (10) months of separation pay commencing October 1, 1999, two months of which have already been paid, based upon an annual salary rate of $225,000.00) made payable to Employee, less customary employee withholdings. The Employee acknowledges and agrees that apart from the other consideration specifically described in this Release, Employee has received all compensation from the Company to which he is entitled, including bonuses, sick pay or vacation pay, incentives, salary, reimbursement for expenses, or any other form of compensation. 3. RELOCATION REIMBURSEMENT. The Company will provide Employee with a check in the amount of Fifty Thousand Dollars ($50,000.00) representing reimbursement for relocation expenses. The Company will issue an IRS Form 1099 in connection with this payment. 4. STOCK VESTING. Employee agrees that his rights to continued vesting under the Company's 1996 Stock Option/Stock Issuance Plan terminated on September 30, 1999. Employee will be entitled to exercise options on 40,000 shares of Company stock (30,000 at an option price of $8.00 per share, and 10,000 at an option price of $14.00 per share), which options are vested, but unexercised, and Employee must exercise these options no later than March 31, 2000 or the options terminate. 2 5. COBRA BENEFITS. The Company shall reimburse Employee for the cost of continuation of the medical and dental insurance coverage presently received by Employee under COBRA for the period up to and including July 31, 2000. The Company will provide Employee with a check in the gross amount of $1,933.58, representing the cost of these COBRA payments. Employee understands that he is responsible for transmitting the appropriate payments each month under the terms of COBRA. In the event Employee elects to continue receiving these benefits under COBRA after July 31, 2000, Employee understands that he will be responsible for making these payments himself. 6. NO ADMISSION OF LIABILITY. Employee and the Company enter into this Release for the sole purpose of avoiding the time and expense involved in possible litigation. This Release shall in no way be construed as an admission by the Company, or any of the Releasees (as defined in paragraph 7 below) of any wrongful conduct with respect to employee or any other person, or that employee has any rights whatsoever against the Company, or any of the Releasees. 7. RELEASE OF CLAIMS. As a material inducement to the Company to enter into this Release, Employee hereby irrevocably and unconditionally releases, acquits and forever discharges the Company, and all of its current and former parents, subsidiaries, affiliates, divisions, successors, predecessors, related corporate entities, assigns, owners, stockholders, partners, directors, officers, employees, agents, representatives, attorneys and all persons acting by, through, under or in concert with any of them (collectively "the Releasees"), from any and all charges, complaints (including, but not limited to, complaints arising under the Federal Age Discrimination in Employment Act of 1967, the California Labor Code, the Civil Rights Act of 1991, and Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1886, 3 the California Fair Employment and Housing Act, the Americans with Disabilities Act, the Unruh Act and the National Labor Relations Act), claims, liabilities, obligations, promises, agreements, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs) actually incurred of any nature whatsoever, known or unknown, suspected or unsuspected which Employee now has, owns or holds, or claims to have, own or hold, or which Employee at any time heretofore had, owned or held, or claimed to have had, owned or held, or which Employee at any time hereafter may have, own or hold, or claim to have, own or hold, against any of the Releasees relating to any event, act or omission that has occurred as of the date of this Release. 8. COVENANT NOT TO SUE. Employee represents that he had not filed any complaints, charges or lawsuits against any of the Releasees; that he will not file any complaint, charge or lawsuit against any of the Releasees at any time hereafter for any event occurring prior to the date of this Release; and that if any agency or court assumes jurisdiction of any complaint, charge or lawsuit against any of the Releasees, Employee will request that the matter be dismissed with prejudice. 9. WAIVER OF CIVIL CODE SECTION 1542. Employee expressly waives and relinquishes all rights and benefits afforded by Section 1542 of the Civil Code of the State of California, and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542. Section 1542 of the Civil Code of the State of California provides as follows: SECTION 1542. A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE 4 MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Thus, notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of the Releasees, Employee expressly acknowledges that this Release is intended to include in its effect, without limitation, all claims which he does not know or suspect to exist in his favor at the time of execution hereof, and that this Release contemplates the extinguishment of any such claim or claims. 10. NO PRIOR ASSIGNMENT. Employee represents that he has not heretofore assigned or transferred, or purported to have assigned or transferred, to any person or entity, any claim or any portion thereof, or any interest therein, and agrees to indemnify, defend and hold Releasees harmless from and against any and all claims, based on or arising out of any such assignment or transfer, or purported assignment or transfer of any claims or any portion thereof or interest therein. 11. CONSTRUCTION OF RELEASE. This Release is the product of negotiations between counsel for the respective Parties. As such, the language of all parts of this Release shall be construed as a whole, according to its fair meaning, and not strictly for or against any of the Parties. It is agreed that this Release shall be construed with the understanding that both Parties were responsible for drafting it. 12. BINDING EFFECT. This Release shall be binding upon Employee and upon his heirs, spouse, administrators, representatives, executors, successors and assigns, and shall inure to the benefit of Releasees and each of them, and to their heirs, administrators, representatives, executors, successors and assigns. 5 13. CALIFORNIA LAW. This Release is made and entered into in the State of California and shall in all respects be interpreted, enforced and governed under the laws of the State of California. Venue shall be in San Diego County. 14. CONFIDENTIALITY. Employee agrees that he will keep the terms and substance of this Release completely confidential, including the terms and substance of any part of the settlement discussions leading to the preparation of this Release; provided, however, the disclosure is permitted only to (a) Employee's accountants, tax advisors or attorneys who provide advice to Employee and who reasonably must be informed of the terms of this Release; (b) as may be required by law; or (c) as may be required to enforce the terms of this Release. Employee further understands that this confidentiality pledge is a material term of this Release, but for which the Company would not have entered into it. 15. NONDISPARAGEMENT. The Company and Employee both agree that neither will do or say anything to disparage the other. In addition, and subject to the terms set forth in paragraph 16 below, the Company and Employee agree that neither will do anything to improperly disrupt, interfere, impair or damage the respective business of the other. 16. OBLIGATIONS CONCERNING COMPANY PROPRIETARY INFORMATION. The Company and Employee acknowledge that nothing in this Release precludes Employee from working in the aviation industry following his departure from the Company. Employee agrees that he has an ongoing obligation to refrain from using or disclosing Company trade secrets, confidential and proprietary information in the pursuit of any future business endeavor, or at all. The Company and Employee also acknowledge that the restrictions on the use or disclosure of Company trade secrets, confidential and proprietary information shall not apply to any information that the Employee can document was: 6 A. Independently developed by the Employee prior to his employment with the Company; B. In the public domain without breach of this Release and through no fault of the Employee; or C. Required to be disclosed to any state, federal or industry regulatory authority. It shall not be a violation of this paragraph 16 if Employee gives notice to a company or companies that are doing or have done business with the Company indicating that Employee has left the employ of the Company and, on their own, the company or companies initiate contact with the Employee for the purpose of doing business with the Employee. This exception to the restrictions described generally in paragraph 16 is expressly subject to the provisions of paragraph 15 above. 17. ENTIRE AGREEMENT. This Release sets forth the entire agreement between the Parties hereto and fully supersedes any and all prior agreements or understandings between the Parties hereto pertaining to the subject matter hereof, including, without limitation, the Employment Agreement effective January 1, 1997, and the First Amendment to Employment Agreement, which was effective as of January 1, 1998. 18. ATTORNEYS' FEES. The parties to this Release understand that each party is responsible for bearing its own costs and attorneys' fees incurred in connection with the preparation and negotiation of this Release, and all matters or events occurring up to the date of this Release. 19. MANDATORY ARBITRATION TO RESOLVE DISPUTES. In the event of a dispute concerning application, interpretation or enforcement of any provision of aspect of this Release, the parties agree that any such dispute shall be submitted to final and binding arbitration in lieu of 7 proceeding before a state or federal agency or court. Such arbitration will take place in the County of San Diego, California, and shall be conducted by an arbitrator mutually agreed upon between the parties from a panel of 11 arbitrators from JAMS/Endispute's San Diego offices. The arbitration will be conducted in accordance with JAMS/Endispute's rules governing commercial arbitrations then in effect. The parties further agree that, notwithstanding any JAMS/Endispute rule to the contrary, the arbitrator shall be vested with discretion and authority to award the prevailing party the costs and expenses incurred in connection with the arbitration, including reasonable attorneys' fees. 20. SEVERABILITY. If any provision of this Release is determined to be invalid or unenforceable, all of the other provisions shall remain valid and enforceable notwithstanding, unless the provision found to be unenforceable is of such material effect that the Release cannot be performed in accordance with the intent of the Parties in the absence thereof. 21. COUNTERPARTS AND FACSIMILES. This Release may be signed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. Facsimile signatures on this Release shall be deemed to be original signatures. 22. MODIFICATIONS IN WRITING. This Release shall not be altered, amended or modified except in a writing signed by Employee and the President of the Company. 23. REVOCATION RIGHT. Employee hereby acknowledges he has twenty-one (21) days within which to review and consider this Release before signing it, although he is not required to wait the entire twenty-one (21) days before signing. Employee has also been advised of his right to consult with an attorney of his choice prior to executing this Release. Employee further acknowledges that he has seven (7) days after signing this Release within which to revoke it should he elect to do so. Any such written revocation shall be sent to the Director of Human 8 Resources, 2320 Marinship Way, Suite 300, Sausalito, CA 94965. Employee further understands that this Release shall become effective and enforceable upon the expiration of the seven (7) calendar days following the date in which Employee executes this Release. PLEASE READ CAREFULLY. THIS RELEASE INCLUDES A RELEASE OF ALL KNOWN OR UNKNOWN CLAIMS. EMPLOYEE Dated: By --------------------- ---------------------------------------- EDWIN F. DIBBLE WILLIS LEASE FINANCE CORPORATION and WILLIS AERONAUTICAL SERVICES, INC. Dated: By ---------------------- ---------------------------------------- DONALD A. NUNEMAKER Executive Vice-President Willis Aeronautical Services, Inc. and Executive Vice-President, Chief Administrative Officer, Willis Lease Finance Corporation 9 EX-10.6 3 EXHIBIT 10.6 EX 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 14th of May, 1999, by and between Willis Lease Finance Corporation ("Employer"), a Delaware corporation, and David J. Hopkins (hereinafter referred to as "Employee"), and is effective as of August 16, 1999; WITNESSETH: WHEREAS, Employer desires to employ Employee, and Employee desires to be employed by Employer, upon the terms and conditions set forth in this Employment Agreement; and WHEREAS, Employee acknowledges that he has had an opportunity to consider this Agreement and consult with independent advisor(s) of his choosing with regard to the terms of this Agreement, and enters this Agreement voluntarily and with a full understanding of its terms; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth, Employer and Employee agree as follows: 1. EMPLOYMENT AND TERM. Employer agrees to employ Employee as Senior Vice President, Sales & Marketing for a period of two (2) years ("Initial Employment Period") commencing on August 16, 1999, and ending on or about July 31, 2001 unless terminated prior thereto in accordance with Section 4 hereof. Each full twelve month period Employee is employed by Employer shall be referred to herein as an "Employment Year." The entire duration of Employee's employment by Employer hereunder shall be referred to herein as the "Employment Period." Employee shall devote his full time and attention, with undivided loyalty, to the business and affairs of Employer during the Employment Period. Employee shall not engage in any other business or job activity during the Employment Period without Employer's prior written consent. Employee shall in good faith perform those duties and functions as are required by his position and as are determined and assigned to him from time to time by the Board of Directors of Employer or its designate(s), such essential duties as set forth on Exhibit A hereto. Notwithstanding the foregoing or any other provision in this Agreement, Employer shall have the right to modify from time to time the title and duties assigned to Employee. After the expiration of the Initial Employment Period pursuant to this Agreement, Employee's employment will automatically renew for successive periods of one year, each year, on the same terms and conditions as are set forth herein, unless either party gives the other notice of nonrenewal at least six (6) months prior to the end of the last applicable Employment Year. Employer may in its sole discretion elect to pay Employee the equivalent of six months base salary in lieu of notice in the event of nonrenewal of this Agreement. Hopkins Employment Agreement Page 2 2. COMPENSATION. During the Employment Period, Employee shall receive compensation from Employer for his services hereunder determined as follows: BASE SALARY. Employer agrees to pay to Employee during the Employment Period a base salary (hereafter referred to as the "Base Salary"), in the amount of One Hundred Sixty Thousand Dollars ($160,000.00) per Employment Year, to be paid not less frequently than bi-monthly in accordance with Employer's usual payroll practices. The Board of Directors will review Employee's Base Salary no less than once annually, and shall have sole discretion to increase or decrease the Base Salary, so long as the Base Salary is not set below $160,000.00. INCENTIVE COMPENSATION PLAN. Employee will be eligible to participate in the Willis Lease Incentive Compensation Plan under which Employee will be eligible for an annual bonus, based on a calendar year. Employee would be entitled to a target bonus equal to 85% of your Base Salary based upon the achievement of certain annual goals and objectives. Because the terms of Employee's Employment Period will commence in the middle of the calendar year, Employee will be eligible for a pro rata portion of his bonus based upon that period of the calendar year for which he has actually been employed. For 1999, Employee will receive a bonus equal to not less than 42.5% of Employee's Base Salary, pro-rated based upon Employee's Start Date. The bonus for 1999 will be paid to employee no later than March 2000. The bonus, thereafter, will be paid as determined by the Board of Directors and employee's bonus will be paid at the same time as the bonus of the Chairman and other company senior executive officers. RELOCATION/TRANSITIONAL EXPENSE COMPENSATION. Employer shall provide Employee with temporary living facilities for a period not to exceed two (2) months at no cost to Employee. Thereafter, Employee would receive a cash payment equal to Employee's relocation expenses, not to exceed an amount of $50,000.00, provided Employee provides adequate receipts to substantiate such expenses. Employer shall gross up for tax purposes 50% of the actual relocation expense, in an amount not to exceed $25,000.00. Employee shall be required to reimburse Employer for the full amount of the relocation expense payment in the event that Employee terminates this Agreement within twelve months of the commencement of employment hereunder or is terminated for cause within this time period. Employee shall be required to reimburse Employer for one-half the amount of the relocation expense payment in the event that Employee terminates this Agreement after twelve months, but within twenty four months of the commencement of employment hereunder, or is terminated for cause within this time period. SIGNING BONUS. Employer shall pay to Employee the amount of $20,000 as a signing bonus. The signing bonus shall be payable to Employee on the first pay-day following the day Employee commences employment pursuant to this Agreement. Employee shall be required to reimburse Employer for the full amount of the signing bonus in the event that Employee terminates this Agreement within twelve months of the commencement of employment hereunder or is terminated for cause. Employee shall be required to reimburse Hopkins Employment Agreement Page 3 Employer for one-half the amount of the signing bonus ($10,000.00) in the event that Employee terminates this Agreement after twelve months, but within twenty four months of the commencement of employment hereunder, or is terminated for cause. 3. FRINGE BENEFITS. During the Employment Period, Employer agrees to provide Employee with the following fringe benefits: (A) BUSINESS EXPENSE REIMBURSEMENT. Employee shall be authorized to incur reasonable business expenses in performing his duties under this Agreement, including, but not limited to, expenses for entertainment, long distance telephone calls, lodging, meals, air fare, transportation and travel. Employer will reimburse Employee for all such reasonable expenses upon presentation by Employee, from time to time, of an itemized account or other appropriate documentation of such expenses. (B) VACATION. Employee shall be entitled to three (3) weeks of paid vacation during each Employment Year, excluding Company holidays; provided, however, that Employer and Employee must mutually agree as to the time during any Employment Year when such vacation may be taken. Upon termination Employee will receive payment for unused accrued vacation. (C) BENEFITS. Employee will be eligible to participate in benefit plans and policies provided to other Employer employees of similar status, on the terms and conditions existing, and as may be changed from time to time, for participation in those plans and policies. (D) STOCK OPTIONS. Employee will be eligible to participate in the Employee Stock Option Plan and Employee Stock Purchase Plan subject to the terms and conditions set forth in detail in the separate Stock Option and Stock Purchase Plan documents. The terms of vesting applicable to Employee are set forth in detail in the separate plan documents, and Employee agrees to be bound by the provisions contained therein, except as otherwise provided in this Agreement. Pursuant to the Employee Stock Option Plan, within thirty (30) days after Employee commences employment with the Company, the Board of Directors shall grant Employee 30,000 shares of Willis Lease Finance Corporation stock, exercisable at the market value per share at the close of business on the date of the grant. The options shall become exercisable in four (4) equal successive annual installments upon Employee's completion of each year of service over the four (4) year period measured from the date of grant. In no event shall the options become exercisable after Optionee's cessation of Service. 4. TERMINATION. Either Employer or Employee may terminate Employee's employment in accordance with the following provisions: Hopkins Employment Agreement Page 4 (A) TERMINATION BY EMPLOYER. The employment of Employee may be terminated by Employer for any reason or no reason, with or without cause or justification, subject to the following: (i) In the event that Employee's employment is terminated by Employer for cause, or due to death or due to Employee's inability to properly perform his duties by reason of incapacity for a period of more than ninety (90) days, Employer's total liability to Employee or his heirs shall be limited to payment of Employee's Base Salary and Fringe Benefits through the effective date of termination, such payment to be made no later than seven (7) days after termination, and Employee shall not be entitled to any further compensation or benefits provided under this Agreement. (a) Cause for termination shall include, but shall not be limited to: (1) Employee's conviction of or plea of nolo contendere to any felony or gross misdemeanor charges brought in any Court of competent jurisdiction; (2) Any fraud, misrepresentation or gross misconduct by Employee against Employer; (3) Employee's breach of this Agreement. (ii) In the event Employee's employment is terminated by Employer other than for cause, including a material change in position, Employer will provide not less than six (6) months notice of termination or an amount equal to six (6) months of Employee's Base Salary in lieu of notice and Employee will be paid his Base Salary and Fringe Benefits through the date of termination, such payment to be made no later than seven (7) days after termination. The notice period and/or payments in lieu of notice provided herein shall be terminated in the event Employee obtains new employment after receiving notice of termination from Employer. (B) TERMINATION BY EMPLOYEE. If Employee's employment with Employer is terminated by Employee for any reason, Employee shall be entitled only to his Base Salary and Fringe Benefits through the date of termination and shall not be entitled to any further compensation or benefits pursuant to this Agreement, such payment to be made no later than seven (7) days after termination. Employee agrees to give Employer at least ninety (90) days prior written notice of termination of his employment. Employer shall have the right in its sole discretion to continue to employ Employee for ninety days, or for a shorter period with pay in lieu of notice to Employee in the amount to which Employee would have been entitled if employed for the ninety-day notice period. Hopkins Employment Agreement Page 5 5. MAINTENANCE OF CONFIDENTIALITY AND DUTY OF LOYALTY. Employee acknowledges that, pursuant to his employment with Employer, he will necessarily have access to trade secrets and information that is confidential and proprietary to Employer in connection with the performance of his duties. In consideration for the disclosure to Employee of, and the grant to Employee of access to such valuable and confidential information and in consideration of his employment, Employee shall comply in all respects with the provisions of this Section 5. (A) NONDISCLOSURE. During the Employment Period and thereafter, Confidential and Proprietary Information of Employer of which Employee gains knowledge during the Employment Period or prior thereto in connection with his hiring shall be used by Employee only for the benefit of Employer in connection with Employee's performance of his employment duties, and Employee shall not, and shall not allow any other person that gains access to such information in any manner or form, disclose, communicate, divulge or otherwise make available, or use, any such information, other than for the immediate benefit of Employer and without the prior written consent of Employer. For purposes of this Agreement, the term "Confidential and Proprietary Information" means information not generally known to the public and which is proprietary to Employer and relates to Employer's existing or reasonably foreseeable business or operations, including but not limited to trade secrets, business plans, advertising or public relations strategies, financial information, budgets, personnel information, customer information and lists, and information pertaining to research, development, manufacturing, engineering, processing, product designs (whether or not patented or patentable), purchasing and licensing, and may be embodied in reports or other writings or in blue prints or in other tangible forms such as equipment and models. Employee will refrain from any acts or omissions that would jeopardize the confidentiality or reduce the value of any Employer Confidential and Proprietary Information. (B) COVENANT OF LOYALTY. During the Employment Period and for any period Employee is receiving compensation from Employer, Employee shall not, on his own account or as an employee, agent, promoter, consultant, partner, officer, director, or shareholder of any other person, firm, entity, partnership or corporation, own, operate, lease, franchise, conduct, engage in, be connected with, have any interest in, or assist any person or entity engaged in any business in the continental United States that is in any way competitive with or similar to the business that is conducted by Employer or is in the same general field or industry as Employer. Without limiting the generality of the foregoing, Employee does hereby covenant not to, during the Employment Period and for any period that he is receiving compensation from Employer: (i) solicit, accept or receive any compensation from any customer of Employer or any business competitive to that of Employer; or Hopkins Employment Agreement Page 6 (ii) contact, solicit or call upon any customer or supplier of Employer on behalf of any person or entity other than Employer for the purpose of selling, providing or performing any services of the type normally provided or performed by Employer; or (iii) induce or attempt to induce any person or entity to curtail or cancel any business or contracts which such person or entity had with Employer; or (iv) induce or attempt to induce any person or entity to terminate, cancel or breach any contract which such person or entity has with Employer, or receive or accept any benefits from such termination, cancellation or breach. (C) NO SOLICITATION. During the Employment Period, during any period Employee is receiving compensation from Employer and for one year thereafter. Employee agrees not directly or indirectly to solicit, induce or attempt to solicit or induce any employee of Employer to terminate his or her employment with Employer in order to become employed by any other person or entity. (D) INJUNCTIVE RELIEF. Employee expressly agrees that the covenants set forth in this Section 5 are reasonable and necessary to protect Employer and its legitimate business interests, and to prevent the unauthorized dissemination of Confidential Information to competitors of Employer. Employee also agrees that Employer will be irreparably harmed and that damages alone cannot adequately compensate Employer if there is a violation of this Section 5 by Employee, and that injunctive relief against Employee is essential for the protection of Employer. Therefore, in the event of any such breach, it is agreed that, in addition to any other remedies available, Employer shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction, plus attorneys' fees actually incurred for the securing of such relief. Furthermore, Employee agrees that Employer shall not be required to post a bond or other collateral security with the court if Employer seeks injunctive relief. To the extent any provision of this Section 5 is deemed unenforceable by virtue of its scope or limitation, Employee and Employer agree that the scope and limitation provisions shall nevertheless be enforceable to the fullest extent permissible under the laws and public policies applied in such jurisdiction where enforcement is sought. 6. NOTICES. Any notice which either party may wish or be required to give to the other party pursuant to this Agreement shall be in writing and shall be either personally served or deposited in the United States mail, registered or certified and with proper postage prepaid, addressed as follows: TO EMPLOYER: Willis Lease Finance Corporation 2320 Marinship, Suite 300 Hopkins Employment Agreement Page 7 Sausalito, CA. 94965 Attn: General Counsel TO EMPLOYEE: David J. Hopkins ---------------- ---------------- or to such other address as the parties may designate from time to time by written notice to the other party given in the above manner. Notice given by personal service shall be deemed effective upon service. Notice given by registered or certified mail shall be deemed effective three (3) days after deposit in the mail. 7. MISCELLANEOUS. (A) MODIFICATIONS. This Agreement supersedes all prior agreements and understandings between the parties relating to the employment of Employee by Employer, and it may not be changed or terminated orally. No modification, termination, or attempted waiver of any other provisions of this Agreement shall be valid unless in writing signed by the party against whom the same is sought to be enforced. (B) ENFORCEABILITY AND SEVERABILITY. If any term of this Agreement is deemed void, voidable, invalid or unenforceable for any reason, such term shall be deemed severable from all other terms of this Agreement, which shall continue in full force and effect. (C) PRIOR OBLIGATIONS OF EMPLOYEE. Employee represents and warrants that by entering this Agreement he is not breaching any contractual relationship or obligation toward any person or entity. Furthermore, he understands that Employer is hiring him solely for the purpose of engaging his skill and expertise and not to acquire trade secrets or confidential information belonging to any other person or entity. Employee further understands that he is prohibited from disclosing such trade secrets and proprietary information to Employer. (D) ARBITRATION. Any disputes or controversy between the parties to this Agreement, including allegations of fraud and misrepresentation, arising from or as a result of this Agreement, the resulting business dealings between Employer and Employee, Employee's employment or the termination thereof, including any claims of discrimination or other claims under any federal, state, or local law or regulation now in existence or hereinafter enacted concerning in any way the subject of Employee's employment with Employer or its termination, shall be resolved, after the parties attempt informal resolution, exclusively by arbitration in accordance with the Rules and Regulations of the American Arbitration Association. All Arbitration hearings shall be held in San Francisco County, California within one hundred twenty (120) days from the date Arbitration is demanded by any of the parties and the Arbitrator shall render his/her written decision within thirty (30) days after the Arbitration hearing has Hopkins Employment Agreement Page 8 concluded. The decision of the Arbitrator shall be final and binding on all parties, and may be entered as a judgment by any party with any federal or state court of competent jurisdiction. The parties to the Arbitration hearing shall share any filing fees and Arbitrator's fees which must be paid in advance of the hearing equally; however, as set forth below the prevailing party shall be entitled to recover from the losing party all costs that it has incurred as a result of the Arbitration hearing, including fees paid to the arbitrator, travel costs and attorneys' fees. This provision shall not alter the rights of the parties to seek and obtain the provisional equitable remedies provided under any applicable state or federal law. Employee represents, by his signature, that he is making a voluntary and knowing waiver of his right to pursue any and all employment-related claims in court. (E) SUCCESSORS. This Agreement shall extend to and be binding upon Employee, his legal representatives, heirs and distributees, and upon Employer, its successors and assigns. (F) GOVERNING LAW. This Agreement and all remedies hereunder shall be construed and enforced in accordance with the laws of the State of California. (G) EFFECTIVE DATE. This Agreement shall be effective as of the date first above written. (I) Facsimile Copy. This parties will accept execution by facsimile. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the date first set forth above. Employer: WILLIS LEASE FINANCE CORPORATION By: --------------------------------- President and CEO Employee: - ------------------------------------ David J. Hopkins Hopkins Employment Agreement Page 9 Exhibit A Essential Duties of Employee - - Provide leadership and direction to the sales team; - - Provide leadership in "origination" activities, effectively sourcing aircraft engine leasing and trading opportunities with customers on a worldwide basis; - - Assess the market for aircraft engine leases and related products. Formulate and effectively implement a strategic marketing plan; - - Establish and maintain consistent, effective integration of marketing activities with other departments within the Company. - - Ensure that leasing volume and fee income goals are achieved. Initially Employee shall report to the Chief Administrative Officer, but Employer has the right to change the individual to whom Employee shall report. EX-10.13 4 EXHIBIT 10.13 EX 10.13 WILLIS LEASE FINANCE CORPORATION 1996 STOCK OPTION/STOCK ISSUANCE PLAN (AMENDED AND RESTATED AS OF APRIL 6, 1999) ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1996 Stock Option/Stock Issuance Plan is intended to promote the interests of Willis Lease Finance Corporation, a California corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into five separate equity programs: (i) the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, (ii) the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants, (iii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), (iv) the Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive option grants at periodic intervals to purchase shares of Common Stock, and (v) the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee and attendance fees otherwise payable in cash applied to special option grants. B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. However, any discretionary option grants or stock issuances for members of the Primary Committee shall be made by a disinterested majority of the Board. B. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. The members of the Secondary Committee may be Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary). C. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. D. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or any option or stock issuance thereunder. E. The Primary Committee shall have the sole and exclusive authority to determine which Section 16 Insiders and other highly compensated employees shall be eligible for participation in the Salary Investment Option Grant Program for one or more calendar years. However, all option grants under the Salary Investment Option Grant Program shall be made in accordance with the express terms of that program, and the Primary Committee shall not exercise any discretionary functions with respect to the option grants made under that program. F. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. 2. G. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of those programs, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs. IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares. D. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. E. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals serving as non-employee Board members on the Underwriting Date, (ii) those individuals who first become non-employee Board members after the Underwriting Date, whether through appointment by the Board or election by the Corporation's stockholders, and (iii) those individuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non-employee Board member. 3. F. All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock reserved for issuance over the term of the Plan shall not exceed 1,025,000 shares. Such authorized share reserve is comprised of (i) 525,000 shares initially reserved for issuance under the Plan, and (ii) an additional increase of 500,000 shares authorized by the Board on February 24, 1998, and approved by the stockholders at the 1998 Annual Meeting. B. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 250,000 shares of Common Stock in the aggregate per calendar year, beginning with the 1996 calendar year. C. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent those options expire or terminate for any reason prior to exercise in full. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation, at the original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. D. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under this Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 4. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; PROVIDED, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Five and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. 5. C. EFFECT OF TERMINATION OF SERVICE. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. 6. E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Five shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall NOT be subject to the terms of this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. 7. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, PROVIDED the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year. E. The Plan Administrator shall have full power and authority to grant options under the Discretionary Option Grant Program which will automatically accelerate in the event the Optionee's Service subsequently terminates by reason of an Involuntary Termination within twelve (12) months following the effective date of any Corporate Transaction in which those options are assumed or replaced and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully-vested shares until the EARLIER of (i) the expiration 8. of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full. F. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to (i) provide for the automatic acceleration of one or more outstanding options (and the automatic termination of one or more outstanding repurchase rights with the immediate vesting of the shares of Common Stock subject to those rights) upon the occurrence of a Change in Control or (ii) condition any such option acceleration (and the termination of any outstanding repurchase rights) upon the subsequent Involuntary Termination of the Optionee's Service within a specified period following the effective date of such Change in Control. Any options accelerated in connection with a Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term. G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. H. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value 9. (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is rejected by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the LATER of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Common Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested under each surrendered option (or surrendered portion thereof) over (B) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date. (iii) The Plan Administrator shall pre-approve, at the time the limited stock appreciation right is granted, the subsequent exercise of that right in accordance with the terms of the grant and the provisions of this Section V.C. No additional approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. (iv) The balance of the option (if any) shall continue in full force and effect in accordance with the documents evidencing such option. 10. ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM I. OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for those calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00) (or the appropriate amount with respect to elections made by newly eligible individuals during a calendar year). The Primary Committee shall have complete discretion to determine whether to approve the filed authorization in whole or in part. To the extent the Primary Committee approves the authorization, the individual who filed that authorization shall automatically be granted an option under the Salary Investment Grant Program on the first trading day in January of the calendar year for which the salary reduction is to be in effect, or, if the Program is first implemented during a calendar year, the option shall be granted on the first trading day of the month following the month in which the Program is implemented. II. OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; PROVIDED, however, that each such document shall comply with the terms specified below. A. EXERCISE PRICE. (i) The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. (ii) The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): 11. X = A DIVIDED BY (B x 66-2/3%), where X is the number of option shares, A is the dollar amount of the approved reduction in the Optionee's base salary for the calendar year, and B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Service. However, the option shall, immediately upon the Optionee's cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program, to the extent not already vested, shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. 12. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the EARLIER of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service or (iii) the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Salary Investment Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. The Primary Committee shall, at the time the option with such limited stock appreciation right is granted under the Salary Investment Option Grant Program, pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Primary Committee or the Board shall be required at the time of the actual option surrender and cash distribution. D. The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. REMAINING TERMS The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 13. ARTICLE FOUR STOCK ISSUANCE PROGRAM I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. PURCHASE PRICE. 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Five, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. VESTING PROVISIONS. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. 14. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the Corporation's outstanding repurchase/cancellation rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase/cancellation rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's 15. repurchase/cancellation rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within twelve (12) months following the effective date of any Corporate Transaction in which those repurchase/cancellation rights are assigned to the successor corporation (or parent thereof). C. The Plan Administrator shall have the discretion, exercisable either at the time the unvested shares are issued or at any time while the Corporation's repurchase rights remain outstanding, to (i) provide for the automatic termination of one or more outstanding repurchase/cancellation rights and the immediate vesting of the shares of Common Stock subject to those rights upon the occurrence of a Change in Control or (ii) condition any such accelerated vesting upon the subsequent Involuntary Termination of the Participant's Service within a specified period following the effective date of such Change in Control. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 16. ARTICLE FIVE AUTOMATIC OPTION GRANT PROGRAM I. OPTION TERMS A. GRANT DATES. Option grants shall be made on the dates specified below: 1. Each individual who is first elected or appointed as a non-employee Board member shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 5,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary. 2. On the date of each Annual Stockholders Meeting, each individual who is to continue to serve as an Eligible Director, whether or not that individual is standing for re-election to the Board at that particular Annual Meeting, shall automatically be granted a Non-Statutory Option to purchase a specified number of shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. The number of shares of Common Stock subject to each such annual automatic option grant will be determined by dividing $20,000 by the Black-Scholes formula value of the option, as determined by the Company's independent financial advisors. However, in no event may such option grant exceed 5,000 shares of Common Stock. There shall be no limit on the number of such $20,000- value option grants any one Eligible Director may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who have otherwise received a stock option grant from the Corporation shall be eligible to receive one or more such annual option grants over their period of continued Board service. Stockholder approval of this 1999 Restatement at the 1999 Annual Meeting shall constitute pre-approval of each option granted under this Article Five on or after the date of that Annual Meeting and the subsequent exercise of that option in accordance with the provisions of this Article Five. B. EXERCISE PRICE. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date. 17. D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each initial 5,000-share grant shall vest, and the Corporation's repurchase right shall lapse, in a series of four (4) successive equal annual installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon the Optionee's completion of one (1) year of Board service measured from the option grant date. Each annual $20,000 value grant shall vest, and the Corporation's repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the option grant date. E. TERMINATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully-vested shares of Common Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares 18. of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each automatic option held by him or her. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. Stockholder approval of this 1999 Restatement at the 1999 Annual Meeting shall constitute pre-approval of each option granted with such a surrender provision on or after the date of that Annual Meeting and the subsequent surrender of that option in accordance with the provisions of this Section II.C. No additional approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, PROVIDED the aggregate exercise price payable for such securities shall remain the same. E. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 19. ARTICLE SIX DIRECTOR FEE OPTION GRANT PROGRAM I. OPTION GRANTS Each non-employee Board member may elect to apply all or any portion of the annual retainer and attendance fees otherwise payable in cash for his or her service on the Board to the acquisition of special option grants under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to first day of the calendar year for which the annual retainer fee and attendance fees which are the subject of that election are otherwise payable, or, with respect to newly eligible non-employee Board members, prior to the first day of the fiscal quarter beginning after they became eligible. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program at the end of each fiscal quarter in the calendar year for which the annual retainer and attendance fees which are the subject of that election would otherwise be payable in cash. II. OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A DIVIDED BY (B x 66-2/3%), where X is the number of option shares, A is the portion of the annual retainer fee plus the portion of any attendance fees earned during the quarter subject to the non-employee Board member's election, and B is the Fair Market Value per share of Common Stock on the option grant date. 20. C. EXERCISE AND TERM OF OPTIONS. The option shall be fully vested at the time of grant. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program may be exercised for any or all of those shares as fully-vested shares until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Board service. III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program, to the extent the option is not already vested, shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed and shall remain exercisable for the fully-vested shares until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program 21. shall remain exercisable until the EARLIER or (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Director Fee Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution. D. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 22. ARTICLE SEVEN MISCELLANEOUS I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. TAX WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan became effective with respect to the Discretionary Option Grant and the Stock Issuance Programs immediately upon the Plan Effective Date. The Automatic Option Grant Program became effective on the Underwriting Date. The Director Fee Option Grant Program shall become effective upon shareholder approval of the proposal to incorporate the program into the Plan at the 1999 Annual Meeting. B. The Plan was amended and restated by the Board on February 24, 1998 (the "1998 Restatement") to effect the following changes: (i) increase the maximum number of shares of Common Stock authorized for issuance over the term of the Plan from 525,000 shares to 1,025,000 shares, (ii) render the non-employee Board members who are serving as Plan Administrator eligible to receive option grants and direct stock issuances under the Discretionary Option Grant and Stock Issuance Programs in effect under the Plan, (iii) remove certain restrictions on the eligibility of non-employee Board members to serve as Plan Administrator, and (iv) effect a series of additional changes to the provisions of the Plan (including the stockholder approval requirements, the transferability of Non-Statutory Options and the elimination of the six (6)-month holding requirement as a condition to the exercise of stock appreciation rights) in order to take advantage of the amendments to Rule 16b-3 of the 1934 Act which exempts certain officer and director transactions under the Plan from the short-swing liability provisions of the federal securities laws. The 1998 Restatement was approved by the stockholders at the 1998 Annual Meeting. All option grants and direct stock issuances made 23. prior to the 1998 Restatement shall remain outstanding in accordance with the terms and conditions of the respective instruments evidencing those options or issuances, and nothing in the 1998 Restatement shall be deemed to modify or in any way affect those outstanding options or issuances. The Plan Administrator may make option grants and direct stock issuances under the Plan at any time before the date fixed herein for the termination of the Plan. The Plan was again amended and restated by the Board on April 6, 1999 to (i) incorporate the Salary Investment Option Grant and Director Fee Option Grant Programs and (ii) change the calculation of the number of shares of common stock for which continuing non-employee Board members are to be automatically granted stock options at each Annual Stockholder's Meeting, beginning with the 1999 Annual Meeting, from a fixed 1,000 shares per non-employee Board member to a grant worth $20,000 based upon a Black-Scholes option valuation, with the number of shares subject to each such automatic grant not to exceed 5,000 shares. C. The Plan shall terminate upon the EARLIEST of (i) June 19, 2006, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such plan termination, all outstanding option grants and unvested stock issuances shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations. B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. 24. VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 25. APPENDIX The following definitions shall be in effect under the Plan: A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under the Plan. B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean Willis Lease Finance Corporation, a California corporation, and any corporate successor to all or substantially all of the assets or voting stock of Willis Lease Finance Corporation which shall by appropriate action adopt the Plan. A-1 H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan. I. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option grant program in effect for non-employee Board members under Article Six of the Plan. J. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. K. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One. L. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. M. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. N. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement. (iv) For purposes of any option grants made prior to the Underwriting Date, the Fair Market Value shall be determined by the Plan Administrator, after taking into account such factors as it deems appropriate. 2. O. HOSTILE TAKE-OVER shall mean a change in ownership of the Corporation effected through the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. P. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. Q. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. R. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). S. ACT shall mean the Securities Exchange Act of 1934, as amended. T. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. U. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program. V. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock 3. possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. W. PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. X. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant Program, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. Y. PLAN shall mean the Corporation's 1996 Stock Option/Stock Issuance Plan, as set forth in this document. Z. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. AA. PLAN EFFECTIVE DATE shall mean June 21, 1996, the date on which the Plan was adopted by the Board. AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. AC. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). The Plan Administrator shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. AD. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment option grant program in effect under the Plan. AE. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. AF. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. AG. SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member 4. of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan. AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. AL. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. AM. TAXES shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). AO. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters who managed the initial public offering of the Common Stock. AP. UNDERWRITING DATE shall mean September 18, 1996, the date on which the Underwriting Agreement was executed and priced in connection with the initial public offering of the Common Stock. 5. EX-11.1 5 EXHIBIT 11.1 Exhibit 11.1 Computation of Earnings WILLIS LEASE FINANCE CORPORATION Computation of Earnings Per Share
1999 1998 1997 ---------- ---------- ---------- (in thousands, except per share data) Income before extraordinary item Basic Earnings: Income before extraordinary item $3,283 $9,451 $5,330 ========== ========== ========== Shares: Average common shares outstanding 7,382 7,266 5,497 ========== ========== ========== Basic earnings per common share before extraordinary item $0.44 $1.30 $0.97 ========== ========== ========== Assuming Full Dilution Earnings: Income before extraordinary item $3,283 $9,451 $5,330 ========== ========== ========== Shares: Diluted average common shares outstanding 7,447 7,461 5,673 ========== ========== ========== Earnings per common share assuming full dilution, before extraordinary item $0.44 $1.27 $0.94 ========== ========== ========== Net income Basic Earnings: Net income $3,283 $9,251 $7,338 ========== ========== ========== Shares: Average common shares outstanding 7,382 7,266 5,497 ========== ========== ========== Basic earnings per common share $0.44 $1.27 $1.33 ========== ========== ========== Assuming Full Dilution Earnings: Net income $3,283 $9,251 $7,338 ========== ========== ========== Shares: Diluted average common shares outstanding 7,447 7,461 5,673 ========== ========== ========== Earnings per common share assuming full dilution $0.44 $1.24 $1.29 ========== ========== ==========
Supplemental information: Difference between average common shares outstanding to calculate basic and assuming full dilution is due to options outstanding under the 1996 Stock Options/Stock Issuance Plan and warrants issued in conjunction with the initial public offering 51 EX-23.1 6 EXHIBIT 23.1 EX 23.1 CONSENT AND REPORT ON SCHEDULE II OF KMPG LLP INDEPENDENT ACCOUNTANT TO THE BOARD OF DIRECTORS OF WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES: Under date of February 17, 2000, we reported on the consolidated balance sheets of Willis Lease Finance Corporation (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, which are included in Form 10K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule, Valuation Accounts, in Form 10K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to incorporation by reference in the registration statement (No. 333-15343) on Form S-8 of Willis Lease Finance Corporation of our reports dated February 17, 2000, and March 27, 2000, relating to the consolidated balance sheets of Willis Lease Finance Corporation as of December 31, 1999, and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, and the related financial statement schedule, which reports appear in the December 31, 1999, annual report on Form 10K of Willis Lease Finance Corporation. SAN FRANCISCO, CALIFORNIA MARCH 27, 2000 EX-27.1 7 EXHIBIT 27.1
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 25,468 0 5,798 0 22,237 0 339,721 22,266 412,315 0 0 0 0 74 69,464 412,315 25,436 95,931 28,317 90,980 17,466 0 22,357 4,329 1,046 0 0 0 0 3,283 0.44 0.44
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