-----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, O9kwM1Fw2+OfxhAtCK8jBhdWErr4QnaGIU4R9nnW1Z7hSMxT/13qiwYpvKl/sGQk lJ4iKV5huqAwrnR9cCv4kg== 0000950149-97-002017.txt : 19971111 0000950149-97-002017.hdr.sgml : 19971111 ACCESSION NUMBER: 0000950149-97-002017 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19971110 SROS: NONE 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: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-39865 FILM NUMBER: 97710985 BUSINESS ADDRESS: STREET 1: 180 HARBOR DR STREET 2: STE 200 CITY: SAUSALITO STATE: CA ZIP: 94965 BUSINESS PHONE: 4153315281 MAIL ADDRESS: STREET 1: 180 HARBOR DR STREET 2: SUITE 200 CITY: SAUSALITO STATE: CA ZIP: 94965 S-1 1 S-1 FOR WILLIS LEASE FINANCE CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997. REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ WILLIS LEASE FINANCE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 5088 68-0070656 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
180 HARBOR DRIVE, SUITE 200 SAUSALITO, CALIFORNIA 94965 (415) 331-5281 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ CHARLES F. WILLIS, IV CHIEF EXECUTIVE OFFICER WILLIS LEASE FINANCE CORPORATION 180 HARBOR DRIVE, SUITE 200 SAUSALITO, CALIFORNIA 94965 (415) 331-5281 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: DOUGLAS D. SMITH, ESQ. RICHARD A. BOEHMER, ESQ. GIBSON, DUNN & CRUTCHER LLP O'MELVENY & MYERS LLP ONE MONTGOMERY STREET 400 SOUTH HOPE STREET TELESIS TOWER LOS ANGELES, CALIFORNIA 90071 SAN FRANCISCO, CALIFORNIA 94104 TELEPHONE NO. (213) 669-6000 TELEPHONE NO. (415) 393-8200 TELECOPIER NO. (212) 669-6407 TELECOPIER NO. (415) 986-5309
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE
================================================================================================================ PROPOSED MAXIMUM AMOUNT PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- Common Stock, no par value.................. 1,725,000 $18.875 $32,559,375 $9,867 ================================================================================================================
(1) Includes 225,000 additional shares of Common Stock pursuant to an over-allotment option. (2) Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(c) based on the average of the high and low prices for the Common Stock as reported on the Nasdaq National Market on November 6, 1997. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997 PROSPECTUS 1,500,000 SHARES (LOGO) WILLIS LEASE FINANCE CORPORATION COMMON STOCK --------------------------- All of the 1,500,000 shares of Common Stock, no par value per share (the "Common Stock"), offered hereby (the "Offering") are being sold by Willis Lease Finance Corporation (the "Company"). The Common Stock is traded on the Nasdaq National Market under the symbol "WLFC." On November 6, 1997 the last sale price of the Common Stock as reported by the Nasdaq National Market was $18.63 per share. See "Price Range of Common Stock." --------------------------- THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. --------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================================== Underwriting Price to Discounts Proceeds to Public(1) and Commissions(2) Company(2) - ----------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ - ----------------------------------------------------------------------------------------------- Total(3)........................... $ $ $ ===============================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, estimated at $510,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 225,000 shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. --------------------------- The shares of Common Stock offered by this Prospectus are offered by the Underwriters, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that the delivery of certificates for the shares of Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1997. --------------------------- LEHMAN BROTHERS DAIN BOSWORTH INCORPORATED November , 1997 3 [PHOTOS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK PRIOR TO THE PRICING OF THIS OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THIS OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes included elsewhere in this Prospectus, including the unaudited consolidated financial statements for the nine month periods ended September 30, 1997 and 1996 (the "Unaudited Financial Statements") and the audited consolidated financial statements for the years ended December 31, 1996 and 1995 (the "Audited Financial Statements"). Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY Willis Lease Finance Corporation (the "Company") provides operating leases of commercial jet aircraft engines and aircraft equipment and sells aircraft engines and parts to air carriers, manufacturers and overhaul/repair facilities worldwide. The Company's core business is acquiring and leasing commercial aircraft spare engines and other aircraft equipment, primarily pursuant to operating leases. As a significant corollary to its core business, the Company, through its wholly-owned subsidiary Willis Aeronautical Services, Inc. ("WASI"), specializes in the purchase and resale of aftermarket airframe and engine parts, engines, modules and rotable components. The Company also engages in the selective purchase and resale of commercial aircraft engines. Integrating these three activities improves the Company's ability to maximize the residual and resale values of its engines, equipment and parts. The Company's senior management has extensive expertise in the commercial jet aircraft engine industry, a business which is not the focus of the major commercial aircraft lessors. As of September 30, 1997, the Company had 42 engines and eight aircraft parts packages under lease to 34 customers in 20 countries. The Company's strategy for its leasing business is to focus primarily on marketing operating leases of commercial aircraft engines and related equipment to a diversified base of customers worldwide. With operating leases, the Company retains the potential benefit and assumes the risk of the residual value of the leased asset, as distinct from finance leases where the entire cost of the asset is generally recovered over the term of the lease. In order to maximize residual values, the Company focuses on popular Stage III commercial jet aircraft engines. As of September 30, 1997, all of the engines in the Company's lease portfolio were Stage III engines and were generally suitable for use on one or more commonly used aircraft. Through WASI, the Company purchases and resells various aircraft equipment in the aftermarket. 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 recently expanded its operations by opening a new facility in Arizona to facilitate the disassembly of aircraft into parts for sale. The Company also engages in the selective purchase and resale of commercial aircraft engines and engine components in the aftermarket. It is the Company's general objective to minimize risk by not purchasing engines or components on speculation; however, on occasion, the Company purchases engines and components without having a commitment for their sale. To date, these engines and components have been successfully sold or leased by the Company shortly after acquisition. Management believes the Company's market offers attractive growth opportunities. Industry analysts estimate that the worldwide fleet of approximately 11,500 commercial aircraft utilizes approximately 30,000 engines, including approximately 5,000 spare engines valued at over $11 billion. The Company's engine portfolio represents approximately 1% of the current market for spare engines. Based on industry analysts' projections of growth in the commercial aircraft fleet, the Company expects commercial airlines to acquire approximately 5,300 additional spare engines over the next 20 years. Airlines have increasingly turned to operating leases as an alternative to traditional financing of their aircraft, engines and spare parts. Operating leases allow airlines greater fleet and financial flexibility due to their shorter term nature and relatively small initial capital outlay. Aviation Week and Space Technology ("Aviation Week") reports that leasing will be the primary means by which the global air transport industry acquires new aircraft between now and 1999, and probably beyond. According to Aviation Week, based upon 3 5 data provided by GE Capital Aviation Services, 84% of the world's airlines leased all or a portion of their equipment in 1996, up from 59% in 1986. As part of its growth stategy, the Company intends to expand its existing operations to include leasing and selling similar assets in additional markets such as the corporate, commuter and cogeneration markets. For example, the Company recently made its first investment in the commuter market by committing to purchase three De Havilland DHC-8-102 commuter aircraft and three spare engines, which are currently on lease to a domestic commuter carrier. The Company is a California corporation which commenced its leasing business in 1988. Its executive offices are located at 180 Harbor Drive, Suite 200, Sausalito, California 94965 and its telephone and facsimile numbers are (415) 331-5281 and (415) 331-0607, respectively. The Company transacts business directly and through its subsidiaries. Unless otherwise indicated, references in this Prospectus to the Company refer to Willis Lease Finance Corporation and its subsidiaries. THE OFFERING Common Stock offered by the Company... 1,500,000 shares Common Stock to be outstanding after the Offering....................... 6,952,320 shares(1) Use of proceeds...................... To finance the acquisition of additional equipment for lease or sale, potential acquisitions of businesses complementary to the Company's existing businesses and the possible expansion into other aviation-related activities and businesses, as well as for working capital and other general corporate purposes. Pending such uses, the net proceeds will be used to reduce the outstanding borrowings under the Company's revolving line of credit. See "Use of Proceeds." Nasdaq National Market Symbol........ WLFC
- --------------- (1) Excludes (i) 438,500 shares of Common Stock issuable upon exercise of options granted under the Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") and 71,500 additional shares of Common Stock reserved for issuance under the 1996 Plan, (ii) 64,473 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan and (iii) 100,000 shares of Common Stock issuable upon exercise of outstanding warrants. See "Management -- 1996 Stock Option/Stock Issuance Plan," and "Employee Stock Purchase Plan." 4 6 SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) INCOME STATEMENT DATA: Revenue: Operating lease revenue.................. $ 8,744 $10,323 $13,636 $13,771 $13,740 $10,379 $13,481 Finance lease revenue.................... -- -- -- -- -- -- 223 Gain (loss) on sale of leased equipment.............................. 659 (281) 633 (483) 2 -- 1,333 Spare parts sales........................ -- -- 795 3,859 5,843 3,303 11,459 Sale of equipment acquired for resale.... 3,598 -- 2,184 5,472 12,105 9,605 12,748 Interest and other income................ 70 938 542 119 618 197 544 ------- ------- ------- ------- ------- ------- ------- Total revenue.......................... 13,071 10,980 17,790 22,738 32,308 23,484 39,788 Expenses: Interest expense......................... 4,815 4,809 5,948 5,722 4,323 3,371 5,226 Depreciation expense..................... 2,666 3,070 4,447 4,703 3,181 2,513 2,995 Residual share(1)........................ 279 445 1,284 408 723 536 598 Cost of spare parts sales................ -- -- 659 2,546 3,308 1,604 7,751 Cost of equipment acquired for resale.... 3,140 -- 1,863 2,742 10,789 8,551 10,672 General and administrative expense....... 1,357 1,533 1,616 3,335 5,124 3,434 6,358 ------- ------- ------- ------- ------- ------- ------- Total expenses......................... 12,257 9,857 15,817 19,456 27,448 20,009 33,600 Gain on modification of credit facility(2).............................. -- -- -- 2,203 -- -- -- ------- ------- ------- ------- ------- ------- ------- Income before income taxes, minority interest and extraordinary item.......... 814 1,123 1,973 5,485 4,860 3,475 6,188 Income taxes............................... (327) (454) (797) (2,212) (1,976) (1,395) (2,456) ------- ------- ------- ------- ------- ------- ------- Income before minority interest and extraordinary item....................... 487 669 1,176 3,273 2,884 2,080 3,732 Less: minority interest in net income of subsidiary............................... -- -- 4 57 79 79 -- ------- ------- ------- ------- ------- ------- ------- Income before extraordinary item........... 487 669 1,172 3,216 2,805 2,001 3,732 Extraordinary item less applicable income taxes(3)................................. -- -- -- -- -- -- 2,008 ------- ------- ------- ------- ------- ------- ------- Net income................................. $ 487 $ 669 $ 1,172 $ 3,216 $ 2,805 $ 2,001 $ 5,740 ======= ======= ======= ======= ======= ======= ======= Earnings per share before extraordinary item..................................... $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $0.65 Extraordinary item......................... -- -- -- -- -- -- 0.36 ------- ------- ------- ------- ------- ------- ------- Earnings per share......................... $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $1.01 ======= ======= ======= ======= ======= ======= ======= Weighted average number of shares outstanding.............................. 3,111 3,111 3,111 3,111 3,796 3,215 5,709 Return on average assets(4)................ 0.79% 0.97% 1.54% 3.68% 2.59% 2.67% 3.34% Return on average equity(4)................ 172.39% 82.90% 75.37% 94.99% 20.02% 21.26% 19.01%
AT SEPTEMBER 30, 1997 ------------------------ AS ACTUAL ADJUSTED(5) -------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Total assets................................................................................ $173,018 $ 173,018 Equipment under lease, net.................................................................. 135,886 135,886 Debt financing(6)........................................................................... 108,062 82,311 Shareholders' equity........................................................................ 29,164 54,915 Debt to equity ratio........................................................................ 3.7x 1.5x
AT DECEMBER 31, AT ---------------------------------------- SEPTEMBER 30, 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ------------- LEASE PORTFOLIO: Engines in lease portfolio at end of the period(7).......... 26 25 26 31 32 43
5 7 (1) The Company has negotiated a sharing of residual proceeds with certain lenders in exchange for a higher percentage financing of certain aircraft engines. Residual sharing arrangements apply to five of the Company's engines (representing $15.5 million of book value) as of September 30, 1997. The Company accrues for its residual sharing obligations using net book value as a proxy for residual proceeds. See "Business -- Financing/Source of Funds" and Note 1 to the Audited Financial Statements. (2) Gain on modification of credit facility of $2.2 million represents the elimination of residual share payable of $2.4 million less the net loss on the sale of two engines to the lender of $199,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Audited Financial Statements. (3) In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2 million or $0.36 per weighted average share, net of tax. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Unaudited Financial Statements. (4) Calculations are based on the average of beginning and end of period balances. Nine month results are annualized and exclude the extraordinary item. (5) As adjusted to give effect to the sale of 1,500,000 shares of Common Stock offered hereby at an assumed price of $18.63 per share (the closing price per share of the Common Stock on November 6, 1997), less underwriting discounts and estimated expenses of the Offering and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (6) Inclusive of accrued interest and capital lease obligation and exclusive of residual share payable. (7) At of September 30, 1997, 42 of the 43 engines in the lease portfolio were on lease. In addition, at September 30, 1997, eight parts packages with a net book value of $7.0 million were on lease. 6 8 RISK FACTORS An investment in the shares of Common Stock being offered hereby involves a high degree of risk. In addition to other information in this Prospectus, the following risk factors should be considered carefully by potential purchasers in evaluating an investment in the Common Stock offered hereby. Except for historical information contained herein, this Prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed below as well as those discussed elsewhere herein. OWNERSHIP RISKS The Company leases its portfolio of aircraft engines and spare parts packages (collectively, "Aircraft Equipment") primarily under operating leases as opposed to finance leases. Under an operating lease, the Company retains title to the Aircraft Equipment and assumes the risk of not recovering its entire investment in the Aircraft Equipment through the re-leasing and remarketing process. Operating leases require the Company to re-lease or sell Aircraft Equipment in its portfolio in a timely manner upon termination of the lease in order to minimize off-lease time and recover its investment in the Aircraft Equipment. Numerous factors, many of which are beyond the control of the Company, may have an impact on the Company's ability to re-lease or sell Aircraft Equipment on a timely basis. Among the factors are general market conditions, regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft engines), changes in the supply or cost of the Aircraft Equipment and technological developments. Further, the value of a particular used aircraft engine varies greatly depending upon its condition, the number of hours remaining until the next major maintenance of the aircraft engine is required and general conditions in the airline industry. In addition, the success of an operating lease depends in part upon having the Aircraft Equipment returned by the lessee in marketable condition as required by the lease. Consequently, there can be no assurance that the Company's estimated residual value for the Aircraft Equipment will be realized. As of September 30, 1997, the Company had 42 engines and eight parts packages under lease to 34 customers in 20 countries (one additional engine is off lease and is being actively marketed by the Company). If the Company is unable to re-lease or sell the Aircraft Equipment on favorable terms, its business, financial condition, cash flow, ability to service debt and results of operations could be adversely affected. The Company, through WASI, also acquires aviation equipment such as whole engines and aircraft which can be dismantled and sold as parts. Before parts may be installed in an aircraft, they must meet certain standards of condition established by the Federal Aviation Administration ("FAA"). See "Government Regulations" below. Parts must also be traceable to sources deemed acceptable by the FAA. See "Business -- Spare Parts Sales." Parts owned by the Company may not meet applicable standards or standards may change, causing parts which are already in the Company's inventory to be scrapped or modified. Engine manufacturers may also develop new parts to be used in lieu of parts already contained in the Company's inventory. In all such cases, to the extent the Company has such parts in its inventory, their value may be reduced. In addition, if the Company does not sell airframe and engine component parts that it purchases in the time frame contemplated at acquisition, the Company may be subject to unanticipated inventory financing costs as well as all the risks of ownership described above. The Company also engages in the selective purchase and resale of commercial aircraft engines and engine components in the aftermarket. On occasion, the Company purchases engines or components without having a commitment for their sale. If the Company were to purchase an engine or component without having a firm commitment for its sale or if a firm commitment for sale were to exist but not be consummated for whatever reason, the Company would be subject to all the risks of ownership described above. 7 9 INDUSTRY RISKS Downturns in the air transportation industry affect each of the three components of the Company's business. In particular, substantial increases in fuel costs or interest rates, increased fare competition, slower growth in air traffic, or any significant downturn in the general economy could adversely affect the air transportation industry and may therefore negatively impact the Company's business, financial condition and results of operations. While the Company believes that its lease terms protect its Aircraft Equipment and the Company's investment in such Aircraft Equipment, there can be no assurance that the financial difficulties experienced by a number of airlines will not have an adverse effect on the Company's business, financial condition or results of operations. In recent years and as discussed in "Customer Credit Risks" below, a number of commercial airlines have experienced financial difficulties, in some cases resulting in bankruptcy proceedings. CUSTOMER CREDIT RISKS 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 existing and prospective customers include smaller domestic and foreign passenger airlines, freight and package carriers and charter airlines, which, together with major passenger airlines, may suffer from the factors which have historically affected the airline industry. As a result, certain of these customers may pose credit risks to the Company. The Company's inability to collect receivables due under a lease or to repossess Aircraft Equipment in the event of a default by a lessee could have a material adverse effect on the Company's business, financial condition or results of operations. A number of airlines have experienced financial difficulties, certain airlines have filed for bankruptcy and a number of such airlines have ceased operations. In most cases where a debtor seeks protection under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), creditors are automatically stayed from enforcing their rights. In the case of United States certified airlines, Section 1110 of the Bankruptcy Code provides certain relief to lessors of the aircraft equipment. Specifically, the debtor airline has 60 days from the date the airline seeks protection under Chapter 11 of the Bankruptcy Code to agree to perform its obligations and to cure any defaults. If it does not do so, the lessor may repossess the aircraft equipment. The scope of Section 1110 has been the subject of significant litigation and there can be no assurance that the provisions of Section 1110 will protect the Company's investment in an aircraft engine in the event of a lessee's bankruptcy. In addition, Section 1110 does not apply to lessees located outside of the United States and applicable foreign laws may not provide comparable protection. During the three years ended September 30, 1997, three lessees of the Company filed for bankruptcy protection or otherwise became insolvent or ceased operations. In two of these cases (Great American Airways and Mark Air), the Company's engines were returned and re-leased. In the third case, Air Liberte S.A. was acquired by British Airways and the lease continues. On October 5, 1997, Western Pacific Airlines, Inc., a domestic lessee of three of the Company's engines with a combined net book value of $8.7 million, filed a petition under Chapter 11 of the Bankruptcy Code in the District of Colorado. Western Pacific has 60 days from October 5, 1997 to agree to perform its obligations and to cure any defaults under its leases with the Company. QUARTERLY FLUCTUATIONS IN OPERATING RESULTS The Company has experienced fluctuations in its quarterly operating results and anticipates that these fluctuations may continue. Such fluctuations may be due to a number of factors, including the timing of sales of engines and spare parts and engine marketing activities, unanticipated early lease terminations, the timing of engine acquisitions or a default by a lessee. Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations for preceding quarters are not necessarily meaningful and that results for any prior quarter should not be relied upon as an indication of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Quarterly Results of Operations." In the event the Company's revenues or earnings for any quarter are less than the level 8 10 expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's Common Stock. INTERNATIONAL RISKS In 1996, approximately 61% of the Company's lease revenue was generated by leases to foreign customers. During the nine months ended September 30, 1997, approximately 64% of the Company's lease revenue was generated by leases to foreign customers. Such leases may present greater risks to the Company because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. In addition, many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company attempts to minimize its currency and exchange risks by negotiating all of its lease transactions in U.S. Dollars and all guarantees obtained to support various lease agreements are denominated for payment in U.S. Dollars. To date, the Company has experienced some collection problems under certain leases with foreign airlines, and there can be no assurance that the Company will not experience such collection problems in the future. The Company may also experience collection problems related to the enforcement of its lease agreements under foreign local laws and the attendant remedies in such locales. Consequently, the Company is subject to the timing and access to courts and the remedies local laws impose in order to collect its lease payments and recover its assets. In addition, political instability abroad and changes in international policy also present risks associated with expropriation of the Company's leased engines. To date, the Company has experienced limited problems in reacquiring assets; however, there can be no assurance that the Company will not experience more serious problems in the future. Certain countries have no registration or other recording system with which to locally establish the Company's or its lender's interest in the engines and related leases, potentially making it more difficult for the Company to prove its interest in an engine in the event that it needs to recover an engine located in such a country. The Company's engines and the aircraft on which they are installed can be subject to certain foreign taxes and airport fees. Consequently, unexpected liens on an engine or the aircraft on which it is installed could be imposed in favor of a foreign entity, such as Eurocontrol or the airports of the United Kingdom. DEPENDENCE UPON AVAILABILITY OF FINANCING The operating lease business is a capital intensive business. The Company's typical operating lease transaction requires a cash investment by the Company of approximately 15% to 20% of the aircraft engine purchase price, commonly known as an "equity investment." The Company's equity investments have historically been financed from internally generated cash and the net proceeds of the Company's initial public offering which was completed on September 18, 1996 at a price of $8.00 per share (the "Initial Public Offering"), and in the future will include a substantial portion of the net proceeds of this Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The balance of the purchase price is typically financed with the proceeds of secured borrowings. Accordingly, the Company's ability to successfully execute its business strategy and to sustain its operations is dependent, in part, on the availability of debt and equity capital. There can be no assurance that the necessary amount of such capital will continue to be available to the Company on favorable terms, or at all. If the Company were unable to continue to obtain required financing on favorable terms, the Company's ability to add new leases to its portfolio and parts inventory would be limited, which would have a material adverse effect on the Company's business, financial condition and results of operations. BACK LEVERAGING The Company typically acquires the engines it leases with a combination of equity capital and funds borrowed from financial institutions. In some circumstances, the Company acquires assets before it has obtained debt financing. There can be no assurance that debt financing will be available after the asset has been acquired or, if available, at attractive rates or terms. Factors that could cause debt financing to be more 9 11 expensive or unavailable include changes in interest rates, financial conditions of the lessee or the Company, prospects for the airline industry or the asset type as well as general economic conditions. If debt financing is not available, a like amount of the Company's equity capital would be unavailable for use to acquire additional assets, which could have a material adverse effect on the Company's business, financial condition or results of operations. INTEREST RATE RISKS The Company's engine leases are generally structured at fixed rental rates for specified terms. As of September 30, 1997, borrowings subject to interest rate risk totaled $66.6 million or 62% of the Company's total borrowings. Increases in interest rates could narrow or eliminate the spread, or result in a negative, spread between the rental revenue the Company realizes under its leases and the interest rate that the Company pays under its lines of credit or loans. The Company has purchased an amortizing interest rate cap with a notional principal amount of $37.2 million as of September 30, 1997, to reduce its interest rate exposure; however, there can be no assurance that the Company's business, operating results or financial condition will not be adversely affected during any period of increases in interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Management of Interest Rate Exposure." COMPETITION In the medium-term engine lease market segment, which is the Company's target market, the Company principally competes with Shannon Engine Services, headquartered in Shannon, Ireland, which is owned in part by CFM International ("CFM") and Rolls Royce Finance Ltd. ("Rolls Royce"). Rolls Royce limits its leasing activities to products of its parent company and related parties. The Bank of Tokyo-Mitsubishi, through its affiliate Engine Lease Finance in Shannon, Ireland, also competes with the Company. Each of these competitors is substantially larger and has greater financial resources than the Company which may permit, among other things, greater access to capital markets at more favorable terms. In addition, major aircraft lessors, including International Lease Finance Corporation and General Electric Capital Aviation Services, compete with the Company to the extent that they include spare engine leases with their aircraft leases. With respect to engine marketing and spare parts and component sales, the Company competes with airlines, aircraft manufacturers, aircraft, engine and parts brokers, and parts distributors. The Company's major competitors include the Allen Aircraft division of AAR Corp., The AGES Group, The Memphis Group, Aviation Sales Company, Kellstrom Industries and AVTEAM, Inc. Certain of these competitors may have, or may have access to, financial resources substantially greater than the Company. Significant competition encountered by the Company in the future may limit the Company's ability to expand its business, which would have a material adverse effect on the Company's business, financial condition and results of operations. Certain of the Company's competitors have substantially greater resources than the Company, including greater name recognition, larger inventories, a broader range of material, complementary lines of business and greater financial, marketing and other resources. In addition, original equipment manufacturers ("OEMs"), aircraft maintenance providers, FAA certified repair facilities and other aviation aftermarket suppliers may vertically integrate into the aircraft engine leasing or aircraft engine/spare parts sales industry, thereby significantly increasing industry competition. A variety of potential actions by any of the Company's competitors, including a reduction of product prices or the establishment by competitors of long-term relationships with new or existing customers, could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will continue to compete effectively against present and future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition or results of operations. 10 12 MANAGEMENT OF GROWTH The Company has recently experienced significant growth in revenues. Such growth has placed, and is expected to continue to place, a significant strain on the Company's managerial, operational and financial resources. Due to the Company's rapid pace of growth over the past year, the Company hired three new officers (an Executive Vice President and Chief Administrative Officer, an Executive Vice President and Chief Financial Officer and a Senior Vice President and General Counsel) during the four months prior to September 30, 1997. There can be no assurance that the Company will be able to effectively manage the expansion of its operations, or that the Company's systems, procedures or controls will be adequate to support the Company's operations. An inability to effectively manage growth could have a material adverse effect on the Company's business, financial condition or results of operations. ACQUISITION AND EXPANSION RISKS One of the components of the Company's growth strategy is the select acquisition of businesses complementary to the Company's existing businesses and possible expansion into new aviation-related activities. The inability of the Company to identify suitable acquisition candidates or to complete acquisitions or expansions on reasonable terms could adversely affect the Company's ability to grow. In addition, any acquisition or expansion made by the Company may result in potentially dilutive issuances of equity securities, the incurrence of additional debt and future charges to earnings related to the amortization of goodwill and other intangible assets. The Company also may experience difficulties in the assimilation of operations, services, products and personnel, an inability to sustain or improve historical revenue levels, the diversion of management's attention from ongoing business operations and the potential loss of key employees. Any of the foregoing could have a material adverse effect on the Company's business, financial condition or results of operations. The acquisition of other equipment leasing companies or portfolios creates certain additional risks. For example, because acquired leases have been originated by other companies, they are not subject to the Company's underwriting policies and procedures and, therefore, may be subject to greater risks of payment delinquencies and charge-offs. In addition, acquired leases may consist of products not currently offered by the Company, or offered only on a limited basis. Acquired leases may also increase the concentration of the Company's portfolio of leases serviced in certain geographical regions or change the relative concentration of such portfolio among geographical regions. Acquired leases may not contain the same indemnification provisions, maintenance provisions, equipment residual value assumptions and other material terms as the Company's current leases. Finally, the provisions of acquired leases may not adequately protect the Company from claims arising out of the lessee's use of the acquired lease equipment. PRODUCT LIABILITY RISKS The Company is exposed to product liability claims in the event that the use of its aircraft engines or parts is alleged to have resulted in bodily injury or property damage. In addition to requiring indemnification under the terms of the lease, the Company requires its lessees to carry the types of insurance customary in the air transportation industry, including comprehensive liability insurance and casualty insurance. The Company and, if applicable its lenders, are named as an additional insured on liability insurance policies carried by lessees, with the Company or its lenders normally identified as the payee for loss and damage to the equipment. The Company monitors compliance with the insurance provisions of the leases. To date, the Company has not experienced any significant uninsured or insured aviation-related claims and has not experienced any product liability claims related to its aircraft engines or parts. However, an uninsured or partially insured claim, or claim for which third-party indemnification is not available, could have a material adverse effect upon the Company's business, financial condition or results of operations. RISK OF CHANGES IN TAX LAWS OR ACCOUNTING PRINCIPLES 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 11 13 principles that make operating lease financing less attractive could adversely affect the Company's business, financial condition or results of operations. DEPENDENCE ON KEY MANAGEMENT The Company's business operations are dependent in part upon the expertise of certain key employees. Loss of the services of such employees, particularly Charles F. Willis, IV, Chief Executive Officer or Edwin F. Dibble, the President of WASI, would have a material adverse effect on the Company's business. The Company has entered into an employment agreement with Mr. Dibble and the Company maintains key man life insurance of $2.5 million on Mr. Willis and $1.5 million on Mr. Dibble. See "Management." GOVERNMENT REGULATION The Company's customers are generally subject to a high degree of regulation in the various jurisdictions in which they operate. Such regulations also indirectly affect the Company's business operations. Under the provisions of the Transportation Act, as amended, the FAA exercises regulatory authority over the air transportation industry. The FAA regulates the manufacture, repair and operation of all aircraft engines operated in the United States. Its regulations are designed to insure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for the various types of commercial aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. 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 worldwide marketability. 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. In addition, by the year 2000, federal regulations will 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 Federal Aviation Regulations of the United States. As of September 30, 1997, all of the engines in the Company's lease portfolio were Stage III engines. See "Business -- Government Regulation." CONTROL BY PRINCIPAL SHAREHOLDER Upon completion of the Offering, the Company's principal shareholder, Mr. Willis, will beneficially own approximately 44% of the outstanding shares of Common Stock of the Company and therefore effectively control the Company. Accordingly, Mr. Willis will have the power to contest the outcome of substantially all matters, including the election of the Board of Directors of the Company, submitted to the shareholders for approval. In addition, future sales by the Company's principal shareholder of substantial amounts of Common Stock, or the potential for such sales, could adversely affect the prevailing market price of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Principal Shareholders," "Description of Capital Stock" and "Shares Eligible for Future Sale." POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Common Stock could be subject to significant fluctuations in response to operating results of the Company, changes in general conditions in the economy, the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or its lessees, or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance, and changes in earnings estimates or recommendations by securities analysts. 12 14 ANTI-TAKEOVER PROVISIONS Certain provisions of law, and the Company's Amended and Restated Articles of Incorporation (the "Articles of Incorporation") and Bylaws could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise, and the removal of incumbent officers and directors. These provisions include authorization of the issuance of up to 5,000,000 shares of Preferred Stock, with such characteristics that may render it more difficult or tend to discourage a merger, tender offer or proxy contest. The Articles of Incorporation also provide that, for as long as the Company has a class of stock registered pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), shareholder action can be taken only at an annual or special meeting of shareholders and may not be taken by written consent. The Company's Bylaws also limit the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice. In addition, the Company has qualified as a "listed corporation" as defined in Section 301.5(d) of the California Corporation Code and cumulative voting has been eliminated. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids, and to encourage persons seeking to acquire control of the Company to negotiate first with the Company. See "Description of Capital Stock -- Certain Anti-Takeover Provisions." USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,500,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $25.8 million, assuming an offering price of $18.63 per share (the closing price per share of the Common Stock on November 6, 1997), less underwriting discounts, commissions and estimated expenses of the Offering. The Company intends to use the net proceeds of the Offering, together with debt financing: (a) to finance the continued growth of the Company, including the acquisition of additional aircraft engines and aircraft equipment for lease or sale as well as the acquisition of engine and airframe component inventory, (b) to finance potential acquisitions of businesses complementary to the Company's existing businesses, (c) to finance the possible expansion into other aviation-related activities and businesses, and (d) for working capital and other general corporate purposes. The Company is continually engaged in discussions regarding possible acquisitions of businesses complementary to the Company's existing businesses and possible expansion into new aviation-related activities and such growth may involve acquisitions of existing companies or asset portfolios. There are no present agreements to acquire any existing companies or asset portfolios. There can be no assurance that any such acquisitions or expansions can be consummated on terms favorable to the Company, if at all. See "Risk Factors -- Acquisition and Expansion Risks." Pending the above-described uses, the Company will reduce its outstanding borrowing under its $30 million revolving credit facility with CoreStates Bank which bears interest at prime plus 50 basis points and expires on June 12, 1998. PRICE RANGE OF COMMON STOCK The Initial Public Offering was completed on September 18, 1996 at a price of $8.00 per share. The Company's Common Stock is quoted on the Nasdaq National Market System under the symbol "WLFC." The following table sets forth, for the periods indicated, the high and low sale prices per share of the Common Stock as reported by Nasdaq.
HIGH LOW ------ ------ 1996: Third Quarter...................................... $10.00 $ 8.50 Fourth Quarter..................................... 12.88 8.75 1997: First Quarter...................................... $14.50 $12.25 Second Quarter..................................... 12.50 10.38 Third Quarter...................................... 23.50 12.25 Fourth Quarter (through November 6, 1997).......... 24.13 17.50
13 15 On November 6, 1997 the last reported sale price for the Common Stock was $18.63 per share. As of September 30, 1997, there were approximately 8 record holders of the Common Stock, which number does not reflect the number of individuals and institutional investors holding stocks in nominee name through banks, brokerage firms and others. DIVIDEND POLICY The Company intends to retain all available funds for use in its business. Accordingly, the Company does not anticipate declaring or paying any dividends on the Common Stock in the foreseeable future. The payment of cash dividends in the future would be made at the discretion of the Board of Directors of the Company and would depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant. See "Capitalization." In 1995 and 1996, the Company declared dividends to its sole shareholder in the amounts of $255,000 and $951,475, respectively. Since the Initial Public Offering, the Company has not declared any dividends. See Note 8 to the Audited Financial Statements. 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company at September 30, 1997, on an actual basis, and as adjusted to give effect to the sale of the 1,500,000 shares of Common Stock offered by the Company hereby (assuming an offering price of $18.63 per share, which was the closing price per share of the Common Stock on November 6, 1997), after deducting underwriting discounts and commissions and estimated expenses of the Offering, and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
SEPTEMBER 30, 1997 ------------------------ ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Debt financing(1)................................................... $108,062 $ 82,311 Shareholders' equity: Preferred stock, no par value per share; 5,000,000 shares authorized; none issued........................................... -- -- Common stock, no par value per share; 20,000,000 shares authorized; 5,452,320 shares outstanding, actual and 6,952,320 shares outstanding, as adjusted(2)....................................... 16,277 42,028 Retained earnings................................................... 12,887 12,887 ------- ------- Total shareholders' equity........................................ 29,164 54,915 ------- ------- Total capitalization...................................... $137,226 $ 137,226 ======= =======
- --------------- (1) Inclusive of accrued interest and capital lease obligation and exclusive of residual share payable. (2) Excludes (i) 438,500 shares of Common Stock issuable upon exercise of options granted under the 1996 Plan and 71,500 additional shares of Common Stock reserved for issuance under the 1996 Plan, (ii) 64,473 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan and (iii) 100,000 shares of Common Stock issuable upon exercise of outstanding warrants. See "Management -- 1996 Stock Option/Stock Issuance Plan," and "Employee Stock Purchase Plan." 15 17 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following selected consolidated financial and operating data should be read in conjunction with the accompanying Unaudited Financial Statements and the related Notes thereto and the accompanying Audited Financial Statements and the related Notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated financial data set forth below as of and for the fiscal years ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the consolidated financial statements of the Company audited by KPMG Peat Marwick LLP. The consolidated financial data as of and for the nine months ended September 30, 1996 and September 30, 1997 are unaudited, but have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the financial position and results of operations for these periods. Consolidated operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the entire year.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE AND LEASE PORTFOLIO DATA) INCOME STATEMENT DATA: Revenue: Operating lease revenue..................... $ 8,744 $10,323 $13,636 $13,771 $ 13,740 $ 10,379 $ 13,481 Finance lease revenue....................... -- -- -- -- -- -- 223 Gain (loss) on sale of leased engines....... 659 (281) 633 (483) 2 -- 1,333 Spare parts sales........................... -- -- 795 3,859 5,843 3,303 11,459 Sale of equipment acquired for resale....... 3,598 -- 2,184 5,472 12,105 9,605 12,748 Interest and other income................... 70 938 542 119 618 197 544 ------- ------- ------- ------- ------- ------- ------- Total revenue............................. 13,071 10,980 17,790 22,738 32,308 23,484 39,788 Expenses: Interest expense............................ 4,815 4,809 5,948 5,722 4,323 3,371 5,226 Depreciation expense........................ 2,666 3,070 4,447 4,703 3,181 2,513 2,995 Residual share(1)........................... 279 445 1,284 408 723 536 598 Cost of spare parts sales................... -- -- 659 2,546 3,308 1,604 7,751 Cost of equipment acquired for resale....... 3,140 -- 1,863 2,742 10,789 8,551 10,672 General and administrative expense.......... 1,357 1,533 1,616 3,335 5,124 3,434 6,358 ------- ------- ------- ------- ------- ------- ------- Total expenses............................ 12,257 9,857 15,817 19,456 27,448 20,009 33,600 Gain on modification of credit facility(2).... -- -- -- 2,203 -- -- -- ------- ------- ------- ------- ------- ------- ------- Income before income taxes, minority interest and extraordinary item...................... 814 1,123 1,973 5,485 4,860 3,475 6,188 Income taxes.................................. (327) (454) (797) (2,212) (1,976) (1,395) (2,456) ------- ------- ------- ------- ------- ------- ------- Income before minority interest and extraordinary item.......................... 487 669 1,176 3,273 2,884 2,080 3,732 Less: minority interest in net income of subsidiary.................................. -- -- 4 57 79 79 -- ------- ------- ------- ------- ------- ------- ------- Income before extraordinary item.............. 487 669 1,172 3,216 2,805 2,001 3,732 Extraordinary item less applicable income taxes(3).................................... -- -- -- -- -- -- 2,008 ------- ------- ------- ------- ------- ------- ------- Net income.................................... $ 487 $ 669 $ 1,172 $ 3,216 $ 2,805 $ 2,001 $ 5,740 ======= ======= ======= ======= ======= ======= ======= Earnings per share before extraordinary item........................................ $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $0.65 Extraordinary item............................ -- -- -- -- -- -- $0.36 ------- ------- ------- ------- ------- ------- ------- Earnings per share............................ $0.16 $0.22 $0.38 $1.03 $0.74 $0.62 $1.01 ======= ======= ======= ======= ======= ======= ======= Weighted average number of shares outstanding................................. 3,111 3,111 3,111 3,111 3,796 3,215 5,709 Return on average assets(4)................... 0.79% 0.97% 1.54% 3.68% 2.59% 2.67% 3.34% Return on average equity(4)................... 172.39% 82.90% 75.37% 94.99% 20.02% 21.26% 19.01% BALANCE SHEET DATA: Total assets................................ $69,711 $68,632 $83,542 $91,437 $124,933 $108,604 $173,018 Aircraft engines under lease, net........... 69,166 67,499 78,989 74,704 92,943 75,368 128,930 Other equipment under lease, net............ -- -- -- -- 3,149 -- 6,956 Debt financing(5)........................... 64,349 59,840 69,456 69,911 76,146 62,475 108,062 Shareholders' equity........................ 463 1,151 1,959 4,812 23,202 20,288 29,164 Debt to equity ratio........................ 139.0x 52.0x 35.5x 14.5x 3.3x 3.1x 3.7x LEASE PORTFOLIO: Engines in lease portfolio at end of the period(6)................................. 26 25 26 31 32 28 43
16 18 - --------------- (1) The Company has negotiated a sharing of residual proceeds with certain lenders in exchange for a higher percentage financing of certain aircraft engines. Residual sharing arrangements apply to five of the Company's engines (representing $15.5 million of book value) as of September 30, 1997. The Company accrues for its residual sharing obligations using net book value as a proxy for residual proceeds. See "Business -- Financing/Source of Funds" and Note 1 to the Audited Financial Statements. (2) Gain on modification of credit facility of $2.2 million represents the elimination of residual share payable of $2.4 million less the net loss on the sale of two engines to the lender of $199,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Audited Financial Statements. (3) In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2 million or $0.36 per weighted average share, net of tax. (4) Calculations are based on the average of beginning and end of period balances. Results for periods less than one year are annualized and exclude the extraordinary item. (5) Inclusive of accrued interest and capital lease obligation and exclusive of residual share payable. (6) At September 30, 1997, 42 of the 43 engines in the lease portfolio were on lease. In addition, at September 30, 1997, eight parts packages with a net book value of $7.0 million were on lease. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition and results of operations of the Company should be read in conjunction with the Unaudited Financial Statements and the related Notes thereto and the Audited Financial Statements and the related Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." OVERVIEW The Company's core business is acquiring and leasing, primarily pursuant to operating leases, commercial aircraft spare engines and other aircraft equipment. The Company, through WASI, also specializes in the purchase and resale of aftermarket airframe and engine parts, engines, modules and rotable components. In addition, the Company engages in the selective purchase and resale of commercial aircraft engines. Revenue consists primarily of operating lease revenue, income from the leasing and sale of spare parts and components and income from the sale of engines and equipment. Leasing Operations. Most of the Company's leases are operating leases for accounting purposes. Under an operating lease, the Company retains title to the engine, thereby retaining the potential benefit and assuming the risk of the residual value of the engine. Operating leases require the Company to re-lease or sell an engine in a timely manner upon termination of a lease. Lease payments are recorded as operating lease revenue and depreciation expense for engines is generally recognized on a straight line basis over 15 years to a 55% residual value. In a typical term loan transaction, third party lenders will provide 80% to 85% of the financing for the acquisition of engines to be leased on an operating lease basis, the lease payments and the underlying engine or parts package are pledged as collateral, and most of the lease payments associated with the financed engines are used to retire the underlying debt with the balance of the cash retained by the Company for operating purposes. Generally, the loans provide financing for the initial term of a lease but do not extend through the period of any lease renewal; however, financing extensions can generally be negotiated. Since the typical lease will have a term of approximately five years, the term loan facility will generally require payment of the balance of the loan at the end of the lease term. Thus, at the end of the lease term, the Company must either re-lease and refinance the engine or sell the engine. In some instances, third party lenders have provided more than 85% of the financing of engines, in which case the lenders have generally required a sharing of the residual value of the engine upon the sale of the engine. The Company accrues for its residual sharing obligations using net book value as a proxy for residual proceeds. Residual sharing arrangements apply to five of the Company's engines (representing $15.5 million of book value) as of September 30, 1997. At the commencement of each lease, the Company typically collects security deposits (normally equal to at least one month's lease payment) and maintenance reserves (normally equal to one month's estimated maintenance reserve) from the lessee. 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 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. Spare Parts Sales. Through its subsidiary, WASI, the Company 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 with the associated costs reflected as cost of spare parts sales. 18 20 Equipment Sales. 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 associated costs reflected as cost of sold equipment acquired for resale. See "Risk Factors" for various factors that may have an impact on the Company's results of operations and condition. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenue is summarized as follows:
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1997 1996 ----------------- ----------------- AMOUNT % AMOUNT % ------- ----- ------- ----- (DOLLARS IN THOUSANDS) Leasing activities............................. $13,704 34.4 % $10,379 44.2 % Gain on sale of leased equipment............... 1,333 3.4 -- -- Spare parts sales.............................. 11,459 28.8 3,303 14.1 Sale of equipment acquired for resale.......... 12,748 32.0 9,605 40.9 Interest and other income...................... 544 1.4 197 0.8 ------- ----- ------- ----- Total................................ $39,788 100.0% $23,484 100.0% ======= ===== ======= =====
Gross profit (net of cost of sales, allowance for sales returns, depreciation and interest expense as applicable) before general and administrative expenses and income taxes is summarized as follows:
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1997 1996 ----------------- ----------------- AMOUNT % AMOUNT % ------- ----- ------- ----- (DOLLARS IN THOUSANDS) Leasing activities............................. $ 5,113 40.5 % $ 4,103 59.0 % Gain on sale of leased equipment............... 1,333 10.5 -- -- Spare parts sales.............................. 3,570 28.3 1,608 23.1 Sale of equipment acquired for resale.......... 2,076 16.4 1,054 15.1 Interest and other income...................... 544 4.3 197 2.8 ------- ----- ------- ----- Total................................ $12,636 100.0% $ 6,962 100.0% ======= ===== ======= =====
Lease Portfolio. During the first nine months of 1997, sixteen engines and five spare parts packages were added to the Company's lease portfolio at a total cost of $52.8 million. Five engines were sold from the portfolio. Leasing Activities. Operating lease revenue for the nine months ended September 30, 1997, increased 30% to $13.5 million from $10.4 million from the comparable period in 1996. This increase reflects lease revenues from additional engines and spare parts packages acquired after September 30, 1996. In late June 1997, the Company entered into two finance leases. Finance lease income generated from these transactions totaled $223,000 for the nine months ended September 30, 1997. There were no comparable transactions as of September 30, 1996. Expenses directly related to operating lease activity increased 37% to $8.6 million. Interest expense increased 55% to $5.0 million for the nine months ended September 30, 1997, from the comparable period in 1996, due primarily to an increased loan base and the replacement of the existing facility with a new loan agreement in the first quarter of 1997 bearing a higher interest rate. Depreciation expense increased 18% to $2.9 million for the nine months ended September 30, 1997, from the comparable period in 1996, due to the larger asset base in 1997. Residual sharing expense increased 12% to $598,000 for the nine months ended September 30, 1997, from the comparable period in 1996. This expense is calculated by comparing the net book value of the engines subject to such agreements to their related debt balances and adjusting the residual 19 21 share payable up or down to the appropriate amount representing the sharing percentage of any excess of the net book value over the corresponding debt balance for the five engines subject to residual sharing. Gain on Sale of Leased Engines. During the nine months ended September 30, 1997, the Company sold three engines from the lease portfolio. These engines had a net book value of $6.1 million and they were sold for a gain of $1.3 million. There were no sales of leased engines for the nine months ended September 30, 1996. Spare Parts Sales. Revenues from spare parts sales increased 247% to $11.5 million. The gross margin, decreased to 32% in 1997, from 51% in the corresponding period in 1996. The Company does not believe that the relatively high margin in 1996 is indicative of future results. Sale of Equipment Acquired for Resale. During the nine months ended September 30, 1997, the Company sold 10 engines for $12.7 million which resulted in a gain of $2.1 million, compared to the nine months ended September 30, 1996, during which the Company sold five engines for $9.6 million resulting in a gain of $1.1 million. Included in the 1997 sales was one transaction involving the sale of four engines acquired at a cost of $600,000 and sold for a gain of $100,000. Interest and Other Income. Interest and other income for the nine months ended September 30, 1997, increased to $544,000 from $197,000 for the nine months ended September 30, 1996. This is a result of interest earned on deposits held, primarily the proceeds from the Initial Public Offering. General and Administrative Expenses. General and administrative expenses increased 85% to $6.4 million for the nine months ended September 30, 1997, from the comparable period in 1996. This increase reflects expenses associated with staff additions, increased rent due to the expansion of the WASI facility, as well as an increase in professional fees, insurance expense and public company costs. Income Taxes. Income taxes for the nine months ended September 30, 1997, increased to $2.5 million from $1.4 million for the comparable period in 1996. This increase reflects an increase in the Company's pre-tax earnings. Extraordinary Item. In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2 million, net of tax, or $0.36 per weighted average share. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 ----------------- ----------------- AMOUNT % AMOUNT % ------- ----- ------- ----- (DOLLARS IN THOUSANDS) Leasing activities............................ $13,740 42.5% $13,771 60.6% Gain (loss) on sale of leased equipment....... 2 -- (483) (2.1) Spare parts sales............................. 5,843 18.1 3,859 17.0 Sale of equipment acquired for resale......... 12,105 37.5 5,472 24.0 Interest and other income..................... 618 1.9 119 0.5 ------- ----- ------- --- Total............................... $32,308 100.0% $22,738 100.0% ======= ===== ======= ===
20 22 Gross profit (net of cost of sales, allowance for sales returns, depreciation and interest expense as applicable) before general and administrative expenses and income taxes is summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1995 ----------------- ---------------- AMOUNT % AMOUNT % ------- ----- ------ ----- (DOLLARS IN THOUSANDS) Leasing activities............................. $ 5,605 55.7% $3,126 47.2% Gain (loss) on sale of leased equipment........ 2 -- (483) (7.3) Spare parts sales.............................. 2,521 25.1 1,126 17.0 Sale of equipment acquired for resale.......... 1,316 13.1 2,730 41.3 Interest and other income...................... 617 6.1 119 1.8 ------- ----- ------- ----- Total................................ $10,061 100.0% $6,618 100.0% ======= ===== ======= =====
Lease Portfolio. At December 31, 1995, the Company had 31 engines in its operating lease portfolio. During 1996, four engines were either transferred or sold from the lease portfolio. One of the four engines was transferred at its net book value to WASI and dismantled for spare parts sales. The remaining three engines were sold to third parties. In addition, another engine from the lease portfolio was sold under a sale and leaseback agreement and is now reflected on the Company's balance sheet as an engine on capital lease. In the third quarter of 1996, the Company acquired one engine for $2.8 million and in the fourth quarter of 1996, the Company acquired four engines for a total cost of approximately $16.3 million, as well as two auxiliary power units (APU's) and a spare parts package for a total cost of approximately $3.2 million. At December 31, 1996, the Company held 32 engines in its lease portfolio. Operating Leases. Operating lease revenue for the year ended December 31, 1996 decreased to $13.7 million from $13.8 million for the corresponding period in 1995. This decrease is primarily due to a decrease in revenue from one engine which was off-lease and in a repair facility for eight months in 1996 and two engines which were sold in 1996, offset slightly by five engines purchased and leased late in 1996. In 1996, expenses directly related to operating lease activity dropped 23% to $8.1 million from $10.6 million in 1995. The reduction in expenses in 1996 was due to a reduction in depreciation expenses of $1.6 million (33%) as a result of two engines in 1995 that were fully depreciated and the sale of two engines in the third quarter of 1996. Interest expense dropped $1.2 million (22%) in 1996 from 1995, due primarily to the modification of the then-existing term loan with Marine Midland Bank (the "Midland Loan") in June 1995 resulting in more favorable interest rates. Residual sharing expenses, however, increased 77% to $723,000 in 1996 from the corresponding period in 1995 due to changes in the Company's portfolio of engines subject to such agreements. This expense is calculated by comparing the net book value of these engines to their related debt balances and adjusting the residual share payable up or down to the appropriate amount representing the sharing percentage of any excess of the net book value over the corresponding debt balance for the five engines subject to residual sharing. Gain (Loss) on Sale of Leased Engines. The loss in 1995 was attributable to unanticipated overhaul expenses of $373,000 required in order to prepare an engine for resale and a $110,000 loss on the sale of the engine. Spare Parts Sales. Revenues from spare parts sales increased 51% to $5.8 million primarily due to increased volume. Gross margin rose to 43% in 1996 from 34% in the corresponding period in 1995, primarily due to a change in the mix of parts sold and the gross margins related thereto. Equipment Sales. During the year ended December 31, 1996, the Company sold four engines for proceeds of $12.1 million, generating gains of $1.3 million. In 1995, the Company sold three engines for $4.8 million, a fuselage and miscellaneous components it acquired in connection with an aircraft purchase for $572,000 and other components for $100,000. The aggregate cost of the equipment sold was $10.8 million and $2.7 million in 1996 and 1995, respectively. The Company expects that equipment sales opportunities and profitability will continue to vary materially from period to period. 21 23 Interest and Other Income. Interest and other income for 1996 increased to $617,000 from $119,000 in 1995, an increase of 418%. This increase was due primarily to increased marketing/brokerage fee income earned on one engine, nonrecurring credits due the Company regarding excessive engine overhaul costs and an increase in interest earned on the net proceeds from the Initial Public Offering, as well as interest earned on certain engine security deposits. General and Administrative Expenses. General and administrative expenses increased 53% to $5.1 million in 1996, up from $3.3 million in 1995. This increase reflects additional compensation due to an increased workforce and increased bonus payments; increased telephone and travel costs due to increased marketing personnel and activity; increased rent due to the expansion of the WASI facility and an increase in professional fees and insurance as a result of the Initial Public Offering. Gain on Modification of Credit Facility. In 1995, the Company modified the terms of the Midland Loan. The gain of $2.2 million in 1995 on the modification of credit facility reflects a gain from the removal of residual sharing provisions of $2.4 million and a $199,000 loss on the sale of two engines to the lender. Income Taxes. Income taxes decreased to $2 million in 1996 from $2.2 million in 1995. The Company's effective tax rates for Federal and state taxes was approximately 41% and 40% in 1996 and 1995, respectively. Therefore, the decrease in tax expense was due to the decrease in the Company's income before taxes and minority interest offset by a slight increase in the effective tax rate. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenue is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 ---------------- --------------- AMOUNT % AMOUNT % ------- ------ ------- ----- (DOLLARS IN THOUSANDS) Leasing activities................................. $13,771 60.6% $13,636 76.7% Gain (loss) on sale of leased equipment............ (483) (2.1) 633 3.6 Spare parts sales.................................. 3,859 17.0 795 4.4 Sale of equipment acquired for resale.............. 5,472 24.0 2,184 12.3 Interest and other income.......................... 119 0.5 542 3.0 ------- ----- ------- ----- Total.................................... $22,738 100.0% $17,790 100.0% ======= ===== ======= =====
Gross profit (net of cost of sales, allowance for sales returns, depreciation and interest expense as applicable) before general and administrative expenses and income taxes is summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 --------------- -------------- AMOUNT % AMOUNT % ------ ------ ------ ----- (DOLLARS IN THOUSANDS) Leasing activities................................... $3,126 47.2% $2,007 56.0% Gain (loss) on sale of leased equipment.............. (483) (7.3) 633 17.6 Spare parts sales.................................... 1,126 17.0 85 2.4 Sale of equipment acquired for resale................ 2,730 41.3 321 8.9 Interest and other income............................ 119 1.8 542 15.1 ------ ----- ------ ----- Total...................................... $6,618 100.0% $3,588 100.0% ====== ===== ====== =====
Lease Portfolio. During 1995, the Company acquired a total of eight engines and sold three, for a net increase of five. Two of the acquired engines were overhauled in 1995 and became available for sale or lease in 1996 and two additional engines were purchased in late December 1995, both subject to existing leases. Thus, these four engines did not impact results in 1995. The four remaining engines were acquired in July 1995 and were leased on a short-term basis. At December 31, 1995, two of these remaining four engines were on lease and the other two engines were being refurbished for ultimate sale. See "Business -- Aircraft Engine 22 24 Portfolio." Two of the engines sold during 1995 were sold as part of the 1995 modification of the Midland Loan and the third engine was sold in June 1995. Operating Leases. Operating lease revenue increased to $13.8 million in 1995 from $13.6 million in 1994, an increase of 1.5%. Although the Company's lease portfolio increased by a net of five engines in 1995, as discussed above a number of the engines acquired did not impact revenue during 1995 and the lease revenue from the engines acquired in July 1995 were offset by the reduction in lease revenue from the engines sold in 1995. Expenses directly related to operating lease activities declined to $10.6 million in 1995 from $11.6 million in 1994, a 9% decrease. The reduction in expenses was largely due to a $877,000 reduction in residual sharing in conjunction with the 1995 modification of the Midland Loan. A decrease in interest expense to $5.5 million in 1995 from $5.9 million in 1994 as a result of lower interest rates due to the 1995 modification of the Midland Loan contributed to the overall expense decrease. These decreases in expenses were partially offset by a $256,000 increase in depreciation as a result of a $300,000 write-down of one of the Company's engines in 1995 due to the Company's implementation of Statement of Financial Accounting Standard No. 121 as of December 31, 1995 and increases in the lease portfolio discussed above. Gain (Loss) on Sale of Leased Engines. The Company recorded a loss on the sale of an engine at lease termination of $483,000 in 1995 compared to a gain of $633,000 recorded in 1994, resulting in a $1.1 million reduction in total revenue. The loss in 1995 was attributable to unanticipated overhaul expenses of $373,000 required in order to prepare an engine for resale and a $110,000 loss on the sale of the engine. Spare Parts Sales. Revenue from spare parts sales increased to $3.9 million in 1995 from $795,000 in 1994, a 385% increase, while costs of sales increased to $2.5 million from $659,000, a 286% increase. Gross margin increased to 34% in 1995 from 17% in 1994. Interest expense related to spare parts sales activities was $187,000 in 1995 as compared to $51,000 in 1994, an increase of 267%. These increases resulted primarily from the commencement of operations by WASI in October of 1994. Equipment Sales. In 1995, the Company sold three engines for $4.8 million, a fuselage and miscellaneous components it acquired in connection with an aircraft purchase for $572,000 and other components for $100,000. The aggregate cost of this equipment was $2.7 million. In 1994, the Company sold an engine for $2.2 million with a related cost of equipment acquired for resale of $1.9 million. Interest and Other Income. Interest and other income decreased to $119,000 in 1995 from $542,000 in 1994 primarily due to the termination of a remarketing fee arrangement with the lender in connection with the 1995 modification of the Midland Loan. In addition, the Company earned broker fees of $137,000 in 1994 which will not reoccur as the related agreement was terminated in 1994. The remaining decrease was due to management fees earned in 1994 for which no similar services were performed in 1995. General and Administrative Expense. General and administrative expense increased to $3.3 million in 1995 from $1.6 million in 1994, an increase of 106%. The increase resulted primarily from an increase in compensation and related benefits as a result of a full year of operations at WASI and the addition of staff in marketing and finance as well as increased travel, promotional and insurance expenses. Gain on Modification of Credit Facility. In 1995, the Company modified the terms of the Midland Loan. The gain of $2.2 million on modification of credit facility reflects a gain from the removal of residual sharing provisions of $2.4 million and a $199,000 loss on the sale of two engines to the lender. Income Taxes. Income tax expense increased to $2.2 million in 1995 from $797,000 in 1994, an increase of 178%. The Company's effective tax rate for Federal and state taxes is approximately 40% for both 1995 and 1994; therefore, the increase in tax expense is directly related to the increase in the Company's income before taxes and minority interest to $5.5 million in 1995 from $2.0 million in 1994. 23 25 QUARTERLY RESULTS OF OPERATIONS The following table presents selected quarterly financial information for each of the ten quarters ended September 30, 1997 both in dollars and as a percentage of total revenue. This information is unaudited, but, in the opinion of the Company's management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the selected quarterly information when read in conjunction with the Unaudited Financial Statements and Notes thereto and Audited Financial Statements and Notes thereto included elsewhere herein. The operating results for any quarter are not necessarily indicative of results for any subsequent period or for the entire fiscal year.
THREE MONTHS ENDED ------------------------------------------------------------------------------------------------ JUN SEPT DEC MAR JUN SEP DEC MAR JUN SEP 30, 30, 31, 31, 30, 30, 31, 31, 30, 30, 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Revenue: Operating lease revenue...... $2,990 $3,865 $3,840 $3,454 $3,381 $3,544 $3,362 $4,115 $4,429 $4,937 Finance lease revenue........ -- -- -- -- -- -- -- -- -- 223 Gain (loss) on sale of leased engines.................... (110) -- (373) -- -- -- 2 397 -- 936 Spare parts sales............ 761 794 1,654 1,286 1,148 869 2,540 2,222 3,656 5,582 Sale of equipment acquired for resale................. -- 5,372 100 2,211 4,613 2,781 2,500 2,548 7,600 2,600 Interest and other income.... 15 27 37 -- 47 150 420 251 201 91 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total revenue.......... 3,656 10,058 5,258 6,951 9,189 7,344 8,824 9,533 15,886 14,369 Expenses: Interest expense............. 1,544 1,174 1,367 1,147 1,124 1,101 951 1,472 1,684 2,069 Depreciation expense......... 938 1,228 1,625 1,100 678 735 668 875 979 1,141 Residual share............... (45) 118 125 222 152 161 188 191 181 227 Cost of spare parts sales.... 495 494 1,158 525 861 218 1,704 1,304 2,403 4,044 Cost of equipment acquired for resale................. -- 2,740 2 1,600 3,933 3,018 2,238 2,253 6,385 2,034 General and administrative expense.................... 777 999 1,013 910 1,191 1,332 1,691 1,778 2,146 2,434 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total expenses......... 3,709 6,753 5,290 5,504 7,939 6,565 7,440 7,873 13,778 11,949 Gain on modification of credit facility..................... 2,203 -- -- -- -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes, minority interest and extraordinary item........... 2,150 3,305 (32) 1,447 1,250 779 1,384 1,660 2,108 2,420 Income taxes................... (864) (1,316) (5) (583) (512) (301) (581) (645) (842) (969) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before minority interest and extraordinary item....... 1,286 1,989 (37) 864 738 478 803 1,015 1,266 1,451 Less: minority interest in net income of subsidiary......... 10 8 28 27 7 45 -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net income before extraordinary item......................... 1,276 1,981 (65) 837 731 433 803 1,015 1,266 1,451 Extraordinary item less applicable income taxes...... -- -- -- -- -- -- -- 2,008 -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net income............. $1,276 $1,981 $ (65) $ 837 $ 731 $ 433 $ 803 $3,023 $1,266 $1,451 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== INCOME STATEMENT DATA AS A PERCENTAGE OF REVENUE: Revenue: Operating lease revenue...... 81.8% 38.4% 73.0% 49.7% 36.8% 48.3% 38.1% 43.2% 27.9% 34.4% Finance lease income......... -- -- -- -- -- -- -- -- -- 1.6 Gain (loss) on sale of leased engines.................... (3.0) -- (7.1) -- -- -- -- 4.2 -- 6.5 Spare parts sales............ 20.8 7.9 31.5 18.5 12.5 11.8 28.8 23.3 23.0 38.8 Sale of equipment acquired for resale................. -- 53.4 1.9 31.8 50.2 37.9 28.3 26.7 47.8 18.1 Interest and other income.... 0.4 0.3 0.7 -- 0.5 2.0 4.8 2.6 1.3 0.6 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Expenses: Interest expense............. 42.2 11.7 26.0 16.5 12.1 15.0 10.8 15.4 10.5 14.4 Depreciation expense......... 25.7 12.2 30.9 15.8 7.4 10.0 7.6 9.2 6.2 7.9 Residual share............... (1.2) 1.2 2.4 3.2 1.7 2.2 2.1 2.0 1.1 1.6 Cost of spare parts sales.... 13.5 4.9 22.0 7.6 9.4 3.0 19.3 13.7 15.1 28.1 Cost of equipment acquired for resale................. -- 27.2 -- 23.0 42.8 41.1 25.4 23.6 40.2 14.2 General and administrative expense.................... 21.2 9.9 19.3 13.1 13.0 18.1 19.2 18.7 13.6 16.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total expenses......... 101.4 67.1 100.6 79.2 86.4 89.4 84.4 82.6 86.7 83.1 Gain on modification of credit facility..................... 60.2 -- -- -- -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes, minority interest and extraordinary item........... 58.8 32.9 (0.6) 20.8 13.6 10.6 15.7 17.4 13.3 16.8 Income taxes................... (23.6) (13.1) (0.1) (8.4) (5.6) (4.1) (6.6) (6.8) (5.3) (6.7) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before minority interest and extraordinary item....... 35.2 19.8 (0.7) 12.4 8.0 6.5 9.1 10.6 8.0 10.1 Less: minority interest in net income of subsidiary......... 0.3 0.1 0.5 0.4 0.1 0.6 -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net income before extraordinary item......................... 34.9 19.7 (1.2) 12.0 7.9 5.9 9.1 10.6 8.0 10.1 Extraordinary item less applicable income taxes...... -- -- -- -- -- -- -- 21.1 -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net income............. 34.9% 19.7% (1.2)% 12.0% 7.9% 5.9% 9.1% 31.7% 8.0% 10.1% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
24 26 The Company has experienced fluctuations in its quarterly operating results and anticipates that these fluctuations may continue. Such fluctuations may be due to a number of factors, including the timing of sales of engines and spare parts and engine remarketing activities, an unanticipated early lease termination, the timing of engine acquisitions or a default by a lessee. See "Risk Factors -- Quarterly Fluctuations in Operating Results." LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its growth through borrowings secured by its lease portfolio. See "Overview" above and "Business -- Financing/Source of Funds." Cash of approximately $104.0 million, $16.1 million, $15.7 million and $19.3 million in the nine months ended September 30, 1997 and the years ended December 31, 1996, 1995 and 1994, respectively, was derived from this activity. In these same time periods, $71.6 million, $13.5 million, $9.3 million and $11.5 million, respectively, was used to pay down related debt. In 1996, proceeds from the Initial Public Offering were approximately $15.9 million as discussed below. Cash flows from operating activities generated approximately $9.0 million, $9.6 million, $0.5 million and $8.9 million in the nine months ended September 30, 1997, and the years ended December 31, 1996, 1995 and 1994, respectively. The Company's primary use of funds is for the purchase of equipment for lease. Approximately $43.5 million, $25.3 million, $9.3 million and $17.6 million of funds were used for this purpose in the nine months ended September 30, 1997 and the years ended December 31, 1996, 1995 and 1994, respectively. Additional funds were used in these periods to finance the growth of inventories to support parts sales. The Initial Public Offering was for 2,300,000 shares of Common Stock at $8.00 per share. The proceeds to the Company, net of all expenses, was $15.9 million. These proceeds were used to prepay $1.3 million of indebtedness under an existing term facility, and to purchase an amortizing interest rate cap to hedge a portion of the Company's exposure to increases in interest rates on its variable rate borrowings for a cost of $469,000. The balance of the proceeds, together with debt financing, were used to acquire additional engines for lease, to acquire engine and airframe component inventory, and for working capital and other general corporate purposes. Until February 1997, the Company's primary lender was Marine Midland Bank. Prior to June 1995, the Midland Loan provided, among other things, for interest payable at LIBOR plus 3.5% to 5%, required a specified percentage of lease payments to be applied to debt service but required final payment only upon the sale of the subject engine, and provided to the lender a share of the residual value of financed engines. In June 1995, the Company modified the Midland Loan. As part of the modification, the Midland Loan was converted to a ten-year, full payout loan, the existing residual sharing arrangement with the lender was terminated, the interest rate was reduced to LIBOR plus 1%, and the lender acquired two engines from the Company with a net book value of $5.7 million. This modification resulted in a gain to the Company of $2.2 million. In February, 1997, the Company repaid the Midland Loan at a discount which resulted in an extraordinary book gain, net of tax and related costs, of approximately $2.0 million. The transaction was financed through a loan of $41.5 million from U.S. Bancorp Leasing & Financial at an interest rate of LIBOR plus 2.5%. This loan matures in February 1998. At that time, the Company has the option to extend the facility for an additional six years. As of September 30, 1997, $6.4 million was available under this facility. The Company has a $30 million revolving credit facility with CoreStates Bank, N.A. to finance the acquisition of engines and high-value spare parts for sale or lease. At September 30, 1997, $3.8 million was available under this facility. This facility, which expires on June 12, 1998, bears interest at prime plus 50 basis points and may be renewed annually. The Company has a $15 million secured term facility with Finova Capital Corporation for the acquisition of engines for lease. At September 30, 1997, approximately $2.4 million was available under this facility. This term facility, which expires on December 29, 2001, bears interest on each drawdown at a rate equal to the rate on five-year Treasury notes at the date of drawdown plus 5.55%. Advances against this facility are for not more than 80% of the appraised value of the engine. The loan is repaid by applying not less than 90% of the 25 27 underlying lease payment to debt service, and at the end of 60 months, the loan must have amortized at least 40% of its original balance. The Company also has a $15.0 million financial program with Fleet Capital Corporation for the financing of the acquisition of engines for lease to U.S. domestic entities. Fleet Capital Corporation evaluates each proposed engine financing to determine whether it will participate. The interest rate under this program is dependent upon the quality of the credit and the underlying collateral. Advances under the program are for an amount up to 80% of the fair market value of the equipment, not to exceed 100% of the purchase price. Advances are repaid from the lease payments associated with the financed engines. In September 1997, the Company financed two engines using this program. The amount borrowed was $6.3 million with interest rates varying from 8.9% to 10%. As of September 30, 1997, approximately $8.7 million was available under this program. The Company also has a $3 million secured working capital facility with The Pacific Bank, N.A. for the acquisition of engines to be dismantled and sold for parts through WASI. This facility provides for 80% advances against the purchase price of parts for resale and bears interest at prime plus 1%. This facility requires interest-only payments for the first five months with the principal balance due six months after drawdown and expires on January 31, 1998. The Company directly guarantees WASI's obligations under this facility. As of September 30, 1997, approximately $1.2 million was available under this facility. The Company has received a letter of commitment from a financial institution to provide an $80 million warehouse facility to a special purpose finance subsidiary of the Company, for the financing of jet aircraft engines to be transferred by the Company to such finance subsidiary. The facility will become available immediately upon completion of definitive agreements. This transaction's structure is intended to facilitate future public or private securitized note issuances by the special purpose finance subsidiary. This facility is expected to have an eight year term and to bear interest at LIBOR plus 225 basis points. This facility requires the issuer to hedge 50% of the facility against interest rate changes. The Company expects to use some of the proceeds of the facility distributed to it by its finance subsidiary to pay down a portion of the U.S. Bancorp Leasing & Financial loan and the CoreStates Bank loan. The Company has entered into commitments for the purchase of an aircraft for disassembly by WASI, the purchase of two engines for the lease portfolio and the purchase of three commuter aircraft with three spare engines for the lease portfolio. The aggregate purchase price for these assets is $19.9 million and as of September 30, 1997, deposits of $310,000 have been made in connection with these purchases. The Company has arranged financing for one engine and is in the process of arranging financing for the other purchases. The Company believes that its current and anticipated credit facilities, internally generated funds, cash-on-hand and the net proceeds of this Offering will be sufficient to fund the Company's anticipated operations for at least 12 months, at which time additional equity or debt capital is anticipated to be required to fund projected growth. The Company's ability to successfully execute its business strategy is dependent in part on its ability to raise equity capital and to obtain debt capital. There can be no assurance that the necessary amount of such equity or debt capital will continue to be available to the Company on favorable terms, or at all. If the Company were unable to continue to obtain required financing on favorable terms, the Company's ability to add new engines and parts packages to its portfolio or to conduct profitable operations with its existing asset base would be impaired, which would have a material adverse effect on the Company's business, financial condition and results of operations. As of September 30, 1997, the Company had four engines and three spare parts packages which had not been financed. The Company will seek permanent financing for this equipment, although no assurance can be given that such financing will be available on favorable terms, if at all. In addition, certain of the Company's engines have been financed under floating rate facilities. Until fixed rate financing for these assets is in place, the Company is subject to interest rate risk, since the underlying lease revenue is fixed. The Company has entered into commitments for the purchase of an aircraft for disassembly by WASI, the purchase of two engines for the lease portfolio and the purchase of three commuter aircraft with three spare engines for the 26 28 lease portfolio. The aggregate purchase price for the assets is $19.9 million and as of September 30, 1997, deposits of $310,000 have been made in connection with these purchases. The Company has arranged financing for one engine and is in the process of arranging financing for the other purchases. MANAGEMENT OF INTEREST RATE EXPOSURE At September 30, 1997, $66.6 million of the Company's borrowings were on a variable rate basis at various interest rates tied to either LIBOR or the prime rate. The Company's equipment leases are generally structured at fixed rental rates for specified terms. To date, this variable rate borrowing has resulted in lower interest expense for the Company. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue the Company realizes under its leases and the interest rate that the Company pays under its borrowings. See "Risk Factors -- Interest Rate Risks." In September 1996, the Company purchased an amortizing interest rate cap at a cost of $469,000 from an investment grade financial institution (the "Counter Party") in order to limit its exposure to increases in interest rates on a portion of its current variable rate borrowings. Pursuant to this cap, the Counter Party will make payments to the Company, based on the notional amount of the cap, if the three month LIBOR rate is in excess of 7.66%. As of September 30, 1997, the notional principal amount of the cap was $37.2 million and said amount will decline to $26 million at the end of its term. The cost of the cap is being amortized as an expense over a four-year period. The Company will be exposed to credit risk in the event of non-performance by the Counter Party. 27 29 BUSINESS The Company is a leading provider of operating leases of Aircraft Equipment worldwide. The Company's core business is acquiring and leasing Aircraft Equipment to domestic and international airlines, manufacturers and overhaul/repair facilities pursuant to operating leases. As of September 30, 1997, the Company had 42 engines under lease to 29 customers in 17 countries and eight spare parts packages under lease to seven customers in seven countries (for a net total of 34 customers in 20 countries). Through WASI, the Company also acquires aviation equipment, such as whole engines and aircraft, which can be dismantled and sold as parts at a greater profit. In addition, the Company engages in the selective purchase and resale of commercial aircraft engines and engine components in the aftermarket. Integrating of these three activities improves the Company's ability to maximize the residual and resale values of its engines, equipment and parts. INDUSTRY BACKGROUND Commercial airlines typically maintain a number of spare aircraft engines to ensure that their aircraft are not grounded when engines or parts are removed for normal maintenance or as a result of failure. Industry analysts estimate that the worldwide fleet of approximately 11,500 commercial aircraft utilizes approximately 30,000 engines, including approximately 5,000 spare engines valued at over $11 billion. The Boeing Report estimates 16,160 new commercial aircraft will be added over the next 20 years, resulting in a projected worldwide fleet of approximately 23,600 commercial aircraft in 2016, net of retired aircraft. These 16,160 new deliveries, which represent a mixture of two-, three- and four-engined aircraft, will require approximately 35,000 installed engines and, assuming a ratio of approximately 15% spare engines to installed engines, approximately 5,300 additional spare engine acquisitions over the next 20 years. Moreover, the Boeing Report, and the foregoing numbers, do not address the additional number of aircraft and engines which will be required to service the commuter or corporate markets. Airlines have increasingly turned to operating leases as an alternative to traditional financing of their aircraft, engines and spare parts. Aviation Week reports that leasing will be the primary means by which the global air transport industry acquires new aircraft between now and 1999, and probably beyond. Aviation Week, based upon data provided by GE Capital Aviation Services, states that in 1986, 41% of the world's airlines owned all of their equipment, 15% leased all of their equipment and 44% used a mix of the two (with 80% owned and 20% leased). By contrast, in 1996, only 16% owned all of their equipment, while 42% leased all of their equipment and 42% used a mix of the two (with 40% owned and 60% leased). Advantages to airlines of leasing include greater flexibility in fleet management, off-balance sheet treatment of operating leases, the ability to employ funds without affecting debt-to-equity ratios, and the shifting of residual value risk to a third party. The Company believes that airlines are increasingly considering their spare aircraft engines as significant capital assets suitable for lease. Due to the increasing cost of newer aircraft engines, the anticipated modernization of the worldwide aircraft fleet and the significant cost associated therewith, and the emergence of new niche-focused airlines which generally use leasing for capital asset acquisitions, the Company believes this trend toward operating leases will continue. STRATEGY The Company's strategy for its leasing business is to focus primarily on operating leases of commercial aircraft engines and parts worldwide while maximizing residual values. Key elements of the Company's business strategy include the following: Focus on Aftermarket Commercial Aircraft Engines. The Company purchases primarily aftermarket commercial aircraft engines and parts for lease and resale. By focusing on this market, the Company is able to take advantage of the background and capability of its management, most of whom have extensive expertise in the aircraft engine industry, and to service a niche which is not the focus of the major commercial aircraft lessors. Focus on Operating Leases. The Company believes that airlines are becoming increasingly aware of the benefits of financing their fleet equipment on an operating lease basis, including preservation of cash flow, off 28 30 balance sheet financing, shifting residual risk to a third party and flexibility in managing fleet size and composition. Maximize Residual Value. In order to maximize the value of engines when they are re-leased or sold at the end of a lease, the Company focuses on noise compliant Stage III commercial jet aircraft engines. As of September 30, 1997, all of the Company's engines were Stage III engines and were generally suitable for use on one or more commonly used aircraft. The Company also believes that its attention to maintenance and inspection of engines contributes to residual values. Capitalize on Complementary Spare Parts Business. Through the spare parts and component sales operations of its WASI subsidiary, the Company sells aircraft spare parts to commercial passenger airlines, air cargo carriers, overhaul/repair facilities and other spare parts distributors. The Company believes that WASI complements the Company's core business of leasing aftermarket commercial aircraft engines and parts. WASI can provide some parts for maintenance and overhaul of the Company's engines at prices lower than the Company could obtain from third parties. As engines in the Company's leasing portfolio age and reach the point at which they are more valuable as component parts, the Company expects that WASI will be able to salvage valuable components and thereby maximize the residual value of the engines. Access a Diversified Global Client Base. For 1996 and the first nine months of 1997, approximately 61% and 64%, respectively, of the Company's lease revenue was from foreign customers, with no one customer or country (other than the United States) accounting for more than 14% of lease revenue. The Company believes that this diversity reduces the risks associated with dependence on one or more significant customers in one country. To date, all of the Company's leases and sales contracts are denominated and payable in U.S. Dollars. Capitalize on Complementary Aviation-Related Businesses. The Company believes that there are numerous opportunities to expand into aviation-related niche businesses representing growth prospects for the Company. The Company intends to expand its existing businesses to include similar assets in additional markets such as the corporate, commuter and cogeneration markets. In October of 1997 the Company paid a nonrefundable deposit of $100,000 for the purchase of three commuter aircraft and three spare engines for $12.3 million and is presently in negotiations with lenders to provide financing for this package. The Company may engage in the selective purchase of additional aircraft in the future. The Company is also continually engaged in discussions regarding possible acquisitions of companies and asset portfolios relating and complementary to the Company's existing businesses. In addition, the Company constantly evaluates de novo expansion opportunities. There can be no assurance that any such acquisitions or expansions can be consummated on terms favorable to the Company, if at all. See "Risk Factors Acquisition and Expansion Risks." AIRCRAFT ENGINE LEASING Most 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 engine. Operating lease rates are generally priced higher than finance lease rates, in part because of the risks associated with the residual value. See "Risk Factors -- Ownership Risks." The Company targets the medium-term engine lease market, which generally consists of leases with three to ten year lease terms. Airlines, manufacturers and overhaul/repair facilities leasing for this term generally do so when their projected utilization of a specific engine is deemed to be less than its useful life, or when they seek to manage their cash flow more efficiently while strengthening their balance sheets. All of the Company's engine lease transactions with three to ten year lease terms 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 engine, 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 engine 29 31 upon return at the end of the lease. During the term of the lease, the Company generally requires the lessee to maintain the aircraft engine in accordance with an approved maintenance program designed to ensure that the aircraft engine meets applicable regulatory requirements in the jurisdictions in which the lessee operates. Under short-term leases and certain medium-term leases, the Company undertakes a portion of the maintenance and regulatory compliance risk. To date, the Company has attempted to minimize its currency and exchange risks by negotiating all of its aircraft engine lease transactions in U.S. Dollars. In addition, to date, all guarantees obtained to support various lease agreements are denominated and payable in U.S. Dollars. See "Risk Factors -- International Risks." The Company typically collects maintenance reserves and security deposits from the lessee. 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 repair associated with engine use or maintenance is required. In most 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. The Company 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 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 its ability to repossess its collateral should the need arise. While the Company has experienced some collection problems, including delay in lease rental payments, to date the Company has not experienced material losses attributable to such problems; however, there can be no assurance that the Company will not experience collection problems or significant losses in the future. See "Risk Factors -- Customer Credit Risks." During a given lease period, the Company's leases require that the leased engines undergo regular maintenance and inspection at pre-approved engine maintenance facilities certified by the FAA or its foreign equivalent. In addition, when engines come off-lease, they undergo thorough inspections to verify compliance with lease return conditions. Regular maintenance and thorough inspections during and after the lease term help ensure that the Company's leased engines maintain their residual value. While there can be no assurance that the Company's maintenance and inspection requirements will result in a realized return to the Company upon termination of a lease, the Company believes that its emphasis on maintenance and inspection generally helps it to recover its investment in the engines. Upon termination of a lease, the Company will re-lease or sell the aircraft engine or will have the engine dismantled and will sell the parts. The demand for aftermarket aircraft engines and parts 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 engines and technological developments. In addition, the value of a particular used aircraft engine varies greatly depending upon its condition, the maintenance services performed during the lease term and the number of hours remaining until the next major maintenance of the engine is required. If the Company is unable to re-lease or sell an engine on favorable terms, its ability to service debt may be adversely affected. See "Risk Factors -- Ownership Risks" and "Business -- Aircraft Engine Portfolio." ENGINE LESSEES As of September 30, 1997, the Company had 42 engines under lease to 29 customers in 17 countries. As of September 30, 1997: (a) the Company's domestic engine lessees were Alaska Airlines, Inc., Continental Airlines, Inc., Delta Airlines, Evergreen International Airlines, Inc., Frontier Airlines, Inc., General Electric Engine Services, Inc., Reno Air, Inc., Tower Air, Western Pacific Airlines, Inc. and World Airways, Inc., and 30 32 (b) the Company's foreign engine lessees were AerLingus (Ireland), Aerovias de Mexico, S.A. de C.V., Air Atlanta Icelandic, Inc. (Iceland), Air Canada, Air Liberte S.A. (France), Air 2000 (United Kingdom), Air New Zealand Limited, Asiana Airlines, Inc. (Korea), Avianca (Colombia), BWIA International Airways Limited (Trinidad & Tobago), Canada 3000 Airlines Limited, Gulf Aircraft Maintenance Company (United Arab Emirates), P.T. Garuda Indonesia, General Electric Capital Aviation Services, Inc. (United Kingdom), Scandinavian Airlines System, Spanair (Spain), Jet Airways (India), Ltd., Transportes Aeroes Portugueses (Portugal), S.A. and Virgin Atlantic Airways, Ltd. (United Kingdom). The following table displays the regional profile of the Company's engine lessee customer base by operating lease revenue for the year ended December 31, 1996 and the nine months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31, 1996 ------------------------------ ------------------------------ OPERATING LEASE OPERATING LEASE REVENUE PERCENTAGE REVENUE PERCENTAGE --------------- ---------- --------------- ---------- United States................... $ 4,878,121 36% $ 5,295,084 39% Europe.......................... 4,099,725 30 2,840,428 21 Mexico.......................... 1,855,994 14 1,865,118 14 Canada.......................... 1,030,785 8 1,291,000 9 Australia/New Zealand........... 772,200 6 1,029,600 7 Asia............................ 512,832 4 889,208 6 South America................... 275,042 2 530,000 4 Middle East..................... 56,333 -- -- -- ----------- ----- ----------- ----- Total operating lease revenue... $13,481,032 100% $13,740,438 100% =========== ===== =========== =====
For the year ended 1996 and for the nine-months ended September 30, 1997, Aerovias de Mexico, S.A. de C.V., a lessee customer of the Company, contributed approximately 14% of operating lease revenue. AIRCRAFT ENGINE PORTFOLIO The Company's management frequently reviews opportunities to acquire suitable aircraft engines based on market demand, customer airline requirements and in accordance with the Company's engine portfolio mix criteria and planning strategies for leasing. Before committing to purchase specific engines, 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 engines and their anticipated obsolescence. As a result, certain types and configurations of engines do not necessarily fit the profile for inclusion in the Company's portfolio of engines owned and used in its leasing operation. The Company focuses particularly on the noise compliant Stage III aircraft engines. As of September 30, 1997, all of the engines in the Company's lease portfolio were Stage III engines and were generally suitable for use on one or more commonly used aircraft. The Company purchases a majority of its engines in the aftermarket, primarily from airlines or other leasing companies. 31 33 The Company's commercial aircraft engine portfolio consists of aircraft engines manufactured by CFM, General Electric (CF), Pratt & Whitney (JT and PW) and Rolls Royce (RB). The following tables show by engine type the number of engines owned by the Company, the aircraft type on which each engine type is generally used, and the scheduled lease terminations of the Company's lease portfolio at September 30, 1997: ENGINE TYPE AND AIRCRAFT APPLICATION
ENGINE TYPE AIRCRAFT APPLICATION QUANTITY - ------------ ----------------------------- -------- CF6-50 C2/E2 A300, DC10-30 3 747-200 CF6-80 C2A2 747-400 1 767-200ER/300/300ER, MD11, A300- 600/600R/600F/ST. 600ST A310-200 ADV/300 CF6-80 C2B6 767-300ER 1 CF6-80 C2B6F 767-300ER 1 CF6-80E1 A330/300 1 CFM56-3B1 737-300/400/500 2 CFM56-3B2 737-300/400/500 5 CFM56-3C1 737-300/400/500 6 CFM56-5A3 A320/100/200, A319 2 CFM56-5C4 A340/300 1 JT8D-217C MD83 1 JT8D-219 MD82 10 JT9D-7AH 747-100/200 1 JT9D-7A 747-100/200 1 JT9D-7J 747-200/SP 1 PW2037 757-200 1 PW2040 757-200 1 PW4060 747-400, 767-300ER 2 A310, MD11 RB211-535E4 757-200 2 ----- Total 43 =====
32 34 SCHEDULE OF ENGINE LEASE TERMINATIONS
ENGINE NET BOOK VALUE ---------------- ---------------- NUMBER % AMOUNT % ------ ----- ------ ----- (DOLLARS IN MILLIONS) 1997.......................... 5 11.6% $ 12.2 9.5% 1998.......................... 12 28.0 30.4 23.5 1999.......................... 4 9.3 9.1 7.1 2000.......................... 4 9.3 11.0 8.5 2001.......................... 4 9.3 14.5 11.2 2002.......................... 7 16.3 25.2 19.6 2003.......................... 3 7.0 10.6 8.2 2004.......................... 1 2.3 4.2 3.3 2005.......................... 1 2.3 6.0 4.7 2006.......................... 1 2.3 2.9 2.2 Off Lease..................... 1 2.3 2.8 2.2 -- ----- ------ ----- Total............... 43 100.0% $128.9 100.0% == ===== ====== =====
The Company anticipates that current lessees will extend three of the five leases which terminate in 1997 and is negotiating with a different lessee to lease an engine which is the subject of another lease which terminates in 1997. The fifth 1997 lease terminated in early October 1997 and the engine (a JT9D-7AH engine with a book value of $431,250) has been relocated to the WASI facility for the sale of its parts. The Company is actively marketing the engine which is off lease. ENGINE PORTFOLIO VALUE The Company has obtained an updated appraisal of its engines from Aircraft Information Services, Inc. ("AISI"), a recognized appraiser of aircraft engines. A copy of the appraisal begins at page A-1 of this Prospectus and should be reviewed for a discussion of the assumptions utilized and various factors considered by AISI. AISI has rendered its opinion that the aggregate "Current Market Value" of the Company's aircraft engine portfolio (excluding the JT9D-7AH engine relocated to WASI), assuming the engines are in average half-life condition, is $143.1 million, which compares favorably to the aggregate net book value at September 30, 1997 of $128.5 million of the Company's appraised engine portfolio. "Current Market Value" is the appraiser's opinion as to the value of the aircraft engines under market conditions that are perceived to exist at a specific point in time for a sale between equally willing and informed buyers and sellers, neither under compulsion to buy or sell, in a single unit cash transaction with no hidden value or liability and with supply and demand of the sale item roughly in balance. "Average half-life" condition assumes that every component or maintenance service which has a prescribed interval that determines its service life, overhaul interval or interval between maintenance services is at a condition which is one-half of the total interval. The Company, through the return conditions required by its leases and the maintenance reserves collected by the Company from its lessees, attempts to put its engines in the equivalent of a "freshly refurbished" condition, after application of the maintenance reserves. "Freshly refurbished" condition is defined to be that of an engine immediately after a major shop visit which refurbished all engine modules or all engine compressor and combustor/turbine stages, as appropriate, with all life-limited components at half-life. AISI has rendered its opinion that the "Current Market Value" of the Company's aircraft engines appraised, assuming the engines are in freshly refurbished condition, is $157.1 million. 33 35 The following table sets forth the opinion of AISI as to the aggregate "Future Value Forecast" for the aircraft engines appraised as of September 30, 1997, for the periods indicated below:
1998 1999 2000 2001 2002 - ------- ------ ------ ------ ------ (IN MILLIONS) $139.4 $135.8 $132.4 $128.9 $125.7
"Future Value Forecast" is the appraiser's opinion as to the expected value of an asset at a specific date in the future and assumes "Base Value" criteria, half-life condition and an assumed annual inflation rate of 3.0%. "Base Value" is similar to Current Fair Market Value; however it assumes theoretically balanced market conditions rather than actual present market conditions or assumed market conditions at a specified future date. Since appraisals are only estimates of residual values, there can be no assurance that the appraised value is accurate or that it will not materially change due to factors beyond the Company's control, including but not limited to, obsolescence and changing market conditions, lack of support by relevant airframe, engine or component manufacturers. Nor can there be assurance that, upon expiration of the leases, the Company will realize the then book or appraised value through either sale or re-leasing of the engines in the event of an absence of purchasers or re-lease demand. AISI was paid $10,350, plus out-of-pocket expenses, for its services to the Company in connection with its appraisal. In the future, the Company does not intend to include the appraised value of its engines in its reports and registration statements filed with the SEC. FINANCING/SOURCE OF FUNDS The Company typically acquires the engines it leases with a combination of equity capital and funds borrowed from financial institutions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Risk Factors -- Back Leveraging." The Company can typically borrow 80% to 100% of the engine purchase price on a recourse, non-recourse or partial recourse basis. Under most of the Company's term loans, the lender is entitled to receive most of the lease payments associated with the financed engines to apply to debt service. Under the Company's warehouse facilities, the lender is paid interest only until such time as loans under the facilities become due. Generally, lenders take a security interest in the engines. The Company retains ownership of the engines, 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 for full or partial recourse loans, the financial condition of the Company. The Company obtains the balance of the purchase price of the engine, the "equity" portion, from internally generated funds, cash-on-hand, and going forward, the net proceeds of this Offering. The loans available to the Company under recourse arrangements are secured by the financed engines and the assignment of lease payments due under the related leases. Upon default under a loan covering equipment financed through recourse borrowings, the lender providing the financing can foreclose on the equipment, repossess and sell such equipment and seek any balance due on such financing from the Company to the extent of the recourse. The credit standing of certain of the Company's customers and the long operating life of aircraft engines allows the Company to finance some of its equipment on a non-recourse basis. Certain of the Company's engines are owned in wholly-owned subsidiaries set up for financing purposes. Non-recourse loans represent loans to the Company's subsidiaries which own only the assets securing the loan and as to which the Company has not guaranteed the loan. The Company and its subsidiaries at September 30, 1997 had borrowings of $7.8 million of non-recourse loans and $96.9 million of full or partial recourse loans. The Company is not liable for the repayment of the non-recourse loans unless the Company breaches certain limited representations and warranties under the applicable pledge agreement. The lender assumes the credit risk of each such lease, and its only recourse, upon a default under a lease, is against the lessee and the leased engine. 34 36 The Company has negotiated a sharing of residual proceeds with certain lenders in exchange for a higher percentage financing of certain aircraft engines. Residual sharing arrangements apply to five of the Company's engines (representing $15.5 million of book value) as of September 30, 1997. The Company accrues for its residual sharing obligations using net book value as a proxy for residual proceeds. SPARE PARTS SALES As a significant corollary to its core business, the Company, through WASI, specializes in the purchase and resale of aftermarket engine parts, engines, modules and rotable components. WASI purchases individual engine parts from airlines and others in the aftermarket or acquires whole airframes or engines and contracts to have the airframes or engines dismantled into their component parts for resale by WASI. Some of the acquired component 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 JT9D, PW 4000 and JT8D aircraft engines and components. These engines are the most widely used aircraft engines in the world, powering the Boeing 747, 727 and 737, McDonnell Douglas DC10 and DC9 and Airbus A-300 series of 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 core leasing business. To date, WASI's operations have afforded the Company additional contacts and opportunities in the aircraft engine market. WASI can provide some parts for maintenance and overhaul of the Company's engines at prices lower than the Company could obtain from third parties. As engines in the Company's leasing portfolio age and reach the point at which they are more valuable as component parts, the Company expects that WASI will be able to have them dismantled, salvage valuable components and thereby maximize the residual value of the engines. WASI has strict guidelines regulating how parts are procured and overhauled. When procuring aircraft parts, great emphasis is placed on source and traceability. At September 30, 1997, at least 95% of WASI's inventory on hand was acquired from a certified commercial air carrier or others operating under recognized regulatory agencies accepted by the FAA. Less than 5% of the inventory was acquired from trading companies and in all such cases the parts are certified by the seller as to origin. WASI does not trade in consumable parts such as hardware/fasteners. Hardware/fasteners are the most difficult to identify as unapproved material and in many cases are impossible to identify as unapproved material without conducting detailed analysis. WASI's trades in life-limited parts are restricted to parts that have complete traceability back to the OEM or in few cases traceability from a commercial air carrier back to the OEM. See "Risk Factors -- Government Regulation." WASI advertises its aircraft engine parts availability on the Inventory Locator Service ("ILS") electronic database. Users of ILS can access the database and determine which companies have the desired inventory. The Company also advertises in industry publications and receives a number of customers through referrals. WASI may from time to time enter into consignment agreements with airlines or related companies to acquire surplus inventories for the purpose of marketing and selling such consigned parts. Consignment allows WASI to access inventory for sale without the cost and risk of ownership. 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. It is the Company's general policy to minimize risk by not purchasing engines or components on speculation; however, on occasion, the Company purchases engines and components without having a commitment for their sale. The Company normally makes a contractual commitment to purchase specific engines or components for its own account only after, or concurrently with, obtaining a firm customer commitment to purchase. Although the Company usually has sale commitments at delivery, it would have financial exposure if it purchased an engine or components which could not immediately be resold. The Company assesses the supply and demand of 35 37 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. The Company does not refurbish or perform other maintenance on the engines or components it sells; however, from time to time, the Company has hired third party contractors to refurbish or repair such engines and components. COMPETITION In the medium-term engine lease market segment, which is the Company's target market, the Company principally competes with Shannon Engine Services, headquartered in Shannon, Ireland, which is owned by CFM and Rolls Royce. Rolls Royce limits its leasing activities to products of its parent company and related parties. The Bank of Tokyo-Mitsibishi, through its affiliate Engine Lease Finance in Shannon, Ireland, also competes with the Company. Each of these competitors is substantially larger and has greater financial resources than the Company which may permit, among other things, greater access to capital markets at more favorable terms. In addition, major aircraft lessors, including International Lease Finance Corporation and General Electric Capital Aviation Services, compete with the Company to the extent that they include spare engine leases with their aircraft leases. With respect to engine marketing and spare parts and component sales, the Company competes with airlines, aircraft manufacturers, aircraft, engine and parts brokers, and parts distributors. The Company's major competitors include the Allen Aircraft division of AAR Corp., The AGES Group, The Memphis Group, Aviation Sales Company, Kellstrom Industries and AVTEAM, Inc. Certain of these competitors may have, or may have access to, financial resources substantially greater than the Company. Significant increases in competition encountered by the Company in the future may limit the Company's ability to expand its business, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that the primary competitive factors in the aircraft engine leasing industry are flexibility in leasing terms, including price, return conditions and term of lease, and availability of engines. The Company believes that it is able to compete favorably in leasing commercial aircraft engines and parts due to its experience in the industry and reputation and expertise in acquiring and leasing commercial aircraft engines at economical prices which allows the Company to re-lease or sell such engines and parts at a competitive price. See "Risk Factors -- Competition." INSURANCE The Company requires its lessees to carry the types of insurance customary in the air transportation industry, including comprehensive liability insurance 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. All policies contain a breach of warranty endorsement or severability of interest clause so that the Company continues to be protected even if the operator/lessee violates one or more of the warranties or conditions of the insurance policy. The Company monitors compliance with the insurance provisions of the leases. The Company also carries contingency and product liability insurance. GOVERNMENT REGULATION The Company's customers are generally subject to a high degree of regulation in the various jurisdictions in which they operate. Such regulations also indirectly affect the Company's business operations. Under the provisions of the Transportation Act, as amended, the FAA exercises regulatory authority over the air transportation industry. The FAA regulates the manufacture, repair and operation of all aircraft engines operated in the United States. Its regulations are designed to insure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair proce- 36 38 dures for the various types of commercial aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. 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 worldwide marketability. 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. In addition, by the year 2000, federal regulations will 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 Federal Aviation Regulations of the United States. As of September 30, 1997, all of the engines in the Company's lease portfolio were Stage III engines. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. EMPLOYEES As of September 30, 1997, the Company had 40 full-time employees and four part-time employees (excluding consultants), including 22 employees in equipment leasing and trading and 22 employees in airframe and engine component sales. None of the Company's employees is covered by a collective bargaining agreement and the Company believes its employee relations are good. FACILITIES The Company's principal offices are located at 180 Harbor Drive, Suite 200, Sausalito, California 94965. The Company occupies space in Sausalito under a lease that covers approximately 5,500 square feet of office space and expires on March 14, 1999. Engine financing sales, trading and general administrative activities are conducted from the Sausalito location. The Company also leases approximately 22,800 square feet of office and warehouse space for WASI's operations at 291 Harbor Way, South San Francisco, California 94080. This lease expires on May 31, 1998. See Note 10 to the Audited Financial Statements. In addition, the Company leases approximately 10,730 square feet of 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, 1999. The Company believes that its current facilities may not be adequate for its needs and anticipates acquiring additional facilities as needed. 37 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to each person who is a director or executive officer of the Company.
NAME AGE* POSITION ----------------------------------- ----- ------------------------------------------ Charles F. Willis, IV 49 President and Chief Executive Officer, Chairman of the Board of Directors Donald A. Nunemaker 50 Executive Vice President and Chief Administrative Officer James D. McBride 41 Executive Vice President and Chief Financial Officer William L. McElfresh 51 Director and Executive Vice President -- Strategic Development Steven D. Oldenburg 48 Senior Vice President -- Sales and Marketing Rae A. Capps 45 Senior Vice President and General Counsel Elliot M. Fischer 49 Vice President -- Syndications Edwin F. Dibble 54 President -- WASI Ross K. Anderson (1) 56 Director William M. LeRoy (1) 55 Director Willard H. Smith, Jr. (1) 60 Director
- --------------- *Age listed as of September 30, 1997 (1) Member of the Audit and Compensation Committees of the Board of Directors Set forth below is certain information with respect to each director and executive officer of the Company. CHARLES F. WILLIS, IV is the founder of the Company, has served as Chief Executive Officer, President and a Director since its incorporation in 1985 and has served as Chairman of the Board of Directors since 1996. Mr. Willis has 31 years of experience in the aviation industry. He has provided a wide range of consulting services for the aviation industry, including fleet planning, cost of recertification estimation, assistance with purchase and lease documentation, appraisal of competing equipment and evaluation of financing proposals. From 1975 to 1985, Mr. Willis served as President of the Company's predecessor, Charles F. Willis Company, which purchased, financed and/or sold a variety of large commercial transport aircraft and provided consulting services to the aviation industry. During 1974, Mr. Willis operated a small business not involved in the aviation industry. From 1972 through 1973, Mr. Willis was Assistant Vice President of Sales at Seaboard World Airlines, a freight carrier. From 1965 through 1972, he held various positions at Alaska Airlines, including positions in the departments of flight operations, sales and marketing. DONALD A. NUNEMAKER has served as the Company's Executive Vice President and Chief Administrative Officer since July of 1997. Mr. Nunemaker is responsible for managing the day-to-day operation of the Company and has been extensively involved in the equipment leasing industry since 1973. From 1995 to 1996, Mr. Nunemaker was President and Chief Executive Officer of LeasePartners, Inc., a small ticket vendor leasing company based in Burlingame, California, which was acquired by Newcourt Credit Group. From 1990 to 1994, Mr. Nunemaker was Executive Vice President of Concord Asset Management, Inc., an aircraft and computer leasing subsidiary of Concord Leasing, Inc., which was owned by the HSBC Group. Before joining Concord in 1990, Mr. Nunemaker was President of Banc One Leasing Corporation of New Jersey, which was Banc One's small ticket leasing subsidiary. Prior to that he spent thirteen years with Chase Manhattan Leasing Company in a variety of senior line and staff positions. His last position at Chase was that of Senior Vice President & Division Executive -- Special Products Division, which included management responsibility for Chase Aircraft Finance Company, Chase/Horizon Creditcorp and the AT&T Finance Group. Mr. Nunemaker has an M.B.A. from Indiana University. 38 40 JAMES D. MCBRIDE has served as the Company's Executive Vice President and Chief Financial Officer since September of 1997. Prior to joining the Company, Mr. McBride was Senior Vice President and the Chief Financial Officer of Triton Container International Limited, an international lessor serving intermodal shipping companies worldwide. During his twelve year tenure at Triton, in addition to the position of Senior Vice President, Mr. McBride held the positions of Vice President, Finance; Vice President, Treasurer; and Director of Finance. Prior to joining Triton, Mr. McBride held various positions at Crocker National Bank and Bank of America. Mr. McBride has been involved in leasing and financial services for over twenty years. He has significant experience in the areas of capital formation, accounting and control, domestic and international operations, information systems and risk management. Mr. McBride holds a M.B.A. from the Haas School of Business at the University of California, Berkeley. WILLIAM L. MCELFRESH was named as the Company's Executive Vice President of Strategic Development in February 1997. Prior to that, he served as the Company's Executive Vice President-Marketing since 1989 and was named a Director of the Company in 1996. For approximately 29 years, Mr. McElfresh has been involved with commercial jet engine sales and support. From 1987 through 1989, he was a partner with Turbine Engine Support Co., Inc. and provided sales, brokerage, exchange and monitoring programs for aircraft engines and parts. As Vice President, Sales and Marketing for International Aircraft Support, Inc. from 1983 through 1987, Mr. McElfresh found and exploited new market opportunities for commercial jet aircraft engines and spare parts. From 1977 through 1983, he developed and managed the worldwide spares support and overall operations for the Power Accessories Division of TRW, Inc. From 1972 to 1983, he established a marketing program in Asia and Pacific island markets to support the growth for the new Component Repair Group of TRW Inc., which manufactured the major aircraft engine components for Pratt and Whitney, General Electric and CFM. From 1968 to 1972, he was an Aircraft Maintenance Officer in the United States Air Force assigned to VIP and NASA Operations Support. Mr. McElfresh holds a B.A. from the University of Kansas and an M.B.A. from Pepperdine University. STEVEN D. OLDENBURG was named as the Company's Senior Vice President -- Sales and Marketing in August 1997. Prior to that, he served as the Company's Senior Vice President -- Capital Markets since November 1995. For over 19 years, Mr. Oldenburg has been involved in the leasing industry, providing and arranging debt and equity. Mr. Oldenburg has structured and negotiated several hundred millions of dollars in equipment financings for national and international leveraged and single investor leases. As Vice President, Syndications, for Marine Midland Business Loans, Inc. (formerly Concord Leasing, Inc.) from 1991 through 1994, he specialized in financing commercial aircraft and other transportation-related equipment. From 1976 through 1991, he also managed the financing for high tech equipment, medical equipment, rail equipment and corporate aircraft for other international lessors. Mr. Oldenburg holds a B.S. in Management from the University of Vermont and a Certificate in Accounting from Bentley College in Boston. RAE A. CAPPS has served as the Company's Senior Vice President and General Counsel since June of 1997 and is responsible for overseeing the legal affairs of the Company. Ms. Capps was Vice President, General Counsel and Corporate Secretary of Hawaiian Airlines from 1993 to June of 1997. She was an attorney in the law firm of Goodsill Anderson Quinn & Stifel in Honolulu, Hawaii from 1990 to 1993 and an attorney in the law firm of Gendel, Raskoff, Shapiro & Quittner in Los Angeles from 1987 to 1990. Ms. Capps holds a B.A. from the University of Texas and a J.D. from the University of Utah. ELLIOT M. FISCHER has served as the Company's Vice President -- Syndications since September of 1997. From March of 1995 to September of 1997, he served as the Company's Chief Financial Officer and Controller. During the 15 years prior to joining the Company, Mr. Fischer held senior level finance positions at several leasing companies, including LeasePartners, Inc. from 1994 to 1995; USL Capital from 1990-1994; and Chrysler Capital Corporation from 1980 to 1987. During 1994, Mr. Fischer was Corporate Controller at LeasePartners, a vendor leasing company in Burlingame, California. His experience includes financial reporting and controls, forecasting, budgeting, strategic planning and reporting systems. Prior experience includes financial reporting in manufacturing environments, and a three-year assignment with International Paper Company as Chief Financial Officer of a paper converting facility in Japan. Mr. Fischer worked in public accounting for three years and is a Certified Public Accountant, holding a B.B.A. in accounting from Pace University in New York. 39 41 EDWIN F. DIBBLE has served as President of WASI since May of 1997 and was a Vice President of WASI from October of 1994 to May of 1997. From 1986 to 1994, Mr. Dibble served as Vice President of engines and parts sales for Turbine Engine Support Co., Inc. From 1984 to 1986, Mr. Dibble worked in purchasing for International Aircraft Support, Inc. From 1964 to 1984, Mr. Dibble held various positions with United Airlines in the areas of maintenance sales and services. Mr. Dibble also worked in the Powerplant Planning Department, coordinating the support for all types of aircraft engines operated by United Airlines. ROSS K. ANDERSON has served as a Director of the Company since 1996. Since 1993, Mr. Anderson has been President and Chief Executive Officer of Astech Manufacturing, Inc. ("Astech"), an aerospace company manufacturing proprietary metal honeycomb products using high temperature alloys. Astech's principal customers include Boeing, Pratt & Whitney and General Electric for commercial aircraft engines. From 1991 to 1993, Mr. Anderson was employed at Teledyne Aircraft Group as Group Executive. From 1987 to 1991, Mr. Anderson served as President of Teledyne Picco. Mr. Anderson received his M.S. in Aeronautical Engineering from California Institute of Technology, his M.B.A. from Stanford Graduate School of Business and his B.S. from the United States Naval Academy. WILLIAM M. LEROY has served as a Director of the Company since 1996. In 1993, Mr. LeRoy established the LeRoy Accountancy Corporation, an audit firm specializing in the audits of employee benefit plans. From 1965 to 1993, Mr. LeRoy served in various positions at Ernst & Young LLP an independent accounting firm, in the Chicago, San Jose and San Francisco offices including as audit partner responsible for the financial institution and leasing company practice in northern California. Mr. LeRoy received his M.B.A. from Golden Gate University and his B.S. in Accounting from Northern Illinois University. WILLARD H. SMITH, JR. has served as a Director of the Company since 1996. From 1979 through 1995, Mr. Smith was employed at Merrill Lynch, Pierce Fenner & Smith Incorporated ("Merrill Lynch") and served as Managing Director since 1983 in their Equity Capital Markets Division. From 1992 through 1995, Mr. Smith's primary focus was the real estate investment trust industry. His duties as Managing Director at Merrill Lynch included evaluating companies' structure and equity requirements, coordinating the placement of equity offerings with Merrill Lynch's retail and institutional client base, and assessing the market's demand for potential offerings. Mr. Smith is also a Board Member of the Cohen & Steers Realty Shares, Cohen & Steers Realty Income Fund, the Cohen & Steers Total Return Realty Fund, the Cohen & Steers Special Equity Fund, Inc., Cohen & Steers Equity Income Fund, Essex Property Trust, Inc., Highwoods Properties, Inc. and Realty Income Corporation. Prior to joining Merrill Lynch, Mr. Smith worked at F. Eberstadt & Co. from 1971 to 1979. Mr. Smith received his B.S. in Business Administration, and B.S. in Industrial Engineering from the University of North Dakota in 1959 and 1960, respectively. All directors hold office until the next annual meeting of shareholders or until their successors have been elected. Executive officers serve at the discretion of the Board. There are no family relationships between any of the directors or executive officers of the Company. DIRECTOR COMPENSATION Non-employee members of the Board are each paid an annual fee of $10,000 and are reimbursed for their out-of-pocket expenses incurred to attend Board of Directors or Committee meetings. They also receive $1,000 for each Board meeting and $500 for each Committee meeting which they attend in person, and $500 for each Board and Committee meeting held by telephone. Pursuant to the automatic option grant program under the 1996 Plan, each individual who first becomes a non-employee Board member after the effective date of the Plan is eligible to receive an option grant for 5,000 shares of Common Stock at an exercise price per share equal to 100% of the fair market value on the date of grant. In addition, at each annual shareholders meeting, beginning with the 1997 Annual Meeting, each individual who is to continue to serve as a non-employee Board member after the meeting will receive an additional option grant to purchase 1,000 shares of Common Stock whether or not such individual has been in the prior employ of the Company. 40 42 INDEMNIFICATION AND LIMITATION OF LIABILITY The Company has adopted provisions in its Articles of Incorporation that eliminate the personal liability of its directors for monetary damages arising from a breach of their fiduciary duties in certain circumstances to the fullest extent permitted by law and that authorize the Company to indemnify its directors and officers to the fullest extent permitted by law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company has entered into indemnification agreements with its directors and certain officers containing provisions which are in some respects broader than the specific indemnification provisions contained in the California Corporation Code. The indemnification agreements may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors and officers' insurance if available on reasonable terms. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. AUDIT COMMITTEE The Audit Committee, whose members are Ross K. Anderson, William M. LeRoy and Willard H. Smith, Jr., meets with the Company's financial management and its independent public accountants to review internal financial information, audit plans and results, and financial reporting procedures. COMPENSATION COMMITTEE The Compensation Committee, whose members are Ross K. Anderson, William M. LeRoy and Willard H. Smith, Jr., reviews and approves the Company's compensation arrangements for senior management and administers the Company's 1996 Plan. 41 43 EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation earned by (i) the Company's Chief Executive Officer and (ii) each of the four other most highly compensated executive officers of the Company serving as such as of the end of the last fiscal year whose total annual salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1996. Such individuals will be hereafter referred to as the "Named Executive Officers." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------- ------------------------------------- SECURITIES FISCAL OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS - --------------------------------- ------ -------- -------- ------------- ------------------- Charles F. Willis, IV 1996 $448,488 $175,000 -- -- Chief Executive Officer 1995 $577,704 -- -- -- William L. McElfresh 1996 $150,833 $ 63,265 -- 150,000 Executive Vice President 1995 $116,000 $134,892 -- -- John F. Votruba 1996 $164,956 $ 40,000 -- 30,000 General Counsel (1) 1995 $141,908 -- -- -- Edwin F. Dibble 1996 $100,000 $264,615(2) -- 30,000 Vice President-WASI 1995 $100,000 $ 94,485(2) -- -- Steven D. Oldenburg 1996 $ 94,792 $ 31,000 $23,387(3) 30,000 Senior Vice President 1995 $ 86,969(4) $ 30,000 -- --
- --------------- (1) Mr. Votruba resigned from the Company in June of 1997. (2) Mr. Dibble's bonus is determined as a percentage of pre-tax profits of WASI. (3) Represents relocation expenses paid by the Company. (4) Includes $73,995 in consulting fees paid by the Company to Mr. Oldenburg before he became an employee of the Company. COMPENSATION ARRANGEMENTS AND EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS CHARLES F. WILLIS, IV. Mr. Willis' base salary for 1997 will be $250,000 and his maximum bonus will be $350,000. WILLIAM L. MCELFRESH. Effective July 1, 1996, Mr. McElfresh signed a five-year employment agreement with the Company. The agreement automatically renews for additional one year terms unless either party gives notice of nonrenewal six months prior to expiration of the current term. Mr. McElfresh's base salary is $150,000 per year, subject to adjustment by the Company's Board of Directors. Mr. McElfresh is entitled to receive bonuses under the Company's Incentive Compensation Plan. STEVEN D. OLDENBURG. Effective July 1, 1996, Mr. Oldenburg signed a five-year employment agreement with the Company. The agreement automatically renews for additional one year terms unless either party gives notice of nonrenewal six months prior to expiration of the current term. Mr. Oldenburg's base salary is $150,000 per year, subject to adjustment by the Company's Board of Directors. Mr. Oldenburg is entitled to receive bonuses under the Company's Incentive Compensation Plan. The Company must provide Mr. Oldenburg with at least six months' notice prior to termination of his employment. EDWIN F. DIBBLE. Effective January 1, 1997, Mr. Dibble has signed a five-year employment agreement with WASI. The agreement automatically renews for an additional year unless WASI gives notice of termination sixty days prior to the expiration of the employment period. Mr. Dibble's base salary is $100,000 per year, subject to adjustment by WASI's Board of Directors. 42 44 INCENTIVE COMPENSATION PLAN The Company has established an incentive compensation plan for executive officers, certain independent contractors and sales personnel (the "Incentive Compensation Plan"). This plan became effective as of July 1, 1996 and generally provides for payments expressed as a percentage of a participant's base compensation upon achievement of pre-agreed financial and qualitative objectives. The bonus percentages are established annually by the Compensation Committee of the Board of Directors. Bonuses can be tiered depending upon individual, profit center and Company performance. Generally, performance criteria are based on achievements of annual budgets, return on equity and assets and, to a lesser degree, on subjective evaluations of performance and individual relative contribution to the Company's goals and objectives. A portion of any bonus over a specific amount will be paid out by the Company over a one year period and is subject to forfeiture if the participant terminates his relationship with the Company prior to the scheduled payment date. 1996 STOCK OPTION/STOCK ISSUANCE PLAN The Company's 1996 Plan was adopted by the Board of Directors on June 21, 1996. 525,000 shares of Common Stock have been authorized for issuance under the 1996 Plan. The 1996 Plan is divided into three separate components: (i) the Discretionary Option Grant Program under which eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 100% of their fair market value on the grant date, (ii) the Stock Issuance Program under which such individuals may, in the Plan Administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at an exercise price equal to 100% of their fair market value at the time of issuance or as a bonus tied to the performance of services and (iii) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee Board members to purchase shares of Common Stock at an exercise price equal to 100% of their fair market value on the grant date. The Discretionary Option Grant Program and the Stock Issuance Program are administered by the Compensation Committee. The Compensation Committee as Plan Administrator has complete discretion to determine which eligible individuals are to receive option grants or stock issuances, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. However, in no event may any one participant in the 1996 Plan receive option grants or direct stock issuances for more than 250,000 shares per calendar year. In the event that the Company is acquired by merger or asset sale, each outstanding option under the Discretionary Option Grant Program, which is not to be assumed or replaced by the successor corporation, will automatically accelerate in full, and all unvested shares under the Stock Issuance Program will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation. The Plan Administrator has the authority under the Discretionary Option Grant and Stock Issuance Programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will automatically vest in the event of a change in control of the Company effected by a successful tender offer for more than 50% of the outstanding voting stock or by proxy contest for the election of Board members. The Plan Administrator also has the authority to provide for automatic vesting of options and unvested shares upon the individual's service being terminated, whether involuntarily or through a resignation for good reason, within twelve (12) months following either a merger or asset sale or a change in control. Stock appreciation rights are authorized for issuance under the Discretionary Option Grant Program which provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. The Plan 43 45 Administrator also has discretion to issue limited stock appreciation rights under the Discretionary Option Grant Program to certain officers and directors of the Company which will provide the holders with the election, upon the successful completion of a hostile tender offer for more than 50% of the Company's outstanding voting securities, to surrender their outstanding options for a cash distribution from the Company in an amount per surrendered option share equal to the excess of (i) the highest reported price per share paid in effecting the take-over (ii) the option exercise price payable per share. The Plan Administrator has the authority to effect the cancellation of outstanding options under the Discretionary Option Grant Program in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. Under the Automatic Option Grant Program, each individual who becomes a non-employee Board member after the effective date of the Plan will receive an option grant on such date for 5,000 shares of Common Stock exercisable at an exercise price per share equal to 100% of the fair market value on the date of grant, provided such individual has not otherwise been in the prior employ of the Company. In addition, at each annual shareholders meeting, beginning with the 1997 Annual Meeting, each individual who is to continue to serve as a non-employee Board member after the meeting will receive an additional option grant to purchase 1,000 shares of Common Stock whether or not such individual has been in the prior employ of the Company. Each automatic grant will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable; however, any shares purchased upon exercise of the option will be subject to repurchase should the optionee's service as a non-employee Board member cease prior to vesting in the shares. The initial 5,000-share grant will vest in four equal and successive annual installments over the optionee's period of Board service. Each additional 1,000- share grant will vest upon the optionee's completion of one year of Board service measured from the grant date. However, each outstanding option will immediately vest upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Board member. The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will terminate on June 20, 2006, unless sooner terminated by the Board. The following table sets forth information concerning the stock options granted by the Company during the 1996 fiscal year to the Named Executive Officers. No stock appreciation rights were granted during the 1996 fiscal year to the Named Executive Officers. OPTIONS GRANTS IN 1996 FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER TOTAL STOCK OF OPTIONS PRICE APPRECIATION SECURITIES GRANTED EXERCISE FOR UNDERLYING EMPLOYEES OR BASE OPTION TERM(1) OPTIONS IN FISCAL PRICE PER EXPIRATION ----------------------- NAME GRANTED YEAR 1996 SHARE (2) DATE 5% 10% - ------------------------ -------- ---------- --------- -------- -------- ---------- Charles F. Willis, IV... -- NA NA NA $ -- $ -- William L. McElfresh.... 150,000 47.6% $8.00 9/16/06 754,673 1,912,491 John F. Votruba......... 30,000 9.5% $8.00 9/16/06 150,935 382,498 Edwin F. Dibble......... 30,000 9.5% $8.00 9/16/06 150,935 382,498 Steven D. Oldenburg..... 30,000 9.5% $8.00 9/16/06 150,935 382,498
- --------------- (1) There is no assurance provided to the option holder or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the 5% and 10% assumed annual rates of compounded stock price appreciation. 44 46 (2) The exercise price may be paid in cash, in shares of Common Stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares and the Federal and state income and employment tax liability incurred by the optionee in connection with such exercise. The following table sets forth certain information with respect to the Named Executive Officers concerning shares of the Company's Common Stock subject to exercisable and unexercisable stock options which the Named Executive Officers held at the end of the 1996 fiscal year. No options or SARs were exercised by any Named Executive Officer during the 1996 fiscal year. Except to the extent of any limited stock appreciation rights awarded in connection with outstanding options, none of the Named Executive Officers held any stock appreciation rights at the end of that fiscal year.
FISCAL YEAR-END OPTION VALUES --------------------------------------------------------------- NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------- ----------- ------------- ----------- ------------- Charles F. Willis, IV.................... -- -- $ -- $ -- William L. McElfresh..................... 37,500 112,500 182,813 548,438 John F. Votruba.......................... 7,500 22,500 36,563 109,688 Edwin F. Dibble.......................... 7,500 22,500 36,563 109,688 Steven D. Oldenburg...................... 7,500 22,500 36,563 109,688
- --------------- (1) Based on the fair market value of the shares at the end of the 1996 fiscal year ($12.875 per share) less the option exercise price payable for those shares. As of September 30, 1997, 453,500 options have been awarded (15,000 of which have been exercised) and 71,500 shares of Common Stock were reserved for issuance under the 1996 Plan. EMPLOYEE STOCK PURCHASE PLAN The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on June 21, 1996. The Purchase Plan is designed to allow eligible employees of the Company and participating subsidiaries to purchase shares of Common Stock, at semi-annual intervals, through their periodic payroll deductions under the Purchase Plan, and a reserve of 75,000 shares of Common Stock was established for this purpose. Individuals who are eligible employees on the start date of any offering period may enter the Purchase Plan on that start date or on any subsequent semi-annual entry date (the first business day of February and August each year). Individuals who first become eligible employees after the start date of the offering period may join the Purchase Plan on any subsequent semi-annual entry date within that period. Payroll deductions may not exceed 10% of base salary, and the accumulated payroll deductions of each participant will be applied to the purchase of shares on his or her behalf on each semi-annual purchase date (the last business day in January and July) at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the fair market value of the Common Stock on the participant's entry date into the offering period or (ii) the fair market value on the semi-annual purchase date. In no event, however, may any participant purchase more than 500 shares on any one semi-annual purchase date. The Purchase Plan will terminate on the earlier of (i) the last business day of July 2006, (ii) an earlier date determined by the Board or (iii) the date all shares available for issuance have been sold. As of September 30, 1997, 10,527 shares of Common Stock had been issued by the Company as a result of employee stock purchases under the Purchase Plan and 64,473 shares of Common Stock remain reserved for issuance under the Purchase Plan. 45 47 CERTAIN TRANSACTIONS Related Party Transactions. In September 1993, the Company entered into a management agreement with T-4 Inc. ("T-4"), an entity owned by Mr. Willis, to provide administrative and management services for the relative cost of such services. For the years ended December 31, 1994 and 1995, the Company recognized $120,000 and $30,000 in management fee income under this agreement. At December 31, 1995, the Company wrote off its $30,000 receivable. Effective July 1, 1996, the Company purchased T-4 for a nominal cash amount. Loans to Shareholder. During 1994 and 1995, the Company made loans totaling $19,600 and $165,635, respectively, to Mr. Willis. Between January 1, 1996 and July 31, 1996 the Company made loans totaling $265,478 to Mr. Willis. The outstanding balance on loans from the Company to Mr. Willis was $373,845 as of December 31, 1994, $481,789 as of December 31, 1995 and $743,731 as of July 31, 1996. Of such loans, $10,000 were represented by a promissory note that bears interest at 8% per annum. The remainder of such loans are non-interest bearing. Immediately prior to the consummation of the Initial Public Offering, the Company declared a cash dividend to Mr. Willis in the amount of approximately $951,475 in order to facilitate the repayment in full of the loans described above and to pay related income tax liabilities. Contribution of Minority Interest in WASI. Upon consummation of the Initial Public Offering, Mr. Dibble, Vice President of WASI, together with his wife, contributed all of the shares owned by them in WASI (approximately a 20% interest) to the Company in exchange for 16,136 shares of Common Stock of the Company. The number of shares of Common Stock was determined by dividing $129,091 by the initial price to the public in the Initial Public Offering. The Company believes that this method of valuation was no less favorable to the Company than would otherwise have been received in a similar transaction with an unaffiliated third party. Any future transactions between the Company and its officers, directors, and affiliates will be on terms no less favorable to the Company than can be obtained from unaffiliated third parties. Such transactions with such persons will be subject to approval by a majority of the Company's outside directors or will be consistent with policies approved by such outside directors. 46 48 PRINCIPAL SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of the Company's Common Stock as of September 30, 1997 by: (i) each person who is known to the Company to own beneficially more than five percent of the outstanding shares of the Company's Common Stock; (ii) each director; (iii) each officer listed on the Summary Compensation Table; and (iv) all directors and executive officers as a group.
COMMON STOCK --------------------------------------------- PERCENTAGE OF PERCENTAGE OF CLASS BEFORE CLASS AFTER NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OFFERING OFFERING ----------------------------------------------- --------- ------------- ------------- Charles F. Willis, IV(2)....................... 3,060,657(3) 56.1% 44.0% William L. McElfresh(2)........................ 77,939 1.4 1.1 Steven D. Oldenburg(2)......................... 15,849 * * Edwin F. Dibble(2)(4).......................... 37,760 * * Ross K. Anderson(2)............................ 7,000 * * William M. LeRoy(2)............................ 6,000 * * Willard H. Smith, Jr.(2)....................... 7,000 * * All directors and executive officers as a group (11 persons)................................. 3,244,205 59.5% 46.7%
- --------------- * Less than one percent (1) Except as indicated in the footnotes to this table, the shareholders named in the table are known to the Company to have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. The number of shares beneficially owned includes Common Stock of which such individual has the right to acquire beneficial ownership either currently or within 60 days after September 30, 1997 including, but not limited to, shares beneficially owned upon the exercise of an option. (2) The mailing address for each individual is c/o Willis Lease Finance Corporation, 180 Harbor Drive, Suite 200, Sausalito, CA 94965. (3) All of the 3,060,657 shares are held by CFW Partners, LP., a California Limited Partnership of which Charles F. Willis, IV holds a one percent (1%) interest as the sole general partner and of which he holds an eighty percent (80%) interest as a limited partner. A trust for the benefit of Mr. Willis' son holds the remaining nineteen percent (19%) interest as a limited partner. (4) 16,136 of the shares were received in exchange for a minority interest in WASI, and are held by Mr. Dibble and his wife. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par value. After giving effect to the Offering, there will be 6,952,320 shares of Common Stock outstanding. No shares of the Company's Preferred Stock will be outstanding upon consummation of the Offering. COMMON STOCK Subject to the rights of the holders of any Preferred Stock which may be outstanding, each holder of Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor, and, in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of shareholders. Holders of Common Stock have no preemptive rights to purchase or subscribe for any stock or 47 49 other securities and there are no conversion rights or redemption or sinking fund provisions with respect to such Common Stock. All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be when issued, fully paid and nonassessable. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Preferred Stock in one or more series, and to designate the rights, preferences, limitations, restrictions of and upon shares of each series, including voting, redemption and conversion rights. The Board of Directors may also designate dividend rights and preferences in liquidation. It is not possible to state the effect of the authorization and issuance of any series of Preferred Stock upon the rights of holders of Common Stock until the Board of Directors determines the specific terms, rights and preferences of such a series of Preferred Stock. However, such effects might include, among other things, restricting dividends on the Common Stock, diluting the voting power of the Common Stock or impairing the liquidation rights of such shares without further action by holders of Common Stock. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management, which could thereby depress the market price of the Company's Common Stock. At present, the Company has no plans to issue any shares of Preferred Stock. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of law, and the Company's Articles of Incorporation and Bylaws could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise, and the removal of incumbent officers and directors. These provisions include authorization of the issuance of up to 5,000,000 shares of Preferred Stock, with such characteristics that may render it more difficult or tend to discourage a merger, tender offer or proxy contest, as described in "Preferred Stock" above. The Company's Articles of Incorporation also provide that, for as long as the Company has a class of stock registered pursuant to the Exchange Act, shareholder action can be taken only at an annual or special meeting of shareholders and may not be taken by written consent. The Company's Bylaws also limit the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice. In addition, cumulative voting has been eliminated. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids, and to encourage persons seeking to acquire control of the Company to negotiate first with the Company. The Company believes that the benefits of increased protection of the Company's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company, outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar of the Common Stock is American Stock Transfer & Trust Company. 48 50 UNDERWRITING Under the terms of, and subject to the conditions in, the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, the Underwriters named below, for whom Lehman Brothers Inc. and Dain Bosworth Incorporated are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company, and the Company has agreed to sell to each Underwriter, the aggregate number of shares of Common Stock set forth opposite the name of each such Underwriter below:
NUMBER OF UNDERWRITERS SHARES --------- Lehman Brothers Inc............................................... Dain Bosworth Incorporated........................................ --------- Total................................................... 1,500,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters to purchase shares of Common Stock are subject to certain conditions, and that if any of the foregoing shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all the shares of Common Stock agreed to be purchased by the Underwriters must be so purchased. The Company has been advised that the Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus, and to certain selected dealers (who may include the Underwriters) at such public offering price less a selling concession not in excess of $ per share. The selected dealers may reallow a concession not in excess of $ per share to certain brokers and dealers. After the public offering, the offering price, the concession to selected dealers and the reallowance may be changed by the Representatives. The Company has agreed in the Underwriting Agreement to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act") and to contribute to payments that the Underwriters may be required to make in respect thereof. The Company has granted to the Underwriters a 30-day option to purchase up to an additional 225,000 shares of Common Stock, on the same terms and conditions as set forth above to cover over-allotments, if any. To the extent that the option is exercised, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. CFW Partners and all the directors and executive officers of the Company have agreed that they will not, subject to certain limited exceptions, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for any such shares for a period of 90 days after the effective date of the Offering without the prior written consent of Lehman Brothers Inc. In addition, the Company has agreed that it will not, subject to certain limited exceptions, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for such shares without the prior written consent of Lehman Brothers Inc. for 90 days after the effective date of the Offering. Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase shares of Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. In addition, if the Representatives over-allot (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), and thereby create a short position in the Common Stock in connection with the Offering, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. 49 51 In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Dain Bosworth Incorporated holds a warrant to acquire 50,000 shares of Common Stock exercisable at a price of $10.40 per share. The warrant was acquired in connection with the participation by Dain Bosworth Incorporated in the Initial Public Offering. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, San Francisco, California. Certain legal matters in connection with the sale of the securities offered hereby will be passed upon for the Underwriters by O'Melveny & Myers LLP, Los Angeles, California. An attorney with Gibson, Dunn & Crutcher LLP participating in the preparation of this Prospectus beneficially owns shares of Common Stock, in an amount less than 0.1% of the outstanding Common Stock of the Company, which was purchased after the Initial Public Offering in an open market transaction. EXPERTS The Consolidated Financial Statements as of December 31, 1995 and December 31, 1996 and for each of the years in the three-year period ended December 31, 1996 have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company can be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Northwest Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center, New York, New York 10048 and may be copied at prescribed rates. The Commission also maintains a site on the World Wide Web that contains reports, proxy and information statements and other information regarding the Company. The address for this site is: http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act (together with all amendments and exhibits thereto, the "Registration Statement") with respect to the securities offered hereby. This Prospectus, filed as part of such Registration Statement, does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete and are qualified in their entirety by reference to each such contract, agreement or other document which is filed as an exhibit to the Registration Statement. The Registration Statement may be inspected without charge at the Commission's principal office in Washington, D.C. or at the Commission's Regional Offices described above, and copies of such materials can be obtained from the Commission's Public Reference Section referred to above at prescribed rates. 50 52 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheet as of September 30, 1997 (unaudited)....................... F-2 Consolidated Statements of Income for the nine months ended September 30, 1997 and the nine months ended September 30, 1996 (unaudited).................................... F-3 Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 1997 (unaudited)................................................................ F-4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and September 30, 1996 (unaudited)...................................................... F-5 Notes to Unaudited Consolidated Financial Statements.................................. F-6 Report of Independent Accountants dated March 6, 1997................................. F-8 Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995............. F-9 Consolidated Statements of Income for the years ended December 31, 1996, December 31, 1995 and December 31, 1994.......................................................... F-10 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, December 31, 1995 and December 31, 1994............................................. F-11 Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and December 31, 1994...................................................... F-12 Notes to Consolidated Financial Statements............................................ F-13
F-1 53 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS
SEPTEMBER 30, 1997 ------------------ (UNAUDITED) Cash and cash equivalents................................................... $ 6,603,045 Deposits.................................................................... 14,220,403 Equipment held for operating lease, less accumulated depreciation of $17,088,008 at September 30, 1997......................................... 125,924,782 Net investment in direct finance lease...................................... 9,961,033 Property, equipment and furnishings, less accumulated depreciation of $240,275 at September 30, 1997............................................ 507,638 Spare parts inventory....................................................... 9,569,416 Maintenance billings receivable............................................. 1,078,400 Operating lease rentals receivable.......................................... 108,712 Receivables from spare parts sales.......................................... 3,342,133 Other receivables........................................................... 82,304 Other assets................................................................ 1,620,590 ------------ Total assets...................................................... $173,018,456 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses..................................... $ 2,144,727 Salaries and commissions payable.......................................... 909,982 Deferred income taxes..................................................... 8,980,369 Deferred gain............................................................. 189,902 Notes payable and accrued interest........................................ 105,224,643 Capital lease obligation.................................................. 2,837,703 Residual share payable.................................................... 1,797,404 Maintenance deposits...................................................... 17,925,155 Security deposits......................................................... 2,480,392 Unearned lease revenue.................................................... 1,364,679 ------------ Total liabilities................................................. 143,854,956 Shareholders' equity: Common stock, no par value. Authorized 20,000,000 shares; 5,452,320 issued and outstanding at September 30, 1997.................................. 16,276,933 Retained earnings......................................................... 12,886,567 ------------ Total shareholders' equity........................................ 29,163,500 ------------ Total liabilities and shareholders' equity........................ $173,018,456 ============
See accompanying notes to the unaudited consolidated financial statements. F-2 54 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1997 1996 ----------- ----------- (UNAUDITED) REVENUE: Operating lease revenue......................................... $13,481,032 $10,379,013 Finance lease revenue........................................... 222,763 -- Gain on sale of leased equipment................................ 1,333,448 -- Spare part sales................................................ 11,459,311 3,303,123 Sale of equipment acquired for resale........................... 12,747,840 9,605,315 Interest and other income....................................... 543,660 196,702 ----------- ----------- Total revenue........................................... 39,788,054 23,484,153 EXPENSES: Interest expense................................................ 5,225,603 3,371,351 Depreciation expense............................................ 2,995,121 2,512,585 Residual share.................................................. 598,125 535,795 Cost of spare part sales........................................ 7,751,179 1,603,609 Cost of equipment acquired for resale........................... 10,671,668 8,551,229 General and administrative...................................... 6,358,000 3,434,216 ----------- ----------- Total expenses.......................................... 33,599,696 20,008,785 Income before income taxes, minority interest and extraordinary item............................................................ 6,188,358 3,475,368 Income taxes...................................................... (2,456,283) (1,394,943) ----------- ----------- Income before minority interest and extraordinary item............ 3,732,075 2,080,425 Less: minority interest in net income of subsidiary............... -- (79,053) ----------- ----------- Income before extraordinary item.................................. 3,732,075 2,001,372 Extraordinary item less applicable income taxes................... 2,007,929 -- ----------- ----------- Net income.............................................. $ 5,740,004 $ 2,001,372 =========== =========== Earnings per common share: Income before extraordinary item.................................. $0.65 $0.62 Extraordinary item................................................ 0.36 -- ----------- ----------- Net income.............................................. $1.01 $0.62 =========== =========== Weighted average number of shares outstanding..................... 5,708,569 3,215,148
See accompanying notes to the unaudited consolidated financial statements. F-3 55 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
ISSUED AND OUTSTANDING TOTAL SHARES OF COMMON RETAINED SHAREHOLDERS' COMMON STOCK STOCK EARNINGS EQUITY ------------ ----------- ----------- ------------- Balances at December 31, 1996.............. 5,426,793 $16,055,689 $ 7,146,563 $ 23,202,252 Shares issued.............................. 25,527 221,244 -- 221,244 Net income................................. -- -- 5,740,004 5,740,004 --------- ----------- ----------- ----------- Balances at September 30, 1997 (unaudited).............................. 5,452,320 $16,276,933 $12,886,567 $ 29,163,500 ========= =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements. F-4 56 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1997 1996 ------------ ----------- (UNAUDITED) Cash flows from operating activities: Net income................................................... $ 5,740,004 $ 2,001,372 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of equipment held for lease..................... 2,905,016 2,460,703 Depreciation of property, equipment and furnishings.......... 90,105 51,882 (Gain) loss on sale of property, equipment and furnishings... (45,122) 5,700 Gain on sale of leased equipment............................. (1,333,448) -- Increase in residual share payable........................... 598,125 535,795 Minority interest in net income of subsidiary................ -- (84,774) Changes in assets and liabilities: (Increase) decrease in deposits.............................. (620,199) 246,955 Increase in spare parts inventory............................ (5,511,768) (681,650) Increase in receivables...................................... (1,414,577) (771,175) Increase in other assets..................................... (667,171) (1,281,508) (Decrease) increase in accounts payable and accrued expenses.................................................. (608,914) 5,198,453 Increase in salaries and commission payable.................. 371,324 163,544 Increase in deferred income taxes............................ 3,030,693 1,387,088 Decrease in deferred gain.................................... (19,872) -- (Decrease) increase in accrued interest...................... (364,270) 25,045 Increase in maintenance deposits............................. 6,244,630 952,088 Increase in security deposits................................ 501,887 619,188 Increase (decrease) in unearned lease revenue................ 90,410 (95,785) ----------- ----------- Net cash provided by operating activities.................... 8,986,853 10,732,921 Cash flows from investing activities: Proceeds from sale of equipment held for operating lease (net of selling expenses)...................................... 12,083,807 997,350 Proceeds from sale of property, equipment and furnishings .......................................................... 80,500 28,200 Purchase of equipment held for operating lease............... (43,487,728) (4,121,670) Purchase of property, equipment and furnishings.............. (174,341) (236,558) Investment in direct finance lease........................... (10,095,000) -- Principal payments received on direct finance lease.......... 133,967 -- ----------- ----------- Net cash used in investing activities........................ (41,458,795) (3,332,678) Cash flows from financing activities: Repayments from shareholder, net............................. -- 476,204 Proceeds from issuance of notes payable...................... 104,038,706 2,484,467 Proceeds from issuance of common stock....................... 221,244 13,949,759 Principal payments on notes payable.......................... (71,635,450) (9,945,597) Cash dividends paid on common stock.......................... -- (500,000) Principal payments on capital lease obligation............... (122,754) -- ----------- ----------- Net cash provided by financing activities...................... 32,501,746 6,464,833 Increase in cash and cash equivalents.......................... 29,804 13,865,076 Cash and cash equivalents at beginning of period............... 6,573,241 815,649 ----------- ----------- Cash and cash equivalents at end of period..................... $ 6,603,045 $14,680,725 =========== ===========
See accompanying notes to the unaudited consolidated financial statements. F-5 57 WILLIS LEASE FINANCE CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Willis Lease Finance Corporation and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Prospectus, together with "Management's Discussion and Analysis of Financial Condition and Results of Operations." In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 1997, and the results of its operations for the nine month periods ended September 30, 1997 and 1996 and its cash flows for the nine month periods ended September 30, 1997 and 1996. The results of operations and cash flows for the nine month period ended September 30, 1997, are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 1997. (2) MANAGEMENT ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. During the quarter ended September 30, 1997, the Company recorded an allowance for estimated returns of spare parts based on recent experience. Such returns occur in the ordinary course of the Company's business. (3) SHARES ISSUED The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on June 21, 1996, and filed with the Securities and Exchange Commission on November 1, 1996. The Purchase Plan is designed to allow eligible employees of the Company and participating subsidiaries to purchase shares of Common Stock, at semi-annual intervals, through their periodic payroll deduction under the Purchase Plan. The purchase price is the lesser of 85% of the market price of the Common Stock at the beginning of each purchase interval or 85% of the market price of the Common Stock at the end of each purchase interval. A reserve of 75,000 shares of Common Stock has been established for this purpose. During the nine month period ended September 30, 1997, the Company issued 10,527 shares of Common Stock as a result of employee stock purchases under the Purchase Plan. Under the 1996 Stock Option/Stock Issuance Plan, 525,000 shares of the Company's Common Stock were set aside to provide eligible persons with the opportunity to acquire a proprietary interest in the Company. During the nine month period ended September 30, 1997, 15,000 stock options were exercised in connection with this agreement. (4) FINANCING In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2 million or $0.36 per weighted F-6 58 WILLIS LEASE FINANCE CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) average share, net of tax. The new facility bears interest at LIBOR plus 2.5% and matures in February, 1998. At that time, the Company has the option to extend the facility for an additional six years. In June 1997, the Company obtained a $15 million revolving credit facility to finance the acquisition of engines and high-value spare parts for sale or lease. In July 1997, the Company increased this facility to $30 million. This facility, which expires on June 12, 1998, bears interest at prime plus 50 basis points and may be renewed annually. (5) SUBSEQUENT EVENT On October 5, 1997, Western Pacific Airlines, Inc., a domestic lessee of three engines with a combined net book value of $8.7 million filed a petition under Chapter 11 of the Bankruptcy Code in the District of Colorado. Western Pacific has 60 days from October 5, 1997, to agree to perform its obligations and to cure any defaults under its leases with the Company. Although the Company has not received any payments from Western Pacific in October 1997, the Company has security deposits and prepaid rents totaling $284,500 relating to these engines. At this time, the Company does not anticipate that the bankruptcy will have a material adverse effect on the Company's financial position or results of operations. (6) EARNINGS PER SHARE For the purposes of calculating earnings per share, weighted average shares outstanding includes the effect, if any, of outstanding options and warrants. (7) COMMITMENTS In June 1997, the Company committed to purchase nine aircraft engines. The Company is obligated to purchase these engines by December 31, 1997. The agreement provides that, to the extent that a purchased engine will be overhauled by the seller, the payment of both the purchase price and the cost of the overhauled engine will be deferred until the engine is overhauled and delivered to the Company. It is not known at this time how many engines will be overhauled. As of September 30, 1997, three of the nine engines subject to this agreement have been purchased. The Company has entered into commitments for the purchase of an aircraft for disassembly by WASI, the purchase of two engines for the lease portfolio and the purchase of three commuter aircraft with three spare engines for the lease portfolio. The aggregate purchase price for these assets is $19.9 million and as of September 30, 1997, deposits of $310,000 have been made in connection with these purchases. The Company has arranged financing for one engine and is in the process of arranging financing for the other purchases. (8) NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share" which requires the Company to replace its presentation of primary earnings per share with a presentation of basic earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement. The principal difference between primary earnings per share under current accounting standards and basic earnings per share under the new statement is that basic earnings per share does not consider common stock equivalents such as stock options and warrants. Diluted earnings per share under the new Statement will include potential dilution of convertible securities, stock options and warrants. The Statement is effective for the Company's third quarter of 1997 and requires restatement of all prior periods presented under the new Statement. Basic earnings per share under the new Statement would have been $1.05 and $.62 for the nine months ended September 30, 1997 and 1996. Diluted earnings per share under the new Statement would have been $1.03 and $.62 for the nine months ended September 30, 1997 and 1996. F-7 59 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Willis Lease Finance Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Willis Lease Finance Corporation and subsidiaries (formerly Charles F. Willis Company) (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 that 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 (formerly Charles F. Willis Company) as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, the Company changed its method of computing depreciation in 1995. KPMG PEAT MARWICK LLP San Francisco, California March 6, 1997 F-8 60 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
AS OF DECEMBER 31, ----------------------------- 1996 1995 ------------ ------------ Cash and cash equivalents....................................... $ 6,573,241 $ 815,649 Deposits........................................................ 13,600,204 11,320,617 Aircraft engines held for operating lease, less accumulated depreciation of $16,372,418 in 1996 and $13,681,211 in 1995... 93,131,972 74,704,379 Aircraft engines on capital leases.............................. 2,960,457 -- Property, equipment and furnishings, less accumulated depreciation of $160,407 in 1996 and $86,695 in 1995.......... 458,780 207,784 Spare parts inventory........................................... 4,057,648 2,916,003 Maintenance billings receivable................................. 1,107,283 408,454 Operating lease rentals receivable.............................. 405,601 73,658 Receivables from spare parts sales.............................. 854,566 772,474 Other receivables............................................... 829,522 10,481 Other assets.................................................... 953,419 207,894 ------------ ------------ Total assets.......................................... $124,932,693 $ 91,437,393 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses......................... $ 2,753,641 $ 1,052,455 Salaries and commissions payable.............................. 538,658 163,961 Deferred income taxes......................................... 5,949,676 4,092,325 Deferred gain................................................. 209,774 -- Notes payable and accrued interest............................ 73,185,657 69,910,797 Capital lease obligation...................................... 2,960,457 -- Residual share payable........................................ 1,199,279 476,526 Maintenance deposits.......................................... 11,680,525 8,717,170 Security deposits............................................. 1,978,505 1,270,021 Unearned lease revenue........................................ 1,274,269 857,087 ------------ ------------ Total liabilities..................................... 101,730,441 86,540,342 Minority interest in net assets of subsidiary................... -- 84,774 Shareholders' equity: Common stock, no par value. Authorized 20,000,000 and 10,000 shares, 5,426,793 and 1,500 issued and outstanding at December 31, 1996 and 1995, respectively................... 16,055,689 500 Retained earnings............................................. 7,146,563 5,293,566 Advances to shareholder....................................... -- (481,789) ------------ ------------ Total shareholders' equity............................ 23,202,252 4,812,277 ------------ ------------ Total liabilities and shareholders' equity............ $124,932,693 $ 91,437,393 ============ ============
See accompanying notes to consolidated financial statements. F-9 61 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- REVENUE: Operating lease revenue......................... $13,740,438 $13,770,730 $13,635,934 Gain (loss) on sale of leased engines........... 2,208 (482,894) 632,578 Spare part sales................................ 5,842,607 3,858,610 795,262 Sale of equipment acquired for resale........... 12,105,315 5,472,362 2,184,000 Interest and other income....................... 617,144 119,188 541,900 ----------- ----------- ----------- Total revenue........................... 32,307,712 22,737,996 17,789,674 EXPENSES: Interest expense................................ 4,323,276 5,721,811 5,947,843 Depreciation expense............................ 3,181,216 4,703,487 4,447,082 Residual share.................................. 722,753 407,684 1,284,523 Cost of spare part sales........................ 3,307,928 2,545,872 658,864 Cost of sold equipment acquired for resale...... 10,788,730 2,742,262 1,863,000 General and administrative...................... 5,123,813 3,334,768 1,615,585 ----------- ----------- ----------- Total expenses.......................... 27,447,716 19,455,884 15,816,897 Gain on modification of credit facility........... -- 2,202,928 -- ----------- ----------- ----------- Income before income taxes and minority interest........................................ 4,859,996 5,485,040 1,972,777 Income taxes...................................... (1,976,471) (2,212,280) (797,159) ----------- ----------- ----------- Income before minority interest................... 2,883,525 3,272,760 1,175,618 Less: minority interest in net income of subsidiary...................................... (79,053) (56,343) (3,431) ----------- ----------- ----------- Net income.............................. $ 2,804,472 $ 3,216,417 $ 1,172,187 =========== =========== =========== Net income per share (pro forma for 1995 and 1994)............................. $ 0.74 $ 1.03 $ 0.38 =========== =========== =========== Weighted average number of shares outstanding..... 3,796,182 3,110,657 3,110,657
See accompanying notes to consolidated financial statements. F-10 62 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ISSUED AND OUTSTANDING TOTAL SHARES OF COMMON RETAINED ADVANCES TO SHAREHOLDERS' COMMON STOCK STOCK EARNINGS SHAREHOLDER EQUITY ------------ ----------- ---------- ----------- ------------- Balances at December 31, 1994..... 1,500 $ 500 $2,332,149 $ (373,845) $ 1,958,804 Advances to shareholder, net of repayments...................... -- -- -- (107,944) (107,944) Dividends......................... -- -- (255,000) -- (255,000) Net income........................ -- -- 3,216,417 -- 3,216,417 --------- ----------- ---------- --------- ----------- Balances at December 31, 1995..... 1,500 500 5,293,566 (481,789) 4,812,277 Common stock issue and proceeds from IPO, net................... 5,425,293 16,055,189 -- -- 16,055,189 Repayments to shareholders, net... -- -- -- 481,789 481,789 Dividends......................... -- -- (951,475) -- (951,475) Net income........................ -- -- 2,804,472 -- 2,804,472 --------- ----------- ---------- --------- ----------- Balances at December 31, 1996..... 5,426,793 $16,055,689 $7,146,563 $ -- $ 23,202,252 ========= =========== ========== ========= ===========
See accompanying notes to consolidated financial statements. F-11 63 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income............................................. $ 2,804,472 $ 3,216,417 $ 1,172,187 Adjustments to reconcile income to net cash provided by operating activities: Depreciation of aircraft engines held for operating lease................................................ 3,103,601 4,663,949 4,431,039 Depreciation of property, equipment and furnishings.... 77,615 39,538 16,043 Gain on modification of credit facility................ -- (2,202,928) -- Loss (gain) on sale of property, equipment, furnishings.......................................... 5,701 (5,536) (1,530) Loss (gain) on sale of leased aircraft engines......... (2,208) 482,894 (632,578) Increase in residual share payable..................... 722,753 407,684 1,284,523 Minority interest in net income of subsidiary.......... 79,053 56,343 3,431 Changes in assets and liabilities: (Increase) in deposits................................. (2,279,587) (11,061,221) (56,564) (Increase) in spare parts inventory.................... (1,176,384) (940,494) (100,871) (Increase) in receivables.............................. (1,931,905) (359,173) (538,921) (Increase) decrease in other assets.................... (745,525) 54,785 (67,248) Increase in accounts payable and accrued expenses...... 1,701,186 606,656 239,797 Increase in salaries and commission payable............ 374,697 77,201 46,760 Increase in deferred income taxes...................... 1,857,351 2,179,381 791,559 Increase in deferred gain on sale of aircraft engine... 209,774 -- -- Increase (decrease) in accrued interest................ 666,571 (341,379) 259,918 Increase in maintenance deposits....................... 2,963,355 3,294,179 1,637,050 Increase in security deposits.......................... 708,484 124,444 407,697 Increase in unearned lease revenue..................... 417,182 243,726 44,702 ----------- ----------- ----------- Net cash provided by operating activities.............. 9,556,186 536,466 8,936,994 Cash flows from investing activities: Proceeds from sale of aircraft engines (net of selling expenses)............................................ 3,748,035 2,600,000 2,000,644 Proceeds from sale of property, equipment and furnishings.......................................... 28,198 38,500 3,000 Purchase of aircraft engines held for operating lease................................................ (25,277,021) (9,258,379) (17,634,027) Purchase of property, equipment and furnishings........ (362,510) (194,403) (62,603) ----------- ----------- ----------- Net cash (used in) investing activities................ (21,863,298) (6,814,282) (15,692,986) ----------- ----------- ----------- Cash flows from financing activities: Repayments from (advances to) shareholder, net......... 481,789 (107,944) (18,827) Proceeds from issuance of notes payable................ 16,086,621 15,730,277 19,300,445 Proceeds from issuance of common stock................. 15,926,101 -- -- Principal payments on notes payable.................... (13,478,332) (9,337,852) (11,473,474) Cash dividends paid on common stock.................... (951,475) (255,000) (345,280) Minority interest in net assets of subsidiary.......... -- -- 25,000 ----------- ----------- ----------- Net cash provided by financing activities................ 18,064,704 6,029,481 7,487,864 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents......... 5,757,592 (248,335) 731,872 Cash and cash equivalents beginning of period............ 815,649 1,063,984 332,112 ----------- ----------- ----------- Cash and cash equivalents end of period.................. $ 6,573,241 $ 815,649 $ 1,063,984 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-12 64 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 (formerly Charles F. Willis Company) (Willis) is a California corporation which began leasing operations in 1988. Willis is a provider of operating leases of spare commercial aircraft engines worldwide. Willis is primarily engaged in acquiring aftermarket commercial aircraft spare engines and providing operating leases of such engines to foreign and domestic airlines, manufacturers and overhaul/repair facilities. 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) and T-10 Inc. (T-10) are wholly-owned subsidiaries of Willis. They are all California corporations and were established to purchase and lease commercial aircraft engines. Terandon, T-2 and T-5 were incorporated in 1986, 1991 and 1993, respectively, T-7 and T-8 were both incorporated in 1994, and T-10 was incorporated in 1995. T-4 was acquired by Willis in 1996 and was incorporated in 1993. Willis Aeronautical Services, Inc. (WASI) is a wholly-owned subsidiary of Willis. WASI is a California corporation established in 1994 for the purpose of commercial aircraft, airframe and powerplant component marketing and sales. (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, and WASI (together, the Company). Minority interest includes a twenty percent minority interest in WASI which was acquired by the Company on September 18, 1996 through the issuance of $129,088 in common stock. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Advances to Shareholder The advances to the sole shareholder are noninterest bearing (except for a $10,000 interest bearing note). All such notes were repaid in 1996. Advances are accounted for through a reduction of shareholders' equity. (d) Revenue Recognition Revenue from leasing of aircraft engines is recognized as operating 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. (e) Aircraft Engines Held for Operating Lease and Capital Lease Aircraft engines held for operating lease are stated at cost, less accumulated depreciation. Certain professional fees incurred in connection with the acquisition of aircraft engines are capitalized as part of the cost of the engines. Effective January 1, 1995, the Company changed its depreciation policy with respect to engines on long-term lease and has restated its previously issued financial statements. Previously, the Company depreciated such assets on a straight line basis over their estimated useful life of 25 years to a salvage value of 15%. The Company has changed its methodology to depreciate the engine 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 more 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 in 15 years from date of acquisition. The F-13 65 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) effect of this change in accounting principle was a reduction of depreciation expense of $357,999 and $405,657 for the years ended December 31, 1995 and 1994, respectively. This change in accounting principle also resulted an increase in net loss on sale of leased aircraft engines of $48,237 in 1995 and a reduction in net gain on sale of leased aircraft engines of $176,788 in 1994. Engines that in the Company's opinion would not be economically advantageous to overhaul the next time the life-limited parts need to be replaced, are depreciated over the remaining life using component depreciation based on usage as reported monthly by the lessees. In March of 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 reviewed the carrying value of its equipment considering residual values and release rates. This review resulted in a loss on revaluation related to one engine of $300,000 in 1995, which has been included in depreciation expense. There were no write-downs required during 1996. (f) 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 specifically identified. (g) Loan Commitment and Related Fees To the extent that the Company is required to pay loan commitment fees in order to secure debt, such fees are amortized over the life of the related loan on a straight-line basis. (h) Maintenance Costs Maintenance costs under the Company's long-term leases are generally the responsibility of the lessees. Maintenance deposits in the accompanying balance sheet include refundable maintenance payments and certain non-refundable maintenance payments received from the lessees. If 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, the maintenance fees are included in operating lease revenue. Major overhauls paid for by the Company are capitalized and depreciated over the estimated remaining useful life of the engine. (i) Interest Rate Hedge In 1996, the Company purchased an interest rate cap in order to hedge 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. (j) 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 F-14 66 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. (k) 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. (l) 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 $1,199,279 and $476,526 as of December 31, 1996 and 1995, respectively. As of December 31, 1996 and 1995, a total of six and nine engines, respectively, with a net book value of $16,457,439 and $17,866,935, respectively, were subject to residual value arrangements (notes 4, 5 and 14). (m) Equipment Acquired for Resale The Company periodically engages in transactions involving the purchase and immediate resale of aircraft engines. Generally, the Company makes a contractual commitment to purchase specific assets for its own account for resale only after or concurrently with obtaining a firm order from a customer. All aircraft engines purchased by the Company for such transactions during 1996 and 1995 were sold in the year acquired. (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. (p) Per share information Per share information is computed using the weighted average number of common and diluted common equivalent shares outstanding. For primary and fully diluted earnings per share, common equivalent shares consist of the incremental shares issued upon the assumed exercise of diluted stock options, using the treasury stock method. (2) AIRCRAFT ENGINES HELD FOR OPERATING LEASE At December 31, 1996, the Company owned 31 aircraft engines and related equipment with an aggregate original cost of $109,504,390. At December 31, 1995, the Company owned 31 aircraft engines with an aggregate original cost of $88,385,590. F-15 67 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1996, minimum future rentals under the noncancelable operating leases of these aircraft engines are as follows: 1997.......................... $13,845,290 1998.......................... 10,828,463 1999.......................... 7,423,338 2000.......................... 5,736,712 2001.......................... 2,926,444 Thereafter.................... 2,021,000 ----------- $42,781,247 ===========
Approximately 90% of these future rentals will be applied to service principal and interest payments on outstanding notes payable (notes 5 and 14). Contingent rentals included in operating lease revenue totaled $266,000, $362,000 and $145,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Certain of the Company's aircraft engines are leased and operated internationally. All leases relating to this equipment are denominated and payable in U.S. dollars. The Company leases its aircraft engines to lessees domiciled in seven geographic regions: United States, Canada, Mexico, Australia/New Zealand, Europe, South America and Asia. The tables below set forth geographic information about the Company's aircraft engines grouped by domicile of the lessee.
YEARS ENDED DECEMBER 31, ------------------------------------------- REGION: 1996 1995 1994 ---------------------------------- ----------- ----------- ----------- Operating lease revenue: United States..................... $ 5,295,084 $ 4,560,472 $ 4,851,286 Canada............................ 1,291,000 1,080,000 964,666 Mexico............................ 1,865,118 1,900,699 1,178,474 Australia/New Zealand............. 1,029,600 1,339,433 1,689,600 Europe............................ 2,840,428 3,858,792 2,762,629 South America..................... 530,000 308,316 716,575 Asia.............................. 889,208 723,018 1,472,704 ---------- ---------- ---------- Total operating lease revenue............... $13,740,438 $13,770,730 $13,635,934 ========== ========== ==========
F-16 68 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------------------ REGION: 1996 1995 1994 ------------------------------------- ---------- ---------- ---------- Operating lease revenue less depreciation, interest, spare parts interest and residual share: United States...................... $2,405,061 $ 463,336 $ 275,681 Canada............................. 548,769 301,039 185,746 Mexico............................. 306,007 348,900 307,843 Australia/New Zealand.............. 471,293 271,355 410,112 Europe............................. 1,409,631 1,521,563 675,408 South America...................... 185,297 77,569 82,059 Asia............................... 339,545 185,196 125,121 Off-lease and other................ (60,711) (231,210) (105,484) ---------- ---------- --------- Total operating lease revenue less depreciation, interest, spare parts interest and residual share........ $5,604,892 $2,937,748 $1,956,486 ========== ========== =========
YEARS ENDED DECEMBER 31, ------------------------------------------- REGION: 1996 1995 1994 ------------------------------------ ----------- ----------- ----------- Net book value of engines: United States..................... $31,332,388 $24,138,266 $23,601,123 Canada............................ 7,115,984 7,356,011 7,596,038 Mexico............................ 13,441,445 9,255,029 9,506,072 Australia/New Zealand............. 5,509,070 5,706,410 9,332,036 Europe............................ 30,051,738 19,056,190 16,921,539 South America..................... 2,033,831 1,951,012 4,829,647 Asia.............................. 4,109,446 4,243,830 7,202,126 Off-lease......................... 2,498,527 2,997,631 -- ------------ ------------ ------------ Total net book value of engines owned and a capital lease......... $96,092,429 $74,704,379 $78,988,581 ============ ============ ============
(3) PROPERTY, EQUIPMENT AND FURNISHINGS Property, equipment and furnishings consist of the following:
AS OF DECEMBER 31, --------------------- 1996 1995 -------- -------- Automobiles............................................ $140,297 $ 36,049 Computer equipment..................................... 186,272 93,726 Furniture and equipment................................ 292,618 164,704 -------- -------- 619,187 294,479 Accumulated depreciation............................... (160,407) (86,695) -------- -------- Net book value......................................... $458,780 $207,784 ======== ========
F-17 69 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) GAIN ON MODIFICATION OF CREDIT FACILITY In June 1995, the Company's primary credit facility was modified into a 10 year full payout loan. As part of this transaction, the residual sharing agreement was terminated. Furthermore, the lender agreed to acquire two engines from the portfolio, with a net book value of $5,724,045, as payment in full for the respective outstanding loan balance on each of the engines. The modification resulted in a net gain of $2,202,928. (5) NOTES PAYABLE AND ACCRUED INTEREST Notes payable consisted of the following:
AS OF DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- Notes payable with an interest rate of LIBOR plus 1.0%. Secured by aircraft engines and rental payments on leased aircraft engines. The loan requires quarterly payments in arrears, through June 30, 2005. This note is the result of the credit facility modification (notes 4 and 14).................................................. $44,221,306 $48,400,889 Notes payable with fixed interest rates ranging between 8% and 10%. Secured by aircraft engines and rental payments on leased aircraft engines. These notes mature in 1998 or are due upon the sale of the collateral property................................... 5,982,236 6,513,190 Notes payable with an interest rate of LIBOR plus 5%. Secured by aircraft engines and rental payments on leased aircraft engines. The notes mature in the year 2001 or are due upon the sale of the collateral property............................................... 5,189,286 6,617,509 Note payable for a spare parts purchase. Interest accrued at 8% on the unpaid balance. This note was secured by the spare parts. The note matured in August 1996....................................... -- 1,332,641 Notes payable at an interest rate of 11.03%. Secured by aircraft engines. The notes mature on December 29, 2000.................... 3,128,943 3,360,000 Note payable at an interest rate of 11.68%. Secured by an aircraft engine. The note matures on December 31, 2001. This note and the preceding 11.03% notes are part of a $15 million secured term facility for the acquisition of engines........................... 2,368,242 -- Note payable at a fixed interest rate of 9.0%. Secured by aircraft engines and subordinated to the $3,128,943 note discussed above... -- 420,000 Notes payable with a variable interest rate of LIBOR plus 1.5% secured by four engines. Fixed principal payments plus interest are made monthly, and the notes have maturity dates ranging from August 1996 through July 1997..................................... 325,000 1,358,333 Note payable, secured by two engines. This note was non-interest bearing until August, 1996 and thereafter, interest bearing at the Paris Interbanking Operations Rate plus 2%. The note was paid on December 30, 1996................................................. -- 1,395,874 Capital line of credit extended to WASI not to exceed $1,000,000. Interest accrued at prime plus 1%, with repayment terms of interest only for 6 months. The loan was secured by all of the assets of WASI. This facility expired on October 31,1996.......... -- 282,139
F-18 70 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 1995 ----------- ----------- Capital line of credit extended to WASI for $3,000,000. Interest accrues at prime plus 1%, with repayment terms of interest only for 6 months. The loan is secured by all of the assets of WASI. This facility expires on October 31, 1997......................... 661,000 -- Notes payable to two employees of the Company ($25,000 of the notes bears interest at 8%). The remaining balance was noninterest bearing and both notes were paid on September 18, 1996............ -- 50,000 Short-term bridge note with an interest rate of 7%. Secured by aircraft engines and spare parts purchased 12/31/96. The note matures on January 31, 1997 (note 14)............................. 8,632,313 -- Note payable at a fixed interest rate of 7%. Secured by aircraft engines and spare parts. This note is subordinated to the bridge note discussed above and also to the permanent notes replacing the bridge note. The note matures on June 30, 2004.................... 1,830,538 -- ----------- ----------- $72,338,864 $69,730,575 =========== ===========
The Company also has a $15.0 million term facility for the acquisition of engines for lease. This term facility allows for an advance rate of 80% of fair market value of the equipment, not to exceed 100% of the purchase price. The facility is to be used for domestic lessees. Interest rate under this facility will be dependent upon the quality of the credit and the underlying collateral. As of December 31, 1996, no drawdowns had taken place under this facility. 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 $72,202,487 at December 31, 1996. The fair value of the interest rate cap, as estimated by the financial institution providing the instrument is $266,257 at December 31, 1996. In accordance with three of the loan agreements, the Company must maintain certain net worth levels and, additionally, with respect to one of these loans, must maintain a certain current ratio and certain earnings levels. In addition, the Company must prepay loan amounts in the event a collateral engine is sold or otherwise disposed of. Repayment schedules as of December 31, 1996 for the notes payable for each of the next five years are presented below. A substantial amount of operating lease revenue is applied to the repayment of principal and interest. Principal outstanding at December 31, 1996 is repayable as follows:
YEAR -------------------------------- 1997............................ $14,516,505 1998............................ 10,194,820 1999............................ 4,492,805 2000............................ 7,920,608 2001............................ 12,667,933 Thereafter...................... 22,546,193 ----------- Total................. $72,338,864 ===========
As of December 31, 1996 and 1995, accrued interest in the amounts of $846,793 and $180,222, respectively, is included in notes payable and accrued interest. At December 31, 1996 and 1995, the Company held deposits in the amount of $13,600,204 and $11,320,617, respectively, consisting of bank accounts that are F-19 71 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) subject to withdrawal restrictions as per lease or loan agreements. The deposits received in prior years are reflected as a reduction of the note payable balance in accordance with the terms of the previous loan agreement (note 4). Certain lease agreements require prepayments to the Company for periodic engine maintenance. In addition, this account includes security deposits held. Substantially all of the deposits bear interest for the Company's benefit. In February 1997, the Company obtained a new credit facility for $41.5 million and repaid the $44.2 million existing note payable (note 14). In February 1997, the Bridge Loan noted above was replaced with permanent financing in the amount of $11,010,875. This financing has an interest rate of 10.52% and has a maturity date of January 30, 2002 (note 14). (6) INCOME TAXES
FEDERAL STATE TOTAL ---------- -------- ---------- December 31, 1996: Current............................. $ 93,864 $ 25,256 $ 119,120 Deferred............................ 1,580,360 276,991 1,857,351 ---------- -------- ---------- $1,674,224 $302,247 $1,976,471 ========== ======== ========== December 31, 1995: Current............................. $ 25,833 $ 7,066 $ 32,899 Deferred............................ 1,670,220 509,161 2,179,381 ---------- -------- ---------- $1,696,053 $516,227 $2,212,280 ========== ======== ========== December 31, 1994: Current............................. $ -- $ 5,600 $ 5,600 Deferred............................ 612,877 178,682 791,559 ---------- -------- ---------- $ 612,877 $184,282 $ 797,159 ========== ======== ==========
The following is a reconciliation of the statutory federal income tax expense to the effective income tax expense:
YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 ---------- ---------- -------- Statutory federal income tax expense............................. $1,652,397 $1,864,914 $670,744 State taxes, net of federal benefit... 298,307 340,710 121,626 Other................................. 25,767 6,656 4,789 ---------- ---------- -------- Effective income tax expense.......... $1,976,471 $2,212,280 $797,159 ========== ========== ========
F-20 72 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, ---------------------------- 1996 1995 ------------ ----------- Deferred tax assets: Prepaid rent................................... $ 511,466 $ 344,018 Residual sharing expenses...................... 481,367 191,268 Uniform capitalization expenses................ 48,166 26,394 Other.......................................... 7,462 2,403 Passive activity loss carryforwards............ 6,185,615 4,325,565 ----------- ---------- Total gross deferred tax assets............. 7,234,076 4,889,648 Less valuation allowances................... -- -- ----------- ---------- Net deferred tax assets..................... 7,234,076 4,889,648 Deferred tax liabilities: Depreciation on aircraft engines............... (13,183,752) (8,981,973) ----------- ---------- Net deferred tax liability.................. $ (5,949,676) $(4,092,325) =========== ==========
As of December 31, 1996 the Company has passive activity loss carryforwards totaling $17,706,748 for federal and $2,693,391 for state income tax purposes which have no expiration date and will be available to offset future passive revenue. (7) SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION During the years ended December 31, 1996 and 1995, the Company paid interest totaling $3,656,707 and $6,063,190, respectively. Income taxes paid were $31,552 and $13,218 for the years ended December 31, 1996 and 1995. During the years ended December 31, 1996, 1995 and 1994, the Company made loans of $265,478, $165,635 and $19,600 to a Company shareholder. Repayments on such loans for the years ended December 31, 1996, 1995 and 1994 were $747,267, $57,691 and $773, respectively. The outstanding balance as of December 31, 1996 and 1995 were $0 and $481,789, respectively. (8) DIVIDENDS During the years ended December 31, 1996 and 1995, the Company paid dividends totaling $951,475 and $255,000 to a Company shareholder, respectively. (9) CONCENTRATION OF CREDIT RISK 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. As of December 31, 1996 and 1995, management believes the Company had no significant concentrations of credit risk. F-21 73 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the year ended December 31, 1996, the Company had one significant customer, Aerovias Mexico, S.A. de C.V., which accounted for approximately 14% of lease revenue. The Company does not believe that the loss of this customer would have a material impact on its operations. (10) COMMITMENTS The Company has two leases for its office and warehouse space. The annual lease rental commitments are $123,408 and $124,692 and the leases expire on March 14, 1999 and May 31, 1998, respectively. Maturities of capital lease obligation as of December 31, 1996 are as follows:
YEAR ----------------------------------------- 1997..................................... $ 376,536 1998..................................... 376,536 1999..................................... 376,536 2000..................................... 376,536 2001..................................... 376,536 Thereafter............................... 2,568,841 ----------- Net Minimum Lease Payments............... 4,451,521 Less: Amount Representing Interest....... (1,491,064) ----------- Present Value of Net Minimum Lease Payments............................... $2,960,457 ===========
(11) RELATED PARTY TRANSACTIONS During 1996, the Company had a note payable to two employees of the Company, who were minority shareholders of a subsidiary of the Company. This amount was repaid in September 1996. (12) SECURITY DEPOSIT AND MAINTENANCE RESERVE In connection with the Bridge Loan (note 4) for the purchase of an engine and parts package, the Company recorded a liability for maintenance reserves and security deposits relating to such equipment and a corresponding receivable from the seller. These funds continued to be held by the seller until permanent financing was in place. Upon completion of permanent financing in February 1997, these funds were transferred from the seller to the new lender. (13) ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS 123) 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 31, 1995. F-22 74 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1996, the Company has two stock-based compensation plans and has issued warrants, which are described below. 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 been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to $2,398,699 and $.63, respectively. Employee Stock Purchase Plan Under the 1996 Stock Purchase Plan, the Company is authorized to issue up to 75,000 shares of its Common Stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, the employees may elect to have up to 10% of their annual base salary, to a maximum of $25,000 per year, withheld for the purchase of the Company's Common Stock. Purchase intervals are six months each, ending on January 31 and July 31. The purchase price is the lesser of 85% of the market price of the Common Stock at the beginning of each purchase interval or 85% of the market price of the Common Stock at the end of each purchase interval. The first stock purchase date was January 31, 1997; accordingly, the Company had sold no shares to employees under the plan through December 31, 1996. Under FASB Statement 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black Scholes model with the following assumptions for 1996: Dividend yield of zero; an expected life of 1.25 years; expected volatility of 84 percent; and weighted average risk-free interest rate of 6.22 percent. The weighted average fair value of those purchase rights granted in 1996 was $3.08. 1996 Stock Option/Stock Issuance Plan Under the 1996 Plan, 525,000 shares of the Company's shares have been set aside to provide eligible persons with the opportunity to acquire a proprietary interest in the Company. The plan includes a Discretionary Option Grant Program, a Stock Issuance Program, and an Automatic Option Grant Program for eligible non-employee Board members. The fair value of each option granted was estimated on the date of grant using the Black Scholes option-pricing model with the following assumptions for 1996: weighted average risk-free interest rate of 6.22 percent; dividend yield of zero; expected life of 2.43 years, and volatility of 84 percent. A summary of the status of the Company's Stock Option/Stock Issuance Plan as of December 31, 1996, and changes during the year then ended is as follows:
1996 -------------------- WEIGHTED AVERAGE EXERCISE SHARES PRICE ------- -------- Outstanding at beginning of year......................... -- -- Granted.................................................. 315,000 $ 8.00 Exercised................................................ -- -- Forfeited................................................ -- -- Outstanding at end of year............................... 315,000 $ 8.00 Options exercisable at end of year....................... 90,000 $ 8.00 Weighted-average fair value of options granted during the year................................................... $ 4.19
F-23 75 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1996, the 315,000 options outstanding under the Plan are all exercisable at $8.00 per share, and have a weighted average remaining contractual life of 9.71 years. The Company expects that approximately 90 percent of the non-vested options awarded at December 31, 1996 will eventually vest. Warrants In conjunction with the Initial Public Offering, the Company sold five-year purchase warrants for $.0l per warrant covering an aggregate of 100,000 shares of Common Stock exercisable at a price equal to 130% of the Initial Public Offering price. The warrants are exercisable commencing 24 months after the effective date of the Initial Public Offering or earlier, but not earlier than 12 months after the effective date of the Initial Public Offering, if and when the Company files a registration 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 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. (14) SUBSEQUENT EVENTS In February 1997, the Company obtained a new credit facility for $41.5 million to replace the existing note of $44.2 million. The transaction resulted in an extraordinary gain of approximately $2.9 million (pre-tax) (note 5). In February 1997, the Company's Bridge Loan was replaced with permanent financing in the amount of $11,010,875 (note 5). F-24 76 [AISI LOGO] 27 October 1997 Willis Lease Finance Corporation 180 Harbor Drive Suite 200 Sausalito CA 94965 Attention: Charles F. Willis, IV Chief Executive Officer Subject: ENGINE: PORTFOLIO APPRAISAL AISI REPORT NO. A7S029BVO Gentlemen: AIRCRAFT INFORMATION SERVICES, INC. (AISI), was requested by Willis Lease Finance Corporation to perform a sight unseen current market value appraisal, both in half life and in freshly refurbished condition, and a five year future value forecast of a portfolio of engines as identified in Table I (the "Engines"). After studying the past, present and anticipated future market and consulting with knowledgeable engine brokers, lessors and financiers, we have formed the opinion that the Engines have the following aggregate values: Current Market Value Half Life $143,050,000 Current Market Value Freshly Refurbished $157,100,000 Future Value Forecast 1998 $139,410,000 1999 $135,760,000 2000 $132,350,000 2001 $128,870,000 2002 $125,650,000
The Future Value Forecast above assumes an annual inflation rate at 3.0%, half life condition and is based upon base market value (as defined below). These values are subject to the assumptions, definitions and disclaimers herein. Because of the nature of the used engine market, AISI normally considers a 610% variation of the given value to define the range of the market values for a given engine. METHODOLOGY AND DEFINITIONS The historical standard term of reference for commercial engine value has been 'half-life fair market value' of an 'average' engine. However, 'market value' could mean a fair value in the given market or a value in a hypothetical 'fair' or balanced market, and the two definitions are not equivalent. Recently, the term 'base value' has been created to describe the theoretical balanced market condition and to avoid the potentially misleading term 'fair market value' which has now become synonymous with the term 'current market value' or a 'fair' value in the actual current market. AISI value definitions arc consistent with those of the International Society of Transport Aircraft Trading (ISTAT) of 0l January 1994; AISI is a member of that organization and employs an ISTAT Certified Senior Aircraft Appraiser. AISI defines a 'base market' value as that of a transaction between equally willing and informed buyer and seller, neither under compulsion to buy or sell, for a single unit cash transaction with no hidden value or liability and with supply and demand of the sale item roughly in balance. Base values are typically given for engines in 'new' condition, 'average half-life' condition, or in a specifically described condition unique to a single engine at a specific time. New base engine values are typically manufacturers list prices and do not include the deep discounts for volume purchases. An 'average' engine is an operable airworthy engine in average physical condition and with average accumulated flight hours and cycles, with no damage history and with level of modification which is normal for its intended use and age. AISI considers average condition A-1 77 unless otherwise stated. 'Half-life' condition assumes that every component or maintenance service which has a prescribed interval that determines its service life, overhaul interval or interval between maintenance services, is at a condition which is one-half of the total interval. AISI defines engine 'freshly refurbished' condition to be that of an engine fresh from an engine heavy maintenance shop visit which refurbished all engine modules or all engine compressor and combustor/turbine stages as appropriate, with all life-limited components at half-life. It should be noted that AISI and ISTAT value definitions apply to a transaction involving a single engine, and that transactions involving more than one engine are often executed at considerable and highly variable discounts to a single engine price, for a variety of reasons relating to an individual buyer or seller. AISI defines a 'current market value' or 'fair market value' as that value which reflects the real market conditions, whether at, above or below the base value conditions. Assumption of a single unit sale and definitions of engine condition, buyer/seller qualifications and type of transaction remain unchanged from that of base value. Current market value takes into consideration the status of the economy in which the engine is used, the status of supply and demand for the particular engine type, the value of recent transactions and the opinions or informed buyers and sellers. Current market value assumes that there is no short term time constraint to buy or sell. Given the relatively thin used engine market and the relatively broad range of values for transactions for an engine type, the meaning of 'base value' for used engines is open to broad interpretation. Normally base value is derived from historical normalized current market values with manufacturer's list price as a start point, while current market value is deduced directly from recent transactions. For used engines there are seldom sufficient historical transactions to permit the same derivation of engine base values as is possible for aircraft base values. In our opinion the used engine market is currently a relatively hard market, and base value will be close to current market values for most engine types. AISI encourages the use of base values to consider historical trends, to establish a consistent baseline for long term value comparisons and future value considerations, or to consider how actual market values vary from theoretical base values. Base values are less volatile than current market values and tend to diminish regularly with time. Base values are normally inappropriate to determine near term values. AISI encourages the use of current market values to consider the probable near term value of an engine. AISI defines a BARE ENGINE as an engine without accessories, but complete with all air, hydraulic and electrical lines which are not directly part of accessories. AISI defines a BASIC QEC engine as including all accessories, connecting lines and engine mounts but not including engine inlet cowl, fan cowl or thrust reverser. AISI defines a FULL QEC engine as a basic QEC engine plus inlet cowl, fan cowl and thrust reverser. There will be some variation in full QEC inventory from engine type to type, and from position to position. FUTURE VALUE FORECAST AISI was requested to provide an aggregate base market future value forecast of the Engines for the next five years, in half-life condition, assuming 3.0% inflation. Our future value forecast is based on the premise that the Engines will be in defined condition, that they have and will be well maintained and that they will suffer no design, material defect, accident, incident or foreign object damage that would impact their future value. We further assume that the Engines will continue to enjoy the active support of the airframe, engine and component manufacturers, and there will be no major war or economic recession throughout the forecast period. Unless otherwise agreed by AISI in writing, this report shall be for the sole use of the client/addressee This report is offered as a fair and unbiased assessment of the subject engines. AISI has no past, present, or anticipated future interest in the subject engines. The conclusions and opinions expressed in this report are based on published information, information provided by others, reasonable interpretations and calculations A-2 78 thereof and are given in good faith. Such conclusions and opinions are judgments that reflect conditions and values which are current at the time of this report. The values and conditions reported upon are subject to any subsequent change. AISI shall not be liable to any party for damages arising out of reliance or alleged reliance on this report, or for any parties action or failure to act as a result of reliance or alleged reliance on this report. Sincerely, AIRCRAFT INFORMATION SERVICES, INC. /s/ FRED E. BEARDEN Fred E. Bearden President A-3 79 TABLE I - LIST OF ENGINES
ENGINE TYPE CONFIGURATION ENGINE TYPE CONFIGURATION ------------ ------------- ------------ ------------- 1) CF6-50C2 Basic QEC 22) CFM56-5A3 Basic QEC 2) CF6-50C2 Basic QEC 23) CFM56-5C4 Bare 3) CF6-50C2 Basic QEC 24) JT8D-217C Basic QEC 4) CF6-80C2A2 Full 25) JT8D-219 Bare 5) CF6-80C2B6 Basic QEC 26) JT8D-219 Bare 6) CF6-80C2B6 Basic QEC 27) JT8D-219 Bare 7) CF6-80E1 Bare 28) JT8D-219 Bare 8) CFM56-3B1 Bare 29) JT8D-219 Basic QEC 9) CFM56-3B1 Bare 30) JT8D-219 Basic QEC 10) CFM56-3B2 Bare 31) JT8D-219 Basic QEC 11) CFM56-3B2 Bare 32) JT8D-219 Basic QEC 12) CFM56-3B2 Bare 33) JT8D-219 Basic QEC 13) CFM56-3B2 Basic QEC 34) JT8D-219A Bare 14) CFM56-3B2 Basic QEC 35) JT9D-7A Basic QEC 15) CFM56-3C1 Bare 36) JT9D-7J Full 16) CFM56-3C1 Bare 37) PW2037 Bare 17) CFM56-3C1 Bare 38) PW2040 Basic QEC 18) CFM56-3C1 Basic QEC 39) PW4060 Bare 19) CFM56-3C1 Basic QEC 40) PW4060 Full 20) CFM56-3C1 Basic QEC 41) RB211-535E4 Basic QEC 21) CFM56-5A3 Bare 42) RB211-535E4 Basic QEC
A-4 80 ========================================================= NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................ 3 Risk Factors.............................. 7 Use of Proceeds........................... 13 Price Range of Common Stock............... 13 Dividend Policy........................... 14 Capitalization............................ 15 Selected Consolidated Financial and Operating Data.......................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 18 Business.................................. 28 Management................................ 38 Certain Transactions...................... 46 Principal Shareholders.................... 47 Description of Capital Stock.............. 47 Underwriting.............................. 49 Legal Matters............................. 50 Experts................................... 50 Additional Information.................... 50 Index to Consolidated Financial Statements.............................. F-1 Appraisal................................. A-1
========================================================= ========================================================= 1,500,000 SHARES [LOGO] WILLIS LEASE FINANCE CORPORATION COMMON STOCK --------------------------- PROSPECTUS November --, 1997 --------------------------- LEHMAN BROTHERS DAIN BOSWORTH INCORPORATED ========================================================= 81 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq listing fee. SEC registration fee.............................................. $ 9,867 NASD filing fee................................................... 3,756 Nasdaq listing fee................................................ 17,500 Transfer Agent fees and expenses.................................. 5,000 Printing expenses................................................. 175,000 Legal fees and expenses........................................... 175,000 Blue Sky fees and expenses........................................ 10,000 Accounting fees and expenses...................................... 80,000 Appraisal fee..................................................... 10,350 Directors and Officers insurance premiums......................... 20,000 Miscellaneous..................................................... 3,527 -------- Total................................................... $510,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 317 of the California General Corporation Law (the "California Law") and Article III of the Company's Articles of Incorporation (the "Articles"), provide for the indemnification of directors, officers, and "agents" (as defined in Section 317 of the California Law) under certain circumstances. The Articles grant the Company the power to indemnify its directors, officers, and agents under certain circumstances to the extent permitted by California Law against certain expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of his or her position as a director, officer, employee or agent. Section 317 of the California Law provides that a corporation has the power to purchase and maintain insurance on behalf of any agent of the corporation against any liabilities asserted against or incurred by the agent in such capacity. The Company has procured a directors' and officers' liability insurance policy insuring the Company's directors and officers against certain liabilities and expenses incurred by them in their capacities as such, and insuring the Company under certain circumstances, in the event that indemnification payments are made by the Company to such directors and officers. Section 204(a)(11) of the California Law provides for the indemnification, subject to certain limitations, of directors, officers and agents for breach of their duty to a corporation and its shareholders in excess of that expressly permitted by Section 317 of the California Law. The Company has entered into indemnification agreements with its directors and officers. These agreements provide substantially broader indemnity rights than those provided under the California Law and the Company's Bylaws. The indemnification agreements are not intended to deny or otherwise limit third- party or derivative suits against the Company or its directors or officers, but if a director or officer were entitled to indemnity or contribution under the indemnification agreement, the financial burden of a third-party suit would be borne by the Company, and the Company would not benefit from derivative recoveries against the director or officer. Such recoveries would accrue to the benefit of the Company but would be offset by the Company's obligations to the director or officer under the indemnification agreement. II-1 82 The above discussion of the Company's Articles and indemnification agreements and of Sections 204(a)(11) and 317 of the California Law is not intended to be exhaustive and is respectively qualified in its entirety by such Articles, indemnification agreements and statutes. In addition, the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors, and by the Registrant of the Underwriters, for certain liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Except as set forth below, the Registrant did not sell any securities which were not registered under the Securities Act during the three year period ended September 30, 1997. On September 18, 1996, the Company issued 14,343 shares of the Company's Common Stock valued at $121,091 to Mr. Dibble, President-Willis Aeronautical Services Inc. and his wife, in exchange for the contribution of all of the shares of the capital stock owned by them in Willis Aeronautical Services Inc., a subsidiary of the Company. The issuance of shares was undertaken pursuant to the exemption from the registration requirements of the Securities Act provided under Section 4(2) thereof. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation, filed September 11, 1996 together with Certificate of Amendment of Amended and Restated Articles of Incorporation filed on September 24, 1996. Incorporated by reference to Exhibit 3.2 of the Company's report on Form 10-K for the year ended December 31, 1996. 3.2 Bylaws, Incorporated by reference to Exhibit 3.3 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-5126 filed on June 21, 1996. 5.1 Opinion of Gibson, Dunn & Crutcher LLP.* 10.1 1996 Stock Option/Stock Issuance Plan and form of agreement thereunder. Incorporated by reference to Exhibit 10.1 to Registration Statement No. 333-5126 filed on June 21, 1996. 10.2 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.2 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.3 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. 10.4 Lease dated May 23, 1995 for facilities located in South San Francisco, California, together with amendment thereto dated March 18, 1996. Incorporated by reference to Exhibit 10.4 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.5 Lease dated February 4, 1997, between Atlas Metal Spinning Company and Willis Aeronautical Services, Inc., for an office and warehouse facility located in South San Francisco. Incorporated by reference to Exhibit 10.5 of the Company's report on Form 10-K for the year ended December 31, 1996. 10.6 Lease dated March 16, 1992 for facilities located in Sausalito, California, together with amendment thereto. Incorporated by reference to Exhibit 10.6 of the Company's report on Form 10-K for the year ended December 31, 1996.
II-2 83
EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------------- 10.7 Employment Agreement between the Company and William McElfresh. Incorporated by reference to Exhibit 10.5 to Registration Statement No. 333-5126 LA filed on June 21, 1996. 10.8 Employment Agreement between the Company and Steven Oldenburg. Incorporated by reference to Exhibit 10.6 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.9 Employment Agreement between the Company and Edwin Dibble. 10.10 Assignment and Assumption of Leases and Purchase and Sale of Engines Agreement, dated September 11, 1992 between Terandon Leasing Corporation and International Lease Finance Corporation. Incorporated by reference to Exhibit 10.8 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.11 Engine Loan Agreement dated April 22, 1994, between T-5, Inc. and Ryoshin Leasing (USA) Inc. Incorporated by reference to Exhibit 10.11 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.12 Loan Agreement dated March 1, 1994 between T-7, Inc. and Heller Financial Inc. Incorporated by reference to Exhibit 10.12 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.13 Loan Agreement dated April 1, 1994 between T-7, Inc. and Heller Financial Inc. Incorporated by reference to Exhibit 10.13 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.14 Secured Loan Agreement dated December 29, 1995 between T-10, Inc. and Finova Capital Corporation. Incorporated by reference to Exhibit 10.14 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.15 Credit Agreement dated June 30, 1995 between the Company and Svenska Finans International BV. Incorporated by reference to Exhibit 10.15 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.16 Loan Agreement dated January 28, 1997, together with related documents. Incorporated by reference to Exhibit 10.16 of the Company's Report on Form 10K for the year ended December 31, 1996. 10.17 Loan Agreement dated November 6, 1996 between Willis Aeronautical Services, Inc. and The Pacific Bank, N.A., together with related documents. Incorporated by reference to Exhibit 10.17 of the Company's Report on Form 10-K for the year ended December 31, 1996. 10.18 Loan Agreement dated February 2, 1997 between the Company and Finova Capital Corporation. Incorporated by reference to Exhibit 10.18 to the Company's Report on Form 10-Q for the period ended March 31, 1997. 10.19 Loan Agreement dated June 12, 1997 with CoreStates Bank, together with related documents for a $15 million revolving credit facility. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended June 30, 1997. 10.20 Amendment dated July 28, 1997, to loan agreement dated June 12, 1997, for the increasing of the revolving credit facility to $30 million from $15 million. Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended June 30, 1997. 10.21 Engine Loan and Security Agreement, dated September 8, 1997 between T-12, Inc. and Fleet Capital Corporation.
II-3 84
EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------------- 10.22 Engine Loan and Security Agreement, dated September 17, 1997 between T-12, Inc. and Fleet Capital Corporation. 10.23 Engine Sales Agreement dated August 14, 1997, together with related documents, for a $47 million purchase from Pratt & Whitney for nine bare Pratt & Whitney 4056 engines. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended September 30, 1997. 10.24 Loan Agreement dated September 8, 1997, together with related documents, for a $2 million loan from Fleet Capital Corporation relating to the financing of equipment leased to Delta Air Lines. Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended September 30, 1997. 10.25 Loan Agreement dated September 17, 1997, together with related documents, for a $4.3 million loan from Fleet Capital Corporation relating to the financing of equipment leased to GE ESI. Incorporated by reference to Exhibit 10.21 to the Company's Report on Form 10-Q for the period ended September 30, 1997. 11.1 Statement regarding computation of per share earnings. Incorporated by reference to Exhibit 11.1 to the Company's Report on Form 10-Q for the period ended September 30, 1997. 21.1 Subsidiaries of the Company. Incorporated by reference to Exhibit 21.1 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 23.1 Consent of KPMG Peat Marwick, LLP. 23.2 Consent of Gibson, Dunn & Crutcher LLP (see Exhibit 5.1) 23.3 Consent of Aircraft Information Services, Inc.
- --------------- * To be filed by amendment. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to any arrangement, provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than that payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (i) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (ii) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement for the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 85 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned in the City of Sausalito, State of California, on the 10th day of November, 1997. WILLIS LEASE FINANCE CORPORATION BY: /s/ CHARLES F. WILLIS, IV ------------------------------------ Charles F. Willis, IV President KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles F. Willis, IV and Donald A. Nunemaker severally, as his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact or agent or substitute lawfully does or causes to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE - -------------------------------------- ---------------------------------- -------------------- /s/ CHARLES F. WILLIS, IV Chairman of the Board; President November 10, 1997 - -------------------------------------- and Chief Executive Officer Charles F. Willis, IV /s/ DONALD A. NUNEMAKER Executive Vice President and Chief November 10, 1997 - -------------------------------------- Administrative Officer Donald A. Nunemaker /s/ JAMES D. MCBRIDE Executive Vice President and Chief November 10, 1997 - -------------------------------------- Financial Officer James D. McBride /s/ WILLIAM L. MCELFRESH Director and Executive Vice November 10, 1997 - -------------------------------------- President -- Strategic Development William L. McElfresh /s/ ROSS K. ANDERSON Director November 10, 1997 - -------------------------------------- Ross K. Anderson /s/ WILLIAM M. LEROY Director November 10, 1997 - -------------------------------------- William M. LeRoy /s/ WILLARD H. SMITH, JR. Director November 10, 1997 - -------------------------------------- Willard H. Smith, Jr.
II-5 86 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ------------------------------------------------------------- ------------ 1.1 Form of Underwriting Agreement............................... 3.1 Amended and Restated Articles of Incorporation, filed September 11, 1996 together with Certificate of Amendment of Amended and Restated Articles of Incorporation filed on September 24, 1996. Incorporated by reference to Exhibit 3.2 of the Company's report on Form 10-K for the year ended December 31, 1996............................................ 3.2 Bylaws, Incorporated by reference to Exhibit 3.3 to Registration Statement No. 333-5126-LA filed on June 21, 1996......................................................... 4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-5126 filed on June 21, 1996.............................. 5.1 Opinion of Gibson, Dunn & Crutcher LLP.*..................... 10.1 1996 Stock Option/Stock Issuance Plan and form of agreement thereunder. Incorporated by reference to Exhibit 10.1 to Registration Statement No. 333-5126 filed on June 21, 1996... 10.2 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.2 to Registration Statement No. 333-5126-LA filed on June 21, 1996............................................. 10.3 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........................... 10.4 Lease dated May 23, 1995 for facilities located in South San Francisco, California, together with amendment thereto dated March 18, 1996. Incorporated by reference to Exhibit 10.4 to Registration Statement No. 333-5126-LA filed on June 21, 1996......................................................... 10.5 Lease dated February 4, 1997, between Atlas Metal Spinning Company and Willis Aeronautical Services, Inc., for an office and warehouse facility located in South San Francisco. Incorporated by reference to Exhibit 10.5 of the Company's report on Form 10-K for the year ended December 31, 1996..... 10.6 Lease dated March 16, 1992 for facilities located in Sausalito, California, together with amendment thereto. Incorporated by reference to Exhibit 10.6 of the Company's report on Form 10-K for the year ended December 31, 1996..... 10.7 Employment Agreement between the Company and William McElfresh. Incorporated by reference to Exhibit 10.5 to Registration Statement No. 333-5126 LA filed on June 21, 1996......................................................... 10.8 Employment Agreement between the Company and Steven Oldenburg. Incorporated by reference to Exhibit 10.6 to Registration Statement No. 333-5126-LA filed on June 21, 1996......................................................... 10.9 Employment Agreement between the Company and Edwin Dibble....
87
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ------------------------------------------------------------- ------------ 10.10 Assignment and Assumption of Leases and Purchase and Sale of Engines Agreement, dated September 11, 1992 between Terandon Leasing Corporation and International Lease Finance Corporation. Incorporated by reference to Exhibit 10.8 to Registration Statement No. 333-5126-LA filed on June 21, 1996......................................................... 10.11 Engine Loan Agreement dated April 22, 1994, between T-5, Inc. and Ryoshin Leasing (USA) Inc. Incorporated by reference to Exhibit 10.11 to Registration Statement No. 333-5126-LA filed on June 21, 1996............................................. 10.12 Loan Agreement dated March 1, 1994 between T-7, Inc. and Heller Financial Inc. Incorporated by reference to Exhibit 10.12 to Registration Statement No. 333-5126-LA filed on June 21, 1996..................................................... 10.13 Loan Agreement dated April 1, 1994 between T-7, Inc. and Heller Financial Inc. Incorporated by reference to Exhibit 10.13 to Registration Statement No. 333-5126-LA filed on June 21, 1996..................................................... 10.14 Secured Loan Agreement dated December 29, 1995 between T-10, Inc. and Finova Capital Corporation. Incorporated by reference to Exhibit 10.14 to Registration Statement No. 333-5126-LA filed on June 21, 1996........................... 10.15 Credit Agreement dated June 30, 1995 between the Company and Svenska Finans International BV. Incorporated by reference to Exhibit 10.15 to Registration Statement No. 333-5126-LA filed on June 21, 1996............................................. 10.16 Loan Agreement dated January 28, 1997, together with related documents. Incorporated by reference to Exhibit 10.16 of the Company's Report on Form 10K for the year ended December 31, 1996......................................................... 10.17 Loan Agreement dated November 6, 1996 between Willis Aeronautical Services, Inc. and The Pacific Bank, N.A., together with related documents. Incorporated by reference to Exhibit 10.17 of the Company's Report on Form 10-K for the year ended December 31, 1996................................. 10.18 Loan Agreement dated February 2, 1997 between the Company and Finova Capital Corporation. Incorporated by reference to Exhibit 10.18 to the Company's Report on Form 10-Q for the period ended March 31, 1997.................................. 10.19 Loan Agreement dated June 12, 1997 with CoreStates Bank, together with related documents for a $15 million revolving credit facility. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended June 30, 1997................................................ 10.20 Amendment dated July 28, 1997, to loan agreement dated June 12, 1997, for the increasing of the revolving credit facility to $30 million from $15 million. Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended June 30, 1997................................... 10.21 Engine Loan and Security Agreement, dated September 8, 1997 between T-12, Inc. and Fleet Capital Corporation. Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended September 30, 1997.........................................................
88
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ------------------------------------------------------------- ------------ 10.22 Engine Loan and Security Agreement, dated September 17, 1997 between T-12, Inc. and Fleet Capital Corporation. Incorporated by reference to Exhibit 10.21 to the Company's Report on Form 10-Q for the period ended Septemper 30, 1997......................................................... 10.23 Engine Sales Agreement dated August 14, 1997, together with related documents, for a $47 million purchase from Pratt & Whitney for nine bare Pratt & Whitney 4056 engines. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended September 30, 1997......................................................... 10.24 Loan Agreement dated September 8, 1997, together with related documents, for a $2 million loan from Fleet Capital Corporation relating to the financing of equipment leased to Delta Air Lines. Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended September 30, 1997........................................... 10.25 Loan Agreement dated September 17, 1997, together with related documents, for a $4.3 million loan from Fleet Capital Corporation relating to the financing of equipment leased to GE ESI. Incorporated by reference to Exhibit 10.21 to the Company's Report on Form 10-Q for the period ended September 30, 1997..................................................... 11.1 Statement regarding computation of per share earnings. Incorporated by reference to Exhibit 11.1 to the Company's Report on Form 10-Q for the period ended September 30, 1997......................................................... 21.1 Subsidiaries of the Company. Incorporated by reference to Exhibit 21.1 to Registration Statement No. 333-5126-LA filed on June 21, 1996............................................. 23.1 Consent of KPMG Peat Marwick, LLP............................ 23.2 Consent of Gibson, Dunn & Crutcher LLP (see Exhibit 5.1)..... 23.3 Consent of Aircraft Information Services, Inc................
- --------------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 1,500,000 SHARES WILLIS LEASE FINANCE CORPORATION COMMON STOCK UNDERWRITING AGREEMENT __________ __, 1997 LEHMAN BROTHERS INC. DAIN BOSWORTH INCORPORATED, As Representatives of the several Underwriters named in Schedule 1, c/o Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Dear Sirs: Willis Lease Finance Corporation, a California corporation (the "Company"), proposes to sell 1,500,000 shares (the "Firm Stock") of the Company's Common Stock, no par value per share (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an option to purchase up to an additional 225,000 shares of the Common Stock on the terms and for the purposes set forth in Section 2 (the "Option Stock"). The Firm Stock and the Option Stock, if purchased, are hereinafter collectively called the "Stock." This is to confirm the agreement concerning the purchase of the Stock from the Company by the Underwriters. 1. Representations, Warranties and Agreements of the Company. The Company represents, warrants and agrees that: (a) A registration statement on Form S-1, [and an amendment thereto,] with respect to the Stock has (i) been prepared by the Company in conformity with the requirements of the United States Securities Act of 1933 (the "Securities Act") and the rules and regulations (the "Rules and Regulations") of the United States Securities and Exchange Commission (the "Commission") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act. Copies of such registration statement [and the amendment thereto] have been delivered by the Company to you as the representatives (the "Representatives") of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means each prospectus included in such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the 2 Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at the Effective Time, including all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5(a) hereof and deemed to be a part of the registration statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means such final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. (c) The Company and each of its subsidiaries (as defined in Section 15) have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged; and none of the subsidiaries of the Company (other than Willis Aeronautical Services, Inc.) is a "significant subsidiary", as such term is defined in Rule 405 of the Rules and Regulations. (d) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims. 2 3 (e) The shares of the Stock to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein will be duly and validly issued, fully paid and non-assessable; and the Stock will conform to the description thereof contained in the Prospectus. (f) This Agreement has been duly authorized, executed and delivered by the Company. (g) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets; and except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. (h) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. (i) Except as described in the Registration Statement, the Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock options plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (j) Neither the Company nor any of its subsidiaries has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, 3 4 whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus. (k) The financial statements (including the related notes and supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. (l) KPMG Peat Marwick LLP, who have certified certain financial statements of the Company, whose report appears in the Prospectus and who have delivered the initial letter referred to in Section 7(f) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations. (o) Aircraft Information Services, Inc., whose report appears in the Prospectus, was, as of the date of such report, and is, as of the date hereof, an independent appraiser with respect to the Company. (n) The Company and each of its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and all real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. (o) The Company and each of its subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar businesses in similar industries. (p) The Company and each of its subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights and licenses necessary for the conduct of their respective businesses and have no reason to believe 4 5 that the conduct of their respective businesses will conflict with, and have not received any notice of any claim of conflict with, any such rights of others. (q) There are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, might have a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company and its subsidiaries; and to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (r) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations. (s) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus which is not so described. (t) No labor disturbance by the employees of the Company exists or, to the knowledge of the Company, is imminent which might be expected to have a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company and its subsidiaries. (u) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (v) The Company has filed all federal, state and local income and franchise tax returns required to be filed through the date hereof and has paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company or any of its subsidiaries which has had (nor does the Company have any knowledge of any tax 5 6 deficiency which, if determined adversely to the Company or any of its subsidiaries, might have a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company and its subsidiaries. (w) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (x) The Company (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (y) Neither the Company nor any of its subsidiaries (i) is in violation of its charter or by-laws, (ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business. (z) Neither the Company nor any of its subsidiaries, nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (aa) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or any of its subsidiaries (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its 6 7 subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its subsidiaries or with respect to which the Company or any of its subsidiaries have knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries; and the terms "hazardous wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (ab) Neither the Company nor any subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 2. Purchase of the Stock by the Underwriters. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell the Firm Stock to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set opposite that Underwriter's name in Schedule 1 hereto. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine. In addition, the Company grants to the Underwriters an option to purchase up to 225,000 shares of Option Stock. Such option is granted solely for the purpose of covering over-allotments in the sale of Firm Stock and is exercisable as provided in Section 3 hereof. Shares of Option Stock shall be purchased severally for the account of the Underwriters in proportion to the number of shares of Firm Stock set opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of each Underwriter with respect to the Option Stock shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Option Stock other than in 100 share amounts. The price of both the Firm Stock and any Option Stock shall be $_____ per share. The Company shall not be obligated to deliver any of the Stock to be delivered on the First Delivery Date or the Second Delivery Date (as hereinafter defined), as the case may be, except upon payment for all the Stock to be purchased on such Delivery Date as provided herein. 7 8 3. Offering of Stock by the Underwriters. Upon authorization by the Representatives of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions set forth in the Prospectus. 4. Delivery of and Payment for the Stock. Delivery of and payment for the Firm Stock shall be made at the office of Gibson, Dunn & Crutcher LLP, One Montgomery Street, Telesis Tower, 26th Floor, San Francisco, California, 94104, at 10:00 A.M., New York City time, on the [fourth] full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the "First Delivery Date." On the First Delivery Date, the Company shall deliver or cause to be delivered certificates representing the Firm Stock to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by certified or official bank check or checks or wire transfer payable in immediately available funds; provided, that the amount of such payment shall be reduced by one days' interest on the amount of gross proceeds at the Underwriters' cost of borrowing such funds plus any other expenses associated with such payment of immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in such names and in such denominations as the Representatives shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Stock, the Company shall make the certificates representing the Firm Stock available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. At any time on or before the thirtieth day after the date of this Agreement, the option granted in Section 2 may be exercised by written notice being given to the Company by the Representatives. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Representatives, when the shares of Option Stock are to be delivered; provided, however, that this date and time shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. The date and time the shares of Option Stock are delivered are sometimes referred to as the "Second Delivery Date" and the First Delivery Date and the Second Delivery Date are sometimes each referred to as a "Delivery Date". Delivery of and payment for the Option Stock shall be made at the place specified in the first sentence of the first paragraph of this Section 4 (or at such other place as shall be determined by agreement between the Representatives and the Company) at 10:00 A.M., New York City time, on the Second Delivery Date. On the Second Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Stock to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by certified or official bank check or checks or wire transfer payable in immediately available funds; provided, that the amount of such payment shall be 8 9 reduced by one days' interest on the amount of gross proceeds at the Underwriters' cost of borrowing such funds plus any other expenses associated with such payment of immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall be registered in such names and in such denominations as the Representatives shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Stock, the Company shall make the certificates representing the Option Stock available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the Second Delivery Date. 5. Further Agreements of the Company. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (c) To deliver promptly to the Representatives such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement and the computation of per share earnings) and (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus; and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the 9 10 offering or sale of the Stock or any other securities relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act, to notify the Representatives and, upon their request, to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance. (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission; (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to the Representatives and counsel for the Underwriters and obtain the consent of the Representatives to the filing; (f) As soon as practicable after the Effective Date, to make generally available to the Company's security holders and to deliver to the Representatives an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158); (g) For a period of five years following the Effective Date, to furnish to the Representatives copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Common Stock may be listed pursuant to requirements of or agreements with such exchange or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder; (h) Promptly from time to time to take such action as the Representatives may reasonably request to qualify the Stock for offering and sale under the securities laws of such jurisdictions as the Representatives may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Stock; (i) For a period of [90] days from the date of the Prospectus, not to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock 10 11 or securities convertible into or exchangeable for Common Stock (other than the Stock and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants or rights), or sell or grant options, rights or warrants with respect to any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the grant of options pursuant to option plans existing on the date hereof), or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock; whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, in each case without the prior written consent of Lehman Brothers Inc.; (j) Prior to the Effective Date, to apply for the inclusion of the Stock on the National Market System and to use its best efforts to complete that inclusion, subject only to official notice of issuance, prior to the First Delivery Date; (k) To apply the net proceeds from the sale of the Stock being sold by the Company as set forth in the Prospectus; and (l) To take such steps as shall be necessary to ensure that neither the Company nor any subsidiary shall become an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 6. Expenses. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Stock and any taxes payable in that connection; (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement; (d) the costs of producing and distributing this Agreement and any other related documents in connection with the offering, purchase, sale and delivery of the stock; (e) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of sale of the Stock; (f) any applicable listing or other fees; (g) the fees and expenses of qualifying the Stock under the securities laws of the several jurisdictions as provided in Section 5; (h) the costs of preparing, printing and distributing a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters); and (i) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement; provided that, except as provided in this Section 6 and in Section 11 the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters. 11 12 7. Conditions of Underwriters' Obligations. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 5(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of O'Melveny & Myers LLP, counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Gibson, Dunn & Crutcher LLP shall have furnished to the Representatives its written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; (ii) each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own 12 13 its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole; (iii) the authorized capital stock of the Company conforms to the description thereof contained in the Prospectus; (iv) the shares of Common Stock outstanding prior to the issuance of the Stock to be sold by the Company have been duly authorized and are validly issued, fully paid and nonassessable; (v) the Stock to be sold by the Company has been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, and the issuance of the Stock will not be subject to any preemptive or similar rights; (vi) this Agreement has been duly authorized, executed and delivered by the Company; (vii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the articles of incorporation or by-laws of the Company or any of its subsidiaries or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or, to the best of such counsel's knowledge, any judgment, or decree of any governmental body, agency or court having jurisdiction over the Company or any of its subsidiaries, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or "blue sky" laws of the various states in connection with the offer and sale of the Stock by the Underwriters; (viii) the statements (1) in the Prospectus under the captions "Business _ Government Regulation," "Management _ Compensation Arrangements and Employee Agreements with Named Executive Officers," "Management _ Incentive Compensation Plan," "Management _ 1996 Stock Option/Stock Issuance Plan," "Management _ Employee Stock Purchase Plan" and "Description of Capital Stock" and (2) in the Registration Statement in Items 24 and 26, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents 13 14 and proceedings and fairly summarize the matters referred to therein in all material respects; (ix) such counsel does not know of any legal or governmental proceeding pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (x) the Company is not an "investment company" or an entity "controlled" by an investment company," as such terms are defined in the Investment Company Act of 1940, and the rules and regulations of the Commission thereunder; (xi) such counsel (1) believes that the Registration Statement and Prospectus (except for financial statements and schedules included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the Rules and Regulations, (2) believes that (except for financial statements or other financial data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (3) believes that (except for financial statements or other financial data as to which such counsel need not express any belief) the Prospectus, as of its date and as of the date of the opinion, did not and does not contain any untrue statement of a material fact or omitted or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (xii) to the best of such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company, except as disclosed in the Prospectus; (xiii) the certificates for the Stock comply with the provisions of California law and have been duly approved by the Board of Directors of the Company; (xiv) the Registration Statement has become effective under the Securities Act and, to the best knowledge of such counsel, no stop order 14 15 proceedings suspending the effectiveness of the Registration Statement have been instituted or threatened or are pending under the Securities Act; and In rendering such opinion, such counsel may (i) state that its opinion is limited to matters governed by the Federal laws of the United States of America, the laws of the States of New York and California. Such counsel shall also have furnished to the Representatives a written statement, addressed to the Underwriters and dated such Delivery Date, in form and substance satisfactory to the Representatives, to the effect that (x) such counsel has acted as counsel to the Company on a regular basis (although the Company is also represented by its General Counsel and, with respect to certain other matters, by other outside counsel), and has acted as counsel to the Company in connection with the preparation of the Registration Statement, and (y) based on the foregoing, no facts have come to the attention of such counsel which lead it to believe that the Registration Statement, as of the Effective Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The foregoing opinion and statement may be qualified by a statement to the effect that such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus except for the statements made in the Prospectus under the captions as specifically set forth in clause (viii) above. (e) The Representatives shall have received from O'Melveny & Myers LLP, counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (f) At the time of execution of this Agreement, the Representatives shall have received from KPMG Peat Marwick LLP a letter, in form and substance satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. 15 16 (g) With respect to the letter of KPMG Peat Marwick LLP referred to in the preceding paragraph and delivered to the Representatives concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Representatives a letter (the "bring-down letter") of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (h) The Company shall have furnished to the Representatives a certificate, dated such Delivery Date, of its Chairman of the Board, its President and its chief financial officer stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Delivery Date; the Company has complied with all its agreements contained herein; and the conditions set forth in Sections 7(a) and 7(i) have been fulfilled; and (ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion (A) as of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus. (i) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus or (ii) since such date there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being 16 17 delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (j) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (k) The National Market System shall have approved the Stock for inclusion, subject only to official notice of issuance. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 8. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Underwriter, its officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (B) in any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) specifically for the purpose of qualifying any or all of the Stock under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a "Blue Sky Application"), (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any 17 18 amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct), and shall reimburse each Underwriter and each such officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, or in any Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any officer, employee or controlling person of that Underwriter. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers and employees, each of its directors, and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, and shall reimburse the Company and any such director, officer or controlling person for any legal or other expenses 18 19 reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, employee or controlling person. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representatives shall have the right to employ counsel to represent jointly the Representatives and those other Underwriters and their respective officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company under this Section 8 if, in the reasonable judgment of the Representatives, it is advisable for the Representatives and those Underwriters, officers, employees and controlling persons to be jointly represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Company. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any 19 20 indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, on the other hand, bear to the total gross proceeds from the offering of the shares of the Stock under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8 were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 8 shall be deemed to include, for purposes of this Section 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Stock underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such 20 21 fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. (e) The Underwriters severally confirm and the Company acknowledges that the statements with respect to the public offering of the Stock by the Underwriters set forth on the cover page of, the legend concerning over-allotments on the inside front cover page of and the concession and reallowance figures appearing under the caption "Underwriting" in, the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. 9. Defaulting Underwriters. If, on either Delivery Date, any Underwriter defaults in the performance of its obligations under this Agreement, the remaining non-defaulting Underwriters shall be obligated to purchase the Stock which the defaulting Underwriter agreed but failed to purchase on such Delivery Date in the respective proportions which the number of shares of the Firm Stock set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm Stock set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto; provided, however, that the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Stock on such Delivery Date if the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed but failed to purchase on such date exceeds 9.09% of the total number of shares of the Stock to be purchased on such Delivery Date, and any remaining non-defaulting Underwriter shall not be obligated to purchase more than 110% of the number of shares of the Stock which it agreed to purchase on such Delivery Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or those other underwriters satisfactory to the Representatives who so agree, shall have the right, but shall not be obligated, to purchase, in such proportion as may be agreed upon among them, all the Stock to be purchased on such Delivery Date. If the remaining Underwriters or other underwriters satisfactory to the Representatives do not elect to purchase the shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the obligation of the Underwriters to purchase, and of the Company to sell, the Option Stock) shall terminate without liability on the part of any non-defaulting Underwriter or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 6 and 11. As used in this Agreement, the term "Underwriter" includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Stock which a defaulting Underwriter agreed but failed to purchase. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other underwriters are obligated or agree to purchase the Stock of a defaulting or withdrawing Underwriter, either the Representatives or the Company may postpone the Delivery Date for up to seven full business 21 22 days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. 10. Termination. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 7(i) or 7(j), shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement. 11. Reimbursement of Underwriters' Expenses. If (a) the Company shall fail to tender the Stock for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, the Company will reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company shall pay the full amount thereof to the Representatives. If this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 12. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588), with a copy, in the case of any notice pursuant to Section 8(c), to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285; and (b) if to the Company, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Rae A. Capps, Esq. (Fax: (415) 331-0607); provided, however, that any notice to an Underwriter pursuant to Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representatives, which address will be supplied to any other party hereto by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the Representatives. 13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only 22 23 those persons, except that (A) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the indemnity agreement of the Underwriters contained in Section 8(b) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 14. Survival. The respective indemnities, representations, warranties and agreements of the Company and the Underwriters contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 15. Definition of the Terms "Business Day" and "Subsidiary". For purposes of this Agreement, (a) "business day" means any day on which the New York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations. 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK. 17. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 18. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 23 24 If the foregoing correctly sets forth the agreement among the Company, its subsidiaries and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, WILLIS LEASE FINANCE CORPORATION By_____________________________________ Name: Title: Accepted: LEHMAN BROTHERS INC. DAIN BOSWORTH INCORPORATED For themselves and as Representatives of the several Underwriters named in Schedule 1 hereto By LEHMAN BROTHERS INC. By _____________________________ Authorized Representative 24 25 SCHEDULE 1
Number of Underwriters Shares - ------------ --------- Lehman Brothers Inc................................................. Dan Bosworth Incorporated........................................... -------- Total
25 EX-10.9 3 EMPLOYMENT AGREEMENT BETWEEN THE CO. & EDWIN D. 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is effective January 1, 1997, and entered into as of this 28th day of July 1997, by and between Willis Aeronautical Services, Inc. ("WASI") ("Employer" or "Company"), a California corporation, and Edwin Dibble (hereinafter referred to as "Employee"); WHEREAS, Employer possesses valuable skills, experience and unique business knowledge about the operation of the Company's business; and WHEREAS, the Company desires to ensure that Employee will continue to make his skills, experience and knowledge available to the Company in the operation of its business; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth, Employer and Employee agree as follows: 1. Employment Period. The Company hereby employs the Employee and the Employee hereby accepts employment with the Company for a period of five (5) years beginning on January , 1997 and extending through December 1, 2002 (the "Employment Period"), unless Employee is terminated prior thereto as herein provided. 2. Duties of Employee. The Employee shall serve as President of the Company, effective May 14, 1997. Consistent with his position as President, the Employee shall perform all services and do all things necessary or advisable to manage and conduct the operations and day-today business of the Company and shall perform such other duties and undertake responsibilities as are reasonably assigned to him by the Board of Directors of the Company (the "Board"), subject always to the authority of the Board. Without limiting the foregoing, the Employee's duties shall include, but not be limited to, (i) marketing, (ii) general bookkeeping, (iii) managing the Company's employees, (iv) preparing the Company's business plan, (v) preparing the Company's pro forma profit and loss statement, balance sheet and cash flow projections for the period ending each calendar year (presented on a quarterly basis), (vi) preparing the Company's expense budget, and (vii) applying for local permits and business licenses. The Employee shall have the powers and authorities as may be needed to carry out his duties. He shall devote his full time, ability, attention and best efforts to the business of the Company during regular business hours during the Employment Period, and shall act at all times in accordance with what he reasonably believes is in the best interests of the Company. Any consulting fees earned by the Employee during the Employment Period shall be contributed to the Company. 3. Compensation. During the Employment Period, Employer agrees to provide Employee with the following compensation: (A) Salary. As compensation for his services hereunder, the Employee shall receive a base salary (the "Base Salary") of One Hundred Thousand Dollars ($100,000.00) per annum, to be paid not less frequently than monthly in accordance with Employer's usual 2 payroll practices. The Base Salary may be increased or decreased subject to Company profitability and cash needs, at to end of each twelve (12) month period (or other more frequent intervals) by the Board consistent with the Employee's performance and the Company's policy regarding increases in officer compensation established from time to time by the Board. (B) Bonus. Upon the attainment of performance objectives established by the Board, the Employee shall be entitled to receive an annual cash bonus equal to fifteen (15%) of the Company's pre-tax net income net of such bonus. 4. 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 four (4) weeks of paid vacation during each Employment; provided, however, that Employer and Employee must mutually agree as to the time during any Employment Year when such vacation may be taken. (C) Benefits. Employee will be eligible to participate in benefit plans or programs 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, programs and policies, such terms and conditions to be similar to those provided to employees of Willis Lease Finance Corporation. The Employee may receive such other and additional benefits as the Board in its discretion may determine from time to time. 5. Termination. (A) Company Termination for Cause. Notwithstanding anything to the contrary herein, the Employee's employment under this Agreement may be terminated by the Board at any time effective upon delivery of written notice to the Employee, if any of the following events occur: (i) The Employee is found guilty of serious, criminal misconduct by a court of competent jurisdiction; acts or fails to act in reckless or willful disregard of lawful instructions given under authority of the Board; engages in acts of gross misconduct; or misuses corporate funds. (ii) The Employee materially breaches any of his obligations under this Agreement or the Shareholders' Agreement dated as of October 1, 1994 among the Charles F. Willis Company, Edwin Dibble, Vicki L. Sherrill-Dibble and the Company (the "Shareholders' Agreement"), and fails to correct the same within thirty (30) days or delivery of written notice thereof to the Employee by the Company. 2 3 The notice of termination shall specify that the termination is pursuant to this Section 5, and the Employee shall be entitled to a full hearing before the entire Board at a Board meeting held within ten (10) days of receipt by the Employee of his notice of termination. Upon termination under this Section 5, all compensation and benefits (except the ability to exercise options or other types of equity incentives, if any, to the extent vested, for one (1) month after the effective date of termination) shall immediately cease; provided that the Company shall pay the Employee's Base Salary through the effective date of termination. (B) Termination Without Cause By Company. The Company may terminate the employment of the Employee under this Agreement, for any reason or for no reason, by giving at least sixty (60) days prior written notice of the effective date of termination to the Employee; provided that, upon any such termination under this Section, the parties agree that the Company shall pay the Employee's Base Salary through the effective date of termination and the Company shall make a cash payment to the Employee equal to two (2) months of the Employee's then Base Salary within thirty (30) days of the effective date of termination. In addition to the foregoing, the Company shall: (i) pay the Employee any annual bonuses which would have been earned in connection with services performed under this Agreement prior to termination, prorated accordingly for the portion of the year during which such services were rendered; and (ii) obtain mutual agreement with the Employee on any and all statements that may be issued regarding the reasons for termination. Any material and adverse change in the Employee's responsibilities specified hereunder unless otherwise agreed to by the Employee shall be deemed to be a termination under this Section 5. B, unless cured within thirty (30) days of receipt by the Company of written notice from the Employee specifying such change in responsibility. Unless the Company provides the Employee with written notice or termination under this Section 5. B sixty (60) days prior to the expiration of the Employment Period, this Agreement shall automatically be extended for one year. If such notice of termination is given and this Agreement is not extended beyond the Employment Period, it shall be deemed terminated as of the expiration of the Employment Period or such earlier date as specified in the notice of termination under this Section 5. B, and the Employee shall be entitled to all the benefits provided in this Section 5. B. Termination under this Section 5. B shall be deemed a termination "without cause" for purposes of this Agreement. (C) Termination Without Cause By the Employee. A termination of his employment by the Employee, other than as a result or the breach of this Agreement by the Company, shall entitle the Employee to no further salary or benefits. (D) Death or Disability. If the Employee shall die or shall be disabled by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of not less than twelve (12) months that would render the Employee unable to perform the services being performed by the Employee for the Company 3 4 prior to the occurrence of the disability as described, this Agreement shall be deemed terminated as of the date of death or determination of the disability as described above. Upon any such termination under this Section, the parties agree that the Company shall make a cash payment payable in monthly installments to the Employee or the Employee's estate equal to half of the Employee's then current annual Base Salary through the remainder of the Employment Term. In addition, the Company shall pay the Employee's wife, or if he has no wife, his estate, any bonus and/or other income Employee has earned through the date of termination but has not been paid, including but not limited to accrued bonus from any prior years. 5. Merger or Other Change in Control. Employee shall have the right to terminate this Agreement for Cause at any time within ninety (90) days after completion of a Change in Control of the Company. A Change of Control is deemed to have occurred after the completion of (i) a merger of the Company with any other corporation as a result of which the shareholders of the Company immediately prior to such merger fail to win at least a majority of the voting securities of the surviving corporation in such merger immediately after the merger, and members of the Board of Directors of the Company, elected by the shareholders of the Company, fail to constitute a majority of the Board of Directors of the surviving corporation following completion of the merger, or (ii) a sale of all or substantially all of the assets of the Company to another corporation, if (x) a majority of the directors of the ultimate parent of the purchase immediately following the purchase and sale were not members of the Board of Directors of the Company immediately prior to such sale, and (y) shareholders of the Company immediately prior to such sale do not hold a majority of the voting securities of the ultimate parent of the purchasing corporation following completion of such sale, or (iii) a purchase by another person, firm or corporation of a majority of the voting securities of the Company elected by the shareholders of the Company (other than such purchaser) fail to constitute a majority of the Board of Directors of the Company. Employer and Employee agree that, in the event Employee terminates this Agreement pursuant to this paragraph 5, Employee shall receive the equivalent of six (6) months Base Salary. 6. 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 7. (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 4 5 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 (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 7 are reasonable and necessary to protect Employer and its legitimate business interests, and to prevent the unauthorized dissemination of Confidential and Proprietary 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 5 6 this Section 7 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' feet 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 7 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. 7. 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 Aeronautical Services, Inc. c/o Willis Lease Finance Corporation Charles F. Willis, President and CEO 180 Harbor Drive, Suite 200 Sausalito, CA 94965 To Employee: Ted Dibble 648 Port Drive San Mateo, CA 94404 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. 8. 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 6 7 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 concluded. The decision of the Arbitrator shall be final and binding on all parties, and may be entered as 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) Jurisdiction; Venue; Attorneys' Fees. The parties do hereby agree and submit to personal jurisdiction in the State of California for the purposes of any proceedings brought to enforce or construe the terms of this Agreement or to resolve any dispute or controversy arising under, as a result of, or in connection with this Agreement, and do hereby agree and stipulate that any such proceedings shall be venued and held in San Francisco County, California. The prevailing party in any such proceeding shall be entitled to recover from the losing party all costs that it has incurred as a result of such proceeding including but not limited to all travel costs and attorneys' fees. (H) Effective Date. This Agreement shall be effective as of January 1, 1997. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the date first set forth above. 7 8 Employer WILLIS AERONAUTICAL SERVICES, INC. BY: __________________________________________ Charles F. Willis, Chairman Employee: - ---------------------------------------------- EDWIN DIBBLE, President 8 EX-23.1 4 CONSENT OF KPMG PEAT MARWICK, LLP. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the use of our report included herein and to the reference to our firm under the headings "Experts" and "Selected Consolidated Financial and Operating Data" in the prospectus. San Francisco, California November 7, 1997 EX-23.3 5 CONSENT OF AIRCRAFT INFORMATION SERVICES 1 EXHIBIT 23.3 [AISI LOGO] Willis Lease Finance Corporation 180 Harbor Drive Suite 200 Sausalito, California 94965 Gentlemen: We hereby consent to (i) the inclusion of our report (the "Report"), dated 27 October 1997, setting forth, among other things, our appraisal of the current market value of a portfolio of commercial jet engines of Willis Lease Finance Corporation, in the Registration Statement under the Securities Act of 1933 of Willis Lease Finance Corporation for the registration of 1,725,000 shares of common stock of Willis Lease Finance Corporation (the "Registration Statement"); and (ii) the references to the Report contained in the Registration Statement. Sincerely, Fred Bearden President Aircraft Information Services, Inc. -----END PRIVACY-ENHANCED MESSAGE-----