SecProbe.io

CORRESP
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filename1.htm

July 22, 2005

Mr. Rufus Decker,
Accounting Branch Chief

U. S. Securities and Exchange
Commission

Washington, D. C. 20549-0510

Re:  Form 10-K for the fiscal year ended December 31,
2004, File No. 1-15369

Dear Mr. Decker:

Willis Lease Finance Corporation
(the “Company”) is in receipt of your letter dated April 29, 2005.  The deadline to respond to your letter was
extended in a phone conversation with Meagan Caldwell to May 25,
2005.  The Company filed the response
pursuant to the extension on May 24, 2005.
This filing is in response to further phone conversations with Megan
Caldwell discussing the May 24, 2005 letter to the U.S. Securities and
Exchange Commission (the “SEC”) and is intended summarize the action to be
taken on all open items.

Based on those conversations
the Company has concluded that it will amend its Form 10-K for the fiscal
year ended December 31, 2004 (“Form 10-K/A”).  The Company will also amend its Form 10-Q
for the quarterly period ended March 31, 2005 (“Form 10-Q/A”) to be
consistent with the presentation of the consolidated financial statements and
related disclosures in the Form 10-K/A.

The Form 10-K/A was
reviewed by the KPMG Department of Professional Services (“DPP”).  The DPP representative is Mr. Albert
Aboody and he may be contacted at (212) 909-5850.

The Company acknowledges that:

•                  The Company is
responsible for the adequacy and accuracy of the disclosure in their filings;

•                  Staff comments
or changes to disclosure in response to staff comments do not foreclose the
Commission from taking any action with respect to the filing; and

•                  The Company may
not assert staff comments as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the United
States.

Financial
Statements

Consolidated
Statements of Income, page 32 (April 29, 2005 letter from the SEC to
the Company)

2.   We have read your response to
our comment 12.  We do not dispute the
fact that the $4.1 million gain relating to your debt extinguishment should be
reported as a component of income from continuing operations.  However, it is still unclear to us how you
determined this should be classified as revenue, when interest payments
relating to this debt were classified as debt expense.  Please clarify.  If after considering the above, you now
believe that the gain should be presented in the same section of your
income statements of income as your interest and finance

costs, please amend your statements of income and all related
disclosures accordingly and revise your presentation of similar gains and
losses in other periods as well.  Please
ensure that you include a footnote that describes the reclassification.  Please include a similar discussion in your
selected financial data section.

Response (May 24,
2005 letter from the Company to the SEC):

After
considering your comment above, the Company still believes the net gain on debt
repayment in 2002 of $4.1 million was properly recorded as revenue rather than
as a reduction to or in the same section as interest and finance costs.

As was stated
in our first response, the lender sold its portfolio of loans to a competitor
of the Company and there was a specific prohibition in the loan document
precluding such a sale.  The lender was
therefore motivated to dispose of this loan at a discount to complete their
exit from this portion of their business. The Company took advantage of this
opportunity, as it might engage in the opportunistic sale of an engine at an
advantageous price.

While you are
correct that the interest expense related to this facility was included in
interest expense in the income statement, the Company feels that it would
distort an understanding of the financial statements to include this gain as a
reduction to or in the same section as interest and finance costs because
the Company’s intent in paying off this facility was to realize the gain
offered by the lenders relating to their desire to exit this line of
asset-lending activity.

The Company
was not motivated by the desire to manage its interest expense as shown by the
fact that the majority of the money borrowed to prepay this facility was
borrowed at spreads over one-month LIBOR that were somewhat higher on average
than the spread over one-month LIBOR for the loan that was prepaid.

FASB Statement
of Financial Accounting Concepts No. 6 – Elements of Financial Statements
- Revenues, Expenses, Gains and Losses - paragraph 87 states: “Revenues and
expenses result from an entity’s ongoing major or central operations and
activities-that is, from activities such as producing or delivering goods,
rendering services, lending, insuring, investing, and financing.  In contrast, gains and losses result from
incidental or peripheral transactions of an enterprise with other entities and
from other events and circumstances affecting it.”

The Company
considered this literature and circumstances of the 2002 transaction. As stated
in the Company’s response dated April 28, 2005, the transaction was
considered a peripheral business transaction similar to gains on sales of
leased assets which are included in revenue rather than a component of interest
and finance costs and as a result, the Company believes it is most appropriate
to classify this as a separately disclosed item of revenue.

Response:

After
considering your comments in the phone conversations after the May 24,
2005 filing, the Company has concluded that the net gain on debt prepayment in
2002 of $4.1 million is more properly recorded as an item of expense as a
reduction in net finance costs rather than as revenue.  The Company has also concluded that the net
finance costs should be classified as expenses rather than in a separate section after
earnings from operations.  Below are
draft restated consolidated statements of income for the years ended December
31, 2004, 2003 and 2002 and presentation of the information as previously filed
and as it will be shown in the Form 10-K/A.

2

WILLIS
LEASE FINANCE CORPORATION

AND
SUBSIDIARIES

Consolidated Statements of Income

(In
thousands, except per share data)

  Years Ended

  December 31,

  2004

  2003

  2002

  (as restated)

  (as restated)

  (as restated)

  REVENUE

  Lease revenue

  $

  58,177

  $

  56,977

  $

  55,397

  Gain on sale of leased equipment

  3,085

  2,372

  482

  Other income

  677

  520

  —

  Total revenue

  61,939

  59,869

  55,879

  EXPENSES

  Depreciation expense

  23,198

  21,686

  19,449

  Write-down of equipment

  577

  1,272

  3,052

  Net finance costs:

  Interest expense

  18,449

  17,409

  19,110

  Interest income

  (434

  )

  (244

  )

  (432

  )

  Net gain on debt prepayment

  —

  —

  (4,073

  )

  General and administrative

  14,791

  13,852

  14,439

  Total expenses

  56,581

  53,975

  51,545

  Income before income taxes

  5,358

  5,894

  4,334

  Income tax expense

  (1,501

  )

  (1,717

  )

  (738

  )

  Net income

  $

  3,857

  $

  4,177

  $

  3,596

  Basic earnings per common share:

  $

  0.43

  $

  0.47

  $

  0.41

  Diluted earnings per common share:

  $

  0.42

  $

  0.47

  $

  0.41

  Average common shares outstanding

  8,925

  8,840

  8,831

  Diluted average common shares outstanding

  9,276

  8,888

  8,851

See
accompanying notes to the consolidated financial statements.

3

  For the Year Ended

  2002

  Consolidated Income Statement

  Information

  As

  Previously Filed

  As

  Restated

  REVENUE

  Net gain on debt repayment

  4,073

  —

  Total revenues

  59,952

  55,879

  EXPENSES

  Interest expense

  —

  19,110

  Interest income

  —

  (432

  )

  Net gain on debt repayment

  —

  (4,073

  )

  Total expenses

  36,940

  51,545

  Earnings from operations

  23,012

  —

  Interest expense

  19,110

  —

  Interest income

  (432

  )

  —

  Net interest and finance costs

  18,678

  —

  Income before income taxes

  $

  4,334

  $

  4,334

(l) Organization
and Summary of Significant Accounting Policies

(k) Cash
and Cash Equivalents, page 37 (April 29, 2005 letter from the SEC to
the Company)

3.   We read your response to our
comment 13.  Based on your response, the
terms and conditions in your credit agreement regarding restrictions as to the
use of the maintenance reserve payments and lease security deposits are unclear
to us.  Please clarify for us these
restrictions.  In doing so, please tell
us how you determined it is appropriate to classify these payments and deposits
as cash and cash equivalents despite the restrictions.  We understand from your response that the
cash is invested in operating and short-term money market accounts.  Please also included in your response the
time period in which these reserve payments and deposits are used over the term
of the customer’s lease from the time the monies are received from the
customer.  Finally, please expand your
disclosure to clarify what you refer to in you disclosure as other things that
you are able to utilize these funds for.
Refer to paragraphs 7-10 of SFAS 95: Article 5-02.1 of Regulation
S-X and Chapter 3A, paragraph 6 of

ARB 43.

Response (May 24,
2005 letter from the Company to the SEC):

To clarify
further the disclosure in Note 1(k) and the responses to comments 4 and 13 of
the Company’s response dated April 28, 2005, under the terms of certain of
its debt agreements,

4

monies
collected by the Company under certain leases relating to the maintenance
reserves and security deposits are required to be deposited in a restricted
cash account.   The funds are invested in
money market accounts readily converted to known amounts of cash and considered
cash equivalents per paragraph 8 of SFAS 95.
The reason lenders require these amounts to be restricted is to insure
that the engines that collateralize the loan are adequately maintained.  At any time a maintenance event may occur and
funds must be available for use.  For
this reason, the cash must be held in cash or cash equivalents.  The lenders do not have access to funds in
the accounts unless an event of default occurs under the debt agreements.

The
maintenance reserve payments, when required, are made monthly by lessees to
ensure the funds are available for the costs of maintenance expenses of the
engine.  The monthly maintenance reserve payment
amounts due from the lessee are based on hours the engine is flown and the
number of cycles (take-offs and landings) each month, at rates per hour and
cycle, respectively, from each lease agreement.
The Company is entitled to withdraw funds from the maintenance reserve
account for the payment of maintenance expenses with respect to the
engine.  The time period in which these
reserve funds are used for such maintenance expense is over the useful life of
the engine maintenance period, which varies by engine type depending on where
the engine is in its maintenance period.
These maintenance expenses may be expended at any time over a period of
as long as seven years and is not dependent on any one lease or lessee.

The security
deposits are received from the lessee at the inception of the lease
agreement.  The Company is entitled to
withdraw funds from the security deposit account per the terms of the
applicable lease agreement with respect to the related engine, typically for
the last month(s) of rental payments for the lease term or return of the
deposit to the lessee after the lease has terminated and all terms and
conditions related to the return of the engine have been met.

The other uses
of the restricted cash referred to in the April 28, 2005 response would be
related the sale of an engine.  In a
sale, the Company generally retains the restricted cash and the purchaser takes
title to the engine as is and assumes the liability for maintenance of the
engine.

ARB 43, Chapter 3A, paragraph 6 contemplates the exclusion from current
assets such resources that are restricted as to withdrawal or use for other
than current operations.  Even though the
Company has an unclassified balance sheet, the Company believes that
maintenance of engines is an integral aspect of current operations and the
amounts included in cash directly relate to the recorded liabilities for
maintenance reserves and security deposits where required by the related debt
agreements.

In the future,
the Company’s disclosure, pursuant to Article 5-02.1 of Regulation S-X,
regarding its restricted cash will include the following:

As discussed
in Note 1(k), the Company’s restricted cash balances represent amounts required
to be held in designated accounts by some of the Company’s lenders.  Under these facilities, cash paid by lessees
for maintenance reserves and security deposits is required to be held and used
only for engine maintenance and repair and the return or application of
security deposits, as the case may be, or will generally be available to the
Company upon the sale of the engine.  See
Note 1(f) for a further discussion of the accounting for maintenance
reserves.

5

Response:

After
considering your comments in the phone conversations after the May 24,
2005 filing, the Company has agreed that the correct presentation is to
separately classify certain cash that is restricted in connection with the
Company’s borrowings as restricted cash.
The restricted cash was previously disclosed in narrative form and
included within the description for cash and cash equivalents.  References to the restricted cash previously
disclosed in Note 1(k) will be
included in a new footnote to the financial statements.  Since the cash is restricted, it is not
available for general corporate purposes and has no effect on the current and
future liquidity and capital resources of the Company.

Below are the
restated consolidated balance sheets as of December 31, 2004, 2003 and
2002, the statements of cash flows for the years ended December 31, 2004, 2003
and 2002 and presentation of the information as previously filed and as
restated in the Form 10-K/A.

6

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

  December 31,

  2004

  December 31,

  2003

  (as restated)

  (as restated)

  ASSETS

  Cash and cash equivalents

  $

  5,540

  $

  9,202

  Restricted cash

  46,324

  33,784

  Equipment held for operating lease, less
  accumulated depreciation of $83,881 and $67,873 at December 31, 2004 and
  2003, respectively

  511,443

  499,454

  Net investment in direct finance lease

  —

  5,551

  Operating lease related receivable, net of
  allowances of $400 and $440 at December 31, 2004 and 2003, respectively

  1,630

  2,095

  Notes receivable

  436

  —

  Investment

  1,480

  1,480

  Assets under derivative instruments

  1,398

  7

  Property, equipment & furnishings,
  less accumulated depreciation of $1,259 and $1,193 at December 31, 2004
  and 2003, respectively

  7,537

  877

  Other assets

  9,670

  7,572

  Total assets

  $

  585,458

  $

  560,022

  LIABILITIES AND SHAREHOLDERS’ EQUITY

  Liabilities:

  Accounts payable and accrued expenses

  $

  7,280

  $

  5,753

  Liabilities under derivative instruments

  —

  696

  Deferred income taxes

  27,530

  25,283

  Notes payable

  369,840

  362,395

  Maintenance reserves

  56,871

  46,408

  Security deposits

  2,088

  2,314

  Unearned lease revenue

  5,381

  7,111

  Total liabilities

  468,990

  449,960

  Shareholders’ equity:

  Preferred stock ($0.01 par value, 5,000,000
  shares authorized; none outstanding)

  —

  —

  Common stock, ($0.01 par value, 20,000,000
  shares authorized; 8,998,365 and 8,846,805 shares issued and outstanding at
  December 31, 2004 and 2003, respectively)

  90

  88

  Paid-in capital in excess of par

  62,631

  61,710

  Accumulated other comprehensive
  gain/(loss), net of tax