<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-KSB
(MARK ONE)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-29028
AVIATION DISTRIBUTORS, INC.
(Name of small business issuer in its charter)
DELAWARE
(State or other jurisdiction of 33-0715685
incorporation or organization) (I.R.S. Employer Identification No.)
ONE CAPITAL DRIVE
LAKE FOREST, CALIFORNIA 92630
(Address of Principal Executive Office) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 586-7558
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED:
------------------- ---------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK -- $.001 PAR VALUE
(TITLE OF CLASS)
Check 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 No X
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-KSB. X
---
Revenues of the registrant for the fiscal year ended December 31, 1997
were $38,964,000.
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on March 31, 1998 was approximately $7,245,000, based upon the
average of the bid and asked prices of the Common Stock, as reported by the
National Quotation Bureau Incorporated.
The number of shares of the Common Stock of the registrant outstanding
as of March 31, 1998 was 3,165,000.
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ---
Documents incorporated by reference:
Items 10, 11, 12 and 13 of Part III are incorporated by reference
from a portion of the Company's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Company's 1998 Annual Meeting of
Stockholders and are incorporated by reference into Part III hereof.
<PAGE>
PART I
All statements, other than statements of historical fact, included in
this Form 10-KSB, including without limitation the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," are, or may be deemed to be, "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). Such forward-looking statements involve
assumptions, known and unknown risks, uncertainties and other factors which
may cause the actual results, performance or achievements of Aviation
Distributors, Inc. (the "Company" or "ADI") to be materially different from
any future results, performance, or achievements expressed or implied by such
forward-looking statements contained in this Form 10-KSB. Such potential
risks and uncertainties include, without limitation, competitive pricing and
other pressures from other aviation parts suppliers, aviation industry and
economic conditions generally and in the Company's primary markets,
availability of capital, and other risk factors detailed herein and in other
of the Company's filings with the Securities and Exchange Commission. The
forward-looking statements are made as of the date of this Form 10-KSB and
the Company assumes no obligation to update the forward-looking statements or
to update the reasons actual results could differ from those projected in
such forward-looking statements. Therefore, readers are cautioned not to
place undue reliance on these forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a supplier of new and overhauled aircraft parts to major
commercial airlines worldwide. The Company locates, acquires and supplies
parts for all major aircraft. Additionally, the Company engages in
consignment and marketing agreements with major commercial airlines,
distributors and OEMs which allows the Company to offer a wide range of parts
for sale without certain risks and financing costs associated with owned
inventory. Aircraft parts offered by the Company include those manufactured
by Airbus, Boeing, General Electric, Lockheed, McDonnell Douglas, Pratt &
Whitney and Rolls Royce. Sales have increased from $2.8 million in 1992 to
$7.2 million in 1993, $16.4 million in 1994, $21.3 million in 1995, $23.9
million in 1996 and $39.0 million in 1997. The 1995 sales amount included one
significant sale of two whole aircraft for $6.5 million. If the opportunity
exists, the Company may sell whole aircraft in the future.
INDUSTRY OVERVIEW AND TRENDS
The worldwide aircraft parts market is highly fragmented and parts are
supplied by many types of suppliers, including airlines, OEMs and numerous
distributors, fixed base operators, FAA-certified facilities, traders and
brokers. The Canaan Group Ltd., a management consulting firm specializing in
the aircraft and aerospace industry, estimated that aircraft parts
inventories valued at $45 billion existed in May 1995, with a carrying cost
of $10 billion annually and that 80% of such inventories were owned by
airlines. The Company believes that a portion of such inventory is available
for marketing, consignment and purchase. The Company also believes that,
based on other significant market trends, its target market will continue to
grow.
MARKET GROWTH. According to Boeing's 1996 Market Outlook, the worldwide
fleet of commercial aircraft and cargo jet aircraft is expected to grow from
11,066 aircraft at the end of 1995 to 23,080 aircraft by 2015, representing a
compound annual growth rate of 3.8%. Boeing estimates that revenue passenger
miles will exceed four trillion by 2015, an increase from less than two
trillion in 1995. The Company believes such increase in revenue passenger
miles is an indication that aircraft will be flown more often and will need
standard service checks more frequently. Additionally, the growth rate of
revenue passenger miles for the international market will exceed the growth
rate for the domestic market. The
1
<PAGE>
Company believes that these factors have resulted and will continue to result
in increased demand for aircraft parts worldwide.
REDUCTION IN AIRLINE INVENTORIES. Historically, airlines have controlled
the majority of the aircraft parts inventory. Today, many airlines are
beginning to reduce the size of their parts inventories in an effort to
reduce inventory-carrying costs. These inventory reductions have increased
reliance by many airlines on after-market suppliers to provide parts that are
difficult to obtain from manufacturers on a timely basis, if at all.
Manufacturers' lead time for delivery of aircraft parts averages 30 to 60
days. As airlines continue to demand time-responsive inventory procurement
processes, responsibility for inventory storage and handling has shifted to
suppliers such as the Company. The Company believes that its access to a
large inventory of aircraft parts and its ability to deliver such parts to
its customers quickly and at a competitive price enable it to provide the
services sought by airlines in an effective manner.
INCREASE IN CONSIGNMENT AND MARKETING BUSINESS. To reduce the high costs
associated with excess aircraft parts inventory, many airlines are selling
their parts inventories through consignment and marketing agreements with
suppliers such as the Company. Such agreements enable an airline to
distribute its inventory to a large number of prospective inventory buyers
while enabling suppliers such as the Company to offer an extensive aircraft
parts inventory to its customers with a relatively low capital cost.
REDUCTION IN NUMBER OF SUPPLIERS. In an attempt to increase quality and
service, reduce purchasing costs and streamline purchasing decisions, some
airlines have begun to form relationships with a few preferred suppliers.
Over the last few years, airlines have begun to reduce the number of aircraft
parts suppliers with which they do business. In each case to date where the
Company had an established relationship with an airline, the Company was one
of the parts suppliers selected. The Company believes that due to its focus
on cultivating relationships with its customers and its reputation for
service, quality and reliability, airlines will continue to select the
Company as one of their preferred aircraft parts suppliers.
INCREASED EMPHASIS ON TRACEABILITY. Regulatory agencies have increased
documentation requirements for aircraft parts because of concern regarding
unapproved parts. In order for suppliers to trace all aircraft parts back to
their original source, suppliers have invested in sophisticated information
systems technology. The Company has developed and intends to maintain and
upgrade its information systems technology to ensure that all aircraft parts
bought and sold by the Company comply with applicable regulatory requirements.
BUSINESS STRATEGY
The Company's primary objectives are to be a leading quality supplier of
aircraft parts to airlines worldwide and to increase income from its business
through the application of a comprehensive business strategy combining
various customer service, marketing, operating and growth objectives. The
Company's marketing approach includes direct marketing to airlines and
manufacturers, advertising in trade directories and attending industry trade
shows and conferences. Although the Company concentrates the majority of its
marketing efforts on commercial airlines servicing the passenger market, it
also seeks to foster business from commercial airlines servicing the cargo
market, as well as overhaul facilities and OEMs.
CUSTOMER SERVICE. The Company intends to continue to market and develop
its ability to deliver parts quickly to customers at a preferred price and
continue its emphasis on implementing creative solutions to locate and
deliver hard-to-find aircraft parts. Additionally, the Company plans to
continue to cultivate relationships with its customers to assure that it
retains its position on its customers' preferred list of aircraft parts
suppliers. The Company has historically incurred high levels of selling and
administrative expenses, primarily travel and entertainment, associated with
establishing and
2
<PAGE>
maintaining customer relationships. A key component of the Company's business
strategy is to implement a program to effectively contain such expenses.
EMPHASIS ON QUALITY. The Company will continue to emphasize its
reputation for quality, including its track record of consistently meeting
FAA regulations by maintaining and, if necessary, introducing safeguards to
ensure the quality of its aircraft parts. In addition, in October 1996 the
Company became a full distributor under the National Aerospace and Defense
Contractors Accreditation Program of the Performance Review Institute. Such
safeguards include employing three FAA-licensed Airframe and Powerplant
Inspectors and contracting with three FAA-licensed Designated Airworthiness
Representatives and an outside quality assurance consultant. Each of these
specialists verifies the airworthiness of aircraft parts bought and sold by
the Company.
In March 1998, the Company submitted to an International Standardized
Operations ("ISO") Certification Audit and achieved acceptance of its
documented operational policies and procedures, subject to responding to
minor non-conformance issues. Presently, the Company is in the process of
replying to these findings and believes it will attain the ISO Certification
in the very near term. When formally approved, the Company believes it will
be among a select group in its industry to have achieved this status, which
is a well-recognized symbol of quality operating standards.
FOCUS ON MAJOR COMMERCIAL AIRLINES. The Company plans to continue
targeting major commercial airlines worldwide, many of which are currently
customers of the Company. Such airlines generally have larger aircraft fleets
which generate a greater demand for aircraft parts than smaller airlines.
Consequently, relationships with major commercial airlines enable the Company
to expend fewer resources to generate comparable sales volume and
corresponding revenue with margins of profitability comparable to similar
sales to several smaller airlines. Additionally, major commercial airlines
typically have greater financial resources than smaller airlines, resulting
in reduced credit risk to the Company and a greater likelihood of timely
payment. The Company's relationships with major commercial airlines also
provide the Company with increased access to such airlines' aircraft parts
inventories.
INCREASE ACCESS TO INVENTORY. The Company plans to increase its
accessible inventory by pursuing new consignment and marketing agreements with
airlines, manufacturers and overhaul facilities and purchasing large items, such
as engines and whole aircraft, that can be broken down and sold as smaller parts
for significantly more than the "as - is" value. The Company will seek to secure
aircraft parts where it believes demand is greater than supply. Presently, the
Company believes that demand exceeds supply in the aircraft parts market for
aircraft models over five years old.
GLOBAL EXPANSION. The Company's goal is to service customers
domestically and worldwide and to become a major aircraft parts supplier for
the fastest-growing markets, particularly Asia and Europe. For the year ended
December 31, 1997, 56.5% of the Company's sales were to international
customers. The Company plans to continue to take advantage of the growing
international market through the use of its multilingual sales staff and by
maintaining existing relationships and establishing new relationships in the
following regions: Pacific Rim/Far East/South Pacific, Europe, Latin/South
America, Middle East/Africa and North America.
PRODUCTS AND SERVICES
GENERAL. The Company is in the business of selling a broad range of
aircraft parts from its owned inventory, on behalf of airlines and
manufacturers pursuant to consignment and marketing agreements, and from
inventory located from outside parties. For the year ended December 31, 1997,
sales from Company-owned inventory, pursuant to consignment and marketing
agreements, and pursuant to outside sourcing represented approximately 19.7%,
2.9% and 77.4%, respectively, of the Company's net sales.
3
<PAGE>
The Company's access to an extensive inventory is a result of its
worldwide relationships with airlines, manufacturers and suppliers of
aircraft parts, numerous consignment and marketing agreements with airlines
and manufacturers, and owned inventory of new and overhauled aircraft parts.
The general categories of aircraft parts are as follows: (i) rotable;
(ii) repairable; and (iii) expendable.
A rotable is a part which is removed periodically as dictated by an
operator's maintenance procedures or on an as-needed basis and is typically
repaired or overhauled and re-used an indefinite number of times. A subset of
rotables is life-limited parts. A life-limited rotable has a designated number
of allowable flight hours and/or cycles (one take-off and landing generally
constitutes one cycle) after which it is rendered unusable.
A repairable is similar to a rotable except that it can only be
repaired a limited number of times before it must be discarded. Typically,
rotables and repairables must be removed from an airplane and rebuilt or checked
based upon the number of hours in flight. Rotables and repairables must be
repaired at FAA-approved repair facilities.
An expendable is generally a part which is used and not thereafter
repaired for further use. Consequently, all expendable inventory is new.
Expendable inventory cannot be used for less than its useful life and then
transferred to a new airplane; once an expendable part is removed from an
airplane, it must be discarded.
Currently, the Company supplies aircraft parts for Boeing 737, 747,
and 767 series, Airbus 300 series, McDonnell Douglas 80, DC and MD series
aircraft. These aircraft parts represent a significant portion of the aircraft
parts used by major airlines, which represent the majority of the Company's
current customers. Although not required by the FAA to do so, the Company
maintains on staff three FAA-licensed Airframe and Powerplant Inspectors and
contracts with three FAA-licensed Designated Airworthiness Representatives,
whose responsibilities are to verify the airworthiness of aircraft parts bought
and sold by the Company. The Company believes that its strict adherence to FAA
and manufacturer guidelines has contributed to the Company's growth in customer
base and revenues. The Company does not repair aircraft parts, and therefore is
generally not subject to the risks associated with the repair business.
Each sales person employed by the Company is responsible for making
an appraisal of a particular aircraft part's value and makes such appraisal
based on industry experience and practice after considering current
manufacturers' list price, the condition of the part, the part's availability
and lead time to manufacture the part. The Company carries its own inventory and
also has access to a much larger pool of inventory pursuant to its consignment
and marketing agreements. This gives the Company access to a broad assortment of
aircraft parts which helps the Company meet rapid delivery requirements. The
Company's return policy permits customers to return parts within 10 days of
receipt. Additionally, although the Company's payment terms are generally 30
days, extended payment terms are provided in certain circumstances.
The Company's owned inventory at December 31, 1997 is stored in the
Company's California warehouses; a party who has entered into a marketing
agreement with the Company is responsible for storing the inventory to which
the Company has access pursuant to such marketing agreement. All inventory is
shipped to customers by the Company via national or international courier
services. If an aircraft part sought by a customer exists in the Company's
owned inventory, or exists in inventory on consignment, or inventory
available through exclusive marketing agreements (together, the "Accessible
Inventory"), such part is generally shipped to the customer the day
4
<PAGE>
the order is placed. The turn-around time is generally up to one week from
the time the order is placed if the Company has to acquire a part from an
outside party.
The Company, on an opportunistic basis, purchases for resale
high-price items, such as engines and whole aircraft, which may be sold intact
or broken down for sale of component parts.
CLIENT SERVICES. Client services are conducted through the Company's
California-based multilingual direct sales force, as well as through its
sales force in the Company's overseas offices whose primary responsibility is
to sell aircraft parts and manage customers. Sales personnel travel
extensively to develop strong personal relationships with the Company's
customers, improve communications and remain current on regional market data.
Salespeople are assigned to specific airlines and are supported by a group of
regional agents who assist in countries such as Argentina, Chile, China,
India, Indonesia, Israel, Italy, Malaysia, New Zealand, Pakistan,
Philippines, Singapore and Turkey where local representation is critical to
purchase order processing and timely payment. The Company also maintains a
one-person office in Paris to coordinate European sales and support.
Each sales representative is supported by additional personnel who
research and locate parts ordered by the Company's customers. The Company's
sales staff, through its knowledge of the industry and its relationships
throughout the world, is able to engineer and implement creative solutions to
locate and deliver hard-to-find aircraft parts, a quality that the Company
believes sets it apart from its competitors.
Upon the Company's receipt from a customer of a telephone or fax
inquiry for a specific aircraft part, the Company first checks its owned
inventory for availability of the part, then checks the Accessible Inventory. If
the part is not owned or part of the Accessible Inventory, the Company will
attempt to source the part through cultivated industry contacts or the Inventory
Locator Service ("ILS"), a domestic, industry-wide database of aircraft parts.
Even if the aircraft part is within the Company's owned or Accessible Inventory,
the Company attempts to achieve full market value for each part sold by
researching alternate sources for availability and competing prices for the part
prior to quoting the end user.
Management plans to continue to grow the core business of sourcing
aircraft parts to end users and to enhance the Company's relationships with
existing customers. This should allow new relationships to grow and increase the
exposure of its sales staff to the needs and desires of the customers.
Coincident with the growth of the core business, additional marketing and
consignment opportunities should continue to expand the Company's consignment
and marketing business.
CONSIGNMENT AND MARKETING BUSINESS. In addition to supplying parts
from owned inventory, the Company also supplies parts through (i) consignment
agreements, pursuant to which the Company takes actual possession of a vendor's
inventory, and (ii) exclusive marketing agreements, pursuant to which the
Company markets vendors' inventory which remains in the vendors' possession.
Through consignment or marketing agreements with an aircraft parts supplier, the
Company is able to distribute its aircraft parts to a larger number of
prospective inventory buyers. This allows the Company's vendors to maximize the
value of their inventory while at the same time freeing up resources that can be
focused on their core business. Consignment and marketing arrangements also
enable the Company to offer for sale aircraft parts from a much larger inventory
at minimal capital cost to the Company.
When an inquiry is made with respect to a particular aircraft part, the
Company will query its inventory databases for availability before
researching market value. A party who has entered into a consignment or
marketing agreement with the Company (the "Contract Party") typically
establishes an asking price for each aircraft part subject to the agreement,
but may allow the Company to lower such price to assure a sale. If the
Company feels it must offer a part for below the price established by the
5
<PAGE>
Contract Party, it will first seek the Contract Party's permission. In most
instances, the Contract Party has entered into the relationship with the
Company because it believes the Company has the expertise necessary to
attract the best price for each aircraft part. Further, the Company is paid a
percentage of the sales price as compensation for its consignment and
marketing services. Consequently, the Contract Party, understanding that the
Company's own best interest is in achieving the highest price possible for
the sale of the part, will usually give consideration to a recommendation by
the Company to sell a particular aircraft part at a price below the Contract
Party's established price.
The Company has had consignment and marketing agreements with
airlines and OEMs. No single consignment or marketing agreement is material to
the Company as a whole. At December 31, 1997 the Company had one marketing
agreement and no current consignment agreements.
INVENTORY PURCHASES. The Company acquires aircraft parts by bidding
on the inventory of (i) airlines that are eliminating certain portions of their
parts inventory due to retirement of an aircraft type from their fleet,
downsizing of operations or the dissolution of their businesses and (ii) OEMs
and overhaul facilities who seek to sell excess inventory. Management believes
that its primary source of aircraft parts for acquisition during the next few
years will be from such purchases. The Company also purchases specific items
from time to time, such as engines and whole aircraft, on an opportunistic
basis.
SYSTEMS
Due to concerns regarding unapproved aircraft parts, regulatory
authorities have increased the level of documentation required for aircraft
parts. This requirement has, in turn, been extended by end users to the
suppliers of the parts. The sophistication required to track the history of an
inventory consisting of thousands of aircraft parts is considerable and has
required aircraft parts suppliers to invest significantly in information systems
technology. The high cost of increased technology has made entry into and
survival in the aircraft parts supply market increasingly difficult and
expensive. However, the Company has previously invested in systems technology
and intends to continue to maintain its information systems to allow it to
effectively compete in the aircraft parts supply market.
The most commonly used database available in the aircraft part supply
industry is ILS. ILS is an inventory locating service that assists in searching
for and locating aircraft parts. Once a potential purchaser locates a part owned
by the Company or available through the Company's Accessible Inventory, the
purchaser contacts the Company to confirm price, condition and availability
information. As of December 31, 1997, the Company listed approximately 250,000
items on ILS. Additionally, ILS is one of the tools used by the Company to
locate aircraft parts that are not in the Company's accessible inventory.
The Company also uses a software packages called "Quick Quote." This
computer database creates requests for quote sheets, quotations, sales orders,
purchase orders, repair order and invoices. Quick Quote also provides extensive
part-number databases and inventory control. The system, specifically designed
for the aircraft parts industry, is comprehensive and can originate and complete
a transaction without additional software. The Company also uses advanced
methods of electronic data exchange including Spec 2000, AIRS and BComm.
The Company has purchased a new software package called "Navision
Financials." This software package will replace "Quick Quote" and the Company's
current accounting package. Navision Financials Software is an integrated
accounting and business management software package. This computer database will
create requests for quote sheets, quotations, sales orders, purchase orders,
repair orders and invoices. This database will provide improved extensive part
number databases, improved inventory controls and additional linkage between
accounting and sales. This package was purchased in November 1997 and the
Company plans to implement the new software package in 1998.
6
<PAGE>
COMPETITION
The aircraft parts supply industry is highly competitive. The Company
encounters substantial competition from (i) direct competitors, such as The Ages
Group, The Memphis Group, AAR Corp. and Aviation Sales Company, and (ii)
indirect competitors, such as OEMs, which include aircraft manufacturers such as
Boeing, Airbus and McDonnell Douglas, as well as component manufacturers such as
Bendix, Menasco and Goodrich. Competition is generally based on availability of
product, reputation, customer service, price and lead time. Although many of the
Company's competitors have access to substantially greater financial and other
resources than the Company, the Company believes that by focusing on service,
product integrity and the cultivation of relationships with customers worldwide,
it is well equipped to compete effectively in its industry.
GOVERNMENT REGULATION
Both domestic and foreign entities regulate products sold by the
Company. The following discussion summarizes the required regulatory approvals
and clearances relating to the Company's products and highlights the Company's
specific efforts to conform to such requirements.
The FAA is charged with regulating the manufacture, repair and
operation of all aircraft and aircraft equipment operated within the United
States. The FAA monitors safety by promulgating regulations regarding proper
maintenance of aircraft and aircraft equipment. Similar regulations exist in
foreign countries. All aircraft and aircraft equipment must be monitored on a
continual basis and periodically inspected in order to ensure proper condition
and maintenance. Regulatory agencies specify maintenance, repair and inspection
procedures for aircraft and aircraft equipment. These procedures must be
performed by certified technicians in approved repair facilities on set
schedules. All parts must conform to prescribed regulations and be certified
prior to installation on an aircraft. When necessary, the Company uses FAA
and/or Joint Aviation Authority certified repair shops to repair or certify
parts for distribution. Because regulations are subject to modification, the
Company carefully monitors the FAA and industry trade organizations in order to
assess any potentially adverse impact on the Company caused by changes in
regulations applicable to its operations.
Documentation of spare parts is of paramount importance in the
aircraft parts industry. To ensure that all parts are properly documented and
thus traceable to their original source, the Company requires that its suppliers
comply with all documentation requirements set forth by regulatory agencies.
Documentation may include: (i) an invoice or purchase order from an approved
supplier, (ii) a "teardown" report noting actions taken during the last repair,
(iii) a signed maintenance release from a certified airline or repair facility
that repaired the aircraft spare part and a statement from an inspector
verifying that the part was repaired in accordance with proper workmanship, and
using proper materials and methods.
EMPLOYEES
As of March 31, 1998, the Company had 52 full-time and two part-time
employees in the United States, two full-time and one part-time employees in
Australia, and one full-time employee in France. As of such date, the Company
also has agents in Argentina, Chile, China, India, Indonesia, Israel, Italy,
Malaysia, New Zealand, Pakistan, Philippines, Singapore and Turkey. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
7
<PAGE>
YEAR 2000 MATTERS
The inability of computers, software, and other equipment utilizing
microprocessors to recognize and properly process date fields containing a two
digit year reference such as "00" for the year 2000 is commonly referred to as
the Year 2000 issue. Any of the Company's computer programs that utilize two
digit years may recognize "00" as the year 1900 rather than the year 2000. Such
recognition problems could cause disruptions of operations, including the
inability to process transactions, send invoices, or engage in similar essential
business activities.
The Company has identified all significant applications that will
require modification to address the Year 2000 issue. Internal and external
resources are being used to make the required modifications and test Company
systems for the year 2000. The modifications process of all significant
applications is substantially complete, and the Company intends to complete
modifications and conduct testing by the end of 1998.
The Company is also communicating with third-party vendors to
determine their compliance with the Year 2000 issue. The Company can provide no
assurance that the systems of third parties will be in compliance with the turn
of the century. The inability of the Company to complete modifications and the
failure of third party vendors to complete compliance with the Year 2000 issue,
or both, could have a material adverse effect on the Company's ability to
perform essential business tasks which could have a material adverse effect on
the Company's business.
ITEM 2. DESCRIPTION OF PROPERTY
In February 1998, the Company leased a 36,079 square foot facility at
One Capital Drive, Lake Forest, California 92630 as its prinicpal executive
offices and primary warehouse for $29,500 per month. The facility has
approximately 14,293 square feet allocated to office space and 21,786 square
feet of warehouse. The lease expires January 31, 2005, with an option to extend
the term of the lease for one five-year period at the then market rate for the
equivalent space.
On October 27, 1997, the Company exercised its option to extend for
one year its lease of a 9,500 square foot facility in Mascot, New South Wales,
Australia, located near the Sydney airport. The facility is used primarily for
warehouse space. The lease expires February 28th, 1999.
The Company continues to lease a 4,800 square foot portion of a
16,526 square foot industrial facility in Irvine, California on a month-to-month
basis for $2,400 per month. This facility is used entirely for warehouse space,
but will be phased out as the Company completes the relocation of inventory to
its new facility in Lake Forest.
In December 1997, the Company sold its facility in Irvine,
California, which formerly housed the Company's corporate headquarters and
consisted of 16,000 square feet, 9,200 of which was used for warehouse space,
with the remaining space used for sales administration and accounting offices.
The Company has a sales office in Paris. The Company believes that its
facilities are adequately covered by insurance.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In October 1997, the Company, its founder, its directors, certain
of its officers, a former officer and director, its former auditor and its
underwriter were named as defendants in three civil suits filed as class
actions on behalf of individuals claiming to have purchased ADI Common Stock
during the period from March 1997 to September 1997, and seeking damages for
violation of Federal securities laws. The suits were filed in the United
States District Court for the Central District of California and are
captioned as follows: (i) NGUYEN v. AVIATION DISTRIBUTORS, INC., ET AL., U.S.
District Court, Central District of California, Case No. SACV 97-795 (ANx);
(ii) ALAN GREEN v. AVIATION DISTRIBUTORS, INC., ET AL., U.S. District Court,
Central District of California, Case No. SACV 97-801 GLT (EEx); and (iii)
SHARON TATE v. AVIATION DISTRIBUTORS, INC., ET AL., U.S. District Court,
Central District of California, Case No. SACV 97-838 (Eex).
In April 1998, the Company entered into a settlement in principle, which
is memorialized in a Memorandum of Understanding (the "M.O.U."), with counsel
for the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock,
of which the Company will issue 80,000 shares and the Company's founder,
Osamah S. Bakhit, will contribute 130,000 shares. The settlement is
conditioned upon execution of a definitive settlement agreement and approval
of the settlement by the Federal Court. The M.O.U. provides that the settling
plaintiffs may withdraw from the settlement if the mean trading price of the
Company's common stock is less than $5.00 per share for the 10-day period
beginning 15 days prior to the settlement hearing. Included in legal
settlement expense for the year ended December 31, 1997 is a $620,000 charge.
See "Management Discussion and Analysis of Financial Condition and Results of
Operations -- Legal Settlement Expenses; and Liquidity and Capital Resources"
and Note 10 of Notes to Consolidated Finanacial Statements.
The Company is involved in certain legal and administrative
proceedings and threatened legal and administrative proceedings arising in the
normal course of its business. While the outcome of such proceedings and
threatened proceedings cannot be predicted with certainty, management believes
the ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From March 3, 1997 to September 2, 1997, the Company's Common Stock
was quoted on the Nasdaq SmallCap Market under the symbol "ADIN." Effective
September 2, 1997, trading in the Company's Common Stock was halted by Nasdaq,
and on October 1, 1997 the Company's Common Stock was delisted from the Nasdaq
SmallCap Market based on a failure to comply with the requirements for audited
financial statements. The Company's request for the grant of an exception to the
requirement for audited financial statements until new audited financial
statements were completed was denied by the Nasdaq Listing Qualifications Panel.
Since January 20, 1998, sporadic trading in the Company's Common
Stock has been reported in the over-the-counter-market in the "pink sheets."
The following table sets forth, for the period from March 3, 1997 to
September 2, 1997, the high and low sales prices for the Common Stock on the
Nasdaq SmallCap Market, and from January 20, 1998 through April 9, 1998 as
reported in the over-the-counter market. The prices represent quotations between
dealers, without adjustment for retail markup, mark down or commission, and do
not necessarily represent actual transactions.
COMMON STOCK PRICE
<TABLE>
<CAPTION>
High Low
1997
----
<S> <C> <C>
1st Quarter 5 1/2 4 1/2
2nd Quarter 7 5/8 4 1/4
3rd Quarter 12 1/8 7 1/2
4th Quarter ** **
1998
----
1st Quarter 7 3
- ------------------
** No trading reported.
</TABLE>
The Company has not paid any cash dividends on its Common Stock since
its incorporation and anticipates that, for the foreseeable future, earnings, if
any, will continue to be retained for use in its business. As of March 31, 1998,
the approximate number of record holders of the Company's Common Stock was 12;
however, the Company believes the number of non-objecting beneficial owners is
approximately 150 persons.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of the Company for
each of the periods discussed. This discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and the related
notes thereto, which are included elsewhere in this document.
GENERAL
The Company is a supplier of new and overhauled aircraft parts to
major commercial airlines worldwide. The Company locates, acquires and supplies
parts for all major aircraft. Additionally, the Company engages in consignment
and marketing agreements with major commercial airlines, distributors and OEMs,
which allow the Company to offer a wide range of parts for sale without certain
risks and financing costs associated with owned inventory. The Company was
established in October 1988, incorporated in California in February 1992 and
reincorporated in Delaware in July 1996.
The Company's sales have increased from $21.3 million in 1995, to
$23.9 million in 1996 and $39.0 million in 1997. Of 1995 sales, approximately
$6.5 million resulted from the sale of two whole aircraft (with engines) to
Royal Jordanian Airlines, which is located in the Middle East. Excluding the
whole aircraft transaction, sales in 1995 would have been $14.8 million. If the
opportunity exists, the Company may sell whole aircraft in the future.
OVERVIEW
Net sales consist primarily of gross sales, net of allowance for
returns and other adjustments. Cost of sales consists primarily of product
costs, freight charges and an inventory provision for damaged and obsolete
products. Product costs consist of the acquisition costs of the products and
costs associated with repairs, maintenance and certification.
Net sales and gross profit depend in large measure on the volume and
timing of sales orders received during the period and the mix of aircraft parts
contained in the Company's inventory. The timing of bulk inventory purchases can
impact sales and gross profit. In general, bulk inventory purchases allow the
Company to obtain large inventories of aircraft parts at a lower cost than can
ordinarily be obtained by purchasing such parts on an individual basis. Thus,
these bulk purchases allow the Company to seek larger gross margins on its sale
of aircraft parts since the cost of purchase is reduced.
Sales can be impacted by marketing and consignment agreements because
such agreements give the Company increased access to aircraft parts. Net profits
are impacted by marketing agreements because the Company does not incur costs
associated with carrying owned inventory due to the fact that a party who has
entered into a marketing agreement with the Company is responsible for storing
and maintaining the inventory to which the Company has access pursuant to such
marketing agreement. Generally, sales from consignment and marketing agreements
are not as profitable as sales from bulk inventory purchases.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain information relating to the Company's
operations for the years ended December 31, 1996 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1997
(RESTATED)
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net distributed services and inventory sales $22,427 94.0 % $37,851 97.1%
Net sales on consignment and marketing agreements 1,428 6.0 % 1,113 2.9%
------------- ------------- ------------- -------------
Net sales 23,855 100.0 % 38,964 100.0%
Cost of sales 18,428 77.3 % 29,609 76.0%
------------- ------------- ------------- -------------
Gross profit 5,427 22.7 % 9,355 24.0%
Selling and administrative expenses 5,324 22.3 % 6,528 16.8%
Non recurring expenses - 0.0 % 968 2.5%
Legal settlement expenses 1,375 5.8 % 1.6%
620
------------- ------------- ------------- -------------
Income (loss) from operations (1,272) (5.3)% 1,239 3.2%
Interest expense, net 706 3.0 % 821 2.1%
Extraordinary item 98 0.4 % - 0.0%
Net income (loss) (1,566) (6.6)% 404 1.0%
</TABLE>
NET DISTRIBUTED SERVICES AND INVENTORY SALES. Net distributed services
represents sales of aircraft parts purchased at the point of sale through
outside parties. Inventory sales represent sales of the Company's owned
inventory. Net distributed services and inventory sales increased from $22.4
million for the year ended December 31, 1996 to $37.9 million for the year ended
December 31, 1997, an increase of $15.5 million or 69.2%. This increase was
primarily the result of the additional capital availability in 1997 from both
the initial public offering of 1,380,000 shares and the subsequent increase in
the Company's available line of credit from $6.5 million to $15.0 million. This
new capital allowed the Company to react more quickly to order requests and the
ability to locate and purchase the parts needed to fulfill these orders. In
addition, the general growth in the industry, the emphasis on broadening
relationships with existing domestic customers, and the development of both new
domestic and international customers, and the availability of additional parts
from the Company's own inventory contributed to the significant sales increase
from 1996.
Sales from distributed services represented approximately 92.7% and
79.7% of total distributed services and inventory sales for the years ended
December 31, 1996 and 1997, respectively. Sales of the Company's owned inventory
represented approximately 7.3% and 20.3% of total distributed services and
inventory sales for the years ended December 31, 1996 and 1997, respectively.
This increase is primarily a result of the Company's efforts to purchase bulk
inventory. The Company also has made an effort to pursue larger transactions,
such as sales of engines, cowls and fan reversers, which contributed $6.6
million of net distributed services and inventory sales for 1997 as compared to
$1.9 million in 1996.
NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on consignment and
marketing agreements represent revenue, including commission, from sales of
inventory held on consignment and sales of inventory obtained through marketing
agreements with larger airlines. These types of sales decreased from $1.4
million for the year ended December 31, 1996 to $1.1 million for the year ended
December 31, 1997, a decrease of $300,000 or 21.4%. The decrease was a result of
management's decision to terminate a consignment agreement and a marketing
agreement during 1997.
NET SALES. Net sales increased from $23.9 million for the year ended December
31, 1996 to $39.0 million for the year ended December 31, 1997, an increase of
$15.1 million or 63.2%. This increase has been discussed above in both the
distributed services and inventory sales, offset by the decrease in net sales on
consignment and marketing agreements. See "Net distributed services and
inventory sales" and "Net sales on consignment and marketing agreements."
12
<PAGE>
The sales by region data presented below should be read in
conjunction with the Consolidated Financial Statements, including the Notes
thereto included elsewhere in this document. The following data consists of
sales by region for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
Area Restated
- ------------------------------ --------------- --------------
<S> <C> <C>
Pacific Rim 20.2% 19.5%
Europe 22.2% 21.2%
Latin/South America 11.1% 12.0%
Africa/Middle East 6.8% 3.8%
Domestic 39.7% 43.5%
--------------- --------------
Total 100.0% 100.0%
--------------- --------------
--------------- --------------
</TABLE>
For the year ended December 31, 1996, 60.3% of the Company's sales were to
international customers compared to 56.5% for the year ended December 31,
1997. The decrease in the percentage of the Company's sales to international
customers was primarily due to the Company's emphasis on developing new
domestic customers. The Company expects that international sales will
continue to account for a significant portion of total sales, although the
percentage may fluctuate from year to year.
COST OF SALES. Cost of sales increased from $18.4 million for the year ended
December 31, 1996 to $29.6 million for the year ended December 31, 1997, an
increase of $11.2 million or 60.9%. This increase was primarily the result of
the 63.2% increase in net sales discussed above. As a percentage of net
sales, cost of sales decreased from 77.3% in 1996 to 76.0% in 1997 due to
improved pricing on inventory parts during 1997 as a result of bulk inventory
purchases and certain large transactions that had high gross margins. See
"Distributed services and inventory sales."
GROSS PROFIT. Gross profit increased from $5.4 million, or 22.7% of net sales
for the year ended December 31, 1996 to $9.4 million or 24.0% of net sales
for the year ended December 31, 1997. The gross profit margin primarily
increased as a result of bulk inventory purchases during 1997 and certain
large transactions that had high gross margins. See "Overview" and "Cost of
sales."
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of management compensation, professional fees, consulting
expense and travel expense. The Company's selling and administrative expenses
increased from $5.3 million for the year ended December 31, 1996 to $6.5
million for the year ended December 31, 1997, an increase of $1.2 million or
22.6%. This increase in expenditures for the year ended December 31, 1997
principally reflects higher personnel costs necessary to respond to the
Company's growth, including salaries, taxes, insurance and commission
expenses. As a percentage of net sales, general and administrative expenses
decreased from 22.3% for the year ended December 31, 1996 to 16.8% of net
sales for the year ended December 31, 1997 primarily due to economies of
scale achieved because of higher sales.
NONRECURRING EXPENSES. In 1997, the Company incurred $968,000 of expenses
related to its investigation of allegations concerning its previously issued
financial statements, restatement of those financial statements, class action
lawsuits and investigations by a Federal grand jury and the Securities and
Exchange Commission. See "Item 3 - Legal Proceedings". These expenses
primarily consist of legal, accounting and consulting fees. The amount
charged to operations for compensation to plaintiffs in settlement of the
class action suits was charged to legal settlement expenses (see below).
LEGAL SETTLEMENT EXPENSES. A legal settlement expense was recorded in the
third quarter of 1996 due to settlement negotiations relating to an action
that was brought against the Company, its wholly owned subsidiary, ADI
Consignment Sales, Inc. ("ADICSI"), and Mr. Bakhit in February 1996. The
action arose out of a consignment agreement between ADICSI and the customer
whereby ADICSI agreed to hold certain aircraft parts inventory of such
customer on consignment for sale. The complaint generally alleged causes of
action arising out of breach of contract and fraud. All of the claims
asserted in the lawsuit by the customer were dismissed pursuant to a
settlement agreement executed in November 1996 by all of the parties to the
litigation. In August 1996, the Company made a partial settlement payment to
the customer of $166,000, which was accrued during December 1995 in
accounts payable for aircraft parts purchased during 1995 under the contract.
Although the Company believed it had meritorious defenses to this dispute,
counsel advised the Company that final judicial resolution of such matter
could take several years. Consequently, in order to prevent future strain on
the Company's financial and human resources necessary to defend this dispute,
to avoid the uncertainties associated with litigation generally and to pursue
the Company's initial public offering in a timely manner, the Company made a
strategic business decision to resolve this dispute and in November 1996
entered into a settlement agreement with such customer, pursuant to which the
13
<PAGE>
Company paid $1.2 million. The Company incurred approximately $175,000 of
legal expenses related to this contract dispute as of December 31, 1996.
In October 1997, the Company, its founder, its directors, certain
officers, a former officer and director, its former auditor and its
underwriter were named as defendants in three civil suits filed as class
actions on behalf of individuals claiming to have purchased ADI Common Stock
during the period from March 1997 to September 1997. See "Item 3 - Legal
Proceedings."
In April 1998, the Company entered into a settlement in principal that
is memorialized in a Memorandum of Understanding (the "M.O.U.") with counsel
for the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock,
of which the Company will issue 80,000 shares and the Company's founder,
Osamah S. Bakhit will contribute 130,000 shares. Included in legal settlement
expense for the year ended December 31, 1997 is a $620,000 charge, of which
$480,000 is attributable to the issuance of 80,000 shares of common stock and
$140,000 represents the Company's portion of the cash portion of the
settlement.
INCOME (LOSS) FROM OPERATIONS. As a result of the above factors, income from
operations for the year ended December 31, 1997 increased $2.5 million
compared to the year ended December 31, 1996 as restated. The increase
primarily reflects the increase in net sales and gross profit realized during
1997, somewhat offset by the non recurring expenses discussed above. Income
from operations for the year ended December 31, 1997, excluding the
non-recurring expenses and the legal settlement expense, was $2.8 million, an
increase of $4.1 million. This increase primarily would have been a result of
the increase in gross profit of $3.9 million. See "Gross profit," "Non
recurring expenses" and "Legal settlement expense."
INTEREST EXPENSES, NET. Net interest expense increased from $706,000, or 3.0%
of net sales for the year ended December 31, 1996 to $821,000, or 2.1% of net
sales for the year ended December 31, 1997. The increase in interest expense
is due to an increase in borrowings under the Company's line of credit and
notes to corporations secured by inventory.
EXTRAORDINARY ITEM. During 1996, the Company extinguished a note payable
early and realized an extraordinary gain of $98,000, net of $67,000 in income
taxes.
NET INCOME (LOSS). Net income (loss) increased from $(1.6) million for the
year ended December 31, 1996 to $404,000 for the year ended December 31,
1997, an increase of $2.0 million. Net income for the year ended December 31,
1997, excluding the non-recurring expenses and the legal settlement expense,
would have been approximately $1.4 million, an increase of approximately $3.0
million. This increase is attributable to the increase in gross profit,
somewhat offset by the increase in selling and administrative expenses and
the increase in interest expenses noted above. See "Gross profit," "Selling
and administrative expenses," and "Interest expenses, net."
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From inception to 1995, the Company was financed primarily with its cash
flow from operations and financing activities. The Company had cash and cash
equivalents of $17,000 and $80,000 as of December 31, 1996 and 1997,
respectively. The Company had restricted cash of $64,000 and $1.1 million as
of December 31, 1996 and 1997, respectively.
The Company's operating activities used $1.6 million in 1996 and $7.7
million in 1997, principally related to increases in inventories and, in
1997, increases in accounts receivable from sales growth and extended sales
terms.
In 1996, net cash used in investing activities was $39,000, with a
reduction in restricted cash largely offset by purchases of property and
equipment. In 1997, investing activities used $304,000, consisting of a $1.0
million increase in restricted cash and $323,000 of equipment purchases, net
of $1.0 million of cash proceeds from the sale of the Company's former
corporate headquarters facility.
Financing activities provided cash of $834,000 in 1996 and $8.0 million
in 1997. Net increases in line of credit borrowings were $915,000 and $3.7
million, respectively. In 1997, the Company raised $5.3 million in its
initial public offering and had a $923,000 net increase in long-term debt.
Restricted cash was required for letters of credit issued to certain
vendors. As of December 31, 1997 the Company had working capital of $4.8
million.
The Company's Credit Facility provides for working capital loans of up
to $15.0 million with interest at the Bank of New York Alternate Base Rate
(8.5 percent at December 31, 1997) plus one percent subject to an
availability calculation based on the eligible borrowing base. The eligible
borrowing base includes certain receivables and inventories of the Company.
The terms of the credit agreement provide for a facility non-use fee of 0.75%
per annum of the difference between the facility amount and the average
monthly balance. The Credit Facility matures on June 25, 2000.
BNY Financial Corporation has a fully perfected security interest
against all assets of the Company, except restricted cash, in addition to a
personal guarantee from the Company's founder and secured by 1 million shares
of common stock pledged by the Company's founder.
The Credit Facility provides for the repayment of all debt and/or
termination of the Credit Facility (i) in the event the Company voluntarily
files under the federal bankruptcy laws or fails to dismiss, within 30 days,
any petition filed against it in any involuntary case under such bankruptcy
laws, (ii) if the lender believes the prospect of payment or performance of
the indebtedness is impaired, or (iii) upon a change of control. The $15.0
million Credit Facility has certain financial covenants that require the
Company to have a tangible net worth of at least $4.5 million beginning June
30, 1997, to not make capital expenditures in any fiscal year in an amount in
excess of $750,000, the ratio of EBITDA of the Company excluding interest
income less taxes paid to all cash interest expenses of the Company plus all
principal payments made by the Company to be less than two to one, and shall
not at any time at the end of any month permit its working capital to be less
than $4.0 million.
As of December 31, 1997, the Company was in default on certain
covenants. The financial institution has given the Company a waiver of the
covenants that were in default and modified certain covenants for 1998. The
covenants have been modified to require the Company to have a tangible net
worth of not less than $3 million at December 31, 1998, and that tangible net
worth shall increase by $250,000 per quarter starting in 1998. Additionally,
the EBITDA covenant has been amended to exclude certain fees and charges that
the Company may incur on separately financed transactions with Bank of New
York.
The Company's long-term debt consists of the following: (i) note
payable of $3.1 million at December 31, 1997 to a financial institution, due in
monthly installments of $166,250 (principal and interest) to August 1999 with an
interest rate of 9.5 percent; (ii) note payable of $2.6 million at December 31,
1997 to a corporation, secured by specific inventory, due in monthly
installments of $128,000 (principal and interest) to November 1999, with an
imputed interest rate of 9.5 percent; (iii) note payable of $18,000 at December
31, 1997 to a corporation, secured by an automobile, due in monthly installments
of $485(principal and interest) to July 2001, with an interest rate of 8.15
percent; (iv) note payable of $7,000 as of December 31, 1997 to a corporation,
secured by equipment, due in monthly installments of $347 (principal and
interest) to February 2000, with an interest rate of 24 percent.
Subsequent to December 31, 1997 the Company obtained an additional
borrowing facility from BNY Financial Corporation, in the form of a
$2,342,000 secured promissory note payable, to finance the purchase of an
aircraft engine. The note is to be paid in two installments of $1,600,000 on
March 17, 1998 and $742,000 on April 27, 1998. The Company paid only
$1,288,000 of the first installment and incurred a $100,000 default penalty.
This note is also secured by the 1 million shares of common stock
15
<PAGE>
pledged on the Credit Facility by the Company's founder and collateralized by
the equipment acquired. The note bears interest at Prime plus three percent
plus other fees and has covenants and conditions similar to the Credit Facility
and cross defaults with the Credit Facility.
In 1997, the Company and certain of its current and former officers and
directors were named as defendants in three class action lawsuits. In April
1998, the Company entered into a Memorandum of Understanding to settle the
lawsuits. The Company's estimated cost of settlement, totaling $620,000, was
charged to Legal Settlement Expense in 1997. See "Item 3 - Legal Proceedings."
The Company's operations are financed under a credit facility with BNY
Financial Corporation, a subsidiary of the Bank of New York. This facility
is an asset based line of credit secured by account receivable and inventory
and is the primary source for the Company to finance its operations and
growth. Because of the non-recurring costs associated with the re-auditing of
the Company's financial statements and the ongoing federal investigations,
the Company has used its asset base to meet these obligations. As a result,
the Company may need to increase its capital base in order to continue to
meet its growth objectives. There can be no assurance that such additional
capital will be available on a timely basis or at acceptable terms.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item
13.
17
<PAGE>
AVIATION DISTRIBUTORS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants............................ F-2
Consolidated Balance Sheets as of December 31, 1996 (Restated) and 1997....... F-3
Consolidated Statements of Operations for the Years ended December 31, 1996
(Restated) and 1997......................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996 (Restated) and 1997....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996
(Restated) and 1997......................................................... F-6
Notes to Consolidated Financial Statements.................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Aviation Distributors, Inc.
We have audited the accompanying consolidated balance sheets of AVIATION
DISTRIBUTORS, INC. (a Delaware corporation) as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aviation
Distributors, Inc. as of December 31, 1996 and 1997, and the consolidated
results of its operations and its consolidated cash flows for the years then
ended in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Irvine, California
April 2, 1998 (except for Note 8, as
to which the date is April 20, 1998)
F-2
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
RESTATED
ASSETS 1996 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 16,985 $ 80,218
Restricted cash................................ 63,458 1,103,444
Accounts receivable, net of allowance for
doubtful accounts of $410,500 and $300,000
at December 31, 1996 and 1997, respectively... 4,390,479 7,875,366
Other receivables.............................. 66,272 216,956
Inventories, net of reserve.................... 2,866,756 9,384,573
Prepaid expenses ............................. 69,724 344,283
Income tax receivable.......................... - 392,979
Current portion of notes receivable............ 1,615,528 1,781,172
Notes receivable from founder.................. 408,718 408,718
Deferred tax asset............................. 386,000 293,000
----------- -----------
Total current assets...................... 9,883,920 21,880,709
----------- -----------
PROPERTY AND EQUIPMENT................................. 1,784,853 1,030,100
Less - accumulated depreciation................ 278,686 337,908
----------- -----------
1,506,167 692,192
----------- -----------
Notes receivable, net of current portion................ 3,056,855 1,272,071
Other assets............................................ 167,797 179,512
----------- -----------
3,224,652 1,451,583
----------- -----------
$14,614,739 $24,024,484
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Checks issued not yet presented for payment.....$ 530,440 $ 984,031
Accounts payable................................ 2,844,798 2,882,044
Accrued liabilities............................. 377,044 770,432
Lines of credit................................. 5,583,475 9,289,188
Current portion of long-term debt............... 3,066,540 3,133,352
Current portion of capital lease obligations.... 18,867 19,698
----------- -----------
Total current liabilities.................. 12,421,164 17,078,745
----------- -----------
Long-term debt, net of current portion.................. 3,985,205 2,582,826
----------- -----------
Capital lease obligations, net of current portion....... 34,372 14,674
----------- -----------
Other long-term liability............................... - 480,000
----------- -----------
Deferred tax liability.................................. 86,000 93,000
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value of $.01, 3,000,000
shares authorized; none issued and outstanding. - -
Common stock, par value of $.01, 10,000,000
shares authorized; 1,785,000 and 3,165,000
shares issued and outstanding at December 31,
1996 and 1997, respectively.................... 17,850 31,650
Additional paid in capital...................... 389,150 5,658,099
Accumulated deficit............................. (2,319,002) (1,914,510)
----------- -----------
Total stockholders' equity (deficit)....... (1,912,002) 3,775,239
----------- -----------
$14,614,739 $24,024,484
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
RESTATED
1996 1997
---- ----
<S> <C> <C>
DISTRIBUTED SERVICES AND INVENTORY SALES.... $22,427,254 $37,851,114
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS....................... 1,428,117 1,112,845
----------- -----------
TOTAL NET SALES............................. 23,855,371 38,963,959
COST OF SALES............................... 18,428,269 29,608,994
----------- -----------
Gross profit...................... 5,427,102 9,354,965
SELLING AND ADMINISTRATIVE EXPENSES......... 5,324,772 6,528,256
LEGAL SETTLEMENT EXPENSE.................... 1,375,000 620,000
NON RECURRING EXPENSES...................... - 968,052
----------- -----------
Income (loss) from operations..... (1,272,670) 1,238,657
OTHER (EXPENSES) INCOME:
Interest expense.................. (1,260,244) (1,255,483)
Interest income................... 554,262 434,290
Gain (loss) on sale of asset...... (48,898) 79,772
Other income...................... 60,643 38,256
----------- -----------
Income (loss) before provision
for (benefit from) income taxes.. (1,966,907) 535,492
PROVISION FOR (BENEFIT FROM) INCOME TAXES... (303,000) 131,000
----------- -----------
Net income (loss)
before extraordinary item........ (1,663,907) 404,492
EXTRAORDINARY ITEM - gain on early
extinguishment of debt, net of
applicable income tax of $66,836........... 98,164 -
----------- -----------
NET INCOME (LOSS)................. $(1,565,743) $ 404,492
----------- -----------
----------- -----------
Basic net income (loss) per share:
Income (loss) before extraordinary
item............................ $ (0.93) $ 0.14
Extraordinary item................ 0.05 -
----------- -----------
Basic net income (loss) per share. $ (0.88) $ 0.14
----------- -----------
----------- -----------
Diluted net income (loss) per share:
Income (loss) before extraordinary
item............................ $ (0.93) $ 0.14
Extraordinary item................ 0.05 -
----------- -----------
Diluted net income (loss) per
share........................... $ (0.88) $ 0.14
----------- -----------
----------- -----------
Basic weighted average shares outstanding... 1,785,000 2,910,000
Effect of dilutive stock options............ - 43,108
----------- -----------
Diluted weighted average shares outstanding. 1,785,000 2,953,108
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
NUMBER PAID ACCUMULATED EQUITY
OF SHARES AMOUNT IN CAPITAL DEFICIT (DEFICIT)
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996
as previously reported........ 1,785,000 $ 17,850 $ 389,150 $ (253,994) $ 153,006
Prior period adjustment....... - - - (499,265) (499,265)
--------- -------- ---------- ----------- ----------
Balance at January 1, 1996
as restated................... 1,785,000 17,850 389,150 (753,259) (346,259)
Net loss...................... - - - (1,565,743) (1,565,743)
--------- -------- ---------- ----------- ----------
Balance at December 31, 1996.... 1,785,000 17,850 389,150 (2,319,002) (1,912,002)
Initial public offering........ 1,380,000 13,800 5,268,949 - 5,282,749
Net income.................... - - - 404,492 404,492
--------- -------- ---------- ----------- ----------
Balance at December 31, 1997.... 3,165,000 $ 31,650 $5,658,099 $(1,914,510) $3,775,239
--------- -------- ---------- ----------- ----------
--------- -------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
RESTATED
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ (1,565,743) $ 404,492
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary item - gain on early extinguishment of debt.. (165,000) -
Principal payments on note receivable ..................... 1,462,332 1,619,140
Borrowings on notes payable related to inventory purchases. 1,145,029 3,730,175
Principal payments on notes payable
related to inventory purchases........................... (2,237,332) (3,365,506)
Reduction in amount due on notes payable
related to inventory purchases........................... (616,105) -
Legal settlement........................................... 1,200,000 (80,000)
Principal payments on note payable
related to legal settlement.............................. (300,000) (820,000)
Loss (gain) on sale of property and equipment.............. 48,898 (79,772)
Depreciation and amortization.............................. 231,209 281,550
Changes in assets and liabilities:
Accounts receivable, net.............................. (261,815) (3,484,887)
Other receivables..................................... 75,015 (150,684)
Inventories........................................... (629,860) (6,517,817)
Prepaid expenses...................................... (18,024) (274,559)
Income tax receivable................................. - (392,979)
Deferred tax asset.................................... (360,808) 93,000
Other assets.......................................... (142,666) (11,715)
Checks issued not yet presented for payment........... (44,448) 453,591
Accounts payable...................................... 468,793 37,246
Accrued liabilities................................... 6,211 393,388
Other long term liability............................. - 480,000
Deferred tax liability................................ 57,808 7,000
------------ -----------
Net cash used in operating activities.......... (1,646,506) (7,678,337)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (196,857) (376,398)
Proceeds from the sale of property and equipment.............. - 1,112,050
Borrowings given on note receivable from founder.............. (80,000) -
Decrease (Increase) in restricted cash........................ 237,717 (1,039,986)
------------ -----------
Net cash used in investing activities........... (39,140) (304,334)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit................................. 21,359,968 43,103,511
Principal payments on lines of credit......................... (20,444,277) (39,397,798)
Borrowings on long-term debt.................................. - 519,800
Principal payments of long-term debt.......................... (54,602) (1,443,491)
Principal payments of capital lease obligations............... (26,179) (18,867)
Net proceeds from initial public offering..................... - 5,282,749
------------ -----------
Net cash provided by financing activities....... 834,910 8,045,904
------------ -----------
Net increase (decrease) in cash and cash equivalents.............. (850,736) 63,233
Cash and cash equivalents at beginning of period.................. 867,721 16,985
------------ -----------
Cash and cash equivalents at end of period........................ $ 16,985 $ 80,218
------------ -----------
------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................... $ 1,156,696 $ 1,323,206
------------ -----------
------------ -----------
Income taxes............................................... $ 20,000 $ 399,203
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Aviation Distributors, Inc. ("ADI") and its subsidiary (the "Company")
established operations in 1988, incorporated in the state of California in
1992 and reincorporated in the state of Delaware in 1996. The Company is a
supplier, distributor and broker of commercial aircraft parts and supplies.
The Company's customers are located worldwide.
For the years ended December 31, 1996 and 1997, approximately 60.3% and 56.5%
respectively, of the Company's net sales were export sales. These export
sales by region were approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
RESTATED
1996 1997
---- ----
<S> <C> <C>
Pacific Rim............................................... 20.2% 19.5%
Europe.................................................... 22.2 21.2
Latin/South America....................................... 11.1 12.0
Africa/Middle East........................................ 6.8 3.8
---- ----
60.3% 56.5%
---- ----
---- ----
</TABLE>
ACCOUNTING 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary ADI Consignment and Sales, Inc.
The Company's subsidiary is a non-operating entity; therefore, there were no
significant intercompany transactions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
less than 90 days to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of short-term certificates of deposits held as
security for letters of credit issued on behalf of the Company by financial
institutions. (See note 9)
INVENTORIES
Inventories, which consist primarily of aircraft parts, are stated at the
lower of cost or market with cost determined on a specific identification or
first-in, first-out basis. Expenditures required for the rectification of
parts are capitalized as inventory cost as incurred and are expensed with
cost of sales as the parts are sold. Inventory received from a vendor in
exchange for Company owned inventory is recorded at the historical cost of
the items surrendered, after any necessary reduction for impairment.
Inventory received in settlement of receivables is recorded at the lower of
the receivable balance or the fair value of the items received.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation expense is provided
using the straight-line method over the useful lives of the assets, ranging
from five to thirty years. Expenditures for repairs and maintenance are
expensed as incurred. Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are capitalized. The
carrying amounts of assets sold or retired are removed from their accounts in
the year of disposal, and any resulting gain or loss is reflected in
operations.
F-7
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REINCORPORATION
On July 12, 1996, the Company reincorporated in the State of Delaware,
increasing its authorized number of shares of Common Stock to 10,000,000,
$.01 par value, and increasing the number of shares of Common Stock
outstanding to 2,100,000. All share and per share data have been
retroactively restated in the accompanying financial statements to give
effect to the above items.
Effective July 12, 1996, the Company also authorized the issuance of up to
3,000,000 shares of Preferred Stock, $.01 par value. No Preferred Stock
has been issued.
STOCK SPLIT
In 1996, the Company effected a .85 for one stock split. All share and per
share data reflects this stock split.
FINANCIAL INSTRUMENTS
At December 31, 1997 and 1996, the carrying value of the Company's financial
instruments (cash and cash equivalents, accounts receivable, notes
receivable, lines of credit, other liabilities due in less than one year and
notes payable) approximated their fair values due to the relatively short
maturity of the instruments or because the interest rates on the instruments
are comparable to market rates.
REVENUE RECOGNITION
Sales of aircraft parts are recognized as revenues when the product is
shipped and title has passed to the customer. The Company provides an
allowance for estimated product returns. Distributed services sales represent
sales of aviation parts obtained from outside sources at the point of sale,
whereas inventory sales represent sales from Company owned inventory. Net
sales on consignment and marketing agreements represent revenue related to
inventories owned by others in which the Company has entered into exclusive
marketing and/or consignment agreement to sell the third party parts.
INCOME TAXES
The Company accounts for income taxes using the liability method prescribed
by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes."
BASIC AND DILUTED NET INCOME (LOSS) PER SHARES
Net income (loss) per share is calculated in accordance with Statement of
Financial Accounting Standards (SFAS), No. 128, "Earnings per Share", which
supersedes APB Opinion No. 15, "Earnings per Share". Net income (loss) per
share for all periods presented has been restated to reflect the adoption of
SFAS 128. Basic net income (loss) per share is based upon the weighted
average number of common shares outstanding. Diluted net income (loss) per
share is based on the assumption that all convertible shares and stock
options were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, options and warrants are assumed to
be exercised at the beginning of the period (or at the time of issuance, if
later), and as if funds obtained thereby were used to purchase common stock
at the average market price during the period.
STOCK BASED COMPENSATION
Effective January 1, 1996 the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 provides for companies to recognize
compensation expense associated with stock-based compensation plans over the
anticipated service period based on the fair value of the award on the date
of grant. However, SFAS No. 123 allows companies to continue to measure
compensation costs prescribed by Accounting Principles Board Opinion ("APB")
No. 25 "Accounting for Stock Issued to Employees." Companies electing to
continue accounting for stock-based compensation plans under APB No. 25 must
make pro forma disclosures of net income and earnings per share as if SFAS
No. 123 has been adopted if the fair value of the options has material impact
on earnings. The Company has continued to account for stock-based
compensation plans under APB No. 25. The impact of applying SFAS No. 123 in
1996 and 1997 is immaterial to the financial statements of the Company.
F-8
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which prescribes standards for reporting
comprehensive income and its components. Comprehensive income consists of net
income or loss for the current period and other comprehensive income (income,
expenses, gains and losses that currently bypass the income statement and are
reported directly in a separate component of equity). SFAS 130 is effective
for financial statements issued for periods beginning after December 15,
1997. The Company has determined that the adoption of SFAS 130 will not have
a material effect on the Company's financial statements.
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
applies only to publicly held business entities. A reportable segment,
referred to as an operating segment, is a component of an entity about which
separate financial information is produced internally, that is evaluated by
the chief operation decision-maker to assess performance and allocate
resources. SFAS 131 is effective for financial statements issued for periods
beginning after December 15, 1997. The Company has determined that the
adoption of SFAS 131 will not have a material effect on the Company's
financial statements.
NOTE 2 - RESTATEMENT OF 1996 FINANCIAL STATEMENTS:
The Company has restated its previously issued 1996 consolidated financial
statements for matters related to: previously reported sales and accounts
receivables, inventory costs and valuation reserves, revisions to the previous
policy regarding the capitalization of costs associated with the bulk purchase
of inventory, correction of prior accounting for capitalization of bulk purchase
and certain other costs, correction in the accounting for the gain on early
extinguishment of debt, unrecorded liabilities, additional bad debt expenses and
the related income tax effects. Retained earnings at January 1, 1996, was
reduced by $499,265 as a result of adjustments to sales previously reported and
previously unrecorded liabilities in 1995.
The following is a summary of the restatements for 1996:
<TABLE>
<S> <C>
1. Reduction of previously reported sales, net of related cost of sales............ $ 788,358
2. Inventory cost adjustments and increase
to inventory valuation reserves................................................. 309,855
3. Changes to accounting policy regarding
capitalization of costs incurred with the
bulk purchase of inventory...................................................... 243,406
4. Corrections in accounting for capitalization
of bulk purchase and certain other costs and
gain from early extinguishment of debt transaction.............................. 341,136
5. Increase in reserves for returns and
allowances...................................................................... 115,534
6. Unrecorded liabilities.......................................................... 146,655
7. Additional bad debt expenses.................................................... 280,500
----------
Subtotal.................................................... 2,225,444
Income tax effect of restatement........................................... (344,464)
----------
Total reduction in 1996 net earnings........................ $1,880,980
----------
----------
</TABLE>
F-9
<PAGE>
NOTE 2 - RESTATEMENT OF 1996 FINANCIAL STATEMENTS (CONTINUED):
The effect on the Company's previously issued 1996 financial statements are
summarized as follows:
Balance Sheet as of December 31, 1996:
<TABLE>
<CAPTION>
PREVIOUSLY INCREASE
REPORTED (DECREASE) (RESTATED)
---------- ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Current Assets.................................... $12,298 $(2,414) $ 9,884
Other Assets...................................... 247 (79) 168
Total Assets...................................... 17,108 (2,493) 14,615
Total Current Liabilities......................... 12,569 (148) 12,421
Deferred Tax Liability............................ 51 35 86
Total Liabilities................................. 16,640 (113) 16,527
Stockholders' Deficit:
----------------------
Accumulated Deficit-1995.......................... (254) (499) (753)
Net Income (Loss)................................. 315 (1,881) (1,566)
------- ------- -------
Accumulated Deficit-1996.......................... 61 (2,380) (2,319)
------- ------- -------
------- ------- -------
Total Liabilities and Stockholders' Deficit....... $17,108 $(2,493) $14,615
</TABLE>
Statement of Operations for the year ended December 31, 1996:
<TABLE>
<S> <C> <C> <C>
Total Net Sales................................... $24,871 $(1,016) $23,855
Cost of Sales..................................... 18,162 266 18,428
Gross Profit...................................... 6,709 (1,282) 5,427
Selling and Administration Expenses............... 4,486 838 5,324
Income (Loss) from Operations..................... 848 (2,121) (1,273)
Interest Expense.................................. 1,187 73 1,260
Income before taxes and
extraordinary item................................ 227 (2,194) (1,967)
Provision for (Benefit from) taxes................ 42 (345) (303)
Income (Loss) before
extraordinary item................................ 185 (1,849) (1,664)
Extraordinary Item................................ 130 (32) 98
Net Income (Loss)................................. 315 (1,881) (1,566)
Net Income (Loss) Per Share.................. $ 0.18 $ (1.06) $ (.88)
</TABLE>
F-10
<PAGE>
NOTE 3 - NOTES RECEIVABLE FROM FOUNDER:
Mr. Osamah S. Bakhit is the founder of the Company and is currently a consultant
for the company. The Company loaned $328,718 to Mr. Bakhit in December 1995 and
$80,000 in December 1996. The loans are in the form of notes, bearing interest
at 6%, payable in quarterly installments aggregating $102,180. Interest on the
notes has been paid through June 1997 and the Board of Directors of the Company
has approved the deferral of principal and interest payments until December 31,
1998.
NOTE 4 - AIRCRAFT TRANSACTIONS:
During 1995, the Company purchased commercial aircraft and engines which were
subsequently sold in exchange for a note receivable (see Note 6) secured by an
irrevocable letter of credit provided by the customer. The Company purchased the
aircraft through proceeds from a note payable (see Note 9) to a financial
institution which is secured by the customer note receivable (see Note 14).
NOTE 5 - ACCOUNTS RECEIVABLE:
The Company distributes products in the United States and abroad to commercial
airlines, air cargo carriers, distributors, maintenance facilities and other
aerospace companies. The Company's credit risk consists of accounts receivable
denominated in U.S. dollars from customers in the aircraft industry. The Company
performs periodic credit evaluations of its customers' financial condition and
provides an allowance for doubtful accounts as required. The Company, at times,
offers extended payments terms of up to one year on its receivables.
NOTE 6 - NOTES RECEIVABLE:
Notes receivable consist of the following:
<TABLE>
<CAPTION> DECEMBER 31,
------------------------------------
1996 1997
---- ----
<S> <C> <C>
Notes receivable from a corporation, secured by an Irrevocable Letter of Credit,
due in monthly installments of $166,250 (principal and interest) to August
1999 with an interest rate of 9.5 percent (see Notes 4 and 9) ..................... $4,672,383 $3,053,243
Less - Current portion .............................................................. 1,615,528 1,781,172
---------- ----------
$3,056,855 $1,272,071
---------- ----------
---------- ----------
</TABLE>
NOTE 7 - PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION> DECEMBER 31,
------------------------------------
1996 1997
---- ----
<S> <C> <C>
Computer equipment and software...................................................... $ 292,087 $ 510,775
Furniture and fixtures............................................................... 95,419 266,929
Leasehold improvements............................................................... - 115,783
Machinery and equipment.............................................................. 256,354 91,162
Autos................................................................................ 9,851 45,451
Building............................................................................. 1,131,142 -
---------- ----------
$1,784,853 $1,030,100
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
NOTE 8 - LINES OF CREDIT:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997
---- ----
<S> <C> <C>
Revolving line of credit, interest at the Bank of New York Alternate Base Rate
(8.5 percent at December 31, 1997) plus one percent, due monthly, principal
due June 25, 2000, secured by substantially all of the Company's assets,
except restricted cash; maximum
borrowings are $15,000,000................................................................. $ - $9,289,188
Revolving line of credit, interest at prime rate (8.25 percent at December 31,
1996) plus 1.5 percent, due monthly, principal due March 31, 1997, secured by
substantially all of the Company's
assets, except cash; maximum borrowings were $4,500,000..................................... 3,734,322 -
Revolving line of credit, interest at prime rate (8.25 percent at December 31,
1996) plus one percent, due monthly, principal due August 31, 1997, secured by
substantially all of the Company's assets,
except cash; maximum borrowings were $2,000,000............................................. 1,849,153 -
---------- ----------
$5,583,475 $9,289,188
---------- ----------
---------- ----------
</TABLE>
The Company's current line of credit provides a borrowing facility up to the
lesser of $15,000,000 (facility amount) or the advance rate against qualified
accounts receivable and inventory. Based on the advance rate formula, the
Company was over advanced by $366,461 at December 31, 1997. The borrowing rate
is subject to a premium of 1/2% per annum when the facility is over advanced.
The terms of the credit agreement provide for a facility non-use fee of 0.75%
per annum of the difference between the facility amount and the average monthly
balance. This line of credit is secured by 1,000,000 shares of common stock of
the Company pledged by the Company's founder and personally guaranteed by the
Company's founder.
The credit facility has general financial covenants related to the Company's
financial condition. At December 31, 1997, the Company was in default on
certain covenants. On April 20, 1998, the financial institution issued the
Company a waiver of the covenants that were in default and modified certain
covenants for 1998.
F-12
<PAGE>
NOTE 9 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
RESTATED
1996 1997
---- ----
<S> <C> <C>
Note payable to a financial institution, due in monthly installments of $166,250
(principal and interest) to August 1999, secured by a
note receivable (see Note 6), with an interest rate of 9.5 percent........................ $4,672,383 $3,053,243
Non-interest bearing note payable to a corporation, secured by specific
inventory and $1,000,000 irrevocable letter of credit, due in monthly
installments of $128,194, with a final payment in November 1999 of $71,118,
with an imputed interest rate of 9.5 percent, net of discount of
$253,070 at December 31, 1997.............................................................. - 2,638,317
Note payable to a corporation, secured by an automobile, due in
monthly installments of $485, (principal and interest) to
July 2001, with an interest rate of 8.15 percent............................................ - 17,663
Note payable to a corporation, secured by equipment, due in monthly installments
of $347 (principal and interest) to February 2000, with
an interest rate of 24 percent............................................................... 9,128 6,955
Note payable to a financial institution, secured by a building, due in
adjustable monthly installments of $8,382 as of December 31, 1996, (principal
and interest), to May 1999, with a balloon payment, interest
at Moody's A Bond Index (8.0% at December 31, 1996) plus .125 percent........................ 936,480 -
Note payable to a corporation, due in an installment of $562,500 plus interest
at 10 percent on March 15, 1997 and quarterly installments of $112,500, plus
interest commencing June 15, 1997 to December 15, 1997....................................... 900,000 -
Non-interest bearing note payable to a corporation, secured by specific
inventory, due in semi-annual installments of $125,000 to December 1998, with
an imputed interest rate of 10 percent, net of discount of $154,050. In
December 1996, the parties agreed to reduce the remaining unamortized balance
of this note ($568,600) in exchange for a cash payment of $405,000 resulting
in an extraordinary gain before tax of $165,000............................................. 405,000 -
Non-interest bearing note payable to a corporation, secured by specific
inventory, due in monthly installments to March 1997,
with an imputed interest rate of 10 percent, net of discount of $1,947...................... 126,053 -
Note payable to a corporation, secured by an automobile, due in monthly
installments of $192 (principal and interest) to March 1998, with an
interest rate of 7.9 percent................................................................ 2,701 -
---------- ----------
7,051,745 5,716,178
Less - Current portion........................................................................ 3,066,540 3,133,352
---------- ----------
$3,985,205 $2,582,826
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
NOTE 9 - LONG-TERM DEBT (CONTINUED):
Future annual principal payments on long-term debt at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998........................ $3,133,352
1999........................ 2,573,538
2000........................ 5,984
2001........................ 3,304
----------
$5,716,178
----------
----------
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company leases equipment and facilities under noncancelable operating and
capital leases. As of December 31, 1997, the annual minimum lease commitments
are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, CAPITAL OPERATING
------------ ---------- -----------
<S> <C> <C>
1998........................... $24,108 $ 337,634
1999........................... 13,420 383,027
2000........................... 2,825 382,340
2001........................... - 382,340
2002........................... - 361,199
Thereafter..................... - 737,817
------- ----------
40,353 $2,584,357
----------
----------
Less - Amount representing
interest..................... 5,981
-------
34,372
Less - Current portion......... 19,698
-------
$14,674
-------
-------
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $109,849 and
$123,610, respectively.
The Company supplies certain parts to its customers through various consignment
agreements, under which the Company takes possession of a vendor's inventory and
through exclusive marketing agreements, under which the Company markets the
vendors' inventory, which remains in the vendors possession. These agreements
are generally entered into on a long-term basis. There were no consignment
agreements in effect at December 31, 1997.
The Company neither manufacturers nor repairs aircraft parts and requires that
all of the parts that it sells are properly documented and traceable to their
original source. Although the Company has never been subject to product
liability claims, there is no guarantee that the Company would not be subject to
liability from its potential exposure relating to faulty aircraft parts in the
future. The Company maintains liability insurance to protect from such claims,
but there can be no assurance that such coverage will be adequate to fully
protect the Company from any liabilities it might incur. An insurance loss above
the Company's policy limit could have a material adverse effect upon the
Company's financial condition.
EMPLOYMENT CONTRACTS
The Company has contracts with certain key employees and the Company's founder.
The contracts provide for all normal employee benefits, incentive compensation
under the Executive Incentive Compensation Plan and options to purchase shares
of common stock at an option price of $5 per share. The agreements expire from
December 31, 1999 to December 31, 2001 and will automatically renew for an
additional term ranging from three to five years unless cancelled upon 90 days
written notice.
F-14
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
CLASS ACTION LAWSUITS AND GOVERNMENT INVESTIGATIONS
In August 1997, the Company's former independent auditors withdrew their
previously issued reports on the Company's financial statements for the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996
and resigned as the Company's auditors. These actions were the result of their
investigation of allegations regarding certain of the Company's accounting and
financing practices. The lack of required financial information resulted in the
subsequent halt in trading and delisting of the Company's common stock on the
Nasdaq SmallCap market in September 1997.
In October 1997, three separate class action lawsuits were filed against the
Company, its founder, directors and certain current and former officers and
directors, and others. In February 1998, a motion was approved to consolidate
all three class action lawsuits in Federal court.
In April 1998, the Company entered into a settlement in principle which is
memorialized in a Memorandum of Understanding (the "M.O.U.") with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock,
of which the Company will issue 80,000 shares and the Company's founder,
Osamah S. Bakhit, will contribute 130,000 shares. Included in legal
settlement expense for the year ended December 31, 1997 is a $620,000 charge,
of which $480,000 is attributable to the issuance of 80,000 shares of common
stock and $140,000 represents the Company's portion of the cash consideration.
The settlement is conditioned upon the execution of a definitive settlement
agreement on or before May 1, 1998 and the court's approval of that agreement.
For the agreement to be effected, a certain percentage (to be specified in the
agreement) of shareholders must not have elected to be excluded from the the
terms and conditions of the settlement. The settling plaintiffs may also
withdraw from the settlement if the Company's common shares trade at less than
$5 per share for the ten-day period beginning fifteen days prior to the
settlement hearing.
Both a Federal grand jury and the Securities and Exchange Commission have
commenced investigations into the allegations referred to above. The
investigations are continuing and the Company is unable, at this time, to
evaluate the possible outcome of the investigations or their impact on the
Company.
NOTE 11 - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996 and 1997, activity with respect to the
Company's allowance for doubtful accounts is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING RESTATED
DECEMBER 31, 1996 1997
------------ ---- ----
<S> <C> <C>
Beginning balance......................... $ 48,607 $ 410,500
Charged to expense........................ 518,248 222,713
Amounts written off....................... (156,355) (333,213)
--------- ---------
Ending balance............................ $ 410,500 $ 300,000
--------- ---------
--------- ---------
</TABLE>
NOTE 12 - CONCENTRATION OF CREDIT RISK:
Substantially all of the Company's sales are to airlines, other aircraft
operators and other aircraft parts suppliers. Concentrations of credit risk with
respect to trade accounts receivable are generally diversified due to the large
number of customers and their dispersion worldwide. The Company also performs
credit evaluations on its customers throughout the year. As a result of an
aircraft sale that was taken on terms (see Note 4), the note receivable from one
customer accounted for approximately 12.7 percent and 32.0 percent of total
assets at December 31, 1997 and 1996, respectively.
The Company had two customers that represented 16.9 percent and 12.8 percent of
accounts receivable at December 31, 1997.
F-15
<PAGE>
NOTE 13 - INCOME TAXES:
The components of the provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
RESTATED
1996 1997
---- ----
<S> <C> <C>
Current:
Federal..................................... $ - $ 28,000
State....................................... - 3,000
---------- ---------
- 31,000
---------- ---------
Deferred:
Federal..................................... (257,000) 85,000
State....................................... (46,000) 15,000
---------- ---------
(303,000) 100,000
---------- ---------
$ (303,000) $ 131,000
---------- ---------
---------- ---------
</TABLE>
The reconciliation of income tax expense computed at the U.S. Federal statutory
rate to income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
RESTATED
1996 1997
---- ----
<S> <C> <C>
Tax at U.S. Federal statutory rates............ $ (643,000) $ 173,000
State income taxes, net of federal effect...... (113,000) 31,000
Change in valuation allowance.................. 435,000 (100,000)
Permanent differences.......................... 28,000 33,000
Other, net..................................... (10,000) (6,000)
---------- ---------
$ (303,000) $ 131,000
---------- ---------
---------- ---------
</TABLE>
Deferred income taxes arise as a result of differences in the methods used to
determine income for financial reporting versus income for tax reporting
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
RESTATED
1996 1997
---- ----
<S> <C> <C>
Depreciation.................................... $ (86,000) $ (93,000)
---------- ---------
Gross deferred tax liabilities............... (86,000) (93,000)
---------- ---------
Inventory reserve............................... 75,000 90,000
Allowance for doubtful accounts ................ 165,000 120,000
Operating accruals and capitalized inventory
costs......................................... 84,000 194,000
Legal settlement................................ 361,000 256,000
Net operating loss carryforwards................ 424,000 256,000
---------- ---------
Gross deferred tax assets.................... 1,109,000 916,000
---------- ---------
Deferred tax assets valuation allowance...... (723,000) (623,000)
---------- ---------
$ 300,000 $ 200,000
---------- ---------
---------- ---------
</TABLE>
The Company has a federal net operating loss carryforward of approximately
$637,000, which expires in 2011.
F-16
<PAGE>
NOTE 14 - STOCK BASED COMPENSATION PLANS
On July 10, 1996, the Company adopted the Aviation Distributors, Inc. 1996 Stock
Option and Incentive Plan (the "Plan") which provides for the issuance of up to
a maximum of 264,500 shares of the Company's common stock to employees,
non-employee directors and independent contractors at the sole discretion of the
board of directors. The Plan provides for the issuance of incentive stock
options and non-qualified stock options. Options issued under the Plan may be
accompanied by stock appreciation rights, as defined. Additionally, the Plan
provides for the issuance of restricted stock, dividend equivalents and other
stock and cash based awards and loans to participants in connection with the
options or other plan provisions at the discretion of the board of directors.
On July 16, 1996, the Company's board of directors granted 150,000 options under
the Plan at an exercise price of $7.00 per share (estimated fair market value at
date of grant). On February 28, 1997, the Company's board of directors approved
a resolution changing the exercise price to the offering price of the Common
Stock in the Company's initial public offering, which was $5.00 per share.
The following is a summary of the Company's stock option plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995................. - $ -
Granted.......................................... 150,000 5.00
------- ------
Outstanding at December 31, 1996 ............... 150,000 5.00
Granted.......................................... 30,000 5.00
Forfeited........................................ (16,600) 5.00
------- -----
Outstanding at December 31, 1997 ............... 163,400 $5.00
------- -----
------- -----
</TABLE>
<TABLE>
<CAPTION>
RESTATED
1996 1997
---- ----
<S> <C> <C>
Exercisable at the end of the year............... - 73,723
Weighted average fair value of options granted... $ 0.96 $ 0.96
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants in
1997 and 1996: risk-free rate of 5.5%; no expected dividend yield; and an
expected life of 3 to 4 years.
NOTE 15 - LEGAL SETTLEMENTS
In February 1996, an action was brought against the Company arising out of a
dispute relating to an agreement between the Company and a customer. The
plaintiff claimed, among other things, damages of $3,518,000, interest,
attorney's fees and punitive damages. The Company also filed a counterclaim
against this customer for breach of contract, fraud and negligent
misrepresentation. Although the Company believed it had meritorious defenses to
this dispute, in August 1996, counsel advised the Company that final judicial
resolution of such matter could take several years. Consequently, in order to
pursue an initial public offering in a timely manner, during the third quarter
of 1996 this case was settled for $1.2 million. Included in the legal settlement
expense as of December 31, 1996 is the $1.2 million settlement charge plus
$175,000 of legal costs. During March 1997 the Company paid in full its
obligation under the settlement agreement.
See Note 10 regarding the settlement of 1997 lawsuits.
NOTE 16 - SUBSEQUENT EVENT
In February 1998, the Company obtained an additional borrowing facility, in the
form of $2,342,000 secured promissory note payable, to finance the purchase of
an aircraft engine. The note is to be paid in two installments of $1,600,000 on
March 17, 1998 and $742,000 on April 27, 1998. The Company paid only $1,288,000
of the first installment and incurred a $100,000 default penalty. This note is
secured by the same 1,000,000 shares of common stock pledged on the line of
credit by the Company's founder and collateralized by the equipment acquired.
The note bears interest at Prime plus 3% plus other fees and has covenants and
conditions similar to its working capital credit facility.
F-17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
WITHDRAWAL OF REPORTS ON FINANCIAL STATEMENTS; RESIGNATION OF AUDITOR.
On August 29, 1997, Arthur Andersen LLP, the Company's former independent
auditor (the "Former Auditor") withdrew its previously issued reports on the
Company's financial statements dated December 31, 1994, 1995, and 1996 and
June 30, 1996 (collectively, the "Withdrawn Reports"). The Former Auditor
also resigned on that same date.
In a letter to the Company's Audit Committee, the Former Auditor advised
the Company that it believed that the Company (i) prepared false sales
invoices and provided them to the Company's former bank to obtain financing;
(ii) that the Company prepared false documents and provided them to the
Former Auditor to support the collectibility of accounts receivable balances;
and (iii) that the Company prepared false documents which resulted in
inappropriate recording of sales at December 31, 1996 on orders that had not
been shipped as of that date. The Former Auditor also advised the Company
that it believed that the foregoing matters had a material impact on the
Company's December 31, 1996 financial statements and that they occurred with
the knowledge and involvement of management of the Company. Based on its
beliefs, the Former Auditor was unwilling to continue to rely on management's
representations in connection with its audits of the Company's financial
statements and unwilling to serve as the Company's independent public
accountant.
None of the Withdrawn Reports contained an adverse opinion or disclaimer
of opinion, nor were the Withdrawn Reports qualified or modified as to
uncertainty, audit scope, or accounting principles.
In May 1996, the Former Auditor informed the Company of significant
deficiencies in the design and operation of its internal controls that it had
observed in connection with its audit of the Company's December 31, 1995
financial statements. The Company addressed these deficiencies by hiring a
new Chief Financial Officer and a new Chief Accounting Officer in June 1996,
as well as implementing changes in its internal controls.
In connection with the December 31, 1996 audit, the Former Auditor
proposed an adjustment to the bad debt reserve for $100,000. The matter was
discussed with management and an adjustment was made which satisfied the
Former Auditor, who then issued an unqualified report for that period.
In connection with limited review procedures performed on the quarter
ended March 31, 1997, the Former Auditor became aware of the fact that
certain receivables were collected by accepting inventory from some
customers. These inventory exchanges are non-monetary transactions, which the
Former Auditor believed should not have resulted in the recognition of
revenue and profit on the related original sales. Management of the Company
believed that its recognition policy was in accordance with industry
standards. The Former Auditor proposed an adjustment to reverse the original
profit relating to these exchanges. No amount was recorded in the first
quarter as management believed that it had excess reserves in inventory and
had overaccrued on certain liabilities, which would negate any impact on the
quarterly results.
In connection with limited review procedures performed on the quarter
ended June 30, 1997, the Former Auditor raised issues with respect to (i) a
sale for $240,000 recorded in June 1997 which may not have been shipped until
July 3, 1997, (ii) the level of bad debt and credit memo reserves, which on
the basis of limited testing by the Former Auditor, was believed by it to be
in the range of $125,000 to $250,000 low, and (iii) additional inventory
exchanges recorded in the second quarter. In response to discussions with the
Former Auditor concerning these items, the Company adopted the recommendation
to increase the reserves for bad debts and credit memos to $346,000 and
reversed several excess accrued liabilities and part of its inventory
reserves. The Company also made the adjustment necessary to reverse the
$240,000 sale transaction in question. The Former Auditor expressed
18
<PAGE>
concern that further adjustments may be required upon completion of the
review of the matters addressed in the Letter.
Subsequent to the issuance of the press release by the Company of its
second quarter 1997 results and prior to the Company's filing of its second
quarter 1997 Form 10-Q, which did include known adjustments recommended by
the Former Auditor, the Former Auditor requested and the Company agreed to
delay the filing of a registration statement for a secondary offering until
certain allegations brought to the attention of the Former Auditor were
completely reviewed and evaluated as to the potential impact on the Company's
previously released financial reports.
The Company expressed a concern to the Former Auditor regarding numerous
changes of experienced personnel, including the audit partners, and as to
whether these changes were the cause of increasing audit costs.
The Company authorized the Former Auditor to respond fully to the
inquiries of the successor auditor concerning the subject matter of each of
the foregoing disagreements.
COMMUNICATIONS BETWEEN THE FORMER AUDITOR AND THE COMPANY'S AUDIT
COMMITTEE. On July 24, 1997, the Former Auditor notified an outside director
that it had become aware of information from an informant(s) regarding the
Company's practices, including allegations of falsification of documents
given to the Former Auditor and allegations of improper financial reporting
and, based upon a limited procedural review, the Former Auditor reiterated
its concern about the filing for a secondary offering. The Company had
previously agreed to delay the secondary offering based upon the Former
Auditor's disclosure to management that the Former Auditor needed more time
to perform additional tests of the Company's internal controls and reporting
procedures. The Former Auditor then requested a meeting with all of the
outside directors of the Company.
On July 25, 1997, two of the outside directors, the Company's securities
counsel, and representatives of the Former Auditor participated in a
conference call wherein the Former Auditor informed the directors that the
allegations included (i) the existence of previously undisclosed related
party transactions, (ii) falsified documents, such as shipping documents,
receiving reports, and purchase orders, (iii) fictitious sales and exchanges
of inventory, and (iv) improper recording of sales and receivable agings to
misrepresent the characterization of accounts receivable.
On July 25, 1997, the Board of Directors of the Company appointed the
three non-employee directors to serve on the Company's Audit Committee. On
July 28, 1997, the Audit Committee engaged the Former Auditor to conduct an
investigation into the allegations.
On August 9, 1997, the Former Auditor participated in a conference call
with two of the members of the Audit Committee and special counsel to the
Company to update the status of the investigation work. The Former Auditor
reported that they believed that some of the allegations had proven correct,
most significantly, that false invoices had been created and sent to the
Company's former bank in order to obtain financing on the accounts receivable
and working capital lines. In addition, the Former Auditor reported that
there had been an admission by a Company employee that a falsified document
was prepared purporting to document an inventory exchange and that the false
document had been provided to the Former Auditor in connection with its
limited review procedures in the first quarter of 1997. The Former Auditor
also recommended that the Board replace or suspend the Chief Executive
Officer, bring in a senior management person to direct the Company's
investigation, and discuss requirements for disclosure of the investigation
with its legal counsel.
On August 12, 1997, the Audit Committee engaged the services of Kenneth
A. Lipinski, an independent consultant reporting directly to the Audit
Committee who was subsequently hired as the
19
<PAGE>
Company's interim Chief Operating Officer, to work with the Former Auditor in
connection with the investigation, to monitor the performance of the
Company's accounting personnel, and to make recommendations to the Audit
Committee with respect to the subject matter of the allegations.
On August 29, 1997, the consultant and two members of the Audit
Committee met with the Former Auditor to discuss the status of the Former
Auditor's investigation. At the meeting, the Former Auditor indicated that on
August 28, 1997 it internally came to the conclusion that the December 31,
1996 financial statements were materially misstated and the Former Auditor
delivered the Letter to the Company.
APPOINTMENT OF A REPLACEMENT AUDITOR. On November 18, 1997, the
Company's Audit Committee engaged Grant Thornton LLP (the "New Auditor") as
its independent auditors. The Registrant's Board of Directors approved the
decision to engage the New Auditor.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
<TABLE>
<CAPTION>
EXECUTIVE AGE TITLE
- --------- --- -----
<S> <C> <C>
Saleem S. Naber 68 Chief Executive Officer, President and Director
Gary L. Joslin 61 Chief Financial Officer, Vice President - Finance
Osamah S. Bakhit 48 Marketing and Sales Advisor
Kenneth A. Lipinski 55 Interim Chief Operating Officer
Jeffrey G. Ward 38 Executive Vice President
Victor Buendia 40 Vice President, Latin and South American Sales
Elizabeth Morgan 34 Vice President, Consignment and Domestic Sales
Laura M. Villafuerte 30 Controller
Bruce H. Haglund 46 Secretary, Director, Chairman of the Audit Committee
Daniel C. Lewis 48 Director and Member of the Audit Committee
William T. Walker, Jr. 66 Director and Member of the Audit Committee
</TABLE>
SALEEM S. NABER, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr. Naber,
who became Chief Executive Officer, President and a Director of the Company
in April 1998, has 40 years of experience in the aerospace industry,
exclusively with Lucas Aerospace and Western Gear Corporation, acquired by
Lucas in 1988. His responsibilities with Lucas ranged from Design Engineer
of Precision Products to President of Lucas Western, Inc., the $400 million
U.S. division of Lucas. Mr. Naber's most recent post was Managing Director
of Lucas Aerospace, Aircraft Systems Division. Mr. Naber received a Bachelor
of Science degree in Electrical Engineering from the University of California
- - Berkeley and pursued post-graduate courses at the University of Southern
California and the University of California - Los Angeles. Mr. Naber is also
a member of the Executive Committee of the Company.
GARY L. JOSLIN, CHIEF FINANCIAL OFFICER, VICE PRESIDENT - FINANCE. Mr.
Joslin, who became Chief Financial Officer and Vice President - Finance in
April 1998, served as a management and financial consultant prior to joining
ADI. Previously, he served as a senior financial executive in the wholesale
and retail segments of the building materials and equipment industry for
companies ranging in size from $70 million to $450 million, including White
Cap Industries and Prime Source, Inc. He also served in numerous financial
positions with Wickes Companies, a multi-billion-dollar conglomerate involved
in
20
<PAGE>
retailing, wholesaling, and manufacturing. Mr. Joslin holds a Bachelor of
Science degree in Accounting from California State University - Long Beach
and is a licensed CPA. Mr. Joslin is also a member of the Executive Committee
of the Company.
OSAMAH S. BAKHIT, MARKETING AND SALES ADVISOR. Mr. Bakhit, the founder of the
Company, was Chief Executive Officer, President, Chairman and a Director of
the Company from its inception until his resignation as an officer and
Director of the Company in November 1997. He is no longer an executive
officer of the Company, but works full-time as a marketing and sales advisor.
Mr. Bakhit has over 16 years of aircraft experience. Prior to forming the
Company in 1988, Mr. Bakhit was CEO of Bakhit Enterprises, a company that
purchased heavy construction vehicles and material for General Enterprise
Company. Mr. Bakhit worked for General Enterprise Company in Amman, Jordan,
where he managed overall construction operations. His duties included
supervising the construction of Queen Alia International Airport in Jordan.
Mr. Bakhit attended the University of California, Irvine.
KENNETH A. LIPINSKI, INTERIM CHIEF OPERATING OFFICER. Mr. Lipinski has over
30 years experience as President, Chief Executive Officer, Chief Operating
Officer or Chief Financial Officer of companies in the telecommunications,
real estate, mortgage banking and retail clothing industries. These companies
ranged in size from $20 million to $250 million in annual revenue and were
closely-held or publicly traded NYSE listed companies. His business career
commenced at Arthur Andersen & Co., where he spent eight years immediately
after graduating from the University of Notre Dame. He has a CPA and
California Real Estate Brokers licenses and is a member of the Young
Presidents Organization. Mr. Lipinski is also Chairman of the Executive
Committee of the Company.
JEFFREY G. WARD, EXECUTIVE VICE PRESIDENT. Mr. Ward has over 16 years of
aircraft experience and currently oversees and lends leadership to the
extensive sales team at ADI. Prior to joining the Company in 1993, Mr. Ward
was a sales representative for System Industries. He was a sales consultant
to the aerospace industry with key accounts including the U.S. military and
major aerospace manufacturers. Prior to System Industries, Mr. Ward was a
sales representative for Eastman Kodak Company. Mr. Ward also served in the
United States Marine Corps for seven years as a naval aviator. Mr. Ward has
a B.A. in Economics and German from University of Virginia. Mr. Ward is also
a member of the Executive Committee of the Company.
VICTOR BUENDIA, VICE PRESIDENT, LATIN AND SOUTH AMERICAN SALES. Mr. Buendia
has five years of aircraft experience. Mr. Buendia is responsible for all of
the Company's major Latin America accounts. Prior to joining the Company in
1992, Mr. Buendia owned and operated his own business and brings valuable
marketing, communication and sales skills to ADI.
ELIZABETH MORGAN, VICE PRESIDENT, MARKETING. Ms. Morgan has 13 years of
experience in aircraft parts sales. Ms. Morgan is responsible for the
operations and sales of the Company's consignment sales and marketing
agreements. Prior to joining the Company in 1994, Ms. Morgan was the Director
of Marketing for Pacific Airmotive, a division of UNC. In addition, Ms.
Morgan has worked for several other companies in aircraft sales.
LAURA M. VILLAFUERTE, CONTROLLER. Ms. Villafuerte has over four years of
public accounting experience and is a Certified Public Accountant. Currently,
Ms. Villafuerte manages the Company's finance and accounting departments and
is responsible for financial reporting and the Company's treasury. From 1991
to 1996, Ms. Villafuerte worked for Arthur Andersen LLP, where she supervised
audit engagements and prepared and reviewed financial reports. Ms.
Villafuerte has a B.S. in Accounting from the University of Southern
California.
BRUCE H. HAGLUND, SECRETARY AND DIRECTOR. Mr. Haglund has served as General
Counsel of the Company since 1992 and has served as Secretary and a director
of the Company from June 1996 to present. Since 1994, Mr. Haglund has been a
partner in the law firm Gibson, Haglund & Johnson. Prior to 1994, Mr. Haglund
was a principal in the law firm of Phillips, Haglund, Hadden & Jeffers. From
1984 to 1991, he was a partner at the law firm of Gibson & Haglund. Mr.
Haglund is also a member of the Board of Directors of GB Foods Corporation,
the Secretary of Metalclad Corporation, public companies traded on the Nasdaq
SmallCap Market, and the Secretary of Renaissance Golf Products, Inc., a
public company whose stock is traded on the OTC/BB. Mr. Haglund has a J.D.
from the University of Utah College of Law. Mr. Haglund is also the Chairman
of the Audit Committe of the Board and a member of the Executive Committee of
the Company.
DANIEL C. LEWIS, DIRECTOR. Mr. Lewis became a director of the Company in
March 1997. Mr. Lewis currently serves as a Senior Vice President of
Booz-Allen & Hamilton, Inc. ("Booz-Allen") where he heads the firm's
worldwide engineering manufacturing businesses of aerospace, automotive and
industrials. At
21
<PAGE>
Booz-Allen, Mr. Lewis is a member of the Commercial Leadership Team,
Operating Council, and is a former Director of the company. Prior to joining
Booz-Allen, Mr. Lewis was a materials manager in Warner-Lambert's consumer
products group. Prior to Warner-Lambert, Mr. Lewis was with Sundstrand
working in the machine tool and aerospace business. Mr. Lewis has a B.S. in
Industrial Supervision and a B.A. in Applied Science from Purdue University
and an M.B.A. from Fairleigh Dickinson University. Mr. Lewis is also a member
of the Audit Committee of the Board.
WILLIAM T. WALKER, JR., DIRECTOR. Mr. Walker became a director of the Company
in March 1997. Mr. Walker founded Walker Associates, a corporate finance
consulting firm for investment banking, in 1985 and has participated in or
been instrumental in completing over $250 million in public and private
offerings since its inception. Prior to forming Walker Associates, Mr. Walker
served as executive Vice President, Manager of Investment Banking, Member of
the Board and Executive Committee and Chairman of the Underwriting Committee
for Bateman Eichler Hill Richards, a New York Stock Exchange Member firm. Mr.
Walker is also a member of the Board of Directors of Fortune Petroleum
Corporation and Go-Video, Inc., both public companies traded on the American
Stock Exchange. Mr. Walker attended Stanford University. Mr. Walker is also a
member of the Audit Committee of the Board.
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
Section 16 (a) of the Securities Exchange Act requires the Company's
officers, Directors, and persons who own more than 10% of a registered class
of the Company's equity securities to file reports of ownership and changes
in ownership with the SEC and NASDA. Officers, Directors, and greater than
10% beneficial owners are required by SEC regulation to furnish the Company
with copies of all Section 16 (a) forms they file. The Company believes that
all filing requirements were complied with applicable to its Officers,
Directors, and greater than 10% beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1998 Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in
the 1998 Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 1998 Proxy
Statement.
22
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-KSB:
1. Financial Statements for the periods ended December 31, 1996 and 1997:
Independent Auditors' Reports
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
2. Exhibits
The following exhibits are being filed with this Annual Report on Form
10-KSB and/or are incorporated by reference therein in accordance with the
designated footnote references:
<TABLE>
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws, as amended, of the Registrant. (1)
3.3 Amendment to Amended and Restated Certificate of Incorporation of the Registrant. (1)
4.1 Specimen Common Stock Certificate. (1)
9.1 Voting Trust Agreement, dated November 17, 1997, by and among Osamah Bakhit, Aviation Distributors, Inc., and Dirk O.
Julander, as trustee. (2)
10.2 1996 Stock Option and Incentive Plan. (1)
10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia The Royal Jordanian Airlines and Aviations
Distributors, Inc.. (1)
10.4 Credit and Security Agreement, dated June 25, 1997, by and
between Aviation Distributors, Inc. and BNY Financial
Corporation.
10.5 Secured and Guaranteed Promissory Note, dated February 24,
1998, by and between Aviation Distributors, Inc. and BNY
Financial Corporation.
10.6 Amended and Restated Employment Agreement, dated as of July 16, 1996, by and between Osamah S. Bakhit and Aviation
Distributors, Inc. (1)
10.7 Employment Agreement, dated as of July 16, 1996, by and between Mark W. Ashton and Aviation Distributors, Inc. (1)
10.8 Employment Agreement, dated as of July 16, 1996, by and between Jeffrey G. Ward and Aviation Distributors, Inc. (1)
10.9 Commercial Lease, dated June 11, 1996, by and between Francis De Leone and Aviation Distributors, Inc. (1)
10.10 Amendment to Employment Agreement, dated November 17, 1997, by and between Osamah S. Bakhit and Aviation Distributors, Inc.
10.11 Amendment to Employment Agreement, dated November 17, 1997, by and between Mark W. Ashton and Aviation Distributors, Inc.
10.12 Lease, dated as of July 9, 1997, by and between Olen Properties Corp. and Aviation Distributors, Inc.
10.13 Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation Distributors, Inc., dated as of December 31, 1995.(1)
10.14 Settlement Agreement dated as of November 1, 1996. (1)
10.15 Form of Indemnity Agreement. (1)
23
<PAGE>
10.33 Promissory Note between Aviation Distributors, Inc. and Osamah S. Bakhit, dated December 31, 1996.(1)
99.4 Engine Chattel Mortgage.
</TABLE>
- --------------
(1) Filed with the Company's Registration Statement on Form SB-2 dated March
3, 1997.
(2) Filed with the Company's Current Report on Form 8-K dated August 29, 1997.
24
<PAGE>
(b) Reports on Form 8-K.
<TABLE>
<CAPTION>
Date of Report/Filing Date Item Reported
-------------------------- -------------
<S> <C>
August 29, 1997/September 8, 1997 Change in Registrant's Certifying Accountant (Withdrawal of
Reports on Financial Statements; Resignation of Arthur
Andersen LLP). No financial statements were filed.
August 29, 1997/September 17, 1997 Financial Statements and Exhibits (Letter from Arthur
Andersen LLP). No financial statements were filed.
October 1, 1997/October 14, 1997 Other Events (Delisting by Nasdaq). No financial statements
were filed.
November 19, 1997/November 19, 1997 Change in Registrant's Certifying Account (Appointment of
Grant Thornton LLP); Other Events (Resignation of Osamah S.
Bakhit as Chairman, CEO; Transfer of Bakhit Shares to Voting
Trust). No financial statements were filed.
</TABLE>
SUPPLEMENTAL INFORMATION
An annual report and an information statement shall be furnished to the
security holders of the Company subsequent to the filing of this Form 10-KSB.
The Company shall furnish copies of the annual report to security holders and
the proxy statement to the Securities and Exchange Commission when it is sent
to the security holder.
25
<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.
AVIATION DISTRIBUTORS, INC.
By: /s/ Kenneth A. Lipinski
--------------------------------------
Kenneth A. Lipinski
Chief Operating Officer
Date: April 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- -----
<S> <C> <C>
/s/ Kenneth A. Lipinski Chief Operating Officer April 20, 1998
- ----------------------------------- (Principal Executive Officer
Kenneth A. Lipinski and Principal Accounting
Officer)
/s/ Bruce H. Haglund Director April 20, 1998
- -----------------------------------
Bruce H. Haglund
/s/ Daniel C. Lewis Director April 20, 1998
- -----------------------------------
Daniel C. Lewis
/s/ William T. Walker, Jr. Director April 20, 1998
- -----------------------------------
William T. Walker, Jr.
</TABLE>
26
<PAGE>
ITEM 14(A)(1) AND (2)
AVIATION DISTRIBUTORS, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE>
CREDIT AND SECURITY AGREEMENT
This Credit and Security Agreement is made as of June __, 1997 (the
"Agreement") by and between BNY FINANCIAL CORPORATION ("Lender"), having offices
at 1290 Avenue of the Americas, New York, New York 10104 and AVIATION
DISTRIBUTORS, INC. ("Borrower"), having its principal place of business at One
Wrigley Drive, Irvine, California 92618.
WHEREAS, the Borrower has requested that Lender make loans and
advances available to Borrower; and
WHEREAS, Lender has agreed to make such loans and advances to
Borrower, as Borrower's Lender for the purpose of refinancing existing debt and
for working capital purposes in the ordinary course of Borrower's business, and
to pay fees and expenses incurred in connection herewith, on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties hereto
agree as follows:
1. (A) General Definitions. When used in this Agreement, the following
terms shall have the following meanings:
"Advance Rates" means the Inventory Advance Rate and the Receivables
Advance Rate.
"Affiliate" of any Person means (a) any Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with
such Person, or (b) any Person who is a director or officer (i) of such Person,
(ii) of any Subsidiary of such Person or (iii) of any Person described in clause
(a) above. For purposes of this definition, control of a Person shall mean the
power, direct or indirect, (i) to vote 5% or more of the securities having
ordinary voting power for the election of directors of such Person, or (ii) to
direct or cause the direction of the management and policies of such Person
whether by contract or otherwise.
"Aircraft" means each aircraft in which the Borrower now has or may in the
future acquire an interest including the Airframes and all Aircraft Engines
incorporated, installed in or attached thereto and where the context permits the
related Manuals and Technical Records.
<PAGE>
"Aircraft Chattel Mortgages" means each of the aircraft chattel mortgages
in respect of each of the Aircraft and/or Aircraft Engines in substantially the
form of Exhibit __ attached hereto, as the same may be renewed, modified,
amended, supplemented or restated, from time to time in the manner provided
therein.
"Aircraft Engine" shall mean each aircraft engine in which the Borrower may
now have or in the future acquire an interest, together in each case with any
and all Aircraft Parts incorporated or installed in or attached thereto and any
Aircraft Part removed therefrom until such time as a replacement part shall be
substituted therefor. Except as otherwise set forth herein.
"Aircraft Inventory" means all Aircraft, Airframes, Aircraft Engines and
Aircraft Parts of the Borrower.
"Aircraft Parts" shall mean all appliances, components, parts, instruments,
appurtenances, avionics, accessories, furnishings and other equipment of
whatever nature (other than complete Aircraft Engines), which are now or from
time to time may be incorporated or installed in or attached to an aircraft
(including without limitation the Airframe of such Aircraft, any related
Aircraft Engines and any related appliances, components, parts, instruments,
appurtenances, avionics, accessories, furnishings and other equipment of
whatever nature).
Airframe" means each of the Aircraft, excluding any Aircraft Engines or
engines from time to time installed thereon, but including any and all Aircraft
Parts (except Aircraft Parts that are incorporated or installed in or attached
to any such Aircraft Engine or engine), so long as: (i) such included Aircraft
Parts shall be incorporated or installed in or attached to such Aircraft (but
not in or to any Aircraft Engines from time to time installed thereon); or (ii)
such included Aircraft Parts shall remain identified or connected with such
Aircraft in that they are subject to repair, alteration or modification as
provided in Sections 8(j) and 8(k) of this Agreement, except Aircraft Engines
from time to time installed thereon.
"Airworthiness Directive" means any airworthiness directive or any other
mandatory regulation, directive or instruction (including FAA-mandated
manufacturers' changes, notices, and/or service bulletins or changes, notices,
advisory circulars or service bulletins) issued by any Governmental Authority
asserting jurisdiction over any Aircraft, Aircraft Engine, Aircraft Part or
Airframe, over its use, operation or maintenance that may from time to time be
issued.
"Alternate Base Rate" means, for any day, a rate per annum equal to the
higher of (i) the Prime Rate in effect on such day and (ii) the Federal Funds
Rate in effect on such day plus 1/2 of 1%.
"Ancillary Agreements" means all agreements, instruments, and documents
including, without limitation, mortgages, pledges, powers of attorney, consents,
assignments, contracts, notices, security agreements, trust agreements whether
2
<PAGE>
heretofore, concurrently, or hereafter executed by or on behalf of Borrower or
delivered to Lender, relating to this Agreement or to the transactions
contemplated by this Agreement.
"Appraisal" means an appraisal of the fair market value and the Orderly
Liquidation Value of each and every Aircraft, Airframe and Aircraft Engine and
of all Aircraft Parts, which is (i) conducted by the Appraiser, (ii) prepared
for and addressed to the Lender, (iii) based upon a physical inspection of such
Aircraft, Airframes, Aircraft Engines and Aircraft Parts and a review of related
maintenance records and (iv) accompanied by all back-up calculations made by
such Appraiser.
"Appraiser" means Aviation Solutions, Inc. or such other recognized
aircraft appraisal company, which shall in all cases be unaffiliated with each
of the Borrower and the Lender and acceptable to the Lender.
"Bank" means The Bank of New York.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in New York are authorized or required by law to close.
"Certificated Air Carrier" means a Citizen of the United States holding a
carrier operating certificate issued by the Secretary of Transportation pursuant
to Chapter 447 of Title 49, United States Code, for aircraft capable of carrying
ten or more individuals or 6,000 pounds or more of cargo.
"Change of Management" means any change in the management of the Borrower
whereby Mr. Osamah Bakhit is no longer the Chief Executive Officer of the
Borrower.
"Change of Ownership" means any merger, consolidation or sale of
substantially all of the property or assets of Borrower.
"Citizen of the United States" means the meaning specified in Section
40102(a)(15) of Title 49 of the United States Code or any similar legislation of
the United States of America enacted in substitution or replacement therefor.
"Closing Date" means the date set forth in the first paragraph of this
Agreement or such other date as may be agreed upon by the parties hereto.
"Collateral" means and includes:
(A) all Inventory;
(B) all Equipment;
(C) all General Intangibles;
3
<PAGE>
(D) all Receivables;
(E) all books, records, ledgercards, files, correspondence,
computer programs, tapes, disks and related data processing software (owned by
Borrower or in which it has an interest) which at any time evidence or contain
information relating to (A), (B), (C) and (D) above or are otherwise necessary
or helpful in the collection thereof or realization thereupon;
(F) documents of title, policies and certificates of insurance,
securities, chattel paper, other documents or instruments evidencing or
pertaining to (A), (B), (C), (D) and (E) above;
(G) all guaranties, liens on real or personal property, leases,
and other agreements and property which in any way secure or relate to (A), (B),
(C), (D), (E) and (F) above, or are acquired for the purpose of securing and
enforcing any item thereof;
(H) (i) all cash held as cash collateral to the extent not
otherwise constituting Collateral, all other cash or property at any time on
deposit with or held by Lender for the account of Borrower (whether for
safekeeping, custody, pledge, transmission or otherwise), (ii) all present or
future deposit accounts (whether time or demand or interest or non-interest
bearing) of Borrower with Lender or any other Person including those to which
any such cash may at any time and from time to time be credited, (iii) all
investments and reinvestments (however evidenced) of amounts from time to time
credited to such accounts, and (iv) all interest, dividends, distributions and
other proceeds payable on or with respect to (x) such investments and
reinvestments and (y) such accounts; and
(I) all products and proceeds of (A), (B), (C), (D), (E), (F),
(G) and (H) above (including, but not limited to, all claims to items referred
to in (A), (B), (C), (D), (E), (F), (G) and (H) above) and all claims of
Borrower against third parties (x) for (i) loss of, damage to, or destruction
of, and (ii) payments due or to become due under leases, rentals and hires of,
any or all of (A), (B), (C), (D), (E), (F), (G) and (H) above and (y) proceeds
payable under, or unearned premiums with respect to policies of insurance in
whatever form.
"Contract Rate" means an interest rate per annum equal to (i) Alternate
Base Rate plus (ii) one percent (1%) provided, however, the Contract Rate shall
not at any time be less than 6%.
"CRAF Program" the Civil Reserve Air Fleet Program currently administered
by the United States Air Force Mobility Command pursuant to Executive Order No.
11490, as amended, or any substantially similar program.
"Current Assets" at a particular date, means all cash, cash equivalents,
4
<PAGE>
accounts and inventory of Borrower and all other items which would, in
conformity with GAAP, be included under current assets on a balance sheet of
Borrower as at such date plus any inventory classified as long-term inventory in
accordance with GAAP; provided, however, that such amounts shall not include (a)
any amounts for any indebtedness owing by an Affiliate of Borrower, unless such
indebtedness arose in connection with the sale of goods or other property in the
ordinary course of business and would otherwise constitute current assets in
conformity with GAAP, (b) any shares of stock issued by an Affiliate of
Borrower, (c) the cash surrender value of any life insurance policy and (d) any
assets which would be classified as intangible assets under GAAP.
"Current Liabilities" at a particular date, means all amounts which would,
in conformity with GAAP, be included under current liabilities on a balance
sheet of Borrower as at such date, but in any event including, without
limitation, the amounts of (a) all indebtedness payable on demand, or, at the
option of the Person to whom such indebtedness is owed, not more than twelve
(12) months after such date, (b) any payments in respect of any indebtedness
(whether installment, serial maturity, sinking fund payment or otherwise)
required to be made not more than twelve (12) months after such date, (c) all
reserves in respect of liabilities or indebtedness payable on demand or, at the
option of the Person to whom such indebtedness is owed, not more than twelve
(12) months after such date, the validity of which is contested at such date and
(d) all accruals for federal or other taxes measured by income payable within a
twelve (12) month period.
"Credit Risk" means the risk of loss resulting solely and exclusively from
a Customer's financial inability to pay at maturity with respect to any
Receivable purchased hereunder.
"Customer" means and includes the account debtor with respect to any
Receivable and/or the prospective purchaser of goods, services or both with
respect to any contract or contract right, and/or any party who enters into or
proposes to enter into any contract or other arrangement with Borrower, pursuant
to which Borrower is to deliver any personal property or perform any services.
"Default Rate" means a rate equal to two percent (2%) per annum in excess
of the Contract Rate or the Overadvance Rate, as the case may be.
"Dispute" means any cause asserted for nonpayment of Receivables,
including, without limitation, any alleged defense, counterclaim, offset,
dispute or other claim (real or merely asserted) whether arising from or
relating to the sale of goods or rendition of services or arising from or
relating to any other transaction or occurrence.
"EBITDA" means net income before the calculation of taxes, interest
expenses depreciation and amortization.
5
<PAGE>
"Eligible Inventory" means Aircraft Inventory which Lender, in its sole and
absolute discretion, determines: (a) is subject to the fully perfected (under
all applicable laws) security interest of Lender and is subject to no other
liens or encumbrances whatsoever (other than Permitted Liens); (b) is in good
condition and meets all standards imposed by any governmental agency, or
department or division thereof having regulatory authority over such Inventory,
its use or sale including but not limited to the Federal Fair Labor Standards
Act of 1938 as amended, and all rules, regulations and orders thereunder; (c) is
currently either usable or salable in the normal course of Borrower's business;
and (d) if purchased from Qantas Airlines prior to the date hereof and located
in Australia is specifically reviewed and separately approved in writing by
Lender to be Eligible Inventory; (e) that any such Inventory as Lender shall
determine should be the subject of an Appraisal (it being understood that all
Aircraft Inventory (whether an individual item or an aggregate of items acquired
in one purchase) purchased by Borrower for Five Hundred Thousand ($500,000)
dollars or more must be subject to an Appraisal) is a subject of an Appraisal
which is satisfactory to Lender; and (f) is not determined by Lender, in its
sole discretion, to be ineligible for any other reason.
"Eligible Receivables" means and includes each Receivable (including
without limitation all loan, sale and exchange transactions pursuant to Exchange
Agreements) which conforms to the following criteria: (a) shipment of the
merchandise or the rendition of services has been completed; (b) no return,
rejection or repossession of the merchandise has occurred; (c) merchandise or
services shall not have been rejected or disputed by the Customer and there
shall not have been asserted any offset, defense, counterclaim, or Dispute; (d)
continues to be in full conformity with the representations and warranties made
by Borrower to Lender with respect thereto; (e) Lender is, and continues to be,
satisfied with the credit standing of the Customer in relation to the amount of
credit extended; (f) is documented by an invoice in a form approved by Lender
and shall not be unpaid more than sixty (60) days from due date nor more than
one hundred fifty (150) days from invoice date; (g) less than fifty (50%)
percent of the unpaid amount of invoices due from such Customer remain unpaid
more than sixty (60) days from due date; (h) is not evidenced by chattel paper
or an instrument of any kind with respect to or in payment of the Receivable
unless such instrument is duly endorsed to and in possession of Lender or
represents a check in payment of a Receivable; (i) if the Customer's primary
place of business is located outside of the United States or Canada, (A) the
Customer shall either be listed or subsequently added by Lender in writing on
Schedule B attached hereto (it being understood that Lender may remove any such
customer from such Schedule B at any time, if Lender in its discretion believes
such customer to no longer be credit worthy) or if not so listed (a "Nonlisted
Customer") such Nonlisted Customer is during the first ninety (90) days of this
Agreement subject to a credit insurance policy in favor of Borrower in form and
substance satisfactory to Lender and thereafter such Nonlisted Customer is the
subject of a credit approval under an export factoring agreement with Lender,
or (B) the goods which gave rise to such Receivable were shipped after receipt
by Borrower from or on behalf of the Customer of an irrevocable letter of
credit, assigned and
6
<PAGE>
delivered to Lender and confirmed by a financial institution acceptable to
Lender and is in form and substance acceptable to Lender, payable in the full
amount of the Receivable in United States dollars at a place of payment located
within the United States; (j) such Receivable is not subject to any lien, other
than Permitted liens; (k) does not arise out of transactions with any employee,
officer, agent, director, stockholder or Affiliate of Borrower; (l) is payable
to Borrower; (m) does not arise out of a bill and hold sale prior to shipment
and, if the Receivable arises out of a sale to any Person to which Borrower is
indebted, the amount of such indebtedness, and any anticipated indebtedness, is
deducted in determining the face amount of such Receivable; (n) is net of any
returns, discounts, claims, credits and allowances; (o) if the Receivable arises
out of contracts between Borrower and the United States, any state, or any
department, agency or instrumentality of any of them, Borrower has so notified
Lender, in writing, prior to the creation of such Receivable, and, if Lender so
requests, there has been compliance with any governmental notice or approval
requirements, including without limitation, compliance with the Federal
Assignment of Claims Act; (p) is a good and valid account representing an
undisputed bona fide indebtedness incurred by the Customer therein named, for a
fixed sum as set forth in the invoice relating thereto with respect to an
unconditional sale and delivery upon the stated terms of goods sold by Borrower,
or work, labor and/or services rendered by Borrower; and (q) is otherwise
satisfactory to Lender as determined in good faith by Lender in the reasonable
exercise of its discretion.
"Equipment" means and includes all of Borrower's now owned or hereafter
acquired equipment, machinery and goods (excluding Inventory), whether or not
constituting fixtures, including, without limitation: plant and office
equipment, tools, dies, parts, data processing equipment, furniture and trade
fixtures, trucks, trailers, loaders, other vehicles and all replacements and
substitutions therefore and all accessions thereto.
"Event of Default" means the occurrence of any of the events set forth in
paragraph 18.
"Event of Loss" shall be with respect to the Aircraft, Airframes, Aircraft
Engines and Aircraft Parts, any of the following events: (i) the loss of such
property or the use thereof due to the destruction of or damage to such property
that renders repair uneconomic or that renders such property permanently unfit
for normal use by the Borrower or any lessee of such property for any reason
whatsoever; (ii) any damage to such property that results in an insurance
settlement with respect to such property on the basis of a total loss; (iii) the
theft or disappearance of such property that results in loss of use or
possession of such property by the Borrower or any lessee of such property; (iv)
the confiscation, condemnation, or seizure of, or requisition of title to such
property by any governmental or purported governmental authority of the United
States or any agency or instrumentality of any thereof (other than a requisition
for use by any such authority, such as the CRAF Program), that in the case of
any event referred to in this clause (iv) shall have
7
<PAGE>
resulted in the loss of possession or use of such property by the Borrower; (v)
the confiscation, condemnation, or seizure of or requisition of title to such
property by any foreign governmental authority or purported governmental
authority or any agency or instrumentality of any thereof (other than a
requisition of use by any such authority described in clause (vii) below) that
in the case of any event referred to in this clause (v) shall have resulted in
the loss of possession or use of such property by the Borrower; (vi) as a result
of any law, rule, regulation, order or other action by the FAA or other
governmental body of the government of registry of the Aircraft having
jurisdiction, the use of such property in the normal course of the business of
air transportation shall have been prohibited; (vii) the requisition for use
(which does not involve or threaten to involve the confiscation, condemnation,
seizure or requisition of title to such property) by any foreign governmental
authority or any agency or instrumentality thereof. An Event of Loss with
respect to the Aircraft shall be deemed to have occurred if an Event of Loss
occurs with respect to the Airframe.
"Exchange Agreement" means the collective reference to each Exchange
Agreement between the Borrower and a Customer of the Borrower pursuant to which
such Customer exchanges an Aircraft Part for credit against sale of an Aircraft
Part to such Customer by the Borrower.
"FAA" means the U.S. Federal Aviation Administration.
"Federal Funds Rate" means, for any day, the weighted average of the rates
on overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers, as published for such day (or if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or if such rate is not so published for any day which
is a Business Day, the average of quotations for such day on such transactions
received by The Bank of New York from three Federal funds brokers of recognized
standing selected by The Bank of New York.
"Formula Amount" shall have the meaning set forth in paragraph 2(d).
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time.
"General Intangibles" means and includes all of Borrower's now owned or
hereafter acquired general intangibles as said term is defined in the Uniform
Commercial Code in effect in the State of New York including, without
limitation, trademarks, tradenames, tradestyles, trade secrets, equipment
formulation, manufacturing procedures, quality control procedures, product
specifications, patents, patent applications, copyrights, registrations,
contract rights, choses in action, causes of action, corporate or other business
records, inventions, designs, goodwill, claims under guarantees, licenses,
franchises, tax refunds, tax refund claims, computer programs, computer data
bases, computer program flow diagrams,
8
<PAGE>
source codes, object codes and all other intangible property of every kind and
nature.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Hazardous Substance" means, without limitation, any flammable explosives,
radon, radioactive materials, asbestos, urea formaldehyde foam insulation,
polychlorinated byphenyls, petroleum and petroleum products, methane, hazardous
materials, hazardous wastes, hazardous or toxic substances or related materials
as defined in CERCLA, the Hazardous Materials Transportation Act, as amended (49
U.S.C. Sections 1801, et seq.), RCRA, Articles 15 and 27 of the New York State
Environmental Conservation Law or any other applicable Environmental Law and in
the regulations adopted pursuant thereto.
"Incipient Event of Default" means any act or event which, with the giving
of notice or passage of time or both, would constitute an Event of Default.
"Inventory" means and includes all of Borrower's now owned or hereafter
acquired goods (including without limitation Aircraft Inventory), merchandise
and other personal property, wherever located, to be furnished under any
contract of service or held for sale or lease, all raw materials, work in
process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's business or
used in selling or furnishing such goods, merchandise and other personal
property, and all documents of title or other documents representing them.
"Inventory Advance Rate" shall have the meaning set forth in the definition
of Inventory Availability.
"Inventory Availability" means the amount of Revolving Credit Advances
against Eligible Inventory Lender may from time to time during the Term make
available to Borrower up to the lesser of (a) Ten Million Dollars ($10,000,000)
less the aggregate outstanding face amount of any letters of credit caused to be
issued by Lender for Borrower or (b) the lesser of (i) eighty percent (80%), net
of book reserve, of the cost of Borrower's Eligible Inventory or (ii) fifty
percent (50%) of the Orderly Liquidation Value of Borrower's Eligible Inventory
calculated on a first in first out basis ("Inventory Advance Rate").
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any Financing Lease
having substantially the same economic effect as any of the foregoing), and the
filing of any financing statement under the Uniform Commercial Code or
comparable law of any
9
<PAGE>
jurisdiction in respect of any of the foregoing.
"Loans" means the Revolving Credit Advances and all other extensions of
credit hereunder.
"Manuals and Technical Records" all such manuals, technical data, log books
and other records pertaining to the Aircraft to be maintained by the Borrower or
as shall be required to comply with the requirements of the FAA or any
Regulatory Authority from time to time applicable and in force.
"Matured Funds Rate" means the rate of interest, announced by Lender from
time to time, as the rate applicable to matured funds, such rate to be adjusted
automatically on the effective date of any change in such rate as announced by
Lender.
"Maximum Loan Amount" means Fifteen Million Dollars ($15,000,000).
"Maximum Revolving Amount" means Fifteen Million Dollars ($15,000,000).
"Net Face Amount" of Receivables means the gross face invoice amount
thereof, less returns, discounts (the calculation of which shall be determined
by Lender where optional terms are given), anticipation or any other unilateral
deductions taken by Customers, and credits and allowances to Customers of any
nature.
"Obligations" means and includes all Loans, all advances, debts,
liabilities, obligations, covenants and duties owing by Borrower to Lender (or
any corporation that directly or indirectly controls or is controlled by or is
under common control with Lender) of every kind and description (whether or not
evidenced by any note or other instrument and whether or not for the payment of
money or the performance or non-performance of any act), direct or indirect,
absolute or contingent, due or to become due, contractual or tortious,
liquidated or unliquidated, whether existing by operation of law or otherwise
now existing or hereafter arising including, without limitation, any debt,
liability or obligation owing from Borrower to others which Lender may have
obtained by assignment or otherwise and further including, without limitation,
all interest, charges or any other payments Borrower is required to make by law
or otherwise arising under or as a result of this Agreement and the Ancillary
Agreements, together with all reasonable expenses and reasonable attorneys' fees
chargeable to Borrower's account or incurred by Lender in connection with
Borrower's account whether provided for herein or in any Ancillary Agreement.
"Orderly Liquidation Value" means as to Inventory the price which in
Lender's opinion or as determined by the Appraiser would be the likely sales
price of Borrower's Inventory in an orderly liquidation over a one (1) year
period.
10
<PAGE>
"Overadvance Rate" means a rate equal to one half of one (1/2%) percent per
annum in excess of the Contract Rate.
"Partial Contract Term" shall have the meaning set forth in Section
5(e)(ii).
"Partial Last Year" shall have the meaning set forth in Section 5(e)(ii).
"Permitted Liens" means (i) liens of carriers, warehousemen, mechanics and
materialmen incurred in the ordinary course of business securing sums not
overdue; (ii) liens incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (a) not
overdue or (b) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of Borrower in
conformity with GAAP, (iii) liens in favor of Lender, (iv) liens for taxes (a)
not yet due or (b) being diligently contested in good faith, provided that
adequate reserves with respect thereto are maintained on the books of Borrower
in conformity with GAAP and (v) liens specified on Schedule 1(A) hereto.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prime Rate" means the prime commercial lending rate of The Bank of New
York as publicly announced in New York, New York to be in effect from time to
time, such rate to be adjusted automatically, without notice, on the effective
date of any change in such rate. This rate of interest is determined from time
to time and is neither tied to any external rate of interest or index nor does
it necessarily reflect the lowest rate of interest actually charged to any
particular class or category of customers.
"Receivables" means and includes all of Borrower's now owned or hereafter
acquired accounts and contract rights, instruments, insurance proceeds,
documents, chattel paper, letters of credit and Borrower's rights to receive
payment thereunder, any and all rights to the payment or receipt of money or
other forms of consideration of any kind at any time now or hereafter owing or
to be owing to Borrower, all proceeds thereof and all files in which Borrower
has any interest whatsoever containing information identifying or pertaining to
any of Borrower's Receivables, together with all of Borrower's rights to any
merchandise which is represented thereby, and all Borrower's right, title,
security and guaranties with respect to each Receivable, including, without
limitation, all rights of stoppage in transit, replevin and reclamation and all
rights as an unpaid vendor.
"Receivables Advance Rate" shall have the meaning set forth in the
definition of Receivables Availability.
11
<PAGE>
"Receivables Availability" means the amount of Revolving Credit Advances
against Eligible Receivables. Lender may from time to time during the term of
this Agreement make available to Borrower up to eighty (80%) percent
("Receivables Advance Rate") of the Net Face Amount of Borrower's Eligible
Receivables.
"Reports" shall have the meaning set forth in Section 14.
"Requirement of Law" means as to any Person, the partnership agreement,
certificate of incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other governmental authority, in
each case applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Retained Goods" shall have the meaning set forth in Section 8(h).
"Revolving Credit Advances" shall have the meaning set forth in paragraph
2(d).
"Settlement Date" means two (2) Business Days after the day on which the
applicable Receivable is actually collected by Lender.
"Subsidiary" of any Person means a corporation or other entity of whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Tangible Net Worth" at a particular date means (a) the aggregate amount of
all assets of Borrower as may be properly classified as such in accordance with
GAAP consistently applied excluding such other assets as are properly classified
as intangible assets under GAAP plus any Indebtedness which is subordinated to
Lender on terms which are in form and substance satisfactory to Lender, less (b)
the aggregate amount of all liabilities of the Borrower and less Receivables due
from Affiliates.
"Term" means the Closing Date through the day preceding the third
anniversary of the Closing Date in the year 2000 subject to acceleration upon
the occurrence of an Event of Default hereunder or other termination hereunder.
"Total Liabilities" at a particular date means all Indebtedness of Borrower
as at such date.
"Working Capital" at a particular date means the excess, if any, of Current
Assets over Current Liabilities, including without duplication the aggregate
amount
12
<PAGE>
at any time outstanding of Revolving Credit Advances at such date.
(B) Accounting Terms. Any accounting terms used in this Agreement
which are not specifically defined shall have the meanings customarily given
them in accordance with GAAP.
(C) Other Terms. All other terms used in this Agreement and defined
in the Uniform Commercial Code as adopted in the State of New York, shall have
the meaning given therein unless otherwise defined herein.
2. Loans.
(a) Lender shall not assume the Credit Risk on any Receivables.
(b) Collected Receivables will be credited to Borrower's account for
purposes of interest computation on the Settlement Date. Lender may deduct from
the amount payable to Borrower on any Settlement Date reserves for all
Obligations then chargeable to Borrower's account and Obligations which in
Lender's sole judgment may be chargeable to Borrower's account thereafter.
(c) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Lender shall make revolving credit advances (the
"Revolving Credit Advances") to Borrower from time to time during the Term
which, in the aggregate at any time outstanding, will not exceed the lesser of
(x) the Maximum Revolving Amount or (y) an amount equal to the sum of:
(i) Receivables Availability, plus
(ii) Inventory Availability, minus
(iii) such reserves as Lender may reasonably deem proper and
necessary from time to time.
The sum of 2(d)(i), plus (ii) minus (iii) shall be referred to as the
"Formula Amount".
(e) Notwithstanding the limitations set forth above, Lender retains
the right to lend Borrower from time to time such amounts in excess of such
limitations as Lender may determine in its sole discretion.
(f) If Borrower does not pay any interest, fees, costs, or charges to
Lender when due, Borrower shall thereby be deemed to have requested, and Lender
is hereby authorized at its discretion to make and charge to Borrower's account,
a Revolving Credit Advance to Borrower as of such date in an amount equal to
such unpaid interest, fees, costs, or charges.
13
<PAGE>
(g) Any sums expended by Lender due to Borrower's failure to perform
or comply with its obligations under this Agreement, including but not limited
to the payment of taxes, insurance premiums or leasehold obligations, shall be
charged to Borrower's account as a Revolving Credit Advance and added to the
Obligations.
(h) Lender will account to Borrower monthly with a statement of all
Loans and other advances, charges and payments made pursuant to this Agreement,
and such account rendered by Lender shall be deemed final, binding and
conclusive unless Lender is notified by Borrower in writing to the contrary
within thirty (30) days of the date each account was rendered specifying the
item or items to which objection is made.
(i) During the Term, Borrower may borrow, prepay and reborrow
Revolving Credit Advances, all in accordance with the terms and conditions
hereof.
(j) The aggregate balance of Loans outstanding at any time shall not
exceed the Maximum Loan Amount. The aggregate balance of Revolving Credit
Advances outstanding at any time shall not exceed the Formula Amount.
3. Repayment of Loans.
Borrower shall be required to (i) make a mandatory prepayment
hereunder at any time that the aggregate outstanding principal balance of the
Loans made by Lender to Borrower hereunder is in excess of the Maximum Loan
Amount or the Formula Amount in an amount equal to such excess, and (ii) repay
on the expiration of the Term (x) the then aggregate outstanding principal
balance of Revolving Credit Advances made by Lender to Borrower hereunder
together with accrued and unpaid interest, fees and charges and (y) all other
amounts owed Lender under this Agreement and the Ancillary Agreements.
4. Procedure for Revolving Credit Advances. The Borrower may by written
notice request a borrowing of Revolving Credit Advances prior to 1:00 P.M. New
York time on the Business Day of its request to incur, on that day, a Revolving
Credit Advance. All Revolving Credit Advances shall be disbursed from
whichever office or other place Lender may designate from time to time and,
together with any and all other Obligations of Borrower to Lender, shall be
charged to the Borrower's account on Lender's books. The proceeds of each
Revolving Credit Advance made by the Lender shall be made available to the
Borrower on the day so requested by way of credit to the Borrower's operating
account maintained with such bank as Borrower designated to Lender. Any and all
Obligations due and owing hereunder may be charged to Borrower's account and
shall constitute Revolving Credit Advances.
5. Interest; Fees.
14
<PAGE>
(a) Interest.
(i) Except as modified by paragraph 5(a)(iii) below, interest
on Loans shall be payable in arrears on the last day of each month. Interest
payments hereunder may, at Lender's option be charged by Lender to Borrower's
account. Interest charges shall be computed on the unpaid balance of the
Revolving Credit Advances for each day they are outstanding at a rate per annum
equal to the Contract Rate. In the event the aggregate amount of Revolving
Credit Advances exceeds the Formula Amount for five (5) or more days in any
month during the Term, the average daily balance of Revolving Credit Advances in
that month shall bear interest at the Overadvance Rate.
(ii) Interest shall be computed on the basis of actual days
elapsed over a three hundred sixty (360)day year.
(iii) Upon the occurrence and during the continuance of an Event
of Default, interest shall be payable at the Default Rate.
(iv) Notwithstanding the foregoing, in no event shall interest
exceed the maximum rate permitted under any applicable law or regulation, and if
any provision of this Agreement or an Ancillary Agreement is in contravention of
any such law or regulation, such provision shall be deemed amended to provide
for interest at said maximum rate and any excess amount shall either be applied,
at Lender's option, to the outstanding Loans in such order as Lender shall
determine or refunded by Lender to Borrower.
(v) Borrower shall pay principal, interest and all other
amounts payable hereunder, or under any Ancillary Agreement, without any
deduction whatsoever, including, but not limited to, any deduction for
any set-off or counterclaim.
(b) Fees.
(i) Closing Fee. Upon execution of this Agreement by Borrower
and Lender, Borrower shall pay to Lender a closing fee in an amount equal to One
Hundred Thousand Dollars ($100,000) Fifty Thousand Dollars ($50,000) of which
having been paid under the terms and conditions set forth in the commitment
letter, dated June 2, 1997, between Lender and Borrower issued in connection
with this transaction).
(ii) Unused Line Fee. In the event the average closing daily
unpaid balances of all Revolving Credit Advances and the face amount of
outstanding letters of credit hereunder during any calendar month is less than
the Maximum Revolving Amount, Borrower shall pay to Lender a fee at a rate per
annum equal to one quarter of one percent (1/4%) on the amount by which the
Maximum Revolving Amount exceeds such average daily unpaid balance. Such fee
15
<PAGE>
shall be calculated on the basis of a year of 360 days and actual days elapsed,
and shall be charged to Borrower's account on the first day of each month with
respect to the prior month.
(iii) Collateral Monitoring Fee. Borrower shall pay to Lender
during each month or part thereof during the Term, and during any renewal term,
a monthly fee of Four Thousand Dollars ($4,000), in addition upon Lender's
performance of any collateral monitoring namely any field examination,
collateral analysis or other business analysis, the need for which is to be
determined by Lender and which monitoring is undertaken by Lender or for
Lender's benefit, a per diem amount equal to Lender's then standard rate per
person, for each person employed to perform such monitoring together with all
costs, disbursements and expenses incurred by the Lender and the person
performing such collateral monitoring shall be charged to Borrower's account.
(c) Increased Costs. In the event that any applicable law, treaty or
governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by Lender (for purposes of this Section 5(c),
the term "Lender" shall include Lender and any corporation or bank controlling
Lender) with any request or directive (whether or not having the force of law)
from any central bank or other financial, monetary or other authority, shall:
(i) subject Lender to any tax of any kind whatsoever with
respect to this Agreement or change the basis of taxation of payments to Lender
of principal, fees, interest or any other amount payable hereunder or under any
Ancillary Agreements (except for changes in the rate of tax on the overall net
income of Lender by the jurisdiction in which it maintains its principal
office);
(ii) impose, modify or hold applicable any reserve, special
deposit, assessment or similar requirement against assets held by, or deposits
in or for the account of, advances or loans by, or other credit extended by, any
office of Lender, including (without limitation) pursuant to Regulation D of the
Board of Governors of the Federal Reserve System; or
(iii) impose on Lender any other condition with respect to this
Agreement or any Ancillary Agreements;
and the result of any of the foregoing is to increase the cost to Lender of
making, renewing or maintaining its Loans hereunder by an amount that Lender
deems to be material or to reduce the amount of any payment (whether of
principal, interest or otherwise) in respect of any of the Loans by an amount
that Lender deems to be material, then, in any case Borrower shall promptly pay
Lender, upon its demand, such additional amount as will compensate Lender for
such additional cost or such reduction, as the case may be. Lender shall certify
the amount of such additional cost or reduced amount to Borrower, and such
certification shall be conclusive absent manifest error.
16
<PAGE>
(d) Capital Adequacy.
(i) In the event that Lender shall have determined that any
applicable law, rule, regulation or guideline regarding capital adequacy, or any
change therein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Lender (for purposes
of this Section 5(d), the term "Lender" shall include Lender and any corporation
or bank controlling Lender) with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on Lender's capital as a consequence of its obligations hereunder to a
level below that which Lender could have achieved but for such adoption, change
or compliance (taking into consideration Lender's policies with respect to
capital adequacy) by an amount deemed by Lender to be material, then, from time
to time, Lender shall provide Borrower with the method of calculation of the
reduced rate of return along with the rates of return both before and after any
such reduction and Borrower shall pay upon demand to Lender such additional
amount or amounts as will compensate Lender for such reduction. In determining
such amount or amounts, Lender may use any reasonable averaging or attribution
methods. The protection of this Section shall be available to Lender regardless
of any possible contention of invalidity or inapplicability with respect to the
applicable law, regulation or condition.
(ii) A certificate of Lender setting forth such amount or amounts
as shall be necessary to compensate Lender with respect to Section 5(d) hereof
when delivered to Borrower shall be conclusive absent manifest error.
(e) Matured Funds. On the last day of each month during the Term,
Lender shall credit Borrower's account with interest at the Matured Funds Rate
in effect during such month on the average daily balance during such month of
any amounts payable by Lender to Borrower hereunder which are not drawn by
Borrower on the Settlement Date.
6. Security Interest.
(a) To secure the prompt payment to Lender of the Obligations,
Borrower hereby assigns, pledges and grants to Lender a continuing security
interest in and to the Collateral, whether now owned or existing or hereafter
acquired or arising and wheresoever located (whether or not the same is subject
to Article 9 of the Uniform Commercial Code). All of the Borrower's ledger
sheets, files, records, books of account, business papers and documents relating
to the Collateral shall, until delivered to or removed by Lender, be kept by
Borrower in trust for Lender until all Obligations have been paid in full. Each
confirmatory assignment schedule or other form of assignment hereafter executed
by Borrower shall be deemed
17
<PAGE>
to include the foregoing grant, whether or not the same appears therein.
(b) Lender may file one or more financing statements disclosing
Lender's security interest in the Collateral without Borrower's signature
appearing thereon or Lender may sign on Borrower's behalf as provided in
paragraph 13 hereof. The parties agree that a carbon, photographic or other
reproduction of this Agreement shall be sufficient as a financing statement. If
any Receivable becomes evidenced by a promissory note or any other instrument
for the payment of money, Borrower will immediately deliver such instrument to
Lender appropriately endorsed.
7. Representations Concerning the Collateral. Borrower represents and
warrants (each of which such representations and warranties shall be deemed
repeated upon the making of each request for a Revolving Credit Advance and made
as of the time of each and every Revolving Credit Advance hereunder):
(a) all the Collateral (i) is owned by Borrower free and clear of all
claims, liens, security interests and encumbrances (including without limitation
any claims of infringement) except (A) those in Lender's favor and (B) Permitted
Liens and (ii) is not subject to any agreement prohibiting the granting of a
security interest or requiring notice of or consent to the granting of a
security interest;
(b) all Receivables (i) represent complete bona fide transactions
which require no further act under any circumstances on Borrower's part to make
such Receivables payable by Customers, (ii) to the best of Borrower's knowledge,
are not subject to any present, future or contingent Disputes and (iii) do not
represent bill and hold sales, consignment sales, guaranteed sales, sale or
return or other similar understandings or obligations of any Affiliate or
Subsidiary of Borrower.
8. Covenants Concerning the Collateral. During the Term, Borrower
covenants that it shall:
(a) not dispose of any of the Collateral whether by sale, lease or
otherwise except for (i) the sale of Inventory in the ordinary course of
business, and (ii) the disposition or transfer of obsolete and wornout Equipment
in the ordinary course of business during any fiscal year having an aggregate
fair market value of not more than One Hundred Thousand Dollars ($100,000)and
only to the extent that (x) the proceeds of any such disposition are used to
acquire replacement Equipment which is subject to Lender's first priority
security interest or (y) the proceeds of which are remitted to Lender in
reduction of the Obligations;
(b) not encumber, mortgage, pledge, assign or grant any security
interest in any Collateral or any of Borrower's other assets to anyone other
than Lender except as set forth on Schedule 1(A) attached hereto and made a part
hereof;
(c) place notations upon Borrower's books of account and any
18
<PAGE>
financial statement prepared by Borrower to disclose Lender's security interest
in the Collateral;
(d) defend the Collateral against the claims and demands of all
parties and the Borrower shall defend and protect its title to, its possession
of and the Lender's lien in the Collateral against all claims, Liens, demands,
penalties and rights asserted by any Person or Persons other than Permitted
Liens. Without derogating the obligation of the Borrower under Section 8(o)
below in the event that the Borrower acquires any interest in any property that
is not subject to a perfected Lien in favor of the Lender prior to but no later
than simultaneously with any each requisition the Borrower shall take such
action (including, without limitation, the preparation and filing of financing
statements and aircraft chattel mortgage in form and substance satisfactory to
the Lender) as the Lender shall request in order to create and/or perfect a
first priority Lien in favor of the Lender on such property.
(e) keep and maintain the Equipment and all property in good
operating condition, except for ordinary wear and tear, and shall make all
necessary repairs and replacements thereof so that the value and operating
efficiency shall at all times be maintained and preserved. Borrower shall not
permit any such items to become a fixture to real estate or accessions to other
personal property:
(A) Without in any way limiting the generality of the foregoing,
the Borrower agrees to keep and maintain, or cause to be kept and maintained,
the Aircraft, the Airframes, the Aircraft Engines and the Aircraft Parts in good
operating condition, except for ordinary wear and tear, and to make or cause to
be made all necessary repairs and replacements thereof so that the value and
operating efficiency thereof shall at all times be maintained and preserved in
accordance with industry standards and any and all applicable Requirements of
Law and, in the case of each Aircraft not registered with the FAA, so as to
maintain such Aircraft as readily certifiable as airworthy under Part 121 or
Part 125 of the U.S. Federal Aviation Regulations, and any successor, substitute
or equivalent regulations applicable to the operation of commercial aircraft
(regardless of the jurisdiction of its registration). Without in any way
limiting the foregoing, all Aircraft held by the Borrower for lease or sale
shall, while not in passenger or cargo operation, be stored and maintained in
accordance with all manufacturers approved storage procedures for long-term or
short-term storage, as the case may be.
(B) Maintain or cause to be maintained in the English language,
or provide or cause to be provided promptly upon the request of the Lender
English translations of, all records, logs and other materials required to be
maintained in respect of the Aircraft under each applicable Requirement of Law.
(f) not extend the payment terms of any Receivable without prompt
notice thereof to Lender;
(g) perform all other steps requested by Lender to create and
19
<PAGE>
maintain in Lender's favor a valid perfected first security interest in all
Collateral; and
(h) Borrower shall promptly (if requested by Lender to do so) provide
Lender with duplicate originals of all credits which Borrower issues to its
Customers and immediately notify Lender of any merchandise returns or Disputes.
Borrower shall settle all Disputes at no cost or expense to Lender. Should
Lender so elect, upon the occurrence of any Event of Default, Lender may at any
time in its discretion (i) withdraw Borrower's authority to issue credits to its
Customers without Lender's prior written consent; (ii) litigate Disputes or
settle them directly with Customers on terms acceptable to Lender; or (iii)
direct Borrower to set aside and identify as Lender's property any returned or
repossessed merchandise or other goods which by sale resulted in Receivables
theretofore assigned to Lender ("Retained Goods"). All Retained Goods (and the
proceeds thereof) shall be (A) held by Borrower in trust for Lender as Lender's
property, (B) subject to Lender's security interest hereunder and (C) disposed
of only in accordance with Lender's express written instructions.
(i) Each Aircraft shall at all times during which it is registered
with any Governmental Authority under any Requirement of Law, including
without limitation registration with the FAA under the Federal Aviation Act
have an appropriate, currently effective airworthiness certificate issued by
the Governmental Authority of the jurisdiction of its registration and shall
be in compliance with all Airworthiness Directives applicable to the
Aircraft. All Airworthiness Directives shall be accomplished in accordance
with all applicable bulletins and manuals published by the manufacturer of
the Airframe or Aircraft Engines or Aircraft Parts or FAA-approved or other
applicable Governmental Authority-approved data.
(j) (A) Upon the occurrence of an Event of Loss with respect to an
Aircraft or the Airframe and the Aircraft Engines then installed thereon, the
Borrower shall promptly give the Lender written notice of such Event of Loss and
prepay the Loans pursuant to and as required by this Agreement.
(B) Upon the occurrence of an Event of Loss with respect to an
Aircraft Engine under circumstances in which there has not occurred an Event of
Loss with respect to the Airframe on which it is installed, the Borrower shall
forthwith (and in any event, within thirty (30) days after such occurrence) give
the Lender written notice thereof and shall promptly replace the Aircraft Engine
with another engine of the same make, manufacturer and model as the Aircraft
Engine (or replace any Aircraft Engines on the related Aircraft so that all such
Aircraft Engines are of the same manufacturer, make and model and are equivalent
to or an improved model of the Aircraft Engine being replaced and otherwise
suitable for installation and use on the Airframe) free and clear of all Liens
(other than Permitted Liens and having a value and utility equal to or greater
than, and being in as good operating condition as, the Aircraft Engine with
respect to which such Event
20
<PAGE>
of Loss occurred (assuming that such Aircraft Engine had been maintained in
accordance with this Agreement). Prior to or at the time of any such conveyance,
the Borrower, at its own expense, will (a) cause amendments to the related
Aircraft Chattel Mortgage to be duly executed by the Borrower and, in the case
of such Aircraft Chattel Mortgage, to be filed for recording pursuant to the
Federal Aviation Act, or the applicable laws, rules and regulations or any other
jurisdiction in which the Airframe may then be registered, (b) furnish the
Lender with such evidence of compliance with the insurance provisions of
Sections 12(t) and 12(u) hereof with respect to such replacement Aircraft Engine
as the Lender may reasonably request, and (c) provide the Lender an opinion of
counsel reasonably satisfactory to the Lender concerning the absence of Liens
(other than Permitted Liens with respect to such replacement engine. For all
purposes hereof, each such replacement engine shall, after such conveyance, be
deemed part of the property leased hereunder, and shall be deemed an Aircraft
Engine.
(k) Maintain, use, service, repair, overhaul and operate the
Aircraft, and cause all lessees to maintain, use, service, repair, overhaul and
operate the Aircraft, in accordance with all applicable Requirements of Laws,
and in accordance with all airworthiness certificates, licenses and
registrations relating to the Aircraft issued by a Governmental Authority,
except to the extent the Borrower (or, if a Lease is then in effect, any lessee)
is contesting in good faith the validity or application of any such Requirement
of Law in any reasonable manner which does not materially adversely affect the
Lender (including, without limitation, risk subjecting the Lender to any
criminal liability) or materially adversely affect the use or diminish the value
of the Aircraft.
(l) In the event of the requisition for use of any Aircraft or
Airframe by the United States Government or any other Governmental Authority in
the jurisdiction of registration thereof not constituting an Event of Loss, the
Borrower shall notify the Lender of such requisition and shall assign all rights
to receive payments for such requisition (including without limitation
insurance, indemnity or reimbursement rights to the extent provided by the
United States Government or such other Governmental Authority) to the Lender and
all of the Borrower's obligations under this Agreement with respect to the
Aircraft (including insurance obligations) shall continue to the same extent as
if such requisition had not occurred.
(m) In the event of the requisition for use of an Aircraft Engine
(but not the Airframe to which it is affixed or relates) by the United States
Government or any other government of registry of the Aircraft or any agency or
instrumentality of any thereof (other than in the circumstances contemplated by
Section 8(l) the Borrower shall replace such Aircraft Engine hereunder by
complying (or causing any lessee to comply) with the terms of Section 8(j) to
the same extent as if an Event of Loss had occurred with respect thereto, and,
upon compliance with Section 8(j) hereof, any payments received by the Lender or
the Borrower from such government entity with respect to such requisition shall
be paid over to, or retained
21
<PAGE>
by,the Borrower.
9. Collection and Maintenance of Collateral and Records.
Lender may, at all times during normal business hours verify
Borrower's Receivables utilizing an audit control company or any other agent of
Lender. Lender or Lender's designee may notify Customers, at any time at
Lender's sole discretion, of Lender's security interest in Receivables, collect
them directly and charge the collection costs and expenses to Borrower's
account, but, unless and until Lender does so or gives Borrower other
instructions, Borrower shall instruct all of its Customers to make payments on
account of Receivables to an account under Lender's dominion and control at such
bank as Lender may designate, as provided by the terms of Section 23. To the
extent Borrower receives any payments on account of Receivables, it shall hold
such payments for Lender's benefit in trust as Lender's trustee and immediately
deliver them to Lender in their original form with all necessary endorsements
or, as directed by Lender, deposit such payments as directed by Lender pursuant
to Section 22 hereof. Lender will credit (conditional upon final collection)
all such payments to Borrower's account on the Settlement Date. Promptly after
the creation of any Receivables, Borrower shall provide Lender with schedules
describing all Receivables created or acquired by Borrower and shall execute and
deliver confirmatory written assignments of such Receivables to Lender, but
Borrower's failure to execute and deliver such schedules or written confirmatory
assignments of such Receivables shall not affect or limit Lender's security
interest or other rights in and to the Receivables. Borrower shall furnish, at
Lender's request, copies of contracts, invoices or the equivalent, and any
original shipping and delivery receipts for all merchandise sold or services
rendered and such other documents and information as Lender may require. All of
Borrower's invoices shall bear the terms stated on the applicable customer
order, and no change from the original terms of such customer order shall be
made without the prior written consent of Lender. Borrower shall provide Lender
on a monthly (within ten (10) days after the end of each month), or more
frequent basis, as requested by Lender, a summary report of Borrower's current
Inventory, certified as true and accurate by Borrower's President or Chief
Financial Officer, as well as an aged trial balance of Borrower's existing
accounts payable and existing Accounts Receivable. Borrower shall provide
Lender, as requested by Lender, such other schedules, documents and/or
information regarding the Collateral as Lender may require. Without limiting
the foregoing, Borrower shall provide to Lender a borrowing base certificate at
least once daily ("Borrowing Base Certificate"), which must be in form and
substance acceptable to Lender and which Borrowing Base Certificate shall
certify to Lender, and shall contain sufficient information and calculations as
Lender may deem necessary or desirable, in order to verify any Receivables
Availability, Inventory Availability, the applicable Formula Amount and whether
or not Receivables and/or Inventory included therein are Eligible Receivables
and/or Eligible Inventory. Without limiting the foregoing, a Borrowing Base
Certificate must be executed and delivered by Borrower to Lender at the time of
or prior to each request for Revolving Credit Advances pursuant to Section 4.
Each such Borrowing
22
<PAGE>
Base Certificate shall be delivered to Lender at its office described in Section
25 below, on each relevant Business day.
10. Inspections. (a) At all times during normal business hours, Lender
shall have the right to (a) visit and inspect Borrower's properties and the
Collateral, (b) inspect, audit and make extracts from Borrower's relevant books
and records, including, but not limited to, management letters prepared by
independent accountants, and (c) discuss with Borrower's principal officers, and
independent accountants, Borrower's business, assets, liabilities, financial
condition, results of operations and business prospects. Borrower will deliver
to Lender any instrument necessary for Lender to obtain records from any service
bureau maintaining records for Borrower.
(b) Lender shall cause, at the Borrower's sole cost and expense,
desktop reappraisals of all of Borrower's Aircraft Inventory every six (6)
months and a full and complete physical Appraisal of all Aircraft Inventory to
be conducted annually; provided, however, that upon the occurrence of an Event
of Loss with respect to any Aircraft Inventory or at any other time Lender shall
deem itself insecure or unsafe or shall fear diminution in value of the Aircraft
Inventory, Lender may cause, at the Borrower's sole cost and expense, additional
Appraisals and inspections to be conducted with respect to the Aircraft
Inventory and Borrower shall use its best efforts to facilitate such Appraisals
or inspections.
11. Financial Information. Borrower shall provide Lender (a) as soon as
available, but in any event within ninety (90) days after the end of each of
Borrower's fiscal years, Borrower's balance sheet as at the end of such fiscal
year and the related statements of income, retained earnings and statement of
cash flow for such fiscal year, setting forth in comparative form the figures as
at the end of and for the previous fiscal year, which shall have been reported
on by independent certified public accountants who shall be satisfactory to
Lender and shall be accompanied by an unqualified audit report issued by such
independent certified public accountants; (b) as soon as available but in any
event within 45 days, drafts of Borrower's balance sheet as at the end of each
of Borrower's fiscal years and the related statements of income, retained
earnings and statement of cash flow for such fiscal year, which have been
internally prepared by Borrower; (c) as soon as available, but in any event
within thirty (30) days after the close of each month and quarter, the balance
sheet as at the end of such month and quarter and the related statements of
income, retained earnings and changes in statement of cash flow for such month
and quarter, which have been internally prepared by Borrower. All financial
statements required under (a), (b) and (c) above shall be prepared in accordance
with GAAP, subject to year end adjustments in the case of monthly and quarterly
statements. Together with the financial statements furnished pursuant to (a)
above, Borrower shall deliver a certificate of Borrower's certified public
accountants addressed to Lender stating that (i) they have caused this Agreement
and the Ancillary Agreements to be reviewed and (ii) in making the examination
necessary for the issuance of such financial statements, nothing has come to
their attention to lead them to believe that any
23
<PAGE>
Event of Default or Incipient Event of Default exists and, in particular, they
have no knowledge of any Event of Default or Incipient Event of Default or, if
such is not the case, specifying such Event of Default or Incipient Event of
Default and its nature, when it occurred and whether it is continuing. At the
times the financial statements are furnished pursuant to (a), (b) and (c) above,
a certificate of Borrower's President or Chief Financial Officer shall be
delivered to Lender stating that, based on an examination sufficient to enable
him to make an informed statement, no Event of Default or Incipient Event of
Default exists, or, if such is not the case, specifying such Event of Default or
Incipient Event of Default and its nature, when it occurred, whether it is
continuing and the steps being taken by Borrower with respect to such event. If
any internally prepared financial information, including that required under
this paragraph, is unsatisfactory in any manner to Lender, Lender may request
that Borrower's independent certified public accountants review same.
In addition to the foregoing financial statements, Borrower shall
furnish Lender no less than thirty (30) days prior to the beginning of each
fiscal year commencing with fiscal year 1998, a month by month projected
operating budget and cash flow for such fiscal year (including an income
statement and balance for each month), such projections to be accompanied by a
certificate signed by Borrower's President or Chief Financial Officer to the
effect that such projections have been prepared on the basis of sound financial
planning practice consistent with past budgets and financial statements and that
such officer has no reason to question the reasonableness of any material
assumptions on which such projections were prepared.
12. Additional Representations, Warranties and Covenants. Borrower
represents and warrants (each of which such representations and warranties shall
be deemed repeated upon the making of a request for a Revolving Credit Advance
and made as of the time of each Revolving Credit Advance made hereunder), and
covenants that:
(a) Borrower is a corporation duly organized and validly existing
under the laws of the State of Delaware and duly qualified and in good standing
in every other state or jurisdiction in which the nature of Borrower's business
requires such qualification;
(b) the execution, delivery and performance of this Agreement and the
Ancillary Agreements (i) have been duly authorized, (ii) are not in
contravention of Borrower's certificate of incorporation, by-laws or of any
indenture, agreement or undertaking to which Borrower is a party or by which
Borrower is bound and (iii) are within Borrower's corporate powers;
(c) this Agreement and the Ancillary Agreements executed and
delivered by Borrower are Borrower's legal, valid and binding obligations,
enforceable in accordance with their terms;
24
<PAGE>
(d) it keeps and will continue to keep all of its books and records
concerning the Collateral at Borrower's executive offices located at the address
set forth in the introductory paragraph of this Agreement and will not move such
books and records without giving Lender at least thirty (30) days prior written
notice;
(e) (i) the operation of Borrower's business is and will continue to
be in compliance in all material respects with all applicable federal, state and
local laws, including but not limited to all applicable environmental laws and
regulations.
(ii) Borrower will establish and maintain a system to assure and
monitor continued compliance with all applicable environmental laws, which
system shall include periodic reviews of such compliance.
(iii) in the event the Borrower obtains, gives or receives notice
of any release or threat of release of a reportable quantity of any Hazardous
Substances on its property (any such event being hereinafter referred to as a
"Hazardous Discharge") or receives any notice of violation, request for
information or notification that it is potentially responsible for investigation
or cleanup of environmental conditions on its property, demand letter or
complaint, order, citation, or other written notice with regard to any Hazardous
Discharge or violation of any environmental laws affecting its property or
Borrower's interest therein (any of the foregoing is referred to herein as an
"Environmental Complaint") from any Person or entity, including any state agency
responsible in whole or in part for environmental matters in the state in which
such property is located or the United States Environmental Protection Agency
(any such person or entity hereinafter the "Authority"), then the Borrower
shall, within five (5) Business Days, give written notice of same to the Lender
detailing facts and circumstances of which the Borrower is aware giving rise to
the Hazardous Discharge or Environmental Complaint and periodically inform
Lender of the status of the matter. Such information is to be provided to allow
the Lender to protect its security interest in the Collateral and is not
intended to create nor shall it create any obligation upon the Lender with
respect thereto.
(iv) Borrower shall respond promptly to any Hazardous Discharge
or Environmental Complaint and take all necessary action in order to safeguard
the health of any Person and to avoid subjecting the Collateral to any lien,
charge, claim or encumbrance. If Borrower shall fail to respond promptly to any
Hazardous Discharge or Environmental Complaint or Borrower shall fail to comply
with any of the requirements of any environmental laws, the Lender may, but
without the obligation to do so, for the sole purpose of protecting the Lender's
interest in Collateral: (A) give such notices or (B) enter onto Borrower's
property (or authorize third parties to enter onto such property) and take such
actions as the Lender (or such third parties as directed by the Lender) deem
reasonably necessary or advisable, to clean up, remove, mitigate or otherwise
deal with any such Hazardous Discharge
25
<PAGE>
or Environmental Complaint. All reasonable costs and expenses incurred by the
Lender (or such third parties) in the exercise of any such rights, including any
sums paid in connection with any judicial or administrative investigation or
proceedings, fines and penalties, together with interest thereon from the date
expended at the Default Rate for Revolving Credit Advances shall be paid upon
demand by the Borrower, and until paid shall be added to and become a part of
the Obligations secured by the Liens created by the terms of this Agreement or
any other agreement between Lender and Borrower.
(v) Borrower shall defend and indemnify the Lender and hold the
Lender harmless from and against all loss, liability, damage and expense,
claims, costs, fines and penalties, including attorney's fees, suffered or
incurred by the Lender under or on account of any environmental laws, including,
without limitation, the assertion of any lien thereunder, with respect to any
Hazardous Discharge, the presence of any hazardous substances affecting
Borrower's property, whether or not the same originates or emerges from
Borrower's property or any contiguous real estate, including any loss of value
of the Collateral as a result of the foregoing except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge
resulting from actions on the part of the Lender. The Borrower's obligations
under this paragraph 12(e) shall arise upon the discovery of the presence of any
Hazardous Substances on the Borrower's property, whether or not any federal,
state, or local environmental agency has taken or threatened any action in
connection with the presence of any hazardous substances. The Borrower's
obligation and the indemnifications hereunder shall survive the termination of
this Agreement.
(vi) For purposes of paragraph 12(e) all references to
Borrower's property shall be deemed to include all of Borrower's right, title
and interest in and to all owned and/or leased premises;
(f) based upon the Employee Retirement Income Security Act of 1974
("ERISA"), and the regulations and published interpretations thereunder: (i)
Borrower has not engaged in any Prohibited Transactions as defined in paragraph
406 of ERISA and paragraph 4975 of the Internal Revenue Code, as amended; (ii)
Borrower has met all applicable minimum funding requirements under paragraph 302
of ERISA in respect of its plans; (iii) Borrower has no knowledge of any event
or occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) Borrower has no fiduciary responsibility for investments with
respect to any plan existing for the benefit of persons other than Borrower's
employees; and (v) Borrower has not withdrawn, completely or partially, from any
multiemployer pension plan so as to incur liability under the Multiemployer
Pension Plan Amendments Act of 1980;
(g) it is solvent, able to pay its debts as they mature, has capital
sufficient to carry on its business and all businesses in which it is about to
engage
26
<PAGE>
and the fair saleable value of its assets (calculated on a going concern basis)
is in excess of the amount of its liabilities;
(h) there is no pending or threatened litigation, actions or
proceeding which involve the possibility of materially and adversely affecting
the Borrower's business, assets, operations, condition or prospects, financial
or otherwise, or the Collateral or the ability of Borrower to perform this
Agreement;
(i) all balance sheets and income statements which have been
delivered to Lender fairly, accurately and properly state Borrower's financial
condition on a basis consistent with that of previous financial statements and
there has been no material adverse change in Borrower's financial condition as
reflected in such statements since the date thereof and such statements do not
fail to disclose any fact or facts which might materially and adversely affect
Borrower's financial condition;
(j) (x) it possesses all of the licenses, patents, copyrights,
trademarks, tradenames and permits necessary to conduct its business, (y) there
has been no assertion or claim of violation or infringement with respect thereof
and (z) all such licenses, patents, copyrights, trademarks, tradenames and
permits are listed on Schedule 12(j);
(k) it will pay or discharge when due all taxes, assessments and
governmental charges or levies imposed upon it;
(l) it will promptly inform Lender in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any of Borrower's properties, assets or business, which might
singly or in the aggregate, have a materially adverse effect on Borrower; (ii)
any amendment of Borrower's certificate of incorporation or by-laws; (iii) any
change in Borrower's business, assets, liabilities, condition (financial or
otherwise), results of operations or business prospects which has had or might
have a materially adverse effect on Borrower; (iv) any Event of Default or
Incipient Event of Default; (v) any default or any event which with the passage
of time or giving of notice or both would constitute a default under any
agreement for the payment of money to which Borrower is a party or by which
Borrower or any of Borrower's properties may be bound which would have a
material adverse effect on Borrower's business, operations, property or
condition (financial or otherwise) or the Collateral; (vi) any change in the
location of Borrower's executive offices; (vii) any change in the location of
Borrower's Inventory or Equipment from the locations listed on Schedule 12(l)
attached hereto, (viii) any change in Borrower's corporate name; (ix) any
material delay in Borrower's performance of any of its obligations to any
Customer and of any assertion of any material claims, offsets, counterclaims or
Disputes by any Customer and of any allowances, credits and/or other monies
27
<PAGE>
granted by it to any Customer; (x) furnish to and inform Lender of all material
adverse information relating to the financial condition of any account debtor;
and (xi) any material return of goods;
(m) it will not (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other than
Borrower's indebtedness to Lender and as set forth on Schedule 12(m) attached
hereto and made a part hereof; (ii) declare, pay or make any dividend or
distribution on any shares of the common stock or preferred stock of Borrower or
apply any of its funds, property or assets to the purchase, redemption or other
retirement of any common or preferred stock of Borrower; (iii) directly or
indirectly, prepay any indebtedness (other than to Lender), or repurchase,
redeem, retire or otherwise acquire any indebtedness of Borrower; (iv) makes
advances, loans or extensions of credit to any Person; (v) become either
directly or contingently liable upon the obligations of any Person by
assumption, endorsement or guaranty thereof or otherwise; (vi) enter into any
merger, consolidation or other reorganization with or into any other Person or
acquire all or a portion of the assets or stock of any Person or permit any
other Person to consolidate with or merge with it; (vii) form any Subsidiary or
enter into any partnership, joint venture or similar arrangement; (viii)
materially change the nature of the business in which it is presently engaged;
(ix) change its fiscal year or make any changes in accounting treatment and
reporting practices without prior written notice to Lender except as required by
GAAP or in the tax reporting treatment or except as required by law; (x) enter
into any transaction with any Affiliate, except in ordinary course on arms
length terms; or (xi) bill Receivables under any name except the present name of
the Borrower; (xii) sell, transfer or lease or otherwise dispose of any of its
properties or assets, except in the ordinary course of its business;
(n) it shall not at any time permit its Tangible Net Worth to be less
than Four Million Five Hundred Thousand Dollars ($4,500,000) as of the Closing
Date and June 30, 1997 and increasing by Five Hundred Thousand Dollars
($500,000) each calendar quarter thereafter;
(o) it shall not during the three months ending September 30, 1997,
nor during the six months ending December 31, 1997 nor during the nine months
ending March 31, 1998 nor during any twelve month period measured at each
calendar quarter end and thereafter at any time permit the ratio of (i) EBITDA
of Borrower excluding interest income less taxes paid, to (ii) all cash interest
expenses of Borrower plus all principal payments made by Borrower (excluding
those made on the note in favor of State Street Bank and Trust Company for such
period to be less than two (2) to one (1);
(p) all financial projections of Borrower's performance prepared by
Borrower or at Borrower's direction and delivered to Lender will represent, at
the time of delivery to Lender, Borrower's best estimate of Borrower's future
financial performance and will be based upon assumptions which are reasonable in
light of
28
<PAGE>
Borrower's past performance and then current business conditions;
(q) it will not make capital expenditures in any fiscal year an
amount in excess of Seven Hundred Fifty $750,000;
(r) it shall not at any time at the end of any calendar quarter
permit its Working Capital to be less than Four Million ($4,000,000) at all
times;
(s) none of the proceeds of the Loans hereunder will be used directly
or indirectly to "purchase" or "carry" "margin stock" or to repay indebtedness
incurred to "purchase" or "carry" "margin stock" within the respective meanings
of each of the quoted terms under Regulation G of the Board of Governors of the
Federal Reserve System as now and from time to time hereafter in effect; and
(t) it will bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. At its own cost and expense in
amounts and with carriers acceptable to Lender, it shall (i) keep all its
insurable properties and properties in which it has an interest insured against
the hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to Borrower's including,
without limitation, business interruption insurance; (ii) maintain a bond in
such amounts as is customary in the case of companies engaged in businesses
similar to Borrower's insuring against larceny, embezzlement or other criminal
misappropriation of insured's officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of Borrower
either directly or through authority to draw upon such funds or to direct
generally the disposition of such assets; (iii) maintain public and product
liability insurance against claims for personal injury, death or property damage
suffered by others; (iv) maintain all such workmen's compensation or similar
insurance as may be required under the laws of any state or jurisdiction in
which Borrower is engaged in business; (v) furnish Lender with (x) copies of all
policies and evidence of the maintenance of such policies at least thirty (30)
days before any expiration date, and (y) appropriate loss payable endorsements
in form and substance satisfactory to Lender, naming Lender as loss payee and
providing that as to Lender the insurance coverage shall not be impaired or
invalidated by any act or neglect of Borrower and the insurer will provide
Lender with at least thirty (30) days notice prior to cancellation. Borrower
shall instruct the insurance carriers that in the event of any loss thereunder,
the carriers shall make payment for such loss to Lender and not to Borrower and
Lender jointly. If any insurance losses are paid by check, draft or other
instrument payable to Borrower and Lender jointly, Lender may endorse Borrower's
name thereon and do such other things as Lender may deem advisable to reduce the
same to cash. Lender is hereby authorized to adjust and compromise claims. All
loss recoveries received by Lender upon any such insurance may be applied to the
Obligations, in such order as Lender in its sole discretion shall determine.
Any surplus shall be paid by Lender to Borrower or
29
<PAGE>
applied as may be otherwise required by law. Any deficiency thereon shall be
paid by Borrower to Lender, on demand.
(u) In the event and at such time as Borrower shall own any Aircraft
or Aircraft Engine, Borrower shall:
(A) carry or cause to be carried with insurers of recognized
responsibility acceptable to the Lender (i) with respect to each Aircraft,
aircraft public liability (including, without limitation, passenger legal
liability, contractual liability and, to the extent war risk insurance is
required by Section 12(w) hereof, war risk liability) insurance and property
damage insurance (exclusive of manufacturer's product liability insurance) and
(ii) cargo liability insurance, in each such case of a type, covering the risks
and in scope and amount consistent from time to time with prudent industry
custom and practice. All policies of insurance carried in accordance with this
Section 12(w) and any policies taken out in substitution or replacement for such
policies (A) shall be amended to name the Lender as additional insureds as their
respective interests may appear (but without imposing on the Lender liability to
pay the premiums for such insurance), (B) shall provide that in respect of the
interests of the Lender in such policies, the insurance shall not be invalidated
by any action or inaction of the Borrower and shall insure the Lender regardless
of any breach or violation of any warranty, declaration or condition contained
in such policies by the Borrower, and (C) shall provide that if the insurers
cancel such insurance for any reason whatever or if any material change is made
in such insurance that adversely affects the interest of the Lender, or such
insurance shall lapse for non-payment of premium, such cancellation, lapse or
change shall not be effective as to the Lender for thirty days (seven days in
the case of war risk and allied perils coverage) after receipt by the Lender
respectively, of written notice by such insurers of such cancellation, lapse or
change; provided, however, that if any notice period specified above is not
reasonably obtainable, such policies shall provide for as long a period of prior
notice as shall then be reasonably obtainable. Each liability policy (l) shall
be primary without right of contribution from any other insurance that is
carried by the Lender, (2) shall expressly provide that all of the provisions
thereof, except the limits of liability, shall operate in the same manner as if
there were a separate policy covering each insured, and (3) shall waive any
right of the insurers to any set-off or counterclaim or any other deduction,
whether by attachment or otherwise, in respect of any liability of (and shall
waive any right of subrogation against) the Lender to the extent of any moneys
due to the Lender;
(B) maintain or cause to be maintained in effect with insurers
of recognized responsibility acceptable to the Lender, all risk aircraft hull
insurance covering the Aircraft and all risk coverage of the related Aircraft
Engines (including, without limitation, war risk and governmental confiscation
and expropriation (other than by the government of registry of the Aircraft) and
hijacking insurance, in respect of all Aircraft flown outside of the United
States and Canada), which is of a type as from time to time is in accordance
with prudent industry custom and practice for an amount and in no event less
than the fair market value thereof. Any
30
<PAGE>
policies of insurance carried in accordance with this paragraph (b) covering the
Aircraft and any policies taken out in substitution or replacement for any such
policies (i) shall name the Lender as additional insureds, as their respective
interests may appear (but without imposing on any such party liability to pay
premiums with respect to such insurance), (ii) shall provide that all proceeds
shall be payable to the Lender, (iv) shall provide that if the insurers cancel
such insurance for any reason whatever, or if any material change is made in the
insurance that adversely affects the interest of the Lender, such cancellation
or change shall not be effective as to the Lender for thirty (30) days (seven
days in the case of hull war risk and allied perils coverage) after receipt by
the Lender respectively, of written notice by such insurers of such cancellation
or change, provided, however, that if any notice period specified above is not
reasonably obtainable, such policies shall provide for as long a period of prior
notice as shall then be reasonably obtainable, (v) shall provide that in respect
of the respective interests of the Lender in such policies the insurance shall
not be invalidated by any action or inaction of the Borrower and shall insure
the respective interests of the Lender as they appear. regardless of any breach
or violation of any warranty, declaration or condition contained in such
policies by the Borrower, (vi) shall be primary without any right of
contribution from any other insurance that is carried by the Lender, (vii) shall
waive any right of subrogation of the insurers against the Lender, and (viii)
the Borrower shall waive any right of the insurers to set-off or counterclaim or
any other deduction, whether by attachment or otherwise, in respect of any
liability of the Borrower (or any lessee) to the extent of any moneys due to the
Lender. In the case of a loss with respect to an engine (other than an Aircraft
Engine) installed on the Airframe, the Borrower shall hold any payment to it of
any insurance proceeds in respect of such loss for the account of the Borrower
or any other third party that is entitled to receive such proceeds. In the case
of any policy that contains an exclusion for war or allied perils risks, the
Borrower will cause such policy, as well as each amount shall be paid to the
Borrower to the extent not previously applied in accordance with the preceding
sentence or otherwise under the Ancillary Agreements.
(v) it shall not purchase or acquire obligations or stock of, or any
other interest in, or make any investment in any entity, except (A) obligations
issued or guaranteed by the United States of America or any agency thereof, (B)
commercial paper with maturities of not more than one hundred eighty (180) days
and a published rating of not less than A-1 or P-1 (or the equivalent rating),
(C) certificates of time deposit and bankers' acceptances having maturities of
not more than one hundred eighty (180) days and repurchase agreements backed by
United States government securities of a commercial bank if (x) such bank has a
combined capital and surplus of at least Five Hundred Million Dollars
($500,000,000), or (y) its debt obligations, or those of a holding company of
which it is a subsidiary, are rated not less than A (or the equivalent rating)
by a nationally recognized investment rating agency and (D) U.S. money market
funds that invest solely in obligations issued or guaranteed by the United
States of America or an Agency thereof, and (E) Eurodollar time deposits with
financial institutions with a published rating of not less than A-1 or P-1 (or
the equivalent rating).
31
<PAGE>
(w) the Borrower is not and will not become a Certificated Air
Carrier.
(x) the Borrower does not, as of the execution of this Agreement,
presently own any Aircraft or Aircraft Engines.
(y) Borrower shall not register or permit the registration of any
Aircraft under the laws of any country other than the United States, in each
such case without at least twenty (20) Business Days prior written notice to the
Lender. The Borrower shall not operate the Aircraft, in any area excluded from
coverage by any insurance required by the terms of this Agreement or in any area
of hostilities unless the Aircraft is covered by "war risk" insurance.
(z) Borrower shall not acquire any property or interest in property
(including, without limitation, Aircraft and Aircraft Parts) other than property
made subject to a Permitted Lien without (i) taking on or before the acquisition
thereof all steps necessary to create a perfected first priority Lien in favor
of the Lender therein, including without limitation the execution and filing of
an aircraft chattel mortgage and (ii) preparing and delivering to the Lender any
and all appropriate amendments to the Schedules to this Agreement (other than
Schedule B which may not be amended unilaterally), including without limitation,
in the case of Aircraft, Aircraft Engines adding the same to Schedule B.
(aa) Any payment, received at any time by the Lender or the Borrower
from any Governmental Authority or other Person with respect to an Event of Loss
shall be applied in the same manner as insurance proceeds are applied pursuant
to the Agreement.
(bb) On or prior to the date hereof and at least annually, prior to
each anniversary of the Closing Date, the Borrower shall furnish to the Lender a
report and/or certificate signed by a firm of independent aircraft insurance
brokers, appointed by the Borrower and reasonably acceptable to the Lender,
describing in reasonable detail the insurance then carried and maintained on or
with respect to the Aircraft and stating that in the opinion of such firm such
insurance complies with the terms of Section 12(u). The Borrower shall cause
such firm to advise the Lender in writing (i) promptly of any default in the
payment of any premium and of any other act or omission on the part of the
Borrower of which such firm has knowledge and that might invalidate or render
unenforceable in whole or in part, any insurance on the Aircraft, Airframes,
Aircraft Engines and Aircraft Parts, and (ii) at least 10 days prior to the
expiration or termination date of any insurance maintained with respect thereto
if such insurance has not been renewed by such date in accordance with the terms
hereof.
13. Power of Attorney. Borrower hereby appoints Lender or any other
Person whom Lender may designate as Borrower's attorney, with power to: (i)
32
<PAGE>
endorse Borrower's name on any checks, notes, acceptances, money orders, drafts
or other forms of payment or security that may come into Lender's possession;
(ii) sign Borrower's name on any invoice or bill of lading relating to any
Receivables, drafts against Customers, schedules and assignments of Receivables,
notices of assignment, financing statements and other public records,
verifications of account and notices to or from Customers; (iii) verify the
validity, amount or any other matter relating to any Receivable by mail,
telephone, telegraph or otherwise with Customers; (iv) execute customs
declarations and such other documents as may be required to clear Inventory
through Customs; (v) do all things necessary to carry out this Agreement, any
Ancillary Agreement and all related documents; and (vi) on or after the
occurrence and continuation of an Event of Default, notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Lender, and to receive, open and dispose of all mail addressed to
Borrower. Borrower hereby ratifies and approves all acts of the attorney.
Neither Lender nor the attorney will be liable for any acts or omissions or for
any error of judgment or mistake of fact or law. This power, being coupled with
an interest, is irrevocable so long as any Receivable which is assigned to
Lender or in which Lender has a security interest remains unpaid and until the
Obligations have been fully satisfied.
14. Expenses. Borrower shall pay all of Lender's out-of-pocket costs and
expenses, including without limitation reasonable fees and disbursements of
counsel retained or employed by Lender and appraisers, in connection with the
preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary Agreement.
Borrower shall pay all of Lender's out-of-pocket costs and expenses, including
without limitation reasonable fees and disbursements of counsel retained or
employed by Lender, in connection with (a) the preparation, execution and
delivery of any waiver, any amendment thereto or consent proposed or executed in
connection with the transactions contemplated by this Agreement or the Ancillary
Agreements, (b) Lender's obtaining performance of the Obligations under this
Agreement and any Ancillary Agreements, including, but not limited to, the
enforcement or defense of Lender's security interests, assignments of rights and
liens hereunder as valid perfected security interests, (c) any attempt to
inspect, verify, protect, collect, sell, liquidate or otherwise dispose of any
Collateral, and (d) any consultations in connection with any of the foregoing.
Borrower shall also pay Lender's then standard price for furnishing Borrower or
its designees copies of any statements, records, files or other data
(collectively, "Reports") requested by Borrower or its designees, other than
reports of the kind furnished to Borrower and Lender's other borrowers on a
regular, periodic basis in the ordinary course of Lender's business. Borrower
shall pay Lender's customary bank charges, including, without limitation, all
wire transfer fees incurred by Lender, for all bank services performed or caused
to be performed by Lender for Borrower at Borrower's request. Borrower shall
also pay all Appraisal fees, costs, and expenses charged by Appraiser in
connection with any
33
<PAGE>
Appraisals which may be conducted at Lender's request from time to time
hereunder. All such costs and expenses together with all filing, recording and
search fees, taxes and interest payable by Borrower to Lender shall be payable
on demand and shall be secured by the Collateral. If any tax by any
governmental authority is or may be imposed on or as a result of any transaction
between Borrower and Lender which Lender is or may be required to withhold or
pay, Borrower agrees to indemnify and hold Lender harmless in respect of such
taxes, and Borrower will repay to Lender the amount of any such taxes which
shall be charged to Borrower's account; and until Borrower shall furnish Lender
with indemnity therefor (or supply Lender with evidence satisfactory to it that
due provision for the payment thereof has been made), Lender may hold without
interest any balance standing to Borrower's credit and Lender shall retain its
security interests in any and all Collateral. Borrower hereby acknowledges that
Lender shall not be liable in any manner whatsoever for any selling expenses,
orders, purchases or contracts of any kind resulting from any transaction
between Borrower and any other Person and Borrower hereby indemnifies and holds
Lender harmless with respect thereto, which indemnity shall survive termination
of this Agreement.
15. Assignment. Lender may assign any or all of the Obligations together
with any or all of the security therefor and any transferee shall succeed to all
of Lender's rights with respect thereto. Upon such transfer, Lender shall be
released from all responsibility for the Collateral to the extent same is
assigned to any transferee. Lender may from time to time sell or otherwise
grant participations in any of the Obligations and the holder of any such
participation shall, subject to the terms of any agreement between Lender and
such holder, be entitled to the same benefits as Lender with respect to any
security for the Obligations in which such holder is a participant. Borrower
agrees that each such holder may exercise any and all rights of banker's lien,
set-off and counterclaim with respect to its participation in the Obligations as
fully as though Borrower were directly indebted to such holder in the amount of
such participation. Borrower may not assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of Lender,
and no such assignment or transfer of any such obligation shall relieve Borrower
thereof unless Lender shall have consented to such release in a writing
specifically referring to the obligation from which Borrower is to be released.
16. Waivers. Borrower waives presentment and protest of any instrument
and notice thereof, notice of default and all other notices to which Borrower
might otherwise be entitled.
17. Term of Agreement. This Agreement shall continue in full force and
effect until the expiration of the Term. The Term shall be automatically
extended for successive periods of one (1) year each unless either party shall
have provided the other with a written notice of termination, at least ninety
(90) days prior to the expiration of the initial Term or any renewal Term. The
Borrower may terminate this Agreement at any time upon ninety (90) days' prior
written notice ("Termination Date") upon payment in full of the Obligations;
provided, that
34
<PAGE>
Borrower pays an early termination fee in an amount equal to the Maximum
Revolving Advance Amount. For the purposes hereof, Required Percentage shall
mean (a) three percent (3%) from the Closing Date through the date preceding the
first anniversary of the Closing Date, two percent (2%) from the first
anniversary of the Closing through the day preceding the second anniversary of
the Closing Date and one percent (1%) from the second anniversary, or any
subsequent anniversary in any renewal term, the Closing date through the date
preceding the third anniversary of the Closing date or from any subsequent
anniversary of the Closing Date to the date preceding any next following
anniversary of the Closing Date in any renewal term.
18. Events of Default. The occurrence of any of the following shall
constitute an Event of Default:
(a) failure to make payment of any of the Obligations when required
hereunder;
(b) failure to pay any taxes when due unless such taxes are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been provided on Borrower's books;
(c) failure to perform under and/or committing any breach of this
Agreement or any Ancillary Agreement or any other agreement between Borrower and
Lender;
(d) occurrence of a default under any agreement to which Borrower is
a party with third parties which has a material adverse affect upon Borrower's
business, operations, property or condition (financial or otherwise) including
all leases for any premises where Inventory or Equipment is located;
(e) any representation, warranty or statement made by Borrower
hereunder, in any Ancillary Agreement, any certificate, statement or document
delivered pursuant to the terms hereof, or in connection with the transactions
contemplated by this Agreement should at any time be false or misleading in any
material respect;
(f) an attachment or levy is made upon any of Borrower's assets
having an aggregate value in excess of ($10,000),or a judgment is rendered
against Borrower or any of Borrower's property involving a liability of more
than Ten Thousand Dollars ($10,000), which shall not have been vacated,
discharged, stayed or bonded pending appeal within thirty (30) days from the
entry thereof;
(g) any change in Borrower's condition or affairs (financial or
otherwise) which in Lender's opinion impairs the Collateral or the ability of
Borrower to perform its Obligations;
35
<PAGE>
(h) any lien created hereunder or under any Ancillary Agreement for
any reason ceases to be or is not a valid and perfected lien having a first
priority interest;
(i) if Borrower shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of creditors, (iii) commence a voluntary case under
the federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated
a bankrupt or insolvent, (v) file a petition seeking to take advantage of any
other law providing for the relief of debtors, (vi) acquiesce to, or fail to
have dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (vii) take any action for the
purpose of effecting any of the foregoing;
(j) Borrower shall admit in writing its inability, or be generally
unable to pay its debts as they become due or cease operations of its present
business;
(k) any Affiliate or any Subsidiary or any Guarantor shall (i) apply
for or consent to the appointment of, or the taking possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property, (ii) admit in writing its inability, or be generally unable, to
pay its debts as they become due or cease operations of its present business,
(iii) make a general assignment for the benefit of creditors, (iv) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vii) acquiesce to, or fail to have dismissed, within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws,
(viii) take any action for the purpose of effecting any of the foregoing;
(l) Borrower directly or indirectly sells, assigns, transfers,
conveys, or suffers or permits to occur any sale, assignment, transfer or
conveyance of any assets of Borrower or any interest therein, except as
permitted herein;
(m) Borrower fails to operate in the ordinary course of business;
(n) Lender shall in good faith deem itself insecure or unsafe or
shall fear diminution in value, removal or waste of the Collateral;
(o) a default by Borrower in the payment, when due, of any principal
of or interest on any indebtedness for money borrowed;
(p) any Change of Ownership or any Change of Management.
19. Remedies. (a) Upon the occurrence of an Event of Default pursuant to
paragraph 18 (i) herein, all Obligations shall be immediately due and payable
and
36
<PAGE>
this Agreement shall be deemed terminated; upon the occurrence and continuation
of any other of the Events of Default, Lender shall have the right to demand
repayment in full of all Obligations, whether or not otherwise due and/or to
terminate this Agreement without advance notice. Until all Obligations have
been fully satisfied, Lender shall retain its security interest in all
Collateral. Lender shall have, in addition to all other rights provided herein,
the rights and remedies of a secured party under the Uniform Commercial Code,
and under other applicable law, all other legal and equitable rights to which
Lender may be entitled, including without limitation, the right to take
immediate possession of the Collateral, to require Borrower to assemble the
Collateral, at Borrower's expense, and to make it available to Lender at a place
designated by Lender which is reasonably convenient to both parties and to enter
any of the premises of Borrower or wherever the Collateral shall be located,
with or without force or process of law, and to keep and store the same on said
premises until sold (and if said premises be the property of Borrower, Borrower
agrees not to charge Lender for storage thereof for a period up to at least
sixty (60) days after sale or disposition of said Collateral). Further, Lender
may, at any time or times after default by Borrower, sell and deliver all
Collateral held by or for Lender at public or private sale for cash, upon credit
or otherwise, at such prices and upon such terms as Lender, in Lender's sole
discretion, deems advisable or Lender may otherwise recover upon the Collateral
in any commercially reasonable manner as Lender, in its sole discretion, deems
advisable. Except as to that part of the Collateral which is perishable or
threatens to decline speedily in nature or is of a type customarily sold on a
recognized market, the requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at Borrower's address as shown in
Lender's records, at least ten(10) days before the time of the event of which
notice is being given. Lender may be the purchaser at any sale, if it is
public. In connection with the exercise of the foregoing remedies, Lender is
granted permission to use all of Borrower's trademarks, tradenames, tradestyles,
patents, patent applications, licenses, franchises and other proprietary rights
which are used in connection with (a) Inventory for the purpose of disposing of
such Inventory and (b) Equipment for the purpose of completing the manufacture
of unfinished goods. The proceeds of sale shall be applied first to all costs
and expenses of sale, including attorneys' fees, and second to the payment (in
whatever order Lender elects) of all Obligations. Lender will return any excess
to Borrower and Borrower shall remain liable to Lender for any deficiency.
20. Waiver; Cumulative Remedies. Failure by Lender to exercise any right,
remedy or option under this Agreement or any supplement hereto or any other
agreement between Borrower and Lender or delay by Lender in exercising the same,
will not operate as a waiver; no waiver by Lender will be effective unless it is
in writing and then only to the extent specifically stated. Lender's rights and
remedies under this Agreement will be cumulative and not exclusive of any other
right or remedy which Lender may have.
21. Application of Payments. Borrower irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
37
<PAGE>
received by Lender from or on Borrower's behalf and Borrower hereby irrevocably
agrees that Lender shall have the continuing exclusive right to apply and
reapply any and all payments received at any time or times hereafter against
Borrower's Obligations hereunder in such manner as Lender may deem advisable
notwithstanding any entry by Lender upon any of Lender's books and records.
22. Depository Accounts. Any payment received by Borrower on account of
any Collateral shall be held by Borrower in trust for Lender and Borrower shall
promptly deliver same in kind to Lender or deposit all such payments into the
Lock Box Account at such bank as Lender may designate for application to payment
of the Obligations. Borrower shall also execute such further documents as
Lender may deem necessary to establish such an account and all funds deposited
in such account shall immediately be deemed Lender's property.
23. Lock Box Accounts. Borrower shall, at Lender's request, instruct all
of its Customers to make such payments on account of Receivables to an account
under Lender's dominion and control at such bank as Lender may designate.
Borrower shall also execute such further documents as Lender may deem necessary
to establish such an account and all funds deposited in such account shall
immediately be deemed Lender's property.
24. Revival. Borrower further agrees that to the extent Borrower makes a
payment or payments to Lender, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then, to
the extent of such payment or repayment, the obligation or part thereof intended
to be satisfied shall be revived and continued in full force and effect as if
said payment had not been made.
25. Notices. Any notice or request hereunder may be given to Borrower or
Lender at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this paragraph.
Any notice or request hereunder shall be given by registered or certified mail,
return receipt requested, or by overnight mail or by telecopy (confirmed by
mail). Notices and requests shall be, in the case of those by mail or overnight
mail, deemed to have been given when deposited in the mail or with the overnight
mail carrier, and, in the case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to the Lender: BNY Financial Corporation
1290 Avenue of the Americas
New York, New York 10104
Attention: Frank Imperato, V.P.
38
<PAGE>
Telephone: (212) 408-7026
Telecopy: (212) 408-7162
If to the Borrower: Aviation Distributors, Inc.
One Wrigley Drive
Irvine, CA 92618
Attention: Osamah S. Bakhit, Pres.
Telephone: (714) 586-7558
Telecopy: (714) 586-6246
With a copy to: Gibson Haglund & Johnson
2010 Main Street
Irvine, CA 92614
Attention: Bruce H. Haglund
Telephone: 714-752-1100
Telecopy: 714-752-1144
26. Governing Law and Waiver of Jury Trial. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK. LENDER SHALL HAVE THE RIGHTS AND REMEDIES OF A SECURED PARTY UNDER
APPLICABLE LAW INCLUDING, BUT NOT LIMITED TO, THE UNIFORM COMMERCIAL CODE OF NEW
YORK. BORROWER AGREES THAT ALL ACTIONS AND PROCEEDINGS RELATING DIRECTLY OR
INDIRECTLY TO THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR ANY OTHER OBLIGATIONS
SHALL BE LITIGATED IN THE FEDERAL DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW
YORK OR, AT LENDER'S OPTION, IN ANY OTHER COURTS LOCATED IN NEW YORK STATE OR
ELSEWHERE AS LENDER MAY SELECT AND THAT SUCH COURTS ARE CONVENIENT FORUMS AND
BORROWER SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS. BORROWER WAIVES
PERSONAL SERVICE OF PROCESS AND CONSENTS THAT SERVICE OF PROCESS UPON BORROWER
MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED
TO BORROWER AT BORROWER'S ADDRESS APPEARING ON LENDER'S RECORDS, AND SERVICE SO
MADE SHALL BE DEEMED COMPLETED TWO (2) DAYS AFTER THE SAME SHALL HAVE BEEN SO
MAILED. BOTH PARTIES HERETO WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BETWEEN BORROWER AND LENDER AND BORROWER WAIVES THE RIGHT TO ASSERT
IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH REGARD TO THIS AGREEMENT
OR ANY OF THE OBLIGATIONS ANY OFFSETS OR COUNTERCLAIMS WHICH IT MAY HAVE.
27. Limitation of Liability. Borrower acknowledges and understands that
in order to assure repayment of the Obligations hereunder Lender may be required
39
<PAGE>
to exercise any and all of Lender's rights and remedies hereunder and agrees
that neither Lender nor any of Lender's agents shall be liable for acts taken or
omissions made in connection herewith or therewith except for actual bad faith.
28. Entire Understanding. This Agreement and the Ancillary Agreements
contain the entire understanding between Borrower and Lender and any promises,
representations, warranties or guarantees not herein contained shall have no
force and effect unless in writing, signed by the Borrower's and Lender's
respective officers. Neither this Agreement, the Ancillary Agreements, nor any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged.
29. Modification. This Agreement and the Ancillary Agreements constitute
the complete agreement between the parties with respect to the subject matter
hereof and thereof and may not be modified, altered or amended except by an
agreement in writing signed by the parties hereto and thereto.
30. Severability. Wherever possible each provision of this Agreement or
the Ancillary Agreements shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
31. Captions. All captions are and shall be without substantive meaning
or content of any kind whatsoever.
32. Counterparts. This Agreement may be executed in one or more
counterparts, each of which taken together shall constitute one and the same
instrument.
33. Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
40
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year first above written.
ATTEST:
AVIATION DISTRIBUTORS, INC.
By:/s/ Bruce H. Haglund
---------------------------------
Title: SECRETARY
BNY FINANCIAL CORPORATION
By:/s/ Osamah S. Bakhit
---------------------------------
Title: President
SCHEDULES
Schedule 1(A) - Permitted Liens
Purchase Money up to Seven Thousand Fifty Dollars
Schedule 12(j) - Licenses, Patents, Trademarks and Copyrights
41
<PAGE>
Schedule 12(l) - Inventory Locations
Schedule 12(m) - Permitted Indebtedness
42
<PAGE>
SECURED AND GUARANTEED PROMISSORY NOTE
$2,342,000.00 New York, New York
February 24, 1997
FOR VALUE RECEIVED, the undersigned AVIATION DISTRIBUTORS, INC., a
Delaware corporation (the "Borrower") having its principal place of business at
One Capital Drive, Lake Forest, California, 92630, hereby unconditionally
promises to pay to the order of BNY FINANCIAL CORPORATION (the "Lender") at the
office of the Lender located at 1290 Avenue of the Americas, New York, NY 10104,
in lawful money of the United States of America and in immediately available
funds, the principal amount of TWO MILLION THREE HUNDRED AND FORTY TWO THOUSAND
DOLLARS ($2,342,000.00), when the same shall become due in accordance with
Section 4 hereof. The undersigned further agrees to pay interest in like money
at such office on the unpaid principal amount of this Secured and Guaranteed
Promissory Note (hereinafter, this "Note") from time to time from the date
hereof at a rate or rates per annum as specified in Section 2 hereof until such
amount is paid in full (both before and after judgment). Interest shall be
payable on each Interest Payment Date (as defined in Section 1 hereof),
commencing on the first such date to occur after the date hereof, on the Final
Maturity Date (as defined in Section 1 hereof) and on any date of payment in
full on the unpaid principal amount hereof. Interest shall be calculated in the
manner set forth in Section 2 hereof. If any payment of or under this Note
becomes due and payable on a day other than a Business Day, the maturity thereof
shall be extended to the next succeeding Business Day and, with respect to
payments of principal, interest thereon shall be payable at the then applicable
rate during such extension.
Section 1. DEFINITIONS. Capitalized terms that are used but not
defined herein shall have the meanings ascribed to them in the Credit Agreement.
In addition, the following definitions shall be applicable to this Note:
"AMENDED AND RESTATED GUARANTEE": that certain Amended and Restated
Guarantee, dated as of the date hereof, from the Guarantor to the Lender.
"BILL OF SALE": that certain Bill of Sale dated February 19, 1998
from Aerolease Financial Group, Inc. to the Borrower.
<PAGE>
"CLOSING DATE": the date that the conditions contained in Section 8(c)
of this Note are satisfied or waived.
"CREDIT AGREEMENT": That certain Credit and Security Agreement made
as of June 25, 1997, by and between the Lender and the Borrower, as amended
to the date hereof, including, without limitation, by that letter
agreement, dated September 8, 1997 from the Lender to the Borrower, and as
the same may be further amended from time to time.
"CREDIT DOCUMENTS": The Credit Agreement and the Ancillary Documents.
"ENGINE PURCHASE AGREEMENT": that certain Aircraft Engine Sales
Agreement, entered into on the 24th of November 1997, by and between
Aerolease Financial Group and the Borrower.
"FINAL MATURITY DATE": April 27, 1998.
"GUARANTOR": Osamah S. Bakhit, guarantor under the Amended and
Restated Guaranty Agreement.
"INTEREST PAYMENT DATE": the last day of each of February 1998, and
March 1998.
"LOAN PARTY": each of the Borrower, the Guarantor, the Third-Party
Pledgeholder and the Voting Trustee (collectively referred to herein as the
"LOAN PARTIES").
"LOCKBOX ACCOUNT" shall mean that certain post office box identified
as Aviation Distributors, Inc., P.O. Box 905420, Charlotte, North Carolina
28230-5420, to the attention of First Chicago National Processing Corporation
Lockbox Number 090520.
"NOTE AIRCRAFT ENGINE": A CFM Incorporated CFM56-2C1 Model Engine,
bearing manufacturer's serial number 692501.
"NOTE AIRCRAFT ENGINE PARTS": any and all components of the Note
Aircraft Engine on and after the commencement of the "parting out" of such
engine.
"NOTE DOCUMENTS": This Note, the Third Party Pledge Agreement, the
Bill of Sale, the Engine Purchase Agreement, the Amended and Restated Guarantee
and the Stock Pledge Agreement, and each other agreement, certificate, document
or instrument, including without limitation financial and other statements,
heretofore, simultaneously or in the future executed by or on behalf of the
Borrower and delivered to the Lender in connection with the Term Loan or the
Note, the
-2-
<PAGE>
Third Party Pledge Agreement, the Bill of Sale, the Engine Purchase Agreement,
the Amended and Restated Guarantee or the Stock Pledge Agreement.
"NOTE EVENT OF DEFAULT": any of the events specified Section 4(b)(i),
(ii), or (iii) hereof.
"STOCK PLEDGE AGREEMENT": that certain Stock Pledge Agreement, dated
as of the date hereof, made by the Guarantor and the Voting Trustee in favor of
the Lender.
"TERM LOAN": the loan of $2,342,000.00 made by Lender to Borrower on
the date hereof and evidenced by this Note.
"THIRD PARTY PLEDGE AGREEMENT": that certain Third Party Pledge
Agreement, by and among Lender, Borrower and the Third Party Pledgeholder.
"THIRD PARTY PLEDGEHOLDER": Sochata-Engines Overhaul, a corporation
organized under the laws of France.
"THIRTY-DAY PERIOD": Each period of thirty consecutive calendar days
commencing with the date hereof, in the case of the first such period, and
commencing on the day immediately following the last day of the immediately
preceding period, in all other cases.
"VOTING TRUSTEE": Dirk O. Julander, under that certain Trust
Agreement, made as of November 17, 1997, by and among the Guarantor, the
Borrower and Dirk O. Julander, as trustee.
Section 2. INTEREST. (a) The unpaid principal amount on this Note
shall bear interest at the Prime Rate plus three percent (3%) per annum.
(b) If all or a portion of (i) the principal hereof or (ii) any
interest payable thereon shall not be paid when due (whether upon demand or
otherwise), such overdue amount shall bear interest at the interest rate
applicable pursuant to Section 2(a) hereof plus two percent (2%) per annum.
(c) Interest shall be calculated on the basis of actual days elapsed
over a three hundred and sixty (360) day year.
(d) Interest shall be payable in arrears on each Interest Payment
Date, on the Final Maturity Date, and on any date of payment in full of the
unpaid principal amount hereof.
(e) In no event shall any interest charged hereunder be in excess of
the maximum rate permitted by law to be charged by the Lender.
Section 3. TAXES. All payments made by the Borrower under this Note
shall be made free and clear of, and without deduction or withholding for or on
-3-
<PAGE>
account of, any present or future income, stamp or other taxes, levies, imposts,
duties, charges, fees, deductions or withholdings, now or hereafter imposed,
levied, collected, withheld or assessed by any Governmental Authority,
excluding, in the case of the Lender, net income taxes and franchise taxes
(imposed in lieu of net income taxes) imposed on the Lender, as a result of a
present or former connection between the jurisdiction of the government or
taxing authority imposing such tax and the Lender or any political subdivision
or taxing authority thereof or therein (all such non-excluded taxes, levies,
imposts, duties, charges, fees, deductions and withholdings being hereinafter
called "TAXES"). If any Taxes are required to be withheld from any amounts
payable to the Lender hereunder, the amounts so payable to the Lender shall be
increased to the extent necessary to yield to the Lender (after payment of all
Taxes) interest or any such other amounts payable hereunder at the rates or in
the amounts specified in this Note. Whenever any Taxes are payable by the
Borrower, as promptly as possible thereafter the Borrower shall send to the
Lender for its own account a certified copy of an original official receipt
received by the Borrower showing payment thereof. If the Borrower fails to pay
any Taxes when due to the appropriate taxing authority or fails to remit to the
Lender the required receipts or other required documentary evidence, the
Borrower shall indemnify the Lender for any incremental taxes, interest or
penalties that may become payable to the Lender as a result of any such failure.
The agreements in this section shall survive the payment of this Note.
Section 4. MATURITY; ACCELERATION UPON NOTE EVENTS OF DEFAULT AND
CREDIT AGREEMENT EVENTS OF DEFAULT. (a) Portions of the principal on this
Note, in the respective amounts set forth in Schedule I hereto under the heading
"Principal", shall automatically become due and payable on the dates set forth
on such Schedule I opposite such amounts, without presentment, demand, protest
or notice, all of which are hereby waived, and the entire unpaid principal of
and accrued interest on and all other amounts owing under this Note shall
automatically become due and payable on the Final Maturity Date immediately,
without presentment, demand, protest or notice, all of which are hereby waived.
(b) If any of the following events shall occur and be continuing:
(i) The Borrower shall fail to pay any principal when due in
accordance with the terms hereof or the Borrower shall fail to pay any
interest or any other amount payable hereunder within five days after any
such interest or other amount becomes due in accordance with the terms
thereof or hereof;
(ii) Any representation or warranty made or deemed made by the
Borrower or any other Loan Party in this Note or in any other Note Document
furnished by Borrower or any other Loan Party, or on behalf of any of them,
at any time under or in connection with this Note or any other Note
Document shall prove to have been incorrect in any material respect on or
as of the date made or deemed made;
-4-
<PAGE>
(iii) The Borrower shall fail to comply with the provisions of
Section 8(b) hereof;
(iv) The Borrower or any other Loan Party shall default in the
observance or performance of any agreement contained in this Note other
than as provided in clauses (i) and (iii) of this Section 4(b) or in any
other Note Document and such default shall continue unremedied for a period
of 30 days; or
(v) an Event of Default shall occur;
then, and in any such event, (A) if such event is an Event of Default specified
in subsections (i), (j) and (k) of Section 18 of the Credit Agreement with
respect to the Borrower, automatically the entire principal amount of this Note
(with accrued interest thereon) and all other amounts owing under this Note
shall immediately become due and payable, and (B) if such event is any other
Event of Default or a Note Event of Default, the Lender may by notice to the
Borrower, declare the entire principal amount of this Note (with accrued
interest thereon) and all other amounts owing under this Note to be due and
payable forthwith, whereupon the same shall immediately become due and payable.
Notwithstanding the foregoing, the existence and continuation of the Events of
Default specifically identified on Exhibit B hereto shall not cause the amounts
owing under this Note to become due and payable. Except as expressly provided
above in this Section, presentment, demand, protest and all other notices of any
kind are hereby expressly waived.
Section 5. REPRESENTATIONS AND WARRANTIES.
The Borrower hereby represents and warrants to the Lender that:
(i) (a) It is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, (b) it has the power and
authority, and the legal right, to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged, (c) it is duly qualified and in good standing under the laws
of each jurisdiction where its ownership, lease or operation of property or the
conduct of its business requires such qualification and (d) it is in compliance
with all Requirements of Law.
(ii) It has the power and authority, and the legal right, to make,
deliver and perform the Note Documents and to borrow hereunder and has taken all
necessary action to authorize the execution, delivery and performance of this
Note (including without limitation, the borrowings on the terms and conditions
hereof) and to authorize the execution, delivery and performance of all of the
other Note Documents.
(iii) No consent or authorization of, filing with, notice to or other
act by or in respect of, any Governmental Authority or any other Person is
required in
-5-
<PAGE>
connection with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of the Note Documents.
(iv) Each Note Document has been or will be duly executed and
delivered on behalf of each Loan Party that is a party thereto. Each Note
Document when executed and delivered will constitute a legal, valid and binding
obligation of each Loan Party that is a party thereto enforceable against it in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
(v) Except as described in Exhibit A hereto, no litigation,
investigation or proceeding of or before any arbitrator or Governmental
Authority is pending or, to its knowledge, threatened by or against any of the
Loan Parties, or against any of its properties or revenues with respect to any
of the Credit Documents or any of the transactions contemplated hereby or
thereby.
(vi) Upon payment in full of $2,142,000.00 to Aerolease Financial
Group, Inc., the Borrower will own the Note Aircraft Engine and the Note
Aircraft Engine Parts free and clear of all Liens other than the Lien of the
Lender under the Credit Documents and the Note Documents.
(vii) Upon execution and delivery of the Third Party Pledge Agreement,
Lender shall have a first priority, perfected security interest in and to the
Note Aircraft Engine and the Note Aircraft Engine Parts.
(viii) Exhibit B sets forth a description of all Events of Default
that have occurred and are continuing under the Credit Agreement on the date
hereof and each of the representations and warranties of each Loan Party in each
Credit Document is true in all material respects on the date hereof except and
only to the extent that the same relate to the matters giving rise to such
Events of Default.
Section 6. FEES. (a) Simultaneously with the making of the Term
Loan, the Borrower shall pay to the Lender a $200,000.00 closing fee. The
Borrower hereby authorizes the Lender to withhold said fee from the proceeds of
the Term Loan and to pay itself the same on behalf of the Borrower.
(b) If the outstanding principal amount of this Note exceeds
$1,071,000.00 on each day of a Thirty-Day Period, Borrower shall pay to Lender
an overadvance fee of $100,000.00 on the Business Day next succeeding the last
day of such Thirty-Day Period.
Section 8. CERTAIN ACKNOWLEDGMENTS, AFFIRMATIONS AND COVENANTS.
(a) Borrower hereby acknowledges and agrees that:
-6-
<PAGE>
(i) The Credit Agreement and each of the Ancillary
Documents is in full force and effect and is hereby ratified and
affirmed in all respects.
(ii) Each of this Note and the other Note Documents
constitute Ancillary Documents and this Note and all amounts due
hereunder constitute Obligations, in each such case for all purposes
under the Credit Agreement.
(iii) The Note Aircraft Engine and Note Aircraft Engine
Parts constitute Collateral subject to the Lien of the Lender under
the Credit Documents and the Third Party Pledge Agreement and the Lien
of the Lender in the Collateral secures the payment by the Borrower of
all amounts due hereunder and the performance by the Borrower of each
of its obligations hereunder. For the avoidance of doubt, the
Borrower hereby grants to the Lender a security interest in the
Collateral to secure such payment and performance.
(iv) The Note Aircraft Engine Parts constitute Aircraft
Inventory and shall be held and maintained by the Borrower in
accordance with the provisions of the Credit Documents, including,
without limitation, the maintenance, insurance, protection of the
Lender's security interest and further assurance provisions thereof.
(v) None of the Note Aircraft Engine Parts shall constitute
Eligible Inventory until all amounts due hereunder shall have been
paid in full and such Note Aircraft Engine Parts otherwise meet the
terms of the definition thereof in the Credit Agreement.
(vi) Except as set forth in Section 4(b) above, Lender has
not waived any of its rights in respect of any of the Events of
Default described in Exhibit B hereto.
(b) The Term Loan has been made to enable Borrower to acquire the
Note Aircraft Engine Parts and to pay certain fees due hereunder and the
proceeds of the Term Loan will be used solely for such purposes. As soon as
reasonably practicable after the date hereof, the Borrower shall cause the Note
Aircraft Engine to be parted out and shall exercise commercially reasonable
efforts to sell the Note Aircraft Engine Parts. No later than twenty-one days
after the date hereof, either the Lien of the Lender in the Note Aircraft Engine
and Note Aircraft Engine Parts shall, to Lender's sole satisfaction, be a
first-priority, perfected Lien, or Borrower shall have caused the Note Aircraft
Engine to have been parted out and all or substantially all of the Note Aircraft
Engine Parts to have been sold. All proceeds from the sale of the Note Aircraft
Engine Parts shall be deposited in the Lockbox Account and applied to the
repayment of the Revolving Credit Advances in accordance with the Credit
Documents.
-7-
<PAGE>
(c) On or before the Closing Date, the Borrower shall have delivered
to the Lender, duly executed copies of the following agreements and documents:
(i) the Amended and Restated Guarantee;
(ii) the Stock Pledge Agreement and the Pledged Stock (as
defined in the Stock Pledge Agreement);
(iii) a certificate of the Chief Operating Officer or the
Chief Executive Officer of the Borrower, in form and substance
satisfactory to the Lender, to the effect that (i) each of the
representations and warranties of the Borrower contained in the Note
Documents is true in all material respects, (ii) to the best of his
knowledge, each of the representations and warranties of the Guarantor
and the Voting Trustee contained in the Note Documents is true in all
material respects and (iii) that each of the conditions of this
paragraph (c) of Section 8 have been satisfied and;
(iv) such other agreements, documents or instruments as the
Lender may in its sole discretion require;
(v) an opinion of counsel to the Borrower in form and
substance satisfactory to the Lender and covering such matters as the
Lender may in its sole discretion require; and, if reasonably
practicable, the Third Party Pledge Agreement.
(vi) If a duly executed copy of the Third Party Pledge
Agreement cannot be reasonably practicably delivered by the Borrower
to the Lender before or simultaneously with the execution and delivery
of this Note, then the Borrower shall exercise its best efforts to
cause the same to be executed and delivered to the Lender as soon as
possible thereafter.
Section 9. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. This Note may not be amended,
supplemented or modified except in accordance with the provisions of this
Section 9 (a). The Lender may, from time to time, (i) enter into with the
Borrower written amendments, supplements or modifications hereto for the purpose
of adding any provisions to this Note or changing in any manner the rights of
the Lender or the Borrower hereunder or (ii) waive, on such terms and
conditions as the Lender may specify in such instrument, any of the requirements
of this Note or any default by the Borrower hereunder and its consequences. Any
such waiver and any such amendment, supplement or modification shall be binding
upon the Borrower, the Lender and all future holders of this Note. In the case
of any waiver, the Borrower and the Lender shall be restored to their former
position and rights hereunder, and any default hereunder waived shall be deemed
to be cured and not continuing; but
-8-
<PAGE>
no such waiver shall extend to any subsequent or other default hereunder, or
impair any right consequent thereon.
(b) NOTICES. All notices, requests and demands to or upon the
respective parties hereto shall be made in accordance with the provisions of the
Credit Agreement.
(c) PAYMENT OF EXPENSES AND TAXES. The Borrower agrees (i) to pay
or reimburse the Lender for its out-of-pocket costs and expenses incurred in
connection with the development, preparation and execution of, and any
amendment, supplement or modification to, this Note and the other Note
Documents, and the consummation and administration of the transactions
contemplated hereby and thereby, including, without limitation, the fees and
disbursements of counsel to the Lender, (ii) to pay or reimburse the Lender for
all its costs and expenses incurred in connection with the enforcement or
preservation of any rights under this Note and the other Note Documents,
including, without limitation, the fees and disbursements of counsel to the
Lender, (iii) to pay, indemnify, and hold the Lender harmless from, any and all
recording and filing fees and any and all liabilities with respect to, or
resulting from any delay in paying, stamp, excise and other taxes, if any, which
may be payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Note and the other Note Documents, and
(iv) to pay, indemnify, and hold the Lender harmless from and against any and
all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever arising out of or in connection with any claim, litigation,
investigation, arbitration or proceeding relating to this Note and the other
Note Documents (all the foregoing in this clause (iv), collectively, the
"indemnified liabilities"), PROVIDED, that the Borrower shall not have any
obligation hereunder to the Lender with respect to indemnified liabilities
arising from the gross negligence or willful misconduct of the Lender. The
agreements in this Section 9 (c) shall survive repayment of this Note.
(d) SUCCESSORS AND ASSIGNS. This Note shall be binding upon the
Borrower and its successors and assigns, and shall inure to the benefit of the
Lender and all future holders of this Note and their respective successors and
assigns, except that the Borrower may not assign or transfer any of its rights
or obligations under this Note without prior written consent of the Lender.
(e) SEVERABILITY. Any provision of this Note which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
-9-
<PAGE>
(f) GOVERNING LAW. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE
BORROWER AND THE LENDER HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
AVIATION DISTRIBUTORS, INC.
By: /s/ Kenneth A. Lipinski
-------------------------------
Title: Chief Operating Officer
-10-
<PAGE>
Schedule I to
NOTE
PRINCIPAL REPAYMENT SCHEDULE
<TABLE>
<CAPTION>
Date Principal
---- ---------
<S> <C>
March 17, 1998 $1,600,000.00
April 27, 1998 $ 742,000.00
</TABLE>
<PAGE>
EXHIBIT A
AVIATION DISTRIBUTORS, INC.
LITIGATION SUMARY
1. Shareholder Suits (Class Actions)
<TABLE>
<CAPTION>
Description Date Filed Court
- ----------- ---------- -----
<S> <C> <C>
Kim Thoa Nguyen v. ADI,
Osamah S. Bakhit, ET AL October 8, 1997 U.S. District Court
Central
District of
California
Alan Green v. ADI,
Osamah S. Bakhit, ET AL October 9, 1997 U.S. District Court
Central District of
California
Sharon Tate v. ADI,
Osamah S. Bakhit, ET AL October 21, 1997 U.S. District Court
Central District of
California
</TABLE>
2. Other Litigation
<TABLE>
<CAPTION>
Description Date Filed Court
- ----------- ---------- -----
<S> <C> <C>
Anylem Kidane and Aflink. Inc v.
ADI, Osamah S. Bakhit, ET AL April 17, 1996 Orange County
Superior Court
(Claim for profit participation
form an Airline sale)
Techalloy Co., Inc. v. ADI,
Osamah S. Bakhit, ET AL October 7, 1997 Orange County
Municipal Court
(Claim for payment on sale
of goods)
Said El Turk v. ADI,
Osamah S. Bakhit, ET AL November 6, 1997 Orange County
Superior Court
(Claim for money damages
on the sale of plane)
<PAGE>
M&M Aircraft v. ADI,
Osamah S. Bakhit, ET AL December 31, 1997 Circuit Court of the
11th District
Dade County, Florida
(Claim for recovery of
repair costs from purchase
of allegedly faulty parts
from ADI)
</TABLE>
3. Ongoing Investigations
Investigation being conducted by the United States Securities and Exchange
Commission captioned IN THE MATTER OF AVIATION DISTRIBUTORS, INC., File No.
HO-3319.
Federal Grand Jury investigation being conducted by the United States Attorney's
Office for the Central District of California and the Federal Bureau of
Investigation. There is no formal caption or title for this Grand Jury
investigation.
-13-
<PAGE>
EXHIBIT B
EVENTS OF DEFAULT
<PAGE>
<PAGE>
AVIATION DISTRIBUTORS, INC.
AMENDMENT TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT to the Employment Agreement dated July 16, 1997 (the
"Employment Agreement") by and between OSAMAH S. BAKHIT, a married man residing
at 23015 Cecilia, Mission Viejo, California 92691 ("BAKHIT" or "Executive"), and
AVIATION DISTRIBUTORS, INC., a Delaware corporation with offices at One Wrigley
Drive, Irvine, California 92618 (the "Company" or "ADI") is made as of this
17th day of November, 1997 for the purpose of setting forth the agreement of the
parties with respect to certain amended terms of the Employment Agreement, a
copy of which is attached hereto as Exhibit "A" and incorporated herein by this
reference, as set forth below:
1. The parties agree to amend Section 1.1 of the Employment Agreement to
read in full as follows:
1.1 Executive shall be employed by the Company. Executive shall
devote substantially all of his working time and efforts to
the business of the Company. Until revised by mutual
agreement, Executive's duties shall be as set forth in the
Memorandum of Duties dated November 17, 1997, a copy of
which is attached hereto as Exhibit "B" and incorporated
herein by this reference. Executive shall perform such
duties and responsibilities in accordance with the practices
and policies of the Company as in effect from time to time
in accordance with Executive's employment arrangements with
the Company. Executive shall report directly to the Board.
Page 1
<PAGE>
2. The Company agrees to observe and abide by the terms and conditions
set forth in the resolutions of the Board of Directors as set forth in the
Certificate of Secretary dated November 13, 1997, a copy of which is attached
hereto as Exhibit "C" and incorporated herein by this reference.
3. The Company agrees to observe and abide by all of the terms and
conditions of the Employment Agreement other than as amended hereby. In
connection with the Company's agreement to indemnify BAKHIT as set forth in
Section 21 of the Employment Agreement, the Company (i) acknowledges that the
Company will continue to honor its contractual and statutory duty to indemnify
him to the full extent permitted by Delaware law for any costs, expenses or
damages suffered as a consequence of such litigation or investigations, (ii)
agrees to advance the costs of defense for BAKHIT in connection with legal
actions brought against him, whether civil, criminal, or administrative in
nature.
4. BAKHIT hereby resigns as the President, Chief Executive Officer,
Chairman of the Board, and a member of the Board of Directors of ADI, and ADI
hereby accepts such resignation.
5. The Company agrees to use its best efforts and to take such steps as
may be reasonably necessary to provide that BAKHIT will continue to be covered
by the Company's directors and officers insurance. The Company acknowledges
that nothing herein is intended to constitute grounds for BAKHIT's exclusion
from coverage.
(remainder of page blank)
Page 2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Employment Agreement at Irvine, California on the date first written above.
AVIATION DISTRIBUTORS, INC.
By: /s/ Bruce H. Haglund
--------------------------------
Bruce H. Haglund, Secretary
/s/ OSAMAH S. BAKHIT
- -----------------------------------
OSAMAH S. BAKHIT
Page 3
<PAGE>
AVIATION DISTRIBUTORS, INC.
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT to the Employment Agreement dated July 16, 1997 (the
"Employment Agreement") by and between MARK W. ASHTON, a married man residing at
23015 Cecilia, Mission Viejo, California 92691 ("ASHTON"), and AVIATION
DISTRIBUTORS, INC., a Delaware corporation with offices at One Wrigley Drive,
Irvine, California 92618 ("ADI") is made as of this 13th day of November, 1997
for the purpose of setting forth the agreement of the parties with respect to
certain amended terms of the Employment Agreement as follow:
1. The parties agree to amend Section 1.1 of the Employment Agreement to
read in full as follows: "Executive shall be employed by the Company in a
capacity as the Board of Directors may determine which is reasonable given his
employment experience and education, which may change from time to time, in
furtherance of the Company's business."
2. At the request of the Board of Directors of ADI, and acting in the
best interests of ADI and in the furtherance of the business of ADI, ASHTON
hereby resigns as the Vice President-Finance, Chief Financial Officer, and a
member of the Board of Directors of ADI, and ADI hereby accepts such
resignation. ASHTON's status as an employee of ADI remains unchanged, and his
resignation does not prejudice any rights under the Employment Agreement.
3. The parties acknowledge that ASHTON has been placed on a paid leave of
absence by ADI and agree that the paid leave of absence will continue until
December 31, 1997 or the completion of an audit of ADI's financial statement for
the nine months ended September 30, 1997, whichever is later. ASHTON will
remain an employee in good standing of ADI during the leave of absence, and the
leave of absence will not prejudice any rights under the Employment Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Employment Agreement at Irvine, California on the date first written above.
AVIATION DISTRIBUTORS, INC.
By: /s/ Bruce H. Haglund
------------------------------
Bruce H. Haglund,
Secretary
/s/ MARK W. ASHTON
- -------------------------------
MARK W. ASHTON
<PAGE>
[LOGO] EXHIBIT 99.1
1. PARTIES. This Lease, dated, for reference purposes only June 9, 1997, is
made by and between OLEN PROPERTIES CORP. A FLORIDA CORPORATION (herein
called "Lessor") and AVIATION DISTRIBUTORS, INC. A DELAWARE CORPORATION
(herein called ("Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
that certain real property situated in the County of Orange, State of
California, commonly known as 1 Capital Drive, Lake Forest, CA 92630 and
described as A free-standing Building. Said real property including the land
and all improvements therein, is herein called "The Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for Seven (7) years
commencing on Thirty (30) days after substantial completion of Tenant and
ending on Seven (7) years after Commencement Improvements and final
inspection by City of Lake Forest, unless sooner terminated pursuant to any
provision hereof. * (See Addendum A, Item D for Start Date Amendment and
Items E and H for Early Possession Agreements.)
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor (See Addendum A,
Item I for additional terms.) nor shall such failure affect the validity of
this Lease or the obligations of Lessee hereunder or extend the term hereof,
but in such case, Lessee shall not be obligated to pay rent until possession
of the Premises is tendered to Lessee; provided, however, that if Lessor
shall not have delivered possession of the Premises within sixty (60) days
from said commencement date, Lessee may, at Lessee's option, by notice in
writing to Lessor within ten (10) days thereafter, cancel this Lease, in
which event the parties shall be discharged from all obligations hereunder;
provided further, however, that if such written notice of Lessee is not
received by Lessor within said ten (10) day period, Lessee's right to cancel
this Lease hereunder shall terminate and be of no further force or effect.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay
rent for such period at the initial monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly
payments of $29,512.68, in advance, on the first day of each month of the
term hereof. Lessee shall pay Lessor upon the execution hereof $29,512.68 as
rent for the first month (Base Rent $24,317.25); Direct Expense Charges
$5,195.43; Lessee shall pay Lessor on September 1, 1997 as Security Deposit
equal to one month's rent ($29,512.68) pursuant to Article 5 herein.
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment. Rent shall be payable
in lawful money of the United States to Lessor at the address stated herein
or to such other persons or at such other places as Lessor may designate in
writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor on September 1, 1997
$29,512.68 as security for Lessee's faithful performance of Lessee's
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of such deposit for the
payment of any rent or other charge in default or for the payment of any
other sum to which Lessor may become obligated by reason of Lessee's default,
or to compensate Lessor for any loss or damage which Lessor may suffer
thereby. If Lessor so uses or applies all or any portion of said deposit,
Lessee shall within ten (10) days after written demand therefor deposit cash
with Lessor in an amount sufficient to restore said deposit to the full
amount hereinabove stated and Lessee's failure to do so shall be a material
breach of this Lease. If the monthly rent shall, from time to time, increase
during the term of this Lease, Lessee shall thereupon deposit with Lessor
additional security deposit so that the amount of security deposit held by
Lessor shall at all times bear the same proportion to current rent as the
original security deposit bears to the original monthly rent set forth in
paragraph 4 hereof. Lessor shall not be required to keep said deposit
separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not
theretofore been applied by Lessor, shall be returned, without payment of
interest or other increment for its use, to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest hereunder) at the
expiration of the term hereof, and after Lessee has vacated the Premises. No
trust relationship is created herein between Lessor and Lessee with respect
to said Security Deposit.
NOTE: SECURITY DEPOSIT SHALL NOT BE APPLIED TOWARD THE LAST MONTH'S RENT.
6. USE.
6.1 USE. The Premises shall be used and occupied only for - office,
distribution and warehousing for aviation equipment and parts as approved by
the City of Lake Forest or any other use which is reasonably comparable and
for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or
ordinance in effect on such Lease term commencement date. In the event it is
determined that this warranty has been violated, then it shall be the
obligation of the Lessor, after written notice from Lessee, to promptly, at
Lessor's sole cost and expense, rectify any such violation. In the event
Lessee does not give to Lessor written notice of the violation of this
warranty within six months from the date that the violation is discovered,
the correction of same shall be the obligation of the Lessee at Lessee's sole
cost. The warranty contained in this paragraph 6.2 (a) shall be of no force
or effect if, prior to the date of this Lease, Lessee was the owner or
occupant of the Premises, and, in such event, Lessee shall correct any such
violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at
Lessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements in effect during the term or any part of the term hereof,
regulating the use by Lessee of the Premises. Lessee shall not use nor permit
the use of the Premises in any manner that will tend to create waste or a
nuisance or, if there shall be more than one tenant in the building
containing the Premises, shall tend to disturb such other tenants.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on Lease commencement date (unless Lessee is already in possession)
and Lessor further warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation. Lessee's failure to give such written
notice to Lessor within thirty (30) days after the Lease commencement date
shall cause the conclusive presumption that Lessor has complied with all of
Lessor's obligations hereunder. The warranty contained in this paragraph
6.3(a) shall be of no force or effect if prior to the date of this Lease,
Lessee, was the owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises in their condition existing as of the Lease commencement
date or the date that Lessee takes possession of the Premises, whichever is
earlier, subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing and regulating the use of the Premises,
and any covenants or restrictions of record, and accepts this Lease subject
thereto and to all matters disclosed thereby and by any exhibits attached
hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made
any representation or warranty as to the present or future suitability of the
Premises for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order, condition and
repair the Premises and every part thereof, structural and non structural,
(whether or not such portion of the Premises requiring repair, or the means
of repairing the same are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises)
including, without limiting the generality of the foregoing, all plumbing,
heating, air conditioning, (Lessee shall procure and maintain, at Lessee's
expense, an air conditioning system maintenance contract) ventilating,
electrical, lighting facilities and equipment within the Premises, fixtures,
walls (interior and exterior), foundations, ceilings, roofs (interior and
exterior), floors, windows, doors, plate glass and skylights located within
the Premises, and all landscaping, driveways, parking lots, fences and signs
located on the Premises and sidewalks and parkways adjacent to the Premises.
7.2 SURRENDER. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as when received, ordinary wear and tear excepted, clean and free of
debris. Lessee shall repair any damage to the Premises occasioned
NET
American Industrial Real Estate Association
<PAGE>
this Lease, Lessee shall leave the air lines, power panels, electrical
distribution systems, lighting fixtures, space heaters, air conditioning,
plumbing and fencing on the premises in good operating condition.
7.3 LESSOR'S RIGHTS. If Lessee fails to perform Lessee's obligations
under this Paragraph 7, or under any other paragraph of this Lease, Lessor
may at its option (but shall not be required to) enter upon the Premises
after ten (10) days' prior written notice to Lessee (except in the case of an
emergency, in which case no notice shall be required), perform such
obligations on Lessee's behalf and put the same in good order, condition and
repair, and the cost thereof together with interest thereon at the maximum
rate then allowable by law shall become due and payable as additional rental
to Lessor together with Lessee's next rental installment.
7.4 LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that
Lessor have no obligation, in any manner whatsoever, to repair and maintain
the Premises nor the building located thereon nor the equipment therein,
whether structural or non structural, all of which obligations are intended
to be that of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives
the benefit of any statute now or hereinafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate
this Lease because of Lessor's failure to keep the premises in good order,
condition and repair.
7.5 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent not to
be unreasonably withheld, make any alterations, improvements, additions, or
Utility Installations in, on or about the Premises, except for nonstructural
alterations not exceeding $10,000 in cumulative costs during the term of this
Lease. In any event, whether or not in excess of $10,000 in cumulative cost,
Lessee shall make no change or alteration to the exterior of the Premises nor
the exterior of the building(s) on the Premises without Lessor's prior
written consent. However, Lessee agrees to inform Lessor in writing of all
changes made within the Premises within thirty (30) days of the date of said
change. As used in this Paragraph 7.5 the term "Utility Installation" shall
mean carpeting, window coverings, air lines, power panels, electrical
distribution systems, lighting fixtures, space heaters, air conditioning,
plumbing, and fencing. Lessor may require that Lessee remove any or all of
said alterations, improvements, additions or Utility Installations at the
expiration of the term, and restore the Premises to their prior condition.
Lessor may require Lessee to provide Lessor, at Lessee's sole cost and
expense, a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such improvements, to insure Lessor against any
liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or
Utility Installations in violation hereof without the prior approval of
Lessor, Lessor may require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in, or about the Premises that Lessee shall desire to make and
which requires the consent of the Lessor shall be presented to Lessor in
written form, with proposed detailed plans. If Lessor shall give its consent,
the consent shall be deemed conditioned upon Lessee acquiring a permit to do
so from appropriate governmental agencies, the furnishing of a copy thereof
to Lessor prior to the commencement of the work and the compliance by Lessee
of all conditions of said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of
any work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall,
in good faith, contest the validity of any such lien, claim or demand, then
Lessee shall, at its sole expense defend itself and Lessor against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises,
upon the condition that if Lessor shall require, Lessee shall furnish to
Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's reasonable attorneys fees
and costs in participating in such action if Lessor shall decide it is to its
best interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of
Lessee), which may be made on the Premises, shall become the property of
Lessor and remain upon and be surrendered with the Premises at the expiration
of the term. Notwithstanding the provisions of this Paragraph 7.5(d),
Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the
Premises, shall remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 7.2
8. INSURANCE INDEMNITY.
8.1 INSURING PARTY. As used in this Paragraph 8, the term "insuring
party" shall mean the party who has the obligation to obtain the Property
Insurance required hereunder. The insuring party shall be designated in
Paragraph 46 hereof. In the event Lessor is the insuring party, Lessor shall
also maintain the liability insurance described in paragraph 8.2 hereof, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee under said paragraph 8.2, but Lessor shall not be required to name
Lessee as an additional insured on such policy. Whether the insuring party is
the Lessor or the Lessee, Lessee shall, as additional rent for the Premises,
pay the cost of all insurance required hereunder, except for that portion of
the cost attributable to Lessor's liability insurance coverage in excess of
$1,000,000 per occurrence. If Lessor is the insuring party Lessee shall,
within ten (10) days following demand by Lessor, reimburse Lessor for the
cost of the insurance so obtained.
8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and
keep in force during the term of this Lease a policy of Combined Single
Limit, Bodily Injury and Property Damage insurance insuring Lessor and Lessee
against any liability arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be a combined single limit policy in an amount not less than $500,000
per occurrence. The policy shall insure performance by Lessee of the
indemnity provisions of this Paragraph 8. The limits of said insurance shall
not, however, limit the liability of Lessee hereunder.
8.3 PROPERTY INSURANCE.
(a) The insuring party shall obtain and keep in force during the
term of this Lease a policy or policies of insurance covering loss or damage
to the Premises, in the amount of the full replacement value thereof, as the
same may exist from time to time, but in no event less than the total amount
required by lenders having liens on the Premises, against all perils included
within the classification of fire, extended coverage, vandalism, malicious
mischief, flood (in the event same is required by a lender having a lien on
the Premises), and a special extended perils ("all risk" as such term is used
in the insurance industry). Said insurance shall provide for payment of loss
thereunder to Lessor or to the holders of mortgages or deeds of trust on the
Premises. The insuring party shall, in addition, obtain and keep in force
during the term of this Lease a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all real estate taxes and insurance costs for said period. A stipulated
value or agreed amount endorsement deleting the coinsurance provision of the
policy shall be procured with said insurance as well as an automatic increase
in insurance endorsement causing the increase in annual property insurance
coverage by 2% per quarter. If the insuring party shall fail to procure and
maintain said insurance the other party may, but shall not be required to,
procure and maintain the same, but at the expense of Lessee. If such
insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount.
(b) If the Premises are part of a larger building, or if the
Premises are part of a group of buildings owned by Lessor which are adjacent
to the Premises, then Lessee shall pay for any increase in the property
insurance of such other building or buildings if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof.
But if Lessee is the insuring party the Lessee shall insure its fixtures,
equipment and tenant improvements.
8.4 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or
such other ratings as may be required by a lender having a lien on the
Premises, as set forth in the most current issue of "Best's Insurance Guide".
The insuring party shall deliver to the other party copies of policies of
such insurance or certificates evidencing the existence and amounts of such
insurance with loss payable clauses as required by this paragraph 8. No such
policy shall be cancellable or subject to reduction of coverage or other
modification except after thirty (30) days' prior written notice to Lessor. If
Lessee is the insuring party Lessee shall, at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with renewals or "binders"
thereof, or Lessor may order such insurance and charge the cost thereto to
Lessee, which amount shall be payable by Lessee upon demand. Lessee shall not
do or permit to be done anything which shall invalidate the insurance policies
referred to in Paragraph 8.3. If Lessee does or permits to be done anything
which shall increase the cost of the insurance policies referred to in
Paragraph 8.3, then Lessee shall forthwith upon Lessor's demand reimburse
Lessor for any additional premiums attributable to any act or omission or
operation of Lessee causing such increase in the cost of insurance. If Lessor
is the insuring party, and if the insurance policies maintained hereunder
cover other improvements in addition to the Premises. Lessor shall deliver to
Lessee a written statement setting forth the amount of any such insurance
cost increase and showing in reasonable detail the manner in which it has
been computed.
8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining
the policies of insurance required hereunder, give notice to the insurance
carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any negligence of the Lessee, or any of Lessee's agents,
contractors, or employees, and from and against all costs, attorney's fees,
expenses and liabilities incurred in the defense of any such claim or any
action or proceeding brought thereon: and in case any action or proceeding be
brought against Lessor by reason of any such claim, Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons except if caused
by the gross negligence or willful misconduct of Lessor in, upon or about the
Premises arising from any cause and Lessee hereby waives all claims in
respect thereof against Lessor.
8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other
person in or about the Premises, nor shall Lessor be liable for injury to the
person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places
and regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant, if any, of
the building in which the Premises are located.
NET -2-
<PAGE>
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less
than 50% of the then replacement cost of the Premises. "Premises Building
Partial Damage" shall herein mean damage or destruction to the building of
which the Premises are a part to the extent that the cost of repair is less
than 50% of the then replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or
more of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 50% or more
of the then replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which
was caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 PARTIAL DAMAGE--INSURED LOSS. Subject to the provisions of
paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is an insured Loss and which falls into the
classification of Premises Partial Damage or Premises Building Partial
Damage, then Lessor shall, at Lessor's expense, repair such damage, but not
Lessee's fixtures, equipment or tenant improvements unless the same have
become a part of the Premises pursuant to Paragraph 7.5 hereof as soon as
reasonably possible and this Lease shall continue in full force and effect.
Notwithstanding the above, if the Lessee is the insuring party, and if the
insurance proceeds received by Lessor are not sufficient to effect such
repair, Lessor shall give notice to Lessee of the amount required in addition
to the insurance proceeds to effect such repair. Lessee shall contribute the
required amount to Lessor within ten days after Lessee has received notice
from Lessor of the shortage in the insurance. When Lessee shall contribute
such amount to Lessor, Lessor shall make such repairs as soon as reasonably
possible and this Lease shall continue in full force and effect. Lessee shall
in no event have any right to reimbursement for any such amounts so
contributed.*
9.3 PARTIAL DAMAGE--UNINSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is not an Insured Loss and which falls within the
classification of Premises Partial Damage or Premises Building Partial
Damage, unless caused by a negligent or willful act of Lessee (in which event
Lessee shall make the repairs at Lessee's expense), Lessor may at Lessor's
option either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
the date of the occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, as of the date of the occurrence of such damage. In the
event Lessor elects to give such notice of Lessor's intention to cancel and
terminate this Lease, Lessee shall have the right within ten (10) days after
the receipt of such notice to give written notice to Lessor of Lessee's
intention to repair such damage at Lessee's expense, without reimbursement
from Lessor, in which event this Lease shall continue in full force and
effect, and Lessee shall proceed to make such repairs as soon as reasonably
possible. If Lessee does not give such notice within such 10-day period this
Lease shall be cancelled and terminated as of the date of the occurrence of
such damage.*
9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease
there is damage, whether or not an Insured Loss, (including destruction
required by any authorized public authority), which falls into the
classification of Premises Total Destruction or Premises Building Total
Destruction, this Lease shall automatically terminate as of the date of such
total destruction.
9.5 DAMAGE NEAR END OF TERM.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option
cancel and terminate this Lease as of the date of occurrence of such damage
by giving written notice to Lessee of Lessor's election to do so within 30
days after the date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee
has an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than 20 days after the
occurrence of an Insured Loss falling within the classification of Premises
Partial Damage during the last six months of the term of this Lease. If
Lessee duly exercises such option during said 20 day period, Lessor shall,
at Lessor's expense, repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to
exercise such option during said 20 day period, then Lessor may at Lessor's
option terminate and cancel this Lease as of the expiration of said 20 day
period by giving written notice to Lessee of Lessor's election to do so
within 10 days after the expiration of said 20 day period, notwithstanding
any term or provision in the grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in paragraphs 9.2 or 9.3,
and Lessor or Lessee repairs or restores the Premises pursuant to the
provisions of this Paragraph 9, the rent payable hereunder for the period
during which such damage, repair or restoration continues shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of rent, if any, Lessee shall have no claim against
Lessor for any damage suffered by reason of any such damage, destruction,
repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within 90 days after such obligations shall accrue,
Lessee may at Lessee's option cancel and terminate this Lease by giving
Lessor written notice of Lessee's election to do so at any time prior to the
commencement of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.
9.7 Termination--Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 Waiver. Lessor and Lessee waive the provisions of any statutes
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES. (See Addendum A, Item F herein.)
10.1 PAYMENT OF TAXES. Lessee shall reimburse Lessor for the real
property tax, as defined in paragraph 10.2, applicable to the Premises during
the term of this Lease. All such payments shall be made within ten (10) days
of receipt of Lessor's invoice for such payment. If any such taxes paid by
Lessee shall cover any period of time prior to or after the expiration of the
term hereof, Lessee's share of such taxes shall be equitably prorated to
cover only the period of time within the tax fiscal year during which this
Lease shall be in effect, and Lessor shall reimburse Lessee to the extent
required. If Lessee shall fail to pay any such taxes, Lessor shall have the
right to pay the same, in which case Lessee shall repay such amount to Lessor
with Lessee's next rent installment together with interest at the maximum
rate then allowable by law.
10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Premises by any authority
having the direct or indirect power to tax, including any city, state or
federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, as against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, as against Lessor's right to rent or other income
therefrom, and as against Lessor's business of leasing the Premises. The term
"real property tax" shall also include any tax, fee, levy assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax," or (ii) the nature of which was hereinbefore included within
the definition of "real property tax," or (iii) which is imposed for a
service or right not charged prior to June 1, 1978, or, if previously
charged, has been increased since June 1, 1978, or (iv) which is imposed as a
result of a transfer, either partial or total, of Lessor's interest in the
Premises or which is added to a tax or charge hereinbefore included within
the definition of real property tax by reason of such transfer, or (iv) which
is imposed by reason of this transaction, any modifications or changes hereto
or any transfers hereof.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property
taxes for all of the land and improvements included within the tax parcel
assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information
as may be reasonably available. Lessor's reasonable determination thereof, in
good faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the
real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay Lessor the taxes attributable
to Lessee within 10 days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor
of all charges jointly metered with other premises. Lessor warrants all
utilities will be provided to the Building upon the Commencement Date.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the
Premises, without Lessor's prior written consent, which Lessor shall not
unreasonably withhold. Lessor shall respond to Lessee's request for consent
hereunder in a timely manner and any attempted assignments, transfer,
mortgage, encumbrance or subletting without such consent shall be void, and
shall constitute a breach of this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion
thereof, without Lessor's consent, to any corporation which controls, is
controlled by or is under common control with Lessee, or to any corporation
resulting from the merger or consolidation with Lessee, or to any person or
entity which acquires all the assets of Lessee as a going concern of the
business that is being conducted on the Premises, provided that said assignee
assumes, in full, the obligations of Lessee under this Lease. Any such
assignment shall not, in any way, affect or limit the liability of Lessee
under the terms of this Lease even if after such assignment or subletting the
terms of this Lease are materially changed or altered without the consent of
Lessee, the consent of whom shall not be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or after
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of
any provision hereof. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by any assignee of Lessee or any successor of Lessee, in the
performance of any of the terms hereof. Lessor may proceed directly against
Lessee without the necessity of exhausting remedies against said assignee.
Lessor may consent subsequent assignments or subletting of this Lease or
amendments or modifications to this Lease with assignees.
* Notwithstanding the foregoing, Lessee shall have no obligation to
contribute any amount to Lessor for damages resulting from Lessor's
negligence or negligent omissions.
NET -3-
<PAGE>
of Lessee without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve
Lessee of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorney's fees incurred in
connection therewith, such attorney's fees not to exceed $350.00 for each
such request.
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee, other than described in paragraph (b) above, where such failure
shall continue for a period of 30 days after written notice hereof from
Lessor to Lessee; provided, however, that if the nature of Lessee's default
is such that more than 30 days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commenced such cure
within said 30-day period and thereafter diligently prosecutes such cure to
completion.
(d) (i) The making by Lessee of any general arrangement of
assignment for the benefit of creditors; (ii) Lessee become a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless,
in the case of a petition filed against Lessee, the same is dismissed within
60 days); (iii) the appointment of a trustee or receiver to take possession
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where possession is not restored to Lessee
within 30 days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
30 days. Provided, however, in the event that any provision of this paragraph
13.1(d) is contrary to any applicable law, such provision shall be of no
force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by
Lessor by reason of Lessee's default including, but not limited to, the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's
fees, and any real estate commission actually paid; the worth at the time of
award by the court having jurisdiction thereof of the amount by which the
unpaid rent for the balance of the term after the time of such award exceeds
the amount of such rental loss for the same period that Lessee proves could
be reasonably avoided; that portion of the leasing commission paid by Lessor
pursuant to Paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent
as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but
in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to
Lessee in writing, specifying wherein Lessor has failed to perform such
obligation; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days are required for performance then Lessor
shall not be in default if Lessor commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such overdue amount,
nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of rent,
then rent shall automatically become due and payable quarterly in advance,
rather than monthly, notwithstanding paragraph 4 or any other provision of
this Lease to the contrary.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain, or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than 10% of the
floor area of the building on the Premises, or more than 25% of the land area
of the Premises which is not occupied by any building, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing only
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the rent shall be reduced in the proportion that the floor area
of the building taken bears to the total floor area of the building situated
on the Premises. No reduction of rent shall occur if the only area taken is
that which does not have a building located thereon. Any award for the taking
of all or any part of the Premises under the power of eminent domain or any
payment made under threat of the exercise of such power shall be the property
of Lessor, whether such award shall be made as compensation for diminution in
value of the leasehold or for the taking of the fee, or as severance damages;
provided, however, that Lessee shall be entitled to any award for loss of or
damage to Lessee's trade fixtures and removable personal property. In the
event that this Lease is not terminated by reason of such condemnation,
Lessor shall to the extent of severance damages received by Lessor in
connection with such condemnation, repair any damage to the Premises caused
by such condemnation except to the extent that Lessee has been reimbursed
therefor by the condemning authority, Lessee shall pay any amount in excess
of such severance damages required to complete such repair.
15. BROKER'S FEE.
(a) Upon execution of this Lease by both parties, Lessor shall pay
to CB COMMERCIAL, JAMES MENCONI, JEFF CARR, JON MARCHIORLATTI a fee as set
forth in a separate agreement between Lessor and said broker(s), or in the
event there is no separate agreement between Lessor and said broker(s), the
sum of $PER AGREEMENT, for brokerage services rendered by said broker(s) to
Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under
this Lease, or any subsequently granted option which is substantially similar
to an Option granted to Lessee under this Lease, or if Lessee acquires any
rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or if Lessee remains in possession of the
Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or if said broker(s) are the procuring cause of any
other lease or sale entered into between the parties pertaining to the
Premises and/or any adjacent property in which Lessor has an interest, then
as to any of said transaction, Lessor shall pay said broker(s) a fee in
accordance with the schedule of said broker(s) in effect at the time of
execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity
having an ownership interest in said real property or any part thereof, when
such fee is due hereunder. Any transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed
to have assumed Lessor's obligation under this Paragraph 15. Said broker
shall be a third party beneficiary of the provisions of this Paragraph 15.
15. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days'
prior written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification
and certifying that this Lease, as so modified, is in full force and effect)
and the date to which the rent and other charges are paid in advance, if any,
and by acknowledging that there are not, to Lessee's knowledge, any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if any
are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
NET -4-
<PAGE>
conclusive upon Lessee (i) that this Lease is in full force and effect
without modification except as may be represented by Lessor (ii) that there
are no uncured defaults in Lessor's performance, and (iii) that no more than
one month's rent has been paid in advance of such failure may be considered
by Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises,
or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall
include the past three years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only
the owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and except as expressly provided
in Paragraph 15, in the event of any transfer of such title or interest.
Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligation thereafter to be performed,
provided that any funds in the hands of Lessor or the then grantor at the
time of such transfer, in which Lessee has an interest, shall be delivered to
the grantee. The obligations contained in this Lease to be performed by
Lessor shall, subject as aforesaid, be binding on Lessor's successors and
assigns, only during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law from the date due. Payment of such interest shall
not excuse or cure any default by Lessee under this Lease, provided, however,
that interest shall not be payable on late charges incurred by Lessee nor on
any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence.
21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification. Except as otherwise stated in
this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in Paragraph 15 hereof nor any cooperating broker on this transaction
nor the Lessor or any employees or agents of any of said persons has made any
oral or written warranties or representations to Lessee relative to the
condition or use by Lessee of said Premises and Lessee acknowledges that
Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance
thereof with all applicable laws and regulations in effect during the term of
this Lease except as otherwise specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified mail, and
if given personally or by mail, shall be deemed sufficiently given if
addressed to Lessee or to Lessor at the address noted below the signature of
the respective parties, as the case may be. Either party may by notice to the
other specify a different address for notice purposes except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice purposes. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any
act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to or approval of any subsequent act by Lessee. The acceptance of
rent hereunder by Lessor shall not be a waiver of any preceding breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such
preceding breach at the time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of
the Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's reasonable consent, remains in
possession of the Premises or any part thereof after the expiration of the
term hereof, such occupancy shall be a tenancy from month to month upon all
the provisions of this Lease pertaining to the obligations of Lessee, but all
options and rights of first refusal, if any, granted under the terms of this
Lease shall be deemed terminated and be of no further effect during said
month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions
of Paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State wherein the Premises are located. California represents
the forum choice for any disputes.
30. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation or security
now or hereafter placed upon the real property of which the Premises are a
part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms.
If any mortgagee, trustee or ground lessor shall elect to have this Lease
prior to the lien of its mortgage, deed of trust or ground lease, and shall
give written notice thereof to Lessee, this Lease shall be deemed prior to
such mortgage, deed of trust, or ground lease, whether this Lease is dated
prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate
an attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure
to execute such documents within 10 days after written demand shall
constitute a material default by Lessee hereunder, or, at Lessor's option,
Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably
appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and
stead, to execute such documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the
prevailing party in any such action, on trial or appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to
enter the Premises at reasonable times and when possible, during normal
business hours with 24-hour notice for the purpose of inspecting the same,
showing the same to prospective purchasers, lenders, or lessees, and making
such alterations, repairs, improvements or additions to the Premises any
ordinary "For Sale" signs and Lessor may at any time during the last 120 days
of the term hereof place on or about the Premises any ordinary "For Lease"
signs, all without rebate of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease. Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises without
Lessor's prior written consent except that Lessee shall have the right,
without the prior permission of Lessor to place ordinary and usual for rent
or sublet signs thereon.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent
shall not be reasonably withheld.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease
or to renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (2) the option or right of first refusal to lease
the Premises or the right of first offer to lease the Premises or the right
of first refusal to lease other property of Lessor or the right of first
offer to lease other property of Lessor; (3) the right or option to purchase
the Premises, or the right of first refusal to purchase the Premises, or the
right of first offer to purchase the Premises or the right or option to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor or the right of first offer to purchase other
property of Lessor.
NET -5-
<PAGE>
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised on the assigned voluntarily or
involuntarily by XXX any person or entity other than Lessee, provided
however, the Option may be exercised by or assigned to any Lessee Affiliate
as defined in paragraph 12.2 of this Lease. The Options herein granted to
Lessee are not assignable separate and apart from this Lease.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised
unless the prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the
default elapsed in said notice of default is cured, or (ii) during the period
of time commencing on the day after a monetary obligation to Lessor is due
from Lessee and unpaid (without any necessity for notice thereof to Lessee)
continuing until the obligation is paid, or (iii) at any time after an event
of default described in paragraphs 13.1(a), 13.1(d) or 13.1(e) (without any
necessity of Lessor to give notice of such default to Lessee), or (iv) in the
event that Lessor has given to Lessee three or more notices of default under
paragraph 13.1(b) where a late charge has become payable under paragraph 13.4
for each of such defaults, or paragraph 13.1(c), whether or not the defaults
are cured, during the 12 month period prior to the time that Lessee intends
to exercise the subject Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of 30 days after such obligation becomes due, or (ii)
Lessee fails to commence to cure a default specified in paragraph 13.1(c)
within 30 days after the date that Lessor gives notice to Lessee of such
default and/or Lessee fails thereafter to diligently prosecute said cure to
completion, or (iii) Lessee commits a default described in paragraph 13.1(a),
13.1(d) prosecuted 13.1(e)(without any necessity of Lessor to give notice of
such default to Lessee), or (iv) Lessor gives to Lessee three or more notices
of default under paragraph 13.1(d), where a late charge becomes payable under
paragraph 13.4 for each such default, or paragraph 13.1(c), whether or not
the defaults are cured.
40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide
by keep and observe all reasonable rules and regulations which Lessor may
make from time to time for the management, safety, care, and cleanliness of
the building and grounds, the parking of vehicles and the preservation of
good order therein as well as for the convenience of other occupants and
tenants of the building. The violations of any such rules and regulations
shall be deemed a material breach of this Lease by Lessee.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
same. Lessee assumes all responsibility for the protection of Lessee, its
agents and invitees from acts of third parties.
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restriction do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure
to do so shall constitute a material breach of this Lease.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise to any
amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment, and there shall survive
the right on the part of said party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said party to pay such sum or any part thereof, said party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty days (30) days after
execution of this Lease, deliver to Lessor evidence of such authority
satisfactory to Lessor.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. INSURING PARTY. The insuring party under this lease shall be the LESSEE.
47. ADDENDUM. See Addenda A, B, C, D and E and Exhibits A, A-1, A-2, and B-1
and B-2 attached hereto and made a part hereof.
48. RENT PAYMENTS. Rent payments are due on the first of each month. Please
remit to Olen Properties Corp., 7 Corporate Plaza, Newport Beach, CA 92660.
LESSOR DOES NOT INVOICE ON A MONTHLY BASIS.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR
ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO. THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE.
THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE ON THE DATES
SPECIFIED IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES.
OLEN PROPERTIES CORP.
Executed at: Newport Beach A FLORIDA CORPORATION
--------------------------- ---------------------------------
on July 16, 1997 By /s/ CHARLES C. AUFHAMMER
--------------------------- -----------------------------
Charles c. Aufhammer
Vice President, Marketing
Address 7 Corporate Plaza By
--------------------------- -----------------------------
Newport Beach, CA 92660
--------------------------- "LESSOR"
AVIATION DISTRIBUTORS, INC.
Executed at A DELAWARE CORPORATION
--------------------------- -----------------------------
on By /s/ OSAMAH BAKHIT
--------------------------- -----------------------------
Address By Osamah Bakhit, President
--------------------------- -----------------------------
"LESSEE"
<PAGE>
ADDENDUM "A"
TO LEASE DATED: June 9, 1997
BY AND BETWEEN: OLEN PROPERTIES CORP.
A FLORIDA CORPORATION
AS LESSOR; AND: AVIATION DISTRIBUTORS, INC.
A DELAWARE CORPORATION
AS LESSEE
- -------------------------------------------------------------------------------
A. SIGN CRITERIA
These regulations are established in order to maintain a continuity in
appearance throughout Spectrum Pointe and to comply with the City of
Lake Forest sign ordinance. Conformance with the following sign
regulations will be strictly enforced:
1. GENERAL REQUIREMENTS:
(a) Each unit or building shall be allowed one identity sign.
(b) The sign shall be installed at Lessee's expense.
(c) No electrical or audible signs shall be permitted.
(d) Except as provided herein, no advertising placards, banners,
pennants, names, insignias, trademarks, or other descriptive
material shall be affixed or maintained upon the glass panes or
exterior walls of the building.
2. SPECIFICATIONS-Multi-tenant Buildings:
(TO BE DETERMINED)
3. SPECIFICATIONS-Single-tenant Buildings:
(a) Front Entry Sign:
(i) Lessee shall use three dimensional, plant-on, individual
letters. These letters shall be made of 3" thick,
poly-styrened back with a high impact styrene letter face
not to exceed 14" in height.
(ii) Type face shall be Helvetica medium and the color shall be
white.
(iii) The maximum area within which the sign, including logo, can
be installed shall be 40 square feet per building, except
in the event that more than one tenant occupies a single
building, the sign size allotment shall be determined on a
prorata basis. The square footage dimensions shall be
calculated by taking the distance from the first to the last
letter, including all spaces between the letters
("length"), and multiplying that dimension by the distance
from the top to the bottom of the largest letter or logo
("width").
(iv) Placement of the sign on the building shall be in the
location and by the method designated by Lessor. Lessee
shall submit a sketch of the proposed sign to Lessor for
approval prior to construction and installation.
(v) Lessee shall be responsible for obtaining all approvals and
permits that may be required by the City of Lake Forest or
the Association.
(b) Warehouse Mandoor Sign:
(i) These signs shall be on 5" X 18" plexiglass, white in color
with black lettering hot-stamped onto the plexiglass face.
It shall be attached with double-sided adhesive tape, and
the skin of the door is not to be penetrated.
CCA /s/ CCA
- ---------------- ----------------
Lessor's Initial Lessee's Initial
<PAGE>
ADDENDUM "A"
PAGE 2
B. DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS
Lessee acknowledges that its leasehold estate is part of the Planned
Development and subject to a Declaration of Covenants, Conditions, and
Restrictions. Lessee agrees to accept its leasehold estate subject to
the aforementioned Declaration and agrees to perform and comply with any
and all restrictions set forth in said declaration or to make adequate
provisions to permit entry and other actions by Lessor for the purpose
of performing and complying with these restrictions.
C. MANAGEMENT
Hereinafter Lessor agrees to perform all of Lessee's obligations
("Direct Expenses") defined in Article 10.1 of this Lease, and only the
common area and landscaping obligations set forth under Article 7.1.
Direct Expense Budget for 1998 is as follows:
TOTAL DIRECT EXPENSE MONTHLY BUDGET FOR:
SPECTRUM POINTE
<TABLE>
<CAPTION>
<S> <C>
Total Project Square Footage: 164,900
Tenant's Square Footage: 36,079
Tenant's Percentage: 21.88%
MONTHLY EXPENSES
PER MONTH
Landscaping $ 1,319.20
Sweeping 494.70
Utilities 1,649.00
Exterior Maintenance 1,319.20
Management (1.5% of gross) 1,649.00
Reserve 989.40
---------
TOTAL COMMON AREA $ 7,420.00
Property Taxes 10,388.70
Melo Roos Assessments 5,111.90
Pacific Commercentre Assn. Dues 824.50
---------
TOTAL EXPENSES PER MONTH $16,325.10
Lessee's monthly prorata share is 21.88% of the above expenses as follows:
Common Area.................................................... $ 1,623.50
Property Taxes................................................. $ 3,571.93
---------
TOTAL MONTHLY DIRECT EXPENSE BUDGET............................ $ 5,195.43
---------
---------
</TABLE>
Lessor will provide Lessee an estimate of the Direct Expenses each year
which will be added to the monthly lease payment. The estimate for the
first year is based on the Direct Expense Budget above. Lessor agrees
to provide Lessee with an accounting of the actual expenses as of
December 31st of each year. Should the cost of providing these services
exceed the estimate, then upon receipt of a statement from Lessor,
Lessee shall pay a lump sum equal to Lessee's prorata share of Direct
Expenses for the previous calendar year, less the total of the monthly
installments of the estimated Direct Expenses paid in the previous
calendar year. The estimated monthly installments to be paid for the
next calendar year shall be adjusted to reflect such increase. IN NO
EVENT SHALL THE ANNUAL ADJUSTMENT FOR COMMON AREA EXPENSES EXCEED THREE
PERCENT (3%) PER ANNUM.
If in any calendar year Lessee's share of Direct Expenses shall be less
than the preceding year, then upon receipt of Lessor's statement, any
over payment made by Lessee on the monthly installment basis provided
above shall be credited toward the next monthly rent falling due and the
estimated monthly installment of Direct Expenses to be paid shall be
adjusted to reflect such lower Direct Expenses for the most recent year.
CCA /s/ CCA
- ----------------- -----------------
Lessor's Initials Lessee's Initials
<PAGE>
ADDENDUM "A"
PAGE 3
D. START DATE AMENDMENT
Upon establishing a fixed Commencement and Termination Date for this
Lease, an amendment shall be created defining said dates which will
be attached hereto and will become hereof a part of the terms and
conditions of this Lease.
E. EARLY ACCESS AGREEMENT
Lessor agrees to grant Lessee rent-free access to the Premises during
the last thirty (30) days of the construction period and prior to final
inspection for the purpose of fixturization and utility installations.
Said access shall be co-ordinated with Lessor's job-site superintendent
and shall be granted at times and in such areas as said job-site
superintendent deems in his sole discretion to in no way interfere with
or delay the construction of the Tenant Improvements as set forth on
Addendum E herein. Lease payments shall not commence until the
Commencement Date as set forth on the Start Date Amendment. Lessor shall
have no liability or responsibility for damages to the personal property
of Lessee, or any loss suffered by Lessee through vandalism, theft, or
destruction of the property by fire or other causes.
F. REAL ESTATE TAX ASSESSMENT
In no event shall Lessee be responsible for any tax increases caused by
the sale or transfer of the Building during the initial lease term, or
any extensions thereof.
G. HAZARDOUS MATERIALS
To the best of Lessor's knowledge, there is no asbestos or hazardous
materials including, but not limited to, Radon gas, PCB's, lead base
paint, ground water contamination, industrial, radioactive or chemical
waste, urea-formaldehyde insulation, under ground storage tanks on the
property, or within 2,000 feet of the property and the property is not
in a flood or seismic zone. Notwithstanding any other provision in the
Lease and the Addenda thereto, Lessee shall not be responsible for any
costs associated with hazardous materials clean-up on the Premises not
caused by or resulting from the activities or negligent omissions of
Lessee, and Lessor hereby agrees to defend and indemnify Lessee from any
claims related thereto.
H. EARLY POSSESSION AGREEMENT
Lessor agrees to grant Lessee early occupancy of said Premises, the date
to be upon substantial completion of Tenant Improvements and Final
Inspection by City of Lake Forest. Lease payments shall not commence
until thirty (30) days thereafter. Lessor shall have no liability or
responsibility for damages to the personal property of, or any loss
suffered by Lessee through vandalism, theft, or destruction of the
property by fire or other causes. It is agreed by Lessee and Lessor that
all the terms and conditions of the lease are to be in full force and
effect, except as to rent, as of the date of Lessee's possession of
subject Premises.
I. DELAY IN POSSESSION
In the event Lessor has not received Final Inspection of Tenant
Improvements by the City of Lake Forest on or before one-hundred twenty
(120) days from the date of issuance of the Tenant Improvement building
permit, then Lessor shall credit Lessee with one day of free rent for
every day beyond one hundred-twenty (120) days from issuance of said
tenant improvement building permit that Final Inspection is not
received. This 120-day period shall be extended proportionately by the
length of any delay in construction progress caused by Lessee, Lessee's
agents, or any other cause not under the reasonable control of Lessor.
Should the building not be completed and not be occupiable on or before
February 1, 1998, then Lessee shall have the right to cancel this Lease
with no further costs or obligations.
CCA /s/ CCA
- ----------------- -----------------
Lessor's Initials Lessee's Initials
<PAGE>
"ADDENDUM B"
BY AND BETWEEN: OLEN PROPERTIES CORP., A FLORIDA CORPORATION
AS LESSOR; AND: AVIATION DISTRIBUTORS, INC., A DELAWARE CORPORATION
AS LESSEE
TO LEASE DATED: JUNE 9, 1997
- -------------------------------------------------------------------------------
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed affixed on or to any part of the outside
or inside of the Building without the written consent of Lessor first
had and obtained and Lessor shall have the right to remove and destroy
any such sign, placard, picture, advertisement, name or notice without
notice to and at the expense of Lessee.
All approved signs or lettering on doors shall be printed, painted,
affixed or inscribed at the expense of Lessee.
Lessee shall not place anything or allow anything to be placed near
the glass of any window, door, partition or wall which may appear
unsightly from outside the Premises; provided, however, that the
Lessor may furnish and install a Building standard window covering
at all exterior windows. Lessee shall not without prior written
consent of Lessor cause or otherwise install sunscreen on any
window.
2. The sidewalks, halls, passages, exits, entrances, elevators and
stairways, driveways, and parking areas shall not be obstructed by
Lessees or used by them for any purposes other than for ingress and
egress from their respective Premises.
3. Lessee shall not alter any lock or install any new or additional locks
or bolts on any doors or windows of the Premises, without prior written
consent of Lessor and subsequent delivery of a duplicate key to Lessor.
4. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown therein and
the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Lessee who, or whose
employees or invitees shall have caused it.
5. Lessee shall not overload the floor of the Premises or in any way deface
the Premises or any part thereof.
6. Lessee shall not use, keep or permit to be used or kept any foul or
noxious gas or substances in the Premises, or permit or suffer the
Premises to be occupied or used in a manner offensive or objectionable
to the Lessor or other occupants of the Building by reason of noise,
odors and/or vibrations, or interfere in any way with other Lessees or
those having business therein, nor shall any animals or birds be brought
in or kept in or about the Premises or the Building.
7. No cooking shall be done or permitted by any Lessee on the Premises, nor
shall the Premises be used for washing clothes, for lodging, or for any
improper, objectionable or immoral purpose.
8. Lessee shall not keep in the Premises or the Building any kerosene,
gasoline or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied or
approved in writing by the Lessor.
9. Lessor will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires
will be allowed without the consent of the Lessor. The locations of
telephones, call boxes and other office equipment affixed to the
Premises shall be subject to the approval of Lessor.
10. Lessor reserves that right to exclude or expel from the Building any
person who, in the judgment of Lessor, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in
violation of any of the rules and regulations of the Building.
11. Lessee shall not disturb, solicit, or canvass any occupant of the
Building and shall cooperate to prevent same.
12. Without the written consent of Lessor, Lessee shall not use the name of
the building in connection with or in promoting or advertising the
business of Lessee except as Lessee's address.
13. Lessor shall have the right to control and operate the public portions
of the Building, and the public facilities, and heating and air
conditioning, as well as facilities furnished for the common use of the
Lessees, in such manner as it deems best for the benefit of the Lessees
generally.
14. All garbage and refuse shall be placed by Lessee in the containers at
the location prepared by Lessor for refuse collection, in the manner and
at the times and places specified by Lessor. Lessee shall not burn any
trash or garbage of any kind in or about the Leased Premises or the
Business Park. All cardboard boxed must be "broken down" prior to being
placed in the trash container. All Styrofoam chips must be bagged or
otherwise contained prior to placement in the trash container, so as not
to constitute a nuisance. Pallets may not be disposed of in the trash
bins or enclosures. It is the Lessee's responsibility to dispose of
pallets by alternative means.
Should any garbage or refuse not be deposited in the manner specified by
Lessor, Lessor may after three (3) hours verbal notice to Lessee, take
whatever action necessary to correct the infracture at Lessee's expense.
15. No aerial antenna shall be erected on the roof or exterior walls of the
Leased Premises, or on the grounds, without in each instance, the
written consent of Lessor first being obtained. Any aerial or antenna so
installed without such written consent shall be subject to removal by
Lessor at any time without notice.
16. No loud speakers, televisions, phonographs, radios or other devises
shall be used in a manner so as to be heard or seen outside of the
Leased Premises or in neighboring space without the prior written
consent of Lessor.
17. The outside areas immediately adjoining the Leased Premises shall be
kept clean and free from dirt and rubbish by the Lessee, to the
satisfaction of the Lessor, and Lessee shall not place or permit any
obstruction or materials in such areas. No exterior storage shall be
allowed.
18. Lessee shall use at Lessee's cost such pest extermination contractors as
Lessor may direct and at such intervals as Lessor may require.
CCA /s/ CCA
- ----------------- -----------------
Lessor's Initials Lessee's Initials
<PAGE>
ADDENDUM B
PAGE 2
19. These common types of damages will be charged back to the Lessee if they
are not corrected PRIOR TO VACATING the premises:
- Keys not returned to Lessor for ALL locks, requiring the service of
a locksmith and rekeying.
- Removal of all decorator painting, wallpapering and paneling, or
Lessor's prior consent to remain.
- Electrical conduit and receptacles on the surface of walls.
- Phone outlets, wiring, or phone equipment added on wall surfaces.
- Security tape/magnetic tape switches for burglar alarm systems
added to window and door surfaces.
- Penetration of roof membrane in any manner.
- Holes in walls, doors, and ceiling surfaces.
- Addition or change of standard door hardware.
- Painting or gluing of carpet or tile on warehouse floors.
- Glass damage.
- Damage to warehouse ceiling insulation.
- Stains or damage to carpeting beyond normal wear-and-tear.
- Damaged, inoperative, or missing electrical, plumbing, or HVAC
equipment.
- Debris and furniture requiring disposal.
- Damaged or missing mini-blinds, draperies, and baseboards.
- Installation of additional improvements without Lessor's prior
written approval or obtainment of required City building permits.
Lessee agrees to comply with all such rules and regulations upon notice from
Lessor. Should Lessee not abide by these Rules and Regulations, Lessor may
serve a three (3) day notice to correct deficiencies. If Lessee has not
corrected deficiencies by the end of the notice period, Lessee will be in
default of lease.
Lessor reserves the right to amend or supplement the foregoing rules and
regulations and to adopt and promulgate additional rules and regulations
applicable to the leased premises. Notice of such rules and regulations and
amendments and supplements thereto, if any, shall be given to the Lessee.
CCA /s/ CCA
- ----------------- -----------------
Lessor's Initials Lessee's Initials
<PAGE>
ADDENDUM "D"
TO LEASE DATED: June 9, 1997
BY AND BETWEEN: OLEN PROPERTIES CORP.
A FLORIDA CORPORATION
AS LESSOR; AND: AVIATION DISTRIBUTORS, INC.
A DELAWARE CORPORATION
AS LESSEE
- -------------------------------------------------------------------------------
OPTION TO EXTEND/LEASE EXTENSION
Providing LESSEE is not in default under any of the terms of this Lease,
Lessee shall have the Option to Extend the term of this Lease for ONE (1)
FIVE-YEAR period on all the same terms and conditions as contained in this
Lease, except that the base monthly rent commencing with the first month of
each Lease Extension shall be the THEN MARKET RATE for equivalent space in
the area of Spectrum Pointe, but in no event shall the new monthly rent be
less than the base monthly rent for the previous twelve (12) months.
Thereafter, the base monthly rent shall be subject to an upward only
adjustment at the beginning of each one (1) year period of the Lease
Extension/Option Period. The new base rent for each twelve (12) month period
shall be determined by adding to the annual rental for the previous twelve
(12) months a sum equal to any percentage increase that may occur in the
Consumer Price Index (Urban Wage Earners and Clerical Workers) as published
by the United States Department of Labor, Bureau of Labor Statistics for the
Los Angeles-Long Beach-Anaheim Metropolitan Area (1967 - 100 Base), for the
previous twelve months.
To exercise this Option to Extend, Lessee must give notice IN WRITING to
Lessor by Certified mail, return receipt requested at least ONE HUNDRED AND
EIGHTY DAYS prior to the expiration of the previous term.
If such index is not published for the period for which a rental adjustment
determination is to be based upon, another index generally recognized as
being comparable and authoritative shall be substituted by Lessor. Inasmuch
as the appropriate index numbers may not be available on the date when any
such adjustment is to be effective, the latest index numbers available shall
be used until such time as the appropriate index numbers become available, at
which time the calculation shall be made as soon as reasonably possible and
the rent payment shall be appropriately adjusted so as to include both the
correctly adjusted monthly rent current from the intended adjustment date.
In the event the Bureau of Labor Statistics ceases to publish the Consumer
Price Index, the parties hereto may agree to use any similar type of Index,
or if they are unable to agree upon a substitute Index, the parties shall
select an independent arbitrator who shall determine an alternate method of
computing the increased rental. In the event the parties hereto cannot agree
on an independent arbitrator, the Option to Extend shall terminate.
All terms and conditions of Article 39 of the Lease shall remain in full
force and effect.
CCA /s/ CCA
- ----------------- -----------------
Lessor's Initials Lessee's Initials
<PAGE>
ADDENDUM "E"
TO LEASE DATED: June 9, 1997
BY AND BETWEEN: OLEN PROPERTIES CORP.
A FLORIDA CORPORATION
AS LESSOR; AND: AVIATION DISTRIBUTORS, INC.
A DELAWARE CORPORATION
AS LESSEE
- -------------------------------------------------------------------------------
CONSTRUCTION OF TENANT IMPROVEMENTS
In consideration of Lessee's agreement to enter into this Lease, Lessor
agrees to cause the Premises to be constructed and improved substantially in
accordance with such improvements as are more particularly described and
detailed on the plans ("Design Plans") attached hereto as "Exhibit A-1" (Site
Plan), "Exhibit A-2" (Elevations), and "Exhibits B-1 and B-2" (Floor Plans),
all of which are attached hereto (collectively, the "Tenant Improvements").
As soon as reasonably possible after Lessor's receipt of signed Leases and
movie-in monies, Lessor shall cause to be prepared working drawings for the
Tenant Improvements and shall furnish them to Lessee for Lessee's prompt
review and approval, which approval shall not be unreasonably withheld. It
shall be unreasonable for Lessee to withhold such approval except if such
working drawings are inconsistent in some material respect with the Design
Plans attached hereto. If Lessee has not approved and signed working
drawings on or before five (5) business days from its receipt of same, then
such working drawings shall be deemed approved by Lessee. If Lessee
disapproves such working drawings, Lessee's notice of disapproval shall also
include the specific reasons authorized hereunder for such disapproval.
Lessor and Lessee shall negotiate in good faith to resolve as soon as
possible any differences between them regarding such working drawings.
Lessor agrees to construct "turn-key" Tenant Improvements substantially in
accordance with Design Plans attached hereto and made a part hereof, said
Improvements to be completed in a workmanlike manner using Lessor's building
standards and include the following:
1. All full-height drywall partitions taped, textured and painted;
2. All air conditioning and heating unit(s) and distribution and return air
ducts as required to provide industry standard office HVAC;
3. Designweave 30 oz. plush-pile carpet and pad with carpet base, and/or
vinyl composition tile with Roppe 4" rubber base;
4. Vertical blinds on all exterior windows;
5. Doors and lever-type door hardware;
6. Standard grid dropped ceiling with 2'x 4' fluorescent office lighting
(warehouse to have metal halide 30 foot candle warehouse lighting);
7. Building standard electrical throughout office area (includes J-boxes in
open areas) per a mutually agreed upon plan;
8. Building standard telephone and computer pull-string and plaster rings
in mutually-approved locations;
9. Space planning, working drawings and electrical drawings and all
applicable building permits for construction;
10. Kitchen with ten (10) linear feet of upper and lower laminate cabinets
with sink and garbage disposal;
11. Two (2) two-stall restrooms with laminate counter & sink, two (2)
one-stall/one urinal restrooms with laminate counter & sink, two (2)
one-stall warehouse restrooms, one private bathroom with shower in
President's office, and two (2) shower rooms for gym;
12. Five (5) foot laminate wet bar in President's office;
CCA /s/ CCA
- ----------------- -----------------
Lessor's Initials Lessee's Initials
<PAGE>
ADDENDUM "E"
PAGE 2
The base building shall consist of concrete tilt-up construction and include
the following:
1. 24' minimum warehouse clearance;
2. Two (2) dock high loading positions and one (1) ground level loading
position;
3. 800 amps 277/480, 3 phase power panel;
4. .45/3,000 g.p.m. fire sprinkler system;
5. Foil insulation in the warehouse;
6. 6 inch concrete slab;
7. Sealed warehouse floor;
8. 4 ply roof;
9. 118 parking stalls.
Lessor reserves the right to construct Lessee's Tenant Improvements. Lessee
acknowledges that the tenant improvements to be completed by Lessor are
subject to the review and approval of final working drawings by Lessee,
Lessor and the City of Lake Forest. All Improvements shall be constructed in
accordance with all applicable building codes and ordinances, including but
not limited to all applicable ADA codes and requirements.
Lessor shall make every reasonable effort to complete the above Tenant
Improvements as soon as reasonably possible after receipt of signed leases
and move-in monies, and estimates said work to take approximately five (5)
months to complete from date of Lessor's receipt of building permits, but
Lessor can make no guaranty of an exact date of completion. However, Lessor
shall diligently prosecute the construction of the Tenant Improvement to
completion, using its best efforts to substantially complete same by November
15, 1997. Lessee shall be responsible for obtaining any permits or licenses
required for Lessee's particular use and operation in the Premises
including, without limitation, business licenses, permits for any Hazardous
Materials utilized in Lessee's operations, and any certificate of occupancy
which may be required for Lessee's particular use and operation in the
Premises.
ADDITIONAL TENANT IMPROVEMENTS: Lessor and Lessee recognize that the Tenant
Improvements identified and detailed on Exhibits A-1, A-2, B-1 and B-2 are
the result of agreements arrived at during previous meeting between Lessor
and Lessee. Any Additional Tenant Improvements are subject to Lessor's
approval thereof, with the understanding that the total cost of the
Additional Tenant Improvements shall be the sole responsibility of Lessee. If
Lessor and Lessee are unable to agree upon the plans for, or the cost of, any
such proposed Additional Tenant Improvements, Lessor shall not be obliged to
construct such Additional Tenant Improvements and may proceed with the
construction of the Tenant Improvements in accordance with the Working
Drawings. In the event Additional Tenant Improvements are approved by Lessor,
theN Lessor shall prepare an Additional Work Authorization ("AWA") outlining
the specific additional work to be completed and shall deliver same to
Lessee. Lessee shall execute said AWA and return it to Lessor, together with
a check (or other negotiated form of payment) for the total cost of such
Additional Tenant Improvements. Lessor shall not be obliged to commence
construction of any approved Additional Tenant Improvements until Lessor has
received such signed AWA and the check (or other negotiated form of payment).
Any construction delay arising out of Lessee's request for any Additional
Tenant Improvements shall result in the acceleration of the Commencement Date.
COMPLETION OF TENANT IMPROVEMENTS: The Tenant Improvements shall be deemed
"Substantially Completed" for purposes of this Lease upon final inspection
sign-off on the building permit for the Tenant Improvements by the City of
Lake Forest Building Department. Lessee shall conduct no construction or
other operations, with the exception of that work set forth in the Early
Access provision (Addendum A, Item E herein), in or on the Premises prior to
such Substantial Completion without Lessor's prior written consent which may
be granted or withheld in Lessor's sole discretion. Lessee shall fully
cooperate with Lessor in obtaining the certificate of occupancy.
See Addendum A, Item E for Early Access Agreement.
CCA /s/ CCA
- ----------------- -----------------
Lessor's Initials Lessee's Initials
<PAGE>
AMENDMENT TO LEASE
DATE CHANGE
THIS AMENDMENT is dated for reference purposes only at Newport Beach,
California, this 26th day of JANUARY, 1998, by and between OLEN PROPERTIES
CORP., a Florida Corporation, as "Lessor", and AVIATION DISTRIBUTORS, INC. A
DELAWARE CORPORATION as "Lessee", for property located at: a CAPITAL DRIVE,
LAKE FOREST, CA 92830, Lessor and Lessee, being parties to a Lease dated June
9, 1997, hereby express their mutual desire and intent to amend the Term of
the Lease as follows:
The term of this Lease shall be for: Seven (7) years
A. Original Commencement date was: THIRTY (30) DAYS AFTER SUBSTANTIAL
COMPLETION OF TENANT IMPROVEMENTS AND FINAL INSPECTION BY CITY OF
LAKE FOREST
B. Revised Commencement date is: MARCH 1, 1998
C. Lease Expiration date is: JANUARY 31, 2005
EARLY POSSESSION AGREEMENT: Lessor agrees to grant Lessee early occupancy of
said Premises, the date to be JANUARY 30, 1998. Lease payments shall not
commence until March 1, 1998. Lessor shall have no liability or
responsibility for damages to the personal property or any loss suffered by
Lessee through vandalism, theft, or destruction of the property by fire or
other causes. It is agreed by Lessee and Lessor that all the terms and
conditions of the lease are to be in full force and effect, except as to
rent, as of the date of Lessee's possession of subject Premises.
Except as modified herein, all other terms and conditions of the Lease
between the parties above described, and attached hereto, shall continue in
full force and effect.
LESSOR: LESSEE:
OLEN PROPERTIES CORP. AVIATION DISTRIBUTORS, INC.
A DELAWARE CORPORATION
By: By: /s/ Kenneth A. Lipinski
------------------------- -------------------------
Charles O. Aufhammer Kenneth A. Lipinski
Vice President, Marketing Chief Operating Office
Date: Date: 1/28/98
------------------------ ----------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,183,662
<SECURITIES> 0
<RECEIVABLES> 12,247,262
<ALLOWANCES> 300,000
<INVENTORY> 9,384,573
<CURRENT-ASSETS> 21,880,709
<PP&E> 1,030,100
<DEPRECIATION> 337,908
<TOTAL-ASSETS> 24,024,484
<CURRENT-LIABILITIES> 17,078,745
<BONDS> 5,716,178
0
0
<COMMON> 31,650
<OTHER-SE> 3,743,589
<TOTAL-LIABILITY-AND-EQUITY> 24,024,484
<SALES> 38,963,959
<TOTAL-REVENUES> 38,963,959
<CGS> 29,608,994
<TOTAL-COSTS> 29,608,994
<OTHER-EXPENSES> 8,116,308
<LOSS-PROVISION> 222,713
<INTEREST-EXPENSE> 1,255,483
<INCOME-PRETAX> 535,492
<INCOME-TAX> 131,000
<INCOME-CONTINUING> 1,238,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 404,492
<EPS-PRIMARY> $0.14
<EPS-DILUTED> $0.14
</TABLE>
<PAGE>
ENGINE CHATTEL MORTGAGE
THIS ENGINE CHATTEL MORTGAGE (the "Mortgage"), dated as of February
__, 1998, between AVIATION DISTRIBUTORS, INC., a Delaware corporation, as
Mortgagor (the "COMPANY"), and BNY FINANCIAL CORPORATION, a New York
corporation, as Mortgagee (the "MORTGAGEE");
WITNESSETH:
WHEREAS, the Company and the Mortgagee have entered into (i) that
certain Credit and Security Agreement, dated as of June 25, 1997 (the "CREDIT
AGREEMENT"), as amended by the letter agreement dated September 8, 1997 from the
Mortgagee, as the same may be further amended from time to time and (ii) that
certain Secured and Guaranteed Promissory Note, dated February __, 1998 (the
"NOTE"), in connection with the Loans (as defined in the Credit Agreement and
the Term Loan (as defined in the Note);
WHEREAS, the Company is the legal and beneficial owner of the
Mortgaged Property (as defined below);
WHEREAS, it is a requirement of the Note that the Company execute and
deliver to the Mortgagee an Engine Chattel Mortgage in substantially the form
hereof;
WHEREAS, the Company wishes to grant pledges and security interests in
favor of the Mortgagee to secure the Company's due payment and performance of
all Obligations (as defined in the Credit Agreement), including, without
limitation, the Company's obligations under the Note; and
WHEREAS, all things necessary to make this Mortgage the valid, binding
and legal obligation of the Company for the uses and purposes herein set forth,
in accordance with its terms, have been done and performed and have happened;
NOW, THEREFORE, THIS MORTGAGE WITNESSETH, AND IT IS HEREBY AGREED AND
DECLARED AS FOLLOWS:
GRANT OF SECURITY INTEREST
That in consideration of the premises herein contained, the Loans and
Term Loan made or to be made to the Company and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, in
order to secure the due payment and performance of all Obligations (including,
without limitation, the Company's obligations under the Note and interest which,
but for the filing of a petition in bankruptcy would accrue on such amounts),
direct or
<PAGE>
indirect, contingent or absolute, of every type or description, at any time
existing, owing to the Mortgagee pursuant to the terms of this Mortgage, the
Credit Agreement, the Note and any Ancillary Documents and the performance of
the covenants therein and herein contained (the "SECURED OBLIGATIONS"), and in
consideration of the premises and of the covenants herein and therein contained,
the Company, as the legal and beneficial owner of the Engines and the other
Mortgaged Property, does hereby transfer, assign, grant, bargain, sell, convey,
mortgage, hypothecate and pledge to the Mortgagee, its successors and assigns,
for the benefit of the Mortgagee, a valid and first perfected security interest
in and Lien on all right, title and interest of the Company in and to the
property described in Granting Clauses I to IX hereof, inclusive, whether now
existing or hereafter acquired (which property, including all property hereafter
specifically subjected to the Lien of this Mortgage by any mortgage supplemental
hereto, is hereinafter called the "MORTGAGED PROPERTY"), to wit:
GRANTING CLAUSE I
The Engines as will be more particularly described in the Initial
Mortgage Supplement to be executed and delivered with respect to such Engines as
provided in this Mortgage, together with all Appliances and Parts installed in
or attached or belonging to such Engines on the Supplement Date, whether or not
such Engines shall be installed in or attached to any airframe; the intent being
to create a first priority perfected security interest in and to such Engines.
GRANTING CLAUSE II
All substitutions, replacements and renewals of the property described
in the foregoing Granting Clause I, and all additions which become physically
attached thereto or incorporated therein, whether such additions are now owned
by the Company or hereafter acquired.
GRANTING CLAUSE III
All records, logs and other materials required by the Federal Aviation
Administration (and the country of registration, if not the United States) to be
maintained in respect of the Mortgaged Property, all maintenance logs and
records and all other property which shall be subjected to the Lien of this
Mortgage by delivery or writing of any kind.
GRANTING CLAUSE IV
All books, records, ledger cards, files, correspondence, computer
programs, tapes, disks and related data processing software (owned by the
Company or in which it has an interest) which at any time evidence or contain
information relating to Granting Clause (I), (II) or (III) above or are
otherwise necessary or helpful in the collection thereof or realization
thereupon.
-2-
<PAGE>
GRANTING CLAUSE V
All Contract Rights, documents of title, policies and certificates of
insurance, securities, chattel paper, other documents or instruments evidencing
or pertaining to Granting Clause (I), (II) or (III) above.
GRANTING CLAUSE VI
All guaranties, liens on real or personal property, leases, and other
agreements and property which in any way secure or relate to Granting Clause
(I), (II) or (III) above, or are acquired for the purpose of securing and
enforcing any item thereof.
GRANTING CLAUSE VII
(i) All cash held as cash collateral to the extent not otherwise
constituting Mortgaged Property, all other cash or property at any time on
deposit with or held by Mortgagee for the account of the Company (whether for
safekeeping, custody, pledge, transmission or otherwise), (ii) all present or
future deposit accounts (whether time or demand or interest or non-interest
bearing) of the Company with Mortgagee or any other Person including those to
which any such cash may at any time and from time to time be credited, (iii) all
investments and reinvestments (however evidenced) of amounts from time to time
credited to such accounts, and (iv) all interest, dividends, distributions and
other proceeds payable on or with respect to (x) such investments and
reinvestments and (y) such accounts.
GRANTING CLAUSE VIII
All estate, right, title, interest and claims whatsoever, at law, as
well as in equity, which the Company has or possesses on the date of this
Mortgage or to which the Company may thereafter become legally or equitably
entitled, in the property described in Granting Clauses I, II, III, IV, V, VI,
VII, and IX.
GRANTING CLAUSE IX
All proceeds of any sale or lease or other revenues or income from the
disposition of any or all of the properties described in the foregoing Granting
Clauses I to VIII inclusive, all proceeds of insurance, to the extent of the
interest of the Mortgagee, from any loss of or damage to any Mortgaged Property,
and any other proceeds of any kind resulting from an Event of Loss with respect
thereto.
TO HAVE AND TO HOLD the Mortgaged Property as security as aforesaid.
The Company does hereby constitute the Mortgagee the true and lawful
attorney of the Company, irrevocably, with an interest and full power of
substitution with full power (in the name of the Company or otherwise) to (i)
ask
-3-
<PAGE>
for, require, demand, and receive, any and all monies and claims for monies (in
each case including insurance and requisition proceeds) due and to become due
under or arising out of the Credit Agreement, the Note, this Mortgage, any other
Ancillary Document, and all other property which now or hereafter constitutes
part of the Mortgaged Property, to endorse any checks or other instruments or
orders in connection therewith, (ii) without limiting the provisions of the
foregoing clause (i) hereof, during the continuance of any Event of Default or
Note Event of Default to the exclusion of the Company to sue for, compound and
give acquittance for, to settle, adjust or compromise any claim for any and all
income and other sums which are assigned under the Granting Clauses hereof as
fully as the Company could itself do, and (iii) during the continuance of any
Event of Default or Note Event of Default to the exclusion of the Company, in
the discretion of the Mortgagee to file any claims or take any action or
institute any proceedings which the Mortgagee may deem to be necessary or
advisable. The Company agrees that, promptly on receipt thereof, it will
transfer to the Mortgagee any and all monies from time to time received by it
constituting part of the Mortgaged Property for application as provided in the
Credit Agreement and the Note.
The Company agrees that at any time and from time to time, upon the
written request of the Mortgagee, the Company will promptly and duly execute and
deliver or cause to be duly executed and delivered any and all such further
instruments and documents as the Mortgagee may reasonably deem necessary or
desirable to perfect, preserve or protect the mortgage, security interests and
assignments created or intended to be created hereby or to obtain for the
Mortgagee the full benefit of the specific rights and powers herein granted.
The Company does hereby warrant and represent that it has not assigned
or pledged, and hereby covenants that it will not sell, mortgage, assign or
pledge, so long as the assignment hereunder shall remain in effect, any of its
right, title, estate or interest hereby assigned, to anyone other than the
Mortgagee, and that it will not, without the prompt notice thereof to Mortgagee
and, if an Event of Default or a Note Event of Default shall have occurred and
be continuing, will not, except as provided in this Mortgage (i) enter into any
agreement amending or supplementing any Ancillary Document (other than any
Ancillary Document to which Mortgagee is a party, which documents and agreements
may only be amended with the prior written consent of the Mortgagee), (ii)
execute any consent, waiver or modification or privileges under the Credit
Agreement, the Note, or any other Ancillary Document, (iv) settle or compromise
any claim arising under the Credit Agreement, the Note or any other Ancillary
Document, (v) submit or consent to the submission of any dispute, difference or
other matter arising under or in respect of the Credit Agreement, the Note or
any other Ancillary Document to arbitration thereunder, or (vi) declare a
default or exercise any remedies under, or terminate, modify or accept a
surrender of, or offer or agree to any termination, modification or surrender
of, the Credit Agreement, the Note or any other Ancillary Document (except as
otherwise expressly provided herein) or by affirmative act, consent to the
creation or existence of any security interest or other lien (other than
-4-
<PAGE>
the security interest and lien of this Mortgage) to secure the payment of
indebtedness upon the Mortgaged Property or upon the estate created by the
Mortgaged Property or any part thereof without first obtaining the Mortgagee's
prior written consent.
It is hereby further agreed that any and all property described or
referred to in the Granting Clauses hereof which is hereafter acquired by the
Company shall ipso facto, and without further conveyance, assignment or act on
the part of the Company or the Mortgagee, become and be subject to the lien and
security interest herein granted as fully and completely as though specifically
described herein, but nothing in this paragraph contained shall be deemed to
modify or change the obligations of the Company contained in the foregoing
paragraphs.
It is further hereby covenanted and agreed by and between the parties
hereto as follows:
ARTICLE ONE
DEFINITIONS
1.1 DEFINITIONS. As used in this Mortgage, except as otherwise
herein indicated, the following terms shall have the respective meanings set
forth below or in the location indicated:
"ANCILLARY DOCUMENTS" and "ANCILLARY DOCUMENT" means each of the
Credit Documents (as defined in the Credit Agreement, including, without
limitation, the Note and the Note Documents), this Mortgage, the Mortgage
Supplement covering the Engines, and any other document referred to or
contemplated in any of the foregoing in each case as the same may be amended,
modified or supplemented from time to time.
"APPLIANCE" shall have the meaning provided in the Federal Aviation
Act.
"APPLICABLE LAWS" shall mean all applicable laws, judgments, decrees,
injunctions, writs and orders of any court, arbitrator and governmental agency
or authority and rules, regulations, orders, interpretations, licenses and
permits of any governmental body, instrumentality, agency or authority.
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a
day on which commercial banking institutions in New York, New York are
authorized or obligated by law to close.
"COMPANY" shall mean Aviation Distributors, Inc., a Delaware
corporation, and its successors and permitted assigns.
-5-
<PAGE>
"CONTRACT RIGHTS" shall mean all rights and remedies of the Company
against the Manufacturer or any other Person with regard to any Engine under a
Purchase Agreement, together with all Proceeds thereof.
"CREDIT AGREEMENT" shall have the meaning set forth in the first
Whereas Clause hereof.
"DATE HEREOF" shall mean the day and year first above written.
"DEFAULT" means any event or condition that, with notice or lapse of
time or both, would become an Event of Default or Note Event of Default.
"DEPARTMENT OF TRANSPORTATION" shall mean the U.S. Department of
Transportation or any successor thereto administering the functions of the
Department of Transportation.
"DOLLARS" and "$" shall mean the lawful currency of the United States
of America.
"ENGINE" shall mean the CFM-2C1 engine (the engine having 750 or more
rated takeoff horsepower or the equivalent of such horsepower), such engine
being identified as bearing manufacturer serial number 692501, and any
replacement engine which may from time to time be substituted therefor together
in each case with any and all Parts incorporated or installed in or attached
thereto and any and all Parts removed therefrom so long as title thereto remains
vested in the Company after removal from such Engine. Except as otherwise set
forth herein, at such time as an engine shall be so substituted, such replaced
Engine shall cease to be an Engine hereunder. The term "Engines" includes, as
of any date of determination, each Engine identified in a Mortgage Supplement
then in effect.
"FEDERAL AVIATION ACT" means Subtitle VII of Title 49 of the United
States Code, and any successor thereto.
"FEDERAL AVIATION ADMINISTRATION" or "FAA" shall mean the Federal
Aviation Administration or any successor thereto administering the functions of
the Federal Aviation Administration under the Federal Aviation Act.
"INITIAL MORTGAGE SUPPLEMENT" shall mean an agreement supplemental to
this Mortgage which shall particularly describe the Engines included in the
Mortgaged Property covered by this Mortgage and is substantially in the form of
Exhibit A-1 hereto.
"LIEN" shall mean any mortgage, pledge, lien, charge, encumbrance,
security interest or lease in the nature thereof (including any conditional sale
agreement, equipment trust agreement or other title retention agreement).
"MANUFACTURER" means CFM.
-6-
<PAGE>
"MORTGAGE", "THIS MORTGAGE" and "THE MORTGAGE" shall mean this Engine
Chattel Mortgage as it may from time to time be supplemented or amended as
herein provided, including supplementing by any Mortgage Supplement pursuant
hereto.
"MORTGAGED PROPERTY" shall have the meaning specified in the
introductory paragraph entitled Grant of Security Interest.
"MORTGAGE SUPPLEMENT" shall mean the Initial Mortgage Supplement or
any other agreement supplemental to this Mortgage substantially in the form of
Exhibit A-2 hereto.
"NOTE DEFAULT RATE" the rate of interest applicable pursuant to, and
upon the occurrence of the conditions set forth in, Section 2(b) of the Note.
"PARTS" shall mean all appliances, components, parts, instruments,
appurtenances, avionics, accessories, furnishings and other equipment of
whatever nature (other than complete Engines or engines), which may now or from
time to time be incorporated or installed in or attached to any Engine.
"PERSON" shall mean an individual, a corporation, a partnership, a
limited liability company, an unincorporated organization, an association, a
joint-stock company, a joint venture, a trust, an estate or a government or any
agency or political subdivision thereof.
"PROCEEDS" shall have the meaning assigned that term under the Uniform
Commercial Code in effect in the State of New York.
"PURCHASE AGREEMENT" shall mean each contract, agreement or
arrangement, if any, pursuant to which the Company has acquired or in the future
acquires an Engine.
"SECURED OBLIGATIONS" has the meaning set forth in the first paragraph
of the Granting Clause hereof.
"SUPPLEMENT DATE" means the date of any Mortgage Supplement including,
without limitation, the Initial Mortgage Supplement.
"UNIFORM COMMERCIAL CODE" means the Uniform Commercial Code in effect
in any applicable jurisdiction.
Capitalized terms used but not defined herein shall have the meaning
assigned thereto in the Credit Agreement and if not in the Credit Agreement,
then in the Note. All references herein to "Articles," "Sections" and other
subdivisions refer to the corresponding Articles, Sections and other
subdivisions of this Mortgage; and the words "herein," "hereof," "hereby,"
"hereunder" and words of
-7-
<PAGE>
similar import refer to this instrument as a whole and not to any particular
Article, Section or subdivision of this Mortgage.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Mortgagee as
follows:
2.1 INTEREST IN MORTGAGED PROPERTY. The Company will, on the
Supplement Date, be the legal and beneficial owner of good and marketable title
to all Mortgaged Property and on the Supplement Date the Mortgaged Property will
be free and clear of all Liens except the Lien of this Mortgage.
2.2 FILINGS AND SECURITY INTEREST. On or by the Supplement Date all
filings, registrations and recordings necessary or reasonably requested by the
Mortgagee to create, preserve, protect and perfect the security interests
granted by the Company to the Mortgagee hereby in respect of the Mortgaged
Property shall have been accomplished by the Company. On the Supplement Date,
the security interest granted to the Mortgagee in and to the Contract Rights
constitutes and thereafter will constitute a perfected security interest thereon
superior and prior to the rights of all other persons therein.
2.3 RESERVED.
2.4 CORPORATE POWER. The Company has full corporate power and
authority and legal right to pledge all the Mortgaged Property pursuant to this
Mortgage.
2.5 EXECUTION AND DELIVERY. The execution, delivery and performance
of this Mortgage and each other Ancillary Document to which the Company is a
party has been duly authorized by all necessary corporate action on the part of
the Company, does not require any stockholder approval, or approval or consent
of any trustee or holders of any indebtedness or obligations of the Company,
except such as have been duly obtained or by the Supplement Date will have been
duly obtained and are in full force and effect, and does not, and as of the
Supplement Date will not, contravene any Applicable Laws binding on the Company
or the Certificate of Incorporation or By-Laws of the Company or contravene the
provisions of, or constitute a default under, or result in the creation of any
Lien (other than the Lien of this Mortgage) upon the property of the Company
under, any indenture, mortgage, contract or other agreement to which the Company
or any of its subsidiaries is a party or by which it or any of its subsidiaries
may be bound or affected.
-8-
<PAGE>
2.6 BINDING OBLIGATION. Each of this Mortgage and each other
Ancillary Document to which the Company is a party is the legal, valid and
binding obligation of the Company and is enforceable against the Company in
accordance with its respective terms.
2.7 APPROVALS, CONSENTS AND LICENSES. On the Supplement Date, the
Company will have obtained all necessary approvals, authorizations, consents,
licenses, certificates and orders of each Governmental Authority having
jurisdiction with respect to the ownership, use and operation of each Engine,
and such approvals, authorizations, consents, licenses, certificates or orders
will be in full force and effect and constitute sufficient authorization
therefor.
2.8 NO EVENT OF LOSS. No Event of Loss has occurred and no event and
no condition exists which would, but for the passage of time, constitute an
Event of Loss with respect to any Engine then being subjected to the Lien of
this Mortgage.
2.9 NO DEFAULT. No Default, Event of Default or Note Event of
Default has occurred and is continuing, other than as disclosed to the Mortgagee
on Exhibit B to the Note.
2.10 REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties of the Company contained in the Credit Agreement and the Note are
true, accurate and complete in all material respects, except and only to the
extent that the same relate to the matters giving rise to the Events of Default
listed on Exhibit B to the Note.
2.11 FULL FORCE AND EFFECT. Each of the Credit Agreement, the Note
and the other Ancillary Documents is in full force and effect.
ARTICLE THREE
COVENANTS
3.1 CERTIFICATE OF INSURANCE. On the Supplement Date, the Company
shall deliver, or cause to be delivered, to the Mortgagee an insurer's
certificate, dated the Supplement Date, as to the due compliance with the
insurance provisions of the Credit Agreement and in form and substance
satisfactory to the Mortgagee.
3.2 OFFICER'S CERTIFICATE. The Company shall deliver to the
Mortgagee on the Supplement Date an officer's certificate, dated the Supplement
Date, stating that:
(a) all necessary approvals, authorizations, consents, licenses,
certificates and orders of each Governmental Authority having jurisdiction with
respect to the ownership, use and operation of each Engine have been obtained,
and
-9-
<PAGE>
such approvals, authorizations, consents, licenses, certificates or orders are
in full force and effect and constitute sufficient authorization therefor;
(b) no Event of Loss has occurred and no event and no condition
exists which would, but for the passage of time, constitute an Event of Loss
with respect to any Engine then being subjected to the Lien of this Mortgage.
(c) no Default, Event of Default or Note Event of Default has
occurred and is continuing, other than as disclosed to the Mortgagee on Exhibit
B to the Note;
(d) all of the representations and warranties of the Company
contained herein, in the Credit Agreement and the Note are true, accurate and
complete in all material respects, except and only to the extent that the same
relate to the matters giving rise to the Events of Default listed on Exhibit B
to the Note; and
(e) each of the Credit Agreement, the Note and the other Ancillary
Documents is in full force and effect.
3.3 RECORDING INFORMATION. The Company shall deliver to the
Mortgagee all filing or recording receipts and acknowledgments issued by
government officials in connection with the filing and/or recording of this
Mortgage or any Mortgage Supplement subjecting the Engines to the Lien of this
Mortgage.
3.4 LIENS ON MORTGAGED PROPERTY. The Company shall not directly or
indirectly create, incur, assume or suffer to exist any Lien on or with respect
to any Mortgaged Property, title thereto or any interest therein, except the
Lien of this Mortgage. The Company shall promptly, at its own expense, take or
cause to be taken such action as may be necessary to duly discharge any such
Lien not permitted above if the same shall arise at any time.
3.5 FURTHER ASSURANCES. Upon the execution and delivery of each
Mortgage Supplement, the Company will cause such supplement to be duly filed and
recorded in a timely fashion to the extent applicable in accordance with the
Federal Aviation Act. In addition, the Company will promptly and duly execute
and deliver to the Mortgagee and to such other persons as the Mortgagee shall
reasonably designate such further documents and assurances and take such further
action as the Mortgagee may from time to time reasonably request in order to
more effectively carry out the intent and purpose of this Mortgage and to
establish and protect the rights and remedies created or intended to be created
in favor of the Mortgagee hereunder, including, without limitation, if requested
by the Mortgagee, at the expense of the Company, the execution and delivery of
supplements or amendments hereto in recordable form, and the recording or filing
of counterparts hereof or thereof, or of financing statements with respect
thereto, in accordance with the laws of such jurisdictions as the Mortgagee may
from time to time deem reasonably advisable.
-10-
<PAGE>
3.6 RECORDING AND FILING. The Company shall cause this Mortgage, any
Mortgage Supplement and any and all additional instruments which shall be
executed pursuant to the terms hereof, so far as permitted by applicable law and
regulations, to be kept filed and recorded in the office of the Federal Aviation
Administration, pursuant to the Federal Aviation Act, and in such other places
as may be required under any applicable law, or as the Mortgagee in its
discretion may reasonably request in order to perfect and preserve the Lien of
this Mortgage on all of the Mortgaged Property and to protect the first priority
security interest with respect to the Mortgaged Property except with respect to
the rights of the Mortgagee hereunder. Without limitation of the foregoing, the
Company shall do or cause to be done any and all acts and things which may be
required to perfect and preserve the Lien of this Mortgage and shall from time
to time execute and file such financing statements as may reasonably be
requested by the Mortgagee to perfect the Lien hereof pursuant to the Uniform
Commercial Code as in effect in any jurisdiction. The Mortgagee is hereby
authorized to and shall execute such continuation statements as may be required.
The Company shall bear the entire cost and expense of all actions required to be
taken pursuant to this Section 3.6.
3.7 INDEMNIFICATION. The Company hereby agrees to indemnify the
Mortgagee, its affiliates and any of its directors, officers, employees, agents
and controlling persons (each being an "Indemnified Party") for any and all
liabilities, obligations, losses, damages, penalties, claims, actions,
judgments, suits, out-of-pocket costs, expenses or disbursements (including,
without limitation, reasonable fees and disbursements of counsel but excluding
internal costs and expenses such as salaries and overhead) of any kind and
nature whatsoever (collectively called "Expenses") which may be imposed on,
incurred by or asserted against such Indemnified Party in any way relating to or
arising out of any Engine, this Mortgage, the Credit Agreement, the Note any
other Ancillary Document, or any other documents contemplated hereby or thereby
or referred to herein or therein or the transactions contemplated hereby or
thereby or the enforcement of any of the terms hereof or of any such other
documents or otherwise arising or relating in any manner to the pledges
contemplated hereunder including, but not limited to, claims arising out of or
in connection with the ownership or use of any of the Mortgaged Property.
The foregoing indemnity as to any Indemnified Party shall not extend
to any Expenses resulting from or arising out of one or more of the following:
(i) with respect to any Indemnified Party, Expenses attributable to
the gross negligence or willful misconduct of, or to the material breach of any
contractual obligation by, or the falsity or inaccuracy of any representation or
warranty of, such Indemnified Party;
(ii) with respect to any particular Indemnified Party, Expenses
attributable to its authorization or giving or withholding of any future
amendments, supplements, waivers or consents with respect to any of the
Mortgage,
-11-
<PAGE>
the Credit Agreement, the Note or any other document contemplated therein other
than such as have been consented to, approved, authorized or requested by the
Company or unless given or withheld when an Event of Default or a Note Event of
Default exists;
(iii) except to the extent fairly attributable to acts or events
occurring prior thereto, acts or events which occur after the expiration or
early termination of this Mortgage; and
(iv) a disposition (voluntary or involuntary) by an Indemnified Party
of all or any part of its interest in the Mortgaged Property or in any of the
Ancillary Documents other than in connection with the exercise of remedies
pursuant to Article Five hereof during the continuance of an Event of Default or
a Note Event of Default.
If a claim is made against an Indemnified Party involving one or more
Expenses and such Indemnified Party has notice thereof, such Indemnified Party
shall promptly, upon receiving such notice, give notice of such claim to the
Company; PROVIDED that the failure to provide such notice shall not release the
Company from any of its obligations to indemnify hereunder.
3.8 PLACARDING. Promptly after being subjected to a security
interest under this Mortgage, the Company will cause to be affixed to, and
maintained on each Engine a plate no smaller than 1" x 3", bearing the following
legend:
"THIS ENGINE IS SUBJECT TO AN ENGINE CHATTEL MORTGAGE IN
FAVOR OF BNY FINANCIAL CORPORATION, AS MORTGAGEE."
Except as above provided, the Company will not allow the name of any
person, association or corporation to be placed on any Engine as a designation
that might be interpreted as a claim of security interest or ownership;
provided, that nothing herein contained shall prohibit the Company from placing
its customary colors and insignia on any Engine.
3.9 CHANGE IN CHIEF EXECUTIVE OFFICE. The Company shall provide the
Mortgagee with prompt written notice of any change in its chief executive office
(as such term is defined in Article 9 of the Uniform Commercial Code as in
effect in the State of California from One Capital Drive, Lake Forest,
California 92630.
3.10 NO WAIVER. No failure on the part of the Mortgagee to exercise,
and no course of dealing with respect to, and no delay in exercising any remedy
hereunder or under the Credit Agreement, the Note or any other Ancillary
Document shall operate as a waiver thereof; nor shall any single or partial
exercise by the Mortgagee of any rights, power or remedy hereunder or thereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. The remedies herein or therein provided are, to the
fullest extent
-12-
<PAGE>
permitted by the law, cumulative and are not exclusive of any remedies provided
by law.
3.11 PROTECTION OF MORTGAGEE'S SECURITY. The Company shall not take
any action that would impair the rights of the Mortgagee in any of the Mortgaged
Property.
3.12 ENGINE CHATTEL MORTGAGE. This Mortgage constitutes one of the
Aircraft Chattel Mortgages referred to in the Credit Agreement.
3.13 [RESERVED].
3.14 NOTICES. The Company agrees promptly to deliver all notices
(other than notices from the Mortgagee) received by the Company under any
Ancillary Document.
ARTICLE FOUR
RIGHT TO PERFORM
4.1 MORTGAGEE'S RIGHT TO PERFORM FOR THE COMPANY. If the Company
shall default in the performance of any obligation contained in Article Three to
maintain the Lien of this Mortgage as a first perfected Lien with respect to the
Mortgaged Property, to maintain or cause to be maintained insurance as provided
in the Credit Agreement, defend the Mortgaged Property and the interests of the
Mortgagee therein, or discharge any Lien (other than the Lien of this Mortgage)
or other charge thereon, the Mortgagee shall have the right (but not the
obligation) to cure such default on behalf of the Company, but only if an Event
of Default or a Note Event of Default shall have occurred (whether or not such
Event of Default or Note Event of Default shall have been declared by the
Mortgagee pursuant to Article Five hereof). The Company shall promptly, upon
demand therefor, reimburse the Mortgagee for the amount of any payments made and
the amount of the reasonable expenses incurred, in each case plus interest at
the Note Default Rate.
ARTICLE FIVE
EVENTS OF DEFAULT AND REMEDIES
5.1 EVENTS OF DEFAULT AND NOTE EVENTS OF DEFAULT. If an Event of
Default or a Note Event of Default shall occur and be continuing, then, and in
such event, the Mortgagee may by notice to the Company, without prejudice to the
rights of the Mortgagee to enforce its claims against the Company, enforce any
or all of the Liens and security interests created pursuant to this Mortgage.
-13-
<PAGE>
5.2 RIGHTS AGAINST MORTGAGED PROPERTY. Upon notification of the
occurrence of any Event of Default or an Note Event of Default and at any time
thereafter so long as the same shall be continuing, the Mortgagee may declare
this Mortgage to be in default and at any time thereafter, so long as the
Company shall not have remedied all such outstanding defaults, the Mortgagee
shall have, and may exercise, in addition to all other rights and remedies
available hereunder, at law or in equity, or by statute, each of the following
rights and remedies, none of which is intended to be exclusive of any other
right or remedy and each of which may be exercised either singly or, to the
extent permitted by Applicable Laws, concurrently with any one or more other
rights or remedies; subject, however, in each such case to the provisions of
Article Seven hereof:
(a) If an Event of Default or an Note Event of Default shall have
occurred and be continuing, then and in every such case the Mortgagee may at any
time, by written notice or notices to the Company, declare all amounts due under
the Credit Agreement and the Note to be due and payable. Upon any such
declaration, all amounts due thereunder, hereunder and under each other
Ancillary Document shall immediately become due and payable without presentment,
demand, protest or notice, all of which are hereby waived; PROVIDED, HOWEVER,
that if an Event of Default referred to in clauses (i), (j) and (k) of Section
18 of the Credit Agreement shall have occurred, then and in every such case all
amounts due thereunder, hereunder and under each other Ancillary Document shall
immediately and without further act become due and payable, without presentment,
demand, protest or notice, all of which are hereby waived. If at any time after
such amounts shall have become so due and payable, and before any judgment or
decree for the payment of the money so due, or any thereof, shall be entered,
all amounts payable shall have been duly paid, and every other Default, Event of
Default and Note Event of Default with respect to any covenant or provision of
this Mortgage or any other Ancillary Document shall have been cured, then and in
every such case the Mortgagee may (but shall not be obligated to) rescind and
annul its declaration and its consequences; but no such rescission or annulment
shall extend to or affect any subsequent Default, Event of Default or Note Event
of Default or impair any right consequent thereon. Notwithstanding the
foregoing, the existence and continuation of the Events of Default specifically
identified on Exhibit B to the Note shall not cause the amounts owing hereunder
to become due and payable.;
(b) To the extent applicable, the Mortgagee shall have the rights and
remedies of a secured party under the Uniform Commercial Code as enacted in any
jurisdiction in which any of the Mortgaged Property may be located and, in any
case, the Mortgagee may directly or by such agent as it may appoint, sell at
public or private sale or otherwise realize upon the whole, or from time to time
any part, of the Mortgaged Property. If notice of any sale or other disposition
is required by law to be given, the Company hereby agrees that a notice sent at
least ten (10) days before the time of any intended public sale, or before the
time at which any private sale or other disposition of the Mortgaged Property is
to be made, shall be reasonable notice
-14-
<PAGE>
of such sale or other disposition. Whenever the Mortgagee shall demand
possession of any of the Mortgaged Property pursuant to this Article Five, the
Company shall, at its own expense, deliver or cause to be delivered such
Mortgaged Property, without risk or expense to the Mortgagee, to such airport or
airports in the continental United States as shall be designated by the
Mortgagee. The Company shall, at the request of the Mortgagee, promptly execute
and deliver to the Mortgagee such instruments or other documents as the
Mortgagee may deem necessary or advisable to enable the Mortgagee or an agent or
representative designated by the Mortgagee, at such time or times and place or
places as the Mortgagee may specify, to obtain possession of all or any part of
the Mortgaged Property the possession of which the Mortgagee shall at the time
be entitled to hereunder;
(c) The Mortgagee may, either after entry or without entry, proceed
by suit or suits at law or in equity to foreclose this Mortgage and to sell all
or, from time to time, any part of the Mortgaged Property under the judgment or
decree of a court of competent jurisdiction;
(d) The Mortgagee may commence legal proceedings for the appointment
of a receiver or receivers (to which the Mortgagee shall be entitled as a matter
of right) to take possession of the Mortgaged Property pending the sale thereof
pursuant either to the power of sale given in this Section 5.2 or to a judgment,
order or decree made in any judicial proceeding for the foreclosure or involving
the enforcement of this Mortgage;
(e) The Mortgagee may either directly or by such agent as it may
appoint or by means of a receiver appointed by a court therefor, enter upon the
premises of the Company, and any other premises where any of the Mortgaged
Property may be located, exclude the Company and all other Persons therefrom and
take immediate possession of the Mortgaged Property, using all necessary force
to do so;
(f) Upon every taking of possession pursuant to this Section 5.2, the
Mortgagee may, from time to time, make all such expenditures for maintenance,
insurance, repairs, replacements, alterations, additions and improvements to and
of the Mortgaged Property as the Mortgagee may deem proper. In each such case,
the Mortgagee shall have the right to hold, use, operate, store, lease, control
or manage the Mortgaged Property, and to exercise all rights and powers of the
Company relating to the Mortgaged Property as the Mortgagee shall deem
appropriate, including the right to enter into any and all such agreements with
respect to the use, operation, storage, leasing, control or management of any of
the Mortgaged Property. The Company shall promptly, upon demand therefor,
reimburse the Mortgagee for the amount of any expenditures, plus interest at the
Note Default Rate, made pursuant to this Section 5.2(f); and
(g) If the Mortgagee shall have obtained possession of any or all
Mortgaged Property in accordance with the requirements of this Section 5.2, the
Mortgagee shall not be obligated to use or operate any such Mortgaged Property
-15-
<PAGE>
directly or indirectly through agents or other representatives or to lease,
license or otherwise permit or provide for the use or operation of such
Mortgaged Property by any other Person unless (i) the Mortgagee shall have been
able to obtain insurance in kinds, at rates and in amounts satisfactory to the
Mortgagee to protect the Mortgaged Property and the Mortgagee against any and
all liability for loss or damage to such Mortgaged Property and for public
liability and property damage resulting from the use or operation of such
Mortgaged Property, and (ii) funds are available from the Mortgaged Property
held by the Mortgagee to pay for all such insurance.
5.3 PROVISIONS REGARDING SALE. Upon any sale of any of the Mortgaged
Property, whether made under the power of sale hereby given or under judgment,
order or decree in any judicial proceedings for the foreclosure or involving the
enforcement of this Mortgage:
(a) The Mortgagee may make and deliver to the purchasers a good and
sufficient deed, bill of sale and instrument of assignment and transfer of the
property sold;
(b) If so requested by the Mortgagee or by any purchaser, the Company
shall ratify and confirm any such sale or transfer by executing and delivering
to the Mortgagee or to such purchaser all property deeds, bills of sale,
instruments of assignment and transfer and releases as may be designated in any
such request;
(c) All right, title, interest, claim and demand whatsoever, either
at law or in equity or otherwise, of the Company of, in and to the property so
sold shall be divested. Such sale shall be a perpetual bar both at law and in
equity against the Company, its successors and assigns, and against any and all
Persons claiming or who may claim the property sold or any part thereof from,
through or under the Company, its successors or assigns;
(d) The receipt of the Mortgagee or of the Person making such sale
shall be a sufficient discharge to the purchaser or purchasers at such sale for
his or their purchase money, and such purchaser or purchasers, and his or their
assigns or personal representatives, shall not, after paying such purchase money
and receiving such receipt of the Mortgagee or of such Person, be obliged to see
to the application of such purchase money or be in any way answerable for any
loss, misapplication or nonapplication thereof; and
(e) To the extent that it may lawfully do so, the Company agrees that
it will not at any time insist upon, or in any manner whatsoever claim or take
the benefit or advantage of any law now or at any time hereafter in force,
permitting it to direct the order in which the Mortgaged Property or any part
thereof shall be sold, and the Company hereby expressly waives all benefit or
advantage of any such laws and agrees that it will not hinder, delay or impede
the execution of any power
-16-
<PAGE>
granted and delegated to the Mortgagee in this Mortgage, but will suffer and
permit the execution of every such power as though no such laws were in force.
5.4 EXERCISE OF REMEDIES. No delay or omission of the Mortgagee in
the exercise of any right, power, remedy or privilege conferred hereunder shall
impair any such right, power, remedy or privilege given by this Mortgage to the
Mortgagee which may be exercised from time to time and as often as may be deemed
expedient by the Mortgagee. No remedy for the enforcement of the rights of the
Mortgagee shall be exclusive of or dependent on any other such remedy but any
one or more of such remedies may from time to time be exercised independently or
in combination.
ARTICLE SIX
TERMINATION
6.1 RELEASE OF MORTGAGED PROPERTY.
(a) All Mortgaged Property shall be released from this Mortgage when
all amounts due from the Company to the Mortgagee hereunder, under the Credit
Agreement, under the Note and under the other Ancillary Documents have been paid
or otherwise satisfied in full.
(b) Upon release of the Mortgaged Property in accordance with Section
6.1(a) hereof, the Mortgagee shall deliver to the Company all Mortgaged Property
and related documents then in the custody or possession of the Mortgagee and, if
requested by the Company, shall execute and deliver to the Company for filing in
each office in which any financing statement relative to the Mortgaged Property
or any part thereof shall have been filed, a termination statement under the
Uniform Commercial Code releasing the Mortgagee's interest therein or a release
of mortgage or similar instrument in recordable form in each office in which a
mortgage was filed releasing the Lien of such mortgage on the Mortgaged Property
covered thereby, and such other documents and instruments as the Company may
reasonably request, all without recourse upon, or warranty whatsoever by, the
Mortgagee, and at the cost and expense of the Company.
ARTICLE SEVEN
MISCELLANEOUS
7.1 SEVERABILITY. If any provision of this Mortgage shall be
invalid, inoperative or unenforceable as applied in any particular case in any
jurisdiction because it conflicts with any other provision hereof or any
constitution or statute or rule or public policy, or for any other reason, such
circumstance shall not have the effect of rendering the provision in question
inoperative or unenforceable in any
-17-
<PAGE>
other case or circumstance or of rendering any other provision herein contained
invalid, inoperative, or unenforceable to any extent whatever.
The invalidity of any one or more phrases, sentences, clauses,
Sections or Articles in this Mortgage shall not affect the remaining portions of
this Mortgage, or any part thereof.
7.2 COUNTERPARTS. This Mortgage may be executed in any number of
counterparts, each of which counterparts shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same Mortgage.
7.3 GOVERNING LAW AND WAIVER OF JURY TRIAL. THIS MORTGAGE AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
MORTGAGEE SHALL HAVE THE RIGHTS AND REMEDIES OF A SECURED PARTY UNDER APPLICABLE
LAW, INCLUDING, BUT NOT LIMITED TO, THE UNIFORM COMMERCIAL CODE OF NEW YORK.
7.4 SUBMISSION TO JURISDICTION; WAIVERS. The Company hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Mortgage and the other Ancillary Documents to
which it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the courts of
the State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the
Company at its address set forth in Section 7.7 or at such other address of
which the Lender shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
-18-
<PAGE>
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section any special, exemplary, punitive or consequential damages.
7.5 WAIVERS OF JURY TRIAL. THE COMPANY AND THE LENDER HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
7.6 ACKNOWLEDGMENT OF RECEIPT OF COPY OF MORTGAGE. The Company
hereby acknowledges and certifies that a full, complete, correct and exact copy
of this Mortgage has been delivered to and received by the Company on the date
of its execution.
7.7 NOTICES. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
facsimile transmission) and, unless otherwise expressly provided herein, shall
be deemed to have been duly given or made (a) in the case of delivery by hand,
when delivered, (b) in the case of delivery by mail, three days after being
deposited in the mails, postage prepaid, or (c) in the case of delivery by
facsimile transmission, when sent and receipt has been electronically confirmed,
addressed as follows in the case of the Company and the Lender, or to such other
address as may be hereafter notified by the respective parties hereto:
The Company: Aviation Distributors, Inc.
One Capital Drive
Lake Forest, California 96230
Attention: Ken Lipinski
Fax: 714-586-1399
The Lender: BNY Financial Corporation
1290 Avenue of the Americas
New York, New York 10104
Attention: Mr. Frank Imperato
Fax : (212) 408-7399
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Mortgage to be
duly executed and delivered as of the date and year first above written.
AVIATION DISTRIBUTORS, INC.
(COMPANY)
By /s/ Kenneth A. Lipinski
--------------------------------
Name: Kenneth A. Lipinski
--------------------------
Title: C.O.O.
-------------------------
BNY FINANCIAL CORPORATION
(MORTGAGEE)
By /s/ Gregory C. Harbaugh
--------------------------------
Name: Gregory C. Harbaugh
--------------------------
Title: Vice President
-------------------------
<PAGE>
EXHIBIT A-1
ENGINE CHATTEL MORTGAGE SUPPLEMENT
ENGINE CHATTEL MORTGAGE SUPPLEMENT, dated February __, 1998, between
AVIATION DISTRIBUTORS, INC., a Delaware corporation (hereinafter called the
"Company"), and BNY FINANCIAL CORPORATION (hereinafter called the "Mortgagee").
W I T N E S S E T H :
WHEREAS, the Company has heretofore executed and delivered an Engine
Chattel Mortgage, dated as of February __, 1998 (hereinafter called the
"Mortgage"), between the Company and the Mortgagee, covering the property of the
Company therein described, to secure the payment of all Secured Obligations from
time to time outstanding and the assurance and performance by the Company of all
of the terms, provisions, agreements and covenants of the Credit Agreement, the
Note and the other Ancillary Documents (including the Mortgage), all as provided
in the Mortgage (all terms used in this instrument, and not otherwise defined,
having the meanings assigned thereto in the Mortgage);
WHEREAS, the Mortgage relates to the property specifically described
in Schedule I hereto and a counterpart of this Mortgage Supplement will be
attached to the counterpart of the Mortgage being filed with the Federal
Aviation Administration;
WHEREAS, the Company is the owner of the property specifically
described in Schedule I hereto, free and clear of all Liens, except the Lien of
the Mortgage and Liens permitted by the Lease, and desires to execute and
deliver this Mortgage Supplement for the purpose of specifically subjecting said
property to, or confirming, the Lien of the Mortgage; and
WHEREAS, all acts and things prescribed by law and by the Certificate
of Incorporation and By-Laws of the Company necessary to implement this Mortgage
Supplement as the valid, binding and legal obligation of the Company, in
accordance with its terms, have been done.
NOW, THEREFORE, this Mortgage Supplement witnesseth, that, to secure
the payment and performance of all Secured Obligations, the Company does hereby
transfer, assign, grant, bargain, sell, convey, mortgage, hypothecate, pledge,
set over, confirm and grant a security interest in, the property described in
Schedule I hereto to the Mortgagee, its successors and assigns, with power of
sale;
TO HAVE AND TO HOLD the aforesaid property described in Schedule I
hereto unto the Mortgagee, its successors and assigns, for the uses and purposes
and subject to the terms, provisions, agreements and covenants set forth in the
Mortgage.
<PAGE>
This Mortgage Supplement shall be construed as supplemental to the
Mortgage and shall form a part thereof, and the Mortgage is hereby incorporated
by reference herein and is hereby ratified, approved and confirmed.
This Mortgage Supplement shall in all respects be governed by, and
construed in accordance with, the laws of the State of New York, including all
matters of construction, validity and performance.
This Mortgage Supplement may be executed in any number of
counterparts, each of which counterparts shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same Mortgage Supplement.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Mortgage
Supplement to be duly executed as of the day and year first above written.
BNY FINANCIAL CORPORATION AVAITION DISTRIBUTORS, INC.
By ____________________________ By ______________________________
Name: Name:
Title: Title:
-4-
<PAGE>
SCHEDULE I
DESCRIPTION OF ENGINES
I. ENGINES
<TABLE>
<CAPTION>
Manufacturer's
Manufacturer Model Serial No.
------------ ----- ----------
<S> <C> <C>
CFM 2C1 692501
</TABLE>
<PAGE>
EXHIBIT A-2
ENGINE CHATTEL MORTGAGE SUPPLEMENT
ENGINE CHATTEL MORTGAGE SUPPLEMENT, dated ________ __, 19__, between
AVIATION DISTRIBUTORS, INC., a Delaware corporation (hereinafter called the
"Company"), and BNY FINANCIAL CORPORATION (hereinafter called the "Mortgagee").
W I T N E S S E T H :
WHEREAS, the Company has heretofore executed and delivered an Engine
Chattel Mortgage, dated as of February __, 1998 (hereinafter called the
"Mortgage"), between the Company and the Mortgagee, covering the property of the
Company therein described, to secure the payment of all Secured Obligations from
time to time outstanding and the assurance and performance by the Company of all
of the terms, provisions, agreements and covenants of the Credit Agreement, the
Note and the Mortgage, all as provided in the Mortgage (all terms used in this
instrument, and not otherwise defined, having the meanings assigned thereto in
the Mortgage);
WHEREAS, the Mortgage relates to the property specifically described
in Schedule I hereto, and a counterpart of the Mortgage has been recorded,
pursuant to the Federal Aviation Act, by the Federal Aviation Administration
(the "FAA") at Oklahoma City, Oklahoma, on ___________ __, 1997, and assigned
Conveyance No. ____________;
WHEREAS, the Company is the owner of the property specifically
described in Schedule I hereto, free and clear of all Liens, except the Lien of
the Mortgage, and desires to execute and deliver this Mortgage Supplement for
the purpose of specifically subjecting said property to, or confirming, the Lien
of the Mortgage; and
WHEREAS, all acts and things prescribed by law and by the Certificate
of Incorporation and By-Laws of the Company necessary to implement this Mortgage
Supplement as the valid, binding and legal obligation of the Company, in
accordance with its terms, have been done;
NOW, THEREFORE, this Mortgage Supplement witnesseth, that, to secure
the payment and performance of all Secured Obligations, the Company does hereby
transfer, assign, grant, bargain, sell, convey, mortgage, hypothecate, pledge,
set over, confirm and grant a security interest in, the property described in
Schedule I hereto to the Mortgagee, its successors and assigns, with power of
sale;
<PAGE>
TO HAVE AND TO HOLD the aforesaid property described in Schedule I
hereto unto the Mortgagee, its successors and assigns, for the uses and purposes
and subject to the terms, provisions, agreements and covenants set forth in the
Mortgage.
This Mortgage Supplement shall be construed as supplemental to the
Mortgage and shall form a part thereof, and the Mortgage is hereby incorporated
by reference herein and is hereby ratified, approved and confirmed.
This Mortgage Supplement shall in all respects be governed by, and
construed in accordance with, the laws of the State of New York, including all
matters of construction, validity and performance; provided, however, that the
parties shall be entitled to all rights conferred by the Federal Aviation Act.
This Mortgage Supplement may be executed in any number of
counterparts, each of which counterparts shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same Indenture Supplement.
IN WITNESS WHEREOF, the parties hereto have caused this Mortgage
Supplement to be duly executed as of the day and year first above written.
BNY FINANCIAL CORPORATION AVIATION DISTRIBUTORS, INC.
By ____________________________ By ______________________________
Name: Name:
Title: Title:
-2-
<PAGE>
SCHEDULE I
DESCRIPTION OF ENGINES
I. ENGINES
<TABLE>
<CAPTION>
Manufacturer's
Manufacturer Model Serial No.
------------ ----- ----------
<S> <C> <C>
</TABLE>
-3-
<PAGE>
OFFICER'S CERTIFICATE
I, Kenneth A. Lipinski, Chief Operating Officer of Aviation
Distributors, Inc. (the "Company") do hereby certify to BNY Financial
Corporation (the "Lender") pursuant to Section 3.2 of that certain Engine
Chattel Mortgage, dated as of February 24, 1998 (the "Mortgage") that as of the
date hereof:
(a) all necessary approvals, authorizations, consents, licenses,
certificates and orders of each Governmental Authority having jurisdiction with
respect to the ownership, use and operation of each Engine have been obtained,
and such approvals, authorizations, consents, licenses, certificates or orders
are in full force and effect and constitute sufficient authorization therefor;
(b) no Event of Loss has occurred and no event and no condition
exists which would, but for the passage of time, constitute an Event of Loss
with respect to any Engine then being subjected to the Lien of the Mortgage;
(c) no Default, Event of Default or Note Event of Default has
occurred and is continuing, other than as disclosed to the Mortgagee on Exhibit
B to the Note;
(d) all of the representations and warranties of the Company
contained in the Mortgage, in the Credit Agreement and in the Note are true,
accurate and complete in all material respects, except and only to the extent
that the same relate to the matters giving rise to the Events of Default listed
on Exhibit B to the Note; and
(e) each of the Credit Agreement, the Note and the other Ancillary
Documents is in full force and effect.
Capitalized terms used but not otherwise defined herein shall have the
meanings assigned thereto in the Mortgage.
Dated this 24th day of February, 1998.
--------------------------------
Name:
Title:
