<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28774
----------------------
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 68-0070656
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2320 Marinship Way, Suite 300, Sausalito, CA 94965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 331-5281
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT JULY 31, 1999
------------------- ----------------------------
Common Stock, $0.01 Par Value 7,393,145
1
<PAGE>
WILLIS LEASE FINANCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity
Year ended December 31, 1998 and
six months ended June 30, 1999 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 2A. Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,557 $ 10,305
Restricted cash 16,327 13,738
Equipment held for operating lease, less accumulated depreciation
of $15,645 at June 30, 1999 and $15,455 at December 31, 1998 316,427 274,618
Net investment in direct finance lease 8,977 9,249
Property, equipment and furnishings, less accumulated depreciation
of $544 at June 30, 1999 and $509 at December 31, 1998 782 2,480
Spare parts inventory 35,340 35,858
Lease related receivables 3,523 2,492
Trade receivables, net 5,164 5,310
Notes receivable 3,122 -
Investment in unconsolidated affiliate 5,643 -
Other receivables 30 757
Other assets 5,743 5,198
-------- --------
Total assets $416,635 $360,005
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 6,973 $ 9,620
Salaries and commissions payable 862 977
Deferred income taxes 14,912 11,684
Deferred gain 497 157
Notes payable and accrued interest 287,479 245,581
Capital lease obligation 2,572 2,652
Residual share payable 3,041 2,618
Maintenance reserves 18,811 13,273
Security deposits 5,309 4,561
Unearned lease revenue 4,378 3,040
-------- --------
Total liabilities 344,834 294,163
-------- --------
Shareholders' equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; none
outstanding) - -
Common stock, ($0.01 par value, 20,000,000 shares authorized;
7,393,145 and 7,360,813 shares issued and outstanding
as of June 30, 1999 and December 31,1998, respectively) 74 74
Paid-in capital in excess of par 42,419 42,033
Retained earnings 29,308 23,735
-------- --------
Total shareholders' equity 71,801 65,842
-------- --------
Total liabilities and shareholders' equity $416,635 $360,005
-------- --------
-------- --------
</TABLE>
See accompanying notes to the consolidated financial statements
3
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Lease revenue $11,078 $7,129 $21,647 $13,565
Gain on sale of leased equipment 3,849 2,431 7,260 5,539
Spare part sales 6,217 6,583 15,189 9,599
Sale of equipment acquired for resale 4,000 4,094 9,775 4,094
Interest and other income 357 434 577 619
------------ ------------- ------------ ------------
Total revenue $25,501 $20,671 $54,448 $33,416
------------ ------------- ------------ ------------
EXPENSES
Interest expense 5,113 3,600 10,006 6,202
Depreciation expense 2,868 1,728 5,983 3,145
Residual share 212 168 423 400
Cost of spare part sales 4,629 4,831 11,259 6,886
Cost of equipment acquired for resale 3,570 3,573 8,354 3,573
General and administrative 4,421 3,184 9,089 6,368
------------ ------------- ------------ ------------
Total expenses 20,813 17,084 45,114 26,574
------------ ------------- ------------ ------------
Income from operations $4,688 $3,587 $9,334 $6,842
Income/(loss) from unconsolidated affiliate (40) - (40) -
------------ ------------- ------------ ------------
Income before income taxes and extraordinary item 4,648 3,587 9,294 6,842
Income taxes (1,861) (1,438) (3,721) (2,743)
------------ ------------- ------------ ------------
Income before extraordinary item 2,787 2,149 5,573 4,099
Extraordinary item less applicable income taxes - - - (200)
------------ ------------- ------------ ------------
Net income $2,787 $2,149 $5,573 $3,899
============ ============= ============ ============
Basic earnings per common share:
Income before extraordinary item $0.38 $0.30 $0.76 $0.57
Extraordinary item - - - (0.04)
------------ ------------- ------------ ------------
Net income $0.38 $0.30 $0.76 $0.53
============ ============= ============ ============
Diluted earnings per common share:
Income before extraordinary item $0.37 $0.29 $0.75 $0.55
Extraordinary item - - - (0.03)
------------ ------------- ------------ ------------
Net income $0.37 $0.29 $0.75 $0.52
============ ============= ============ ============
Average common shares outstanding 7,374 7,263 7,368 7,228
Diluted average common shares outstanding 7,453 7,488 7,455 7,466
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Year Ended December 31, 1998 and Six Months Ended June 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Issued and
outstanding Paid-in Total
shares of Common Capital in Retained shareholders'
common stock Stock Excess of par earnings equity
------------ ----- ------------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,178 $40,117 $ - $14,484 $54,601
Shares issued 183 587 737 - 1,324
Tax benefit from disqualified
dispositions of qualified shares - - 666 - 666
Conversion to par value stock - (40,630) 40,630 - -
Net income - - - 9,251 9,251
---------------- ------------- ------------ ------------ -------------
Balances at December 31, 1998 (audited) 7,361 74 42,033 23,735 65,842
Shares issued 32 - 278 - 278
Tax benefit from disqualified
dispositions of qualified shares - - 108 - 108
Net income - - - 5,573 5,573
---------------- ------------- ------------ ------------ -------------
Balances at June 30, 1999 (unaudited) 7,393 $74 $42,419 $29,308 $71,801
================ ============= ============ ============ =============
</TABLE>
5
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,573 $3,898
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of equipment held for lease 5,724 3,063
Depreciation of property, equipment and furnishings 259 83
Gain on sale of property, equipment and furnishings (1) (2)
Gain on sale of leased equipment (7,260) (5,539)
Increase in residual share payable 423 123
Loss from unconsolidated affiliate 40 -
Changes in assets and liabilities:
Restricted Cash (2,589) (2,731)
Spare parts inventory (335) (15,727)
Receivables (493) 139
Other assets (2,929) (614)
Accounts payable and accrued expenses (1,895) (215)
Salaries and commission payable (15) (357)
Deferred income taxes 3,336 1,787
Deferred gain 340 (13)
Accrued interest (178) 20
Maintenance reserves 5,538 1,178
Security deposits 748 1,354
Unearned lease revenue 1,338 712
---------------- ----------------
Net cash provided (used in) by operating activities 7,624 (12,841)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment held for lease (net of
selling expenses) 33,908 16,487
Proceeds from sale of property, equipment and furnishings 1 16
Purchase of equipment held for operating lease (77,303) (101,397)
Deposits made in connection with inventory purchases - (3,410)
Purchase of property, equipment and furnishings (1,454) (871)
Investment in unconsolidated affiliate (70) -
Principal payments received on direct finance lease 272 285
---------------- ----------------
Net cash used in investing activities (44,646) (88,890)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 81,513 109,984
Proceeds from issuance of common stock 278 586
Principal payments on notes payable (39,437) (18,679)
Principal payments on capital lease obligation (80) (73)
---------------- ----------------
Net cash provided by financing activities 42,274 91,818
(Decrease) increase in cash and cash equivalents 5,252 (9,913)
Cash and cash equivalents at beginning of period 10,305 13,095
---------------- ----------------
Cash and cash equivalents at end of period 15,557 $3,182
================ ================
Supplemental information:
Net cash paid for: Interest $10,185 $6,182
---------------- ----------------
Income Taxes $654 $2,657
---------------- ----------------
Non-cash investing activities:
Transfer of assets to unconsolidated affiliate (net) $5,613 $ -
---------------- ----------------
Non-cash financing activities:
Short term loan related to sale of equipment held
for operating lease $1,500 $ -
---------------- ----------------
Installment loan related to sale of equipment held for
operating lease $1,622 $ -
---------------- ----------------
</TABLE>
See accompanying notes to the consolidated financial statements
6
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Willis
Lease Finance Corporation and its subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Pursuant to such rules and regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying unaudited interim financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto, together with Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal and
recurring adjustments) necessary to present fairly the financial position of the
Company as of June 30, 1999 unaudited, and December 31, 1998 audited, and the
unaudited results of its operations for the three and six month periods ended
June 30, 1999 and 1998 and its cash flows for the six month periods ended June
30, 1999 and 1998. The results of operations and cash flows for the periods
ended June 30, 1999 are not necessarily indicative of the results of operations
or cash flows which may be reported for the remainder of 1999.
2. MANAGEMENT ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
3. SHAREHOLDERS' EQUITY
Authorized capital shares of the Company include 5,000,000 shares of
preferred stock and 20,000,000 shares of common stock with a par value of $0.01
per share. As of June 30, 1999 and December 31, 1998, 7,393,145 and 7,360,813
shares, respectively, of common stock were issued and outstanding. No preferred
stock was issued or outstanding as of June 30, 1999 or December 31, 1998. The
rights and preferences of any preferred stock will be established by the
Company's Board of Directors upon issuance.
The Company has a 1996 Employee Stock Purchase Plan (the "Purchase Plan")
under which 75,000 shares of common stock have been reserved for issuance. This
plan became effective in September 1996. Eligible employees may designate not
more than 10% of their base salary to be deducted each pay period for the
purchase of common stock under the Purchase Plan, and participants may purchase
not more than 500 shares of common stock on any one purchase date, subject to
additional Internal Revenue Code limitations. Each January 31 and July 31,
shares of common stock are purchased with the employees' payroll deductions over
the immediately preceding six months at a price per share of 85% of the lesser
of the market price of the common stock on the purchase date or the market price
on the date of entry into an offering period. During the six month period ended
June 30, 1999, the Company issued 4,382 shares of Common Stock as a result of
employee stock purchases under the Purchase Plan.
7
<PAGE>
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the 1996 Stock Option/Stock Issuance Plan, as amended and restated
April 6, 1999, 1,025,000 shares of the Company's shares have been set aside to
provide eligible persons with the opportunity to acquire a proprietary interest
in the Company. The plan includes a Discretionary Option Grant Program, a Stock
Issuance Program, a Salary Investment Option Grant Program for certain officers
and employees, a Director Fee Option Grant Program and an Automatic Option Grant
Program for eligible nonemployee Board Members. During the six month period
ended June 30, 1999, 30,000 options were exercised. In connection with the
exercise of a portion of these options, the Company recognized a tax benefit of
approximately $108,000.
In conjunction with its initial public offering, the Company sold five-year
purchase warrants for $0.01 per warrant covering an aggregate of 100,000 shares
of common stock exercisable at a price equal to 130% of the initial public
offering price. The warrants became exercisable in December 1997. The warrants'
exercise price and the number of shares of Common Stock are subject to
adjustment to protect the warrant holders against dilution in certain events. In
February 1998, a holder of 50,000 of the warrants exercised the warrants under
the net issuance rights of the warrants. Based on the closing price on such
date, the exercise resulted in the issuance of 25,238 shares to the holder of
the warrants.
4. FINANCING
In May 1999, the Company increased its $80 million debt warehouse facility
to $125 million. The facility is available to a wholly-owned special purpose
finance subsidiary of the Company, WLFC Funding Corporation, for the financing
of jet aircraft engines transferred by the company to such finance subsidiary.
The facility has an eight-year initial term with a revolving period to February
2000 followed by a seven-year amortization period. At June 30, 1999, the
interest rate was a commercial paper based rate plus 1.6%. The facility is
renewable annually.
In March 1998, the Company repaid a loan that had residual sharing
provisions. The repayment resulted in an extraordinary expense of $0.2 million,
net of tax.
5. COMMITMENTS
The Company has three leases for its office and warehouse space. The annual
lease rental commitments are $309,481, $56,000, and $80,829 and the leases
expire on May 31, 2003, December 31, 1999 and July 31, 2000, respectively.
The Company has committed to purchase during 1999, additional used aircraft
and new and used engines for its operations. Certain deposits were made in
connection with these commitments. The Company's current, remaining commitment
to such purchases is not more than $11.7 million.
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On May 28, 1999, the Company entered into an agreement with Chromalloy Gas
Turbine Corporation, a subsidiary of Sequa Corporation, to operate a joint
venture to perform maintenance, repair and overhaul of commercial jet engines.
Under the terms of the joint venture agreement, the Company and Chromalloy
formed a new company, Pacific Gas Turbine Center, LLC ("PGTC LLC"). The Company
contributed the operations and assets of its wholly owned subsidiary Pacific Gas
Turbine Center, Incorporated ("PGTC Inc.") (with a book value of $5.7 million)
and Chromalloy contributed working capital to the joint venture. Both the
Company and Chromalloy have a 50% interest in the joint venture. The equity
method of accounting is used for the Company's 50% ownership in PGTC LLC. Under
the equity method, the original contribution was recorded at cost and is
adjusted periodically to recognize the Company's share of the earnings or losses
of PGTC LLC after the date of formation. The contribution is shown in the
Company's Consolidated Balance
8
<PAGE>
Sheet as a single amount and earnings or losses are shown in the Consolidated
Statement of Income as a single amount. All intercompany profits or losses are
eliminated.
7. OPERATING SEGMENTS
The Company operates in two business segments: (i) Leasing and Related
Operations which involves acquiring and leasing, primarily pursuant to operating
leases, commercial aircraft, aircraft spare engines and other aircraft equipment
and the selective purchase and resale of commercial aircraft engines and other
aircraft equipment and (ii) Spare Parts Sales which involves the purchase and
resale of after-market engine and airframe parts, whole engines, engine modules
and rotable aircraft components and leasing of engines destined for disassembly
and sale of parts.
In 1998, the Company formed PGTC Inc. to engage in engine disassembly and
maintenance, repair and overhaul services. At the end of May 1999, the Company's
investment in and the operations of PGTC Inc. were contributed to a joint
venture, PGTC LLC (see note 6 above). During the five months ended May 31, 1999,
while PGTC Inc. was a wholly-owned subsidiary of the Company, the majority of
PGTC Inc.'s revenue was derived from services provided to WASI. Revenue from
third parties during this period was not material. Accordingly, for the five
months ended May 31, 1999, the operations of PGTC Inc. are included in the Spare
Parts Sales segment. Subsequent to the formation of PGTC LLC, because the
results of PGTC LLC were immaterial, PGTC LLC is not included in the operating
segment analysis for the three and six months ended June 30, 1999. PGTC Inc. was
not in operation during the three and six months ended June 30, 1998.
The Company evaluates the performance of each of the segments based on
profit or loss after general and administrative expenses and inter-company
allocation of interest expense. While the Company believes there are synergies
between the two business segments, the segments are managed separately because
each requires different business strategies.
The following tables present a summary of the operating segments (in
thousands):
<TABLE>
<CAPTION>
For the three months ended June 30, 1999 For the three months ended June 30, 1998
-------------------------------------------- --------------------------------------------
Leasing Spare Leasing Spare
and Related Parts and Related Parts
Operations Sales Total Operations Sales Total
----------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Lease revenue $10,560 $518 $11,078 $7,129 $ - $7,129
Gain on sale of leased equipment 3,849 - 3,849 2,431 - 2,431
Spare parts sales - 6,217 6,217 - 6,583 6,583
Sale of equipment acquired for resale 4,000 - 4,000 4,094 - 4,094
Interest and Other Income 243 114 357 409 25 434
----------------------------------------- --------------------------------------------
Total revenue 18,652 6,849 25,501 14,063 6,608 20,671
----------------------------------------- --------------------------------------------
Expenses:
Interest expense 4,341 772 5,113 3,227 373 3,600
Depreciation expense 2,585 283 2,868 1,711 17 1,728
Residual share 212 - 212 168 - 168
Cost of spare parts - 4,629 4,629 - 4,831 4,831
Cost of equipment acquired for resale 3,570 - 3,570 3,573 - 3,573
General and administrative 2,880 1,541 4,421 2,186 998 3,184
----------------------------------------- ---------------------------------------------
Total expenses 13,588 7,225 20,813 10,865 6,219 17,084
----------------------------------------- ---------------------------------------------
Income from operations $5,064 ($376)(1) $4,688 $3,198 $389 $3,587
========================================= =============================================
Total assets as of June 30, 1999 and
1998 $356,995 $53,997 $410,992 $291,960 $6,775 $298,735
========================================= =============================================
- ------------------------------------------------------------------------------------
</TABLE>
(1) The Company estimates that income from operations would have been $0.1
million if the effect of PGTC Inc.'s operations, after intercompany
eliminations, were eliminated from the results of the Spare Parts Sales
segment.
9
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1999 For the six months ended June 30, 1998
------------------------------------------ ----------------------------------------------
Leasing Spare Leasing Spare
and Related Parts and Related Parts
Operations Sales Total Operations Sales Total
------------------------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Lease revenue $20,625 $1,022 $21,647 $13,565 $ - $13,565
Gain on sale of leased equipment 7,260 - 7,260 5,539 - 5,539
Spare parts sales - 15,189 15,189 - 9,599 9,599
Sale of equipment acquired for resale 9,775 - 9,775 4,094 - 4,094
Interest and other income 462 115 577 586 33 619
------------------------------------------ ------------------------------------------------
Total revenue 38,122 16,326 54,448 23,784 9,632 33,416
------------------------------------------ ------------------------------------------------
Expenses:
Interest expense 8,557 1,449 10,006 5,711 491 6,202
Depreciation expense 5,421 562 5,983 3,113 32 3,145
Residual share 423 - 423 400 - 400
Cost of spare parts - 11,259 11,259 - 6,886 6,886
Cost of equipment acquired for resale 8,354 - 8,354 3,573 - 3,573
General and administrative 5,437 3,652 9,089 4,565 1,803 6,368
----------------------------------------- ------------------------------------------------
Total expenses 28,192 16,922 45,114 17,362 9,212 26,574
----------------------------------------- ------------------------------------------------
Income from operations $9,930 ($596)(2) $9,334 $6,422 $420 $6,842
========================================= ================================================
Total assets as of June 30, 1999
and 1998 $356,995 $53,997 $410,992 $291,960 $6,775 $298,735
========================================= ================================================
- -------------------------------------------------------------------------------------
</TABLE>
(2) The Company estimates that income from operations would have been $0.5
million if the effect of PGTC Inc.'s operations, after intercompany
eliminations, were eliminated from the results of the Spare Parts Sales
segment.
8. SUBSEQUENT EVENT
In July, 1999, the Company entered into an agreement to participate in a
joint venture - Sichuan Snecma Aero-engine Maintenance Co. Ltd. Sichuan Snecma
will focus on providing maintenance services for CFM56 series engines. Other
participants in the joint venture are China Southwest Airlines, Snecma Services
and Beijing Kailan Aviation Technology Development and Services Corporation.
Under the terms of the agreement, the Company expects to contribute not more
than $3 million to the joint venture over the next three years.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's core business is acquiring and leasing, primarily pursuant
to operating leases, commercial aircraft spare engines, aircraft and other
aircraft equipment. The Company, through WASI, also specializes in the
purchase and resale of aftermarket airframe and engine parts, engines,
modules and rotable components. In addition, the Company engages in the
selective purchase and resale of commercial aircraft engines. In July 1998,
the Company formed Pacific Gas Turbine Center, Incorporated ("PGTC Inc."). In
May 1999, the Company contributed the operations and assets of PGTC Inc. to a
newly formed joint venture, Pacific Gas Turbine Center, LLC ("PGTC LLC").
PGTC Inc. and its successor, PGTC LLC provide engine disassembly and
maintenance, repair and overhaul services to the Company and third parties
from the its San Diego location.
Revenue consists primarily of lease revenue, income from the sale of
spare parts and components and income from the sale of engines and equipment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998:
Revenue is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------
1999 1998
---- ----
Amount % Amount %
----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Lease revenue................................................. $11,078 43% $7,129 34%
Gain on sale of leased equipment.............................. 3,849 15 2,431 12
Spare parts sales............................................. 6,217 24 6,583 32
Sale of equipment acquired for resale......................... 4,000 16 4,094 20
Interest and other income..................................... 357 2 434 2
----------------------------------------------------
Total......................................................... $25,501 100% $20,671 100%
====================================================
</TABLE>
LEASING RELATED ACTIVITIES. Lease related revenue for the quarter ended
June 30, 1999, increased 55% to $11.1 million from $7.1 million for the
comparable period in 1998. This increase reflects lease related revenues from
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at June 30, 1999 and
1998 was $325.4 million and $235.5 million, respectively, an increase of 38%.
During the quarter ended June 30, 1999, 24 engines and two aircraft were
added to the Company's lease portfolio at a total cost of $57.0 million. Six
engines and three spare parts packages from the lease portfolio were sold or
transferred to inventory for sale. The engines sold from the lease portfolio
had a total net book value of $16.2 million and were sold for a gain of $3.8
million.
During the quarter ended June 30, 1998, the Company sold three engines
from the lease portfolio. The engines had a net book value of $7.6 million
and were sold for a gain of $2.4 million.
During the quarter ended June 30, 1999, the Company sold one engine
acquired for resale for $4.0 million which resulted in a gain of $430,000.
During the comparable 1998 period, the Company sold one engine for $4.1
million which resulted in a gain of $0.5 million.
11
<PAGE>
SPARE PARTS SALES. Revenues from spare parts sales decreased 6% to $6.2
million as compared to $6.6 million in the quarter ended June 30, 1998. The
gross margin decreased to 26% from 27% in the corresponding period in 1998.
This decrease was due to changes in the mix of parts sold during the periods.
INTEREST AND OTHER INCOME. Interest and other income for each of the
quarters ended June 30, 1999 and 1998, were $0.4 million. Interest is earned
on cash and deposits held.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 42% to $5.1 million for the quarter ended June 30, 1999,
from the comparable period in 1998, due to an increase in average debt
outstanding. This increase in debt was primarily related to debt associated
with the increase in lease portfolio assets and to a lesser extent an
increase in spare parts inventories. Residual sharing expense related to debt
increased 26% to $212,000 for the quarter ended June 30, 1999 from $168,000
for the comparable period in 1998. Residual sharing arrangements apply to
three of the Company's engines as of June 30, 1999 and are a function of the
difference between the debt associated with the residual sharing arrangement
and estimated residual proceeds. Because a greater portion of the principal
of such debt is amortized as debt ages, residual sharing expense increases.
The Company accrues for its residual sharing obligations using net book value
as an estimate for residual proceeds.
DEPRECIATION EXPENSE. Depreciation expense increased 66% to $2.9 million
for the quarter ended June 30, 1999, from the comparable period in 1998, due
primarily to the increase in lease portfolio assets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 39% to $4.4 million for the quarter ended June 30, 1999, from the
comparable period in 1998. This change reflects increased expenses, in all
business segments associated with staff additions, increased rent due to the
expansion of the facilities, as well as an increase in professional fees. Two
months of expenses related to PGTC Inc. are included in the quarter ended
June 30, 1999.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the quarter ended June 30, 1999, increased to $1.9 million from $1.4 million
for the comparable period in 1998. This increase reflects an increase in the
Company's pre-tax earnings. The effective tax rate for the quarters ended
June 30, 1999 and 1998 were 40%.
INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company
entered into a joint venture to perform maintenance, repair and overhaul of
commercial jet aircraft engines. The Company accounts for its 50% interest in
the joint venture using the equity method. During the three months ended June
30, 1999, net losses from the joint venture, after inter-company
eliminations, were $40,000. The Company had no such activity during the
comparable 1998 period.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998:
Revenue is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------
1999 1998
---- ----
Amount % Amount %
------------ ------------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Lease revenue........................................................... $21,647 40% $13,565 41%
Gain on sale of leased equipment........................................ 7,260 13 5,539 16
Spare parts sales....................................................... 15,189 28 9,599 29
Sale of equipment acquired for resale................................... 9,775 18 4,094 12
Interest and other income............................................... 577 1 619 2
------------ ------------- ------------ ---------
Total................................................................... $54,448 100% $33,416 100%
============ ============= ============ =========
</TABLE>
LEASING RELATED ACTIVITIES. Lease related revenue for the six months
ended June 30, 1999, increased 59% to $21.6 million from $13.6 million for
the comparable period in 1998. This increase reflects lease related revenues
from
12
<PAGE>
additional engines and aircraft. The aggregate of net book value of leased
equipment and net investment in direct finance lease at June 30, 1999 and
1998 was $325.4 million and $235.5 million, respectively, an increase of 38%.
During the six months ended June 30, 1999, 30 engines were added to the
Company's lease portfolio at a total cost of $77.1 million. Fourteen engines
and three spare parts packages from the lease portfolio were sold or
transferred to inventory for sale. The engines sold from the lease portfolio
had a total net book value of $27.4 million and were sold for a gain of $7.2
million.
During the six months ended June 30, 1998, four engines and one spare
parts package were sold or transferred to inventory for sale from the lease
portfolio. The engines had a net book value of $10.9 million and were sold
for a gain of $5.5 million.
During the six months ended June 30, 1999, the Company sold three
engines acquired for resale for $9.8 million which resulted in a gain of $1.4
million.
SPARE PARTS SALES. Revenues from spare parts sales increased 58% to
$15.2 million as compared to $9.6 million in the six months ended June 30,
1998. The gross margin decreased to 26% from 28% in the corresponding period
in 1998. This decrease was due to changes in the mix of parts being sold
during the periods.
INTEREST AND OTHER INCOME. Interest and other income for each of the six
months ended June 30, 1999 and 1998, were $0.6 million. Interest is earned on
cash and deposits held.
INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all
activities increased 61% to $10.0 million for the six months ended June 30,
1999, from the comparable period in 1998, due to an increase in average debt
outstanding during the period. This increase in debt was primarily related to
debt associated with the increase in lease portfolio assets and to a lesser
extent an increase in spare parts inventories. Residual sharing expense
increased 6% to $423,000 for the six months ended June 30, 1999 from $400,000
for the comparable period in 1998. Residual sharing arrangements apply to
three of the Company's engines as of June 30, 1999 and are a function of the
difference between the debt associated with the residual sharing arrangement
and estimated residual proceeds. Because a greater portion of the principal
of such debt is amortized as debt ages, residual sharing expense increases.
The Company accrues for its residual sharing obligations using net book value
as an estimate for residual proceeds.
DEPRECIATION EXPENSE. Depreciation expense increased 90% to $6.0 million
for the six months ended June 30, 1999, from the comparable period in 1998,
due primarily to the increase in lease portfolio assets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 43% to $9.1 million for the six months ended June 30, 1999, from
the comparable period in 1998. This change reflects increased expenses, in
all business segments, associated with staff additions, increased rent due to
the expansion of the facilities, as well as an increase in professional fees.
Five months of expenses related to PGTC Inc. are included in the quarter
ended June 30, 1999.
INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for
the six months ended June 30, 1999, increased to $3.7 million from $2.7
million for the comparable period in 1998. This increase reflects an increase
in the Company's pre-tax earnings. The effective tax rate for the six months
ended June 30, 1999 and 1998 were 40%.
INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company
entered into a joint venture to perform maintenance, repair and overhaul of
commercial jet aircraft engines. The Company accounts for its 50% interest in
the joint venture using the equity method. During the six months ended June
30, 1999, net losses from the joint venture, after inter-company
eliminations, were $40,000. The Company had no such activity during the
comparable 1998 period.
EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had
residual sharing provisions and an interest rate of 10%. The repayment
resulted in an extraordinary expense of $0.2 million, net of tax. The Company
had no such transactions during the comparable 1999 period.
13
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that
an entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value.
SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the
effective date of SFAS No. 133. SFAS No. 133, as amended, is now effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. As
of June 30, 1999, the Company is reviewing the effect SFAS No. 133 will have
on the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth through borrowings
secured by its equipment lease portfolio. Cash of approximately $81.5 million
and $110.0 million, in the six month periods ended June 30, 1999 and 1998,
respectively, was derived from this activity. In these same time periods
$39.4 million and $18.7 million, respectively, was used to pay down related
debt. Cash flow from operating activities generated approximately $7.6
million in the six month period ended June 30, 1999 and cash flows from
operating activities used $12.8 million in the six month period ended June
30, 1998. The deficit cash flow from operations for the six month period
ended June 30, 1998 was primarily attributable to the acquisition of used
aircraft for WASI's inventory.
The Company's primary use of funds is for the purchase of equipment for
lease. Approximately $77.3 million and $101.4 million of funds were used for
this purpose in the six month periods ended June 30, 1999 and 1998,
respectively.
At June 30, 1999, the Company had a $150.0 million revolving credit
facility to finance the acquisition of aircraft engines, aircraft and spare
parts for sale or lease as well as for general working capital purposes. As
of June 30, 1999, $0.1 million was available under this facility, subject to
the Company providing sufficient collateral. The facility has a two-year
revolving period followed by a four-year term-out period. The facility is
renewable annually.
In May 1999, the Company increased its $80 million debt warehouse
facility to $125 million. The facility is available to a wholly-owned special
purpose finance subsidiary of the Company, WLFC Funding Corporation, for the
financing of jet aircraft engines transferred by the Company to such finance
subsidiary. The facility is renewable annually. This transaction's structure
facilitates public or private securitized note issuances by the special
purpose finance subsidiary. The subsidiary is consolidated for financial
statement presentation purposes. The facility has an eight-year initial term
with a revolving period to February 2000 followed by a seven-year
amortization period. At June 30, 1999, the interest rate was a commercial
paper based rate plus 1.6%. The Company has guaranteed the obligations under
the facility on a limited basis, up to an amount equal to the greater of: (i)
the lesser of $5 million and 20% of the outstanding obligations or (ii) 10%
of the outstanding obligations. Assuming compliance with the facility's
terms, including sufficiency of collateral, as of June 30, 1999, $38.7
million was available under this facility.
Approximately $6.5 million of the Company's debt is repayable during
1999. Such repayments consist of scheduled installments due under term loans.
The Company believes that its current equity base, internally generated
funds and existing and contemplated debt facilities are sufficient to fund
the Company's anticipated operations into the third quarter of 1999, at which
time additional capital will be required to fund projected growth. The
Company is currently discussing additions to its debt and equity capital
bases with its commercial and investment banks. If the Company is not able to
access additional debt and equity capital, its ability to continue to grow
its asset base consistent with historical trends will be impaired.
As of June 30, 1999, the Company had eight engines, two aircraft and
one spare parts package which had not been financed. Subsequent to June 30,
1999, the Company's revolving credit lenders agreed that six engines and the
two aircraft could be used as collateral for borrowing purposes. The Company
may seek financing for unfinanced equipment,
14
<PAGE>
although no assurance can be given that such financing will be available on
favorable terms, if at all. Certain of the Company's engines have been
financed under floating rate facilities. Accordingly, the Company is subject
to interest rate risk, since the underlying lease revenue is fixed. See
"Management Of Interest Rate Exposure" below.
The Company has committed to purchase, during 1999, additional used
aircraft and used and new engines for its operations. Certain deposits were
made, in 1998, in connection with a portion of these commitments. As of June 30,
1999, the Company's current commitment to such purchases is not more than $11.7
million, which includes $1.4 million of deposits in other assets.
MANAGEMENT OF INTEREST RATE EXPOSURE
At June 30, 1999, $237.8 million of the Company's borrowings were on a
variable rate basis at various interest rates tied to either LIBOR or the
prime rate. The Company's equipment leases are generally structured at fixed
rental rates for specified terms. Increases in interest rates could narrow or
eliminate the spread, or result in a negative spread, between the rental
revenue the Company realizes under its leases and the interest rate that the
Company pays under its borrowings.
In September 1996, the Company purchased an amortizing interest rate cap
in order to limit its exposure to increases in interest rates on a portion of
its variable rate borrowings. Pursuant to this cap, the counter party will
make payments to the Company, based on the notional amount of the cap, if the
three month LIBOR rate is in excess of 7.66%. As of June 30, 1999, the
notional principal amount of the cap was $33.3 million, which will decline to
$26.0 million at the end of its term. The cost of the cap is being amortized
as an expense over its remaining term. To further mitigate exposure to
interest rate changes, the Company has entered into interest rate swap
agreements which have notional outstanding amounts of $30.0 million, a
weighted average remaining term of 26 months and a weighted average fixed
rate of 5.48%. Under its borrowing agreement, WLFC Funding Corporation is
required to hedge a certain portion of its $125 million warehouse facility
against changes in interest rates. WLFC Funding Corporation has entered into
interest rate swap agreements in order to meet such hedging requirements and
to manage the variable interest rate risk related to its debt. As of June 30,
1999, such swap agreements had notional outstanding amounts totaling $50
million, a weighted average remaining term of 45 months and a weighted
average fixed rate of 5.90%.
The Company will be exposed to risk in the event of non-performance of
the interest rate hedge counter parties. The Company anticipates that it will
hedge additional amounts of its floating rate debt during the next several
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for historical information contained herein, the discussion in
this report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute
to such differences include those discussed below as well as those discussed
elsewhere herein and in the Company's report on Form 10-K for the year ended
December 31, 1998. The cautionary statements made in this report should be
read as being applicable to all related forward-looking statements wherever
they appear in this report or in other written or oral statements by the
Company.
The businesses in which the Company is engaged are capital intensive
businesses. Accordingly, the Company's ability to successfully execute its
business strategy and to sustain its operations is dependent, in large part,
on the availability of debt and equity capital. There can be no assurance
that the necessary amount of such capital will continue to be available to
the Company on favorable terms or at all. If the Company is not successful in
obtaining sufficient capital, the Company's ability to: (i) add new aircraft
engines, aircraft and spare parts packages to its portfolio, (ii) add
inventory to support its spare parts sales, (iii) fund its working capital
needs, (iv) develop the business of PGTC LLC, and (v) finance possible future
acquisitions, would be impaired. The Company's inability to obtain sufficient
capital would have a material adverse effect on the Company's business,
financial condition and/or results of operations.
The Company retains title to the aircraft engines, aircraft and parts
packages that it leases to third parties. Upon termination of a lease, the
Company will seek to re-lease or sell the aircraft equipment or will
dismantle the equipment
15
<PAGE>
and will sell the parts. The Company also engages in the selective purchase
and resale of commercial aircraft engines and engine components. On occasion,
the Company purchases engines or components without having a firm commitment
for their sale. Numerous factors, many of which are beyond the Company's
control, may have an impact on the Company's ability to re-lease or sell
aircraft equipment on a timely basis, including the following: (i) general
market conditions, (ii) the condition of the aircraft equipment upon
termination of the lease, (iii) the maintenance services performed during the
lease term and, as applicable, the number of hours remaining until the next
major maintenance is required, (iv) regulatory changes (particularly those
imposing environmental, maintenance and other requirements on the operation
of aircraft engines), (v) changes in the supply or cost of aircraft engines,
and (vi) technological developments. There is no assurance that the Company
will be able to re-lease or sell aircraft equipment on a timely basis or on
favorable terms. The failure to re-lease or sell aircraft equipment on a
timely basis or on favorable terms could have a material adverse effect on
the Company's business, financial condition and/or results of operations.
The Company experiences fluctuations in its operating results. Such
fluctuations may be due to a number of factors, including: (i) general
economic conditions, (ii) the timing of sales of engines and spare parts,
(iii) financial difficulties experienced by airlines, (iv) interest rates,
(v) fuel costs, (vi) downturns in the air transportation industry, (vii)
increased fare competition, (viii) decreases in growth of air traffic, (ix)
unanticipated early lease termination or a default by a lessee, (x) the
timing of engine acquisitions, (xi) engine marketing activities, and (xii)
fluctuations in market prices for the Company's assets. The Company
anticipates that fluctuations from period to period will continue in the
future. As a result, the Company believes that comparisons to results of
operations for preceding periods are not necessarily meaningful and that
results of prior periods should not be relied upon as an indication of future
performance.
A lessee may default in performance of its lease obligations and the
Company may be unable to enforce its remedies under a lease. The Company's
inability to collect receivables due under a lease or to repossess aircraft
equipment in the event of a default by a lessee could have a material adverse
effect on the Company's business, financial condition and/or results of
operations. Various airlines have experienced financial difficulties in the
past, certain airlines have filed for bankruptcy and a number of such
airlines have ceased operations. In most cases where a debtor seeks
protection under Chapter 11 of Title 11 of the United States Code, creditors
are automatically stayed from enforcing their rights. In the case of United
States certified airlines, Section 1110 of the Bankruptcy Code provides
certain relief to lessors of aircraft equipment. The scope of Section 1110
has been the subject of significant litigation and there is no assurance that
the provisions of Section 1110 will protect the Company's investment in an
aircraft, aircraft engines or parts in the event of a lessee's bankruptcy. In
addition, Section 1110 does not apply to lessees located outside of the
United States and applicable foreign laws may not provide comparable
protection. Leases of spare parts may involve additional risks. For example,
it is likely to be more difficult to recover parts in the event of a lessee
default and the residual value of parts may be less ascertainable than an
engine.
The Company's leases are generally structured at fixed rental rates for
specified terms while much of the Company's borrowings are at floating rates.
Increases in interest rates could narrow or eliminate the spread, or result
in a negative spread, between the rental revenue the Company realizes under
its leases and the interest rate the Company pays under its borrowings, and
have a material adverse effect on the Company's business, financial condition
and/or results of operations.
During the six month period ended June 30, 1999, 77% of the Company's
lease revenue was generated by leases to foreign customers, including 9% from
Asian customers and 16% from South American customers. Such international
leases may present greater risks to the Company because certain foreign laws,
regulations and judicial procedures may not be as protective of lessor rights
as those which apply in the United States. The Company is subject to the
timing and access to courts and the remedies local laws impose in order to
collect its lease payments and recover its assets. In addition, political
instability abroad and changes in international policy also present risk of
expropriation of the Company's leased engines. Furthermore, many foreign
countries have currency and exchange laws regulating the international
transfer of currencies.
The Company generates a portion of its revenue from sale of leased
assets. The inability to execute transactions for gain on sale or a change in
the accounting guidelines related to such sales could have a material impact
on the Company's business, financial condition and/or results of operations.
16
<PAGE>
The Company has recently experienced significant growth in revenues. The
Company's growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational and financial
resources. There is no assurance that the Company will be able to effectively
manage the expansion of its operations, or that the Company's systems,
procedures or controls will be adequate to support the Company's operations,
in which event the Company's business, financial condition and/or results of
operations could be adversely affected. The Company may also acquire
businesses that would complement or expand the Company's existing businesses.
Any acquisition or expansion made by the Company may result in one or more of
the following events: (i) the incurrence of additional debt, (ii) future
charges to earnings related to the amortization of goodwill and other
intangible assets, (iii) difficulties in the assimilation of operations,
services, products and personnel, (iv) an inability to sustain or improve
historical revenue levels, (v) diversion of management's attention from
ongoing business operations, and (vi) potential loss of key employees. Any of
the foregoing factors could have a material adverse effect on the Company's
business, financial condition and/or results of operations.
The markets for the Company's products and services are extremely
competitive, and the Company faces competition from a number of sources.
These include aircraft and aircraft part manufacturers, aircraft and aircraft
engine lessors, airline and aircraft service companies and aircraft spare
parts redistributors. Certain of the Company's competitors have substantially
greater resources than the Company, including greater name recognition,
larger inventories, a broader range of material, complementary lines of
business and greater financial, marketing and other resources. In addition,
equipment manufacturers, aircraft maintenance providers, FAA certified repair
facilities and other aviation aftermarket suppliers may vertically integrate
into the markets that the Company serves, thereby significantly increasing
industry competition. There can be no assurance that competitive pressures
will not materially and adversely affect the Company's business, financial
condition and/or results of operations.
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an
ongoing basis. In addition, the Company's lessees currently enjoy favorable
accounting and tax treatment by entering into operating leases. Any change to
current tax laws or accounting principles that make operating lease financing
less attractive or affect the Company's recognition of revenue or expense
would have a material impact on the Company's business, financial condition
and/or results of operations.
Before parts may be installed in an aircraft, they must meet certain
standards of condition established by the FAA and/or the equivalent
regulatory agencies in other countries. Specific regulations vary from
country to country, although regulatory requirements in other countries are
generally satisfied by compliance with FAA requirements. Parts must also be
traceable to sources deemed acceptable by the FAA or such equivalent
regulatory agencies. Such standards may change in the future, requiring
engine components already contained in the Company's inventory to be scrapped
or modified. In all such cases, to the extent the Company has such engine
components in its inventory, their value may be reduced and the Company's
business, financial condition and/or results of operations could be adversely
affected
The Company obtains a substantial portion of its inventories of
aircraft, engines and engine parts from airlines, overhaul facilities and
other suppliers. There is no organized market for aircraft, engines and
engine parts, and the Company must rely on field representatives and
personnel, advertisements and its reputation as a buyer of surplus inventory
in order to generate opportunities to purchase such equipment. The market for
bulk sales of surplus aircraft, engines and engine parts is highly
competitive, in some instances involving a bidding process. While the Company
has been able to purchase surplus inventory in this manner successfully in
the past, there is no assurance that surplus aircraft, engines and engine
parts of the type required by the Company's customers will be available on
acceptable terms when needed in the future or that the Company will continue
to compete effectively in the purchase of such surplus equipment.
A change in the market for aircraft and engine parts could result in the
Company's inventory being overvalued and could require the Company to
write-down its inventory valuations in order to bring them into line with the
revised fair market value. Furthermore, when the Company purchases and
dismantles used aircraft, engines and parts, the Company assigns a value to
the parts based on market price. Airline manufacturers may also develop new
parts to be used in lieu of parts already contained in the Company's
inventory. There is no assurance that a write-down would not adversely affect
the Company's business, operating results or financial condition.
17
<PAGE>
The Company uses computer systems in many areas of its operations. In
addition, various third parties that are important to the Company's business
(including lessees, customers, vendors and financial institutions) use
computer systems in their areas of operations. Should the Company or certain
of such third parties not be "Year 2000 compliant," certain of the Company's
operations could be disrupted for an indeterminate period of time,
potentially having a material adverse impact on the Company's results,
business, financial condition and/or results of operations. As is the case
with most companies, the Year 2000 computer problem creates risks for the
Company.
The Company has assessed the Year 2000 computer problem as it affects
the Company's computer systems and information technology. As a result of the
Company's assessment, the Company does not expect any material interruption
of internal operations arising from the Company's computer systems and
information technology not being Year 2000 compliant. The mission critical
systems of the Company identified during the assessment are all off the shelf
software packages with unmodified source codes which have been certified by
the manufacturer as Year 2000 compliant. All internal hardware and software
remediation was completed during the second quarter and testing will be
conducted during the third quarter. The Company is not aware of any
significant Year 2000 issues with respect to the airworthiness of the
Company's aircraft, aircraft engines or spare parts; however, should such
issues result in Airworthiness Directives or other manufacturer recommended
maintenance for leased assets, the implementation and the majority of the
cost of such implementation would generally be the responsibility of the
lessee. Any resulting costs to the Company cannot be estimated at this time.
Significant uncertainties remain about the effect on the Company's
operations of third parties that may not be Year 2000 compliant and with whom
the Company does business (including lessees, customers, vendors and
financial institutions). The Company is in the process of assessing Year 2000
issues relating to such third parties and certain of the Company's officers
have oversight of these assessments. The Company has circulated to
significant third parties with whom the Company does business a written
request for their plans and progress in addressing the Year 2000 issue. As of
June 30, 1999, approximately two-thirds of the third parties polled had
responded. A majority of the respondents are currently Y2K compliant and the
remaining respondents indicated compliance no later than fourth quarter 1999.
The Company will develop contingency plans to address any material risk of
non-compliance by non-respondents. The Company expects to complete this
process by October 1999. The costs associated with assessing the Year 2000
issue, including developing and implementing the above plan, are expected to
be nominal. Non-compliance on the part of a third party could result in lost
revenue and an inability to make lease or other payments to the Company.
Non-compliance by the third party's financial institution could also affect
the ability to process payments.
A reasonable worst case scenario would be that a large number of third
parties (including lessees and spare parts customers) will be unable to
operate and generate revenues and as a result will be unable to make lease
payments or purchase parts. The Company is unable to estimate the likelihood
or the magnitude of the resulting lost revenue at this time. However, should
this occur, the Company would attempt to repossess leased engines, aircraft
and spare parts from non-compliant third parties and place such assets with
compliant third parties. The Company cannot assure you that it would be able
to re-lease such assets at favorable terms or at all. Similarly, the Company
would attempt to find compliant customers for the Company's spare parts
sales. If a significant number of leased assets could not be re-leased on
favorable terms or at all, or their re-lease is delayed, or if compliant
customers for spare parts sales were unavailable, the Company's business,
financial condition and/or results of operations would be adversely affected.
Providers of casualty and liability insurance to the aviation industry
have indicated that they may exclude coverage for Year 2000 related risks
and/or may require aviation equipment operators to answer, to the insurance
provider's satisfaction, a questionnaire regarding the Year 2000 preparedness
of aviation equipment operators, in order to provide coverage for Year 2000
risks. The inability of a lessee to obtain or maintain coverage for Year 2000
related losses and/or the Company's inability to obtain or maintain any
contingent insurance for Year 2000 related risks would expose the Company to
material risk of loss. The Company is in the process of informing its lessees
of Year 2000 related insurance issues and is monitoring its lessees' ability
to obtain insurance coverage for Year 2000 related risks.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate
risk. A change in the U.S. prime interest rate, LIBOR rate, or cost of funds
based on commercial paper market rates, would affect the rate at which the
Company could
18
<PAGE>
borrow funds under its various borrowing facilities. Increases in interest
rates to the Company, which may cause the Company to raise the implicit rates
charged to its customers, could result in a reduction in demand for the
Company's leases. Certain of the Company's warehouse credit facilities are
variable rate debt. The Company estimates a one percent increase or decrease
in the Company's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $1.5 million per annum. The Company
estimates a two percent increase or decrease in the Company's variable rate
debt would result in an increase or decrease, respectively, in interest
expense of $3.0 million per annum. The foregoing effect of interest rate
changes, net of interest rate hedges, on per annum interest expense is
estimated as constant due to the terms of the Company's variable rate
borrowings, which generally provide for the maintenance of borrowing levels
given adequacy of collateral and compliance with other loan conditions.
The Company hedges a portion of its borrowings, effectively fixing the
rate of these borrowings. The Company is currently required to hedge a
portion of debt of the WLFC Funding Corporation Facility. Such hedging
activities may limit the Company's ability to participate in the benefits of
any decrease in interest rates, but may also protect the Company from
increases in interest rates. A portion of the Company's leases provide that
lease payments be adjusted based on changes in interest rates. Furthermore,
since lease rates tend to vary with interest rate levels, it is likely that
the Company can adjust lease rates for the effect of change in interest rates
at the termination of leases. Other financial assets and liabilities are at
fixed rates.
The Company is also exposed to currency devaluation risk. During the six
month period ended June 30, 1999, 77% of the Company's total lease revenues
came from non-United States domiciled lessees. All of the leases require
payment in United States (U.S.) currency. If these lessees' currency devalues
against the U.S. dollar, the lessees could potentially encounter difficulty
in making the U.S. dollar denominated lease payments.
19
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 25, 1999 Annual Meeting of Shareholders of Willis Lease Finance
Corporation, the following matters were voted upon:
<TABLE>
<CAPTION>
DESCRIPTION VOTES
----------- -----
<S> <C> <C> <C>
1. Election of Class I Directors
William M. LeRoy 6,959,617 For
14,800 Withheld
Robert H. Rau 6,959,617 For
14,800 Withheld
2. Approval of ratification of two
amendments to the Company's 5,912,616 For
1996 Stock Option/Stock 1,044,881 Against
Issuance Plan (the "1996 Plan"). 16,920 Abstain
3. Approval of ratification of selection 6,971,797 For
of KPMG LLP as independent 1,600 Against
public accountants for the 1,020 Abstain
Company for the fiscal year
ended December 31, 1999
</TABLE>
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER
<S> <C>
3.1 Certificate of Incorporation, filed on March 12, 1998 together
with Certificate of Amendment of Certificate of Incorporation
filed on May 6, 1998. Incorporated by reference to Exhibits 4.01
and 4.02 of the Company's report on Form 8-K filed on June 23,
1998.
3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the
Company's report on Form 8-K filed on June 23, 1998.
4.1 Specimen of Common Stock Certificate incorporated by reference to
Exhibit 4.1 of the Company's report on form 10-Q for the quarter
ended June 30, 1998.
10.1* Operating Agreement of PGTC LLC dated May 28, 1999
10.2* Contribution and Assumption Agreement dated May 28, 1999
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
</TABLE>
- -----------------------------------------
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment and the redacted material has been filed separately
with the Commission.
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: August 13, 1999
Willis Lease Finance Corporation
By: /s/ James D. McBride
----------------------
James D. McBride
Chief Financial Officer
<PAGE>
OPERATING AGREEMENT
OF
PACIFIC GAS TURBINE CENTER, LLC
THIS OPERATING AGREEMENT OF Pacific Gas Turbine Center, LLC is made
and entered into as of May 28, 1999 by and among Chromalloy Gas Turbine
Corporation, a Delaware corporation ("CGTC"), Willis Lease Finance
Corporation, a Delaware corporation ("WLFC"), as successor in interest to
Pacific Gas Turbine Center, Incorporated ("PGTC"), a Delaware corporation and
a wholly-owned-subsidiary of WLFC, and PGTC.
RECITALS
A. Concurrently herewith, (i) PGTC, WLFC, and the Company have
entered into the WLFC Contribution Agreement (as defined below), pursuant to
which PGTC has contributed to the Company certain assets, in exchange for
which PGTC has received a 50% Percentage Interest (as defined below) in the
Company, and (ii) (x) CGTC and the Company have entered into the CGTC
Contribution Agreement (as defined below), pursuant to which CGTC has
contributed to the Company $___________* in cash and (y) CGTC shall make an
additional cash capital contribution pursuant to SECTION 4.3(B) hereof (the
sum of (ii)(x) and (ii)(y), the "CGTC CASH CONTRIBUTION"), and in exchange
for such CGTC Cash Contribution CGTC has received a 50% Percentage Interest
in the Company.
B. Immediately following the consummation of the transactions
contemplated by the WLFC Contribution Agreement and the CGTC Contribution
Agreement (collectively, the "CONTRIBUTION AGREEMENTS"), PGTC commenced
dissolution pursuant to applicable law (the "DISSOLUTION") and filed a
Certificate of Dissolution with the Secretary of State of the State of
Delaware pursuant to a Plan of Corporate Liquidation adopted by the Board of
Directors of PGTC on May 26, 1999.
C. Immediately following the contribution to the Company by PGTC
pursuant to the WLFC Contribution Agreement, the assets of PGTC (including
PGTC's Member Interest in the Company) are being distributed to its sole
stockholder, WLFC, and pursuant to this Agreement PGTC shall cease to be a
Member of the Company and WLFC shall become a Member of the Company.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement, the parties hereto hereby agree as
follows:
- -------------------
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
<PAGE>
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION
1.1 DEFINITIONS. The following definitions will apply to the
capitalized terms used in this Agreement for all purposes, unless otherwise
clearly indicated to the contrary:
"AAA" has the meaning set forth in SECTION 14.13.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of
the end of the relevant Tax Year, after giving effect to the following
adjustments:
(a) decrease such deficit by any amounts that such Member is
obligated to restore pursuant to this Agreement or by operation of law upon
liquidation of such Member's Membership Interest or is deemed to be obligated
to restore pursuant to Tax Regulations Section 1.704-1(b)(2)(ii)(c) or the
penultimate sentence of each of Tax Regulations Sections 1.704-2(g)(1) and
1.704-2(i)(5); and
(b) increase such deficit by the items described in Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of "Adjusted Capital Account Deficit" is intended to
comply with the provisions of Tax Regulations Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.
"AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under common control
with, such Person. For purposes of this Operating Agreement, "CONTROL"
(including, with correlative meanings, the terms "CONTROLLING," "CONTROLLED
BY" or "UNDER COMMON CONTROL WITH") as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through
the ownership of voting securities or by contract or otherwise.
"AGREEMENT" means this Operating Agreement, as it may be amended,
modified, supplemented or restated from time to time.
"AVAILABLE CASH" of the Company means, at any time, all cash funds
of the Company on hand after: (a) payment of all expenditures of the Company
that are due and payable as of such time; (b) provision for payment of all
expenditures of the Company that are anticipated to become due and payable
within thirty days following such time; and (c) provision for adequate
reserves (working capital and/or capital), as determined by the Management
Committee.
"BOOK VALUE" means, for any asset, the asset's adjusted basis for
federal income tax purposes, except as follows:
2
<PAGE>
(a) The initial Book Value of any asset contributed by a Member to
the Company will be the gross fair market value of such asset on the date of
contribution, as reasonably determined by the Management Committee (with the
consent of the Required Members).
(b) The Book Values of all Company assets will be adjusted to equal
their respective gross fair market values, as determined by the Management
Committee (with the consent of the Required Members), as of the following
times: (i) the acquisition of an additional interest in the Company by any
new or existing Member in exchange for more than a DE MINIMIS Capital
Contribution; (ii) the distribution by the Company to a Member of more than a
DE MINIMIS amount of Company property as consideration for an interest in the
Company; and (iii) the liquidation of the Company within the meaning of Tax
Regulations Section 1.704-1(b)(2)(ii)(g).
(c) The Book Value of any Company asset distributed to any Member
will be adjusted to equal the gross fair market value of such asset on the
date of distribution, as reasonably determined by the Management Committee
(with the consent of the Required Members).
(d) The Book Value of Company assets will be increased (or
decreased) to reflect any adjustment to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the
extent that such adjustments are required to be taken into account in
determining Capital Accounts pursuant to Tax Regulations Section
1.704-1(b)(2)(iv)(m); provided that Book Value will not be adjusted pursuant
to this paragraph (d) to the extent the Management Committee (with the
consent of the Required Members) determine that an adjustment pursuant to
paragraph (b) is necessary or appropriate in connection with a transaction
that would otherwise result in an adjustment pursuant to this paragraph (d).
"BUSINESS DAY" means any day that is not a Saturday or Sunday or a
day on which banks are required or permitted to be closed in the State of
California.
"CAPITAL ACCOUNT" means, with respect to any Member, the capital
account maintained for such Member in accordance with the following
provisions:
(a) Such Capital Account will be increased by such Member's Capital
Contributions, such Member's allocable share of Profits and any items in the
nature of income or gain that are specifically allocated to such Member
pursuant to SECTIONS 5.4 and 5.5, and the amount of any Company liabilities
assumed by such Member or which are secured by any property distributed to
such Member.
(b) Such Capital Account will be decreased by the cash amount or
Book Value of any property distributed to such Member pursuant to this
Agreement, such Member's allocable share of Losses and any items in the
nature of deductions or losses that are specially allocated to such Member
pursuant to SECTIONS 5.4 and 5.5, and the amount of any liabilities of the
Member assumed by the Company or for the satisfaction of which recourse may
be made to any property contributed by such Member to the Company.
3
<PAGE>
(c) In the event all or a portion of a Member Interest is
Transferred in accordance with the terms of this Agreement, the transferee
will succeed to the Capital Account of the transferor to the extent it
relates to the Transferred Member Interest.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are generally intended to
comply with Tax Regulations Section 1.704-1(b) and will be interpreted and
applied in a manner consistent with such Tax Regulations. If the Management
Committee (with the consent of the Required Members) determines that it is
prudent to modify the manner in which the Capital Accounts, or any increases
or decreases to the Capital Accounts, are computed in order to comply with
such Tax Regulations, the Management Committee (with the consent of the
Required Members) may authorize such modifications, provided that it is not
likely to have a material effect on the amounts distributable to any Person
pursuant to SECTION 13.4 upon the dissolution of the Company, nor a material
effect on the amounts of taxable income, gain, deduction, or loss allocable
to the Members. The Management Committee (with the consent of the Required
Members) may also (i) make any adjustments that are necessary or appropriate
to maintain equality between the Capital Accounts of the Members and the
amount of capital reflected on the Company's balance sheet, as computed for
book purposes, in accordance with Tax Regulations Section
1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the
event unanticipated events might otherwise cause this Agreement not to comply
with Tax Regulations Section 1.704-1(b).
"CAPITAL CALL NOTICE" has the meaning set forth in SECTION 4.3(C).
"CAPITAL CONTRIBUTION" means, with respect to any Member, the amount
of money and the initial Book Value of any property (other than money)
contributed to the Company with respect to the Member Interest held by such
Member.
"CERTIFICATE OF FORMATION" means the Certificate of Formation of the
Company as filed with the Office of the Secretary of State of the State of
Delaware on March 19, 1999, as it may be amended or restated from time to
time.
"CGTC ADDITIONAL CASH CONTRIBUTION" has the meaning set forth in
SECTION 4.3(B)(II).
"CGTC CONTRIBUTION AGREEMENT" means the Contribution Agreement dated
of even date herewith by and between CGTC and the Company.
"CGTC MANAGER" has the meaning set forth in SECTION 7.2.
"CLOSING DATE" means May 28, 1999.
"CODE" means the Internal Revenue Code of 1986, as amended and in
effect from time to time. All references herein to the Code will include any
corresponding provision or provisions of succeeding law.
4
<PAGE>
"COMPANY" means Pacific Gas Turbine Center, LLC, the Delaware
limited liability company formed by the filing of the Certificate of
Formation.
"COMPANY CONFIDENTIAL INFORMATION" means any and all trade secrets,
knowledge, data or know-how of the Company, and any technical, training
and/or business information treated as confidential by the Company, whether
relating to Company Proprietary Technology or the business or operations of
the Company, including, without limitation, any formula, concept, process,
design, device, software, system, list of customers, training manuals,
marketing or sales or service plans, records, financial information, source
codes, programs, inventions, techniques, new products, budgets, projections,
licenses, prices, costs, compilations of information used in the Company's
business or any other information of the Company, in each case, that is not
readily available to the public; PROVIDED that Company Confidential
Information shall not include information that (a) subsequent to its
disclosure, is obtained from a third party in possession of such information
and not under a contractual or fiduciary obligation to the Company to keep
such information in confidence, (b) subsequent to its disclosure, enters the
public domain (except where such occurrence is the direct result of a
violation of SECTION 14.11), (c) prior to disclosure, was already known to
the Person receiving such information, as evidenced by its written records,
(d) is filed with any government or regulatory agency in a manner that makes
such information publicly available, (e) is disclosed pursuant to any
judicial or governmental requirement or order or (f) is otherwise required by
applicable law to be disclosed.
"COMPANY MINIMUM GAIN" has the meaning set forth in Tax Regulations
Section 1.704-2(b)(2) with respect to "partnership minimum gain."
"COMPANY NONRECOURSE DEDUCTIONS" has the meaning set forth in Tax
Regulations Section 1.704-2(b)(1) with respect to "nonrecourse deductions."
"COMPANY PROPRIETARY TECHNOLOGY" means any and all Company
Confidential Information consisting of inventions, discoveries, formulas,
concepts, processes, designs, devices, software, systems, new products,
trademarks, trade names, servicemarks, copyrights, patents, trade secrets,
knowledge, data or know-how owned by the Company or developed or made by, or
caused to be developed or made by, the Company during the term of this
Agreement.
"CONTRIBUTION AGREEMENTS" has the meaning set forth in the Recitals
hereto.
"DEADLOCK" means (a) any failure to agree between the members of the
Management Committee or the Required Members (other than DE MINIMUS issues
and issues involving an amount in controversy less than or equal to $100,000,
in the event that the amount in dispute is readily ascertainable), resulting
in the inability of the Management Committee or the Required Members, as the
case may be, to reach agreement for a thirty (30) day period with respect to
the subject matter of such deadlock situation, despite good faith efforts by
the members of the Management Committee or the Required Members, as the case
may be, to reach agreement with respect thereto, (b) the acquisition by a
Person of a Member Interest pursuant to any foreclosure made upon any Pledge
of such Member Interest or (c) as set forth in SECTION 4.3(C)(III).
5
<PAGE>
"DEFAULT RATE" shall mean the sum of (a) the rate of interest for
commercial loans established and publicly announced by First Union National
Bank as its prime commercial lending rate, PLUS (b) 4%, as determined as of
the Default Notice Date.
"DEFAULT NOTICE DATE" has the meaning set forth in SECTION 4.3(C)(I).
"DELAWARE ACT" means the Delaware Limited Liability Company Act, 6
Del. C. Section 18-101, et seq., as amended from time to time.
"DEPRECIATION" means, for each Tax Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Tax Year, except that if the Book Value of an
asset differs from its adjusted basis for federal income tax purposes at the
beginning of such Tax Year, Depreciation shall be an amount which bears the
same ratio to such beginning Book Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such Tax
Year bears to such beginning adjusted tax basis; provided, however, that if
the adjusted basis for federal income tax purposes of an asset at the
beginning of such Tax Year is zero, Depreciation shall be determined with
reference to such beginning Book Value using any reasonable method selected
by the Management Committee (with the consent of the Required Members).
"FIRST REFUSAL NOTICE" has the meaning set forth in SECTION 11.2(A).
"FIRST REFUSAL OFFER" has the meaning set forth in SECTION 11.2(A).
"FISCAL QUARTER" means (a) the period commencing May 1, 1999 and
ending on June 30, 1999, (b) any subsequent three-month period thereafter (or
upon completion of the winding up of the Company, if sooner) or (c) such
other Fiscal Quarter as the Management Committee may adopt.
"FISCAL YEAR" means (a) the period commencing May 1, 1999 and ending
on December 31, 1999, (b) any subsequent twelve (12) month period commencing
on January 1 and ending on December 31, or (c) any portion of the period
described in clause (b) of this sentence for which the Company is required to
allocate Profits, Losses and other items of Company income, gain, loss or
deduction pursuant to ARTICLE V hereof.
"FORECLOSURE TRANSFEREE" has the meaning set forth in Section
11.4(b).
"GAAP" means generally accepted accounting principles in the United
States of America as from time to time in effect, applied on a consistent
basis with those accounting principles applied at prior dates or for prior
periods.
"GOVERNMENTAL BODY" means any governmental or quasi-governmental
agency, authority, commission, board or other body.
"INDEMNITEE" has the meaning set forth in SECTION 7.16.
"KPMG" has the meaning set forth in SECTION 2.11.
6
<PAGE>
"LIEN" includes any mortgage, lien, pledge, security interest,
conditional sale agreement, charge, claim, easement, right, condition,
restriction or other encumbrance or defect of title of any nature whatsoever
(including without limitation, any assessment, charge or other type of notice
which is levied or given by any governmental body and for which a lien could
be filed).
"LIQUIDATOR" has the meaning set forth in SECTION 13.4.
"LOSSES" has the meaning set forth in the definition of "Profits"
and "Losses."
"MANAGEMENT COMMITTEE" has the meaning set forth in SECTION 7.1.
"MANAGER" means a member of the Management Committee.
"MEMBER INTEREST" means the interest of a Member in the Company
including, without limitation, such Member's right (a) to a distributive
share of the Profits, Losses and other items of income, gain, loss, deduction
and credit of the Company, (b) to a distributive share of the assets of the
Company, and (c) to vote on or to consent or withhold consent on certain
matters as described in this Agreement, each in accordance with its
Percentage Interest.
"MEMBER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Tax Regulations Section 1.704-2(i)(2) with respect to "partner nonrecourse
debt minimum gain" and shall be determined in accordance with Tax Regulations
Section 1.704-2(i)(3).
"MEMBER NONRECOURSE DEDUCTIONS" has the meaning set forth in Tax
Regulations Section 1.704-2(i)(1) and (2) with respect to "partner
nonrecourse deductions."
"MEMBERS" means PGTC (prior to the transfer of its Member Interest
to WLFC), WLFC (subsequent to the receipt of its Member Interest from PGTC),
CGTC, and each other Person who has been admitted as a Member in the Company
in accordance with SECTION 11.5 of this Agreement and whose admission has
been reflected on the books and records of the Company.
"NON-OFFERING MEMBER" has the meaning set forth in SECTION 12.1(A).
"NOTICE OF ACCEPTANCE" has the meaning set forth in SECTION 11.2(C).
"NOTIFIED MEMBER" has the meaning set forth in SECTION 11.2(A).
"OFFER" has the meaning set forth in SECTION 12.1(A).
"OFFERING MEMBER" has the meaning set forth in SECTION 12.1(A).
"OFFER PRICE" has the meaning set forth in SECTION 11.2(A).
"OFFICERS" has the meaning set forth in SECTION 7.4(A).
"PERCENTAGE INTEREST" means, at any time, the percentage of Member
Interests held by a Member at such time in relation to the total Member
Interests outstanding at such time, as set
7
<PAGE>
forth opposite such Member's name on EXHIBIT A, as such Percentage Interest
may be adjusted from time to time pursuant to the terms of this Agreement.
After any such adjustment, the Percentage Interest of such Member, as
adjusted, shall constitute the Percentage Interest of such Member for all
purposes under this Agreement.
"PERSON" means an individual, corporation, partnership, limited
liability company, joint venture, trust, estate, unincorporated organization,
association, Governmental Body or other entity.
"PLEDGE" means, with respect to all or any aspect of a Member
Interest, a pledge, encumbrance, hypothecation or similar disposition in
connection with the granting of a Lien to secure an obligation of the pledgor
or an Affiliate of the pledgor.
"PROFITS" and "LOSSES" mean, for each Tax Year or other period, an
amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) will be included in taxable income or
loss), with the following adjustments (without duplication):
(a) Income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Profits and Losses pursuant
to this definition will be added to such taxable income or loss.
(b) Any expenditures of the Company described in Code Section
705(a)(2)(B), or treated as Code Section 705(a)(2)(B) expenditures pursuant
to Tax Regulations Section 1.704-1(b)(2)(iv)(i) will be subtracted from such
taxable income or loss.
(c) If the Book Value of any Company asset is adjusted pursuant to
paragraphs (b), (c) or (d) of the definition thereof, the amount of such
adjustment will be taken into account as gain or loss from the disposition of
such asset for purposes of computing Profits and Losses.
(d) Gain or loss resulting from any disposition of property with
respect to which gain or loss is recognized for federal income tax purposes
will be computed by reference to the Book Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Book Value.
(e) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such Tax Year,
computed in accordance with the definition of Depreciation.
(f) Notwithstanding any other provision of this definition, any
items that are specially allocated pursuant to SECTIONS 5.4 or 5.5 will not
be taken into account in computing Profits and Losses.
"PURCHASE PRICE" has the meaning set forth in SECTION 11.3(B).
8
<PAGE>
"REQUIRED MEMBERS" means WLFC and CGTC.
"TAX RATE" means, as of any relevant date, the highest marginal
effective federal income tax rate applicable to corporations during a period
with respect to which a distribution is made pursuant to SECTION 6.3, plus 6%.
"TAX REGULATIONS" means the Income Tax Regulations (including
Temporary Regulations) promulgated under the Code, as amended and in effect
(including corresponding provisions of any succeeding Tax Regulations).
"TAX REGULATORY ALLOCATIONS" has the meaning set forth in SECTION
5.5.
"TAX YEAR" means the twelve-month accounting period of the Company
for federal and state income tax purposes ending on December 31 of each year
or such other accounting period as the Company is required to use under
Section 706(b) of the Code; provided that the initial Tax Year of the Company
will be the period beginning on the Closing Date and ending on December 31,
1999 (or such other year end required to be used by the Company under Section
706(b) of the Code), and the last Tax Year of the Company (if not a full
twelve-month accounting period) will be the period beginning on the day
following the end of the penultimate Tax Year of the Company and ending on
the date the final liquidation of the Company is completed.
"THIRD PARTY" means any Person other than (a) the Company, (b) a
Member, (c) the Manager, (d) any Affiliate of any of the foregoing, (e) any
officer, director, shareholder, partner or member of any of the foregoing or
(f) any other Person designated by either WLFC or CGTC in a written form
delivered to the other Member on the Closing Date, which information is
expressly incorporated herein by reference.
"THIRD PARTY OFFER" means a bona fide offer made in writing by any
Third Party to WLFC or CGTC to purchase a Member Interest from such Member on
an arm's length basis.
"TRANSFER" means a sale, assignment, gift, contribution, exchange or
any other disposition of a Member Interest (other than a Pledge).
"TRANSFERRING MEMBER" has the meaning set forth in SECTION 11.2(A).
"VOTING POWER" has the meaning set forth in SECTION 7.3.
"WASI SUBLEASE" means that certain Sublease Agreement dated of even
date herewith by and between WLFC and Willis Aeronautical Services, Inc., a
California corporation, and assigned to the Company pursuant to the
Assignment and Assumption of Lease and Sublease dated of even date herewith
by and between WLFC and the Company.
"WLFC CONTRIBUTION" has the meaning set forth in SECTION 4.3(B)(I).
"WLFC CONTRIBUTION AGREEMENT" means the Contribution Agreement dated
of even date herewith by and among PGTC, WLFC and the Company.
9
<PAGE>
"WLFC MANAGER" has the meaning set forth in SECTION 7.2.
1.2 RULES OF CONSTRUCTION.
(a) All article, section and paragraph titles and captions in this
Agreement are for convenience only, will not be deemed part of this
Agreement, and in no way define, limit, extend, or describe the scope or
intent of any provisions of this Agreement. Except as specifically provided
otherwise, references to "Articles," "SECTIONS" and "EXHIBITS" are to
Articles, Sections and Exhibits of or to this Agreement.
(b) Whenever the context may require, any pronoun used in this
Agreement includes the corresponding masculine, feminine or neuter forms, and
the singular form of nouns, pronouns and verbs includes the plural and VICE
VERSA. The locative adverbs "hereof," "herein," "hereafter," etc. refer to
this Agreement as a whole.
ARTICLE II
ORGANIZATIONAL MATTERS
2.1 FORMATION. The Members have formed the Company as a limited
liability company pursuant to the provisions of the Delaware Act. The Members
are entering into this Agreement in order to set forth the rights and
obligations of the Members with respect to the Company and certain related
matters. Except as otherwise expressly provided herein or in the Contribution
Agreements, the rights and obligations of the Members and the administration
and dissolution of the Company will be governed by the Delaware Act.
2.2 NAME. The name of the Company is "Pacific Gas Turbine Center,
LLC."
2.3 REGISTERED AGENT AND OFFICE. The registered agent and office of
the Company in the State of Delaware shall be Corporation Service Company,
1013 Centre Road, Wilmington, Delaware 19805. The Management Committee may
change the registered office or registered agent from time to time.
2.4 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Company shall be at 7007 Consolidated Way, San Diego, CA 92121, or at
such other place in the United States as the Management Committee may from
time to time designate.
2.5 TERM. The Company will continue in existence in perpetuity, or
until the earlier dissolution of the Company in accordance with the
provisions of ARTICLE XIII.
2.6 OWNERSHIP. The interest of each Member in the Company will be
personal property for all purposes. All property and interests in property,
real or personal, owned by the Company will be deemed owned by the Company as
an entity, and no Member (as such) will have any ownership of such property
or interest therein except by having an ownership interest in the Company as
a Member.
10
<PAGE>
2.7 RELATIONSHIP AMONG MEMBERS. The relationship among the Members
provided for in this Agreement is limited to the conduct of the business of
the Company as a limited liability company in accordance with the terms of
the Delaware Act and this Agreement. Nothing contained in this Agreement will
be construed to create a partnership (other than for tax purposes) between or
among the Members or, except as otherwise expressly provided in this
Agreement, to authorize any Member to act as agent for another Member.
2.8 INDEPENDENT ACTIVITIES OF MEMBERS. Each Member and its
Affiliates may have business interests and engage in business activities in
addition to those relating to the Company, and no other provision of this
Agreement will be deemed to prohibit a Member or any of its Affiliates from
conducting such other businesses and activities.
2.9 NO INDIVIDUAL AUTHORITY. No Member, acting alone, will have
any authority to act for, or to undertake or assume any obligation or
liability on behalf of, any other Member or the Company, except as otherwise
expressly provided in this Agreement.
2.10 QUALIFICATION IN OTHER JURISDICTIONS. The President of the
Company or his designee shall cause the Company to be qualified or registered
as a foreign limited liability company authorized to transact business in all
jurisdictions in which such qualification or registration is reasonably
necessary or advisable, and shall cause the Company to register all trade
names or fictitious names in or under which it conducts business in all
jurisdictions in which the Company conducts business under such names and in
which such registration is necessary or advisable. The President of the
Company or his designee, as an "authorized person" within the meaning of the
Delaware Act, may execute, deliver and file any certificates, affidavits and
registrations (and any amendments and/or restatements thereof) necessary for
the Company so to do.
2.11 ACCOUNTANT. The accountant for the Company for the remaining
portion of the first calendar year following the Closing Date and for the
subsequent two calendar years shall be KPMG Peat Marwick LLP ("KPMG"). CGTC
shall name the Company's accountant to serve for the subsequent three
calendar years. Thereafter, WLFC and CGTC shall alternate in designating the
Company's accountant for each subsequent three-year period.
ARTICLE III
PURPOSE
3.1 PURPOSES AND SCOPE. Subject to the provisions of this
Agreement, the purposes of the Company are: (a) to operate the business of
storage and distribution of aircraft and engine spare parts inventory,
overhaul and testing of jet engines, including the dismantling, cleaning,
repair and testing of said jet engines; and (b) to do any and all other acts
or things which may be desirable, expedient, convenient, incidental or
necessary to carry on the business of the Company as herein contemplated.
3.2 POWERS OF THE COMPANY. The Company shall have the power and
authority to take any and all actions necessary, proper, advisable,
incidental or convenient to or for the
11
<PAGE>
furtherance of the purposes set forth in SECTION 3.1, as determined by the
Management Committee in accordance with the terms and conditions of this
Agreement.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND LOANS
4.1 INITIAL CAPITAL CONTRIBUTIONS. Pursuant to the Contribution
Agreements:
(a) PGTC has made a Capital Contribution of the assets described in
Section 2.01 of the WLFC Contribution Agreement as of the Closing Date; WLFC
shall succeed to such Capital Contributions and the Capital Account
attributable thereto; and
(b) CGTC has made a Capital Contribution of $___________* in cash
as set forth in Section 2.01 of the CGTC Contribution Agreement as of the
Closing Date, and shall make an additional cash Capital Contribution pursuant
to SECTION 4.3(b).
4.2 MEMBER INTERESTS; PERCENTAGE INTERESTS. In consideration of
the Capital Contributions referred to in SECTION 4.1, WLFC (as successor to
PGTC) and CGTC will be deemed to have the following respective Percentage
Interests as of the Closing Date:
<TABLE>
<CAPTION>
Percentage
Name of Member Interest
-------------- ----------
<S> <C>
WLFC 50%
CGTC 50%
----
Total: 100%
</TABLE>
4.3 ADDITIONAL CAPITAL CONTRIBUTIONS.
(a) Except as otherwise provided in this SECTION 4.3 or as
otherwise agreed by the Required Members pursuant to SECTION 7.5(k), no
Member shall be obligated to make any Capital Contributions or loans to the
Company.
(b)(i) Within fifteen (15) days after the Closing Date, WLFC shall
prepare and deliver to CGTC a computation of the contribution, calculated
consistent with EXHIBIT C (the "WLFC CONTRIBUTION"), made by WLFC with
respect to the PGTC Business (as defined in the WLFC Contribution Agreement)
for the period beginning on May 1, 1999 and ending on May 28, 1999. CGTC
shall have five (5) days from receipt of such computation to review such
computation and to propose adjustments (if necessary) to the computation of
the WLFC Contribution. If WLFC and CGTC are unable to agree on the
computation of the WLFC Contribution within thirty (30) days after the
Closing Date, the disputed amount shall be submitted to AAA for arbitration,
the
- --------------------
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
12
<PAGE>
cost of which shall be borne equally by WLFC and CGTC, and whose decision
shall be final and binding and without appeal. After the final determination
by AAA of the WLFC Contribution, neither CGTC nor WLFC shall have any further
right to make any claims against the other with respect to the calculation of
any element of the WLFC Capital Expenditures, absent fraud. The foregoing
shall not be construed as limiting any right or remedy of WLFC, CGTC or LLC
under any other provision of this Agreement in the event any party hereto
breaches any representation, warranty or covenant hereunder.
(ii) On the date that a final determination is made
pursuant to SECTION 4.3(b)(i) of the amount of the WLFC Contribution, CGTC
shall be required, within five (5) days after the date of such determination,
to make an additional Capital Contribution in cash (the "CGTC ADDITIONAL CASH
CONTRIBUTION") in an amount equal to the amount of the WLFC Contribution. The
WLFC Contribution will be recorded on EXHIBIT A as an increase to WLFC's
"Initial Capital Account." Upon the contribution of the CGTC Additional Cash
Contribution to the Company by CGTC in accordance with SECTION 4.3(b)(i), the
CGTC Additional Cash Contribution will be recorded on EXHIBIT A as an
increase to CGTC's "Initial Capital Account." The Members intend that,
following the contribution by CGTC of the CGTC Additional Cash Contribution
to the Company, the Capital Accounts of each of the Members shall equal the
aggregate amount of cash contributed by CGTC pursuant to SECTIONS 4.1(b) and
4.3(B).
(c) At any time during the period from the Closing Date through and
including December 31, 2000, in the event that the annual operating budget of
the Company in effect at such time (as approved by the Required Members
pursuant to SECTION 7.5(q)) provides that each Member is required to make a
Capital Contribution to the Company, then each Member agrees to make such
Capital Contribution in an amount up to the aggregate annual amount set forth
in such annual operating budget; PROVIDED, THAT (i) the aggregate annual
amount set forth in such annual operating budget shall be the same amount for
each Member, (ii) the aggregate annual amount set forth in such annual
operating budget shall not exceed an amount equal to $5,000,000 for each
Member, (iii) any such Capital Contribution shall be made only upon delivery
of a written notice (a "CAPITAL CALL NOTICE") properly authorized by the
Management Committee, and (iv) the total amount of Capital Contributions made
by each Member for any calendar year (regardless of when such Capital
Contributions are made during such year) shall not exceed the aggregate
annual amount set forth in such annual operating budget. Subject to the
provisions of this SECTION 4.3(c), the Management Committee shall provide a
Capital Call Notice, which shall specify the date on which the Capital
Contributions shall be made and which shall be provided to all Members no
less than thirty (30) days prior to the date for payment specified in such
notice. EXHIBIT A shall reflect the actual amount of each Member's Capital
Contributions as of any given time, and the Management Committee shall amend
EXHIBIT A from time to time to keep such information current.
(i) In the event any Member shall default in the funding of
any portion of its Capital Contribution when required to be made, and shall
fail to provide such funds within ten (10) days after notice of default shall
be given to it by the Management Committee (such tenth (10th) day being
referred to herein as the "DEFAULT NOTICE DATE"), then such Member shall be a
defaulting Member and the Management Committee may cause the Company to treat
the
13
<PAGE>
defaulted amount as a loan to the defaulting Member by the Company (and a
deemed Capital Contribution by such defaulting Member), which loan shall bear
interest, compounded annually, at the Default Rate, commencing from the date
the defaulted amount was initially due until the date the "loan" is fully
repaid. The Company may retain distributions otherwise payable to the
defaulting Member, applying such amounts as described below. Notwithstanding
the provisions of SECTIONS 7.3 and 7.5, the approval of the Managers
appointed by the defaulting Member shall not be required with respect to any
actions taken by the Management Committee during any period in which such
Member is in default.
Any amounts withheld from the distributions to the defaulting Member
pursuant to this SECTION 4.3(c)(i) shall be applied in the following
priorities: (x) first, to the expenses and costs, including, without
limitation, attorneys' fees, if applicable, incurred by the Company in
recovering the amounts due and (y) second, there shall be deducted and
retained by the Company the principal portion of such defaulting Member's
unfunded Capital Contribution that is treated as a loan, plus any accrued but
unpaid interest thereon (with all amounts applied to interest first and then
to such portion of such loan). The balance of proceeds remaining shall be
distributed to the defaulting Member in accordance with ARTICLE VI or
SECTION 13.4, as appropriate. The defaulting Member shall remain liable for
all amounts due under this SECTION 4.3(c)(i) to the extent such amounts
remain unpaid after exercise of the remedies provided for in this
SECTION 4.3(c)(i). All amounts withheld and applied pursuant to this
paragraph shall be treated as having been distributed to the defaulting
Member for purposes of determining the Members' Capital Accounts and rights
to other distributions from the Company.
Each of the Members hereby consents to the application to it of the
remedies provided in this SECTION 4.3(c)(i) in recognition of the risk and
speculative damages its default would cause the Company and the other Member
and further agrees that the availability of such remedies and the choice of
any such remedy shall not preclude any other such remedy or any other
remedies that may be available at law, in equity, by statute or otherwise.
(ii) Notwithstanding anything to the contrary in
SECTION 4.3(c)(i), upon the repayment by the defaulting Member to the Company
of all amounts due under SECTION 4.3(c)(i) (including any and all accrued
interest), the Company shall no longer be authorized to withhold
distributions to the defaulting Member with respect to such Capital
Contribution; PROVIDED, HOWEVER, that nothing in this SECTION 4.3(c)(ii)
shall prohibit the Company from exercising its remedies as set forth in
SECTION 4.3(c)(i) (including the withholding of distributions) with respect
to any subsequent defaults by any Member with respect to any subsequent
Capital Call Notices.
(iii) Notwithstanding anything to the contrary contained
herein, in the event that, as of the date that is one (1) year from any
Default Notice Date, the defaulting Member has not repaid all of such
defaulting Member's unfunded Capital Contribution, the non-defaulting Member
shall be entitled to declare a Deadlock and exercise any and all rights of an
Offering Member as set forth in ARTICLE XII.
4.4 CFM56 FINANCING. If at any time on or before the fifth
anniversary of the date of this Agreement, the Company elects to seek
certification and become a working ___________
14
<PAGE>
facility, CGTC shall, pursuant to the terms and conditions set forth on
EXHIBIT B attached hereto, loan to the Company up to ___________ dollars
($___________) in cash to finance such certification and any other expenses
in connection therewith. Any such monetary amounts provided by CGTC to the
Company shall constitute a loan to the Company and shall not constitute a
Capital Contribution.*
ARTICLE V
CAPITAL ACCOUNTS AND ALLOCATIONS
5.1 CAPITAL ACCOUNTS. For purposes of maintaining Capital Accounts
in accordance with Code Section 704(b) and the Tax Regulations thereunder:
(a) Maintenance of Capital Accounts. The Company will maintain for
each Member a separate Capital Account in accordance with this Agreement,
which will control the division of assets upon liquidation of the Company as
provided in SECTION 13.4(d).
(b) Negative Capital Accounts. If any Member has a deficit balance
in its Capital Account, such Member shall have no obligation to restore such
negative balance or to make any Capital Contribution to the Company by reason
thereof, and such negative balance shall not be considered an asset of the
Company or of any Member.
(c) Initial Capital Accounts. The Members agree that the initial
Capital Account of each Member after giving effect to the initial Capital
Contributions provided for in SECTION 4.1 shall be as set forth on EXHIBIT A.
(d) ALLOCATION OF INITIAL CAPITAL CONTRIBUTIONS AMONG CONTRIBUTED
PROPERTY. The Members agree that the aggregate net Book Value of the cash or
assets, as the case may be, contributed to the Company by each Member
pursuant to SECTION 4.1 hereof is equal to the initial Capital Account of
such Member after giving effect to such Capital Contribution, as set forth in
paragraph (c) above.
5.2 INTEREST. No interest will be paid by the Company on Capital
Contributions or on balances in Capital Accounts.
5.3 ALLOCATION OF PROFITS AND LOSSES. After giving effect to the
allocations set forth in SECTIONS 5.4 and 5.5, and after giving effect to any
distributions of cash or property, Profits and Losses for any Tax Year (or
other period) will be allocated to the Members in proportion to their
respective Percentage Interests.
5.4 SPECIAL ALLOCATIONS. Notwithstanding any provision herein, the
following special allocations shall be made in the following order:
- --------------------
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
15
<PAGE>
(a) MINIMUM GAIN CHARGEBACK - COMPANY NONRECOURSE LIABILITIES. If
there is a net decrease in Company Minimum Gain during any Tax Year, certain
items of income and gain will be specially allocated (on a gross basis) to
the Members in accordance with the rules described in Tax Regulations
Section 1.704-2(f) and - 2(j)(2)(i) and (iii), subject to the exemptions set
forth in Tax Regulations Section 1.704-2(f)(2), (3), (4) and (5). This
SECTION 5.4(a) is intended to comply with the minimum gain chargeback
requirement set forth in Tax Regulations Section 1.704-2(f) relating to
Company nonrecourse liabilities (as defined in Tax Regulations
Section 1.704-2(b)(3)) and will be so interpreted.
(b) MINIMUM GAIN CHARGEBACK--MEMBER NONRECOURSE DEBT. If there is
a net decrease in Member Nonrecourse Debt Minimum Gain during any Tax Year,
certain items of income and gain will be specially allocated (on a gross
basis) as quickly as possible to those Members who had a share of the Member
Nonrecourse Debt Minimum Gain (determined pursuant to Section 1.704-2(i)(5)
of the Tax Regulations) in accordance with the rules described in Tax
Regulations Section 1.704-2(i)(4), (j)(2)(ii) and (iii). This SECTION 5.4(b)
is intended to comply with the minimum gain chargeback requirement set forth
in Tax Regulations Section 1.704-2(i)(4) relating to partner nonrecourse debt
(as defined in Tax Regulations Section 1.704-2(b)(4)) and will be so
interpreted.
(c) QUALIFIED INCOME OFFSET. If any Member unexpectedly receives
an adjustment, allocation or distribution described in Tax Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain
shall be allocated, in accordance with Tax Regulations
Section 1.704-1(b)(2)(ii)(d), to such Member in an amount and manner
sufficient to eliminate, to the extent required by such Tax Regulations, the
Adjusted Capital Account Deficit of such Member as quickly as possible,
provided that an allocation pursuant to this SECTION 5.4(c) shall be made if
and only to the extent that such Member would have an Adjusted Capital
Account Deficit after all other allocations provided in this ARTICLE V have
been tentatively made as if this SECTION 5.4(c) were not in the Agreement.
This SECTION 5.4(c) is intended to comply with the "qualified income offset"
requirement set forth in Tax Regulations Section 1.704-1(b)(2)(ii)(d) and
will be so interpreted.
(d) COMPANY NONRECOURSE DEDUCTION. Company Nonrecourse Deductions
for any Tax Year will be specially allocated among the Members in proportion
to their Percentage Interests.
(e) MEMBER NONRECOURSE DEDUCTION. Member Nonrecourse Deductions
will be allocated pursuant to Tax Regulations Section 1.704-2(b)(4) and (i)(l)
to the Member who bears the economic risk of loss with respect to the
deductions.
(f) TAX ALLOCATIONS; CODE SECTION 704(c). In accordance with Code
Section 704(c) and the Tax Regulations thereunder, income, gain, loss and
deductions with respect to any property contributed to the capital of the
Company will, solely for tax purposes, be allocated among the Members so as
to take account of any variation between the adjusted basis of such property
to the Company for federal income tax purposes and its Book Value. Unless
otherwise required by the Tax Regulations under Section 704(c) of the Code,
the Company will take such
16
<PAGE>
variations into account in accordance with the "traditional method" and the
"ceiling rule" under Tax Regulations Section 1.704-3(b)(1).
5.5 CURATIVE ALLOCATIONS. The allocations set forth in
SECTIONS 5.4(a) through (e) (the "TAX REGULATORY ALLOCATIONS") are intended
to comply with certain requirements of the Tax Regulations. It is the intent
of the Members that, to the extent possible, all Tax Regulatory Allocations
will be offset either with other Tax Regulatory Allocations or with special
allocations of other items of Company income, gain, loss, or deduction
pursuant to this SECTION 5.5. Therefore, notwithstanding any other provisions
of this ARTICLE V (other than the Tax Regulatory Allocations), the Management
Committee will make such offsetting special allocations of Company income,
gain, loss, or deduction in whatever manner it determines appropriate so
that, after such offsetting allocations are made, each Member's Capital
Account balance is, to the extent possible, equal to the Capital Account
balance such Member would have had if the Tax Regulatory Allocations were not
part of this Agreement and all Company items were allocated pursuant to
SECTION 5.3. In making allocations under this SECTION 5.5, the Management
Committee will take into account future Tax Regulatory Allocation under
Sections 5.4(a) and 5.4(b) that, although not yet made, are likely to offset
other Tax Regulatory Allocations previously made under SECTIONS 5.4(d) and
5.4(e).
5.6 OTHER ALLOCATION RULES.
(a) For purposes of determining the Profits, Losses, or any other
item allocable to any period, Profits, Losses, and any such other item will
be determined on a daily, monthly, or other basis, as determined by the
Management Committee (with the consent of the Required Members) using any
permissible method under Code Section 706 and the Tax Regulations thereunder.
(b) For federal income tax purposes, every item of income, gain,
loss, and deduction will be allocated among the Members in accordance with
the allocations under SECTIONS 5.3, 5.4, 5.5 and 5.6.
(c) The Members are aware of the income tax consequences of the
allocations made by this ARTICLE V and agree to be bound by the provisions of
this ARTICLE V in reporting their shares of the Company income and loss for
income tax purposes.
(d) It is intended that the allocations in SECTIONS 5.3, 5.4 and
5.5 effect an allocation for federal income tax purposes consistent with Code
Section 704 and comply with any limitations or restrictions therein. The
Management Committee (with the consent of the Required Members) may alter the
allocations pursuant to this ARTICLE V in any manner consistent with Code
Section 704 and to amend the provisions of this Agreement as appropriate to
comply with the Tax Regulations promulgated under Code Section 704, if, in
the opinion of counsel, such an amendment is advisable to reflect allocations
among the Members consistent with those Tax Regulations, and any such
allocation will not have a material effect on the distributions which would
otherwise be made pursuant to SECTIONS 6.1, 6.3, 13.4 or 13.6, it being
understood that, notwithstanding anything in ARTICLE V to the contrary,
allocations shall be effected in a manner that will result in liquidating
distributions pursuant to SECTION 13.4(d)(ii) (after taking into account
Company Minimum Gain and Member Nonrecourse Debt Minimum Gain) being
17
<PAGE>
made in the same amounts as if such liquidating distributions were made in
the amounts set forth in SECTION 6.1.
(e) The Members agree that their Percentage Interests represent
their respective interests in Company profits for purposes of allocating
excess nonrecourse liabilities (as defined in Tax Regulations
Section 1.752-3(a)(3)) pursuant to Tax Regulations Section 1.752-3(a)(3).
ARTICLE VI
DISTRIBUTIONS
6.1 DISTRIBUTIONS.
(a) The Management Committee shall review the Company's accounts at
the end of each fiscal quarter to determine whether distributions are
appropriate. Subject to SECTION 6.1(b), SECTION 6.3, Section 18-607(a) of the
Delaware Act and EXHIBIT B to this Agreement, the Management Committee (with
the consent of the Required Members) shall make such distributions of
Available Cash to the Members as it may determine, in proportion to their
respective Percentage Interests; PROVIDED, HOWEVER, that in the event that,
on or at any time after January 1, 2001, the amount of Available Cash is
greater than $5,000,000, the Management Committee shall distribute all
Available Cash in excess of $5,000,000 to the Members in proportion to their
respective Percentage Interests and such action shall not require the consent
of the Required Members.
(b) Notwithstanding any provision of SECTION 6.1(a) to the
contrary, Available Cash that is derived from a transaction that occurs in
connection with the dissolution, termination and liquidation of the Company
shall be distributed to the Members in accordance with ARTICLE XIII.
6.2 AMOUNTS WITHHELD. Each Member authorizes the Company to
withhold and pay any withholding or other taxes payable by the Company with
respect to such Member as a result of such Member's participation in the
Company. If the Company is required to withhold or pay any such taxes, such
Member will be deemed for all purposes of this Agreement to have received a
payment from the Company at the time of such withholding or payment, which
will be deemed to be a distribution with respect to such Member's Member
Interest. To the extent a Member receiving a deemed distribution under this
SECTION 6.2 would not otherwise be entitled to such distribution during the
Tax Year, such Member shall contribute to the Company in cash the amount of
such deemed distribution which is in excess of the distribution the Member
would have otherwise been entitled to for such Tax Year (but shall receive no
credit for such contribution in circumstances in which Percentage Interests
are redetermined). Any withholding authorized by this SECTION 6.2 will be
made at the maximum applicable statutory rate under the applicable tax law
unless the Management Committee has received an opinion of counsel or other
evidence satisfactory to the Management Committee to the effect that a lower
rate is applicable or that no withholding is applicable.
6.3 TAX DISTRIBUTIONS. Notwithstanding SECTION 6.1(a), no later
than the filing of the Company's federal income tax return with respect to
any Tax Year, the Management Committee shall cause the Company to distribute
to each Member with respect to such Tax Year an amount
18
<PAGE>
not less than (i) the product of (A) the excess, if any, of the cumulative
taxable income of the Company allocated to such Member in each Tax Year from
and after the inception of the Company (including such Tax Year) over (B) the
cumulative taxable income of the Company allocated to such Member in each Tax
Year of the Company (excluding such Tax Year), MULTIPLIED BY (ii) the Tax
Rate in effect during such Tax Year to which such distribution relates, to
the extent such product exceeds distributions made to such Member during such
Tax Year (other than distributions to such Member during such Tax Year under
this SECTION 6.3 with respect to the prior Tax Year). The Management
Committee shall make such distributions on an annual basis, promptly
following the filing of the Company's federal income tax return. Amounts
distributed under this SECTION 6.3 shall be considered advance distributions
under SECTION 6.1(a), and thus Members shall be entitled to distributions
under SECTION 6.1(a) only to the extent that distributions to which such
Member would be entitled under SECTION 6.1(a) (determined without regard to
this SECTION 6.3) exceed amounts previously distributed to such Member under
SECTION 6.1(a) and this SECTION 6.3.
ARTICLE VII
MANAGEMENT OF THE COMPANY
7.1 MANAGEMENT. The business and affairs of the Company shall be
managed by a management committee (the "MANAGEMENT COMMITTEE") consisting of
four (4) Managers. Except for situations in which the approval of a Member or
Members is expressly required by this Operating Agreement or by the Delaware
Act (where such requirement cannot be overridden by the agreement of
Members), the Management Committee shall have full and complete authority,
power and discretion to manage and control the business, affairs and
properties of the Company, to make all decisions regarding those matters and
to perform any and all other acts or activities customary or incident to the
management of the business of the Company. The members of the Management
Committee shall direct, manage and control the business of the Company to the
best of their ability.
7.2 APPOINTMENT OF MANAGERS. Subject to SECTION 7.7, CGTC
initially shall be entitled to appoint two (2) Managers to the Management
Committee (the "CGTC MANAGERS"), and WLFC initially shall be entitled to
appoint two (2) Managers to the Management Committee (the "WLFC MANAGERS").
The number of Managers may be increased, and the rights of each Member to
elect Managers modified, from time to time upon the affirmative vote or
consent of the Required Members; PROVIDED, however, that any such additional
Managers may only be appointed by a Member owning a Percentage Interest equal
to or greater than 50%.
The initial CGTC Managers shall be the following individuals:
Kenneth J. Binder
Christine Richardson
The initial WLFC Managers shall be the following individuals:
James D. McBride
Edwin F. Dibble
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<PAGE>
7.3 VOTE OF MANAGERS. Each Manager will have one vote, equally
weighted with the vote of each other Manager, with respect to any decisions
made by the Management Committee ("VOTING POWER"). Any action taken by the
Management Committee shall require the affirmative vote or consent of
Managers holding at least a majority of the Voting Power; PROVIDED, HOWEVER,
that any action taken by the Management Committee shall require that the
affirmative vote or consent of at least one (1) WLFC Manager and at least one
(1) CGTC Manager. Except as may be authorized by the Management Committee, no
Member, individual Manager, officer, employee, attorney-in-fact or other
agent of the Company shall have any power or authority to bind the Company in
any way, to pledge its credit or to render it liable pecuniarily for any
purpose.
7.4 OFFICERS.
(a) The officers of the Company shall consist of a (i) President,
(ii) Controller, Director of Finance or Chief Financial Officer, (iii) Vice
President and (iv) Corporate Secretary, and (v) any other officer as
determined by the Management Committee (the "OFFICERS"). The Officers shall
be appointed by, and shall exercise such powers and perform such duties as
are prescribed by, the Management Committee; PROVIDED, however, that CGTC
shall have the right to appoint the Chief Financial Officer and Corporate
Secretary of the Company. The Officers need not be employees of the Company.
Any number of offices may be held by the same individual, as the Management
Committee may determine, except that no individual may simultaneously hold
the offices of President and Secretary. The Officers shall hold office for
the term for which they were appointed and until their successors are
appointed and qualified; PROVIDED, HOWEVER, that any Officer may be removed
with or without cause at any time by the Management Committee.
(b) The initial officers of the Company shall be as follows:
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
Graham Bell President, Chief Financial Officer
and Corporate Secretary
Robert Klapatch Vice President - Marketing
Thomas M. McCoy Vice President - Engineering
Hugh Orrell Vice President - Materials/Purchasing
</TABLE>
7.5 SIGNIFICANT OPERATING DECISIONS. Notwithstanding any provision
of this Agreement to the contrary, in addition to the making of any other
decision or the taking of any other action under this Agreement that
specifically requires the approval of the Required Members or that is to be
made by the Required Members, neither the Management Committee nor any
Officer will have the authority to cause the Company to approve, act on or
effect, any of the following actions without the approval of the Required
Members:
(a) the sale of all or substantially all of the business or assets
of the Company, whether by merger, consolidation, sale of assets or otherwise
(other than pursuant to a sale of Member Interests on the basis contemplated
by ARTICLE XI), or the acquisition by the Company of
20
<PAGE>
any other Person or an operating business unit of any other Person, whether
by merger, consolidation, purchase of equity interests or the acquisition of
all or substantially all of the business or assets of such Person or
operating business unit;
(b) the making by the Company of any capital expenditure not
provided for in the annual operating budget (as approved pursuant to Section
7.5(q)) in excess of $100,000 individually or $250,000 in the aggregate for
any Fiscal Year;
(c) the entering into by the Company of (i) any "Power-by-the-Hour"
contract with expected revenues in excess of eight million dollars
($8,000,000) per annum or (ii) any contract or agreement, or any modification
thereof or amendment thereto, if the obligations incurred or the expenditures
made by the Company pursuant to such contract or agreement (or the increase
in such obligations pursuant to such modification or amendment) could
reasonably be expected to exceed eight million dollars ($8,000,000) in the
aggregate;
(d) the incurrence by the Company of any debt with a principal
amount in excess of $500,000 in the aggregate;
(e) except with respect to the transactions described in SECTION
8.7 and except with respect to the WASI Sublease, (i) the entering into by
the Company of any contract or agreement with any Member or any Affiliate of
any Member; or (ii) the termination of, or the amending, modifying or waiving
of any provision of, any such contract or agreement approved pursuant to this
SECTION 7.5(e);
(f) the filing of any voluntary petition, or the acquiescence in
any involuntary petition, in bankruptcy or receivership with respect to the
Company or its property;
(g) the Company's engaging in any business or activity that is not
consistent with the purposes of the Company set forth in SECTION 3.2 hereof
or the making of any material change in the nature of the Company's business;
(h) the admission of additional Members (except in connection with
a Transfer of a Member Interest made in accordance with ARTICLE XI);
(i) the dissolution or winding up of the affairs of the Company;
(j) the adoption of any amendment to the Certificate of Formation
or to this Agreement;
(k) the issuance of any Capital Call Notice to any or all of the
Members requiring any or all of the Members to make a Capital Contribution;
(l) the making of any election to treat the Company other than as a
partnership for income tax purposes;
(m) the making of any distribution by the Company to the Members
(other than to the extent permitted or required by SECTION 6.3);
21
<PAGE>
(n) the taking of any action which would make it impossible to
carry on the ordinary business of the Company;
(o) (i) the employment of any employee of the Company having
compensation in excess of $100,000 annually, unless otherwise provided for in
the annual operating budget as approved pursuant to Section 7.5(q), or (ii)
the entering into of any employment agreement with any employee of the
Company;
(p) the changing of the accounting principles utilized by the
Company or the application thereof in any manner not mandated by GAAP;
(q) the approval of the annual operating budget of the Company
(which shall be submitted to the Management Committee not less than twenty
(20) days prior to the beginning of each Fiscal Year) and any material
changes thereto;
(r) the decision to become a CFM56 (or other aircraft engine type,
other than JT8 and JT9 aircraft engine models) working overhaul and repair
facility;
(s) the entering into by the Company of any contract or agreement
which would require the Company to disclose, license or assign any
proprietary information of the Company (or would require the Company to
license or accept assignment of any proprietary information from any other
Person); and
(t) the type of insurance and coverage limits obtained by the
Company.
Further, notwithstanding any provision of this Agreement to the
contrary, each of WLFC and CGTC agree that only the CGTC Managers, and not
the WLFC Managers, shall be entitled to enforce the Company's rights
(including, but not limited to, all rights triggered by the subtenant's
breach or failure to timely vacate) under the WASI Sublease.
7.6 RESIGNATION. Any Manager may resign at any time by giving
written notice to the Members of the Company. The resignation of any Manager
shall take effect upon receipt of such notice or at such later time as shall
be specified in the notice. Unless otherwise specified in such notice,
acceptance of the resignation of a Manager by the Company, the Members or the
remaining Managers shall not be necessary to make it effective.
7.7 REMOVAL. WLFC may at any time remove and replace any WLFC
Manager with or without cause. CGTC may at any time remove and replace any
CGTC Manager with or without cause. No Member other than WLFC may remove or
replace any WLFC Manager, and no Member other than CGTC may remove or replace
any CGTC Manager. In the event either WLFC or CGTC shall cease to be a Member
for any reason, WLFC or CGTC, as applicable, shall cease to be entitled to
designate Managers, and each of the WLFC Managers or the CGTC Managers, as
applicable, shall be automatically removed as Managers without any further
action required to be taken by any party; and, notwithstanding SECTION
7.8(A), the Member whose Manager designee(s) are so removed will not be
entitled to appoint a replacement Manager or Managers to fill the vacancies
so created.
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7.8 VACANCIES. Any vacancy occurring for any reason in the number
of Managers may be filled pursuant to the following procedures:
(a) If a vacancy occurs as a result of the death, disability,
resignation or removal of a WLFC Manager or a CGTC Manager, WLFC or CGTC, as
applicable, shall be entitled to appoint a replacement Manager; and
(b) Any Person appointed as a replacement Manager shall hold office
until such Person's death, disability, resignation or removal.
7.9 MEETINGS OF MANAGEMENT COMMITTEE.
(a) The Management Committee may hold any of its meetings at such
place or places within or without the State of Delaware as the Management
Committee may from time to time by resolution designate or as called by any
Manager. Managers may participate in any regular or special meeting of the
Management Committee by means of conference telephone or similar
communications equipment pursuant to which all persons participating in the
meeting can hear each other, and such participation shall constitute presence
in person at such meeting.
(b) Regular meetings of the Management Committee may be held at
such times as the Management Committee shall from time to time by resolution
determine, but in any event no less than once per Fiscal Quarter, on or about
April 12, July 12, October 12 and January 12 of each Fiscal Year. Notice of
time and place of any regular meeting shall be mailed to each Manager,
addressed to him at his usual place of business, at least four (4) days
before the day on which the meeting is to be held. Special meetings of the
Management Committee shall be held whenever called by any Manager or the
President. Notice of the time and place of any special meeting shall be
mailed to each Manager, addressed to him at his residence or usual place of
business, at least four (4) days before the day on which the meeting is to be
held, or shall be sent to him at such place by telegraph, telecopy or cable
or be delivered personally not less than 48 hours before the time at which
the meeting is to be held. The purpose of any special meeting shall be
required to be included in any notice of a special meeting. Notice of any
meeting of the Management Committee shall not be required to be given to any
Manager who signs a waiver of notice, whether before or after the meeting, or
who is present at such meeting, except for a Manager who shall attend such
meeting for the express purpose of objecting, at the beginning of such
meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
7.10 QUORUM. Except as otherwise provided in this Operating
Agreement, the presence of Managers holding at least a majority of the Voting
Power shall constitute a quorum for the transaction of business at any
meeting of the Management Committee; PROVIDED, HOWEVER, that the presence of
at least one (1) WLFC Manager and at least one (1) CGTC Manager shall be
required to constitute a quorum.
7.11 ACTION BY WRITTEN CONSENT. Any action required or permitted to
be taken at any meeting of the Management Committee (or of any committee
thereof) may be taken without a meeting by the unanimous written consent of
the Managers.
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7.12 COMMITTEES. The Management Committee may designate such
committees as the Management Committee may determine to serve at its
pleasure, and may prescribe the manner in which proceedings of such
committees shall be conducted. The provisions of this Operating Agreement
with respect to notice and conduct of meetings of Managers shall govern
committees of the Management Committee and actions by such committees. In
resolutions adopted by the Management Committee authorizing any such
committee, the Managers shall specify the authority of any such committee;
PROVIDED, HOWEVER, that that at least one (1) WLFC Manager and at least one
(1) CGTC Manager shall be a committee member of each such committee; and
PROVIDED, FURTHER, that no committee shall have the authority to take any
action that is subject to the special voting provisions set forth in SECTION
7.5 without the affirmative vote or consent of the Required Members. The
provisions of SECTIONS 7.2 and 7.3 with respect to the appointment and voting
rights of Managers shall govern the appointments and voting rights of any
committee members of any committees designated by the Management Committee.
7.13 COMPENSATION. The compensation of the Officers and employees
shall be paid directly by the Company and not by either Member. The
compensation of the President of the Company shall be fixed from time to time
by the Management Committee (or by any committee formed by the Management
Committee to determine compensation matters), and the compensation of all
other Officers and employees of the Company shall be fixed from time to time
by the President; PROVIDED, HOWEVER, that any changes to the salaries and
bonuses of any of the Company's Officers or employees for any Fiscal Year
which, in the aggregate, would result in an increase in the overall amount
provided for compensation in the annual operating budget for such Fiscal
Year, and all changes to the benefit programs for such Officers and employees
for such Fiscal Year, shall be determined by the Management Committee (or an
authorized committee thereof). The Managers shall not be entitled to any
compensation for their services as Managers, but shall be entitled to
compensation for all reasonable, out-of-pocket costs incurred by them in the
performance of their duties as Managers hereunder.
7.14 NO PARTICIPATION BY MEMBERS. Except as expressly set forth in
this Agreement or as expressly required by the Delaware Act (where such
requirement cannot be superseded by the agreement of Members), the Members
shall not have any vote or take any part in the control or management of the
business of the Company, nor have any authority or power to act for or on
behalf of the Company in any manner whatsoever. No Member that is not
otherwise authorized by the Management Committee as an agent shall take any
action to bind the Company, and each Member shall indemnify the Company for
any costs or damages incurred by the Company as a result of the unauthorized
action of such Member. Upon prior written approval of the Management
Committee, each Member shall be reimbursed by the Company for all reasonable,
out-of-pocket costs and expenses incurred by it in connection with the
authorized carrying out of the Company's Business.
7.15 COMPANY FUNDS. The funds of the Company will be deposited in
such account or accounts maintained in the name of the Company with such bank
or banks as are designated by the Management Committee. All withdrawals from
or charges against such accounts shall require the signature of the
Controller, Director of Finance or Chief Financial Officer, as the case may
be, or his designee, and in each case one other authorized signatory, which
signatory shall
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be an Officer of the Company. Funds of the Company may be invested as
determined by the Management Committee in accordance with the terms and
provisions of this Agreement; PROVIDED, HOWEVER, that at all times the
Controller, Director of Finance or Chief Financial Officer, as the case may
be, shall maintain books of account that show the amount of funds of the
Company on deposit in each such account and interest accrued with respect to
such funds as are credited to the Company.
7.16 INDEMNIFICATION. Without duplication as to any matter
indemnified against by the Company pursuant to SECTION 9.03 of each of the
WLFC Contribution Agreement and the CGTC Contribution Agreement, and except
as to any matter for which the Company is entitled to be indemnified pursuant
to SECTION 9.02 of each of the WLFC Contribution Agreement and the CGTC
Contribution Agreement, the Company shall indemnify and hold harmless (i)
each Manager, (ii) each of the Members, (iii) the officers, directors and
employees of each of the Members and the Company (each of the Persons set
forth in clauses (i), (ii) or (iii) above, an "INDEMNITEE"), as follows:
(a) In any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative, or
investigative, and to which an Indemnitee was or is a party or is threatened
to be made a party by reason of any act performed or omitted to be performed
in the name of or on behalf of the Company in connection with the Company's
business, the Company will indemnify such Indemnitee against reasonable
attorneys' fees, judgments, fines, penalties, including excise and similar
taxes, statements, and reasonable expenses actually incurred by such
Indemnitee in connection with the defense and/or settlement of such action,
suit, or proceeding, if such Indemnitee acted in good faith, within such
Indemnitee's scope of authority, without gross negligence or willful
misconduct, and in a manner reasonably believed by such Indemnitee to be in
the best interests of the Company, and in the case of a criminal action or
proceeding, if such Indemnitee had no reason to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, or upon a plea of NOLO CONTENDERE or its equivalent, shall
not, of itself, create a presumption that the Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, or, with respect to any criminal action or
proceeding, that the Indemnitee had reasonable cause to believe that his
conduct was unlawful. In no event, however, will indemnification ever be made
in relation to a proceeding between the Members, in relation to a proceeding
in which the Indemnitee has been found liable for or convicted of fraud or a
criminal act or for grossly negligent, willful, or intentional misconduct in
the Indemnitee's performance of its duty to the Company or in relation to a
proceeding which arises out of a material violation by the Indemnitee of the
terms and provisions of this Agreement.
(b) Any indemnification permitted under this SECTION 7.16 will be
made only out of the assets of the Company (including any insurance proceeds
payable under any insurance policies held by the Company) and no Member will
be obligated to contribute to the capital of, or lend funds to, the Company
to enable the Company to provide such indemnification.
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(c) The indemnification provided by this SECTION 7.16 will be in
addition to any other rights to which each Indemnitee may be entitled under
any agreement or vote of the Required Members, as a matter of law or
otherwise, as to action in the Indemnitee's capacity as a Manager, Officer,
Member, director, officer or employee of a Member, and will continue as to an
Indemnitee who has ceased to serve in such capacity, and will inure to the
benefit of the heirs, successors, assigns, administrators and personal
representatives of the Indemnitee.
(d) The Company shall be authorized to purchase and maintain
insurance on behalf of the Indemnitees.
(e) In no event may an Indemnitee subject a Member to personal
liability by reason of the indemnification provisions of this Agreement.
(f) The provisions of this SECTION 7.16 are for the benefit of the
Indemnitees and the heirs, successors, assigns, administrators, and personal
representatives of the Indemnitees and will not be deemed to create any
rights for the benefit of any other Persons.
7.17 LIABILITY OF THE MANAGERS AND THE MEMBERS.
(a) Subject to the provisions of this Agreement, neither the
Managers, the Members nor the respective stockholders, directors, officers,
employees or agents of the Members will be liable to the Company or to the
other Members for errors in judgment or for any acts or omissions that do not
constitute: (i) gross negligence; (ii) fraud; (iii) willful or wanton
misconduct; or (iv) material violations of this Agreement, in each of cases
(i), (ii), (iii) and (iv) above, pursuant to this Agreement or otherwise
related to the Company.
(b) Each Member may exercise any of the powers granted to it by
this Agreement and perform any of the duties imposed upon it hereunder either
directly or by or through its directors, officers, employees, agents or
representatives.
ARTICLE VIII
MEMBERS
8.1 MANAGEMENT OF BUSINESS. No Member (in its capacity as a Member)
will take part in the control of the Company's business, transact any
business in the Company's name or have the power to sign documents for or
otherwise bind the Company other than as specifically set forth in this
Agreement.
8.2 RETURN OF CAPITAL. No Member will be entitled to the withdrawal
or return of its Capital Contribution except to the extent, if any, that
distributions made pursuant to this Agreement or upon termination of the
Company may be considered as such by law and then only to the extent provided
for in this Agreement.
8.3 PARTITION. Each Member waives any and all rights that it may
have to maintain an action for partition of the Company's property.
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8.4 RESIGNATION. A Member may not resign from the Company prior to
the dissolution and winding up of the Company except upon the assignment of its
Member Interest in accordance with the provisions of ARTICLE XI of this
Agreement. A resigning Member shall not be entitled to receive any distribution
and shall not otherwise be entitled to receive the fair value of its Member
Interest, except as otherwise expressly provided in this Agreement.
8.5 RESTRICTION ON PURCHASE OF MEMBER'S STOCK. Throughout the term
of this Agreement, (a) Sequa Corporation and CGTC and each of their respective
Affiliates shall each be strictly prohibited from purchasing, either directly or
indirectly, securities of WLFC without the prior written consent of WLFC, which
consent may be withheld in WLFC's sole and absolute discretion and (b) WLFC and
each of its Affiliates shall each be strictly prohibited from purchasing, either
directly or indirectly, securities of Sequa Corporation without the prior
written consent of Sequa, which consent may be withheld in Sequa's sole and
absolute discretion.
8.6 REPRESENTATIONS AND WARRANTIES OF MEMBERS. Each Member hereby
represents and warrants to the Company and to the other Member that:
(a) Such Member is acquiring its Member Interest for investment
purposes and not with a view to the resale or distribution thereof;
(b) Such Member understands and acknowledges that such Member's
Member Interest has not been registered under the Securities Act of 1933, as
amended, or any state securities or blue sky laws and may not be sold unless
registered under the Securities Act of 1933, as amended, and qualified under
applicable state securities or blue sky laws or such sale is made pursuant to an
exemption from such registration and qualification requirements;
(c) The limitations on assignment contained in ARTICLE XI create
an economic risk that such Member is capable of bearing; and
(d) Except as described herein, to the best knowledge of such
Member, no condition exists (or would exist with the passage of time or the
giving of notice or both) which would interfere with such Member's ability to
perform its obligations hereunder.
8.7 TRANSACTIONS BETWEEN THE MEMBERS AND THE COMPANY.
(a) CGTC AS__________________________________TO THE COMPANY.
____________________________________________________
__________________________________________. CGTC hereby agrees to offer
______________to the Company ___________________________. In no event shall CGTC
be required to perform _________________________________________________.
_________________________________________________________________________
______________________________, ____________________________________________,
and CGTC shall be entitled______________________.
______________________________________ ______________________________________
________________________________________________________________________________
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__________________________, the Company shall _______________________. If
CGTC does not __________________________________, the Company shall
____________________________________. In the event that CGTC, during its
performance of _______________, determines, in its sole and absolute discretion,
that___________________________________________________________________________
______________________________________________________________________________.
Further, in the event that_____________________________________________________
______________________________________________________________________________.
(b) WASI AS____________________________________.
_______________________________________________________________________________
______________________. WLFC hereby agrees to_________________________________.
In no event shall WASI be required to ________________________________________.
_______________________________________________________________________________
the Company_______________, the Company shall __________________________
and WASI shall ________________. ____________________________________________
__________________________, _________________________________________________
_______________________________________________
the Company shall ______________________. If WASI does
not ______________________, the Company
shall_______________________________. In the
event that____________________________________________________________________
______________________________________________________________________________
____________________________________________________________________.*
(c) Notwithstanding anything to the contrary contained herein, the
Members hereby agree and acknowledge that in the event that WLFC or CGTC, as
the case may be, ____________________________________ then WLFC, or CGTC, as
the case may be, shall ____________________________________ provided to such
Member by SECTIONS 8.7 (a) and (b).
ARTICLE IX
BOOKS, RECORDS, ACCOUNTING AND REPORTS
9.1 RECORDS AND ACCOUNTING. The Management Committee will keep or
cause to be kept appropriate books and records with respect to the Company's
business, which will at all times be kept at the principal office of the
Company. Each Member will have access to such books and records at all
reasonable times, and the Company shall have access to the tax and accounting
books and records of PGTC held by WLFC at all reasonable times. The books of
the Company will be maintained for financial reporting purposes on the
accrual basis in accordance with GAAP.
__________________________
* Portions of this Exhibit has been omitted pursuant to a request for
confidential treatment and the material has been filed separately with the
Commission.
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9.2 REPORTS.
(a) The Management Committee will prepare and deliver to each
Member, at the Company's expense, not later than ten (10) days following the
end of each Fiscal Quarter and not later than thirty (30) days following the
end of each Fiscal Year, a balance sheet, statement of income, statement of
Members' Capital Accounts and statement of source and application of funds of
the Company, as at the end of such Fiscal Quarter or Fiscal Year and for the
Fiscal Year then ended, as applicable, in each case (commencing with the
second such Fiscal Year) setting forth in comparative form the figures for
the preceding Fiscal Year, along with the Management Committee's discussion
and analysis of variances, all in reasonable detail. All such Fiscal Year
reports shall be audited and certified without qualification by the Company's
independent accountants. At the request of any Member, any such Fiscal
Quarter reports shall be reviewed by the Company's independent accountants.
(b) At the request of any Member and at the Company's expense, the
Management Committee will additionally cause to be provided to the Members
(i) an annual analysis detailing the components, and changes therein, of each
Member's Capital Account, and (ii) an annual analysis detailing all
allocations of Profit, Loss and other items of income, gain, loss and
deduction, and (iii) such other reports, information or analysis that any
Member may reasonably request.
ARTICLE X
TAX MATTERS
10.1 PREPARATION OF TAX RETURNS. The Management Committee will
arrange for the preparation and timely filing of all returns necessary for
federal, state and local income tax purposes. The Management Committee shall
submit the returns to each Member for review and approval no later than
fifteen (15) days prior to the due date of the returns, after giving effect
to any extensions of time. If any Member objects to any item on a return,
resolution of the items objected to shall be made by the Required Members.
The classification, realization and recognition of income, gains, losses,
deductions and other items will be based on the method of accounting for
federal income tax purposes determined by the Management Committee.
10.2 TAX STATUS; ELECTIONS. It is intended that the Company will be
classified as a partnership for federal income tax purposes and, where
permitted or required in order to be so classified, will elect to be
classified as a partnership for state and local tax purposes. Except as
otherwise provided in this Agreement, the Management Committee (with the
consent of the Required Members) will determine whether to make any other
election available to the Company under the Code.
10.3 TAX CONTROVERSIES.
(a) Subject to the provisions hereof (including SECTION 10.3(b)
below), CGTC is designated as the "tax matters partner" (as defined in
Section 6231 of the Code) and is authorized and required to represent the
Company, at the Company's expense, in connection with all examinations of the
Company's affairs by tax authorities, including resulting administrative and
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judicial proceedings, and to expend Company funds for professional services
and costs associated therewith. Each Member agrees to cooperate with the tax
matters partner in connection with such proceedings. The tax matters partner
will give all Members prompt notice of any communications from the Internal
Revenue Service, or other taxing authorities, or any actions it proposes to
take as "tax matters partner."
(b) Notwithstanding anything to the contrary in this Agreement, the
tax matters partner will have no authority without first obtaining the
approval of the Required Members to:
(i) enter into a settlement agreement with the
Internal Revenue Service that purports to bind Members other than the tax
matters partner;
(ii) file a petition as contemplated in Code Section
6226(a) or 6228;
(iii) intervene in any action as contemplated in Code
Section 6226(b)(5);
(iv) file any request contemplated in Code Section
6227(b);
(v) enter into an agreement extending the period of
limitations as contemplated in Code Section 6229(b)(1)(B);
(vi) retain any outside professional (other than the
Company's designated accountant) with respect to any tax matters; or
(vii) file any state or federal income tax return on behalf
of the Company.
Notwithstanding the withdrawal of a Member from the Company or the
dissolution of the Company, the provisions of this SECTION 10.3 will survive
and remain binding upon each Member until the statute of limitations has run
for the assessment of federal, state and local taxes with respect to the last
taxable year in which such Member held an interest in the Company.
10.4 ORGANIZATIONAL EXPENSES. The Company will elect to deduct
expenses incurred in organizing the Company ratably over a sixty-month period
as provided in Section 709 of the Code.
ARTICLE XI
TRANSFER RESTRICTIONS; PLEDGES;
CERTAIN RIGHTS; ADMISSION OF SUCCESSOR MEMBERS
11.1 TRANSFER RESTRICTIONS. No Member shall Transfer its Member
Interest, in whole or in part, except in accordance with the terms and
conditions set forth in this ARTICLE XI. Any Transfer, or purported Transfer,
of any Member Interest not made in accordance with this ARTICLE XI shall be
null and void.
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11.2 FIRST REFUSAL RIGHTS.
(a) If, at any time after the second anniversary of the date of
this Agreement, either WLFC or CGTC (in either case, a "TRANSFERRING MEMBER")
proposes to Transfer all of the Member Interests then owned by it to a Third
Party pursuant to a Third Party Offer, then such Transferring Member shall first
give a written notice (a "FIRST REFUSAL NOTICE") to the other Member (the
recipient of such notice in either case, the "NOTIFIED MEMBER"), specifying (i)
the identity of the Third Party making such Third Party Offer, (ii) the purchase
price offered to such Transferring Member for its Member Interests pursuant to
such Third Party Offer (the "OFFER PRICE"), and (iii) any other terms and
conditions of such Third Party Offer, and containing an irrevocable offer (a
"FIRST REFUSAL OFFER"), open to acceptance for a period of thirty (30) days
after the date such First Refusal Notice is given, to sell to the Notified
Member such Member Interests at the Offer Price and on the other terms and
conditions of the Third Party Offer. The First Refusal Notice shall be
accompanied by copies of all letters of intent, term sheets or other documents
setting forth the proposed terms and conditions of such Third Party Offer. The
Notified Member shall not be required to comply with any terms of the Third
Party Offer that are unique to the Third Party.
(b) The Notified Member may accept such First Refusal Offer by
giving a written notice of such acceptance (a "NOTICE OF ACCEPTANCE") to the
Transferring Member within thirty (30) days after the date the First Refusal
Notice is given. If such a Notice of Acceptance is given, the closing of the
Transfer of the Transferring Member's Member Interests to such Notified Member
pursuant to the First Refusal Offer shall take place in accordance with the
provisions of SECTION 11.3 hereof.
(c) If, at the end of the thirtieth day after the First Refusal
Notice is given, the Notified Member has not delivered a Notice of Acceptance of
the First Refusal Offer contained in such notice, then the First Refusal Rights
shall terminate with respect to the Transferring Member's Member Interests, the
offer to sell the Member Interests to the Notified Member shall be deemed
revoked and the Transferring Member, at any time within a period of three (3)
months from the giving of said First Refusal Notice, may transfer all (but not
less than all) of such Member Interests to the Third Party at the Offer Price
and on the terms contained in the Third Party Offer; PROVIDED, HOWEVER, that in
the event the Transferring Member has not so transferred said Member Interests
to the Third Party within said three (3) month period, then said Member
Interests thereafter shall continue to be subject to all of the restrictions
contained in this Agreement as though no First Refusal Notice had ever been
given.
(d) In the event that a determination must be made (as described
below) as to the fair market value of non-cash consideration, the thirty (30)
day period referred to in SECTIONS 11.2(a)-(c) shall be extended to such greater
period of time, not to exceed sixty (60) days after said First Refusal Notice,
as specified by the Management Committee. In the event that the Third Party
Offer provides, in whole or in part, for non-cash consideration, the Offer Price
offered by the Third Party shall be deemed to be the amount of cash, if any,
provided in the Third Party Offer plus the fair market value of the non-cash
consideration as determined in good faith by the Management Committee.
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(e) In no event shall any Member solicit or accept any Third Party
Offer that does not provide for the rights set forth in this SECTION 11.2.
11.3 CLOSING OF PERMITTED TRANSFERS.
(a) The closing of a Transfer provided for in SECTION 11.2(b)
hereof shall take place on the date not later than three (3) months following
the date on which the Notice of Acceptance referred to in SECTION 11.2(b) is
given at the principal office of the Company (or at such other place as the
Transferring Member and the Notified Member shall agree).
(b) On the date of closing of any Transfer of Member Interests by
a Transferring Member to the Notified Member pursuant to SECTION 11.2(b), the
Transferring Member shall assign to the Notified Member the Member Interests
being Transferred pursuant to such Section against delivery of the aggregate
Offer Price for such Member Interests (the "PURCHASE PRICE"), either by (i) wire
transfer of the Purchase Price to an account in a bank located in the United
States designated by the Transferring Member for such purpose or (ii) delivery
to the transferring Member of a cashier's check, payable to the order of the
Transferring Member in the amount of the Purchase Price. Such Transfer shall be
made without any representation or warranty whatsoever (other than to the effect
that the transferring Member has good title to such Member Interests, free and
clear of Liens, and has all requisite power and authority to assign such Member
Interests to the transferee pursuant to SECTION 11.2 hereof).
11.4 PLEDGES OF MEMBER INTERESTS.
(a) A Member may Pledge its Member Interest to any Person.
(b) A Person acquiring a Member Interest pursuant to any
foreclosure made upon any Pledge of such Member Interest (a "FORECLOSURE
TRANSFEREE") will be entitled only to receive the distributive share of the
Company's Profits, Losses and other items of income, gain, losses, deductions
and credit and the distributions of cash and/or property attributable to such
Transferred Member Interest, except as required by applicable law. Without
limiting the foregoing, except as required by applicable law, a Foreclosure
Transferee shall not be entitled to any of the rights of a Member pursuant to
SECTION 7.5 of this Agreement, and such Foreclosure Transferee's consent shall
not be required to any matter hereunder requiring the consent of the Required
Members.
11.5 RIGHTS OF ASSIGNEE.
(a) Except as provided in this ARTICLE XI and as required by
operation of law, the Company will not be obligated for any purpose whatsoever
to recognize the Transfer by any Member of a Member Interest unless such
Transfer is made in accordance with the terms of this Agreement. A transferee or
assignee of a Member's Member Interest other than in accordance with the
provisions of this ARTICLE XI will be entitled only to receive the distributive
share of the Company's Profits, Losses and other items of income, gain, losses,
deductions and credit and the distributions of cash and/or property attributable
to such transferred Member Interest.
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<PAGE>
(b) Any Transfer of a Member Interest must be in writing, may not
contravene any of the provisions of this Agreement, and must be executed by the
transferor and delivered to the Company and recorded on the books of the
Company. Any Transfer which contravenes any of the provisions of this Agreement
will be of no force and effect and will not be recognized by the Company.
(c) A transferee of a Member Interest who is not admitted as a
Member pursuant to SECTION 11.6 will have no right to require any information or
account of the Company's transactions or to inspect the Company books or to
vote, but will only be entitled to receive the allocations and distributions to
which its transferor would otherwise be entitled under this Agreement.
(d) Any transferee who does not become a Member and desires to
make a further transfer of such Member Interest will be subject to all of the
provisions of this ARTICLE XI to the same extent and in the same manner as any
Member desiring to transfer its Member Interest.
(e) No transferee, whether or not such transferee becomes a Member
pursuant to SECTION 11.6, shall be entitled to any of the rights provided by
SECTION 8.7.
11.6 ADMISSION AS A SUCCESSOR MEMBER.
(a) CONDITIONS OF ADMISSION. Subject to the other provisions of
this ARTICLE XI, a transferee of a Member Interest will be admitted as a Member
only if the following conditions are satisfied:
(i) The transferee accepts and agrees to be bound by the
terms and provisions of this Agreement as a Member with respect to the Member
Interest so transferred;
(ii) A counterpart of this Agreement and such other
documents or instruments as the Management Committee may reasonably require is
executed by the transferee to evidence such acceptance and agreement;
(iii) The transferee pays or reimburses the Company for all
reasonable legal fees, filing and publication costs incurred by the Company in
connection with the admission of the transferee as a Member with respect to the
Member Interest so transferred; and
(iv) If the transferee is not an individual, the
transferee provides the Company with evidence satisfactory to counsel for the
Company of the authority of such transferee to become a Member under the terms
and provisions of this Agreement.
(b) FILINGS. The Secretary will make all official filings and
publications as promptly as practicable after the satisfaction by the transferee
of the conditions contained in this ARTICLE XI to the admission of such
transferee as a Member.
11.7 DISTRIBUTIONS AND ALLOCATIONS IN RESPECT OF TRANSFERRED MEMBER
INTERESTS. If any Member Interest is Transferred during any Tax Year in
compliance with the provisions of this
33
<PAGE>
ARTICLE XI, Profits, Losses and all other items attributable to the
transferred (or adjusted) interest for such period will be divided and
allocated between the affected Persons by taking into account their varying
interests during the period in accordance with Code Section 706(d), using any
conventions permitted by law and selected by the Management Committee (with
the consent of the Required Members). All distributions on or before the date
of such Transfer will be made to the transferor. Solely for purposes of
making such allocations and distributions in the case of a Transfer, the
Company will recognize such Transfer not later than the end of the calendar
month during which it is given notice of such Transfer. The Company will not
incur any liability for making allocations and distributions in accordance
with the provisions of this SECTION 11.7, whether or not the Company has
knowledge of any Transfer of any interest.
11.8 TRANSFER OF MEMBER INTEREST BY PGTC TO WLFC. Notwithstanding
any provision in this ARTICLE XI to the contrary, the Transfer of PGTC's Member
Interest to WLFC as contemplated by the Recitals of this Agreement shall not be
subject to any of the provisions of this ARTICLE XI. The parties to this
Agreement acknowledge and agree that WLFC shall be admitted as a Member of the
Company effective upon the distribution of PGTC's Member Interest to WLFC on the
Closing Date, and shall succeed to all rights, obligations and Capital
Contributions, and to the Capital Account of, PGTC.
ARTICLE XII
DEADLOCK; BUY-SELL
12.1 OFFER TO PURCHASE SHARES TRIGGERED BY DEFAULT OR DEADLOCK.
(a) GENERAL. Notwithstanding anything to the contrary contained in
this Agreement, if at any time after the second anniversary of the date of this
Agreement, a Member has declared a Deadlock and has given written notice of such
Deadlock to the other Member, then either WLFC or CGTC (the "OFFERING MEMBER")
may provide the other Member (the "NON-OFFERING MEMBER") with written notice of
an offer (the "OFFER") to purchase all of the Non-Offering Member's Member
Interests within thirty (30) days of the receipt of written notice of the
Deadlock. The notice shall include a purchase price in cash to be payable in
full upon the closing, and must not be subject to any conditions other than
receipt of any required regulatory approvals. The Non-Offering Member shall be
obligated either to (i) sell all of the Non-Offering Member's Member Interests
to the Offering Member or (ii) purchase from the Offering Member all of the
Offering Member's Member Interests, in either case for the same purchase price,
payment terms and any other conditions as were set forth by the Offering Member
in the written notice, within ninety (90) days of the receipt of such written
notice.
(b) DUAL OFFERS. If both Members deliver an Offer pursuant to
SECTION 12.1(a), the offer which has a greater cash value shall be deemed the
Offer, and the party delivering such Offer shall be deemed the Offering Member
and the party delivering the lower cash value offer shall be deemed the
Non-Offering Member for purposes of this SECTION 12.1. If both Members deliver
Offers pursuant to the preceding sentence which are equal in cash value, both
Members may resubmit Offers within five (5) days of the delivery of the original
offers and such new Offers shall be subject to the procedures set forth in the
preceding sentence.
34
<PAGE>
(c) CLOSING. At the closing of any purchase of Member Interests
pursuant to this ARTICLE XII, the buying Member shall tender to the selling
Member the purchase price for the Member Interests to be acquired, and, without
any further action on the part of the selling Member, the selling Member shall
cease to own such Member Interests and shall cease to be a Member of the
Company. Any Member Interests purchased pursuant to this ARTICLE XII shall be
free and clear of any and all Liens, and at the closing the selling Member shall
represent and warrant to such effect and to the effect that the selling Member
is the legal and beneficial owner of such Member Interests. The buying Member
shall deliver at such closing, by wire transfer of immediately available funds,
payment in full for the Member Interests being purchased by the buying Member.
At such closing, all of the parties to the transaction shall execute such
additional documents as are otherwise reasonably necessary or appropriate,
consistent with the terms hereof.
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
13.1 NO DISSOLUTION. The Company shall not be dissolved by the
admission of Members in accordance with the terms of this Agreement or, except
as provided in SECTION 13.2, by any event which terminates the continued
membership of a Member in the Company, so long as the Company at all times has
at least one Member. Upon the occurrence of any such event, the business of the
Company shall be continued without dissolution.
13.2 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved and
its affairs shall be wound up upon the occurrence of any of the following
events:
(a) the bankruptcy or dissolution of a Member, or the occurrence
of any other event under the Delaware Act that terminates the continued
membership of a Member (PROVIDED, HOWEVER, that the dissolution of PGTC shall
not constitute a dissolution of the Company under this ARTICLE XIII or
otherwise);
(b) the entry of a decree of judicial dissolution under Section
18-802 of the Delaware Act;
(c) the completion of the sale of all or substantially all of the
assets of the Company; or
(d) the unanimous written consent of the Members to dissolve the
Company.
13.3 CONTINUATION OF THE COMPANY. Upon the occurrence of an event
described in SECTION 13.2(A) only, the Company may be reconstituted if the
remaining Members at the time of such event unanimously elect to continue the
Company within ninety days after such event. If no election to continue the
Company is made within ninety days after such event, the Company will conduct
only those activities necessary to wind up its affairs.
If such an election to continue the Company is made, then:
(a) the Company will be deemed to be reconstituted and will
continue unless and until dissolved in accordance with this ARTICLE XIII; and
(b) all necessary steps will be taken to amend or restate this
Agreement and, if the Certificate of Formation has been canceled, then a new
certificate of formation (or similar certificate) shall be filed in accordance
with the Delaware Act.
13.4 LIQUIDATION.
(a) Upon dissolution of the Company, a neutral liquidating trustee
(the "LIQUIDATOR") of the Company shall be selected by the Required Members.
(b) The Liquidator will agree not to resign at any time without
fifteen (15) days' prior written notice. The Liquidator may be removed at any
time, with or without cause, by notice of removal approved by the Required
Members. Upon dissolution, removal or resignation of a Liquidator, a successor
and substitute Liquidator (who will succeed to all rights, powers and duties of
the original Liquidator) will, within thirty (30) days thereafter, be approved
by the Required Members. The right to appoint a successor or substitute
Liquidator in the manner provided herein will be recurring and continuing for so
long as the functions and services of the Liquidator are authorized to continue
under the provisions hereof, and every reference herein to a Liquidator will be
deemed to refer also to any such successor or substitute Liquidator appointed in
the manner herein provided.
(c) Except as expressly provided in this ARTICLE XIII, the
Liquidator will have and may exercise, without further authorization or consent
of any of the Members, all of the powers conferred upon the Management Committee
and the Required Members under the terms of this Agreement to the extent
necessary or desirable in the good faith judgment of the Liquidator to complete
the winding up and liquidation of the Company as provided for herein.
(d) Except as provided in SECTION 13.6 below, the Liquidator will
liquidate the assets of the Company, and, after making all allocations and
distributions otherwise required by this Agreement, will apply and distribute
the proceeds of such liquidation in the following order of priority, unless
otherwise required by mandatory provisions of applicable law:
(i) First, to creditors of the Company (including Members) in
the order of priority provided by law, including the escrowing of a reserve of
cash or other assets of the Company for contingent liabilities in an amount
determined by the Liquidator to be appropriate for such purposes; and
(ii) Second, to the Members in accordance with the positive
balances in their respective Capital Accounts.
13.5 RESERVES. After all the assets of the Company have been
distributed, the Company will terminate; PROVIDED that, if at any time
thereafter any funds in any reserve referred to in SECTION 13.4(D)(I) are
released because the need for such reserve has ended, such funds will be
distributed to the Members in the same manner as if such distribution had been
made pursuant to SECTION 13.4(D)(II).
13.6 DISTRIBUTIONS IN KIND. Notwithstanding the provisions of
SECTION 13.4 that require liquidation of the Company's assets, but subject to
the order of priorities set forth therein, if on dissolution of the Company the
Liquidator determines that an immediate sale of part or all of the Company's
assets would be impractical or would cause undue loss to the Members, the
Liquidator may defer for a reasonable time the liquidation of any assets except
those necessary to satisfy liabilities of the Company (other than those to
Members). The Liquidator may distribute to the Members, in lieu of cash, such
Company assets as the Liquidator deems not suitable for liquidation. Any
distributions in kind will be subject to such conditions relating to the
disposition and management thereof as the Liquidator deems reasonable and
equitable. The Liquidator will value any property distributed in kind based upon
such property's fair market value as determined using such reasonable method of
valuation as it may adopt. The fair market value of such property will be the
gross fair market value of such property for purposes of making the adjustments
required by paragraph (b) of the definition of "Book Value" and paragraph (c) of
the definition of "Profits and Losses."
13.7 FILING OF CERTIFICATE OF CANCELLATION. Upon the completion of
the distribution of the Company's property as provided in SECTIONS 13.4, 13.5
and 13.6, the Liquidator (or the Members if necessary) will cause the
Certificate of Formation to be canceled and will take such other actions as may
be necessary to terminate the existence of the Company.
13.8 RETURN OF CAPITAL. No Member will be personally liable for the
return of the Capital Contributions of the Members, or any portion thereof, it
being expressly understood that any such return will be made solely from the
Company's assets.
ARTICLE XIV
GENERAL PROVISIONS
14.1 AMENDMENT. Any amendment to this Agreement or the Certificate
of Formation may be adopted only if unanimously approved in writing by all
Members in accordance with SECTION 7.5(J).
14.2 FURTHER ACTION. The parties will execute and deliver all
documents, provide all information and take or refrain from taking action as may
be necessary or appropriate to achieve the purposes of this Agreement.
14.3 INVALIDITY OF PROVISIONS. If any provision of this Agreement
is declared or found to be illegal, unenforceable or void, in whole or in part,
then the parties will be relieved of all obligations arising under such
provision, but only to the extent that it is illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement be deemed
amended by modifying such provision to the extent necessary to make it legal and
enforceable while preserving its intent or, if that is not possible, by
substituting therefor another provision that is legal and enforceable and
achieves the same objectives.
14.4 NOTICES. All notices that are required or may be given
pursuant to this Agreement must be in writing and delivered personally, by a
recognized courier service, by a recognized overnight delivery service, by
telecopy or by registered or certified mail, postage prepaid, to the attention
of the following persons at their respective addresses, as follows (or to the
attention of such other person or such other address as any party may provide to
the other parties by notice in accordance with this SECTION 14.4):
IF TO WLFC:
Willis Lease Finance Corporation
2320 Marinship Way
Suite 300
Sausalito, California 94965
Attention: General Counsel
Telephone No.: (415) 275-5112
Telecopier No.: (415) 331-5167
IF TO CGTC:
Chromalloy Gas Turbine Corporation
4430 Director Drive
P.O. Box 200150
San Antonio, Texas 78219
Attention: Kenneth J. Binder
Telephone No.: (210) 333-6010
Telecopier No.:
IN EACH CASE, WITH A COPY TO:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Linda L. Curtis, Esq.
Telephone No.: (213) 229-7582
Telecopier No.: (213) 229-6582
AND
Sequa Corporation
200 Park Avenue
New York, New York 10166
Attention: Stuart Z. Krinsly
Telephone No.: (212) 986-5500
Telecopier No.: (212) 557-9465
Any such notice or other communication will be deemed to have been given and
received (whether actually received or not) on the day it is personally
delivered or delivered by courier or overnight delivery service or sent by
telecopy or, if mailed, when actually received.
14.5 BINDING EFFECT. This Agreement will be binding upon and inure
to the benefit of the parties hereto and their successors, legal representatives
and permitted assigns.
14.6 INTEGRATION. This Agreement constitutes the entire agreement
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements and understandings pertaining thereto.
14.7 NO THIRD PARTY BENEFICIARY. This Agreement is made solely and
specifically between and for the benefit of the parties hereto, and their
respective successors and assigns subject to the express provisions hereof
relating to successors and assigns, and (except as specifically set forth in
SECTION 7.16) no other Person whatsoever will have any rights, interest or
claims hereunder or be entitled to any benefits under or on account of this
Agreement as a third party beneficiary or otherwise.
14.8 WAIVER. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof will constitute
waiver of any such breach or any other covenant, duty, agreement, or condition.
14.9 COUNTERPARTS. This Agreement may be executed and delivered in
one or more counterparts and via facsimile, all of which together will
constitute one agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
14.10 GOVERNING LAW. This Agreement will be construed and
interpreted in accordance with and governed by the Delaware Act with respect to
all matters subject thereto, and otherwise will be governed by and construed and
interpreted in accordance with the laws of the State of California applicable to
contracts made and to be performed in that State.
14.11 CONFIDENTIALITY.
(a) Except as may be required to be disclosed by a Member under
applicable law, each Member and Manager shall keep confidential and shall not
disclose, directly or indirectly, to any other Person (other than to its
Affiliates, employees and/or agents in connection with such Member's performance
of its obligations hereunder), or use for its personal benefit, any Company
Proprietary Technology or Company Confidential Information or any other
information belonging to the Company. This SECTION 14.11 shall not apply to (i)
any disclosure by a Member of information that becomes generally available to
the public through no fault of any such Member or Manager or (ii) any disclosure
or use by a Member of any information that is licensed to the Company by such
Member and that such Member retains ownership of and/or rights to use pursuant
to any such licensing arrangement.
(b) Each Member agrees to take any and all actions reasonably
deemed necessary or appropriate by it to insure the continued confidentiality
and protection of the confidential information that it has agreed to keep
confidential pursuant to this SECTION 14.11. In the event that any Member is
requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
process) to disclose any of the confidential information that it has agreed to
keep confidential hereunder, it will provide the Company and the other Member
with prompt notice of such request so that the Company and/or the other Member
may seek an appropriate protective order or waive its compliance with the
provisions of this SECTION 14.11. In the event that such protective order or
other remedy is not obtained, or the Company or the other Member waives
compliance with the provisions of this SECTION 14.11, such Member agrees that it
will furnish only that portion of any confidential information that is legally
required and will exercise its best efforts to obtain reliable assurance that
confidential treatment will be accorded to that portion of any confidential
information being disclosed.
14.12 PUBLICITY. During the term of this Agreement, no Member shall,
nor shall such Member permit its directors, officers, employees, Affiliates,
agents, advisors, representatives or designated Manager to, issue any press
release or otherwise make any public statements or other announcements
concerning the Company or the operations of the business of the Company, without
first notifying and consulting with the other Member regarding the form and
content of such press release, statement or other announcement; PROVIDED,
HOWEVER, that neither Member shall be prevented at any time by this SECTION
14.12 from furnishing any required information to any Governmental Body or from
complying with its legal obligations under the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, or any other
applicable law.
14.13 DISPUTE RESOLUTION.
(a) Any controversy or claim arising out of or relating to this
Agreement (or breach thereof, including without limitation any breach by CGTC of
its obligations under SECTION 4.3(B)), other than a Deadlock, whether arising in
tort, contract or otherwise, shall be settled in accordance with the following
procedures:
(i) The parties shall first attempt to resolve such
controversy or claim by meeting with an independent mediator chosen by both
Members.
(ii) If the parties are unable to mutually agree upon a
mediator, then the mediator shall be appointed by the American Arbitration
Association in the San Diego, California metropolitan area ("AAA") in accordance
with then-current commercial rules of mediation thereof.
(iii) If such controversy or claim cannot be resolved by
mediation within sixty (60) days after the party raising the controversy or
claim first notifies the other party thereof in writing, then the controversy or
claim shall be submitted to AAA for binding arbitration, to be held in the San
Diego, California metropolitan area, in accordance with the then-current
commercial rules of arbitration of AAA.
(b) The award from any binding arbitration shall be binding upon
the parties and their successors and permitted assigns, whether or not any party
fails or refuses to participate therein, and judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof.
(c) The arbitrator shall have the power to issue injunctions and
otherwise to grant equitable relief, and shall award legal fees and costs
(including fees and costs incurred by AAA and by the arbitrator) to the
prevailing party. The arbitrator shall not have the power to award punitive,
exemplary or indirect damages.
(d) Except as may be otherwise ordered by the arbitrator in
accordance with SECTION 14.13(C), each party shall bear its own costs and
expenses in connection with any proceeding commenced under this SECTION 14.13,
including, without limitation, legal fees and disbursements, travel expenses,
witness fees and costs, photocopying and other preparation expenses. The costs
and other fees charged by the independent mediator or AAA, whether in connection
with a mediation and/or arbitration, shall be shared equally by the parties.
<PAGE>
FA992160.080 42
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have executed this Operating Agreement as of the date first above written.
<TABLE>
<S> <C>
WILLIS LEASE FINANCE CORPORATION
By: /s/ Donald A. Nunemaker
Name: DONALD A. NUNEMAKER
Title: EXECUTIVE VICE PRESIDENT
CHROMALLOY GAS TURBINE CORPORATION
By: /s/ Kenneth J. Binder
Name: KENNETH J. BINDER
Title: EXECUTIVE VICE PRESIDENT
PACIFIC GAS TURBINE CENTER, INCORPORATED
By: /s/ Graham P. Bell
Name: GRAHAM P. BELL
Title: PRESIDENT
</TABLE>
- --------
* Portions of this Exhibit has been omitted pursuant to a request for
confidential treatment and the material has been filed separately with the
Commission.
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
* Portions of this Exhibit has been omitted pursuant to a request for
confidential treatment and the material has been filed separately with the
Commission.
<PAGE>
CONTRIBUTION AND ASSUMPTION AGREEMENT*
BY AND AMONG
PACIFIC GAS TURBINE CENTER, INCORPORATED,
WILLIS LEASE FINANCE CORPORATION
AND
PACIFIC GAS TURBINE CENTER, LLC
DATED AS OF MAY 28, 1999
- ------------------------
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and the material has been filed separately with
the Commission.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. DEFINITIONS..................................................................................2
1.01. Definitions..................................................................................2
1.02. Index of Other Defined Terms.................................................................4
ARTICLE II. CONTRIBUTION AND SALE OF ASSETS..............................................................5
2.01. Agreement to Contribute, Sell, Accept and Purchase...........................................5
2.02. Assumption of Liabilities....................................................................6
ARTICLE III. CONTRIBUTION CONSIDERATION...................................................................6
3.01. Contribution Consideration...................................................................6
ARTICLE IV. THE CLOSING..................................................................................6
4.01. The Closing..................................................................................6
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PGTC.......................................................7
5.01. Corporate Existence and Power................................................................7
5.02. Authorization................................................................................7
5.03. Non-Contravention............................................................................7
5.04. Financial Statements.........................................................................7
5.05. Properties; Leases...........................................................................8
5.06. Litigation...................................................................................8
5.07. Brokers......................................................................................8
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF LLC........................................................8
6.01. Organization and Existence...................................................................8
6.02. LLC Authorization............................................................................8
ARTICLE VII. CONDITIONS TO CLOSING........................................................................8
7.01. Conditions to Obligations of PGTC and LLC....................................................8
ARTICLE VIII. MUTUAL COVENANTS.............................................................................9
8.01. Taxes........................................................................................9
8.02. Employee Matters.............................................................................9
8.03. Further Assurances...........................................................................9
</TABLE>
i
<PAGE>
<TABLE>
Page
----
<S> <C> <C>
ARTICLE IX. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AND INDEMNIFICATION....................9
9.01. Agreement Survival of Representations, Warranties and Covenants..............................9
9.02. Indemnification by WLFC......................................................................9
9.03. Indemnification by LLC......................................................................10
9.04. Limitations on Indemnification..............................................................10
9.05. Procedure for Indemnification...............................................................11
ARTICLE X. MISCELLANEOUS...............................................................................12
10.01. Notices.....................................................................................12
10.02. Amendments; No Waivers......................................................................13
10.03. Rights and Remedies Cumulative..............................................................13
10.04. Rights and Remedies of LLC..................................................................14
10.05. Construction; Interpretation................................................................14
10.06. Severability................................................................................14
10.07. Counterparts................................................................................14
10.08. Entire Agreement............................................................................14
10.09. Governing Law...............................................................................14
10.10. Expenses....................................................................................14
10.11. Third-Party Beneficiaries...................................................................14
10.12. Dispute Resolution..........................................................................15
10.13. Press Release...............................................................................15
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
SCHEDULES
---------
<S> <C>
Schedule 2.01(a) Transferred Assets
Schedule 2.01(n) Excluded Assets
Schedule 2.02 Assumed Liabilities
Schedule 5.06 Litigation
</TABLE>
iii
<PAGE>
CONTRIBUTION AND ASSUMPTION AGREEMENT
-------------------------------------
This CONTRIBUTION AND ASSUMPTION AGREEMENT (this
"Agreement"), is dated as of May 28, 1999, by and among PACIFIC GAS TURBINE
CENTER, INCORPORATED, a Delaware corporation ("PGTC"), and a wholly-owned
subsidiary of WILLIS LEASE FINANCE CORPORATION, a Delaware corporation
("WLFC") and PACIFIC GAS TURBINE CENTER, LLC, a Delaware limited liability
company ("LLC").
R E C I T A L S
A. PGTC is currently engaged in the business of
storage and distribution of aircraft and engine spare parts inventory,
overhaul and testing of jet engines, including the dismantling, cleaning,
repair and testing of said jet engines (the "PGTC Business").
B. PGTC, on behalf of WLFC, has formed LLC to
develop, own, operate and maintain the PGTC Business.
C. PGTC, on behalf of WLFC, and LLC are entering into
this Contribution and Assumption Agreement, pursuant to which PGTC is
contributing to LLC certain Transferred Assets, including the PGTC Business,
in exchange for which, upon PGTC's dissolution pursuant to applicable law,
WLFC will receive a Member Interest in LLC.
D. (i) Concurrently herewith, Chromalloy Gas Turbine
Corporation, a Delaware corporation ("CGTC") and LLC are entering into a
Contribution and Assumption Agreement (the "CGTC Contribution Agreement"),
which is substantially similar to this Agreement, pursuant to which CGTC is
contributing to LLC $__________* in cash and (ii) CGTC shall contribute an
additional amount in cash pursuant to Section 4.3(b) of the Operating
Agreement (the sum of (i) and (ii), the "CGTC Cash Contribution"), in
exchange for which CGTC Cash Contribution CGTC will also receive a Member
Interest in LLC.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises, and the
mutual representations, warranties, covenants and agreements hereinafter set
forth, the parties hereto agree as follows.
- ----------------------
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
<PAGE>
ARTICLE I.
DEFINITIONS
1.01. DEFINITIONS. In addition to the terms defined
elsewhere in this Agreement, the following capitalized terms shall have the
following meanings when used herein:
"AFFILIATE" has the meaning given to it in the Operating
Agreement.
"ANCILLARY DOCUMENTS" means the agreements, certificates,
instruments or other documents to be executed and delivered in connection
with this Agreement, including without limitation the Exhibits hereto and the
Operating Agreement.
"APPLICABLE LAW" means, with respect to any Person, any
domestic or foreign, federal, state or local statute, law, ordinances, rule,
administrative interpretation, regulation, order, writ, injunction,
directive, judgment, decree or other requirement of any Governmental
Authority (including any Environmental Law) applicable to such Person or any
of its Affiliates or any of their respective properties, assets, officers,
directors, employees, consultants or agents (in connection with such
officer's, director's, employee's, consultant's or agent's activities on
behalf of such Person or any of its Affiliates).
"ASSUMED LIABILITIES" has the meaning given to it in
Section 2.02.
"CONTRACTS" means all material contracts, agreements,
leases, licenses, sales and purchase orders, commitments and other
instruments of any kind, whether written or oral, to which PGTC is a party as
of the Closing Date and which relate to the PGTC Business.
"CONTRIBUTION CONSIDERATION" has the meaning given to it in
Section 3.01.
"EXCLUDED ASSETS" means those assets of PGTC set forth on
SCHEDULE 2.01(n).
"EXCLUDED LIABILITIES" means those Liabilities that are not
Assumed Liabilities and are not incurred in the ordinary course of business
by PGTC or by WLFC, as the successor to PGTC.
"FACILITIES" means all offices, warehouses, administration
buildings and all real property and all related facilities leased by PGTC or
WLFC in connection with the PGTC Business.
"GAAP" means generally accepted accounting principles in
the United States, consistently applied.
"GOVERNMENTAL AUTHORITY" means any foreign, domestic,
federal, territorial, state or local governmental authority,
quasi-governmental authority, instrumentality, court, government or
self-regulatory organization, commission, tribunal or organization or any
regulatory, administrative or other agency, or any political or other
subdivision, department or branch of any of the foregoing.
2
<PAGE>
"LIABILITY" means, with respect to any Person, any
liability or obligation of such Person of any kind, character or description,
whether known or unknown, absolute or contingent, accrued or unaccrued,
liquidated or unliquidated, secured or unsecured, joint or several, due or to
become due, vested or unvested, executory, determined, determinable or
otherwise and whether or not the same is required to be accrued on the
financial statements of such Person.
"LIEN" includes any mortgage, lien, pledge, security
interest, conditional sale agreement, charge, claim, easement, right,
condition, restriction or other encumbrance or defect of title of any nature
whatsoever (including without limitation, any assessment, charge or other
type of notice which is levied or given by any Governmental Authority and for
which a lien could be filed).
"LOSSES" means all damages, judgments, and amounts paid in
settlement (net of insurance proceeds and any tax-related benefits received).
"MEMBERS" has the meaning given to it in the Operating
Agreement.
"MEMBER INTEREST" has the meaning given to it in the
Operating Agreement.
"OPERATING AGREEMENT" means the Operating Agreement, of
even date herewith, by and between WLFC and CGTC, as may be amended from time
to time.
"PGTC INDEMNITEES" has the meaning given to it in Section
9.03.
"PERCENTAGE INTEREST" has the meaning given to it in the
Operating Agreement.
"PERMITTED LIENS" means (a) Liens securing the repayment of
Assumed Liabilities, (b) Liens for Taxes or governmental charges or claims
(i) not yet due and payable, or (ii) being contested in good faith, if a
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made therefor, (c) statutory Liens of landlords, Liens of
carriers, warehousepersons, mechanics and materialpersons and other Liens
imposed by law incurred in the ordinary course of business for sums (i) not
yet due and payable, or (ii) being contested in good faith, if a reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made therefor, (d) Liens incurred or deposits made in connection with
workers' compensation, unemployment insurance and other similar types of
social security programs or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return of money bonds and similar obligations, in each case
in the ordinary course of business, consistent with past practice and (e)
easements, rights of way and other imperfections of title or encumbrances
that are a matter of public record and do not materially affect the
marketability of the property subject thereto or materially interfere with
the present or proposed use of such property.
"PERSON " has the meaning given to it in the Operating
Agreement.
3
<PAGE>
"PREPAID EXPENSES" means the prepaid charges and expenses
of PGTC relating to the PGTC Business, including, without limitation, any
such charges and expenses with respect to ad valorem taxes, leases and
rentals and utilities.
"REQUIRED CONSENTS" means (a) each governmental or other
material registration, filing, application, notice, transfer, consent,
approval, order, qualification and waiver required under Applicable Law to be
obtained by PGTC by virtue of the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby to avoid the loss of
any material permit or otherwise, and (b) each consent of the other party or
parties to any Contract which must be obtained by PGTC pursuant to an express
term or provision thereof by virtue of the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby to
avoid the invalidity of the transfer of such Contract, the termination
thereof, a material breach or default thereunder or any other material change
or modification to the terms thereof.
"TAX" means all taxes imposed of any nature including
federal, state, local or foreign net income tax, alternative or add-on
minimum tax, profits or excess profits tax, franchise tax, gross income,
adjusted gross income or gross receipts tax, employment related tax
(including employee withholding or employer payroll tax, FICA or FUTA), real
or personal property tax or ad valorem tax, sales or use tax, excise tax,
stamp tax or duty, any withholding or back up withholding tax, value added
tax, severance tax, prohibited transaction tax, premiums tax, occupation tax,
together with any interest or any penalty, addition to tax or additional
amount imposed by any governmental authority (domestic or foreign)
responsible for the imposition of any such tax.
1.02. INDEX OF OTHER DEFINED TERMS. In addition to those
terms defined above, the following terms shall have the respective meanings
given thereto in the sections indicated below:
<TABLE>
<CAPTION>
DEFINED TERM SECTION
<S> <C>
"AAA" 10.13
"Agreement" Preamble
"Balance Sheet" 5.04
"CGTC Contribution Agreement" Recitals
"CGTC" Recitals
"Claimant" 9.05(a)
"Closing Date" 4.01
"Indemnifying Party" 9.05(a)
"LLC" Preamble
"PGTC Business" Recitals
"Proceedings" 5.12
"Transferred Assets" 2.01
</TABLE>
4
<PAGE>
ARTICLE II.
CONTRIBUTION AND SALE OF ASSETS
2.01. AGREEMENT TO CONTRIBUTE, SELL, ACCEPT AND
-----------------------------------------
PURCHASE. Upon the terms and subject to the conditions of this Agreement and
in reliance upon the representations, warranties and agreements herein set
forth, PGTC is contributing and delivering to LLC on the Closing Date, and
LLC is accepting from PGTC, free and clear of all Liens, other than Permitted
Liens, the following, except for any Excluded Assets set forth on SCHEDULE
2.01(n) that are included in any of the following:
(a) The fixtures and equipment set forth on
SCHEDULE 2.01(a);
(b) Any Contracts;
(c) The accounts receivable set forth on
SCHEDULE 2.01(a);
(d) The inventory set forth on SCHEDULE
2.01(a);
(e) The prepaid expenses set forth on
SCHEDULE 2.01(a);
(f) All leasehold interests in the Facilities;
(g) All rights of PGTC to insurance coverage
covering or relating to the PGTC Business with respect to events occurring or
claims arising prior to the Closing Date, but only to the extent such
coverage and any proceeds therefrom covers or relates to any of the Assumed
Liabilities or any pre-Closing liabilities or obligations of the PGTC
Business which LLC becomes subject to notwithstanding the provisions of this
Agreement;
(h) The phone numbers used by the PGTC
Business;
(i) All goodwill associated with the PGTC
Business or the Transferred Assets;
(j) All of PGTC's rights, claims, credits,
causes of action or rights of setoff against third parties relating to the
Transferred Assets of PGTC, whether liquidated or unliquidated, fixed or
contingent, including claims pursuant to all warranties, representations and
guaranties made by suppliers, manufacturers, contractors and other third
parties in connection with products or services purchased by or furnished to
PGTC in connection with the PGTC Business and affecting any of the
Transferred Assets of PGTC;
(k) All transferable franchises, licenses,
permits or other authorizations issued or granted by any Governmental
Authority that are owned by, granted to or held or used by PGTC in connection
with the PGTC Business, whether or not actually utilized by PGTC;
(l) All books, records, files and papers of
PGTC related to the conduct of the PGTC Business at any time prior to the
Closing Date (except records relating to federal
5
<PAGE>
and state income tax and accounting), whether in hard copy or computer
format, including bank account records, books of account, invoices, sales and
promotional literature, manuals and data, sales and purchase correspondence,
lists of present and former suppliers, personnel and employment records of
employees to be hired by LLC pursuant to Section 8.02 and documentation
developed or used for marketing, manufacturing or any other purpose;
(m) All cash and cash equivalents set forth
on SCHEDULE 2.01(a); and
(n) All other assets and properties of PGTC
that exist on the Closing Date and are used in connection with the PGTC
Business, whether tangible or intangible, real or personal.
The collective assets, properties, rights,
licenses, permits, contracts, causes of action, claims, operations and
business to be transferred to LLC by PGTC pursuant hereto, exclusive of any
Excluded Assets, are referred to collectively herein as the "Transferred
Assets." The parties acknowledge and agree that each of the Excluded Assets
shall remain property of PGTC or any successor in interest to PGTC (including
WLFC) following the Closing Date.
2.02. ASSUMPTION OF LIABILITIES. Upon the terms and
subject to the conditions of this Agreement and in reliance upon the
representations, warranties and agreements herein set forth, LLC, effective
as of the Closing Date, will assume and perform and in due course pay and
discharge all obligations, Contracts and other Liabilities of PGTC as they
exist on the Closing Date, including all trade payables and accrued expenses
arising in the ordinary course of business as set forth on SCHEDULE 2.02 (the
"Assumed Liabilities").
ARTICLE III.
CONTRIBUTION CONSIDERATION
3.01. CONTRIBUTION CONSIDERATION. In consideration for
the contribution and assignment to LLC of the Transferred Assets hereunder,
in addition to LLC's assumption of the Assumed Liabilities, LLC will issue to
PGTC a Member Interest in LLC (the "Contribution Consideration") pursuant to
the Operating Agreement having a Percentage Interest equal to 50%.
ARTICLE IV.
THE CLOSING
4.01. THE CLOSING.
(a) The Closing shall take place on May 28,
1999, at the offices of McKenna & Cuneo, LLP located at 750 B Street, Suite
3300, San Diego, CA 92101, unless another date, time or place is agreed to in
writing by the parties hereto.
(b) As of the Closing Date, PGTC and WLFC, as
applicable, shall deliver to LLC the following, in form and substance
reasonably satisfactory to LLC and its
6
<PAGE>
counsel: (i) a duly executed bill of sale in the form attached hereto as
EXHIBIT A; (ii) duly executed assignment and assumption agreements with
respect to the Contracts, in the form attached hereto as EXHIBIT B; (iii) a
duly executed assignment agreement with respect to the Facilities, in the
form attached hereto as EXHIBIT C; and (iv) a duly executed Operating
Agreement in the form attached hereto as EXHIBIT D.
(c) As of the Closing Date, LLC shall deliver
to PGTC (i) duly executed assignment and assumption agreements with respect
to the Contracts, duly executed by LLC, in the form attached hereto as
EXHIBIT B; and (ii) a duly executed assignment agreement with respect to the
Facilities, in the form attached hereto as EXHIBIT C.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF PGTC
As an inducement to LLC to enter into this Agreement and to
consummate the transactions contemplated herein, PGTC represents and warrants
to LLC as follows:
5.01. CORPORATE EXISTENCE AND POWER. Until the date on
which the Certificate of Dissolution with the Secretary of State of Delaware
is filed to dissolve PGTC (as set forth in the Recitals to the Operating
Agreement), PGTC is a corporation duly organized and validly existing and in
good standing under the laws of the state of Delaware, and has all corporate
power and authority required to carry on the PGTC Business as now conducted
and to own and operate the Transferred Assets as now owned and operated.
5.02. AUTHORIZATION. The execution, delivery and
performance by PGTC of this Agreement and the Ancillary Documents and the
consummation by PGTC of the transactions contemplated hereby and thereby are
within PGTC's corporate powers and have been duly authorized by all necessary
corporate action on the part of PGTC. This Agreement and the Ancillary
Documents have been duly and validly executed by PGTC and constitute the
legal, valid and binding agreements of PGTC, enforceable against PGTC in
accordance with their terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and subject to general principles of equity.
5.03. NON-CONTRAVENTION. Assuming the Required Consents
are obtained, to the knowledge of PGTC, the execution, delivery and
performance by PGTC of this Agreement and the Ancillary Documents does not
and will not materially conflict with, constitute a material default under or
be prevented by the terms of any Contract.
5.04. FINANCIAL STATEMENTS. The unaudited balance sheet
of PGTC as of December 31, 1998, the unaudited income statement for the year
ended December 31, 1998, the unaudited balance sheet of PGTC as of April 30,
1999 (the "Balance Sheet") and the unaudited income statement for the
four-month period ended April 30, 1999, a copy of each of which has been
delivered to LLC, present fairly the financial position and assets and
liabilities of PGTC in all material respects as of such date.
7
<PAGE>
5.05. PROPERTIES; LEASES. PGTC holds title to all of
the Transferred Assets owned by it and WLFC has a valid leasehold interest in
all of the Facilities.
5.06. LITIGATION. Except as set forth on SCHEDULE 5.06,
there are no (a) actions, suits, hearings, arbitrations, proceedings (public
or private) or investigations that have been brought by or against any
Governmental Authority or any other Person (collectively, "Proceedings")
pending or, to the knowledge of PGTC, any threatened material Proceedings,
against or affecting the PGTC Business or any of the Transferred Assets or
which seek to enjoin or rescind the transactions contemplated by this
Agreement or otherwise prevent PGTC from complying with the terms and
provisions of this Agreement or (b) existing orders, judgments or decrees of
any Governmental Authority affecting any of the Transferred Assets or the
PGTC Business.
5.07. BROKERS. PGTC is not a party to any contract,
agreement, arrangement or understanding with any Person which will result in
the obligation of LLC to pay any finder's fee, brokerage commission or
similar payment in connection with the transactions contemplated hereby.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES OF LLC
As an inducement to PGTC to enter into this Agreement and
to consummate the transactions contemplated herein, LLC hereby represents and
warrants to PGTC that:
6.01. ORGANIZATION AND EXISTENCE. LLC is a limited
liability company duly organized, validly existing under the laws of the
State of Delaware and has all corporate power and authority to enter into
this Agreement and consummate the transactions contemplated hereby.
6.02. LLC AUTHORIZATION. The execution, delivery and
performance by LLC of this Agreement and the Ancillary Documents and the
consummation by LLC of the transactions contemplated hereby and thereby are
within the powers of LLC and have been duly authorized by all necessary
action on the part of LLC. This Agreement and the Ancillary Documents
constitute a legal, valid and binding agreement of LLC, enforceable in
accordance with their terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and subject to general principles of equity.
ARTICLE VII.
CONDITIONS TO CLOSING
7.01. CONDITIONS TO LLC'S OBLIGATIONS. The respective
obligations of each party under this Agreement shall be subject to the
satisfaction (or waiver by each such party) on or prior to the Closing Date
of the following conditions:
8
<PAGE>
(a) Executed copies of each of the Ancillary
Documents;
(b) Evidence that all conditions to the closing
of the transactions contemplated by the CGTC Contribution Agreement have been
satisfied.
ARTICLE VIII.
MUTUAL COVENANTS
LLC and PGTC hereby covenant and agree as follows:
8.01. TAXES. All sales, value added, use, transfer,
registration, stamp and similar Taxes imposed in connection with the transfer
of the Transferred Assets will be borne by PGTC.
8.02. EMPLOYEE MATTERS. LLC shall offer employment to each
employee of PGTC.
8.03. FURTHER ASSURANCES. At any time or from time to time
after the Closing Date, each party shall, at the request of the other party
or the other party's counsel, execute and deliver any further instruments or
documents and take all such further action as the other party or the other
party's counsel may reasonably request in order to evidence or otherwise
facilitate the consummation of the transactions contemplated hereby.
ARTICLE IX.
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS AND INDEMNIFICATION
9.01. AGREEMENT SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS. All representations, warranties and covenants contained in this
Agreement and any certificate, document or instrument delivered hereunder or
in connection herewith shall be deemed continuing representations, warranties
and covenants and shall survive the Closing Date for a period equal to the
statute of limitations applicable thereto.
9.02. INDEMNIFICATION BY WLFC. WLFC shall indemnify and
hold LLC harmless against and with respect to, and shall reimburse LLC for:
(a) Any and all Losses resulting from a breach of
any representation or warranty or nonfulfillment of any covenant of PGTC
contained herein or in any bill of sale or assignment and assumption
agreements delivered to LLC hereunder or in connection herewith; and
(b) Any and all Losses constituting the payment by
LLC of obligations and liabilities of PGTC that are Excluded Liabilities.
9
<PAGE>
9.03. INDEMNIFICATION BY LLC. LLC shall indemnify and hold
PGTC and WLFC (together, the "PGTC Indemnitees") harmless against and with
respect to, and shall reimburse the PGTC Indemnitees for:
(a) Any and all Losses resulting from a breach of
any representation or warranty or nonfulfillment of any covenant or agreement
by it contained herein or in any assignment and assumption agreements
delivered to PGTC hereunder or in connection herewith;
(b) Any and all Liabilities, accruals, deferments,
debts, duties and obligations incurred or arising after the Closing Date in
connection with the operation of the PGTC Business or any other business of
LLC; and
(c) Any and all Losses constituting the payment by
PGTC or WLFC of obligations and liabilities of LLC that are Assumed
Liabilities.
9.04. LIMITATIONS ON INDEMNIFICATION.
(a) Notwithstanding Sections 9.02 and 9.03 hereto,
the rights and obligations under this Article IX of the PGTC Indemnitees and
LLC are subject to the following:
(i) neither the PGTC Indemnitees nor
LLC shall be entitled to any recovery unless a claim for
indemnification is made in accordance with Section 9.05(a),
the claim for indemnification is made within the time period
of survival set forth in Section 9.01 and the entity seeking
indemnification complies with the procedures set forth in
Section 9.05;
(ii) the PGTC Indemnitees, on the one
hand, and LLC, on the other hand, shall not be entitled to any
indemnification hereunder unless and until the Losses that the
relevant party is entitled to be indemnified for hereunder
exceed, in the aggregate, $250,000, in which event the
relevant party shall only be entitled to recover Losses that
are in excess of $250,000; PROVIDED, HOWEVER, that any Losses
with respect to the items set forth on SCHEDULE 5.06 shall not
be subject to the limitations of this Section 9.04(a)(ii); and
(iii) neither the PGTC Indemnitees nor
LLC shall be entitled to recover Losses from the other
totaling in excess of the sum of $__________* PLUS the amount
of the additional cash capital contribution made by CGTC to
LLC pursuant to Section 4.3(b) of the Operating Agreement.
- --------------------
* The material has been omitted pursuant to a request for confidential
treatment and the material has been filed separately with the Commission.
10
<PAGE>
(b) The indemnification provisions in this Article IX
shall be the exclusive remedy for any breach of the representations and
warranties set forth in this Agreement.
9.05. PROCEDURE FOR INDEMNIFICATION. The procedure for
indemnification shall be as follows:
(a) The party claiming indemnification (the
"Claimant") shall promptly give written notice to the party from whom
indemnification is claimed (the "Indemnifying Party") of any claim, whether
between the parties or brought by a third party, specifying (i) in reasonable
detail, the factual basis for such and (ii) in good faith, the estimated
amount of the claim. If the claim relates to an action, suit or proceeding
filed by a third party against the Claimant, such notice shall be given by
Claimant within ten business days after written notice of such action, suit
or proceeding was received by Claimant. The failure of the Claimant to
provide such written notice within the time period specified shall not
relieve the Indemnifying Party of its indemnification liability under
Section 9.02 or Section 9.03, unless such failure materially prejudices the
rights of the Indemnifying Party in defending against the claim or action.
(b) Following receipt of notice from the Claimant of
a claim, the Indemnifying Party shall have 30 days to make such investigation
of the claim as the Indemnifying Party deems necessary or desirable. For the
purposes of such investigation, the Claimant agrees to make available to the
Indemnifying Party and/or its authorized representative(s) the information
relied upon by the Claimant to substantiate the claim. If the Claimant and
the Indemnifying Party agree at or prior to the expiration of said 30-day
period (or any mutually agreed upon extension thereof) to the validity and
amount of such claim, the Indemnifying Party shall immediately pay to the
Claimant the full amount of the claim. If the Claimant and the Indemnifying
Party do not agree within said period (or any mutually agreed upon extension
thereof), subject to clause (c) below with respect to third party claims, the
Claimant may seek appropriate legal remedy.
(c) With respect to any claim by a third party as to
which the Claimant is entitled to indemnification hereunder, the Indemnifying
Party shall have the right, at its own expense, to participate in or assume
control of the defense of such claim, and the Claimant shall cooperate fully
with the Indemnifying Party. If the Indemnifying Party elects to assume
control of the defense of any third-party claim, the Claimant shall have the
right to participate in the defense of such claim with legal counsel of its
own selection; PROVIDED, HOWEVER, that the Claimant shall pay the fees and
expenses of such counsel. If the Indemnifying Party does not elect to assume
control or otherwise participate in the defense of any third party claim, it
shall be bound by the results obtained by the Claimant with respect to such
Claim; PROVIDED, HOWEVER, that no settlement or compromise of any claim which
may result in any indemnification liability may be made by the Claimant
without the prior written consent of the Indemnifying Party.
11
<PAGE>
(d) If a claim, whether between the parties or by a
third party, requires immediate action, the parties will make every effort to
reach a decision with respect thereto as expeditiously as possible.
(e) Upon satisfaction of any third party claim
pursuant to this Article IX, the Indemnifying Party shall be subrogated to
all rights and remedies of the Claimant against any third party with respect
to such claim.
ARTICLE X.
MISCELLANEOUS
10.01. NOTICES. All notices and other communications
required or permitted to be made under this Agreement shall be in writing and
shall be deemed duly given upon actual receipt if (a) delivered personally or
by confirmed telecopier transmission, (b) delivered on by overnight carrier
or (c) sent by United States registered mail, return receipt requested,
postage prepaid, and addressed as follows:
IF TO LLC:
Pacific Gas Turbine Center, LLC
7007 Consolidated Way
San Diego, California 92121
Attention: Graham Bell
Telephone No.: (619) 877-2841
Telecopier No.: (619) 578-7009
IF TO PGTC:
Pacific Gas Turbine Center, Incorporated,
c/o WLFC Lease Finance Corporation
2320 Marinship Way
Suite 300
Sausalito, California 94965
Attention: General Counsel
Telephone No.: (415) 275-5112
Telecopier No.: (415) 331-5167
IF TO WLFC:
12
<PAGE>
Willis Lease Finance Corporation
2320 Marinship Way
Suite 300
Sausalito, California 94965
Attention: General Counsel
Telephone No.: (415) 275-5112
Telecopier No.: (415) 331-5167
IN EACH CASE, WITH A COPY TO:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Linda L. Curtis, Esq.
Telephone No.: (213) 229-7582
Telecopier No.: (213) 229-6582
IF TO CGTC:
Chromalloy Gas Turbine Corporation
4430 Director Drive
P.O. Box 200150
San Antonio, Texas 78219
Attention: Kenneth J. Binder
Telephone No.: (210) 333-6010
Telecopier No.: (210) 337-3962
Sequa Corporation
200 Park Avenue
New York, New York 10166
Attention: Stuart Z. Krinsly
Telephone No.: (212) 986-5500
Telecopier No.: (212) 557-9465
10.02. AMENDMENTS; NO WAIVERS. Any provision of this
Agreement may be amended or waived if, and only if, such amendment or waiver
is in writing and is duly executed by LLC and PGTC. No failure or delay by
any party in exercising any right, power or privilege under this Agreement
shall operate as a waiver thereof nor shall any single or partial waiver or
exercise thereof preclude the enforcement of any other right, power or
privilege.
10.03. RIGHTS AND REMEDIES CUMULATIVE. The rights and
remedies provided by this Agreement are cumulative and the use of any one
right or remedy by any party shall not preclude or waive its right to use any
or all other remedies. Said rights and remedies are given in addition to any
other rights the parties may have by law, statute, ordinance or otherwise.
13
<PAGE>
10.04. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns. No party may assign or delegate or
otherwise transfer any of its rights or obligations hereunder without the
prior written consent of the other party.
10.05. CONSTRUCTION; INTERPRETATION. The headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Article, section,
schedule, exhibit, recital and party references are to this Agreement unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of
this Agreement for purposes of construing the provisions of this Agreement,
and all provisions of this Agreement shall be construed in accordance with
their fair meaning, and not strictly for or against any party.
10.06. SEVERABILITY. Any term or provision of this
Agreement that is or becomes invalid or unenforceable shall be ineffective to
the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms or provisions of this Agreement.
10.07. COUNTERPARTS. This Agreement may be executed and
delivered in any number of counterparts and via facsimile with the same
effect as if all parties hereto had signed the same document. All
counterparts shall be consumed together and shall constitute one instrument.
10.08. ENTIRE AGREEMENT. This Agreement, together with the
Exhibits and Schedules and the Ancillary Documents, constitute the entire
agreement among the parties pertaining to the subject matter hereof, and
supersedes all prior oral and written, and all contemporaneous oral,
agreements and understandings pertaining thereto.
10.09. GOVERNING LAW. This Agreement, and the application
or interpretation hereof, shall be governed exclusively by its terms and by
the laws of the State of California.
10.10. EXPENSES. WLFC shall pay all costs and expenses
incurred by or on behalf of WLFC in connection with the negotiation of this
Agreement and the performance of the transactions contemplated hereby,
including, without limiting the generality of the foregoing, fees and
expenses of its legal counsel; PROVIDED, HOWEVER, that all costs and expenses
incurred in connection with the formation of LLC, including fees and expenses
of legal counsel in connection therewith, shall be paid 50% by WLFC and 50%
by CGTC.
10.11. THIRD-PARTY BENEFICIARIES. Nothing herein expressed
or implied is intended to or shall be construed to confer upon or give any
person or entity, other than the parties hereto, and their respective
successors and permitted assigns, any rights or remedies under or by reason
of this Agreement.
14
<PAGE>
10.12. DISPUTE RESOLUTION.
(a) Any controversy or claim arising out of or
relating to this Agreement (or breach thereof), whether arising in tort,
contract or otherwise, shall be settled in accordance with the following
procedures:
(i) The parties shall first attempt to
resolve such controversy or claim by meeting with an
independent mediator chosen by both parties.
(ii) If the parties are unable to
mutually agree upon a mediator, then the mediator shall be
appointed by the American Arbitration Association in the
San Diego, California metropolitan area ("AAA") in accordance
with then-current commercial rules of mediation thereof.
(iii) If such controversy or claim cannot
be resolved by mediation within sixty (60) days after the
party raising the controversy or claim first notifies the
other party thereof in writing, then the controversy or claim
shall be submitted to AAA for binding arbitration, to be held
in San Diego, California metropolitan area in accordance with
the then-current commercial rules of arbitration of AAA.
(b) The award from any binding arbitration shall be
binding upon the parties and their successors and permitted assigns, whether
or not any party fails or refuses to participate therein, and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
(c) The arbitrator shall have the power to issue
injunctions and otherwise to grant equitable relief, and shall award legal
fees and costs (including fees and costs incurred by AAA and by the
arbitrator) to the prevailing party. The arbitrator shall not have the power
to award punitive, exemplary or indirect damages.
(d) Except as otherwise provided in Article IX and
as may be otherwise ordered by the arbitrator in accordance with
Section 10.12(c), each party shall bear its own costs and expenses in
connection with any proceeding commenced under this Section 10.12, including,
without limitation, legal fees and disbursements, travel expenses, witness
fees and costs, photocopying and other preparation expenses. The costs and
other fees charged by the independent mediator or AAA, whether in connection
with a mediation and/or arbitration, shall be shared generally by the parties.
10.13. PRESS RELEASE. Neither party shall make any press
release or otherwise announce to the public the transactions described herein
without the other party's written approval of the form and content of the
press release or other announcement. If a public statement is required to be
made by law, the parties shall consult with each other in advance as to the
contents and timing thereof.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Contribution and Assumption Agreement to be duly executed by their respective
authorized officers as of the day and year first above written.
PGTC:
PACIFIC GAS TURBINE CENTER,
INCORPORATED
By: /s/ Jim McBride
Title: Chief Financial Officer
WLFC:
WILLIS LEASE FINANCE CORPORATION
By: /s/ Donald A. Nunemaker
Title: Executive Vice President
LLC:
PACIFIC GAS TURBINE CENTER, LLC
By: /s/ Graham P. Bell
Title: President
16
<PAGE>
Exhibit 11.1
Computation of Earnings EXHIBIT XI
WILLIS LEASE FINANCE CORPORATION
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
------------------------------------- -------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
Income before extraordinary item
Basic
Earnings:
Income before extraordinary item $2,787 $2,149 $5,573 $4,099
Shares:
Average common shares outstanding 7,374 7,263 7,368 7,228
------ ------ ------ ------
Basic earnings per common share before
extraordinary item $0.38 $0.30 $0.76 $0.57
Assuming Full Dilution
Earnings:
Income before extraordinary item $2,787 $2,149 $5,573 $4,099
------ ------ ------ ------
Shares:
Diluted average common shares outstanding 7,453 7,488 7,455 7,466
------ ------ ------ ------
Earnings per common share assuming full dilution,
before extraordinary item $0.37 $0.29 $0.75 $0.55
------ ------ ------ ------
Net income
Basic
Earnings:
Net income $2,787 $2,149 $5,573 $3,899
------ ------ ------ ------
Shares:
Average common shares outstanding 7,374 7,263 7,368 7,228
------ ------ ------ ------
Basic earnings per common share $0.38 $0.30 $0.76 $0.53
Assuming Full Dilution
Earnings:
Net income $2,787 $2,149 $5,573 $3,899
------ ------ ------ ------
Shares:
Diluted average common shares outstanding 7,453 7,488 7,455 7,466
------ ------ ------ ------
Earnings per common share assuming full dilution $0.37 $0.29 $0.75 $0.52
------ ------ ------ ------
Supplemental information:
Difference between average common shares outstanding
to calculate basic and assuming full dilution is due
to options outstanding under the 1996 Stock Options/
Stock Issuance Plan
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
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0
0
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