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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] Annual Report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ TO _____________
COMMISSION FILE NUMBER: 0-29490
HAWKER PACIFIC AEROSPACE
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3528840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11240 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352
(Address of principal executive offices) (Zip code)
(818) 765-6201
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not 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-K. [X]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of March 31, 1999, was approximately
$11,145,000. The number of shares of common stock outstanding on March 31, 1999,
was 5,822,222 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part II incorporate information by reference to certain portions of
registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1998.
Part III incorporates information by reference to the registrant's definitive
Proxy Statement, to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year.
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PART I
Item 1 BUSINESS............................................................ 3
Item 2. PROPERTIES.......................................................... 15
Item 3. LEGAL PROCEEDINGS................................................... 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS................................................. 15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER mATTERS.................................. 15
Item 6. SELECTED FINANCIAL DATA............................................. 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................... 24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 24
PART III OMITTED - (INCORPORATED BY REFERENCE TO PROXY
STATEMENT TO BE FILED NO LATER THAN APRIL 30, 1999)................. 24
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.......................................... 25
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS....................................... 25
REPORT OF INDEPENDENT AUDITORS...................................... 28
CONSOLIDATED BALANCE SHEETS......................................... 29
CONSOLIDATED STATEMENTS OF OPERATIONS............................... 31
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY................................................ 32
CONSOLIDATED STATEMENT OF CASH FLOWS................................ 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 35
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PART I
ITEM 1 - BUSINESS
General
Hawker Pacific Aerospace ("Hawker Pacific" or the "Company") repairs and
overhauls aircraft and helicopter landing gear, hydromechanical components and
wheels, brakes and braking system components for a diverse international
customer base, including commercial airlines, air cargo operators, domestic
government agencies, aircraft leasing companies, aircraft parts distributors and
original equipment manufacturers ("OEMs"). The Company is a certified Federal
Aviation Administration ("FAA") and Joint Airworthiness Authority ("JAA")
approved repair station, and has also been granted Parts Manufacturer Approvals
by the FAA.
In addition, the Company distributes, manufactures and sells new and
overhauled spare parts and components for both fixed wing aircraft and
helicopters. The Company has long-term service contracts with many customers,
including Federal Express Corporation ("Federal Express"), American Airlines,
Inc. ("American Airlines"), the United States Coast Guard, and US Airways, Inc.
("US Airways").
On February 4, 1998, the Company completed its acquisition (the "BA
Acquisition") of substantially all of the assets of the landing gear repair and
overhaul operations (the "BA Assets") of British Airways plc ("British
Airways"). The Company believes the BA Acquisition will provide it with a base
in the United Kingdom from which to significantly expand its international
repair and overhaul operations, and position itself to become a global leader in
its market.
The Company believes it is well situated to benefit from the following
aviation industry trends that are driving increased demand for third-party
repair, overhaul and spare parts inventory management services: (i) the increase
in worldwide air traffic associated with the addition of new aircraft and more
frequent use of existing aircraft; (ii) the outsourcing by aircraft operators of
services previously handled internally; (iii) the break-up of monopolistic
aircraft maintenance consortiums; and (iv) an increase in regulatory pressure
and customer emphasis on the traceability of aircraft parts and overhaul
processes.
The Company traces its origins back to a hydraulics company formed in 1958.
Hawker Pacific was first incorporated in 1980 in California as a distributor of
aircraft parts and certain other consumer products, and began providing aircraft
repair and overhaul services in 1987. In November 1996, BTR Dunlop, Inc. sold
all of the outstanding capital stock of the Company to certain of the Company's
current shareholders. See "Certain Relationships and Related Transactions".
Unless the context otherwise requires, all references herein to the "Company" or
"Hawker Pacific" shall also include Hawker Pacific Aerospace Limited, a wholly-
owned United Kingdom subsidiary formed in November 1997. The Company's principal
executive offices are located at 11240 Sherman Way, Sun Valley, California
91352, and its telephone number is (818) 765-6201.
Recent Developments
Initial Public Offering. On February 3, 1998, the Company completed an initial
public offering (the "Offering") of 2,766,667 shares of the Company's common
stock through several underwriters represented by EVEREN Securities, Inc. and
The Seidler Companies Incorporated. Of the 2,766,667 shares of common stock sold
in the Offering, 2,600,000 shares were sold by the Company and 166,667 shares
were sold by a principal shareholder of the Company. The principal shareholder
sold 415,000 additional shares of common stock pursuant to the exercise of an
over-allotment option granted to the underwriters by the principal shareholder.
The Registration Statement for the Offering (Registration No. 333-40295) was
declared effective by the Securities and Exchange Commission (the "SEC") on
January 29, 1998. The Company received net proceeds of approximately $18.1
million net of expenses of approximately $2.7 million. The Company used
approximately $9.2 million of the net proceeds to fund a portion of the purchase
price for the BA Assets and approximately $7.6 million to repay a portion of the
revolving and term debt previously outstanding under the Company's credit
facility. The Company used the remaining net proceeds for working capital and
general corporate purposes.
Acquisition of Certain Assets of British Airways. On February 4, 1998, the
Company completed the acquisition of certain assets ("BA Assets") of the British
Airways plc landing gear operation (the "BA Acquisition") for a purchase price
of approximately $19.5 million (including acquisition related expenses)
excluding a 747-400 landing gear rotable asset that was acquired during the
second quarter of fiscal 1998 for approximately $2.9 million. The BA assets
consisted of $1.9
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million of inventory, $4.0 million of machinery and equipment and $13.6 million
of landing gear rotable assets. As part of the BA Acquisition, the Company and
British Airways entered into a seven-year exclusive service agreement for the
Company to provide landing gear and related repair and overhaul services to
substantially all of the aircraft currently operated by British Airways.
Market and Industry Overview
The aviation aftermarket consists principally of the servicing and support of
commercial passenger and cargo aircraft. The Company provides aftermarket
landing gear repair and overhaul services and related spare parts to a variety
of customers in the aviation industry. In March 1997, Dillon Read & Co., Inc.
("Dillon Read") estimated the global aviation aftermarket to be $47 billion
annually and projected that it would grow to $60 billion by the year 2000.
Increased Aviation Activity. Boeing's 1998 Current Market Outlook (the "Boeing
Outlook") projects that global air travel will increase by 55% through the year
2007, with cargo traffic growth projected to increase by 69% through 2007.
Average passenger seat miles flown are also expected to increase significantly
over the next few years. Further, many new airlines are expected to commence
operations in the United States and abroad, especially in China and other Asian
nations where only a small percentage of the population has flown to date. In
order to accommodate growing demand, aircraft operators will be required to
increase the size of their aircraft fleets. The Boeing Outlook projects that the
global fleet of aircraft will grow from 12,300 aircraft at the end of 1997 to
17,700 aircraft in 2007, and 26,200 aircraft in 2017.
Increases in passenger travel, air cargo services and the number of aircraft
in service increase the demand for repair and overhaul services. In addition,
the Federal Aviation Administration (the "FAA") requires aircraft landing gear
to be overhauled every seven to ten years. As a result, the growth in the number
of aircraft over the past 15 years is expected to create increased demand for
landing gear repair and overhaul services, which will most likely continue as
the number of new aircraft in service grows. Further, because start-up airlines
generally do not invest in the infrastructure necessary to service their
aircraft, such airlines outsource all or most of their repair and overhaul
services.
Outsourcing of Repair and Overhaul Services. While the overall air
transportation industry has grown significantly over the past decade, commercial
airlines have not experienced consistent earnings growth over the same period.
As a result, many aircraft operators have recognized outsourcing as an
opportunity to reduce operating costs, working capital investment and turnaround
time. In March 1997, Dillon Read estimated the outsourced military and
government market to be $9 billion and the third party market to be $12 billion.
Outsourcing allows aircraft operators to benefit from the expertise of service
providers like Hawker Pacific who have developed specialized repair techniques
and achieved economies of scale unavailable to individual operators.
Additionally, outsourcing allows aircraft operators to limit their capital
investment in infrastructure and personnel by eliminating the need for the
equipment, sophisticated information systems technology and inventory required
to repair and overhaul landing gear and hydromechanical components. Dillon Read
also estimated in March 1997 that approximately 40%, 35% and 95%, respectively,
of commercial, military and general aviation functions are currently outsourced.
The increasing number of long-term service contracts during 1997 and 1998 from
airlines outsourcing their repair and overhaul services exemplifies this growing
trend. As aircraft operators continue to become more cost and value conscious,
the Company expects the trend toward outsourcing to continue.
Break-Up of Monopolistic Aircraft Maintenance Consortiums. Until recently,
European aircraft operators attempted to realize cost savings by forming repair
consortiums to provide maintenance, repair and overhaul services for their
aircraft. Within these repair consortiums, each member was responsible for
providing the consortium's other members with maintenance, repair and overhaul
services for certain specified aircraft components. Over time, these members
have begun subcontracting their maintenance, repair and overhaul services to
independent service providers through a competitive bidding process. The Company
believes that this trend will provide it with opportunities to expand its
European customer base.
Greater Emphasis on Traceability. As a result of concerns regarding unapproved
aircraft spare parts, regulatory authorities have focused on the level of
documentation which must be maintained on aircraft spare parts. Accordingly,
aircraft operators increasingly demand that third party service providers
provide complete traceability of all parts used in the repair and overhaul
process. The sophistication required to track the parts histories of an
inventory consisting of thousands of aircraft spare parts is considerable. For
example, overhaul of a 747 aircraft shipset requires the handling and tracking
of over 2,500 parts. This has required companies to invest heavily in
information systems technology. The
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Company has developed and maintains a proprietary management information system
that enables it to comply with its customer's contract specifications and
enables its customers to comply with governmental regulations concerning
traceability of spare parts. The Company's proprietary system is well-regarded
in the industry, and the Company considers it to be a competitive advantage.
Company Operations
Repair and Overhaul. The primary reasons for removing landing gear or
hydromechanical components from an aircraft for servicing are: (i) the number of
takeoffs and landings, or years since a landing gear's last overhaul, has
reached the `time between overhaul' limit, or (ii) the landing gear or
hydromechanical component has been damaged or is not performing optimally. The
cost of servicing landing gear or hydromechanical components that have been
removed varies depending upon the age and type of aircraft and the extent of
repairs required.
Each landing gear overhaul can involve numerous separate parts and work
orders. For example, the Boeing 737 nose landing gear calls for over 290 parts
and related work orders while the Boeing 747-200 nose gear calls for over 650
parts and related work orders. Generally, the Company performs these overhauls
in approximately four to eight weeks. Hydromechanical component overhauls can
involve 200 or more parts and over 25 separate work orders and are generally
performed in approximately two to four weeks. In order to achieve this
throughput, the Company must perform many parallel processes and integrate
numerous components just before final assembly. Completing this complex overhaul
work within the time constraints set by aircraft operators has led the Company
to develop a highly managed systems-driven process, which is facilitated by its
highly specialized management information system. See "Management Information
Systems and Quality Assurance" below. The stages of the overhaul process include
the following:
Disassembly, Cleaning and Inspection. Upon receiving a landing gear shipset or
a hydromechanical component, the Company's technicians disassemble the unit, a
process which requires special tooling and expertise. Each part is completely
cleaned to allow for comprehensive inspection, testing and evaluation of part
size, structural integrity and material tolerances.
The Company uses a detailed checklist and reporting procedure to create a work
order which documents the state of each part inspected, and indicates the extent
of repair or overhaul to be performed. Technicians tag all parts which need to
be replaced or reworked and electronically prepare bills of material and
requisitions to the Company's parts and production departments for inventory and
scheduling purposes. An internal sales order is created concurrently with the
work order for shipping, pricing, billing and delivery purposes. The Company
utilizes its management information system throughout this process to reduce the
amount of detailed inspection time required.
The disassembly and inspection process enables the Company to obtain detailed
information concerning which parts can be reused or repaired and which must be
replaced, as well as the approximate amount of labor needed to complete the job.
The Company's computer system identifies and tracks the parts and associated
work orders from each landing gear or hydromechanical component throughout the
overhaul process in order to maintain the integrity of the landing gear or
hydromechanical component being serviced. Shop travelers provide a complete,
detailed listing of all repair and overhaul work steps and processes. Once a
landing gear is disassembled, the individual parts are washed, visually
inspected for obvious damage and permanently identified using the internal work
order number assigned to that delivery order. Major and minor parts are then
processed for engineering evaluation and disposition of required repair work
steps.
Parts Rework, Replacement and Reassembly. The next phase of an overhaul
involves reworking existing parts to specifications set by the Company's
customers. This entails a combination of machining, plating, heat treatment,
metal reshaping, surface finishing and restoration of organic finish. At this
phase, each part is accompanied by the customized bar-coded traveler which
facilitates the computerized prioritization and tracking of a part through the
rework phase. Tight control is maintained over scheduling for each part,
enabling the Company to remain within its required turnaround time. The Company
performs the majority of the repair and overhaul procedures in its facilities
using proprietary or specialized repair techniques. In addition, the Company
utilizes in-house manufacturing capabilities to fabricate certain parts used in
the overhaul process that are otherwise difficult to obtain. If a part cannot be
reclaimed, the Company may install either a new part or a previously-reworked
part from inventory. The Company maintains an inventory of serviceable parts
that it has reworked for this purpose. Overhauling parts or using serviceable
parts from inventory in lieu of new parts generally lowers customer costs and
increases the Company's margins in comparison to an overhaul that consists of
exclusively new spare parts. In addition, these manufacturing and service
capabilities are integral to the Company's competitive position
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because they enable the Company to maintain or increase the quality of work
performed and reduce cost and turnaround time relative to its competitors.
Inspection and Shipping. After completing the rework phase of the
overhaul/repair process, each part is delivered to the assembly area where the
end unit is assembled, tested and final inspection is completed. Once the end
unit assembly has been accepted through final inspection it is moved to
shipping, where it is packaged and prepared for dispatch.
Pricing. The Company offers its customers different pricing arrangements for
its repair and overhaul services. Pricing generally depends on the volume and
complexity of the work performed, the kind and number of new or remanufactured
spare parts used in the repair or overhaul, and the required turnaround time.
For many of its customers, the Company exchanges a previously overhauled shipset
from its inventory for an as-removed shipset from the customer's aircraft. The
Company charges the customer a fixed overhaul fee, and upon completing the
overhaul of the as-removed shipset, the Company charges the customer an
additional fee for spare parts or extra services required to overhaul the
landing gear to the customer's specifications. The Company typically bills a
substantial portion of the repair and overhaul fee to the customer up-front upon
receiving its as-removed shipset and generally receives payment for this portion
of the overhaul fee before completing the overhaul.
With certain of its customers for whom the Company regularly provides parts
and services on entire fleets or large numbers of aircraft, the Company utilizes
a flat fee fixed price arrangement which it typically sets forth in long-term
service agreements. Pursuant to the Company's service agreements, the Company
performs repair and overhaul services on a scheduled or as-needed basis. Pricing
depends on the volume and type of aircraft landing gear or hydromechanical
component to be serviced and the required turnaround time. Under its long-term
service agreements, the Company is able to plan in advance for equipment and
inventory requirements and can achieve efficiencies in labor hours and materials
usage relative to the estimate on which the contract price was based.
Parts Distribution
General. Aircraft spare parts are classified within the industry as (i)
factory new, (ii) new surplus, (iii) overhauled, (iv) serviceable, and (v) as-
removed. A factory new or new surplus part is one that has never been installed
or used. Factory new parts are purchased from manufacturers or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other distributors. An overhauled part has been
disassembled, inspected, repaired, reassembled and tested by a licensed repair
facility. An aircraft spare part is classified serviceable if it is repaired by
a licensed repair facility rather than completely disassembled as in an
overhaul. A part may also be classified serviceable if it is removed by the
operator from an aircraft or engine while operating under an approved
maintenance program and is functional and meets any manufacturer or time and
cycle restrictions applicable to the part. A factory new, new surplus,
overhauled or serviceable part designation indicates that the part can be
immediately utilized on an aircraft. A part in as-removed condition requires
functional testing, repair or overhaul by a licensed facility prior to being
returned to service in an aircraft.
Parts Sales. The Company sells factory new, FAA-approved parts manufactured
by approximately 80 OEMs, including Societe D'Application Des Machines Motrices
("SAMM"), Dunlop Equipment Division, Parker Hannifin Corporation ("Parker
Hannifin") and Messier-Bugatti and overhauled aircraft spare parts to a diverse
base of customers in the aviation industry. The Company believes that it
provides customers with value added parts distribution services by offering
immediate availability, broad product lines, technical assistance and additional
services.
Customers
Commercial. The Company serves a broad base of domestic and international
customers in the aviation industry. The Company's customers include British
Airways, Federal Express, American Airlines, Air France, EVA Airways, US
Airways, Continental Airlines and many other national and regional passenger and
cargo airlines. Approximately 80% of the Company's landing gear business is
derived from long-term contracts, generally of five to seven years in duration,
representing one overhaul cycle for a customer's fleet. The Company believes
that the long-term relationships it has developed with many of its customers
provide the Company with a stable and ongoing base of business, as well as a
source of new business opportunities.
Government Contracts. 1998 and 1997 sales to the United States government and
its agencies represented approximately 4.2% and 6.5%, respectively, of
consolidated revenue. The Company's largest government customer has been the
United States Coast Guard ("USCG"). The Company has an agreement with the USCG
to provide repair and overhaul services and spare parts on an as-needed, fixed
price basis for Dauphin II helicopters. The agreement is for a one-
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year term which the USCG may renew for additional one-year terms through the
year 2000. Because government sales are subject to competitive bidding and
government funding, there can be no assurance that such sales will continue at
previous levels. Although the Company's government contracts are subject to
termination at the election of the government, in the event of such a
termination the Company would be entitled to recover from the government all
allowable costs incurred by the Company through the date of termination.
Material Customers. Customers which have accounted for more than 10% of sales
during the last three years are: (i) in 1998, British Airways (22.3%) and
Federal Express (17.5%); (ii) in 1997, Federal Express (19.3%); and (iii) in
1996, Federal Express (18.4%) and the USCG (11.2%).
Management Information System And Quality Assurance
The Company utilizes its management information system to shorten turnaround
times for customer orders, increase output, improve inventory management and
reduce costs by eliminating duplication of work and reducing errors in ordering
of parts. The system consists of an automated inspection and routing system, a
material resources planning module, a bar-coded shop floor control module, an
inventory control and parts tracing module, a tooling calibration module and a
general accounting module.
The system enables the Company to shorten lead times, increase output and
improve inventory management by allowing the Company to manage and control the
process of detailed parts inspection, materials requisitioning and work order
scheduling and release. The system's database contains much of the information
required to perform landing gear inspection activities, including illustrated
parts catalogues, parts specifications and other technical data. This has
largely eliminated the need to update parts catalogues manually and allows an
inspector using a personal computer located at his workstation to (i) refer to
computer based parts manuals and catalogues to identify needed parts, (ii)
access inventory to check on the availability of needed parts, (iii) requisition
needed parts from inventory, and (iv) create and record an audit trail for all
inspected parts and processes. These features of the system have substantially
reduced total detailed inspection time required in the overhaul process.
Using the system, all materials utilized and labor performed in connection
with a work order are recorded using bar code scanners located throughout the
Company's facility. Work order travelers are generated upon commencement of a
repair or overhaul and accompany the separate parts of each landing gear or
hydromechanical component throughout the overhaul process. After each stage of
the process is completed, the employee who performed the work uses the bar code
system to record the date of completion, his or her employee identification
number, critical dimensions and the quantity processed, accepted or rejected.
For each repair or overhaul that it performs, the Company records: (i) all
essential operations and tests conducted; (ii) inspection data on all components
repaired, overhauled or exchanged for new components; and (iii) the sources of
all materials issued during the course of the work. This function allows the
Company to provide more accurate cost and timing estimates to customers,
facilitates faster and more accurate preparation of customer invoices and forms
the basis of the Company's comprehensive quality assurance program. In addition,
shoploading and material requisition personnel receive more accurate planning
data. Using the system, management can (i) plan for material requirements in
advance so that required materials for a specific unit are on hand in time to
facilitate on-time delivery, and (ii) optimize daily manpower and materials
utilization based upon sales forecasts and actual orders.
Equipment Maintenance and Tooling
The Company performs all of the maintenance and repair on the equipment used
in the repair and overhaul process. The Company's maintenance personnel perform
various regularly scheduled maintenance procedures on the Company's equipment on
a weekly, monthly and annual basis, and shift operators perform daily preventive
maintenance. Precision measurement accessories installed on certain machines,
which require periodic calibration, are maintained and serviced by approved
vendors and closely monitored by the Company.
The Company invests significant material and resources to design and construct
tooling and fixtures to support its current product line and improve the
efficiency of the repair and overhaul process. Manufacturer-designed tooling is
typically limited to specialized tools to aid in the disassembly, assembly and
testing of landing gear components, such as spanner wrenches and seal
installation tools. From time to time, the Company's employees may develop
modifications to existing tooling or ideas for new tooling and fixtures in order
to accomplish a specific machining or testing operation or to
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improve the performance of the overhaul process. Tooling and fixtures used in
machining and plating operations are conceived, designed and fabricated in-house
by the technical personnel involved in the Company's daily operations to improve
the labor efficiency of a process and reduce the cost of performing a repetitive
process. The Company believes that its ability to design and fabricate tooling
used in its operations allows it to maximize efficiencies and enables its
customers to realize cost savings and improved turnaround time.
Suppliers And Procurement Practices
The primary sources of parts and components for the Company's overhaul
operations and parts distribution business are domestic and foreign airlines,
OEMs and aircraft leasing companies. The supply of parts and components for the
Company's aftermarket sales is affected by the availability of excess
inventories that typically become available for purchase as a result of new
aircraft purchases by commercial airlines. These new aircraft purchases reduce
the airline's need for spares supporting the aircraft that have been replaced.
Aftermarket supply is also affected by the availability of new parts from OEMs
and the availability of older, surplus aircraft that can be purchased for the
value of the major parts and components.
Although the Company does not have fixed agreements with the majority of its
suppliers, it has frequently been able to obtain price discounts from suppliers
because of the volume and regularity of its purchases. The Company has ten-year
agreements with Dunlop Limited, Aviation Division and Dunlop Equipment Division
(collectively, "Dunlop") that enable it to purchase Dunlop parts at a discount
from list price for resale and for use in the repair and overhaul of a variety
of fixed wing aircraft and helicopters. Dunlop has been the largest single
supplier of materials to the Company in 1997 and 1998.
The Company also has agreements with Messier-Bugatti, SAMM and Eurocopter
France that enable the Company to purchase new aircraft parts at discounts from
list price. Although the Company does not have agreements with many of its
suppliers, and competes with other parts distributors for production capacity,
the Company believes that its sources of supply and its relationships with its
suppliers are satisfactory.
The Company has developed procurement practices to ensure that all supplies
received conform to contract specifications. For cost, quality control and
efficiency reasons, the Company generally purchases supplies only from vendors
with whom the Company has an on-going relationship and/or whom the Company's
customers have previously approved. The Company has qualified second sources or
has identified alternate sources for all of its supplies. The Company chooses
its vendors primarily on the quality of the parts supplied and the vendor's
record for on-time performance. The Company regularly evaluates and audits the
performance of its approved vendors. Repeated failure to comply with the
Company's quality and delivery requirements may cause the Company to remove a
vendor from its approved vendor list.
Sales And Marketing
The Company's sales and marketing strategy targets commercial and government
customers with large fleets of aircraft that require regular repair and overhaul
of landing gear parts and components. In recent years, the Company has
significantly expanded its direct sales efforts, with the dual goals of
increasing sales from the Company's existing customer base as well as attracting
new customers. In particular, the Company focuses its sales efforts on
encouraging its existing and prospective customers to enter into long-term
agreements with the Company for the repair and overhaul of landing gear on all
aircraft within a fleet, or alternatively, to engage the Company to perform
repair and overhaul services on several aircraft at one time. In its sales and
marketing efforts, the Company emphasizes its competitive strengths, including
its superior quality of service, competitive pricing, rapid turnaround time and
extensive industry experience.
The Company markets and sells its products and services worldwide both
directly through an in-house sales staff and indirectly through a network of
independent sales representatives. Air Resources, Inc., an aviation sales
representative agency ("Air Resources"), markets and sells the Company's
products and services to a number of domestic airlines in return for a
commission on sales made through Air Resources' efforts. The Company's domestic
sales are conducted primarily by Air Resources, which focuses its efforts on
major domestic commercial carriers, as well as the Company's in-house sales
force.
The Company conducts its international sales and marketing through a number of
independent agencies based worldwide in such countries as France, Sweden, Mexico
and India. Additionally, senior management plays an active role in marketing the
Company's product lines. The Company's president and chief executive officer,
Dave Lokken, oversees all sales
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activities. Brian Carr, managing director of Sun Valley operations, supervises
landing gear sales, and Michael Riley, vice president of the hydromechanical
business unit, supervises hydromechanical component sales. The Company's sales
staff works closely with engineering and customer support personnel to provide
cost effective solutions to maintaining landing gear and hydromechanical
systems, stressing the Company's repair and overhaul engineering expertise,
turnaround times and component overhauling capabilities.
In addition, the Company actively participates in many of the major aviation
industry gatherings and air shows and hosts groups of aircraft operators at
technical and other meetings. In certain instances, the Company bids on
government contracts through its government contracts department, which
coordinates with the Company's sales and marketing team.
Growth Strategy
Pursue Additional International Growth Opportunities. The Company believes
that the international aviation aftermarket presents the greatest potential for
substantial growth. With the large air transport repair and overhaul operations
that it has established through the recent BA Acquisition, and the
hydromechanical repair and overhaul services that it performs from its
Netherlands facility, the Company believes it will be able to provide customers
with a full range of repair and overhaul services in Europe. In addition, the
Company believes that the break-up of aircraft maintenance consortiums will
create opportunities for the Company to expand its European, Middle Eastern and
Asian customer bases. With facilities located in the United Kingdom and
California, the Company believes that it is geographically positioned to pursue
additional growth opportunities in both the European and Asian aviation
aftermarkets.
Focus on Long-Term Service Agreements. Through increased sales and marketing
efforts, the Company is actively seeking to enter into long-term service
agreements with its existing and potential customers to provide its services for
all of their respective aircraft. A recent example of the Company's success in
this area includes the Company's five-year service agreement with EVA Airways,
based in Taiwan, Republic of China. The Company had previously entered into a
contract to provide overhaul services for all of EVA's B767 aircraft. Based on
the Company's performance in servicing this fleet, EVA recently awarded the
Company another contract for its entire fleet of B747-400's. The Company
believes that long-term service agreements provide it with a more predictable
and consistent flow of business. Approximately 80% of the Company's landing gear
business, and approximately 64% of the Company's consolidated revenue, are
currently derived from long-term service contracts.
Expand Existing Operations. Hawker Pacific seeks to increase sales and
operating income by marketing its landing gear repair and overhaul services to
new and existing customers, and by expanding its hydromechanical component
product lines. The Boeing Outlook projects that the global fleet of aircraft
will grow from 12,300 aircraft at the end of 1997 to 17,700 aircraft in 2007,
and 26,200 aircraft in 2017. The Company plans to expand its landing gear repair
and overhaul operations to capitalize on this growth trend. Because the Company
believes that improved profit margins in fixed wing operations are primarily a
function of increased volume, it plans to expand its capacity to perform fixed
wing landing gear repair and overhaul services. The Company also intends to
expand its hydromechanical component service offerings. The Company recently
began to offer repair and overhaul of constant speed drive-integrated drive
generators.
Accelerate Growth through Acquisition. At such times as its financial
condition and resources permit, the Company will pursue strategically located
companies with technology, equipment and inventory that complement or expand the
Company's existing operations and that may enable it to expand into new
geographic or product markets. In particular, the Company seeks to acquire
companies that will enable it to expand its international operations or
horizontally increase its product offerings within the aviation repair and
maintenance industry.
Competition
Numerous companies compete with Hawker Pacific in the aviation services
industry. The Company primarily competes with various repair and overhaul
organizations, which include the service arms of OEMs, the maintenance
departments or divisions of large air carriers (some of which also offer
maintenance services to third parties) and independent organizations such as the
Aerospace Division of B.F. Goodrich Company, the Landing Gear Division of AAR
Corporation ("AAR"), Revima, a company organized and operating under the laws of
France, and Dowty Aerospace Aviation Services. The Company's major competitors
in its hydromechanical components business include AAR and OEMs such as
Sunstrand, Aeroquip Vickers, Inc., Parker-Hannifin Corporation, Messier-Bugatti
and Lucas.
-9-
<PAGE>
Government Regulation
The Company is highly regulated worldwide by the FAA, the JAA (a consortium of
European regulatory authorities), and various other foreign regulatory
authorities, including the Dutch Air Agency, which regulates the Company's
Netherlands' operations, and the Civil Aviation Authority, which regulates the
Company's United Kingdom operations. These regulatory authorities require all
aircraft to be maintained under continuous condition monitoring programs and
periodically to undergo thorough inspection. In addition, all parts must be
certified by the FAA and equivalent regulatory agencies in foreign countries and
conformed to regulatory standards before installation on an aircraft.
The Company is a certified FAA and JAA approved repair station, and has been
granted Parts Manufacturer Approvals by the FAA Manufacturing Inspectors
District Office. In addition, the Company's operations are regularly audited and
accredited by the Coordinating Agency for Supplier Evaluation, formed by
commercial airlines to approve FAA approved repair stations and aviation parts
suppliers.
Environmental Matters and Proceedings
The Company's operations are subject to extensive and frequently changing
federal, state and local environmental laws and substantial related regulation
by government agencies, including the United States Environmental Protection
Agency (the "EPA"), the California Environmental Protection Agency, and the
United States Occupational Safety and Health Administration. Among other
matters, these regulatory authorities impose requirements that regulate the
operation, handling, transportation and disposal of hazardous materials
generated by the Company during the normal course of its operations, govern the
health and safety of the Company's employees and require the Company to obtain
and maintain permits in connection with its operations. See "Risk Factors--
Environmental Regulations".
Environmental Proceedings. In October 1993, the United States of America and
the State of California each filed lawsuits in the United States District Court
for the Central District of California, against the Company and the owners (the
"Owners") of one of the Company's facilities (the "Site"). The lawsuits (the
"SFVB Actions") alleged that the groundwater in the San Fernando Valley Basin
("SFVB") had been contaminated with volatile organic compounds and other
hazardous substances released from the Site, requiring costly investigation,
evaluation and remediation efforts for which the Company and the Owners were
liable. In February and June 1997, the Company entered into settlements with the
United States of America and State of California pursuant to which the Company
paid the EPA $382,500 and the State of California $40,950, respectively. The
Company believes that it will not be liable to the United States government or
the State of California for any future costs related to this matter, and the
California Regional Water Quality Control Board recently notified the Company of
its conclusion that soil contamination at the Site does not represent a
significant threat to groundwater quality. BTR Dunlop, Inc., the former owner of
the Company ("BTR"), has agreed to indemnify the Company against any future
amounts for which the Company may be responsible in connection with the SFVB
Actions. See "Certain Transactions--Acquisition of the Company from BTR."
From August 1997 through December 1998, several lawsuits were filed by various
individuals against Lockheed Martin Corporation and various other parties,
including the Company, in the Los Angeles Superior Court pleading various causes
of action in connection with certain alleged injuries caused by toxic and
carcinogenic chemicals allegedly released by the defendants in the Burbank and
Glendale areas of Los Angeles County, California. The individual plaintiffs seek
unspecified compensatory and punitive damages. The Company does not believe that
it caused the release of toxic and carcinogenic chemicals alleged in the
complaints and believes that it is entitled to indemnification from BTR in the
event it is held responsible for any damages in these lawsuits. The Company
recently reached agreement to settle all liability associated with said lawsuits
for a nominal payment. The settlement documents are in the process of being
finalized.
Employees and Employee Training
As of March 31, 1999, the Company had 453 full-time employees, of whom 284 are
employed at the Company's Sun Valley headquarters and repair facility, 156 are
employed with the Company's United Kingdom subsidiary, and 13 are employed at
the Company's repair facility in the Netherlands. In the United Kingdom, 83
former British Airways employees, representing 18% of the Company's work force,
are covered by a collective bargaining agreement.
Each of the Company's technical employees receives specific training in the
individual repair and overhaul functions that he or she performs, in addition to
comprehensive general training in total quality management procedures,
statistical process control and material resource planning. The Company also
regularly conducts in-house training programs, which the Company's management
designs using standard industry practice manuals. In-house training is provided
for the
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<PAGE>
Company's technical and engineering employees on a number of subjects, including
materials handling, corrosion prevention and control, surface tension etch
inspection and shot peening.
Risk Factors
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS, THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS SECTION ENTITLED "RISK FACTORS" AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS ANNUAL REPORT, PERSONS WHO MAY OWN OR INTEND TO
OWN SECURITIES OF THE COMPANY SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS.
Aviation Industry Risks
The Company derives all of its sales and operating income from the services
and parts that it provides to its customers in the aviation industry. Therefore,
the Company's business is directly affected by economic factors and other trends
that affect its customers in the aviation industry, including a possible
decrease in aviation activity, a decrease in outsourcing by aircraft operators
or the failure of projected market growth to materialize or continue. When such
economic and other factors adversely affect the aviation industry, they tend to
reduce the overall demand for the Company's products and services, thereby
decreasing the Company's sales and operating income.
Fluctuations in Results of Operations
The Company's operating results are affected by a number of factors, including
the timing of orders for the repair and overhaul of landing gear and fulfillment
of such contracts, the timing of expenditures to manufacture parts and purchase
inventory in anticipation of future services and sales, parts shortages that
delay work in progress, general economic conditions and other factors. Although
the Company has secured several long-term agreements to service multiple
aircraft, the Company receives sales under these agreements only when it
actually performs a repair or overhaul. Because the average time between landing
gear overhauls is seven years, the work orders that the Company receives and the
number of repairs or overhauls that the Company performs in particular periods
may vary significantly causing the Company's quarterly sales and results of
operations to fluctuate substantially. The Company is unable to predict the
timing of the actual receipt of such orders and, as a result, significant
variations between forecasts and actual orders will often occur. In addition,
the Company's need to make significant expenditures to support new aircraft in
advance of generating revenues from repairing or overhauling such aircraft may
cause the Company's quarterly operating results to fluctuate. Furthermore, the
rescheduling of the shipment of any large order, or portion thereof, or any
production difficulties or delays by the Company, could have a material adverse
effect on the Company's quarterly operating results.
Risks Relating to Acquisition Strategy; Establishment of United Kingdom
Operations
The Company may attempt to grow by acquiring service and parts providers whose
operations or inventories complement or expand the Company's existing repair and
overhaul businesses, or whose strategic locations enable the Company to expand
into new geographic markets. The Company's ability to grow by acquisition
depends upon, and may be limited by, the availability of suitable acquisition
candidates and the Company's capital resources. See "Liquidity and Capital
Resources" in Item 1.
Acquisitions involve risks that could adversely affect the Company's operating
results, including the assimilation of the operations and personnel of acquired
companies, the amortization of acquired intangible assets and the loss of key
employees of acquired companies. Although the Company investigates the
operations and assets that it acquires, there may be liabilities that the
Company fails or is unable to discover, and for which the Company as a successor
owner or operator may be liable. In addition, costs and charges, including legal
and accounting fees and reserves and write-downs relating to an acquisition, may
be incurred by the Company or may be reported in connection with any such
acquisition. The Company evaluates acquisition opportunities from time to time,
but the Company has not entered into any commitments or binding agreements to
date, except with respect to the BA Acquisition. There can be no assurance that
the Company will be able to consummate acquisitions on satisfactory terms, or at
all, or that it will be successful in integrating any such acquisitions,
including the BA Acquisition, into its operations. The Company had no history or
experience operating in the United Kingdom prior to the BA acquisition. The
likelihood of the success of the Company's United Kingdom operations
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<PAGE>
must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business. These include, without limitation, the need to establish operating,
marketing and administrative capabilities, the need to implement the Company's
management information system in its new location, the need to locate and move
into a new facility, unanticipated marketing problems, new competitive
pressures, and increased expenses.
Risks Associated With Expansion Of International Operations
The Company's growth strategy is based in large part on the Company's ability
to expand its international operations, which will require significant
management attention and financial resources. The Company currently has a
subsidiary in the United Kingdom and a division in the Netherlands. There can be
no assurance that the Company's efforts to expand operations internationally
will be successful. In addition, international operations are subject to a
number of risks, including longer accounts receivable collection periods and
greater difficulty in accounts receivable collections, unexpected changes in
regulatory requirements, foreign currency fluctuations, import and export
restrictions and tariffs, difficulties and costs of staffing and managing
foreign operations, potentially adverse tax consequences, political instability,
the burdens of complying with multiple, potentially conflicting laws and the
impact of business cycles and economic instability outside the United States.
The Company's sales are principally denominated in United States dollars and
British pounds, and to a lesser extent in Dutch guilders. The Company makes
substantial inventory purchases in French francs from such suppliers as Messier-
Bugatti, Societe D'Applications Des Machines Motrices and Eurocopter France. The
Company's Netherlands facility's inventory purchases are primarily United States
dollar denominated, while sales and operating expenses are partially denominated
in Dutch guilders. To date, the Company's business has not been significantly
affected by currency fluctuations or inflation. Fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive in particular countries, leading to a reduction in sales in that
country.
Substantial Competition
Numerous companies compete with the Company in the aviation services industry.
The Company expects that competition in its industry will increase substantially
as a result of industry consolidations and alliances in response to the trend in
the aviation industry toward outsourcing of repair and overhaul services. In
addition, as the Company moves into new geographic or product markets it will
encounter new competition.
The Company believes that the primary competitive factors in its marketplace
are quality, price, rapid turnaround time and industry experience. Certain of
the Company's competitors have substantially greater financial, technical,
marketing and other resources than the Company. These competitors may have the
ability to adapt more quickly to changes in customer requirements, may have
stronger customer relationships and greater name recognition and may devote
greater resources to the development, promotion and sale of their products than
the Company. There can be no assurance that competitive pressures will not
materially and adversely affect the Company's business, financial condition or
results of operations. See "Business--Competition."
Government Regulation
The Company's operations are regularly audited and accredited by the
Coordinating Agency for Supplier Evaluation, formed by commercial airlines to
approve FAA approved repair stations and aviation parts suppliers. If material
authorizations or approvals are revoked or suspended, the Company's operations
will be materially and adversely affected. As the Company attempts to commence
operations in countries in which it has not previously operated, it will need to
obtain new certifications and approvals. In addition, if new and more stringent
regulations are adopted by foreign or domestic regulatory agencies, or oversight
of the aviation industry is increased in the future, the Company's business may
be adversely affected.
Dependence On Key Suppliers
The Company purchases landing gear spare parts and components for a variety of
fixed wing aircraft and helicopters. The Company has separate 10-year agreements
that each expire in October 2006 with: (i) Dunlop Limited, Aviation Division;
(ii) Dunlop Limited, Precision Rubber; and (iii) Dunlop Equipment Division.
Under two of these agreements, the Company purchases discounted parts for resale
and repair from Dunlop. For the years ended December 31, 1998 and 1997, Dunlop
accounted for approximately $4,513,000 and $4,301,000, respectively, of the
spare parts and components that the Company purchased in such periods. Failure
by any one of these divisions of Dunlop to renew its agreement on
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<PAGE>
similar terms when it expires could have a material adverse affect on the
Company's business. The Company's single largest supplier during 1998 was
Boeing, who provided the Company $13,000,000 of spares parts and components.
In addition, the Company has agreements with Messier-Bugatti, SAMM and
Eurocopter France that enable the Company to purchase new aircraft parts at
discounts from list price. Many of the Company's supplier agreements, other than
its agreements with Dunlop, are short-term and can be terminated by the supplier
upon providing ninety days prior written notice. A decision by any of these
suppliers to terminate their agreements would reduce the competitive advantage
the Company derives therefrom.
Customer Concentration
British Airways, Federal Express and the USCG have been the only customers
accounting for more than 10% of sales during the last three years. For
additional detail please see "Business--Material Customers".
Concentration of Credit Risk
At December 31, 1998, 25.7% and 19.4% of the Company's total accounts
receivable were associated with British Airways and Federal Express,
respectively. At December 31, 1997, 18.9% and 6.1% of the Company's total
accounts receivable were associated with Federal Express and British Airways,
respectively. At December 31, 1996, 7.4% and 9.3% of the Company's total
accounts receivable were associated with Federal Express and the USCG,
respectively.
Write-offs against accounts receivable have been one-twentieth of one percent
in 1998, and two-tenths of one percent in 1997. The Company can not provide any
assurance that such favorable bad debt experience will continue.
Environmental Regulations
The Company's operations are subject to extensive and frequently changing
federal, state and local environmental laws and substantial related regulation
by government agencies, including the EPA, the California Environmental
Protection Agency and the United States Occupational Safety and Health
Administration. Among other matters, these regulatory authorities impose
requirements that regulate the operation, handling, transportation and disposal
of hazardous materials generated by the Company during the normal course of its
operations, govern the health and safety of the Company's employees and require
the Company to obtain and maintain permits in connection with its operations.
This extensive regulatory framework imposes significant compliance burdens and
risks on the Company and, as a result, substantially affects its operational
costs. In addition, the Company may become liable for the cost of removal or
remediation of certain hazardous substances released on or in its facilities
without regard to whether the Company knew of, or caused, the release of such
substances. The Company believes that it currently is in material compliance
with applicable laws and regulations and is not aware of any material
environmental problem at any of its current or former facilities. There can be
no assurance, however, that its prior activities did not create a material
problem for which the Company could be responsible or that future uses or
conditions (including, without limitation, changes in applicable environmental
laws and regulation, or an increase in the amount of hazardous substances
generated by the Company's operations) will not result in material environmental
liability to the Company and materially and adversely affect the Company's
financial condition and results of operations. The Company's plating operations,
which use a number of hazardous materials and generate a significant volume of
hazardous waste, increase the Company's regulatory compliance burden and
compound the risk that the Company may encounter a material environmental
problem in the future. Furthermore, compliance with laws and regulations in
foreign countries in which the Company locates its operations may cause future
increases in the Company's operating costs or otherwise adversely affect the
Company's results of operations or financial condition. See also "Business--
Environmental Matters and Proceedings".
Product Liability Risks
The Company's business exposes it to possible claims for personal injury,
death or property damage which may result from the failure or malfunction of
landing gears, hydromechanical components or aircraft spare parts repaired or
overhauled by the Company. Many factors beyond the Company's control could lead
to liability claims, including the failure of the aircraft on which landing gear
or hydromechanical components overhauled by the Company is installed, the
reliability of the customer's operators of the aircraft and the maintenance of
the aircraft by the customer. The Company currently has in force aviation
products liability and premises insurance, which the Company believes provides
coverage in amounts and on terms that are generally consistent with industry
practice. The Company has not experienced any material product liability claims
related to its products. There can be no assurance that the amount of product
liability insurance that the Company carries at the time a product liability
claim is be made will be sufficient to protect the Company.
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Dependence On Key Personnel
The continued success of the Company depends to a large degree upon the
services of certain of its executive officers and upon the Company's ability to
attract and retain qualified managerial and technical personnel experienced in
the various operations of the Company's business. Loss of the services of such
employees, particularly David Lokken, President and Chief Executive Officer;
Philip Panzera, Vice President and Chief Financial Officer; Dennis Biety,
Managing Director of Hawker Pacific Aerospace Ltd.; Brian Carr, Managing
Director of Sun Valley Operations; or Michael Riley, Vice President-
Hydromechanical Operations, could adversely affect the operations of the
Company.
The Company has entered into employment agreements expiring in 2001 with
Messrs. Lokken and Panzera, and 2003 with Mr. Biety. Messrs. Carr and Riley have
employment agreements with the Company which expire on October 31, 1999.
Risk Associated with Facilities Reorganization
The Company's UK subsidiary will relocate to a new facility in mid-1999. See
"Item 2--Properties". This relocation has been planned for over one year, and
the Company believes it has an effective strategy to move the facility with a
minimum of disruption. The UK operation does, however, have a large amount of
heavy machinery and equipment. Moving these items could present unforeseen
problems. It is also difficult to predict to what extent the Company's principal
operations will be affected by the move. Deliveries to key customers might be
missed, with any delays causing additional fees to the subsidiary or potentially
the loss of the customer.
There is also the risk that machinery or equipment may be lost, damaged or
stolen during the relocation. The Company has theft, casualty and business
interruption insurance, but no assurance can be given that the proceeds from
such insurance will be sufficient to reimburse the Company for any damages it
may suffer.
The Company is in the process of expanding its plating operations at its Sun
Valley facility. This expansion is not expected to be completed until sometime
in 2000. The plating shop of the UK operation is not scheduled to move to the
new facility until sometime in early 2000. Any failure or delay in the expansion
or relocation of these plating operations could impair the Company's ability to
service its customers.
Control By Existing Shareholders And Anti-Takeover Provisions
As of March 26, 1999, the five shareholders (the "Unique Shareholders") of
Unique Investment Corporation ("Unique") beneficially owned in the aggregate
approximately 40.4% of the Company's outstanding common stock, and by virtue of
such ownership, have effective control over all matters requiring a vote of
shareholders, including the election of a majority of directors. See "Security
Ownership of Certain Beneficial Owners and Management".
On March 25, 1999, the Company declared a dividend distribution of one
Preferred Share Purchase Right (the "Rights") on each outstanding share of its
common stock, payable to shareholders of record as of that date. The Rights
attached to the Company's common stock and will be traded separately and be
exercisable only in the event that a person or group acquires or announces the
intent to acquire 20% or more of the Company's common stock. Each Right will
entitle the holder to buy one one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $15. The Rights are
designed to insure that all shareholders receive fair and equal treatment in the
event of any proposed takeover of the Company, and to guard against partial
tender offers, squeeze-outs, open market accumulations and other abusive tactics
to gain control of the Company without paying all shareholders a control
premium. The Rights will not prevent a takeover, but should encourage anyone
seeking to acquire the Company to negotiate with the Board of Directors prior to
attempting a takeover. For additional information, please refer to Note 14--
Subsequent Events to the Consolidated Financial Statements.
Stock Price Volatility
In recent years, the stock market has experienced significant price and volume
fluctuations. These fluctuations, which are often unrelated to the operating
performances of specific companies, have had a substantial effect on the market
price of stocks, particularly for many small capitalization companies. The
Company's common stock is also thinly traded, which frequently causes relatively
small trades to have a disproportionate effect on the Company's market price.
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ITEM 2. PROPERTIES
The Company's principal executive offices and production facilities are
located in Sun Valley, California, near the Burbank Airport in Los Angeles. The
Company occupies the premises, comprising approximately 193,000 square feet and
nine buildings, pursuant to various long-term leases that expire on dates
ranging between 2004 and 2010.
Hawker Pacific Aerospace Ltd. operates the Company's second major repair
facility. This operation is currently located in a British Airways building on
Heathrow Airport in London. Pursuant to the BA acquisition agreement, the UK
subsidiary must relocate from this 125,000 square foot facility during 1999. The
Company intends to move the operation to a new 140,000 square foot facility in
Hayes, about four miles from Heathrow. The relocation will take place from May
1999 to July 1999. The relocation will increase the subsidiary's capacity and
capability, and is expected to significantly improve the Company's ability to
serve current and future European customers, and compete effectively for new
business.
During 1998 the Company's Holland operation relocated to a 11,700 square foot
facility near Schiphol Airport in Amsterdam. The lease for the facility expires
in 2008.
ITEM 3. LEGAL PROCEEDINGS
From August 1997 through December 1998, several lawsuits were filed by various
individuals against Lockheed Martin Corporation and various other parties,
including the Company, in the Los Angeles Superior Court pleading various causes
of action in connection with certain alleged injuries caused by toxic and
carcinogenic chemicals allegedly released by the defendants in the Burbank and
Glendale area of Los Angeles County, California. The individual plaintiffs seek
unspecified compensatory and punitive damages. The Company does not believe that
it caused the release of toxic and carcinogenic chemicals alleged in the
complaints and believes that it is entitled to indemnification from BTR in the
event the Company is held responsible for any damages in these lawsuits. The
Company recently reached agreement to settle all liability associated with said
lawsuits for a nominal payment. The settlement documents are in the process of
being finalized. See also "Business--Environmental Matters and Proceedings".
The Company is sued from time to time in the ordinary course of business. At
the present time, there are no material legal proceedings against the Company,
its subsidiary, or any officer, director, affiliate or five percent shareholder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ National Market under
the symbol "HPAC". The following table sets forth the high and low sale prices
as reported by NASDAQ from January 29, 1998, the date public trading of the
Company's common stock commenced. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Sale Price
---------------
Low High
--- ----
<S> <C> <C>
1998
From January 29, 1998 $8.00 $11.25
2nd Quarter 10.00 14.125
3rd Quarter 1.875 13.50
4th Quarter 2.5625 4.875
1999
1st Quarter 2.50 5.25
</TABLE>
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<PAGE>
As of March 31, 1999, the Company's common stock was held by 29 shareholders
of record, and owned beneficially by an estimated 1,371 shareholders.
The Company has not paid cash dividends on its common stock since its
inception and has no plans to pay dividends on its common stock in the
foreseeable future. The Company's current bank credit facility prohibits the
payment of dividends. The Company intends to reinvest future earnings, if any,
in the development and expansion of its business.
Included in the totals of options granted and options cancelled were 144,207
options that were repriced from $8.00 to $3.56. These options included all
115,365 options granted to senior management in November 1997, and 28,842
options granted to senior management under the 1997 Plan. These newly issued
options were repriced to be consistent with options granted to certain members
of middle management in October 1998, and were issued pursuant to exemptions
available under Section 3(9) of the Securities Act of 1933, as amended.. The
strike price for these options was established at the $3.56 closing price of the
Company's common stock on the date issued.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated certain
financial data which should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included in this Annual Report. For the years ended
December 31, 1994, 1995 and the ten months ended October 31, 1996, the Company
was a wholly owned subsidiary of BTR Dunlop Holdings, Inc., and financial data
related to those periods is presented under columns marked "Predecessor".
Effective November 1, 1996, the Company was acquired by the Unique Shareholders
and the Company's then current executive officers. All financial data subsequent
to October 31, 1996, is presented below under columns marked "Successor".
The balance sheet data as of December 31, 1995, 1996, 1997 and 1998, and the
statement of operations data for the fiscal year ended December 31, 1995, the
ten months ended October 31, 1996, the two months ended December 31, 1996, and
the years ended December 31, 1997 and 1998, are derived from the financial
statements of the Company which have been audited by Ernest & Young LLP,
independent accountants.
The balance sheet and statement of operations data as of December 31, 1994,
are derived from unaudited financial statements. The pro forma statement of
operations data for the year ended December 31, 1996, is derived from unaudited
pro forma adjustments which were made to estimate the results of operations for
fiscal year 1996 as if the purchase had occurred on January 1, 1996. For
additional detail on these pro forma adjustments, please refer to the
"Organization and Basis of Presentation" in Note 1 to the Consolidated Financial
Statements. The unaudited financial statements have been prepared by the Company
on a basis consistent with the Company's audited financial statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the Company's results
of operations for the period.
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------------------- -------------------------------------
Year Ended December 31, Two Months Ten Months Year ended
----------------------------------- Ended Ended December 31,
(pro forma) December 31, -----------------------
(In thousands, except per share data) 1998 1997 1996 1996 1996 1995 1994
- ------------------------------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $65,151 $41,042 $39,004 $ 6,705 $32,299 $35,012 $31,743
Net income (loss) (2,198) 788 (1,523) 469 (1,606) 265 1,050
Net income (loss) per share (0.39) 0.25 (0.48) 0.15 -- -- --
Total assets 87,237 40,898 35,178 -- -- 35,455 25,865
Total long-term debt
(excluding current portion) 2,500 17,700 19,150 -- -- 27,310 21,404
</TABLE>
On February 4, 1998, the Company acquired the British Airways repair and
overhaul operation in the United Kingdom. See "Organization and Basis of
Presentation" in Note 1 to the Consolidated Financial Statements.
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<PAGE>
Income tax expenses for the two months ended December 31, 1996, and the year
ended December 31, 1997, include provisions of $382,000 and $467,000,
respectively, primarily due to changes in deferred tax assets. No tax was
actually payable for such provisions. See Note 4 to the Consolidated Financial
Statements.
Restructuring charges of $1,196,000 are included during the ten months ended
October 31, 1996, and the pro forma year ended December 31, 1996, related to
costs incurred to shut down discontinued operations of Dunlop Miami. See Note 10
to the Consolidated Financial Statements.
Included in selling, general and administrative expenses for the ten months
ended October 31, 1996, and the pro forma year ended December 31, 1996, are
expenditures related to an EPA Claim of approximately $947,000. For the years
ended December 31, 1993 and 1994, selling, general and administrative expenses
included $122,000 and $410,000, respectively, for expenditures related to the
EPA Claim. No such costs were incurred during the two months ended December 31,
1996, or the year ended December 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations".
Fiscal 1995 includes a non-recurring charge to cost of revenues of $927,000
for disposal of inventory related to the Dunlop Merger which had operations in
Chatsworth, CA and Miami, FL. Fiscal 1995 also includes a net gain of
approximately $300,000 included in selling, general and administrative expenses,
which represents an operating expense of $700,000 offset by an insurance
reimbursement of $1,000,000 related to the EPA Claim for which the Company has
been fully indemnified by BTR. The estimated total net cost of the EPA Claim
recorded in fiscal 1995 was based on the information available at that time. See
"Environmental Matters and Proceedings" in Note 1.
Effective January 1, 1994, certain assets, liabilities and operations of
Dunlop Aviation were merged into the Company. The merger was treated similarly
to a pooling of interest for accounting purposes and accordingly, the financial
data as of and for the year ended December 31, 1993 includes those assets,
liabilities and operations as if the merger occurred on January 1, 1993.
Included in selling, general and administrative expenses for the year ended
December 31, 1994, are approximately $501,000 of merger related expenses.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. WHEN USED IN THE FOLLOWING
DISCUSSIONS, THE WORDS "BELIEVES", "ANTICIPATES", "INTENDS", "EXPECTS" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING, BUT NOT
LIMITED TO, THOSE SET FORTH IN "BUSINESS--RISK FACTORS." READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF.
Results Of Operations
The following table sets forth certain statement of operations data for the
periods indicated. Fiscal year 1996 represents an unaudited pro forma
combination of the Successor and Predecessor
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(Dollars in thousands) $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 65,151 100.0% $41,042 100.0% $ 39,004 100.0%
Cost of revenue 55,059 84.5% 31,430 76.6% 31,799 81.5%
-------- ----- ------- ----- -------- -----
Gross margin 10,092 15.5% 9,612 23.4% 7,205 18.5%
Selling general and administrative
expense 9,764 15.0% 5,897 14.4% 6,161 15.8%
Restructuring charges -- -- -- -- 1,196 3.1%
-------- ----- ------- ----- -------- -----
Operating income (loss) 328 -0.5% 3,715 9.1% (152) 0.4%
Interest expense (3,402) -5.2% (2,431) -5.9% (2,312) -5.9%
Interest income 74 -- 3 -- 7 --
Other expense, net -- -- (32) -0.1% -- --
-------- ----- ------- ----- -------- -----
Income (loss) before income taxes
and extraordinary item (3,000) -4.6% 1,255 3.1% (2,457) -6.3%
Income tax provision (benefit) (1,402) -2.2% 467 1.1% (934) -2.4%
-------- ----- ------- ----- -------- -----
Income (loss) before extraordinary
item (1,598) -2.5% 788 2.0% (1,523) -3.9%
Extraordinary loss (600) -0.9% -- -- -- --
-------- ----- ------- ----- -------- -----
Net income (loss) ($2,198) -3.4% $ 788 2.0% ($1,523) -3.9%
======== ===== ======= ===== ======== =====
</TABLE>
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Revenue. Revenue for the year ended December 31, 1998, increased by
$24,109,000, or 59%, from the year ended December 31, 1997. Revenue comparisons
were favorably affected by the Company's acquisition of the British Airways
landing gear repair and overhaul operation in February 1998. Without the effect
of the British Airways acquisition, the Company's other operations recorded
revenue growth of 25% as compared with 1997.
Landing gear repair and overhaul revenue increased $7,753,000 (41%) to
$26,680,000. The increase in landing gear repair and overhaul revenue was
primarily attributable to increased business from Federal Express and American
Airlines at the Company's Sun Valley facility, along with increased business
from British Airways generated by the addition of the Company's United Kingdom
("UK") operation.
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<PAGE>
Fixed wing and helicopter repair and overhaul increased to $14,245,000 from
$13,195,000 in 1997 or 8%. Wheels, brakes and braking system components repair
and overhaul declined 5% to $5,135,000 from $5,393,000 in 1997.
Cost of Revenue and Gross Margin. Cost of revenue as a percentage of sales in
1998 increased to 84.5%, as compared with 76.6% in 1997. Cost of revenue was
higher proportionally during 1998 primarily because the Company's UK subsidiary
was restructuring its operations, implementing new procedures and controls, and
hiring and training personnel throughout 1998. The UK operation therefore
required increased labor, material and overhead costs as compared with the
Company's long-established Sun Valley facility. As the prior comparable period
included only Sun Valley results, the gross margin percentage decreased
accordingly during 1998. Also adversely affecting gross margin was a $750,000
writedown of certain slow-moving inventory.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended December 31, 1998, increased
significantly from the prior comparable period as a direct result of the added
facility in the United Kingdom. Additional expense was also incurred from the
cancellation of a convertible debt offering, foreign currency adjustments, and
an increase to a reserve for doubtful accounts. Although the dollar amount
increased primarily because of the new facility and the significant charges
above, selling, general and administrative expense as a percent of revenue
increased only slightly for the year.
Interest Expense. Interest expense increased by $971,000 during 1998 as a
result of increased borrowings on the Company's senior credit facility.
Income Taxes. During 1998 the Company recorded an income tax benefit of
$1,402,000, as compared to income tax expense of $467,000 in 1997. A valuation
allowance of $225,000 was recorded against the related deferred tax assets for
state net operating loss carryforwards that expire in the near term.
Extraordinary Item. In December 1998 the Company obtained a new senior credit
facility which provided an additional $20,800,000 of availability. The Company
incurred $954,000 of costs in deferred loan fees and prepayment charges to
retire the Company's previous credit facility. These charges were recorded as an
extraordinary item, and presented net of tax of $354,000.
Net Loss. The net loss for fiscal year 1998 was $2,198,000, or $0.39, as
compared with net income of $788,000, or $0.25, for fiscal year 1997.
Quarter Ended December 31, 1998, Compared to Quarter Ended December 31, 1997
Revenue. Revenue for the fourth quarter of 1998 increased by 60% to
$17,618,000 from $10,982,000 for the comparable period of 1997.
Cost of Revenue and Gross Margin. Cost of revenue as a percentage of sales
increased significantly during the fourth quarter of 1998 because of the
addition of the new operation in the United Kingdom. The UK subsidiary was still
establishing its operations, implementing new procedures and controls, and
working to cope with massive personnel turnover issues. The UK operation
therefore required increased labor, material and overhead costs, which
management estimates exceeded $1 million in additional costs, as compared with
the Company's long-established Sun Valley facility. As the prior comparable
period included only Sun Valley results, the gross margin percentage decreased
accordingly during the fourth quarter of 1998.
Extraordinary, Unusual or Infrequently Occurring Items. Fourth quarter charges
totaled $3,421,000, or $0.59. This amount includes an extraordinary expense of
$954,000, and unusual or infrequently occurring charges of $2,467,000. The
extraordinary expense of $954,000 consisted of costs related to retiring the
Company's previous senior credit facility. Unusual or infrequently occurring
charges included: (i) $241,000 for the cancellation of a convertible debt
offering; (ii) $825,000 for restructuring expenses in the UK operation,
including costs related to replacing management and restructuring operations;
(iii) $750,000 to writedown slow-moving inventory; (iv) $326,000 of foreign
exchange adjustments; (v) $225,000 to establish a valuation allowance against
California net operating loss carryforwards which imminently expire; and (vi)
$100,000 to increase the allowance for bad debt.
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<PAGE>
Net Loss. The Company posted a fourth quarter loss of $3,622,000, or $0.62, as
compared with net income of $123,000, or $0.02 in the comparable period of 1997.
Without the effect of the charges above, the Company would have recorded a net
loss of $201,000, or $0.03.
Year Ended December 31, 1997 Compared To Pro Forma Year Ended December 31, 1996
Revenue. Revenue for the year ended December 31, 1997, increased $2,038,000
or 5.2% to $41,042,000 from $39,004,000 for the year ended December 31, 1996.
The increase was a result of a 20.2% increase in landing gear repair and
overhaul services offset by reductions resulting from the Company's closure of
the Dunlop Miami operations and rationalization of unprofitable product lines.
Landing gear repair and overhaul revenues increased to $18,927,000 and accounted
for 46.1% of total revenues for 1997, as compared to $15,745,000 or 40.4% of
total revenues for 1996. The increase in landing gear repair and overhaul
revenues was attributable to increases in business from Federal Express's MD10
freighter conversion program and new wide-body repair and overhaul business from
British Airways and American Airlines.
Fixed wing aircraft and helicopter repair and overhaul declined 0.9% to
$13,195,000 or 32.1% of total revenues for 1997 from $13,310,000 or 34.1% of
total revenues for 1996. This decline was attributable to a reduction in
helicopter repair and overhaul business from the USCG, in part due to the
modifications performed by the Company in 1996 and 1997 to extend the time
between overhauls for the USCG fleet of Dauphin II helicopters. Wheels, brakes
and braking system component repair and overhaul increased 9.8% to $5,393,000 or
13.1% of total revenues for 1997 from $4,913,000 or 12.6% of total revenues for
1996.
For the year ended December 31, 1997, repair and overhaul services accounted
for 92.5% of total revenues, as compared to 90.2% for 1996. Revenues from spare
parts distribution and sales accounted for 7.5% of total revenues for 1997, as
compared to 8.6% for 1996. This decline was a result of the Company's decision
to close the Dunlop Miami operations and discontinue the low margin Dunlop
aircraft tire distribution business, which contributed to improvements in
operating profits.
Gross Margin. Gross margin for the year ended December 31, 1997, increased
33.4% to $9,612,000 from $7,205,000 for 1996. Gross margin as a percent of
revenue increased to 23.4% for the year ended December 31, 1997, compared to
18.5% for 1996. This increase was primarily due to: (i) improved throughput and
economies of scale achieved from increased revenue in wide-body landing gear
repair and overhaul services; (ii) development of the Company's higher margin
fixed wing aircraft and helicopter hydromechanics products; and (iii)
discontinuing the unprofitable Dunlop Miami operation, which adversely impacted
gross profit in 1996 as a result of charges to cost of revenue for non-
productive inventory.
Gross profit for the year ended December 31, 1996, included a nonrecurring
charge of $489,000 to dispose of certain obsolete and non-productive inventory
related to closing Dunlop Miami and a charge of $574,000 primarily related to
other non-productive inventory at the Company's Sun Valley operations, including
inventory related to Dunlop Aviation. Excluding these charges, gross profit
would have been $8,268,000 or 21.2% of revenues for the year ended December 31,
1996.
Selling, General And Administrative Expense. Selling, general and
administrative expense for the year ended December 31, 1997 decreased $264,000
or 4.3% to $5,897,000 from $6,161,000 for the year ended December 31, 1996.
Selling, general and administrative expense decreased as a percent of revenues
to 14.4% from 15.8% for the prior year. This decrease was due to $947,000 of
costs related to the EPA Claim in 1996 that were not incurred in 1997. BTR
indemnified the Company for costs incurred in connection with the EPA Claim.
This decrease was offset by additional costs incurred in 1997 resulting from:
(i) the Company's efforts to expand its international market presence through
sales representatives located in Europe, the Middle East and China; (ii)
management fees paid to Unique Investment Corporation; and (iii) expenses
incurred in connection with developing the Company's relationship with British
Airways. Excluding the $947,000 charge, selling, general and administrative
expenses would have been $5,214,000 or 13.4% of revenue for the year ended
December 31, 1996.
Operating Income. Operating income for the year ended December 31, 1997,
increased $3,867,000 to $3,715,000 or 9.1% of total revenues compared to an
operating loss of $152,000 for 1996. Operating income for the year ended
December 31, 1996, was negatively impacted by nonrecurring restructuring charges
of $1,196,000 and charges to cost of
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<PAGE>
revenues of $1,063,000 related to the closure of the Dunlop Miami and $947,000
in costs related to the EPA claim. Excluding these charges, pro forma operating
income for the year ended December 31, 1996, would have been $3,054,000 or 7.8%
of revenues.
Income Taxes. Income taxes for the year ended December 31, 1997, were
$467,000 compared to an income tax benefit of $934,000 for the year ended
December 31, 1996. The effective tax rate for the year ended December 31, 1997,
was 37.2% compared to 38.0% for 1996. The effective tax rate for the periods
differs from the federal statutory rate of 34.0% due to certain nondeductible
expenses. At December 31, 1997, the Company had net operating loss carryforwards
of $7,892,000. The utilization of these operating loss carryforwards is limited
due to changes in the Company's ownership in November 1996. At December 31,
1997, the Company had a valuation reserve of $659,000 for the deferred tax
assets.
Net Income. As a result of the factors described above, net income for the
year ended December 31, 1997, of $788,000 represents an increase of $2,311,000
from the net loss of $1,523,000 for the year ended December 31, 1996.
Liquidity And Capital Resources
Since the Company was acquired from BTR in November 1996, the Company's
working capital and funds for capital expenditures have been provided by cash
generated from operations, borrowings under the Company's working capital credit
facilities and cash received from the sale of common stock. In November 1996,
the Company entered into a loan agreement with Bank of America National Trust
and Savings Association ("Bank of America") for a $10.0 million revolving line
of credit, a $13.5 million term loan and a $3.0 million capital expenditures
facility.
On January 23, 1998, the Company and Bank of America entered into an Amended
and Restated Business Loan Agreement (the "Amended Loan Agreement"), as a result
of which the maximum amount of credit available to the Company was increased
from $26.5 million to $45.5 million. The credit facilities of the Amended Loan
Agreement became available upon the completion of the Company's initial public
offering and consummation of the acquisition of the British Airways ("BA")
repair operation. The Company used approximately $9.2 million of the proceeds
available under the Amended Loan Agreement to fund a portion of the purchase
price of the BA assets. The Amended Loan Agreement provided the Company with a
$15.0 million revolving line of credit, a $24.5 million term loan, and a $6.0
million capital expenditure facility.
Cash used by the Company for operating activities during 1998 amounted to $3.1
million. This amount resulted primarily from increases in accounts receivable
and inventory related to the new UK subsidiary.
The Company has scheduled capital expenditures in 1999 of approximately $8.7
million. Included in this amount are $3.9 million for rotable assets, and $4.8
million for other capital expenditures. Other capital expenditures consist
primarily of $4.2 million for the relocation of the UK subsidiary. The $45.5
million Bank of America line was not adequate to fund these capital
requirements.
Accordingly, on December 22, 1998, the Company secured a $66.3 million senior
credit facility from Heller Financial, Inc., and NMB-Heller Limited
(collectively, "Heller"). Upon closing, $41.5 million of the proceeds were used
to retire the Bank of America facility, and a $2.5 million principal payment was
made on a $5 million subordinated debt agreement between the Company and Unique
Investment Corporation ("Unique"), an entity controlled by several shareholders
of the Company.
The Loan and Security Agreement with Heller (the "Heller Agreement") provided
a $55 million revolving line of credit, a Term Loan A in the amount of $4.3
million, and a Term Loan B in the amount of $7.0 million. The revolver and both
term loans expire in five years, and carried interest at a base rate of 7.75%.
In January 1999 the Company elected a LIBOR rate option, which changed the rate
of interest on the line of credit, Term Loan A and Term Loan B to 7.0%, 7.25%
and 7.5%, respectively. At March 26, 1999, the weighted average interest rate
for all three loans was 7.1%.
Availability on the $55 million revolving line of credit may be limited by
borrowing base criteria related to levels of accounts receivable, inventory and
exchange assets. At December 31, 1998, the Company's borrowing base was $50.4
million, of which $37.3 million had been advanced, leaving remaining
availability of $13.1 million.
On February 19, 1999, Heller established a $5 million reserve against the
Company's line of credit as a result of the Company being in default on certain
financial covenants. On March 26, 1999, certain exchange gears were temporarily
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<PAGE>
excluded from the borrowing base as they were located in ineligible foreign
countries. At March 26, 1999, excluding the $4.0 million unavailable as a result
of the foreign location of these exchange gears, the Company's borrowing base
was $51.2 million, of which $43.0 million had been advanced, leaving remaining
availability (after the $5 million reserve) of $3.2 million.
The $5 million reserve removed important availability that the Company had
planned on in meeting its capital budget for 1999. As a result of the large
lump-sum payments required for the UK relocation from May through July 1999, and
the decreased level of availability from the reserve, management anticipates
that the Company will undergo a temporary period of cash tightness for the next
few quarters. Management believes this condition will be temporary since cash
flow from operations is anticipated to improve significantly commencing in the
third quarter when the relocation is completed, and the UK subsidiary has
substantially eliminated transition issues which have adversely affected its
operating results.
On March 10, 1999, the Company and Heller entered into a Forbearance Agreement
with regard to certain violations of financial covenants in the Heller
Agreement. In consideration therefor, the Company agreed to: (i) accept certain
stricter financial controls; (ii) provide a consolidated business plan, and an
operational improvements plan for the UK subsidiary; (iii) pay a $75,000 fee;
and (iv) hire a third party consultant to evaluate improvement plans underway
with respect to the UK subsidiary.
The Forbearance Agreement was extended in a Second Forbearance Agreement with
an effective date of April 13, 1999. In exchange for Heller's continued
forbearance, the Company agreed to: (i) continue the tighter financial controls
and retain a consultant as required in the Forbearance Agreement; (ii) accept a
1.5% interest rate increase on the revolving line; (iii) forego the ability to
elect the LIBOR interest rate option; (iv) forego the benefit of future interest
rate reductions if the Company's fixed charge coverage improves; and (v) provide
supplemental financial statements for 1998 conforming to certain financial
criteria.
As additional consideration for the Second Forbearance Agreement, Unique (or a
shareholder of Unique) has agreed to provide Heller by April 23, 1999, a $2.5
million guarantee and stand-by letter of credit securing the Company's
obligations to Heller related to Term Loan B. Upon delivery of this guarantee
and letter of credit, the $5.0 million reserve against the line of credit shall
be released, and the Company will pay, to the extent available on the line of
credit, up to $4.15 million to reduce the outstanding principal balance on Term
Loan B to $2.5 million. At such time as the balance on Term Loan B is reduced to
$2.5 million, all remaining principal payments shall be deferred until the
expiration of Term Loan B on December 31, 2003.
The Second Forbearance Agreement expires on April 30, 1999, and the Company is
presently negotiating with Heller to restructure the facility. Management is
confident that it will be able to successfully restructure the facility with
Heller before the Second Forbearance Agreement expires. The Company intends to
take whatever actions are necessary to insure that it has sufficient liquidity
to meet its cash requirements. The Company is currently considering and
implementing many options to improve liquidity, including eliminating or
deferring selected capital expenditures, selling off lower-performing assets,
and reducing internal costs. In addition, the Company is considering options to
raise capital through external sources.
The Company believes that funds generated from operations, supplemented by
available borrowings under the Heller facility, and, if necessary, additional
capital from external sources, will provide sufficient liquidity to meet the
Company's cash requirements for the year ending December 31, 1999.
Foreign Exchange
The Company has operating units located in the United Kingdom and the
Netherlands, and also conducts business in many other countries worldwide.
Foreign currency exchange rates could cause the Company's products to become
relatively more expensive in particular countries, leading to a reduction in
revenues in that country. However, to date, the Company's business has not been
significantly affected by currency fluctuations.
The Company makes substantial inventory purchases in French francs from such
suppliers as Messier-Dowty, SAMM and Eurocopter France. In the last few years,
the United States dollar has strengthened against the French franc, creating a
favorable exchange rate variance for the Company. Transactions related to the
Company's Netherlands facility are primarily denominated in United States
dollars for inventory purchases, while revenue and operating expenses are
partially denominated in Dutch guilders. The Company anticipates as much as 35%
of its 1999 consolidated revenue may be received by the Company's UK subsidiary
in British pounds sterling.
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<PAGE>
The Company's payment of the purchase price for the BA Acquisition was
denominated in pounds. To hedge against the fluctuation of pounds to dollars,
the Company entered into a transaction which permitted it to purchase
approximately $17 million of pounds at a rate of 1.6373 dollars per pound. The
balance of the purchase price was not hedged, although the spot rate when the BA
Acquisition was completed was similar to the forward hedge rate. The Company
will continue to evaluate hedging options in the future. The Company's business
will require it to continue engaging in foreign currency denominated sales, and
to incur material amounts of expense in foreign currencies. These activities may
generate gains and losses as a result of currency fluctuations.
Quarterly Revenue Fluctuations
The Company's operating results are affected by a number of factors, including
the timing of orders for repair and overhaul work, the timing of expenditures to
manufacture parts and purchase inventory in anticipation of future services and
sales, parts shortages that delay work in progress, general economic conditions
and other factors. As a result, the Company may experience significant
fluctuations in operating results from quarter to quarter. See Risk Factors--
Fluctuations in Results of Operations in Item 1 for additional detail.
Inflation
Although the Company cannot accurately anticipate the effect of inflation on
its operations, the Company does not believe that inflation has had, or is
likely to have in the foreseeable future, a material effect on its results of
operations or financial condition.
Year 2000 Issue
Description. The Company is currently working to resolve the potential impact
of the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures.
Assessment. The Company's plan to resolve the Year 2000 issue involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has fully completed its assessment of all systems that could
be significantly affected by the Year 2000 issue. The completed assessment
indicated that some of the Company's internal software would have to be
rewritten or upgraded, and that the Company's telephone system at Sun Valley
would have to be replaced.
Based on a review of its product lines, the Company has determined that its
products and services do not require remediation to be Year 2000 compliant.
Accordingly, the Company does not believe that the Year 2000 issue presents a
material exposure as it relates to the Company's products and services.
The Company is currently in the process of gathering information and
evaluating the Year 2000 compliance status of its significant suppliers and
subcontractors. To date the Company is not aware of any problems with its
suppliers or subcontractors that would affect the Company's operations. This
assessment is scheduled to be completed by June 15, 1999.
Remediation. The Company has completed approximately 40% of the software
reprogramming and replacement required, and expects to complete the remaining
remedial work required no later than June 15, 1999. Once software has been
reprogrammed or replaced, the Company will begin testing and implementation.
These phases run concurrently for different systems. Testing and implementation
have been completed on the remediation work already accomplished.
The Company has replaced its telephone system in Sun Valley with a Year 2000
compliant system. When a new telephone system is installed in the new UK
facility in May 1999, all communication systems within the Company will be Year
2000 compliant.
Costs. As of March 31, 1999, the total costs incurred to address the
Company's year 2000 issues approximate $120,000. The Company estimates that
another $75,000 of costs may be required to complete remediation efforts on the
year 2000 issue. Given the nature of the Company's repair and overhaul
operations, management does not believe such impact, if any, will be material.
The Company does plan, however, to devote the necessary resources to becoming
Year
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<PAGE>
2000 compliant in a timely manner. The Company believes it has an effective
program in place to resolve this issue prior to the end of the third quarter.
Contingency Plan. The Company is currently developing a contingency plan to
handle any unanticipated year 2000 problems. The Company's contingency plan is
scheduled to be completed by July 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in certain
prices and rates on the Company's financial results and condition, primarily
foreign currency exchange rates and interest rates on borrowings. The Company
does not utilize derivative instruments in managing its exposure to such
changes.
Foreign Currency Risk. The Company has operations in the United Kingdom and
the Netherlands. The currencies of these two countries have been relatively
stable as compared with the U.S. dollar. The Company manages foreign currency
risk, in part, by generally requiring that customers pay for the services of the
Company's foreign operating units in the currency of the country where the
operating unit is located. The Company also does not routinely exchange material
sums of money between the operating units. The Company has not to date seen the
need for currency hedging transactions in the ordinary course of business. For
additional discussion on foreign currency exchange risk as it relates to the
Company's operations, please refer to: (i) Item 7--Foreign Exchange; (ii) Item
1--Risks Associated with International Expansion; and (iii) Note 1 to the
Consolidated Financial Statements--Foreign Currency Translation.
Interest Rate Risk. The Company's senior credit facility is comprised of two
notes payable and a revolving line of credit, each of which carries an interest
rate which varies in accordance with a Base Rate equal to the higher of the
Federal Reserve prime rate, or the Federal Funds Effective Rate. The Company is
subject to potentially material fluctuations in its debt service as the Base
Rate changes. The extent of this risk is not quantifiable or predictable. For
additional information, please refer to Note 1 to the Consolidated Financial
Statements--Fair Value of Financial Instruments.
In February 1998, to reduce the impact of changes in interest rates on the
Company's debt facility, the Company entered into an interest rate swap
agreement. The swap agreement reduced interest rate exposure to a fixed amount.
For additional information, please refer to Note 5 to the Consolidated Financial
Statements--Successor Lines of Credit and Notes Payable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Form 10-K for the information
required by Item 8.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10-13. The information required by Items 10-13 of Part III is omitted and
incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the Company's fiscal year.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors.......................................................................... 28
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................ 29
Consolidated Statements of Operations for the ten months ended October 31, 1996,
two months ended December 31, 1996, the year ended December 31, 1997,
and the year ended December 31, 1998.............................................................. 31
Consolidated Statements of Changes in Shareholders' Equity for the ten months ended October 31, 1996,
two months ended December 31, 1996, the year ended December 31, 1997,
and the year ended December 31, 1998.............................................................. 32
Consolidated Statements of Cash Flows for the ten months ended October 31, 1996,
two months ended December 31, 1996, the year ended December 31, 1997,
and the year ended December 31, 1998.............................................................. 33
Notes to Consolidated Financial Statements.............................................................. 35
Note 1 - Summary of Significant Accounting Policies.................................................. 35
Note 2 - Inventories................................................................................. 39
Note 3 - Equipment and Leasehold Improvements........................................................ 40
Note 4 - Income Taxes................................................................................ 40
Note 5 - Successor Lines of Credit and Notes Payable................................................. 42
Note 6 - Commitments and Contingencies............................................................... 44
Note 7 - Related Party Transactions.................................................................. 45
Note 8 - Stock Option Plan........................................................................... 46
Note 9 - Employee Benefit Plans...................................................................... 48
Note 10 - Restructuring Charges...................................................................... 49
Note 11 - Shareholders' Equity....................................................................... 49
Note 12 - Non-monetary Exchange Transaction.......................................................... 50
Note 13 - Segment Information........................................................................ 50
Note 14 - Subsequent Events (unaudited).............................................................. 50
Schedule II. Valuation and qualifying accounts......................................................... 51
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of fiscal 1998.
-25-
<PAGE>
(c) Exhibits
2.1 Agreement relating to the Sale and Purchase of part of the Business of
British Airways plc dated December 20, 1997 by and among the Company,
Hawker Pacific Aerospace Limited and British Airways plc, and related
Landing Gear Overhaul Services Agreement (1)+
3.1 Amended and Restated Articles of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Company (1)
3.3 Certificate of Amendment to the Amended and Restated Articles of
Incorporation of the Company (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Form 8-A12G, Registration of Certain Classes of Securities (6)
10.1 1997 Stock Option Plan and forms of Stock Option Agreements (1)
10.1A Amendment No. 1 to 1997 Stock Option Plan (1)
10.2 Employment Agreement dated November 1, 1996 between the Company and David
L. Lokken (1)
10.2A First Amendment to Employment Agreement for David L. Lokken (1)
10.3 Employment Agreement dated November 1, 1996 between the Company and Brian
S. Aune (1)
10.3A First Amendment to Employment Agreement for Brian S. Aune (1)
10.4 Employment Agreement dated November 1, 1996 between the Company and Brian
S. Carr (1)
10.4A First Amendment to Employment Agreement for Brian S. Carr (1)
10.5 Employment Agreement dated November 1, 1996 between the Company and
Michael A. Riley (1)
10.5A First Amendment to Employment Agreement for Michael A. Riley (1)
10.6 Form of Indemnity Agreement for directors and executive officers of the
Company (1)
10.7 Business Loan Agreement dated November 27, 1996 between the Company and
Bank of America National Trust and Savings Association (1)
10.7A Amendment No. 1 to Business Loan Agreement between the Company and Bank
of America National Trust and Savings Association (1)
10.8 Agreement of Purchase and Sale of Stock effective as of November 1, 1996
by and among BTR Dunlop, Inc., BTR, Inc., the Company and AqHawk, Inc (1)
10.9 Repair, Overhaul, Exchange, Warranty and Distribution Agreement dated
November 1, 1996 between the Company and Dunlop Limited, Aviation
Division (1)+
10.10 Distribution Agreement dated November 1, 1996 between the Company and
Dunlop Limited, Precision Rubber (1)
10.11 Repair, Overhaul, Exchange, Warranty and Distribution Agreement dated
November 1, 1996 between the Company and Dunlop Equipment Division (1)+
10.12 Repair Services Agreement dated September 9, 1997 between the Company
and American Airlines, Inc (1)+
10.13 Award/Contract dated September 20, 1995 issued by USCG Aircraft Repair
and Supply Center to the Company (1)+
10.14 Maintenance Services Agreement dated August 19, 1994 between the
Company and Federal Express Corporation (1)+
10.15 Lease Agreement dated March 31, 1997 by and between the Company and
Industrial Centers Corp (1)
10.15A First Amendment to Lease Agreement dated March 31, 1997 by and between
the Company and Industrial Centers Corp. (2)
10.16 Management Services Agreement dated November 14, 1997 between the
Company and Unique Investment Corp. (1)
10.17 Mergers and Acquisitions Agreement dated September 2, 1997 between the
Company and Unique Investment Corp. (1)
10.17A Form of First Amendment to Mergers and Acquisitions Agreement between
the Company and Unique Investment Corp. (1)
10.17B First Amendment to Mergers and Acquisitions Agreement, dated as of
January 23, 1998, by and between the Company and Unique Investment Corp.
(3)
10.18 Subordinated Note for $6,500,000 in favor of Unique Investment Corp. (1)
10.19 Amended and Restated Subordinated Promissory Note dated February 3, 1998
in favor of Unique Investment Corp. (2)
10.20 Certified Translation of Rental Agreement between Mr. C. G. Kortenoever
and Flight Accessory Services (1)
10.21 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.21A First Amendment to Lease Agreement dated July 28, 1994 by and between
the Company and Industrial Bowling Corp. (2)
10.22 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.23 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.24 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.25 Lease Agreement dated June 24, 1997 by and between the Company and
AllState Insurance Company (1)
10.25A First Amendment to Lease Agreement between the Company and AllState
Insurance Company (2)
-26-
<PAGE>
10.26 Lease Agreement dated November 21, 1994 by and between the Company and
Gordon N. Wagner and Peggy M. Wagner, and Joseph W. Basinger and Viola
Marie Basinger (1)
10.27 Amended and Restated Business Loan Agreement dated January 23, 1998
between the Company and Bank of America National Trust and Savings
Association (2)
10.28 Security Agreement dated January 23, 1998 by the Company in favor of
Bank of America National Trust and Savings Association (2)
10.29 Pledge Agreement dated January 23, 1998 by the Company in favor of Bank
of America National Trust and Savings Association (2)
10.30 Subordination Agreement dated January 23, 1998 by and among the Company,
Hawker Pacific Aerospace Limited, Bank of America National Trust and
Savings Association, Melanie L. Bastian and Unique Investment Corp. (2)
10.31 Underlease, dated February 4, 1998, by and among British Airways plc,
Hawker Pacific Limited and the Company (3) +
10.32 Bailment and Services Agreement, dated as of September 1, 1997, by and
between Federal Express Corporation and the Company (3) +
10.33 Tenancy Agreement relating to Bennebroekerweg, Rijsinboat (Netherlands),
dated March 15, 1998, between Hawker Pacific Holland, a division of the
Company, and Mateor II C.V. (4)
10.34 Statement of Terms and Conditions of Employment, dated May 12, 1998, by
and between Hawker Pacific Aerospace, Ltd., and Richard Adey (4)
10.35 Statement of Terms and Conditions of Employment, dated October 1, 1998,
by and between Hawker Pacific Aerospace and Philip Panzera (5)
10.36 Statement of Terms and Conditions of Employment, dated October 12, 1998,
by and between Hawker Pacific Aerospace and Dennis Biety (5)
10.37 Loan and Security Agreement, dated December 22, 1998, between Hawker
Pacific Aerospace and Hawker Pacific Aerospace Limited, as borrowers, and
Heller Financial, Inc., and NMB-Heller Limited
10.38 Lease relating to Unit 3 Dawley Park, Hayes, Middlesex, dated April
7,1998, between Sun Life Assurance plc and Hawker Pacific Aerospace
Limited and Hawker Pacific Aerospace
10.39 Sublease related to Building 9, Sun Valley, dated January 14, 1998,
between Hawker Pacific Aerospace and Abex Display Systems, Inc.
10.40 Forbearance Agreement between Hawker Pacific Aerospace and Hawker Pacific
Aerospace Limited, as borrowers, and Heller Financial, Inc., and NMB-
Heller Limited, dated March 10, 1999
10.41 Second Forbearance Agreement between Hawker Pacific Aerospace and Hawker
Pacific Aerospace Limited, as borrowers, and Heller Financial, Inc., and
NMB-Heller Limited, dated April 13, 1999
21.1 Subsidiaries of Registrant (filed herewith on page 53)
27.1 Financial Data Schedule
_______________________________
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, as amended (Registration No. 333-40295), and incorporated herein
by reference
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, and incorporated herein by reference
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, and incorporated herein by
reference
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by
reference
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, and incorporated herein by
reference
(6) Previously filed with the Securities and Exchange Commission on March 23,
1999, and incorporated herein by reference
(d) Financial Statement Schedules
Schedule II -- Valuation And Qualifying Accounts, has been included
herein under Item 14(a) above.
-27-
<PAGE>
Report of Independent Auditors
The Board of Directors
Hawker Pacific Aerospace
We have audited the accompanying consolidated statements of operations and cash
flows of Hawker Pacific Aerospace, a wholly-owned subsidiary of BTR Dunlop
Holdings, Inc. (the "Predecessor") for the ten months ended October 31, 1996. We
have also audited the accompanying consolidated balance sheets of Hawker Pacific
Aerospace (the "Successor") as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the two months ended December 31, 1996 and the years ended December
31, 1997 and 1998. These financial statements are the responsibility of the
Predecessor's and Successor's management. Our responsibility is to express an
opinion on these financial statements and schedule 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
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hawker Pacific
Aerospace at December 31, 1997 and 1998, and the results of their operations and
their cash flows, as the Predecessor and Successor companies, for the ten months
ended October 31, 1996, the two months ended December 31, 1996, and the years
ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Woodland Hills, California
February 13, 1999, except for
paragraphs 5 through 9 of Note 5,
for which the date is April 12, 1999
-28-
<PAGE>
CONSOLIDATED BALANCE SHEETS
Assets
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash $ 560,000 $ 160,000
Accounts receivable, less allowance for
doubtful accounts of $301,000 and $147,000
at December 31, 1998 and
1997, respectively 12,303,000 7,351,000
Other receivables 114,000 80,000
Inventories 21,645,000 14,814,000
Prepaid expenses and other current assets 617,000 240,000
------------ ------------
Total current assets 35,239,000 22,645,000
Equipment and leasehold improvements, net 9,298,000 5,083,000
Landing gear exchange, less accumulated
amortization of $1,844,000 and $375,000
at December 31, 1998 and 1997, respectively 37,877,000 11,067,000
Goodwill, less accumulated amortization of
$25,000 at December 31, 1997 -- 145,000
Deferred taxes 1,916,000 --
Deferred financing costs 798,000 262,000
Deferred offering costs -- 766,000
Other assets 2,109,000 930,000
------------ ------------
Total assets $ 87,237,000 $ 40,898,000
=============================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-29-
<PAGE>
CONSOLIDATED BALANCE SHEETS
(continued)
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
December 31, 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Line of credit $37,185,000 $ 8,529,000
Accounts payable 12,171,000 6,946,000
Deferred revenue 1,023,000 848,000
Accrued payroll and employee benefits 1,433,000 812,000
Accrued expenses and other liabilities 1,242,000 316,000
Current portion of notes payable 11,280,000 1,450,000
------------ ------------
Total current liabilities 64,334,000 18,901,000
Notes payable
Bank note -- 11,200,000
Related party 2,500,000 6,500,000
------------ ------------
2,500,000 17,700,000
Commitments and contingencies
Shareholders' equity
Preferred stock: 5,000,000 and 400 shares
authorized at December 31, 1998 and 1997,
respectively; issued and outstanding: none and
400 shares at December 31, 1998 and
1997, respectively -- 2,000,000
Common stock: 20,000,000 shares authorized;
issued and outstanding: 5,822,222 and 2,972,222
shares at December 31, 1998 and 1997, respectively 21,108,000 1,040,000
Retained earnings (deficit) (941,000) 1,257,000
Accumulated other comprehensive income 236,000 --
------------ ------------
Total shareholders' equity 20,403,000 4,297,000
------------ ------------
Total liabilities and shareholders' equity $ 87,237,000 $ 40,898,000
==========================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-30-
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Successor Predecessor
---------------------------------------------- -------------
Year Year Two Months Ten Months
Ended Ended Ended Ended
December 31, December 31, December 31, October 31,
1998 1997 1996 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 65,151,000 $ 41,042,000 $ 6,705,000 $ 32,299,000
Cost of revenue 55,059,000 31,430,000 4,599,000 27,027,000
------------ ------------ ----------- ------------
Gross profit 10,092,000 9,612,000 2,106,000 5,272,000
------------ ------------ ----------- ------------
Operating expenses
Selling expenses 3,621,000 3,191,000 525,000 2,248,000
General and administrative expense 6,143,000 2,706,000 534,000 2,796,000
Restructuring charges -- -- -- 1,196,000
------------ ------------ ----------- ------------
Total operating expense 9,764,000 5,897,000 1,059,000 6,240,000
------------ ------------ ----------- ------------
Income (loss) from operations 328,000 3,715,000 1,047,000 (968,000)
Other (expense) income
Interest expense (3,402,000) (2,431,000) (203,000) (1,609,000)
Interest income 74,000 3,000 7,000 --
Other expense, net -- (32,000) -- --
------------ ------------ ----------- ------------
Total other (expense) income (3,328,000) (2,460,000) (196,000) (1,609,000)
------------ ------------ ----------- ------------
Income (loss) before income
tax provision (benefit) and
extraordinary item (3,000,000) 1,255,000 851,000 (2,577,000)
Income tax provision (benefit) (1,402,000) 467,000 382,000 (971,000)
------------ ------------ ----------- ------------
Income (loss) before extraordinary
item (1,598,000) 788,000 469,000 (1,606,000)
Extraordinary loss on early
extinguishment of debt (net of
tax benefit of $354,000) (600,000) -- -- --
------------ ------------ ----------- ------------
Net income (loss) $ (2,198,000) $ 788,000 $ 469,000 $ (1,606,000)
======================================================================================================
Earnings (loss) per common share:
basic and diluted $( 0.39) $0.25 $0.15
============ =========== ==========
Weighted average common
and common equivalent
shares outstanding 5,622,770 3,145,079 3,170,551
============ =========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-31-
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Retained Other
--------------- ------------ Earnings Comprehensive
Shares Amount Shares Amount (Deficit) Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1996 -- $ -- -- $ -- $ -- $ -- $ --
Issuance of preferred stock 400 2,000,000 -- -- -- -- 2,000,000
Issuance of common stock to
founders -- -- 2,640,955 -- -- -- --
Issuance of common stock to
management -- -- 229,648 40,000 -- -- 40,000
Net income and comprehensive
income for the period -- -- -- -- 469,000 -- 469,000
------ ----------- --------- ----------- ----------- --------- -----------
Balance at December 31, 1996 400 2,000,000 2,870,603 40,000 469,000 -- 2,509,000
Issuance of common stock -- -- 101,619 1,000,000 -- -- 1,000,000
Net income and comprehensive
income for the year -- -- -- -- 788,000 -- 788,000
------ ----------- --------- ----------- ----------- --------- ----------
Balance at December 31, 1997 400 2,000,000 2,972,222 1,040,000 1,257,000 -- 4,297,000
Net loss for the year -- -- -- -- (2,198,000) -- (2,198,000)
Foreign currency translation -- -- -- -- -- 236,000 236,000
-----------
Comprehensive loss -- -- -- -- -- -- (1,962,000)
Conversion of preferred stock (400) (2,000,000) 250,000 2,000,000 -- -- --
Issuance of common stock -- -- 2,600,000 18,068,000 -- -- 18,068,000
------ ----------- --------- ----------- ----------- --------- -----------
Balance at December 31, 1998 -- $ -- 5,822,222 $21,108,000 $ (941,000) $ 236,000 $20,403,000
================================ ====== =========== ========= =========== =========== ========= ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-32-
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Year Two Months Ten Months
Ended Ended Ended Ended
December 31, December 31, December 31, October 31,
1998 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($2,198,000) $ 788,000 $ 469,000 ($1,606,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Extraordinary loss 954,000 -- -- --
Deferred income taxes (1,771,000) 466,000 382,000 (971,000)
Depreciation 1,464,000 741,000 183,000 525,000
Amortization 1,743,000 463,000 17,000 294,000
Non cash restructuring charge -- -- -- 561,000
Stock compensation -- -- 40,000 --
(Gain) on the sale of machinery,
equipment and landing gear -- (78,000) -- --
Changes in operating assets and liabilities:
Accounts and other receivables (4,986,000) (1,036,000) (103,000) 1,771,000
Inventory (4,870,000) (185,000) (901,000) 1,156,000
Prepaid expenses and other
current assets (377,000) 104,000 21,000 (72,000)
Accounts payable 5,225,000 622,000 2,195,000 (2,681,000)
Deferred revenue 175,000 (745,000) 115,000 532,000
Accrued liabilities 1,546,000 (818,000) (139,000) 261,000
----------- ----------- ------------ -----------
Cash (used in) provided by operating
Activities (3,095,000) 322,000 2,279,000 (230,000)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment, leasehold
improvements and landing gear (7,427,000) (2,890,000) (155,000) (1,173,000)
Proceeds from disposals of equipment,
leasehold improvements and landing gear -- 250,000 -- --
Purchase of equipment and landing gear
from British Airways (26,585,000) -- -- --
Purchase of inventory from British Airways (1,961,000) -- -- --
Other assets (1,162,000) (824,000) -- (26,000)
Acquisition of Predecessor -- -- (28,398,000) --
----------- ----------- ------------ -----------
Cash used in investing activities (37,135,000) (3,464,000) (28,553,000) (1,199,000)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
-33-
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Year Year Two Months Ten Months
Ended Ended Ended Ended
December 31, December 31, December 31, October 31,
1998 1997 1996 1996
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Borrowing under bank note $ 38,766,000 $ -- $13,500,000 $ --
Principal payments on bank note (40,136,000) (850,000) -- --
Principal payments on related party note (4,000,000) -- -- --
Borrowing under related party note -- -- 6,500,000 --
Borrowings/payments on line of credit, net 28,656,000 3,200,000 (1,287,000) --
Proceeds from equity offering 20,800,000 -- -- --
Initial borrowing under line of credit -- -- 6,616,000 --
Borrowings/payments on Due to Parent and
affiliates (net) -- -- -- 2,193,000
Deferred offering costs (1,966,000) (766,000) -- --
Deferred financing cost (1,490,000) (337,000) -- --
Issuance of preferred stock -- -- 2,000,000 --
Contributions to capital -- 1,000,000 -- 242,000
------------ ---------- ----------- -----------
Cash provided by financing activities 40,630,000 2,247,000 27,329,000 2,435,000
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 400,000 (895,000) 1,055,000 1,006,000
Cash, beginning of period 160,000 1,055,000 -- 399,000
------------ ---------- ----------- -----------
Cash, end of period $ 560,000 $ 160,000 $ 1,055,000 $1,405,000
=================================================================================================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 3,291,000 $2,261,000 $ 193,000 $1,279,000
Income taxes $ 81,000 $ 3,000 $ -- $ 20,000
Non-cash investing and financing activities
Acquisition of Predecessor:
Fair market value of assets acquired $34,973,000
Fair market value of liabilities assumed (5,170,000)
Less cash received (1,405,000)
-----------
Net cash paid $28,398,000
===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-34-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Hawker Pacific Aerospace, formerly known as Hawker Pacific, Inc. (the
"Company") is a California corporation with headquarters in Sun Valley,
California, and satellite facilities in the Netherlands and, through May 31,
1996, Miami, Florida. In addition, the Company has a wholly owned subsidiary
known as Hawker Pacific Aerospace, Ltd. which operates an overhaul facility in
the United Kingdom ("UK"). The Company repairs and overhauls aircraft and
helicopter landing gear, hydromechanical components, and wheels, brakes and
braking system components for a diverse international customer base, including
commercial airlines, air cargo operators, domestic government agencies, aircraft
leasing companies, aircraft parts distributors, and original equipment
manufacturers. In addition, the Company distributes, manufactures and sells new
and overhauled spare parts and components for both fixed wing and helicopters.
Organization and Basis of Presentation
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern. As a result of the significant
amounts of cash and operating costs related to the start up of the Company's
operations in the United Kingdom associated with the acquisition of the BA
Assets (see discussion below) and certain other charges incurred in 1998, the
Company incurred losses and negative cash flows from operating activities in
1998, has a working capital and an accumulated deficit at December 31, 1998, and
is in violation of certain financial covenants with regard to its credit
facility. Management's plans with respect to these conditions include carefully
managing cash flow, increasing liquidity and availability on the credit line
where possible, considering the viability of additional external financing,
improving the operations in the United Kingdom, and obtaining an amendment to
the Company's credit facility as discussed in Note 5.
The Company operated as a subsidiary of BTR Dunlop Holdings, Inc., a Delaware
Corporation, from December 21, 1994 to October 31, 1996. BTR Dunlop Holdings,
Inc. was a subsidiary of BTR plc, a United Kingdom company (collectively, the
"Parent").
Effective January 1, 1994, the Company merged its operations with certain
operations of Dunlop Aviation, Inc., a subsidiary of the Parent. The merger was
a combination of companies under common control and was accounted for similar to
the pooling of interests method of accounting.
Pursuant to an Agreement of Purchase and Sale of Stock, AqHawk, Inc.
purchased all of the Company's outstanding stock from BTR plc effective as of
November 1, 1996 (the "Acquisition"). AqHawk, Inc. was formed as a holding
company for the sole purpose of acquiring the stock of the Company and was
subsequently merged into the Company. The acquisition has been accounted for
under the purchase accounting method. The aggregate purchase price was
approximately $29,800,000, which includes the cost of the acquisition. The
aggregate purchase price was allocated to the assets of the Company, based upon
estimates of their respective fair market values. The excess of purchase price
over the fair values of the net assets acquired was $1,019,000 and was recorded
as goodwill. Goodwill has been subsequently reduced for the reduction of certain
allowances on deferred taxes and amortization.
The financial statements for the ten months ended October 31, 1996, are
presented under the historical cost basis of the Company, as a wholly owned
subsidiary of BTR Dunlop Holdings, Inc., the predecessor Company (the
"Predecessor"). The financial statements as of December 31, 1997 and 1998, and
for the two months ended December 31, 1996, and the years ended December 31,
1997 and 1998, are presented under the new basis of the successor company (the
"Successor") established in the Acquisition.
The following unaudited pro forma information combines the results of
operations of the Successor and Predecessor as if the Acquisition had occurred
on January 1, 1996, and includes certain pro forma adjustments to the historical
operating results for amortization of goodwill, depreciation and amortization of
fixed assets and interest expense. The pro forma information is presented for
illustrative purposes only, and is not necessarily indicative of what the actual
results of operations would have been during such period, nor is it intended to
be representative of future operations.
-35-
<PAGE>
Twelve Months Ended
December 31, 1996
(Unaudited)
-----------------------
Revenue $39,004,000
Net loss (1,523,000)
Net loss per share (0.48)
On February 3, 1998, the Company completed an initial public offering (the
"Offering") of 2,766,667 shares of the Company's common stock. Of the 2,766,667
shares of common stock sold in the Offering, 2,600,000 shares were sold by the
Company and 166,667 shares were sold by a principal shareholder of the Company.
The principal shareholder sold 415,000 additional shares of common stock
pursuant to the exercise of an over allotment option granted to the underwriters
by the principal shareholder. The Company received net proceeds of approximately
$18.1 million, net of expenses of approximately $2.7 million. The Company used
approximately $9.2 million of the net proceeds to fund a portion of the purchase
price for certain assets of British Airways as discussed below, and
approximately $7.6 million to repay a portion of the revolving and term debt
previously outstanding under the Company's credit facility.
On February 4, 1998 (the "Acquisition Date"), the Company completed its
acquisition of certain assets of British Airways ("BA Assets"). The BA Assets
represent the assets of British Airways Engineering used to service landing gear
primarily on British Airways' aircraft. The purchase price for the BA Assets was
approximately $19.5 million, including acquisition related expenses, and
excluding a 747-400 landing gear rotable asset that was acquired during the
second quarter of 1998 for approximately $2.9 million. Transaction expenses of
$1.1 million were capitalized as part of the rotable asset value.
As part of the BA Acquisition, the Company and British Airways entered into a
seven-year exclusive service agreement on February 4, 1998, for the Company to
provide landing gear and related repair and overhaul services to substantially
all of the aircraft currently operated by British Airways.
As required by the BA purchase agreement, BA employees covered by a collective
bargaining contract continue to be covered by the contract until three years
after the date the Company completed the purchase. As of December 31, 1998,
there were 83 employees in the Company's UK subsidiary that are covered by the
BA collective bargaining agreement.
Principles of Consolidation
The consolidated financial statements include the accounts of Hawker Pacific
Aerospace and its wholly owned subsidiary, Hawker Pacific Aerospace, Ltd. All
significant intercompany transactions and balances have been eliminated.
Landing Gear Exchange
Landing gear and other rotable assets are accounted for as fixed assets at
cost and are depreciated over their estimated useful lives to their respective
salvage values. These assets include various airplane, wing, body and nose
landing gear shipsets. Landing gear and other rotable assets are held for the
purpose of exchanging the asset with a customer to allow the customer's aircraft
to get back in service in the shortest possible time. Certain of the Company's
contracts could not have been obtained without sufficient rotable inventory to
meet the customer's requirements.
As the landing gear is exchanged and the customer is billed for the cost of
the repair, the landing gear or other parts are typically repaired and
overhauled and maintained as property of the Company for future exchanges. The
estimated useful lives range from 10 to 15 years depending on the age of the
aircraft type, and the Company's estimate of how many years of overhaul demand
remain. Amortization expense is recorded as a cost of revenue using the
straight-line amortization method.
Recognition of Revenue
The Company generates revenue primarily from repair and overhaul services. In
some cases repair and overhaul services include exchange fees for the exchange
of the Company's landing gear or other parts needing repair or overhaul
services. The Company also generates revenue from the sale and distribution of
spare parts. Spare parts sales and exchange fee revenues are each individually
less than 10% of total revenues.
-36-
<PAGE>
Revenue for repair and overhaul services not involving an exchange transaction
is recognized when the job is complete and shipped to the customer. Deferred
revenue is principally comprised of customer prepayments and progress billings
related to the overhaul and repair of landing gear and other services which are
in process. Revenue from spare parts sales is recognized at the time of
shipment. Landing gear exchange fees are recognized on shipment of the exchanged
gear to the customer. Revenue for repair and overhaul service involving an
exchange is recognized when the cost of repairing the part received from the
customer is known and billable.
Concentrations of Risk
Major Customers. The Company performs credit evaluations and analysis of
amounts due from its customers; however, the Company generally does not require
collateral. Credit losses have been within management's expectations and an
estimate of uncollectible accounts has been provided for in the financial
statements.
Three customers accounted for 22.3%, 17.5% and 9.9% of the Company's revenue
for the year ended
December 31, 1998, and represented 25.7%, 19.4% and 5.1%, respectively, of the
accounts receivable balance at December 31, 1998.
One customer accounted for 19.3% of the Company's revenue for the year ended
December 31, 1997, and represented 18.9% of the accounts receivable balance at
December 31, 1997.
One customer accounted for 13.1% of the Company's revenue for the two month
period ended December 31, 1996, and represented 7.4% of the accounts receivable
balance at December 31, 1996.
Revenues from two customers, who each accounted for more than 10% of total
revenue, were 19.6% and 11.7%, respectively, of the Company's total revenue for
the ten month period ended October 31, 1996.
Major Vendors. Two vendors accounted for $17,510,000 of the Company's total
purchases during the year ended December 31, 1998.
Three vendors accounted for $9,283,000 of the Company's total purchases during
the year ended December 31, 1997.
Three vendors accounted for $1,901,000 of the Company's total purchases for
the two month period ended December 31, 1996.
Two vendors accounted for $7,030,000 of the Company's total purchases during
the ten month period ended October 31, 1996.
Inventories
Inventories are stated at the lower of cost or market. Purchased parts and
assemblies are valued based on their weighted average cost. Work-in-process
inventory includes purchased parts, direct labor and factory overhead.
Provisions for potentially obsolete or slow-moving inventory are made based on
management's analysis of inventory levels, turnover and future revenue
forecasts.
-37-
<PAGE>
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation
expense is being provided using the straight-line method based on the following
estimated useful lives.
<TABLE>
<CAPTION>
Predecessor Successor
----------------- -----------------
<S> <C> <C>
Leasehold improvements Lesser of life of Lesser of life of
lease or asset lease or asset
Machinery and equipment 13.3 years 8 years
Tooling 13.3 years 5 years
Furniture and fixtures 7 years 5 years
Vehicles 5 years 3 years
Computer equipment 5 years 3 years
</TABLE>
Expenditures for repairs are expensed as incurred, and additions and
betterments are capitalized.
Goodwill
In connection with the purchase of the Company by AqHawk, Inc. as previously
described, the Company recorded goodwill which represents the excess of the
purchase price over the estimated fair value of the net assets acquired. The
Company was amortizing goodwill using the straight-line method over a period of
fifteen years. The Company assesses the recoverability of its goodwill whenever
adverse events or changes in circumstances or business climate indicate that
expected future cash flows for the business may not be sufficient to support
recorded goodwill.
At December 31, 1997 and 1998, goodwill was reduced by $466,000 and $145,000,
respectively, due to the realization of certain deferred tax assets and the
corresponding reduction of the valuation allowance established in the allocation
of the purchase price of the Acquisition. As a result of the reduction there is
no remaining amount of goodwill at December 31, 1998.
Foreign Currency Translation
The Company considers the local currency of its foreign operations to be the
functional currency. Accordingly, the Company translates the assets and
liabilities of its foreign operations at the rate of exchange in effect at the
period end. Revenues and expenses are translated using an average of exchange
rates in effect during the period. Translation adjustments are recorded as a
separate component of other comprehensive income (loss) and are included in
shareholders' equity. Transaction gains and losses other than on inter-company
accounts deemed to be of a long-term nature are included in net income in the
period they occur.
Realized and unrealized foreign exchange gains (losses) recognized in earnings
amounted to $33,000, ($3,000), $298,000 and $425,000 for the ten months ended
October 31, 1996, the two months ended December 31, 1996, and the years ended
December 31, 1997 and 1998, respectively.
Earnings (Loss) per Share
Earnings (loss) per common share are computed based on the weighted average
number of shares outstanding during each period. The weighted average number of
shares outstanding give effect to the stock split and conversion of preferred
stock discussed in Note 11 as if they had occurred on November 1, 1996.
Basic earnings (loss) per common share is computed based upon the weighted
average number of common shares outstanding for the period. Diluted earnings per
common share reflects the potential dilution that could occur if certain
securities were exercised or converted into common stock. Basic earnings (loss)
per share is the same as diluted earnings (loss) per share for all periods
presented and includes 250,000 shares issued upon the conversion of the
preferred stock discussed in Note 11, as if converted at the beginning of the
period. The number of shares used in the calculation of basic and diluted
earnings per share was 3,170,551, 3,145,079 and 5,622,770 for the two months
ended December 31, 1996 and the years ended December 31, 1997 and 1998,
respectively.
Options to purchase 613,107 shares of common stock at exercise prices between
$3.50 and $9.88 were outstanding during 1998 but were not included in the
computation of diluted earnings per share because the exercise price was greater
-38-
<PAGE>
than the average market price of the common shares and/or the Company incurred a
loss for the period, therefore, the effect would be antidilutive.
Fair Value of Financial Instruments
The Company's financial instruments principally consist of accounts
receivable, accounts payable, line of credit, note payable to a bank, and notes
payable to a related party as defined by Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The
carrying value of accounts receivable and accounts payable approximate their
fair value because of the short-term nature of these instruments. The carrying
value of the line of credit and note payable to a bank approximate their fair
market value since these financial instruments carry a floating interest rate.
The fair market value of the note payable to a related party approximates its
carrying value based on current market rates for such debt.
Management's Use of 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.
Significant estimates and assumptions include the accounts receivable allowance
for doubtful accounts, a provision for potentially obsolete or slow-moving
inventory, the warranty accrual, and the cost accruals for repair and overhaul
services. Actual results may differ from those estimates.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Pursuant to SFAS No. 123, a company may elect to continue expense
recognition under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") or to recognize compensation expense
for grants of stock options, and other equity instruments to employees based on
the fair value methodology outlined in SFAS No. 123. SFAS No. 123 further
specifies that companies electing to continue expense recognition under APB No.
25 are required to disclose pro forma net income and pro forma earning per share
as if fair value based accounting prescribed by SFAS No. 123 has been applied.
The Company has elected to continue expense recognition pursuant to APB No. 25.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components. The components of other comprehensive income (loss)
consist entirely of foreign currency translation adjustments related to the
Company's operations in the United Kingdom.
2. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
Purchased parts and assemblies $19,251,000 $11,961,000
Work-in-process 2,394,000 2,853,000
----------- -----------
$21,645,000 $14,814,000
=========== ===========
</TABLE>
-39-
<PAGE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements, at cost, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
----------- -----------
<S> <C> <C>
Leasehold improvements $ 1,770,000 $ 1,575,000
Machinery and equipment 7,631,000 3,394,000
Tooling 533,000 356,000
Furniture and fixtures 265,000 199,000
Vehicles 38,000 30,000
Computer equipment 1,518,000 384,000
----------- -----------
11,755,000 5,938,000
Less: accumulated depreciation 2,457,000 855,000
----------- -----------
$ 9,298,000 $ 5,083,000
=========== ===========
</TABLE>
4. INCOME TAXES
The tax provision of the Predecessor has been computed as if the Predecessor
filed a separate income tax return. Under a tax sharing arrangement with its
Parent, the Predecessor's deferred tax assets were expected to be recoverable
against the current or future earnings of the Predecessor or its Parent.
For the two months ended December 31, 1996, and the years ended December 31,
1997 and 1998, the tax provision has been computed on a stand-alone basis. A
full valuation allowance for the Successor's net deferred tax assets was
provided at the Acquisition date as an adjustment to goodwill due to future
uncertainty concerning the ultimate realization of the net deferred tax asset.
-40-
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $4,308,000 $3,013,000
Inventory valuation accruals 709,000 439,000
Accounts receivable valuation accruals 121,000 64,000
Employee benefits and compensation 305,000 169,000
Product and service warranties -- 70,000
State tax credits 178,000 127,000
Other items, net -- 76,000
---------- ----------
Total deferred tax assets 5,621,000 3,958,000
Less valuation allowance (225,000) (659,000)
---------- ----------
Net deferred tax asset 5,396,000 3,299,000
========== ==========
Deferred tax liabilities:
Depreciation and amortization
in fixed assets basis 3,302,000 3,234,000
Other items, net due to accelerated depreciation
and tax deferred exchanges 178,000 65,000
---------- ----------
Total deferred tax liabilities 3,480,000 3,299,000
---------- ----------
Net deferred tax asset after allowance 1,916,000 $ --
========== ==========
</TABLE>
Significant components of the provision (benefit) for taxes based on income
(loss) are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------ ------------
Year Year Two Months Ten Months
Ended Ended Ended Ended
December 31, December 31, December 31, October 31,
1998 1997 1996 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ -- $ -- $ --
State 1,000 1,000 -- --
---------- ---------- --------- ----------
1,000 1,000 -- --
Deferred:
Federal (1,114,000) 466,000 277,000 (746,000)
State (289,000) -- 105,000 (225,000)
---------- ---------- --------- ----------
(1,403,000) 466,000 382,000 (971,000)
---------- ---------- --------- ----------
(Benefit) provision for taxes ($1,402,000) $467,000 $ 382,000 $ (971,000)
=========== =========== ========== ===========
</TABLE>
For the years ended December 31, 1997 and 1998, reductions were made in the
valuation reserve of approximately $466,000 and $434,000, respectively, of which
$466,000 for 1997 and $145,000 for 1998 were credited against goodwill. For the
year ended December 31, 1997, deferred tax assets of $302,000 were determined
not to be realizable and were charged directly against the valuation allowance.
At December 31, 1998, there is no valuation allowance on the net deferred tax
asset because management considers the use of the net deferred tax asset more
likely than not.
-41-
<PAGE>
A reconciliation of the statutory federal income tax rate to the effective tax
rate, as a percentage of income before tax, is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
-------------- -------------
Year Year Two Months Ten Months
Ended Ended Ended Ended
December 31, December 31, December 31, October 31,
1998 1997 1996 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate (34%) 34% 34% (34)%
Nondeductible expenses 7 3 3 2
State income taxes, net of
federal benefit (10) -- 8 (6)
Decrease in valuation reserve (10) -- -- --
---- ---- ---- ----
Effective tax rate (47)% 37% 45% (38%)
</TABLE>
The Company has net operating loss carryforwards for federal tax purposes of
$11,437,000 which expire in the years 2008 to 2018. The Company also has state
net operating loss carryforwards of $4,745,000 which expire in the years 1999 to
2003. Utilization of approximately $7,600,000 of federal and $3,200,000 of state
net operating loss carryforwards are subject to limitation as a result of
ownership changes. Such limitations are not anticipated to have a material
impact on the Company's ability to utilize such net operating loss
carryforwards.
5. SUCCESSOR LINES OF CREDIT AND NOTES PAYABLE
On December 22, 1998, the Company secured a $66.3 million senior credit
facility from Heller Financial, Inc., and NMB-Heller Limited (collectively,
"Heller"). The Loan and Security Agreement (the "Heller Agreement") provides a
$55 million revolving line of credit, a Term Loan A in the amount of $4.3
million, and a Term Loan B in the amount of $7.0 million. The revolver and both
term loans expire in five years.
As a result of obtaining the Heller facility the Company incurred $954,000 of
expenses related to early extinguishment of its loan agreement with Bank of
America. This expense is presented in the Consolidated Statements of Operations
for the year ended as of December 31, 1998, as an extraordinary item net of
related tax benefit of $354,000.
At December 31, 1998, all three instruments carried interest at a base rate of
7.75%. Shortly thereafter the Company elected a LIBOR rate option, which
changed applicable interest on the line of credit, Term Loan A and Term Loan B
to 7.0%, 7.25% and 7.5%, respectively. At March 26, 1999, the weighted average
interest rate for all three loans was 7.1%.
Availability for the $55 million revolving line of credit may be limited by
borrowing base criteria related to levels of accounts receivable, inventory and
exchange assets. At December 31, 1998, the Company's borrowing base was $50.3
million, of which $37.2 million had been advanced, leaving remaining
availability of $13.1 million.
On February 19, 1999, Heller established a $5 million reserve on the line of
credit as a result of the Company being in default on certain financial
covenants. On March 26, 1999, certain exchange gears were temporarily excluded
from the borrowing base as they were located in ineligible foreign countries. At
March 26, 1999, excluding the $4.0 million unavailable as a result of these
foreign gears, the Company's borrowing base was $51.2 million, of which $43.0
million had been advanced, leaving remaining availability (after the $5 million
reserve) of $3.2 million.
On March 10, 1999, the Company entered into a Forbearance Agreement with
Heller which waived certain violations of financial covenants in the Heller
Agreement. In consideration therefor, the Company agreed to: (i) accept certain
stricter financial controls; (ii) provide a consolidated business plan, and an
operational improvements plan for the UK subsidiary; (iii) pay a $75,000 fee,
and (iv) hire a third party consultant to evaluate improvement plans underway in
the UK subsidiary.
This agreement was subsequently extended in a Second Forbearance Agreement
with an effective date of April 13, 1999. In exchange for Heller's continued
agreement to forbear, the Company agreed to: (i) continue the tighter financial
controls and retain a consultant as required in the Forbearance Letter; (ii)
accept a 1.5% interest rate increase on the revolving line; (iii) forego the
ability to elect the LIBOR interest rate option; (iv) forego the benefit of
future interest rate
-42-
<PAGE>
reductions if financial conditions improve; and (v) provide supplemental
financial statements for 1998 conforming to certain financial criteria.
Unique Investment Corporation ("Unique"), an entity controlled by shareholders
of the Company, has a $5 million subordinated debt agreement with the Company.
At the closing of the Heller Agreement, $2.5 million of principal related to
this debt was repaid to Unique.
As additional consideration for the Second Forbearance Agreement, Unique (or a
shareholder of Unique) has agreed to provide Heller by April 23, 1999, a $2.5
million guarantee and stand-by letter of credit securing the Company's
obligations to Heller related to Term Loan B. Upon delivery of this guarantee
and letter of credit, the $5.0 million reserve against the line of credit shall
be released, and the Company will pay, to the extent available on the line of
credit, up to $4.15 million to reduce the outstanding principal balance on Term
Loan B to $2.5 million. At such time as the balance on Term Loan B is reduced to
$2.5 million, all remaining principal payments shall be deferred until the
expiration of Term Loan B on December 31, 2003. The Second Forbearance Agreement
expires on April 30, 1999. The Company and Heller are continuing to negotiate a
longer term amendment to the credit facility.
The Company's note payable balance consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Note payable to a financial institution, payable in 19
quarterly installments of $153,000, and a final payment
of $1,375,000 plus interest at prime rate, secured by the
fixed assets of the Company, maturing December 31, 2003.
The interest rate in effect at December 31, 1998, was 7.75%. $ 4,280,000 $ --
Note payable to a financial institution, payable in
quarterly installments of $350,000, plus interest at
prime rate maturing December 31, 2003. The
interest rate in effect at December 31, 1998. was 7.75%. 7,000,000 --
Note payable to a bank, payable in quarterly
installments increasing from $212,500 in 1997 to $625,000
in 2002, plus interest at either the offshore rate plus
1.875% or the bank's reference rate, paid in
full in 1998. -- 12,650,000
Note payable to related party, interest accrues
monthly at the greater of prime plus 4% or 11.8% per
annum, interest payments due monthly, subordinated
to the line of credit and term loans, maturing on the earlier
of the date such balance can be repaid per the loan
agreement or June 30, 2005. 2,500,000 6,500,000
----------- -----------
13,780,000 19,150,000
Less current 11,280,000 1,450,000
----------- -----------
$ 2,500,000 $17,700,000
=========== ===========
</TABLE>
-43-
<PAGE>
Maturity of notes payable as of December 31, 1998, is summarized as follows:
<TABLE>
<S> <C>
1999 $11,280,000
2000 --
2001 --
2002 --
2003 2,500,000
-----------
$13,780,000
===========
</TABLE>
In February, 1998, the Company entered into an interest rate swap agreement
(the "Swap Agreement") to reduce the impact of changes in interest rates in its
floating-rate long-term debt. The Swap Agreement has an initial notional amount
of $14,700,000 reducing to $8,550,000 through the expiration date of March 28,
2002. The Company is required to pay interest on the notional amount at the rate
of 6.39% and receives from the bank a percentage of the notional amount based on
a floating interest rate. The Swap Agreement effectively reduces its interest
rate exposure to a fixed rate of 6.39% of the notional amount. The floating
interest rate in effect under the Swap Agreement is 5.625%. The Swap Agreement
had a negative fair market value of $458,000 at December 31, 1998. The Swap
Agreement is collateralized by a $1 million Treasury Bill, which is included in
Other Assets at cost, which approximates the fair value.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities, certain office equipment and a vehicle
under operating lease agreements, which expire through June 2023, and which
contain certain escalation clauses based on various inflation indexes. Future
minimum rental payments as of December 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 3,835,000
2000 3,279,000
2001 3,271,000
2002 3,214,000
2003 3,212,000
2004 and thereafter 45,706,000
-----------
$61,517,000
===========
</TABLE>
In July 1997 the Company entered into a 13-year operating lease for additional
office space and warehouse facilities. In addition, significant leasehold
improvement costs were incurred during the year ended December 31, 1997.
The Company incurred rent expense of approximately $586,000, $109,000,
$795,000 and $2,898,000 for the ten months ended October 31, 1996, the two
months ended December 31, 1996, the year ended December 31, 1997, and the year
ended December 31, 1998, respectively.
Employment Agreements
The Company is obligated under certain management employment contracts through
October 31, 2001. Future minimum salary expense related to these contracts are
summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 749,000
2000 525,000
2001 451,000
2002 160,000
2003 120,000
----------
$2,005,000
==========
</TABLE>
Environmental Remediation
During 1993, the Company and other parties became defendants in a United
States Environmental Protection Agency and State of California lawsuit (the
"Plaintiffs") alleging violations of certain environmental regulations related
to the contamination of ground water in the San Fernando Valley Basin that
resulted from the release of hazardous substances.
-44-
<PAGE>
During 1996, the Company recorded additional reserves related to this matter
for total reserves of $657,000 at October 31, 1996 and December 31, 1996. The
Company has been indemnified by BTR plc for any claims related to this matter in
excess of the amount recorded. The amount recorded at December 31, 1996,
represented the Company's portion of a settlement that was reached with the
Plaintiffs during 1997.
Included in general and administrative expense for the ten months ended
October 31, 1996, is $947,000 of legal fees and settlement cost associated with
investigating, defending and settling the environmental remediation matter.
There were no corresponding costs incurred in the two months ended December 31,
1996 or the years ended December 31, 1997 and 1998.
Litigation
The Company is involved in various lawsuits, claims and inquiries, which the
Company believes are routine to the nature of the business. In the opinion of
management, the resolution of these matters will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
7. RELATED PARTY TRANSACTIONS
The Predecessor Company generated revenue and purchased goods and services
from its Parent and various subsidiaries of its Parent (collectively the
"Affiliates"). Certain long-term purchase agreements with the Affiliates have
continued under the Successor company.
Total revenue for the ten months ended October 31, 1996, from the Affiliates
was approximately $331,000. Total purchases for the ten months ended October
31, 1996, from the Affiliates was approximately $5,437,000.
In the ordinary course of business, the Company pays sales commissions to a
company which is also a shareholder of the Company. For the year ended December
31, 1997 and 1998, the Company paid $556,000 and $408,000, respectively of
commissions and reimbursed expenses to this related party.
As more fully described in Note 5, the Company is subject to a $5,000,000 note
payable to Unique, an entity controlled by shareholders of the Company. In
December 1998 the Company made a $2,500,000 principal payment on this note to
Unique. This debt is included in long-term notes payable on the 1997 and 1998
balance sheets. Interest expense on this note payable for the years ended
December 31, 1997 and 1998, amounted to $74,000 and $601,000, respectively. See
also Note 14--Subsequent Events, Related Party Transactions.
Management Fee
The Company had an agreement (the "Old Management Agreement") with Unique to
pay a management fee of $25,000 per month. Certain shareholders of the Company
are related parties to Unique. The Company paid and included in general and
administrative expense $50,000 to Unique during the period from November 1,
1996, through December 31, 1996, and $300,000 during the period from January 1,
1997, through December 31, 1997.
In September 1997, the Company and Unique entered into a new management
services agreement (the "New Management Services Agreement") pursuant to which,
upon the consummation of the Offering, the Old Management Agreement was
terminated, and Unique became entitled to receive $150,000 per year payable
monthly commencing in January 1999 for certain management services rendered to
the Company. No management fees were paid to Unique during 1998.
The New Management Services Agreement will terminate upon the Company
completing an underwritten public offering in which selling shareholders offer
25% or more of the common stock sold in such offering.
In September 1997, the Company also entered into a mergers and acquisitions
agreement with Unique pursuant to which Unique received $300,000 upon the
closing of the BA Acquisition for services provided in connection with the
acquisition. Such amount was recorded as part of the cost of the BA assets.
-45-
<PAGE>
Due to Parent and Affiliates
The Predecessor generally funded its operations through borrowings from the
Parent through October 31, 1996. The Predecessor made payments against such
borrowings based on cash availability although there were no contractual payment
terms. During the ten months ended October 31, 1996, the weighted average
interest rate was 4.9%. During the ten months ended October 31, 1996, the
average borrowings outstanding on the Due to Parent and Affiliates account was
approximately $32,978,000. The Company recognized interest expense on borrowings
from its Parent and affiliates of $1,609,000. All borrowing amounts due to
Parent and affiliates were settled in connection with the November 1, 1996,
acquisition of the Company.
Parent Company Allocation of Expenses
The Predecessor received a charge from its Parent for certain insurance (i.e.,
workers' compensation, product liability, group medical, etc.) and employee
benefit program expenses that were contracted and paid by the Parent and
allocated to the various subsidiaries. Management believes these allocations
approximate the amounts that would have been incurred had the Predecessor
operated on a stand-alone basis. Included in general and administrative expense
and cost of revenues is $1,504,000 for the ten months ended October 31, 1996, of
costs charged to the Predecessor by the Parent for these programs.
Warranty Reimbursement from Parent
The Predecessor had an arrangement with the Parent whereby certain warranty
costs incurred by the Predecessor for the failure of parts purchased from the
Parent or its affiliates were reimbursed to the Predecessor.
8. STOCK OPTION PLAN
In November 1997, the Board of Directors adopted the Company's 1997 Stock
Option Plan (the "1997 Plan"). The 1997 Plan, provides for the grant of options
to directors, officers, other employees and consultants of the Company to
purchase up to an aggregate of 634,514 shares of common stock. The purpose of
the 1997 Plan is to provide participants with incentives that will encourage
them to acquire a proprietary interest in, and continue to provide services to,
the Company.
The exercise price of any incentive stock options granted may not be less than
100% of the fair market value of the Company's common stock as of the date of
grant (110% of the fair market value if the grant is to an employee who owns
more than 10% of the total combined voting power of all classes of capital stock
of the Company). Nonqualified options may be granted under the 1997 Plan at an
exercise price of not less than 85% of the fair market value of the Common Stock
on the date of grant. Options may not be exercised more than ten years after the
date of grant (five years after the date of grant if the grant is an incentive
stock option to an employee who owns more than 10% of the total combined voting
power of all classes of capital stock of the Company). The number of options
outstanding and the exercise price thereof are subject to adjustments in the
case of certain transactions such as mergers, recapitalizations, stock splits or
stock dividends.
In November 1997, the Board of Directors of the Company granted six-year
options to purchase 259,572 shares of common stock under the 1997 Plan. All of
these options are exercisable at the initial public offering price per share
(i.e., $8 per share). The options generally are subject to vesting and become
exercisable at a rate of 5% per quarter from the date of grant, subject to the
optionee's continuing employment with the Company. Certain options become fully
vested and exercisable upon a change in control.
In addition, in November 1997, the Board of Directors granted five-year
management stock options to purchase an aggregate of 115,365 shares of common
stock. All of these options are vested and are exercisable at the initial public
offering price per share.
The Company has adopted the disclosure-only requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). Therefore, the following information is presented in
accordance with the provisions of that Statement.
-46-
<PAGE>
Had the Company elected to recognize compensation cost based on the fair value
of options granted as prescribed by FAS 123, net income and earnings per share
would have been reported as the pro forma amounts indicated below for the year
ended December 31, 1998:
Reported net loss ($2,198,000)
Pro forma net loss (2,695,000)
Reported diluted loss per share (0.39)
Pro forma diluted loss per share (0.48)
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Risk free interest rate 5.2%
Dividend yield 0%
Expected stock price volatility 75.0%
Expected option lives
Incentive 5.0 years
Non-qualified 5.0 years
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see above) are highly uncertain,
particularly the expected stock price volatility of the underlying stock.
Because changes in these uncertain input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the options
is amortized over the option vesting periods. The pro forma effect on net
income for 1998 is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma compensation
expense for a full year as certain options were granted at different times
during the year and it does not consider future grants. Pro forma information
in future years will reflect the amortization of a larger number of stock
options granted in several succeeding years.
A summary of the Company's stock option plans and changes in outstanding
options for the year ended December 31, 1998, is presented below:
<TABLE>
<CAPTION>
Shares Weighted
Under Average
Option Exercise Price
--------- --------------
<S> <C> <C>
Options granted in connection with IPO 374,937 $8.00
Options granted 406,892 4.48
Options cancelled (168,722) 8.00
Options exercised -- --
-------
Options outstanding at end of year 613,107 5.66
-------
Options exercisable at end of year 165,836 4.76
-------
Weighted average fair value of options
granted during the year $2.61
=====
</TABLE>
Included in the totals of options granted and options cancelled were 144,207
options that were repriced from $8.00 to $3.56. These options included all
115,365 options granted to senior management in November 1997, and 28,842
options granted to senior management under the 1997 Plan. These options were
repriced to be consistent with options granted to certain members of middle
management in October 1998. The strike price for these options was established
at the $3.56 closing price of the Company's common stock on the date issued.
-47-
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes stock options outstanding information at December
31, 1998.
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- ---------------------------------
Weighted-Average Weighted
Range of Remaining Weighted Average Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$6.91-$7.90 43,261 9.8 $7.00 -- $0.00
$7.90-$8.89 235,937 8.7 $8.00 44,703 $8.00
$8.89-$9.88 14,861 9.2 $9.88 -- $0.00
$2.96-$3.95 319,048 7.6 $3.56 121,133 $3.56
------- --- ----- ------- -----
613,107 9.2 $5.66 165,836 $4.75
======= =======
</TABLE>
9. EMPLOYEE BENEFIT PLANS
During the ten months ended October 31, 1996, the Company recorded a net
periodic pension expense of $234,000 as part of the allocated charges from the
Parent.
Effective January 1, 1997, the Company adopted a defined benefit pension plan
(the "1997 Plan") to provide retirement benefits to its employees. This non-
contributory plan covers substantially all employees of the Company as of the
effective date of the plan. Pursuant to plan provisions, normal monthly
retirement benefits are equal to the participant's credited benefit service (up
to a maximum of 35 years), times the sum of 0.75% of the participant's final
average monthly compensation, plus 0.65% of such compensation in excess of the
participant's covered average monthly wage. The plan also provides for early
retirement and certain death and disability benefits. The Company's funding
policy for the plan is to contribute amounts sufficient to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974,
plus any additional amounts which the Company may determine to be appropriate.
The net pension cost for the Company-sponsored defined benefit pension plan
for the years ended December 31, 1997 and 1998, includes the following
components:
<TABLE>
<CAPTION>
Pension Benefits
-----------------
1998 1997
----------------- ------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $1,040,000 $ --
Service cost 137,000 94,000
Interest cost 73,000 54,000
Actuarial losses 87,000 147,000
Prior service costs -- 745,000
Benefits paid (8,000) --
---------- -----------
Benefit obligation at end of year 1,329,000 1,040,000
---------- -----------
Change in plan assets
Fair value of plan assets at beginning of year -- --
Actual return on plan assets 51,000 --
Company contributions 340,000 --
Benefits paid (8,000) --
---------- -----------
Fair value of plan assets at end of year 383,000 --
---------- -----------
Funded status of the plan (underfunded) (946,000) (1,040,000)
Unrecognized net actuarial losses 149,000 113,000
Unamortized prior service cost 711,000 745,000
---------- -----------
Prepaid (accrued) benefit cost $ (86,000) $ (182,000)
========== ===========
</TABLE>
The Company made contributions of $340,000 to the Plan during 1998. No
contributions were made to the Plan during 1997.
-48-
<PAGE>
The assumptions used in the determination of the net pension cost for the
defined benefit pension plan for the years ended December 31, 1997 and 1998,
were as follows:
Discount rate 7%
Rate of increase in compensation levels 3%
Expected long-term rate of return on assets 7%
Effective January 1, 1997, the Company also adopted a defined contribution
401(k) retirement savings plan which covers substantially all employees of the
Company. Plan participants are allowed to contribute up to 15% of their base
annual compensation and are entitled to receive a company match equal to 50% of
the participant's contribution up to a maximum of 6% of the participant's annual
base compensation. Participant contributions to the plan are immediately fully
vested while the Company matching contributions are subject to a five-year
vesting period. All contributions to the plan are held in a separate trust
account. During the years ended December 31, 1997, and December 31, 1998, the
Company's matching contribution amounted to $137,000 and $168,000, respectively.
This amount was expensed during the period and is included in the Statement of
Operations.
Employees associated with the BA Acquisition continued to participate in the
BA pension plan in 1998. The Company incurred $436,000 of expense related to
contributions to this plan. As of December 31, 1998, the Company had accrued
$100,000 which will be contributed to the BA plan in 1999. As of January 1,
1999, the Company instituted its own pension plan for UK employees which covers
the former BA employees. The Company has no further obligation to the BA Plan
as of January 31, 1999.
10. RESTRUCTURING CHARGES
The Predecessor closed its facility in Miami, Florida, in May 1996. This
closure and the transfer of certain fixed assets and inventory to the Sun
Valley, California, facility resulted in a nonrecurring restructuring charge of
$1,196,000 in the Statement of Operations for the ten months ended October 31,
1996. The nonrecurring charge primarily includes costs incurred related to fixed
and other asset write-offs of approximately $600,000, payroll and severance
costs of approximately $190,000, moving and integration costs of approximately
$243,000, with the remainder applied to facility and other charges.
Additionally, the Company recorded Miami related inventory write-offs of
approximately $489,000, which were charged to cost of sales during the ten
months ended October 31, 1996. Revenue and operating loss of Miami, Florida,
operations were approximately $2,049,000 and ($40,000), respectively for the ten
months ended October 31, 1996.
11. SHAREHOLDERS' EQUITY
AqHawk, Inc., was formed on November 1, 1996, with the issuance of 400 shares
of Series A Preferred Stock to an individual for $2,000,000 and the issuance of
5,741,206 shares of common stock to the same individual, certain shareholders of
Unique, and certain members of management of the Company. Effective November 1,
1996, AqHawk, Inc., merged with the Company through the issuance of 2,870,603
shares of common stock of the Company in exchange for the 5,741,206 shares of
common stock of AqHawk, Inc., and the issuance of 400 shares of Series A
Preferred Stock of the Company for 400 shares of Preferred Stock of AqHawk, Inc.
A value of $40,000 was assigned to 229,648 shares of common stock issued to
management, and such amount was expensed as compensation expense in the two
months ended December 31, 1996.
In 1997 the Company received $1,000,000 for the issuance of 101,619 shares of
the Company's common stock. The capital infusion was made pursuant to an
agreement under which the majority shareholder had agreed to provide to the
Company up to $1,000,000 in return for common stock. The Series A Preferred
Stock was converted into 250,000 shares of common stock in connection with the
Company's initial public offering.
As part of the Company's initial public offering, warrants to purchase 222,716
shares were issued to the underwriters. These warrants allow them to purchase a
share of stock for each warrant at $8.00 per share. The Board of Directors has
reserved 972,595 shares for these warrants, for options issued in 1997, and for
options issued or available with respect to the 1997 Plan.
-49-
<PAGE>
In connection with the initial public offering, the Company effected a
579.48618 for one stock split of the Company's common stock in November 1997 and
a one for .9907406 reverse stock split in January 1998. All references in the
accompanying financial statements to the number of shares of common stock, per
common share amounts have been retroactively adjusted to reflect the stock
splits. All of the Company's Series A Preferred Stock were converted into an
aggregate of 250,000 shares of common stock. In addition, the Company's capital
structure was changed to reflect 20,000,000 shares of common stock. The Board of
Directors has authority to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any future vote
or action by the shareholders.
12. NON-MONETARY EXCHANGE TRANSACTION
During the year ended December 31, 1997, the Company sold certain landing gear
with a book value of $1,240,000 for a different landing gear valued at
$1,800,000 and cash of $250,000. In connection with the exchange transaction the
Company recognized profit of $78,000 during the year ended December 31, 1997,
representing the pro rata portion of the gain associated with the cash received.
The landing gear received in the exchange was recorded in the amount of
$1,068,000.
13. SEGMENT INFORMATION
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their business segments and their enterprise-wide operations. The Company
operates in one segment. The following table sets forth certain geographic
information related to the Company's operations.
<TABLE>
<CAPTION>
United States United Kingdom Consolidated
------------- -------------- ------------
As of December 31, 1998
- -----------------------
<S> <C> <C> <C>
Total assets $46,202,000 $41,035,000 $87,237,000
Total long-lived assets (net of
depreciation and amortization) 17,097,000 30,078,000 47,175,000
For the year ended December 31, 1998
- ------------------------------------
Revenue by location of operations 49,232,000 15,919,000 65,151,000
Loss before income tax benefit
and extraordinary item (382,000) (2,618,000) (3,000,000)
</TABLE>
The Company generated revenue from customers located outside of the United
States of $4,493,000, $1,517,000, $11,856,000 and $26,660,000, of which
$2,887,000, $1,191,000, $9,901,000 and $10,802,000 were revenues generated
from the Company's United States location for the ten months ended October 31,
1996, the two months ended December 31, 1996, and the years ended December 31,
1997 and 1998, respectively.
14. SUBSEQUENT EVENTS (unaudited)
UK Facility Lease. In April 1999 the Company entered into a 25-year operating
lease for a new 140,000 square foot facility in Hayes, approximately four miles
from Heathrow Airport. This facility replaces the current UK facility belonging
to British Airways on Heathrow. The Company takes possession of the building in
April 1999, and commences rent payments in October 1999. Annual rental payments
under the operating lease are $1,992,000.
Related Party Transactions. In April 1999, Unique (or a shareholder of
Unique) has agreed to provide Heller a $2.5 million guarantee and stand-by
letter of credit securing the Company's obligations to Heller related to Term
Loan B. See also "Note 5--Successor Lines of Credit and Notes Payable".
-50-
<PAGE>
Preferred Share Purchase Rights. On March 25, 1999, the Company declared a
dividend distribution of one Preferred Share Purchase Right on each outstanding
share of its common stock. The Rights will be attached to the Company's common
stock and will trade separately and be exercisable only in the event that a
person or group acquires or announces the intent to acquire 20% or more of the
Company's common stock. Each Right will entitle shareholders to buy one one-
hundredth of a share of a new series of junior participating preferred stock at
an exercise price of $15.
The Company is not aware of any current intent to acquire a sufficient number
of shares of the Company's stock to trigger distribution of the Rights.
If the Company is acquired in a merger or other business combination
transaction after a person has acquired 20% or more of the Company's outstanding
common stock, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value of twice such price. In addition, if a person or group
acquires 20% or more of Hawker Pacific Aerospace's outstanding common stock,
each Right will entitle its holder (other than such person or members of such
group) to purchase, at the Right's then-current exercise price, a number of its
common shares having a market value of twice such price.
Following an acquisition by a person or group of beneficial ownership of 20%
or more of the Company's common stock and before an acquisition of 50% or more
of the common stock, the Company's Board of Directors may exchange the Rights
(other than Rights owned by such person or group), in whole or in part, at an
exchange ratio of one one-hundredth of a share of the new series of junior
participating preferred stock per Right. Before a person or group acquires
beneficial ownership of 20% or more of the Company's common stock, the Rights
are redeemable for $.0001 per Right at the option of the Board of Directors.
The Rights are intended to enable the Company's shareholders to realize the
long-term value of their investment in the Company. They will not prevent a
takeover, but should encourage anyone seeking to acquire the Company to
negotiate with the Board prior to attempting a takeover.
The dividend distribution was made on March 25, 1999, payable to the
shareholders of record on that date. The Rights will expire on March 25, 2009.
The Rights distribution is not taxable to shareholders.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other the End of
Description of Period Expenses Accounts Deductions (a) Period
- ----------- --------- -------- -------- -------------- ------
<S> <C> <C> <C> <C> <C>
Predecessor
Ten Months Ended October 31, 1996 $ 39,000 $345,000 $ -- ($188,000) $196,000
Successor
Two Months Ended December 31, 1996 196,000 -- -- (129,000) 67,000
Year Ended December 31, 1997 67,000 167,000 -- (87,000) 147,000
Year Ended December 31, 1998 $147,000 $158,000 $28,000 ($32,000) $301,000
- ---------------------
</TABLE>
(a) Represents amounts written-off against the allowance for doubtful accounts.
-51-
<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 Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HAWKER PACIFIC AEROSPACE
By /s/ Daniel J. Lubeck
------------------------
Daniel J. Lubeck
Chairman Of The Board
Date: April 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Daniel J. Lubeck Chairman of the Board April 14, 1999
- ------------------------------- and Secretary
Daniel J. Lubeck
/s/ David L. Lokken President, Chief Executive April 14, 1999
- ------------------------------- Officer and Director
David L. Lokken (Principal Executive
Officer)
/s/ Philip M. Panzera Vice President and Chief April 14, 1999
- ------------------------------- Financial Officer (Principal
Philip M. Panzera Financial and Accounting
Officer)
/s/ John G. Makoff Director April 14, 1999
- -------------------------------
John G. Makoff
/s/ Scott W. Hartman Director April 14, 1999
- -------------------------------
Scott W. Hartman
/s/ Joel F. McIntyre Director April 14, 1999
- -------------------------------
Joel F. McIntyre
/s/ Daniel C. Toomey, Jr. Director April 14, 1999
- -------------------------------
Daniel C. Toomey, Jr.
/s/Mellon C. Baird Director April 14, 1999
- -------------------------------
Mellon C. Baird
-52-
<PAGE>
Exhibit 21.1 Subsidiaries of Registrant
Registrant has one wholly-owned subsidiary, Hawker Pacific Aerospace Ltd.,
which is located and incorporated in the United Kingdom.
-53-
<PAGE>
EXHIBIT 10.37
LOAN AND SECURITY AGREEMENT
DATED AS OF DECEMBER 22, 1998
among
HAWKER PACIFIC AEROSPACE,
a California corporation
and
HAWKER PACIFIC AEROSPACE LIMITED,
a corporation registered under the laws of England and Wales
as Borrowers,
HELLER FINANCIAL, INC.,
as Agent and as Lender,
THE OTHER LENDERS PARTY HERETO
FROM TIME TO TIME
and
NMB-HELLER LIMITED,
as Funding Agent and as Collateral Agent
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS.................................1
1.1 Certain Defined Terms........................................................1
SECTION 2. LOANS AND COLLATERAL...................................................1
2.1 Loans........................................................................1
(A)(1) Term Loan A..........................................................1
(A)(2) Term Loan B..........................................................2
(B) Revolving Loan.......................................................2
(C) Eligible Collateral..................................................3
(D) Swingline Loan...............................................................6
.............................................................................6
(E) Borrowing Mechanics..................................................7
(F) Automatic Requests...................................................9
(G) Notes................................................................9
(H) Letters of Credit....................................................9
(I) Other Letter of Credit Provisions...................................10
(J) Availability of a Lender's Pro Rata Share...........................11
(K) Special Provisions Regarding Optional Currencies....................12
2.2 Interest....................................................................13
(A) Rate of Interest....................................................13
(B) Computation and Payment of Interest.................................14
(C) Interest Laws.......................................................14
(D) Conversion or Continuation..........................................14
2.3 Fees........................................................................15
(A) Unused Line Fee.....................................................15
(B) Letter of Credit Fees...............................................16
(C) Audit Fees..........................................................16
(D) Other Fees and Expenses.............................................16
(E) Agent's Fees........................................................16
2.4 Payments and Prepayments....................................................16
(A) Manner and Time of Payment..........................................16
(B) Mandatory Prepayments...............................................16
(C) Voluntary Prepayments and Repayments................................18
(D) Payments on Business Days...........................................18
2.5 Term of this Agreement......................................................18
2.6 Statements..................................................................18
2.7 Grant of Security Interest..................................................18
2.8 Capital Adequacy and Other Adjustments......................................20
2.9 Taxes.......................................................................21
(A) No Deductions.......................................................21
(B) Changes in Tax Laws.................................................21
(C) Foreign Lenders.....................................................22
2.10 Required Termination and Prepayment.........................................23
2.11 Optional Prepayment/Replacement of Lenders in Respect of Increased Costs...23
2.12 Compensation................................................................23
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
2.13 Booking of LIBOR Loans......................................................24
2.14 Assumptions Concerning Funding of LIBOR Loans...............................24
2.15 Appointment of Borrower Representative......................................24
SECTION 3. CONDITIONS TO LOANS...................................................24
SECTION 4. BORROWERS' REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS.........25
4.1 Organization, Powers, Capitalization........................................25
(A) Organization and Powers............................................25
(B) Capitalization.....................................................25
4.2 Authorization of Borrowing, No Conflict.....................................25
4.3 Financial Condition.........................................................25
4.4 Indebtedness and Liabilities................................................26
4.5 Account Warranties..........................................................26
4.6 Names and Locations.........................................................26
4.7 Title to Properties; Liens..................................................27
4.8 Litigation; Adverse Facts...................................................27
4.9 Payment of Taxes............................................................27
4.10 Performance of Agreements...................................................27
4.11 Employee Benefit Plans......................................................28
4.12 Intellectual Property.......................................................28
4.13 Broker's Fees...............................................................28
4.14 Environmental Compliance....................................................28
4.15 Solvency....................................................................28
4.16 Disclosure..................................................................29
4.17 Insurance...................................................................29
4.18 Compliance with Laws........................................................29
4.19 Bank Accounts...............................................................30
4.20 Employee Matters............................................................30
4.21 Governmental Regulation.....................................................30
4.22 Access to Accountants and Management........................................30
4.23 Inspection..................................................................30
4.24 Collateral Records..........................................................30
4.25 Account Covenants; Verification.............................................30
4.26 Collection of Accounts and Payments.........................................31
(A) U.S. Borrower......................................................31
(B) U.K. Borrower......................................................31
4.27 Inventory Warranties and Covenants..........................................32
SECTION 5. REPORTING AND OTHER AFFIRMATIVE COVENANTS.............................33
5.1 Financial Statements and Other Reports......................................33
5.2 Endorsement.................................................................33
5.3 Maintenance of Properties...................................................33
5.4 Compliance with Laws........................................................33
5.5 Further Assurances..........................................................33
5.6 Mortgages; Title Insurance; Surveys.........................................34
(A) Mortgaged Property.................................................34
(B) Title Insurance....................................................34
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(C) Surveys............................................................34
5.7 Use of Proceeds and Margin Security.........................................34
5.8 Bailee......................................................................34
5.9 Year 2000...................................................................35
5.10 Maintenance of Certifications...............................................35
SECTION 6. FINANCIAL COVENANTS...................................................35
SECTION 7. NEGATIVE COVENANTS....................................................35
7.1 Indebtedness and Liabilities................................................35
7.2 Guaranties..................................................................36
7.3 Transfers, Liens and Related Matters........................................36
(A) Transfers..........................................................36
(B) Liens..............................................................36
(C) No Negative Pledges................................................36
(D) No Restrictions on Subsidiary Distributions to Borrowers...........36
7.4 Investments and Loans.......................................................37
7.5 Restricted Junior Payments..................................................37
7.6 Restriction on Fundamental Changes..........................................38
7.7 Transactions with Affiliates................................................38
7.8 Conduct of Business.........................................................38
7.9 Tax Consolidations..........................................................38
7.10 Subsidiaries................................................................38
7.11 Fiscal Year; Tax Designation................................................38
7.12 Press Release; Public Offering Materials....................................38
7.13 Bank Accounts...............................................................38
7.14 Exchange Inventory and Work in Process Purchases............................38
7.15 Changes Relating to Subordinated Debt.......................................39
SECTION 8. DEFAULT, RIGHTS AND REMEDIES..........................................39
8.1 Event of Default............................................................39
(A) Payment............................................................39
(B) Default in Other Agreements........................................39
(C) Breach of Certain Provisions.......................................39
(D) Breach of Warranty.................................................39
(E) Other Defaults Under Loan Documents................................39
(F) Involuntary Bankruptcy; Appointment of Receiver, etc...............39
(G) Voluntary Bankruptcy; Appointment of Receiver, etc.................40
(H) Liens..............................................................40
(I) Judgment and Attachments...........................................40
(J) Dissolution........................................................40
(K) Solvency...........................................................40
(L) Injunction.........................................................40
(M) Invalidity of Loan Documents.......................................41
(N) Failure of Security................................................41
(O) Damage, Strike, Casualty...........................................41
(P) Licenses and Permits...............................................41
(Q) Forfeiture.........................................................41
(R) Termination of Certain Contracts...................................41
(S) Change in Control or Management....................................41
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
8.2 Suspension of Commitments...................................................42
8.3 Acceleration................................................................42
8.4 Remedies....................................................................42
8.5 Appointment of Attorney-in-Fact.............................................43
8.6 Limitation on Duty of Agent with Respect to Collateral......................44
8.7 Application of Proceeds.....................................................44
8.8 License of Intellectual Property............................................44
8.9 Waivers, Non-Exclusive Remedies.............................................45
SECTION 9. AGENT, FUNDING AGENT AND COLLATERAL AGENT.............................45
9.1 Agents......................................................................45
(A) Appointment........................................................45
(B) Nature of Duties...................................................46
(C) Rights, Exculpation, Etc...........................................46
(D) Reliance...........................................................47
(E) Indemnification....................................................47
(F) Heller and NMB-Heller Individually.................................48
(G) Successor Agents...................................................48
(H) Collateral Matters.................................................49
(I) Agency for Perfection..............................................50
(J) Exercise of Remedies...............................................50
9.2 Notice of Default...........................................................51
9.3 Action by Agents............................................................51
9.4 Amendments, Waivers and Consents............................................51
9.5 Assignments and Participations in Loans.....................................52
9.6 Set Off and Sharing of Payments.............................................53
9.7 Disbursement of Funds.......................................................54
9.8 Settlements, Payments and Information.......................................54
(A) Revolving Advances and Payments; Fee Payments......................54
(B) Return of Payments.................................................56
9.9 Dissemination of Information................................................56
9.10 Discretionary Advances......................................................56
SECTION 10. MISCELLANEOUS........................................................56
10.1 Expenses and Attorneys' Fees................................................56
10.2 Indemnity; Value Added Tax..................................................57
(A) Indemnity...........................................................57
(B) Value Added Tax....................................................58
10.3 Notices.....................................................................58
10.4 Survival of Representations and Warranties and Certain Agreements...........59
10.5 Indulgence Not Waiver.......................................................60
10.6 Marshaling; Payments Set Aside..............................................60
10.7 Entire Agreement............................................................60
10.8 Severability................................................................60
10.9 Lenders' Obligations Several; Independent Nature of Lenders' Rights.........60
10.10 Headings....................................................................61
10.11 APPLICABLE LAW..............................................................61
10.12 Successors and Assigns......................................................61
10.13 No Fiduciary Relationship; No Duty; Limitation of Liabilities...............61
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
10.14 CONSENT TO JURISDICTION.....................................................61
10.15 WAIVER OF JURY TRIAL........................................................62
10.16 Construction................................................................62
10.17 Counterparts; Effectiveness.................................................62
10.18 Confidentiality.............................................................62
10.19 Judgment Currency...........................................................63
SECTION 11. DEFINITIONS AND ACCOUNTING TERMS.....................................63
11.1 Defined Terms...............................................................63
11.2 Accounting Terms............................................................82
11.3 Other Definitional Provisions...............................................83
11.4 Dollar Equivalents..........................................................83
11.5 Change of Currency..........................................................83
</TABLE>
v
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is dated as of December 22, 1998 and
entered into among HAWKER PACIFIC AEROSPACE, a California corporation (the "U.S.
----
Borrower"), HAWKER PACIFIC AEROSPACE LIMITED, a company organized under the laws
- --------
of England and Wales (registered number 3459428) (the "U.K. Borrower" and,
-------------
collectively with the U.S. Borrower, the "Borrowers"), the financial
---------
institution(s) listed on the signature pages hereof, and their respective
successors and Eligible Assignees (each individually a "Lender" and collectively
------
"Lenders"), HELLER FINANCIAL, INC., a Delaware corporation (in its individual
-------
capacity, "Heller"), for itself as a Lender and as Agent, and NMB-HELLER
------
LIMITED, an Affiliate of Heller domiciled in the United Kingdom, as Funding
Agent and as Collateral Agent.
WHEREAS, Borrowers desire that Lenders extend a credit facility to provide
funds to refinance Borrowers' Existing Indebtedness (as herein defined), to
repay in full Borrowers' existing Subordinated Debt, and to provide working
capital financing and funds for other general corporate purposes of Borrowers;
and
WHEREAS, to secure Borrowers' respective obligations under the Loan
Documents, Borrowers are (a) granting to Agent, for benefit of Agent and
Lenders, a security interest in and lien upon substantially all of Borrowers'
property located at any time in the United States of America, and (b) granting
to Collateral Agent, for benefit of Agent and Lenders, a security interest in
and lien upon substantially all of Borrowers' property located at any time in
the United Kingdom, the Netherlands or any other jurisdiction other than the
United States of America; and
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrowers, Agent, Funding Agent,
Collateral Agent and Lenders agree as follows:
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
1.1 Certain Defined Terms. The capitalized terms and the accounting terms
---------------------
used in this Agreement shall have the meanings set forth in Section 11 of this
----------
Agreement:
SECTION 2. LOANS AND COLLATERAL
--------------------
2.1 Loans.
-----
(A)(1) Term Loan A. Each Lender, severally, agrees to lend to
-----------
Borrowers, jointly and severally, on the Closing Date, its Pro Rata Share of
Term Loan A which is in the aggregate amount of $4,280,000. Term Loan A shall
be funded in one drawing. Amounts borrowed under this subsection 2.1(A)(1) and
--------------------
repaid may not be reborrowed. Borrowers shall make principal payments in the
amount of the applicable Scheduled Installment of Term Loan A (or such lesser
principal amount as shall then be outstanding) on the dates set forth below.
1
<PAGE>
"Scheduled Installment" of Term Loan A means, for each date set forth
---------------------
below, the amount set forth opposite such date.
<TABLE>
<CAPTION>
Date Scheduled Installment
----- ---------------------
<S> <C>
March 31, 1999 and the last day of each June, $152,857
September and December thereafter through
September 30, 2003
December 31, 2003 $1,375,714.30 or the then
remaining principal balance of Term Loan A
</TABLE>
(A)(2) Term Loan B. Each Lender, severally, agrees to lend to
-----------
Borrowers, jointly and severally, on the Closing Date, its Pro Rata Share of
Term Loan B which is in the aggregate amount of $7,000,000. Term Loan B shall
be funded in one drawing. Amounts borrowed under this subsection 2.1(A)(2) and
--------------------
repaid may not be reborrowed. Borrowers shall make principal payments in the
amounts of the applicable Scheduled Installments of Term Loan B (or such lesser
principal amount of Term Loan B as shall then be outstanding) on the dates set
forth below.
"Scheduled Installment" of Term Loan B means, for each date set forth
---------------------
below, the amount set forth opposite such date.
<TABLE>
<CAPTION>
Date Scheduled Installment
---- ---------------------
<S> <C>
March 31, 1999 and the last day of each June, $350,000
September and December thereafter through
September 30, 2003
December 31, 2003 $350,000 or the then remaining
principal balance of Term Loan B
</TABLE>
(B) Revolving Loan. Each Lender, severally, agrees to lend to
--------------
Borrowers from time to time its Pro Rata Share of each Revolving Advance. The
aggregate amount of all Revolving Loan Commitments shall not exceed at any time
$55,000,000. Amounts borrowed under this subsection 2.1(B) may be repaid and
-----------------
reborrowed at any time prior to the earlier of (i) the termination of the
Revolving Loan Commitment pursuant to subsection 8.3 or (ii) the Termination
--------------
Date. Except as otherwise provided herein, no Lender shall have any obligation
to make a Revolving Advance to the extent such Revolving Advance would cause the
Revolving Loan (after giving effect to any immediate application of the proceeds
thereof) to exceed the Maximum Revolving Loan Amount.
(1) "Maximum Revolving Loan Amount" means, as of any date of
-----------------------------
determination, the lesser of (a) the Revolving Loan Commitment(s) of all Lenders
less the Letter of Credit Reserve or (b) the Borrowing Base less the Letter of
- ---- ----
Credit Reserve.
(2) "Borrowing Base" means, as of any date of determination, an
--------------
amount equal to the sum of (a) 85% of the Collateral Value of Borrowers'
Eligible Accounts less such reserves as Agent in its reasonable discretion may
----
elect to establish, plus (b) (ii) the Inventory Borrowing Base less such
---- ----
reserves as Agent in its reasonable discretion may elect to establish,
2
<PAGE>
provided that in no event shall aggregate Advances at any one time outstanding
- --------
against (i) the Exchange/WIP Borrowing Base exceed $40,000,000 or (ii) Eligible
Repair Parts and Unserviceable Parts exceed $12,000,000; and provided further
----------------
that at no time shall more than 90% of the Borrowing Base be comprised of
Eligible Accounts, Eligible Exchange Inventory and Work in Process and Eligible
Repair Parts and Unserviceable Parts located in the United Kingdom.
(3) "Inventory Borrowing Base" means, as of any date of
------------------------
determination, an amount equal to the sum of (a) the Exchange/WIP Borrowing
Base, plus (b) 90% of the Orderly Liquidation Value of Borrowers' Eligible
----
Repair Parts and Unserviceable Parts.
(4) "Exchange/WIP Borrowing Base" means, as of any date of
------------------------------
determination, an amount equal to the lesser of (a) the Applicable Percentage
then in effect multiplied by the Orderly Liquidation Value of Borrower's
-------------
Eligible Exchange Inventory and Work in Process, or (b) the Net Book Value of
Borrowers' Eligible Exchange Inventory and Work in Process.
(C) Eligible Collateral.
-------------------
"Eligible Accounts" means, as at any date of determination, the
-----------------
aggregate of all Accounts that Agent, in its reasonable credit judgment, deems
to be eligible for borrowing purposes. Without limiting the generality of the
foregoing, Agent may determine that the following Accounts are not Eligible
Accounts:
(1) Accounts which, at the date of issuance of the respective
invoice therefor, were payable more than 60 days after the date of issuance;
(2) Accounts which remain unpaid for more than 60 days after the
due date specified in the original invoice or for more than 90 days after
invoice date (or, in the case of Accounts with respect to which the account
debtor is any of British Airways, American Airlines, United Airlines, Federal
Express or any Subsidiary of the foregoing, only, 120 days after invoice date)
if no due date was specified;
(3) Accounts which are otherwise eligible with respect to which the
account debtor is owed a credit by a Borrower, but only to the extent of such
credit;
(4) Accounts due from an account debtor whose principal place of
business is located outside the United States of America, the United Kingdom,
the Netherlands or the Canadian provinces of Ontario, Quebec, British Columbia,
Manitoba or Saskatchewan, unless either (a) such Account is backed by a letter
of credit, in form and substance acceptable to Agent and issued or confirmed by
a bank that is acceptable to Agent in its sole discretion; provided that such
--------
letter of credit has been delivered to Agent as additional Collateral, (b) such
Account is covered by credit insurance satisfactory to Agent and with respect to
which Agent, for the benefit of Agent and Lenders, has been named as loss payee,
or (c) Agent has in its sole discretion otherwise agreed to consider Accounts
due from such account debtor as Eligible Accounts, subject to satisfaction of
the other criteria set forth herein;
3
<PAGE>
(5) Accounts due from an account debtor which Agent has notified
Borrowers does not have a satisfactory credit standing;
(6) Accounts in excess of an aggregate face amount of $50,000 with
respect to which the account debtor is the United States of America, any state
or any municipality, or any department, agency or instrumentality thereof unless
Borrower has, with respect to such Accounts, complied with the Federal
Assignment of Claims Act of 1940 as amended (31 U.S.C. Section 3727 et seq.) or
any applicable statute or municipal ordinance of similar purpose and effect;
(7) Accounts with respect to which the account debtor is an Affiliate
of a Borrower or a director, officer, Agent, stockholder or employee of a
Borrower or any Affiliate of any Borrower;
(8) Accounts due from an account debtor if more than 25% of the
aggregate amount of Accounts of such account debtor have at the time remained
unpaid for more than 60 days after due date or 90 days after the invoice date if
no due date was specified;
(9) Accounts with respect to which there is any unresolved dispute
with the respective account debtor (but only to the extent of such dispute);
(10) Accounts evidenced by an "instrument" or "chattel paper" (each as
defined in the UCC) not in the possession of Agent or Collateral Agent, on
behalf of Lenders;
(11) Accounts with respect to which Agent or Collateral Agent, as
applicable, on behalf of Lenders, does not have a valid, first priority and
fully perfected security interest;
(12) Accounts subject to any Lien except those in favor of Agent or
Collateral Agent, as applicable, on behalf of Lenders;
(13) Accounts with respect to which the account debtor is the subject
of any federal, state or foreign bankruptcy, insolvency or other similar
proceeding;
(14) Accounts due from an account debtor to the extent that such
Accounts exceed in the aggregate a Dollar Equivalent amount equal to the
following percentage, as applicable, of the aggregate consolidated Dollar
Equivalent amount of all Accounts at said date: 40%, in the case of Accounts due
from British Airways; 30%, in the case of Accounts due from Federal Express and
20%, in all other cases;
(15) Accounts with respect to which the account debtor's obligation to
pay is conditional or subject to a repurchase obligation or right to return or
with respect to which the goods or services giving rise to such Account have not
been delivered (or performed, as applicable) and accepted by such account
debtor, including progress billings, bill and hold sales, guarantied sales, sale
or return transactions, sales on approval or consignment sales;
(16) Accounts with respect to which the account debtor is located in
any jurisdiction denying creditors access to its courts in the absence of a
Notice of Business Activities
4
<PAGE>
Report or other similar filing, unless the applicable Borrower has either
qualified as a foreign corporation authorized to transact business in such
jurisdiction or has filed a Notice of Business Activities Report or similar
filing with the applicable Governmental Authority for the then current year;
(17) Accounts with respect to which the account debtor is a creditor
of any Borrower, provided, however, that any such Account shall only be
-------- -------
ineligible as to that portion of such Account which is less than or equal to the
amount owed by such Borrower to such Person.
"Eligible Exchange Inventory and Work in Process" means, as at any
-----------------------------------------------
date of determination, the aggregate Collateral Value of all Exchange Inventory
and Work in Process owned by a Borrower (and for which title has unconditionally
passed to such Borrower) less (a) a reserve in an amount equal to the aggregate
----
Fair Market Value of Borrowers' Exchange Inventory and Work in Process located
as of such date in any Other Acceptable European Country, to the extent such
aggregate Fair Market Value exceeds $1,000,000, and less (b) a reserve in an
----
amount equal to the aggregate Fair Market Value of Borrowers' Exchange Inventory
and Work in Process located as of such date in any jurisdiction other than a
Designated Country or an Other Acceptable European Country. Without limiting
the generality of the foregoing, Agent may determine that the following is not
Eligible Exchange Inventory and Work in Process: (a) finished goods which do
not meet the specifications of the purchase order for such goods; (b) Exchange
Inventory and Work in Process which Agent determines is unacceptable for
borrowing purposes due to age, quality, type, category and/or quantity; (c)
packaging, shipping materials or supplies consumed in any Borrower's business;
(d) Exchange Inventory and Work in Process with respect to which Agent or
Collateral Agent, as applicable, on behalf of Agent and Lenders, does not have a
valid, first priority and fully perfected security interest; (e) Exchange
Inventory and Work in Process with respect to which there exists any Lien in
favor of any Person other than Agent or Collateral Agent, as applicable, on
behalf of Agent and Lenders; and (f) Exchange Inventory and Work in Process
produced in violation of the Fair Labor Standards Act and subject to the so-
called "hot goods" provisions contained in Title 29 U.S.C. 215 (a)(i) or any
replacement statute, or with respect to which any analogous circumstance arises
under or pursuant to the laws of any other applicable Governmental Authority.
For purposes of determining the Exchange/WIP Borrowing Base at any time,
the following procedures shall apply: Borrower shall give Agent 5 Business Days
prior written notice prior to shipping any Eligible Exchange Inventory and Work
in Process to any jurisdiction other than a Designated Country, which notice
shall identify such Eligible Exchange Inventory and Work in Process and shall
state the date such Eligible Exchange Inventory and Work in Process is to be
shipped, the jurisdiction and customer to which it is being shipped, the
expected return date of such Eligible Exchange Inventory and Work in Process and
the Fair Market Value thereof as provided by the most recent Periodic Inventory
Appraisal. On the date such Eligible Exchange Inventory and Work in Process is
so shipped, Agent shall establish the reserve required pursuant to clause (a) or
clause (b) above, as applicable. On the date on which the applicable Borrower
obtains possession of the Eligible Exchange Inventory and Work in Process to be
delivered to the applicable Borrower by the applicable customer in exchange for
such Eligible Exchange Inventory and Work in Process so shipped to such
customer, the associated reserve established pursuant to clause (a) or clause
(b) above, as applicable, shall be reversed by Agent.
5
<PAGE>
"Designated Country" means any of the United States, the United
------------------
Kingdom (including Ireland and Scotland), The Netherlands, Canada, Australia and
New Zealand.
"Other Acceptable European Country" means any of Denmark, Sweden,
---------------------------------
Belgium, France, Germany, Norway, Switzerland or Poland.
"Eligible Repair Parts and Unserviceable Parts" means, as at any date
---------------------------------------------
of determination, the aggregate Collateral Value of all Repair Parts and
Unserviceable Parts owned by a Borrower (and for which title has unconditionally
passed to such Borrower) and located in the United States of America or the
Netherlands, in the case of U.S. Borrower, or the United Kingdom, in the case of
U.K. Borrower, that Agent, in its reasonable credit judgment, deems to be
eligible for borrowing purposes. Without limiting the generality of the
foregoing, Agent may determine that the following is not Eligible Repair Parts
and Unserviceable Parts: (a) Repair Parts or Unserviceable Parts consisting of
work in process that is not readily marketable in its current form, except, in
the case of Repair Parts, to the extent that Repair Parts have been issued to
work orders, which are identified as such and are acceptable to Agent; (b)
finished goods which do not meet the specifications of the purchase order for
such goods; (c) Repair Parts and Unserviceable Parts which Agent determines are
unacceptable for borrowing purposes due to age, quality, type category and/or
quantity; (d) packaging, shipping materials or supplies consumed in any
Borrower's business; (e) Repair Parts and Unserviceable Parts with respect to
which Agent or Collateral Agent, as applicable, on behalf of Agent and Lenders,
does not have a valid, first priority and fully perfected security interest; (f)
Repair Parts and Unserviceable Parts with respect to which there exists any Lien
in favor of any Person other than Agent or Collateral Agent, as applicable, on
behalf of Agent and Lenders; (g) Repair Parts and Unserviceable Parts produced
in violation of the Fair Labor Standards Act and subject to the so-called "hot
goods" provisions contained in Title 29 U.S.C. 215 (a)(i) or any replacement
statute, or with respect to which any analogous circumstance arises under or
pursuant to the laws of any other applicable Governmental Authority; and (h)
Repair Parts and Unserviceable Parts located at any location other than the
applicable Borrower's principal location, unless a waiver of interest acceptable
in form and substance is delivered to Agent or Collateral Agent.
(D) Swingline Loan. Agent may convert any request by U.S.
--------------
Borrower for a Revolving Advance into a request for an Advance under the
Swingline Loan. The Swingline Loan shall be a Base Rate Loan and shall not
exceed in the aggregate at any time outstanding the Maximum Swingline Loan
Amount. In the event that on any Business Day, Swingline Lender desires that
all or any portion of the Swingline Loan should be reduced in whole or in part,
Swingline Lender shall promptly notify Agent to that effect and indicate the
portion of the Swingline Loan to be reduced. Swingline Lender hereby agrees
that it shall notify Agent to reduce the Swingline Loan to $1,000,000 or less at
least once every month. Agent agrees to promptly transmit to Lenders the
information contained in each notice received by Agent from Swingline Lender and
shall concurrently notify Lenders of each Lender's Pro Rata Share of the
obligation to make a Revolving Advance to repay the Swingline Loan (or portion
thereof).
Each of the Lenders hereby unconditionally and irrevocably agrees to fund to
Agent for the benefit of Swingline Lender, in lawful money of the United States
and in same day funds, not later than 1:00 p.m. Chicago time on the Business Day
immediately following the Business Day of such Lender's receipt of such notice
from Agent (provided that if any Lender shall receive such notice at or prior to
--------
11:00 a.m. Chicago time on a Business Day, such funding shall be made by such
Lender on such
6
<PAGE>
Business Day), such Lender's Pro Rata Share of a Revolving Advance (which
Revolving Advance shall be a Base Rate Loan and shall be deemed to be requested
by U.S. Borrower) in the principal amount of such portion of the Swingline Loan
which is required to be paid to Swingline Lender under this subsection 2.1(D)
-----------------
(regardless of whether the conditions precedent thereto set forth in Section 3
---------
and the Conditions Rider are then satisfied and whether or not U.S. Borrower
----------------
has provided a Notice of U.S. Borrowing under subsection 2.1(E)(2) and whether
---------- ---------
or not any Default or Event of Default exists or all or any of the Loans have
been accelerated, but subject to the other provisions of this subsection 2.1(D).
-----------------
The proceeds of any such Revolving Advance shall be immediately paid over to
Agent for the benefit of Swingline Lender for application to the Swingline Loan.
In the event that an Event of Default shall occur and either (i) such Event of
Default is of the type described in subsection 8.1(F) or (G) hereof or (ii) no
----------------- ---
further Revolving Advances are being made under this Agreement, then so long as
any such Event of Default is continuing, each of the Lenders (other than
Swingline Lender) shall be deemed to have irrevocably, unconditionally and
immediately purchased from Swingline Lender such Lender's Pro Rata Share of the
Swingline Loan outstanding as of the date of the occurrence of such Event of
Default. Each Lender shall effect such purchase by making available an amount
equal to its participation on the date of such purchase in Dollars in
immediately available funds to Agent's Account for the benefit of Swingline
Lender. In the event any Lender fails to make available to Swingline Lender
when due the amount of such Lender's participation in the Swingline Loan,
Swingline Lender shall be entitled to recover such amount on demand from such
Lender together with interest at the Federal Funds Effective Rate. Each such
purchase by a Lender shall be made without recourse to Swingline Lender, without
representation or warranty of any kind, and shall be effected and evidenced
pursuant to documents reasonably acceptable to Swingline Lender. The
obligations of Lenders under this subsection 2.1(D) shall be absolute,
-----------------
irrevocable and unconditional, shall be made under all circumstances and shall
not be affected, reduced or impaired for any reason whatsoever.
(E) Borrowing Mechanics. (1) General. LIBOR Loans denominated in
------------------- -------
Dollars and made on any Funding Date shall be in an aggregate minimum amount of
$1,000,000 and integral multiples of $500,000 in excess thereof, and LIBOR Loans
denominated in any Optional Currency shall be in such minimum amounts and
integral multiples thereof as Agent and Borrower Representative may agree at the
time the applicable Notice of Borrowing is given, which shall be calculated so
as to approximate, as nearly as practicable, the minimum amounts and multiples
thereof applicable to LIBOR Loans denominated in Dollars. Any Loans made to
U.S. Borrower shall be in Dollars, and any Loans made to U.K. Borrower shall be
in the Available Currency specified by Borrower Representative in the applicable
Notice of Borrowing, provided that during the initial 60 day period following
--------
the Closing Date, the only Available Currency shall be Dollars. During the
period commencing on the Closing Date through the Primary Syndication Completion
Date, any requested LIBOR Loans shall be for an Interest Period of two (2)
weeks. As used herein, the term "Primary Syndication Completion Date" means the
-----------------------------------
date on which Agent has consummated the syndication of at least $41,280,000 of
the Commitments to one or more other Lenders.
(2) Advances. On any day when any Borrower desires an advance under this
--------
subsection 2.1, Borrower Representative on behalf of the applicable Borrower
- --------------
shall give Agent telephonic notice of the proposed borrowing by 1:00 p.m.
Chicago time (a) on the Funding Date of a Base Rate Loan which is to be made
through Agent to U.S. Borrower in Dollars, (b) one Business Day prior to the
Funding Date of a Base Rate Loan which is to be made through Funding Agent to
U.K. Borrower
7
<PAGE>
in Dollars, Pounds or Euros, (c) two Business Days in advance of the Funding
Date of a Base Rate Loan to U.K. Borrower which is to be made through Funding
Agent in Guilders or Francs, (d) three Business Days in advance of the Funding
Date of any Base Rate Loan which is to be made through Agent to U.K. Borrower in
any Optional Currency; and (e) three Business Days in advance of the Funding
Date of any LIBOR Loan in any Available Currency, which notice shall specify (i)
the proposed Funding Date (which shall be a Business Day), (ii) whether such
Loans shall consist of Base Rate Loans or LIBOR Loans (and, for LIBOR Loans, the
Interest Period applicable thereto), (iii) the applicable Borrower to whom such
Advance is to be made and the Available Currency or Currencies in which the
requested Loan is to be made, (iv) in the case of a requested Advance to be
denominated in an Optional Currency, the Dollar Equivalent amount thereof, and
(v) Availability as of the time such Notice of Borrowing is delivered, which
shall be determined based on the then current Borrowing Base Certificate after
giving effect to all Loans made to Borrowers and all Lender Letters of Credit
issued for the account of Borrowers since the date of such Borrowing Base
Certificate. Any such telephonic notice shall be confirmed in writing on the
same day by 2:00 p.m. Chicago time by delivery to Agent of a duly completed
Notice of Borrowing. Borrower Representative shall request, within one-half hour
prior to the issuance of a Notice of Borrowing requesting Advances in an
Optional Currency, the advice of Agent as to the Dollar Equivalent of the amount
of such Advance, and Borrower Representative shall specify such amount in such
Notice of Borrowing, provided that such advice shall not be deemed to be a
--------
prediction or guaranty of the Dollar Equivalent of such amount after the Notice
of Borrowing is submitted and shall in no way limit the Borrowers' Obligations
under this Agreement due to fluctuations in the applicable Optional Currency.
Neither Funding Agent nor any Lender shall incur any liability to any Borrower
for acting upon any telephonic notice Agent believes in good faith to have been
given by a duly authorized officer or other Person authorized to borrow on
behalf of any Borrower or for otherwise acting in good faith under this
subsection 2.1(E). Agent shall not make (or direct Funding Agent to make) on
- -----------------
behalf of Lenders, nor shall any Lender be required to make, any Advance
pursuant to any telephonic notice unless Agent has also received the most recent
Borrowing Base Certificate and all other documents required under Section 3
---------
hereof and the Reporting Rider hereto by 11:00 a.m. Chicago time on the
---------------
applicable Funding Date. Each Advance to any Borrower under this subsection
----------
2.1(E)(2) shall be deposited by wire transfer in immediately available funds
- ---------
in the applicable Available Currency or Currencies in such account or accounts
as such Borrower may from time to time designate to Agent and Funding Agent in
writing. Each such Advance may be made by Agent directly or, at the election of
Agent (subject to the provisions of subsection 9.1(A)(2)), by Funding Agent on
--------------------
behalf of Agent and Lenders. In the event Agent elects to cause Funding Agent to
make a requested Advance on behalf of Agent and Lenders, Agent shall deliver to
Funding Agent a written notice of such election, specifying the amount of the
applicable Advance, the Available Currency in which such Advance is to be made
and the Business Day in London on which such Advance is to be made. Funding
Agent shall, as promptly as practicable following the commencement of business
in London on the applicable Funding Date, make such Advances as may have been so
requested by Agent in such written notice, and Funding Agent shall have no duty
to ascertain whether Availability exists therefor or whether the conditions to
funding shall have been met (all of which shall be determined by Agent). Agent
may rescind any notice to Funding Agent directing Funding Agent to make an
Advance at any time prior to the time Funding Agent shall have actually made
such Advance. Except as permitted by subsection 9.10, without the prior
---------------
written consent of Requisite Lenders, the aggregate outstanding principal
amount of advances made to Borrowers by Funding Agent on behalf of Lenders under
this subsection 2.1(E)(2) shall not as of any date of determination exceed
--------------------
$500,000. Notwithstanding the foregoing or anything else contained in this
8
<PAGE>
Agreement to the contrary, (a) from and after the date on which (i) an Event of
Default shall have occurred and be continuing, and (ii) a Redirection Notice
shall have been delivered, the only Available Currency shall be Dollars; and (b)
in no event shall Loans denominated in more than one Optional Currency be
outstanding at any time hereunder.
(3) Special Provisions Regarding Communication Between Agent and Funding
--------------------------------------------------------------------
Agent. Promptly upon the close of business, London time, on each Business Day,
- -----
Funding Agent shall deliver or transmit to Agent a written or electronic report
regarding all activity in Borrowers' account on such Business Day in the United
Kingdom, including the amount of any payments credited to any of the Loans on
such date and the amount of any Revolving Advances made to Borrowers on such
Business Day by Funding Agent at the request of Agent.
(F) Automatic Requests. The becoming due of any amount required to be
------------------
paid under this Agreement or any of the other Loan Documents as principal,
accrued interest and fees shall be deemed irrevocably to be an automatic request
by Borrowers for a Revolving Advance, which shall be a Base Rate Loan in Dollars
or, in the event of any payment required to be made in an Optional Currency, in
such Optional Currency, on the due date of, and in the amount required to pay
(as set forth on Agent's books and records), such principal, accrued interest
and fees.
(G) Notes. Borrowers shall execute and deliver to each Lender with
-----
appropriate insertions Notes to evidence such Lender's Commitments. In the
event of an assignment under subsection 9.5, Borrowers shall, upon surrender of
--------------
the assigning Lender's Notes, issue new Notes to reflect the interest held by
the assigning Lender and its Eligible Assignee.
(H) Letters of Credit. The Revolving Loan Commitments may, in addition
-----------------
to Revolving Advances, be utilized, upon the request of U.S. Borrower, for (i)
the issuance of letters of credit denominated in Dollars by Agent or, with
Agent's consent, any Lender, for the account of U.S. Borrower or (ii) the
issuance by Agent of risk participations to banks to induce such banks to issue
Bank Letters of Credit denominated in Dollars for the account of U.S. Borrower
(each of (i) and (ii) above a "Lender Letter of Credit"). Each Lender shall be
-----------------------
deemed to have purchased a participation in each Lender Letter of Credit issued
on behalf of any Borrower in an amount equal to its Pro Rata Share thereof. In
no event shall any Lender Letter of Credit be issued to the extent that the
issuance of such Lender Letter of Credit would cause the sum of the Letter of
Credit Reserve (after giving effect to such issuance) plus the Revolving Loan to
exceed the lesser of (x) the Borrowing Base or (y) the Revolving Loan
Commitment.
(1) Maximum Amount. The aggregate amount of Letter of Credit
--------------
Liability with respect to all Lender Letters of Credit outstanding at any time
shall not exceed $2,000,000.
(2) Reimbursement. Borrowers, jointly and severally, shall be
-------------
irrevocably and unconditionally obligated forthwith without presentment, demand,
protest or other formalities of any kind, to reimburse Agent or the issuer, as
applicable, for any amounts paid with respect to a Lender Letter of Credit
including all fees, costs and expenses paid to any bank that issues a Bank
Letter of Credit. Each Borrower hereby authorizes and directs Agent, at Agent's
option, to debit Borrowers' account (by increasing the Revolving Loan) in the
amount of any payment made with respect to any Lender Letter of Credit. In the
event that Agent elects not to debit Borrowers' account
9
<PAGE>
and Borrowers fail to reimburse Agent or the issuer, as applicable, in full on
the date of any payment under a Lender Letter of Credit, Agent shall promptly
notify each Lender of the unreimbursed amount of such payment together with
accrued interest thereon and each Lender, on the next Business Day, shall
deliver to Agent an amount equal to its respective participation in same day
funds. The obligation of each Lender to deliver to Agent an amount equal to its
respective participation pursuant to the foregoing sentence shall be absolute
and unconditional and such remittance shall be made notwithstanding the
occurrence or continuation of an Event of Default or Default or the failure to
satisfy any condition set forth in Section 3. In the event any Lender fails to
---------
make available to Agent the amount of such Lender's participation in such Lender
Letter of Credit, Agent shall be entitled to recover such amount on demand from
such Lender together with interest at the Base Rate.
(3) Request for Letters of Credit. U.S. Borrower shall give Agent at
-----------------------------
least three Business Days prior notice specifying the date a Lender Letter of
Credit is to be issued, identifying the beneficiary and describing the nature of
the transactions proposed to be supported thereby. The notice shall be
accompanied by the form of the letter of credit being requested. Any letter of
credit which U.S. Borrower requests must be in such form, be for such amount,
contain such terms and support such transactions as are reasonably satisfactory
to Agent. The expiration date of each Lender Letter of Credit shall be on a
date which is at least 30 days prior to the Termination Date.
(I) Other Letter of Credit Provisions.
---------------------------------
(1) Obligations Absolute. The obligation of Borrowers, jointly and
--------------------
severally, to reimburse Agent or any Lender for payments made under, and other
amounts payable in connection with, any Lender Letter of Credit shall be
unconditional and irrevocable and shall be paid under all circumstances strictly
in accordance with the terms of this Agreement including, without limitation,
the following circumstances:
(a) any lack of validity or enforceability of any Lender Letter of
Credit, or any other agreement;
(b) the existence of any claim, set-off, defense or other right which
any Borrower, any Affiliate of any Borrower, Agent or any Lender, on the one
hand, may at any time have against any beneficiary or transferee of any Lender
Letter of Credit (or any Persons for whom any such transferee may be acting),
Agent, any Lender or any other Person, on the other hand, whether in connection
with this Agreement, the transactions contemplated herein or any unrelated
transaction (including any underlying transaction between any Borrower or any of
its Affiliates and the beneficiary of the Lender Letter of Credit);
(c) any draft, demand, certificate or any other document presented
under any Lender Letter of Credit is alleged to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect; or
(d) payment under any Lender Letter of Credit against presentation of
a demand, draft or certificate or other document which does not comply with the
terms of such Lender Letter of Credit; provided that, in the case of any payment
--------
by Agent or a Lender under any
10
<PAGE>
Lender Letter of Credit, Agent or such Lender, as the case may be, has not acted
with gross negligence or willful misconduct (as determined by a court of
competent jurisdiction) in determining that the demand for payment under such
Lender Letter of Credit complies on its face with any applicable requirements
for a demand for payment under such Lender Letter of Credit.
(2) Nature of Lender's Duties. As between Agent, any Lender that
-------------------------
issues a Lender Letter of Credit (each, an "Issuing Lender") and all other
--------------
Lenders, on the one hand, and Borrowers on the other hand, Borrowers assume all
risks of the acts and omissions of, or misuse of any Lender Letter of Credit by
the beneficiary thereof. In furtherance and not in limitation of the foregoing,
neither Agent nor any Issuing Lender shall be responsible: (a) for the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document by
any party in connection with the application for and issuance of any Lender
Letter of Credit, even if it should in fact prove to be in any or all respects
invalid, insufficient, inaccurate, fraudulent or forged; (b) for the validity or
sufficiency of any instrument transferring or assigning or purporting to
transfer or assign any Lender Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (c) for failure of the beneficiary of any
Lender Letter of Credit to comply fully with conditions required in order to
demand payment thereunder; provided that, in the case of any payment under any
--------
such Lender Letter of Credit, Agent or the Issuing Lender, as applicable, has
not acted with gross negligence or willful misconduct (as determined by a court
of competent jurisdiction) in determining that the demand for payment under any
such Lender Letter of Credit complies on its face with any applicable
requirements for a demand for payment thereunder; (d) for errors, omissions,
interruptions or delays in transmission or delivery of any messages, by mail,
cable, telegraph, telex or otherwise, whether or not they be in cipher; (e) for
errors in interpretation of technical terms; (f) for any loss or delay in the
transmission or otherwise of any document required in order to make a payment
under any such Lender Letter of Credit; (g) for the credit of the proceeds of
any drawing under any such Lender Letter of Credit; and (h) for any consequences
arising from causes beyond the control of Agent or any Issuing Lender, as the
case may be.
(3) Liability. In furtherance and extension of and not in limitation
---------
of, the specific provisions herein above set forth, any action taken or omitted
by Agent or any Lender under or in connection with any Lender Letter of Credit,
if taken or omitted in good faith, shall not put Agent or any Lender under any
resulting liability to Borrowers or any other Lender.
(J) Availability of a Lender's Pro Rata Share.
-----------------------------------------
(1) Unless Agent or Funding Agent, as applicable, receives written
notice from a Lender on or prior to any Funding Date that such Lender will not
make available to Agent or Funding Agent, as applicable, as and when required,
such Lender's Pro Rata Share of any requested Loan or Advance, each of Agent and
Funding Agent may assume that each Lender will make such amount available to it
in immediately available funds in the applicable Available Currency on the
Funding Date and each of Agent and Funding Agent may (but shall not be so
required), in reliance upon such assumption, make available to the applicable
Borrower on such Funding Date a corresponding amount.
(2) A Defaulting Lender shall pay interest at the Federal Funds
Effective Rate on the Defaulted Amount from the Business Day following the
applicable Funding Date of such
11
<PAGE>
Defaulted Amount until the date such Defaulted Amount is paid to Agent or
Funding Agent, as applicable. A notice of Agent or Funding Agent submitted to
any Lender with respect to amounts owing under this subsection shall be
conclusive, absent manifest error. If such amount is not paid when due to Agent
or Funding Agent, Agent or Funding Agent, as the case may be, at its option, may
notify Borrowers of such failure to fund and, upon demand by Agent or Funding
Agent, Borrowers shall pay the unpaid amount to Agent or Funding Agent, as
applicable, for Agent's or Funding Agent's account, together with interest
thereon for each day elapsed since the date of such borrowing, at a rate per
annum equal to the interest rate applicable at the time to the Loan made by the
other Lenders on such Funding Date. The failure of any Lender to make available
any portion of its Commitment on any Funding Date or to fund its participation
in a Lender Letter of Credit or Swingline Loan shall not relieve any other
Lender of any obligation hereunder to fund such Lender's Commitment on such
Funding Date or to fund any such participation, but no Lender shall be
responsible for the failure of any other Lender to honor its Commitment on any
Funding Date or to fund any participation to be funded by any other Lender.
(3) Neither Agent nor Funding Agent shall be obligated to transfer to
a Defaulting Lender any payment made by Borrowers to Agent or Funding Agent or
any amount otherwise received by Agent or Funding Agent for application to the
Obligations nor shall a Defaulting Lender be entitled to the sharing of any
interest, fees or payments hereunder.
(4) For purposes of voting or consenting to matters with respect to
(i) the Loan Documents or (ii) any other matter concerning the Loans, a
Defaulting Lender shall be deemed not to be a "Lender" and such Lender's
Commitments and outstanding Loans and Advances shall be deemed to be zero.
(K) Special Provisions Regarding Optional Currencies. Notwithstanding
------------------------------------------------
anything contained herein to the contrary, if any Lender shall, not later than
2:00 p.m. London time one Business Day before the Funding Date of any requested
Revolving Advance which is to be made in an Optional Currency, notify Agent and
Funding Agent that such Lender is not satisfied that deposits in the relevant
Optional Currency will be freely available to it in the relevant amount and, if
applicable, for the relevant Interest Period, the right of Borrower
Representative to request or of U.K. Borrower to receive Revolving Advances in
such Optional Currency from such Lender as part of the Notice of Borrowing
delivered in respect of such requested Revolving Advance or any subsequent
Notice of Borrowing shall be suspended until such Lender shall notify Agent and
Funding Agent that the circumstances causing such suspension no longer exist,
and, at the option of Borrower Representative, the Revolving Advance to be made
by such Lender as part of such requested borrowing (and the Revolving Advance to
be made by such Lender as part of any subsequent borrowing in respect of which
such Optional Currency shall have been requested during such period of
suspension) shall be denominated in any other Available Currency specified by
Borrower Representative which is available (or in Pounds if no such currency is
available) and having an Interest Period coextensive with the Interest Period in
effect in respect of all other Revolving Advances made in such Optional Currency
and comprising a part of such requested Revolving Advance (or having an Interest
Period of one month, if no such other Revolving Advances exist). Agent and/or
Funding Agent shall, upon becoming aware that the circumstances causing any such
suspension no longer apply, promptly so notify Borrower Representative, provided
--------
that the failure of Agent or Funding Agent to so notify Borrower Representative
shall not impair the rights of
12
<PAGE>
Lenders under this subsection 2.1(K) or expose Agent or Funding Agent to any
-----------------
liability to any Borrower, any other Loan Party or any other Person.
2.2 Interest.
--------
(A) Rate of Interest. The Loans and all other Obligations shall bear
----------------
interest from the date such Loans are made or such other Obligations become due
to the date paid at a rate per annum equal to the applicable rates set forth
below (collectively the "Interest Rate"):
-------------
(1) The Revolving Loan and all other Obligations (other than the principal
portion of the Term Loans) shall bear interest (a) if a Base Rate Loan, then at
the sum of the applicable Base Rate plus the Base Rate Margin applicable to the
----
Revolving Loan; and (b) if a LIBOR Loan, then at the sum of the applicable LIBOR
plus the LIBOR Margin applicable to the Revolving Loan;
- ----
(2) Term Loan A shall bear interest (a) if a Base Rate Loan, then at the sum
of the applicable Base Rate plus the Base Rate Margin applicable to Term Loan A;
----
and (b) if a LIBOR Loan, then at the sum of the applicable LIBOR plus the LIBOR
----
Margin applicable to Term Loan A;
(3) Term Loan B shall bear interest (a) if a Base Rate Loan, then at the sum
of the applicable Base Rate plus the Base Rate Margin applicable to Term Loan B;
----
and (b) if a LIBOR Loan, then at the sum of the applicable LIBOR plus the LIBOR
----
Margin applicable to Term Loan B; and
(4) The Swingline Loan shall bear interest at the sum of the Base Rate
applicable to Loans denominated in Dollars plus the Base Rate Margin applicable
----
to the Swingline Loan.
Subject to the provisions of subsection 2.1(E)(1), Borrower Representative shall
--------------------
designate to Agent whether a Loan shall be a Base Rate or LIBOR Rate Loan at the
time a Notice of Borrowing is given pursuant to subsection 2.1(E)(2). Such
--------------------
designation by Borrower Representative may be changed from time to time pursuant
to subsection 2.2(D). If on any day a Loan or a portion of any Loan is
-----------------
outstanding with respect to which notice has not been delivered to Agent in
accordance with the terms of this Agreement specifying the basis for determining
the rate of interest or if LIBOR has been specified and no LIBOR quote in the
applicable Available Currency is available, then for that day that Loan or
portion thereof shall bear interest determined by reference to the Base Rate
applicable to Loans in such Available Currency.
After the occurrence and during the continuance of an Event of Default (i)
the Loans and all other Obligations shall, at the option of Requisite Lenders,
bear interest at a rate per annum equal to 2% plus the applicable Interest Rate
(the "Default Rate"), (ii) each LIBOR Loan shall automatically convert to a Base
------------
Rate Loan denominated in the same Available Currency as such LIBOR Loan at the
end of any applicable Interest Period, and (iii) no Loans may be converted to
LIBOR Loans.
13
<PAGE>
(B) Computation and Payment of Interest. Interest on the Loans and all
-----------------------------------
other Obligations shall be computed on the daily principal balance on the basis
of a 360 day year (or a 365 day year, in the case of Loans denominated in
Pounds) for the actual number of days elapsed. In computing interest on any
Loan, the date of funding of the Loan or the first day of an Interest Period
applicable to such Loan or, with respect to a Base Rate Loan being converted
from a LIBOR Loan, the date of conversion of such LIBOR Loan to such Base Rate
Loan, shall be included; and the date of payment of such Loan or the expiration
date of an Interest Period applicable to such Loan, or with respect to a Base
Rate Loan being converted to a LIBOR Loan, the date of conversion of such Base
Rate Loan to such LIBOR Loan, shall be excluded; provided that if a Loan is
--------
repaid on the same day on which it is made, one day's interest shall be paid on
that Loan. Interest on Base Rate Loans and all other Obligations other than
LIBOR Loans shall be payable to Agent for benefit of Lenders monthly in arrears
on the first day of each month, on the date of any prepayment of Loans, and at
maturity, whether by acceleration or otherwise. Interest on LIBOR Loans shall be
payable to Agent for benefit of Lenders on the last day of the applicable
Interest Period for such Loan, on the date of any prepayment of the Loans, and
at maturity, whether by acceleration or otherwise. In addition, for each LIBOR
Loan having an Interest Period longer than three months, interest accrued on
such Loan shall also be payable on the last day of each three month interval
during such Interest Period. Interest on any Loan or Advance shall accrue and
shall be paid in the Available Currency in which such Loan or Advance was made.
(C) Interest Laws. Notwithstanding any provision to the contrary
-------------
contained in this Agreement or any other Loan Document, Borrowers shall not be
required to pay, and neither Agent nor any Lender shall be permitted to collect,
any amount of interest in excess of the maximum amount of interest permitted by
applicable law ("Excess Interest"). If any Excess Interest is provided for or
---------------
determined by a court of competent jurisdiction to have been provided for in
this Agreement or in any other Loan Document, then in such event: (1) the
provisions of this subsection shall govern and control; (2) neither Borrowers
nor any other Loan Party shall be obligated to pay any Excess Interest; (3) any
Excess Interest that Agent or any Lender may have received hereunder shall be,
at Agent's option, (a) applied as a credit against the outstanding principal
balance of the Obligations or accrued and unpaid interest (not to exceed the
maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any
combination of the foregoing; (4) the interest rate(s) provided for herein shall
be automatically reduced to the maximum lawful rate allowed from time to time
under applicable law (the "Maximum Rate"), and this Agreement and the other Loan
------------
Documents shall be deemed to have been and shall be, reformed and modified to
reflect such reduction; and (5) neither Borrowers nor any Loan Party shall have
any action against Agent or any Lender for any damages arising out of the
payment or collection of any Excess Interest. Notwithstanding the foregoing, if
for any period of time interest on any Obligations is calculated at the Maximum
Rate rather than the applicable rate under this Agreement, and thereafter such
applicable rate becomes less than the Maximum Rate, the rate of interest payable
on such Obligations shall remain at the Maximum Rate until each Lender shall
have received the amount of interest which such Lender would have received
during such period on such Obligations had the rate of interest not been limited
to the Maximum Rate during such period.
(D) Conversion or Continuation. Subject to the provisions of this
--------------------------
subsection 2.2, Borrower Representative, on behalf of any Borrower, shall have
- ---------------
the option to (1) convert at any
14
<PAGE>
time all or any part of outstanding Loans (other than Swingline Loans) equal to
$1,000,000 and integral multiples of $500,000 in excess of that amount (or, in
the case of Loans denominated in an Optional Currency, such other minimum amount
and integral multiples thereof as Agent and Borrower Representative may agree,
which shall be calculated so as to approximate, as nearly as practicable, the
minimum amounts and multiples thereof applicable to LIBOR Loans denominated in
Dollars) from Base Rate Loans to LIBOR Loans denominated in the same Available
Currency as the Loans so converted, or (2) upon the expiration of any Interest
Period applicable to a LIBOR Loan, to (a) continue all or any portion of such
LIBOR Loan equal to $1,000,000 and integral multiples of $500,000 in excess of
that amount (or, in the case of Loans denominated in an Optional Currency, such
other minimum amount and integral multiples thereof as Agent and Borrower
Representative may agree, which shall be calculated so as to approximate, as
nearly as practicable, the minimum amounts and multiples thereof applicable to
LIBOR Loans denominated in Dollars) as a LIBOR Loan denominated in the same
Available Currency as the Loan so converted, or (b) convert all or any portion
of such LIBOR Loan to a Base Rate Loan denominated in the same Available
Currency as the Loan so converted. The succeeding Interest Period(s) of such
continued or converted Loan commence on the last day of the Interest Period of
the Loan to be continued or converted; provided that no outstanding Loan may be
--------
continued as, or be converted into, a LIBOR Loan, when any Event of Default or
Default has occurred and is continuing.
Borrower Representative shall deliver a notice of
conversion/continuation to Agent no later than 1:00 p.m. Chicago time at least 3
Business Days in advance of the proposed conversion/ continuation date (each,
which shall be substantially in the form of Exhibit G, a "Notice of
--------- ---------
Conversion/Continuation"). A Notice of Conversion/Continuation shall certify:
- -----------------------
(1) the proposed conversion/continuation date (which shall be a Business Day);
(2) the amount of the Loan to be converted/continued and the Available Currency
in which it was denominated; (3) the nature of the proposed
conversion/continuation; (4) in the case of conversion to, or a continuation
of, a LIBOR Loan, the requested Interest Period; and (5) that no Default or
Event of Default has occurred and is continuing or would result from the
proposed conversion/continuation.
In lieu of delivering the Notice of Conversion/Continuation, Borrower
Representative may give Agent telephonic notice by the required time of any
proposed conversion/continuation under this subsection 2.2(D); provided that
----------------- --------
such notice shall be promptly confirmed in writing by delivery by Borrower
Representative of a Notice of Conversion/Continuation to Agent on or before the
proposed conversion/continuation date.
Neither Agent nor any Lender shall incur any liability to any Borrower
in acting upon any telephonic notice referred to above that Agent believes in
good faith to have been given by an officer or other person authorized to act on
behalf of Borrowers or for otherwise acting in good faith under this subsection
----------
2.2(D).
- -------
2.3 Fees.
----
(A) Unused Line Fee. Borrowers shall pay to Agent, for the benefit of
---------------
Lenders, a fee in an amount equal to the Revolving Loan Commitment less the sum
----
of (i) the average daily balance of each of the Revolving Loan and the Swingline
Loan, plus (ii) the average daily face amount of the Letter of Credit Reserve
----
during the preceding month, multiplied by .375% per
-------------
15
<PAGE>
annum, such fee to be calculated on the basis of a 360 day year for the actual
number of days elapsed and to be payable monthly in arrears in Dollars on the
first day of each month following the Closing Date.
(B) Letter of Credit Fees. Borrowers shall pay to Agent, for the
---------------------
benefit of Lenders, a fee with respect to the Lender Letters of Credit in the
amount of the average daily amount of Letter of Credit Liability outstanding
during such month, multiplied by 1.50% per annum. Such fee will be calculated
-------------
on the basis of a 360 day year for the actual number of days elapsed and will be
payable monthly in arrears in Dollars on the first day of each month. Borrowers
shall also reimburse Agent for any and all fees and expenses, if any, paid by
Agent or any Lender to the issuer of any Bank Letter of Credit.
(C) Audit Fees. Borrowers agree to pay to Agent for its own account an
----------
audit fee for each inspection equal to $750 per Agent auditor per day or any
portion thereof, together with all out of pocket expenses (including all out of
pocket fees, costs and expenses of any third party auditors retained by Agent.)
(D) Other Fees and Expenses. Borrowers shall pay to each of Agent and
-----------------------
Funding Agent, for their own respective accounts, all charges for returned items
and all other bank charges incurred by Agent or Funding Agent, as well as each
of Agent's and Funding Agent's standard wire transfer charges for each wire
transfer made under this Agreement.
(E) Agent's Fees. In addition to the foregoing, Borrowers shall pay to
------------
Agent those fees set forth in the fee letter dated as of the Closing Date
between Borrowers and Agent, such fees to be paid in the amounts, at the times,
and subject to the conditions set forth in such fee letter.
2.4 Payments and Prepayments.
------------------------
(A) Manner and Time of Payment. In its sole discretion, Agent may
--------------------------
elect to honor the automatic requests by Borrowers for Revolving Advances for
all principal, interest, fees and any other amounts due hereunder on their
applicable due dates pursuant to subsection 2.1(F), and the proceeds of each
-----------------
such Advance, if made, shall be applied as a direct payment of the relevant
Obligation. If Agent elects to bill Borrowers for any amount due hereunder,
such amount shall be immediately due and payable with interest thereon as
provided herein. All payments made by Borrowers with respect to the Obligations
shall be made without deduction, defense, setoff or counterclaim. All payments
to Agent hereunder shall, unless otherwise directed by Agent, be made to Agent's
Account or in accordance with subsection 4.26. Proceeds remitted to Agent's
---------------
Account shall be credited to the Obligations on the Business Day following the
day such proceeds were received; provided, however, proceeds remitted to Agent's
-------- -------
Account by wire transfer shall be credited to the Obligations on the same
Business Day such proceeds were received. For the purpose of calculating
interest on the Obligations, funds shall be deemed received on the same Business
Day in Chicago on which such proceeds were so received.
(B) Mandatory Prepayments.
---------------------
16
<PAGE>
(1) Overadvance. At any time that the sum of the Revolving Loan and
-----------
the Swingline Loan exceeds the Maximum Revolving Loan Amount, Borrowers shall
immediately repay the Revolving Loan and/or the Swingline Loan to the extent
necessary to reduce the aggregate principal balance to an amount equal to or
less than the Maximum Revolving Loan Amount.
(2) Proceeds of Asset Dispositions. Immediately upon receipt by any
------------------------------
Borrower or any Subsidiary thereof of proceeds of any Asset Disposition (in one
or a series of related transactions), which proceeds exceed $10,000 (it being
understood that if the proceeds exceed $10,000, the entire amount and not just
the portion above $10,000 shall be subject to this subsection 2.4(B)(2)),
---------------------
Borrowers shall prepay the Obligations in an amount equal to such proceeds. In
the case of an Asset Disposition involving any disposition of any of the assets
included in the Fixed Asset Appraisal, such prepayments shall first be applied
in payment of Scheduled Installments of Term Loan A, and shall then be applied
in payment of Scheduled Installments of Term Loan B, each in inverse order of
maturity and, at any time after the Term Loans shall have been repaid in full,
such payments shall be applied to reduce the outstanding principal balance of
the Revolving Loan (but not as a permanent reduction of the Revolving Loan
Commitment). In the case of an Asset Disposition involving any disposition of
any other assets, such prepayments shall first be applied in payment of
Scheduled Installments of Term Loan B, and shall then be applied in payment of
Scheduled Installments of Term Loan A, each in inverse order of maturity and, at
any time after the Term Loans shall have been repaid in full, such payments
shall be applied to reduce the outstanding principal balance of the Revolving
Loan (but not as a permanent reduction of the Revolving Loan Commitment). If
Borrowers reasonably expect the proceeds of any Asset Disposition to be
reinvested within 180 days to repair or replace such assets with like assets,
Borrowers shall deliver the proceeds to Agent (in the same Available Currency as
received by the applicable Loan Party) to be applied to the Revolving Loan and
Agent shall establish a reserve against available funds for borrowing purposes
under the Revolving Loan for such amount, until such time as such proceeds have
been reborrowed or applied to other Obligations as set forth herein. Borrowers
may, so long as no Default or Event of Default shall have occurred and be
continuing, reborrow such proceeds only for such repair or replacement. If
Borrowers fail to reinvest such proceeds within 180 days, Borrowers hereby
authorize Lenders to make a Revolving Advance to repay the Obligations in the
manner set forth in this subsection 2.4(B)(2).
--------------------
(3) Prepayments from Excess Cash Flow. Within 100 days after the end
---------------------------------
of each Fiscal Year, commencing with Borrowers' 1999 Fiscal Year, Borrowers
shall prepay the Obligations in Dollars in an amount equal to 25.0% of Excess
Cash Flow for such prior Fiscal Year calculated on the basis of the audited
financial statements for such Fiscal Year delivered to Agent and Lenders
pursuant to the Reporting Rider. All such prepayments from Excess Cash Flow
---------------
shall first be applied to the Scheduled Installments of Term Loan B in inverse
order of maturity until Term Loan B shall have been repaid in full. Thereafter,
within 100 days after the end of each Fiscal Year, Borrowers shall prepay the
Obligations in Dollars in an amount equal to the lesser of (a) 25.0% of Excess
Cash Flow for such prior Fiscal Year (calculated as set forth above) or (b)
$245,000, which prepayments shall be applied to the Scheduled Installments of
Term Loan A in inverse order of maturity until Term Loan A shall have been
repaid in full. Concurrently with the making of any such payment, Borrowers
shall deliver to Agent and Lenders a certificate of Borrower Representative's
chief executive officer or chief financial officer
17
<PAGE>
demonstrating its calculation of the amount required to be paid, such
certificate to be substantially in the form of Exhibit H hereto.
---------
(C) Voluntary Prepayments and Repayments. Except as provided in
------------------------------------
subsection 2.4(B) and except for repayments of the Revolving Loan from time to
- -----------------
time in the ordinary course of business without any permanent reduction in the
Revolving Loan Commitment, Borrowers' Obligations may only be prepaid or repaid
in full and not in part. Borrowers may, at any time upon not less than three
Business Days prior notice to Agent, prepay the Term Loans in full and terminate
the Revolving Loan Commitment; provided, however, the Revolving Loan Commitment
-------- -------
may not be terminated by Borrowers until all Loans are paid in full. Upon
termination of the Revolving Loan Commitment, Borrowers shall cause Agent and
each Lender to be released from all liability under any Lender Letters of Credit
or, at Agent's option, Borrowers will deposit cash collateral (in Dollars) with
Agent in an amount equal to 105% of the Letter of Credit Liability that will
remain outstanding after such termination.
(D) Payments on Business Days. Whenever any payment to be made
-------------------------
hereunder shall be stated to be due on a day that is not a Business Day, the
payment may be made on the next succeeding Business Day and such extension of
time shall be included in the computation of the amount of interest or fees due
hereunder. Except as expressly set forth herein to the contrary, all payments
made by Borrowers in respect of principal or interest on the Loans shall be made
in the same Available Currency as such Loan was made.
2.5 Term of this Agreement. This Agreement shall be effective until the
----------------------
earlier of (a) December 31, 2003 and (b) the acceleration of all Obligations
pursuant to subsection 8.3 (such earlier date being referred to as the
--------------
"Termination Date"). On the Termination Date, the Commitments shall terminate
- -----------------
(unless earlier terminated pursuant to the terms hereunder) and all Obligations
shall become immediately due and payable without notice or demand.
Notwithstanding any termination, until all Obligations have been fully paid and
satisfied, Agent and Collateral Agent, on behalf of Agent and Lenders, shall be
entitled to retain security interests in and liens upon all Collateral, and even
after payment of all Obligations hereunder, Borrowers' obligation to indemnify
Agent, Funding Agent, Collateral Agent and each Lender in accordance with the
terms hereof shall continue.
2.6 Statements. Agent shall render a monthly statement of account to
----------
Borrowers within 20 days after the end of each month. Such statement of account
shall constitute an account stated unless Borrower Representative makes written
objection thereto within 30 days from the date such statement is mailed to
Borrower Representative. Each of Agent and Funding Agent shall record in its
books and records, including computer records, the principal amount of the Loans
owing to each Lender from time to time. Agent's and Funding Agent's books and
records including computer records shall constitute presumptive evidence, absent
manifest error, of the accuracy of the information contained therein. Failure
by Agent or Funding Agent to make any such notation or record shall not affect
the obligations of Borrowers to Lenders with respect to the Loans.
2.7 Grant of Security Interest. To secure the payment and performance of
--------------------------
the Obligations, including all renewals, extensions, restructurings and
refinancings of any or all of the Obligations, each Borrower hereby grants to
Agent, on behalf of Lenders, a continuing security interest, lien and mortgage
in and to all right, title and interest of such Borrower in all of such
18
<PAGE>
Borrower's personal and real property, whether now owned or existing or
hereafter acquired or arising and regardless of where located including, without
limitation:
(A) Accounts, and all guaranties and security therefor, and all goods and
rights represented thereby or arising therefrom including the rights of
stoppage in transit, replevin and reclamation;
(B) Inventory;
(C) general intangibles (as defined in the UCC) including all agreements,
leases, licenses and contracts to which such Borrower is or may become a
party; all obligations or indebtedness owing to such Borrower (other than
Accounts) or other rights to receive payments of money from whatever source
arising and all collateral security therefor; all tax refunds and tax refund
claims; all choses in action and causes of action; and all trade secrets and
other confidential information relating to the business of such Borrower,
whether or not reduced in writing, with respect to the conduct by such
Borrower of its business not generally known by the public;
(D) documents (as defined in the UCC) or other receipts covering, evidencing
or representing goods including all bills of lading, dock warrants, dock
receipts, warehouse receipts and orders for the delivery of goods, and any
other document which in the regular course of business or financing is
treated as adequately evidencing that the person in possession of it is
entitled to receive, hold and dispose of the document and the goods it
covers;
(E) all "instruments," "chattel paper" and "letters of credit" (each as
defined in the UCC) in which such Borrower now has or hereafter acquires any
rights including, without limitation, checks, drafts, notes, bonds,
debentures and certificates of deposit;
(F) Equipment;
(G) investment property (as defined in the UCC) including, without
limitation, all securities (certificated and uncertificated), security
accounts, security entitlements, commodity contracts and commodity accounts,
as such terms are defined in the UCC;
(H) Intellectual Property;
(I) all "fixtures" (as defined in the UCC) now owned or hereafter acquired by
such Borrower including, without limitation, plant fixtures, trade fixtures
and business fixtures, wherever located, and all additions and accessions
thereto and replacements therefor;
(J) Mortgaged Property;
19
<PAGE>
(K) all deposit accounts of any Borrower maintained with any bank or
financial institution;
(L) all cash and other monies and property of any Borrower in the possession
or under the control of Agent, Funding Agent, Collateral Agent, any Lender or
any participant;
(M) all books, records, ledger cards, files, correspondence, computer
programs, tapes, disks and related data processing software that at any time
evidence or contain information relating to any of the property described
above or are otherwise necessary or helpful in the collection thereof or
realization thereon; and
(N) proceeds and products of all or any of the property described above,
including, without limitation, the proceeds of any insurance policies
covering any of the above described property.
The obligations of each Borrower under this subsection 2.7 with respect to any
--------------
property of such Borrower which is not located in the United States shall be
discharged by its execution and delivery of the Foreign Security Documents to
which it is a party.
2.8 Capital Adequacy and Other Adjustments. In the event Agent, Funding
--------------------------------------
Agent or any Lender shall have determined that the adoption after the date
hereof of any law, treaty, governmental (or quasi-governmental) rule,
regulation, guideline or order regarding capital adequacy, reserve requirements
or similar requirements or compliance by Agent, Funding Agent or such Lender or
any corporation controlling Agent, Funding Agent or such Lender with any request
or directive regarding capital adequacy, reserve requirements or similar
requirements (whether or not having the force of law and whether or not failure
to comply therewith would be unlawful) from any central bank or governmental
agency or body having jurisdiction (including without limitation any guideline
or other requirement implementing the Basle Accord) does or shall have the
effect of increasing the amount of capital, reserves or other funds required to
be maintained by Agent, Funding Agent or such Lender or any corporation
controlling Agent, Funding Agent or such Lender and thereby reducing the rate of
return on Agent's, Funding Agent's or such Lender's or such corporation's
capital as a consequence of its obligations hereunder, then Borrowers shall
within 15 days after notice and demand from such Lender or Funding Agent (in
each case with a copy to Agent) or Agent (together with the certificate referred
to in the next sentence) pay to Agent, Funding Agent or such Lender additional
amounts sufficient to compensate Agent, Funding Agent or such Lender for such
reduction. A certificate as to the amount of such cost and showing the basis of
the computation of such cost submitted by Agent, Funding Agent or any Lender to
Borrowers shall, absent manifest error, be final, conclusive and binding for all
purposes. "Basle Accord" means the statement of the Basle Committee on Banking
------------
Regulations and Supervisory Practices dated July 1988 and entitled
"International Convergence of Capital Measurement and Capital Standards", as
amended, modified, supplemented, restated or replaced.
20
<PAGE>
2.9 Taxes.
-----
(A) No Deductions. Any and all payments or reimbursements made hereunder
-------------
shall be made free and clear of and without deduction for any and all taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto; excluding, however, the following: taxes imposed on the net
income of any Lender, Agent or Funding Agent by the jurisdiction under the laws
of which Agent, Funding Agent or such Lender is organized or doing business or
any political subdivision thereof and taxes imposed on its net income by the
jurisdiction of Agent's, Funding Agent's or such Lender's applicable lending
office or any political subdivision thereof (all such taxes, levies, imposts,
deductions, charges or withholdings and all liabilities with respect thereto
excluding such taxes imposed on net income, herein "Tax Liabilities"). If a
---------------
Borrower shall be required by law to deduct any such Tax Liabilities from or in
respect of any sum payable by such Borrower hereunder to Agent, Funding Agent or
any Lender, then the sum payable hereunder shall be increased as may be
necessary so that, after making all required deductions, Agent, Funding Agent or
such Lender, as the case may be, receives an amount equal to the sum it would
have received had no such deductions been made.
(B) Changes in Tax Laws. In the event that, subsequent to the Closing Date,
-------------------
(i) any changes in any existing law, regulation, treaty or directive or in the
interpretation or application thereof, (ii) any new law, regulation, treaty or
directive enacted or any interpretation or application thereof, or (iii)
compliance by Agent, Funding Agent or any Lender with any request or directive
(whether or not having the force of law) from any governmental authority, agency
or instrumentality:
(1) does or shall subject Agent, Funding Agent or any Lender to any tax
of any kind whatsoever with respect to this Agreement, the other Loan Documents
or any Loans made or Lender Letters of Credit issued hereunder, or change the
basis of taxation of payments to Agent, Funding Agent or such Lender of
principal, fees, interest or any other amount payable hereunder (except for net
income taxes, or franchise taxes imposed in lieu of net income taxes, imposed
generally by federal, state or local taxing authorities with respect to interest
or commitment or other fees payable hereunder or changes in the rate of tax on
the overall net income of Agent, Funding Agent or such Lender); or
(2) does or shall impose on Agent, Funding Agent or any Lender any other
condition or increased cost in connection with the transactions contemplated
hereby or participations herein;
and the result of any of the foregoing is to increase the cost to Agent,
Funding Agent or such Lender of issuing any Lender Letter of Credit or making or
continuing any Loan hereunder, as the case may be, or to reduce any amount
receivable hereunder; then, in any such case, Borrowers shall promptly pay to
Agent, Funding Agent or such Lender, as the case may be, upon its demand, any
additional amounts necessary to compensate Agent, Funding Agent or such Lender,
on an after-tax basis, for such additional cost or reduced amount receivable, as
determined by Agent, Funding Agent or such Lender with respect to this Agreement
or the other Loan Documents. If Agent, Funding Agent or any Lender becomes
entitled to claim any additional amounts pursuant to this subsection, it shall
promptly notify Borrowers of the event by reason of which Agent, Funding Agent
or such Lender has become so entitled (with Funding Agent or any
21
<PAGE>
such Lender concurrently notifying Agent). A certificate as to any additional
amounts payable pursuant to the foregoing sentence submitted by Agent, Funding
Agent or any Lender to Borrowers shall, absent manifest error, be final,
conclusive and binding for all purposes.
(C) Foreign Lenders. Each Lender organized under the laws of a jurisdiction
---------------
outside the United States (a "Foreign Lender") as to which payments to be made
--------------
under this Agreement are exempt from United States withholding tax or are
subject to United States withholding tax at a reduced rate under an applicable
statute or tax treaty shall provide to Borrowers and Agent (i) a properly
completed and executed Internal Revenue Service Form 4224 or Form 1001 or other
applicable form, certificate or document prescribed by the Internal Revenue
Service of the United States certifying as to such Foreign Lender's entitlement
to such exemption or reduced rate of withholding with respect to payments to be
made to such Foreign Lender under this Agreement, (a "Certificate of
--------------
Exemption"), or (ii) a letter from any such Foreign Lender stating that it is
- ---------
not entitled to any such exemption or reduced rate of withholding (a "Letter of
---------
Non-Exemption"). Prior to becoming a Lender under this Agreement and within 15
- -------------
days after a reasonable written request of Borrowers or Agent from time to time
thereafter, each Foreign Lender that becomes a Lender under this Agreement shall
provide a Certificate of Exemption or a Letter of Non-Exemption to Borrowers and
Agent.
If a Foreign Lender is entitled to an exemption with respect to payments to
be made to such Foreign Lender under this Agreement (or to a reduced rate of
withholding) and does not provide a Certificate of Exemption to Borrowers and
Agent within the time periods set forth in the preceding paragraph, Borrowers
shall withhold taxes from payments to such Foreign Lender at the applicable
statutory rates and Borrowers shall not be required to pay any additional
amounts as a result of such withholding; provided, however, that all such
-------- -------
withholding shall cease upon delivery by such Foreign Lender of a Certificate of
Exemption to Borrowers and Agent.
(D) Deduction from Payments Made by Agent, Funding Agent or Lenders. With
---------------------------------------------------------------
prejudice to subsection 2.9(A), if Agent or Funding Agent is required to
-----------------
withhold or deduct an amount in respect of any Tax Liabilities from or in
respect of any payments made hereunder to any Lender, the relevant Borrower
shall, upon demand of Agent, pay such additional amounts to Agent or Funding
Agent, as the case may be, so that the relevant Lender receives an amount equal
to the sum it would have received had no such deductions been made.
(E) Tax on Receipts. If and to the extent that either:
---------------
(i) an amount deducted or withheld from any payment or an additional
amount payable for the account of any Lender by reason of a
deduction or withholding pursuant to subsection 2.9(A); or
-----------------
(ii) an amount in respect of increased costs payable pursuant to
subsection 2.8 or 2.9(B)
-------------- ------
is brought into account by a Lender as a receipt for the purposes of
taxation and such amount proves inadequate, by reason of the absence of a
credit, deduction or other relief which is (in any case) immediately and
effectively received, fully and immediately to indemnify the relevant Lender on
an after-tax basis against the cost, payment, deduction or withholding in
22
<PAGE>
question, the relevant Borrower will on demand pay such further sum to Agent for
the account of the relevant Lender as is necessary to remedy the inadequacy.
2.10 Required Termination and Prepayment. If on any date any Lender shall
-----------------------------------
have reasonably determined (which determination shall be final and conclusive
and binding upon all parties) that the making or continuation of its LIBOR Loans
has become unlawful or impossible by compliance by such Lender in good faith
with any law, governmental rule, regulation or order (whether or not having the
force of law and whether or not failure to comply therewith would be unlawful),
then, and in any such event, that Lender shall promptly give notice (by
telephone confirmed in writing) to Borrowers, Agent and Funding Agent of that
determination. Subject to prior withdrawal of a Notice of Borrowing or a Notice
of Conversion/Continuation or prepayment of LIBOR Loans as contemplated by
subsection 2.12, the obligation of such Lender to make or maintain its LIBOR
- ---------------
Loans during any such period shall be terminated at the earlier of the
termination of the Interest Period then in effect or when required by law and
Borrowers shall, no later than the termination of the Interest Period in effect
at the time any such determination pursuant to this subsection 2.10 is made, or
---------------
earlier when required by law, repay or prepay LIBOR Loans together with all
interest accrued thereon or convert LIBOR Loans to Base Rate Loans.
2.11 Optional Prepayment/Replacement of Lenders in Respect of Increased
-------------------------------------------------------------------
Costs. Within 15 days after receipt by Borrowers of written notice and demand
- -----
from any Lender (an "Affected Lender") for payment of additional costs as
---------------
provided in subsection 2.8 or subsection 2.9, Borrowers may, at their option,
-------------- --------------
notify Agent and such Affected Lender of their intention to do one of the
following:
(a) Borrowers may obtain, at Borrowers' expense, a replacement Lender
("Replacement Lender") for such Affected Lender, which Replacement Lender shall
- --------------------
be reasonably satisfactory to Agent. In the event Borrowers obtain a
Replacement Lender within 90 days following notice of their intention to do so,
the Affected Lender shall sell and assign its Loans and Commitments to such
Replacement Lender provided, that Borrowers have reimbursed such Affected Lender
--------
for its increased costs for which it is entitled to reimbursement under this
Agreement through the date of such sale and assignment; or
(b) Borrowers may prepay in full all outstanding Obligations owed to such
Affected Lender and terminate such Affected Lender's Commitments. Borrowers
shall, within 90 days following notice of their intention to do so, prepay in
full all outstanding Obligations owed to such Affected Lender, including such
Affected Lender's increased costs for which it is entitled to reimbursement
under this Agreement through the date of such prepayment and terminate such
Affected Lender's Commitments.
2.12 Compensation. Borrowers shall compensate each Lender, upon written
------------
request by such Lender (which request shall set forth in reasonable detail the
basis for requesting such amounts and which shall, absent manifest error, be
conclusive and binding upon all parties hereto), for all reasonable losses,
expenses and liabilities including, without limitation, any loss sustained by
such Lender in connection with the re-employment of such funds: (i) if for any
reason (other than a default by such Lender) a borrowing of any LIBOR Loan does
not occur on a date specified therefor in a Notice of Borrowing, a Notice of
Conversion/Continuation or a telephonic request for borrowing or
conversion/continuation; (ii) if any prepayment of any of its
23
<PAGE>
LIBOR Loans occurs on a date that is not the last day of an Interest Period
applicable to that Loan; (iii) if any prepayment of any of its LIBOR Loans is
not made on any date specified in a notice of prepayment given by Borrowers; or
(iv) as a consequence of any other default by Borrowers to repay their LIBOR
Loans when required by the terms of this Agreement; provided that during the
--------
period while any such amounts have not been paid, Agent and Funding Agent shall
reserve an equal amount from amounts otherwise available to be borrowed under
the Revolving Loan.
2.13 Booking of LIBOR Loans. Each Lender may make, carry or transfer LIBOR
----------------------
Loans and/or any Loans denominated in any particular Available Currency at, to,
or for the account of, any of its branch offices or the office of an affiliate
of such Lender.
2.14 Assumptions Concerning Funding of LIBOR Loans. Calculation of all
---------------------------------------------
amounts payable to Lenders under subsection 2.12 shall be made as though each
---------------
Lender had actually funded its relevant LIBOR Loan through the purchase of a
LIBOR deposit bearing interest at LIBOR in an amount equal to the amount of that
LIBOR Loan and having maturity comparable to the relevant Interest Period and
through the transfer of such LIBOR deposit from an offshore office to a domestic
office in the United States of America; provided, however, that each Lender may
-------- -------
fund each of its LIBOR Loans in any manner it sees fit and the foregoing
assumption shall be utilized only for the calculation of amounts payable under
subsection 2.12.
- ---------------
2.15 Appointment of Borrower Representative. U.K. Borrower hereby designates
--------------------------------------
U.S. Borrower as its representative and agent on its behalf for the purposes of
executing and delivering Borrowing Base Certificates, Notices of Borrowing,
Notices of Conversion/Continuation, Compliance Certificates and other reports
and certificates required to be delivered hereunder, giving and receiving all
other notices and consents hereunder or under any of the other Loan Documents
and taking all other actions (including in respect of compliance with covenants)
on behalf of such Borrower under the Loan Documents. U.S. Borrower hereby
accepts such appointment. Agent, Funding Agent, Collateral Agent or any Lender
may regard any notice or other communication pursuant to any Loan Document from
Borrower Representative as a notice or communication from all Borrowers, and may
give any notice or communication required or permitted to be given to any
Borrower or Borrowers hereunder to Borrower Representative on behalf of such
Borrower or Borrowers. Each Borrower agrees that each notice, election,
representation and warranty, covenant, agreement and undertaking made on its
behalf by Borrower Representative shall be deemed for all purposes to have been
made by such Borrower and shall be binding upon and enforceable against such
Borrower to the same extent as if the same had been made directly by such
Borrower.
SECTION 3. CONDITIONS TO LOANS
-------------------
The obligations of Agent, Funding Agent and each Lender to make Loans and the
obligation of Agent or any Lender to issue Lender Letters of Credit on the
Closing Date and on each Funding Date are subject to satisfaction of all of the
terms and conditions set forth in this Agreement and in the Conditions Rider
----------------
attached hereto and the accuracy of all the representations and warranties of
Borrowers and the other Loan Parties set forth herein and in the other Loan
Documents.
SECTION 4. BORROWERS' REPRESENTATIONS, WARRANTIES
--------------------------------------
24
<PAGE>
AND CERTAIN COVENANTS
---------------------
To induce Agent, Funding Agent, Collateral Agent and each Lender to
enter into the Loan Documents, to make and to continue to make Loans and to
issue and to continue to issue Lender Letters of Credit, Borrowers jointly and
severally represent, warrant and covenant to Agent, Funding Agent, Collateral
Agent and each Lender that, after giving effect to the consummation of the
transactions contemplated hereunder, the following statements are and will be
true, correct and complete and, unless specifically limited, shall remain so for
so long as any of the Commitments hereunder shall be in effect and until payment
in full of all Obligations:
4.1 Organization, Powers, Capitalization.
------------------------------------
(A) Organization and Powers. Each of the Loan Parties is a
-----------------------
corporation duly organized, validly existing and, in the case of U.S. Borrower
and each other Loan Party domiciled in the United States of America, in good
standing under the laws of its jurisdiction of incorporation and qualified to do
business in all jurisdictions where such qualification is required except where
failure to be so qualified could not reasonably be expected to have a Material
Adverse Effect. Each of the Loan Parties has all requisite corporate power and
authority to own and operate its properties, to carry on its business as now
conducted and proposed to be conducted and to enter into each Loan Document.
(B) Capitalization. The authorized capital stock of each of the Loan
--------------
Parties and its respective Subsidiaries is as set forth on Schedule 4.1(B),
---------------
which Schedule includes a description of all preemptive or other outstanding
rights, options, warrants, conversion rights or similar agreements or
understandings for the purchase or acquisition from any Loan Party of any shares
of capital stock or other securities of any such entity. All issued and
outstanding shares of capital stock of each of the Loan Parties are duly
authorized and validly issued, fully paid, nonassessable, free and clear of all
Liens other than those in favor of Agent or Collateral Agent, as applicable, for
the benefit of Lenders, and such shares were issued in compliance with all
applicable state, federal and foreign laws concerning the issuance of
securities. Each Loan Party will promptly notify Agent of any change in its
ownership or corporate structure.
4.2 Authorization of Borrowing, No Conflict. Each Borrower has the
---------------------------------------
corporate power and authority to incur the Obligations and to grant security
interests in the Collateral. On the Closing Date, the execution, delivery and
performance of the Loan Documents by each Loan Party signatory thereto will have
been duly authorized by all necessary corporate and shareholder action. The
execution, delivery and performance by each Loan Party of each Loan Document to
which it is a party and the consummation of the transactions contemplated by the
Loan Documents by each Loan Party do not contravene any applicable law
(including without limitation Section 151 of the Companies Act), the corporate
charter or bylaws (or equivalent organizational documents) of any Loan Party or
any agreement or order by which any Loan Party or any Loan Party's property is
bound. The Loan Documents are the legally valid and binding obligations of the
applicable Loan Parties respectively, each enforceable against the Loan Parties,
as applicable, in accordance with their respective terms.
4.3 Financial Condition. All financial statements concerning Borrowers
-------------------
and their respective Subsidiaries furnished by or on behalf of any Borrower or
any such Subsidiary to
25
<PAGE>
Agent, Funding Agent or any Lender pursuant to this Agreement have been prepared
in accordance with GAAP consistently applied throughout the periods involved
(except as disclosed therein) and present fairly the financial condition of the
Persons covered thereby as at the dates thereof and the results of their
operations for the periods then ended. The Projections delivered by Borrowers
will be prepared in light of the past operations of the business of Borrowers
and their respective Subsidiaries, and such Projections will represent the good
faith estimate of Borrowers and their senior management concerning the most
probable course of their business as of the date such Projections are delivered.
4.4 Indebtedness and Liabilities. As of the Closing Date, neither any
----------------------------
Borrower nor any Subsidiary thereof has (a) any Indebtedness except as reflected
on the most recent financial statements delivered to Agent and Lenders; or (b)
any Liabilities other than as reflected on the most recent financial statements
delivered to Agent and Lenders or as incurred in the ordinary course of business
following the date of such most recent financial statements delivered to Agent
and Lenders. Borrowers shall promptly deliver copies of all notices given or
received by any Borrower or any Subsidiary thereof with respect to noncompliance
with any term or condition related to the Subordinated Debt or any other
Indebtedness, and shall promptly notify Agent of any potential or actual Event
of Default with respect to the Subordinated Debt or any other Indebtedness.
4.5 Account Warranties. Except as otherwise disclosed to Agent in writing,
------------------
Borrowers represent and warrant as to each Account that: at the time of its
creation, the Account is a valid, bona fide account, representing an undisputed
indebtedness incurred by the named account debtor for goods actually sold and
delivered or for services completely rendered; there are no setoffs, offsets or
counterclaims, genuine or otherwise, against the Account; the Account does not
represent a sale to an Affiliate or a consignment, sale or return or a bill and
hold transaction; no agreement exists permitting any deduction or discount
(other than the discount stated on the invoice); the applicable Borrower is the
lawful owner of the Account and has the right to assign the same to Agent or
Collateral Agent, as applicable, for the benefit of Lenders; the Account is free
of all security interests, liens and encumbrances other than those in favor of
Agent or Collateral Agent, as applicable, on behalf of Lenders, and the Account
is due and payable in accordance with its terms.
4.6 Names and Locations. Schedule 4.6 sets forth all names, trade names,
------------------- ------------
fictitious names and business names under which each Borrower currently conducts
business or has at any time during the past five years conducted business and
the name of any entity which any Borrower has acquired in whole or in part or
from whom any Borrower has acquired a significant amount of assets within the
past five years and sets forth the location of each Borrower's principal place
of business, the location of each Borrower's books and records, the location of
all other offices of each Borrower and all Collateral locations, and such
locations are the applicable Borrower's sole locations for its business and the
Collateral. Each Borrower and each of their respective Subsidiaries will give
Agent at least 30 days advance written notice of: (a) any change of name or of
any new trade name or fictitious business name, (b) any change of principal
place of business, (c) any change in the location of such party's books and
records or the Collateral, or (d) any new location for such Person's books and
records or the Collateral. Agent shall have given its prior written consent to
any such new principal place of business or other new location in the event that
U.S. Borrower proposes to move its principal place of business or the location
where
26
<PAGE>
its books and records are kept to a location outside of the United States or
proposes to establish any new Collateral location which is not in the United
States or the Netherlands, or in the event U.K. Borrower proposes to move its
principal place of business or the location where its books and records are
kept, or proposes to establish any new Collateral location, to a location
outside of England.
4.7 Title to Properties; Liens. Each Borrower and each of their
--------------------------
respective Subsidiaries has good, sufficient and legal title to all of its
respective material properties and assets, in each case, free and clear of all
Liens except Permitted Encumbrances.
4.8 Litigation; Adverse Facts. There are no judgments outstanding against
-------------------------
any Loan Party or affecting any property of any Loan Party nor is there any
action, charge, claim, demand, suit, proceeding, petition, governmental
investigation or arbitration now pending or, to the best knowledge of any
Borrower after due inquiry, threatened against or affecting any Loan Party or
any property of any Loan Party which could reasonably be expected to result in
any Material Adverse Effect. Promptly upon any officer of any Borrower or any
of their respective Subsidiaries obtaining knowledge of (a) the institution of
any action, suit, proceeding, governmental investigation or arbitration against
or affecting any Loan Party or any property of any Loan Party not previously
disclosed by Borrowers to Agent or (b) any material development in any action,
suit, proceeding, governmental investigation or arbitration at any time pending
against or affecting any Loan Party or any property of any Loan Party which
could reasonably be expected to have a Material Adverse Effect, Borrowers will
promptly give notice thereof to Agent and provide such other information as may
be reasonably available to them to enable Agent and its counsel to evaluate such
matter. For the purpose of providing full disclosure to Agent and Lenders,
Borrowers have set forth on Schedule 4.8 a list and brief description of pending
------------
litigation to which any Borrower is a party, provided that Borrowers represent
--------
and warrant that no such litigation could reasonably be expected to result in
any Material Adverse Effect.
4.9 Payment of Taxes. All necessary tax returns and reports of each Loan
----------------
Party required to be filed by any of them have been timely filed and are
complete and accurate in all material respects. All taxes, assessments, fees
and other governmental charges which are due and payable by any Loan Party have
been paid when due; provided that no such tax need be paid if the applicable
--------
Loan Party is contesting same in good faith by appropriate proceedings promptly
instituted and diligently conducted and if such Loan Party has established
appropriate reserves as shall be required in conformity with GAAP. As of the
Closing Date, none of the tax returns of any Loan Party are under audit and
Borrowers shall promptly notify Agent in the event that any Loan Party's tax
returns become the subject of an audit. No tax liens have been filed against
any Loan Party. No material claim is being asserted with respect to any taxes
payable by any Loan Party. The charges, accruals and reserves on the books of
each Loan Party in respect of any taxes or other governmental charges are in
accordance with GAAP. U.S. Borrower's federal tax identification number is 95-
3528840.
4.10 Performance of Agreements. None of the Loan Parties and none of their
-------------------------
respective Subsidiaries is in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
material contractual obligation of any such Person, and no condition exists
that, with the giving of notice or the lapse of time or both, would constitute
such a default.
27
<PAGE>
4.11 Employee Benefit Plans. Each Loan Party and each ERISA Affiliate is
----------------------
in compliance, and will continue to remain in compliance, in all material
respects with all applicable provisions of ERISA, the IRC and all other
applicable federal, state or foreign laws and the regulations and
interpretations thereof with respect to all Employee Benefit Plans. No material
liability has been incurred by any Loan Party or any ERISA Affiliate which
remains unsatisfied for any funding obligation, taxes or penalties with respect
to any Employee Benefit Plan. Neither any Borrower nor any of their respective
Subsidiaries shall establish any new Employee Benefit Plan or amend any existing
Employee Benefit Plan if the liability or increased liability resulting from
such establishment or amendment is material.
4.12 Intellectual Property. Each Borrower and each of their respective
---------------------
Subsidiaries owns, is licensed to use or otherwise has the right to use, all
Intellectual Property used in or necessary for the conduct of its business as
currently conducted, and all such Intellectual Property is identified on
Schedule 4.12.
- -------------
4.13 Broker's Fees. No broker's or finder's fee or commission will be
-------------
payable with respect to any of the transactions contemplated hereby.
4.14 Environmental Compliance. Each Loan Party is in compliance with all
------------------------
applicable Environmental Laws, except for where failure to be in compliance
could not be expected to subject the Loan Parties to liabilities, costs or
expenses in excess of $250,000 in the aggregate. There are no claims,
liabilities, Liens, investigations, litigation, administrative proceedings,
whether pending or threatened, or judgments or orders relating to any Hazardous
Materials asserted or threatened against any Loan Party or relating to any real
property currently or formerly owned, leased or operated by any Loan Party
except for the matters disclosed on Schedule 4.8, none of which could reasonably
------------
be expected to result in a Material Adverse Effect. Notwithstanding anything
contained herein to the contrary, in relation to any matter under Environmental
Laws of the United Kingdom (a) U.K. Borrower shall not be obligated to notify
Agent, Funding Agent, Collateral Agent or any Lender of the existence of any
actual or potential Environmental Claim or environmental condition (except where
such Environmental Claim or environmental condition is likely to have a Material
Adverse Effect), and (b) neither Agent, Funding Agent, Collateral Agent nor any
Lender shall be entitled to take any steps in relation to any such matter except
where the failure to take such steps would be likely to have a Material Adverse
Effect.
4.15 Solvency. From and after the date of this Agreement (a) U.S. Borrower:
--------
(i) owns assets the fair salable value of which are greater than the total
amount of its liabilities (including contingent liabilities); (ii) has capital
that is not unreasonably small in relation to its business as presently
conducted or any contemplated or undertaken transaction; and (iii) does not
intend to incur and does not believe that it will incur debts beyond its ability
to pay such debts as they become due; and (b) U.K. Borrower (i) is not and will
not be unable to pay its debts within the meaning of Section 123 of the
Insolvency Act of 1986 (England and Wales); (ii) is not and will not become
unable to pay its debts as they fall due; and (iii) has not and will not suspend
or threaten to suspend making payments (whether of principal, interest, or
otherwise) with respect to all or any class of its debts.
28
<PAGE>
4.16 Disclosure. No representation or warranty of any Borrower, any of
----------
their respective Subsidiaries or any other Loan Party contained in this
Agreement, the financial statements, the other Loan Documents, or any other
document, certificate or written statement furnished to Agent, Funding Agent or
any Lender by or on behalf of any such Person for use in connection with the
Loan Documents contains any untrue statement of a material fact or omitted,
omits or will omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading in light of the
circumstances in which the same were made. There is no material fact known to
any Borrower that has had or could have a Material Adverse Effect and that has
not been disclosed herein or in such other documents, certificates and
statements furnished to Agent, Funding Agent or any Lender for use in connection
with the transactions contemplated hereby.
4.17 Insurance. Each Borrower and each of their respective Subsidiaries
---------
maintains adequate insurance policies for public liability, property damage,
product liability, and business interruption with respect to its business and
properties and the business and properties of its Subsidiaries against loss or
damage of the kinds customarily carried or maintained by Persons of established
reputation engaged in similar businesses and in amounts acceptable to Agent.
Each Borrower shall cause Agent or Collateral Agent, as applicable, for itself
and on behalf of Lenders, to be named as loss payee on all insurance policies
relating to any Collateral and shall cause Agent, Collateral Agent and each
Lender to be named as additional insured under all liability policies, in each
case pursuant to appropriate endorsements in form and substance satisfactory to
Agent and shall collaterally assign to Agent or Collateral Agent, as applicable,
for itself and on behalf of Lenders, as security for the payment of the
Obligations, all business interruption insurance of Borrowers. On or prior to
the Closing Date Borrowers shall, at their expense, obtain a key man life
insurance policy of at least $1,000,000 insuring the life of David L. Lokken,
which policy shall be issued by an insurer acceptable to Agent and with respect
to which Agent, for the benefit of Agent and Lenders, shall be named as sole
loss payee. Borrowers represent and warrant that no notice of cancellation has
been received with respect to any such policies and each Borrower and each of
their respective Subsidiaries is in compliance with all conditions contained in
any such policies. Borrowers shall apply any proceeds received from any
policies of insurance relating to any Collateral to the Obligations as set forth
in subsection 2.4(B). In the event any Borrower fails to provide Agent with
-----------------
evidence of the insurance coverage required by this Agreement, Agent may, but is
not required to, purchase insurance at Borrowers' expense to protect Agent's,
Collateral Agent's and the Lenders' interests in the Collateral. This insurance
may, but need not, protect Borrowers' interests. The coverage purchased by
Agent may not pay any claim made by any Borrower or any claim that is made
against any Borrower in connection with the Collateral. Borrowers may later
cancel any insurance purchased by Agent, but only after providing Agent with
evidence that Borrowers have obtained insurance as required by this Agreement.
If Agent purchases insurance for the Collateral, Borrowers will be responsible
for the costs of that insurance, including interest thereon and other charges
imposed on Agent in connection with the placement of the insurance, until the
effective date of the cancellation or expiration of the insurance, and such
costs may be added to the Obligations. The costs of the insurance may be more
than the cost of insurance Borrowers are able to obtain on their own.
4.18 Compliance with Laws. No Loan Party is in violation of any law,
--------------------
ordinance, rule, regulation, order, policy, guideline or other requirement of
any Governmental Authority having jurisdiction over the conduct of its business
or the ownership of its properties, including, without limitation, any
Environmental Law, which violation would subject any Loan Party or any of their
29
<PAGE>
respective officers to criminal liability or would have a Material Adverse
Effect, and no such violation has been alleged.
4.19 Bank Accounts. Schedule 4.19 sets forth the account numbers and
------------- -------------
locations of all bank accounts of each Borrower and their respective
Subsidiaries. No Borrower shall establish any new bank accounts, or amend or
terminate any Blocked Account or lockbox agreement, without Agent's prior
written consent.
4.20 Employee Matters. Except as set forth on Schedule 4.20, (a) no Loan
---------------- -------------
Party nor any of such Loan Party's employees is subject to any collective
bargaining agreement, (b) no petition for certification or union election is
pending with respect to the employees of any Loan Party and no union or
collective bargaining unit has sought such certification or recognition with
respect to the employees of any Loan Party, and (c) there are no strikes,
slowdowns, work stoppages or controversies pending or, to the best knowledge of
Borrowers after due inquiry, threatened between any Loan Party and its
respective employees, other than employee grievances arising in the ordinary
course of business, which could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. Except as set
forth on Schedule 4.20, no Loan Party is subject to an employment contract.
-------------
4.21 Governmental Regulation. None of the Loan Parties is subject to
-----------------------
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act or the Investment Company Act of 1940 or to any statute or regulation
of any Governmental Authority limiting its ability to incur indebtedness for
borrowed.
4.22 Access to Accountants and Management. Each Borrower authorizes Agent
------------------------------------
or its designee (which may include Funding Agent) and Lenders to discuss the
financial condition and financial statements of Borrowers and their respective
Subsidiaries with Borrowers' Accountants upon reasonable notice to Borrowers of
its intention to do so, and authorizes Borrowers' Accountants to respond to all
of Agent's inquiries. Agent may and, with the consent of Agent, which will not
be unreasonably denied, each Lender may, confer with each Borrower's management
directly regarding Borrowers' business, operations and financial condition.
4.23 Inspection. Each Borrower shall permit Agent or its designee (which
----------
may include Funding Agent) and any authorized representatives designated by
Agent to visit and inspect any of the properties of each Borrower or any of
their respective Subsidiaries, including their financial and accounting records,
and, in conjunction with such inspection, to make copies and take extracts
therefrom, and to discuss their affairs, finances and business with their
officers and Borrowers' Accountants, at such reasonable times during normal
business hours and as often as may be reasonably requested. Each Lender may,
with the consent of Agent which will not be unreasonably denied, accompany Agent
on any such visit or inspection.
4.24 Collateral Records. Each Borrower shall keep full and accurate books
------------------
and records relating to the Collateral and shall mark such books and records to
indicate Agent's (or Collateral Agent's, as applicable) security interests in
the Collateral, for the benefit of Lenders.
4.25 Account Covenants; Verification. Each Borrower shall, at its own
-------------------------------
expense: (a) cause all invoices evidencing Accounts and all copies thereof to
bear a notice that such invoices
30
<PAGE>
are payable to the applicable lockboxes established in accordance with
subsection 4.26 and (b) use its best efforts to assure prompt payment of all
- ---------------
amounts due or to become due under the Accounts. No discounts, credits or
allowances (other than in the ordinary course of business consistent with past
practices) will be issued, granted or allowed by any Borrower to customers and
no returns will be accepted without Agent's prior written consent; provided,
--------
that until Agent notifies Borrowers to the contrary, Borrowers may presume
consent. The applicable Borrower will promptly notify Agent in the event that a
customer alleges any dispute or claim with respect to an Account or of any other
circumstances known to such Borrower that may impair the validity or
collectibility of an Account. Agent shall have the right, at any time or times
hereafter, to verify the validity, amount or any other matter relating to an
Account, by mail, telephone or in person. After the occurrence of a Default or
an Event of Default, no Borrower shall, without the prior consent of Agent,
adjust, settle or compromise the amount or payment of any Account, or release
wholly or partly any customer or obligor thereof, or allow any credit or
discount thereon.
4.26 Collection of Accounts and Payments. (A) U.S. Borrower. U.S.
----------------------------------- -------------
Borrower shall establish lockboxes and blocked accounts (collectively, "U.S.
----
Blocked Accounts") in such Borrower's name with such banks ("U.S. Collecting
- ---------------- ---------------
Banks") as are acceptable to Agent (subject to irrevocable instructions
- -----
acceptable to Agent as hereinafter set forth) to which all account debtors shall
directly remit all payments on Accounts of U.S. Borrower and in which U.S.
Borrower will immediately deposit all payments made for Inventory or other
payments constituting proceeds of Collateral in the identical form in which such
payment was made, whether by cash or check. The U.S. Collecting Banks shall
acknowledge and agree, in a manner satisfactory to Agent, that all payments made
to the U.S. Blocked Accounts are the sole and exclusive property of Agent, for
the benefit of Agent and Lenders, and that the U.S. Collecting Banks have no
right to setoff against the U.S. Blocked Accounts and that all such payments
received will be promptly transferred to Agent's Account. U.S. Borrower hereby
agrees that all payments made to such U.S. Blocked Accounts or otherwise
received by Agent and whether on the Accounts of U.S. Borrower or as proceeds of
other Collateral of U.S. Borrower or otherwise will be the sole and exclusive
property of Agent, for the benefit of Agent and Lenders. U.S. Borrower shall
irrevocably instruct each U.S. Collecting Bank to promptly transfer all payments
or deposits to the U.S. Blocked Accounts into Agent's Account. If any Borrower,
or any of their respective Affiliates, employees, agents or other Person acting
for or in concert with such Borrower, shall receive any monies, checks, notes,
drafts or any other payments relating to and/or proceeds of Accounts or other
Collateral of U.S. Borrower, such Borrower or such Person shall hold such
instrument or funds in trust for Agent for the benefit of Agent and Lenders,
and, immediately upon receipt thereof, shall remit the same or cause the same to
be remitted, in kind, to the U.S. Blocked Accounts or to Agent at its address
set forth in subsection 10.3 below.
---------------
(B) U.K. Borrower. U.K. Borrower shall establish lockboxes and blocked
-------------
accounts (collectively, "U.K. Blocked Accounts") in such Borrower's name with
---------------------
such banks ("U.K. Collecting Banks") as are acceptable to Agent (subject to
---------------------
irrevocable instructions acceptable to Agent as hereinafter set forth) to which
all account debtors shall directly remit all payments on Accounts and in which
such Borrower will immediately deposit all payments made for Inventory or other
payments constituting proceeds of Collateral in the identical form in which such
payment was made, whether by cash or check. Each U.K. Collecting Bank shall
acknowledge and agree, in a manner satisfactory to Agent, that from and after
the date Collateral Agent (with the prior consent of Agent) delivers a notice
(a "Redirection Notice") to such U.K.
------------------
31
<PAGE>
Collecting Bank, all payments made to the U.K. Blocked Accounts maintained at
such U.K. Collecting Bank are the sole and exclusive property of Collateral
Agent, for the benefit of Agent and Lenders, and that such U.K. Collecting Bank
has no right to setoff against the U.K. Blocked Accounts maintained by it and
that all such payments received will be promptly transferred to Agent's Account.
Prior to the delivery of a Redirection Notice to a U.K. Collecting Bank, such
U.K. Collecting Bank may follow any directions given to it by U.K. Borrower with
respect to the disposition of such funds in the U.K. Blocked Accounts maintained
at such U.K. Collecting Bank. U.K. Borrower hereby agrees that, from and after
the delivery of a Redirection Notice, all payments made to such U.K. Blocked
Accounts or otherwise received by Agent, Collateral Agent or Funding Agent and
whether on the Accounts of U.K. Borrower or as proceeds of other Collateral of
U.K. Borrower or otherwise will be the sole and exclusive property of Collateral
Agent, for the benefit of Agent and Lenders. U.K. Borrower shall irrevocably
instruct each U.K. Collecting Bank to promptly transfer all payments or deposits
to the U.K. Blocked Accounts into Agent's Account from and after the delivery of
a Redirection Notice. If any Borrower, or any of their respective Affiliates,
employees, agents or other Person acting for or in concert with such Borrower,
shall receive any monies, checks, notes, drafts or any other payments relating
to and/or proceeds of Accounts of U.K. Borrower or other Collateral of U.K.
Borrower, such Borrower or such Person shall hold such instrument or funds in
trust for Collateral Agent for the benefit of Agent and Lenders, and,
immediately upon receipt thereof, shall remit the same or cause the same to be
remitted, in kind, to the U.K. Blocked Accounts or to Agent at its address set
forth in subsection 10.3 below.
---------------
4.27 Inventory Warranties and Covenants. Borrowers hereby represent and
----------------------------------
warrant that no Inventory included in the Borrowing Base at any time shall be
subject to any title retention arrangement or similar arrangement by any seller
or vendor of such Inventory.
4.28 Shipments of Exchange Inventory and Work in Process. In the event any
---------------------------------------------------
Borrower proposes to ship any Exchange Inventory and Work in Process to a
customer location in the United States which customer location is not in any of
the States of Alabama, Arizona, California, Florida, Georgia, Hawaii, Illinois,
Indiana, Kansas, Kentucky, Minnesota, Missouri, New York, North Carolina,
Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas or Washington,
such Borrower shall give Agent at least 30 days prior written notice of such
shipment and shall duly execute and deliver such additional UCC-1 financing
statements as may be requested by Agent in order to more fully perfect Agent's
Lien in the Exchange Inventory and Work in Process to be shipped to such
additional location.
Borrowers may amend any one or more of the Schedules referred in this Section
-------
4 (subject to prior notice to Agent, as applicable) and any representation,
- -
warranty, or covenant contained herein which refers to any such Schedule shall
from and after the date of any such amendment refer to such Schedule as so
amended; provided, however, that in no event shall the amendment of any such
-------- -------
Schedule constitute a waiver by Agent and Lenders of any Default or Event of
Default that exists notwithstanding the amendment of such Schedule.
32
<PAGE>
SECTION 5. REPORTING AND OTHER AFFIRMATIVE COVENANTS
-----------------------------------------
Each Borrower covenants and agrees that, so long as any of the Commitments
hereunder shall be in effect and until payment in full of all Obligations, such
Borrower shall perform, and shall cause each of its Subsidiaries to perform, all
covenants in this Section 5.
---------
5.1 Financial Statements and Other Reports. Borrowers will deliver to
--------------------------------------
Agent and each Lender (unless specified to be delivered solely to Agent) the
financial statements and other reports contained in the Reporting Rider attached
---------------
hereto.
5.2 Endorsement. Each Borrower hereby constitutes and appoints each of
-----------
Agent, Funding Agent and Collateral Agent and all Persons designated by Agent
(or by Funding Agent or Collateral Agent with the consent of Agent) for that
purpose as such Borrower's true and lawful attorney-in-fact, with power to
endorse such Borrower's name to any of the items of payment or proceeds
described in subsection 4.26 above and all proceeds of Collateral that come into
---------------
Agent's, Funding Agent's or Collateral Agent's possession or under Agent's,
Funding Agent's or Collateral Agent's control. Both the appointment of each of
Agent, Funding Agent and Collateral Agent as each Borrower's attorney and each
of Agent's, Funding Agent's and Collateral Agent's rights and powers are coupled
with an interest and are irrevocable until payment in full and complete
performance of all of the Obligations.
5.3 Maintenance of Properties. Each Borrower will, and will cause each of
-------------------------
its Subsidiaries to, maintain or cause to be maintained in good repair, working
order and condition all material properties used in the business of such
Borrower and each such Subsidiary and will, and will cause each of its
Subsidiaries to, make or cause to be made all appropriate repairs, renewals and
replacements thereof.
5.4 Compliance with Laws. Each Borrower will, and will cause each of its
--------------------
Subsidiaries to, comply with the requirements of all applicable laws, rules,
regulations and orders of any Governmental Authority as now in effect and which
may be imposed in the future in all jurisdictions in which such Borrower or any
of its Subsidiaries is now doing business or may hereafter be doing business,
other than those laws the noncompliance with which would not have a Material
Adverse Effect.
5.5 Further Assurances. Each Borrower shall, and shall cause each of its
------------------
Subsidiaries to, from time to time, execute such guaranties, financing or
continuation statements, documents, security agreements, reports and other
documents or deliver to Agent (or to Funding Agent or Collateral Agent at the
request of Agent) such instruments, certificates of title, mortgages, deeds of
trust, or other documents as Agent at any time may reasonably request to
evidence, perfect or otherwise implement the guaranties and security for
repayment of the Obligations provided for in the Loan Documents.
33
<PAGE>
5.6 Mortgages; Title Insurance; Surveys.
-----------------------------------
(A) Mortgaged Property. Each Borrower shall as promptly as possible
------------------
(and in any event within 60 days after such designation) deliver to Agent or
Collateral Agent, as applicable, a fully executed Mortgage, in form and
substance satisfactory to Agent, on any Mortgaged Property designated by Agent.
(B) Title Insurance. Within 30 days following delivery of any
---------------
Mortgage with respect to any Mortgaged Property, the applicable Borrower shall
deliver or cause to be delivered to Agent or Collateral Agent, as applicable,
ALTA lender's title insurance policies (or, in the case of Mortgaged Property
which is not located in the United States, such similar policies insuring title
to real property as may be customary in the jurisdiction in which such Property
is located and which are otherwise acceptable to Agent) issued by title insurers
reasonably satisfactory to Agent (the "Mortgage Policies") in form and substance
-----------------
and in amounts reasonably satisfactory to Agent assuring Agent that the
Mortgages are valid and enforceable first priority mortgage liens (or the
equivalent thereof) on the respective Mortgaged Property, free and clear of all
defects and encumbrances except Permitted Encumbrances. The Mortgage Policies
shall be in form and substance reasonably satisfactory to Agent and shall
include an endorsement insuring against the effect of future advances under this
Agreement, for mechanics' liens and for any other matter that Agent may
reasonably request. In the case of each leasehold constituting Mortgaged
Property, Agent or Collateral Agent, as applicable, shall have received such
estoppel letters, consents and waivers from the landlords and non-disturbance
agreements from any holders of mortgages or deeds of trust on such real estate
as may have been requested by Agent, which letters shall be in form and
substance satisfactory to Agent.
(C) Surveys. Within 30 days following delivery of any Mortgage with
-------
respect to any Mortgaged Property, the applicable Borrower shall deliver or
cause to be delivered to Agent or Collateral Agent, as applicable current
surveys, certified by a licensed surveyor, for all real property that is the
subject of the Mortgage Policies including any Mortgaged Property for which a
Mortgage Policy is issued. All such surveys shall be sufficient to allow the
applicable title insurer to issue the Mortgage Policy to be delivered in respect
of such Mortgaged Property pursuant to subsection 5.6(B).
-----------------
5.7 Use of Proceeds and Margin Security. Each Borrower shall use the
-----------------------------------
proceeds of all Loans for proper business purposes (as described in the recitals
to this Agreement) consistent with all applicable laws, statutes, rules and
regulations. No portion of the proceeds of any Loan shall be used by any
Borrower or any Subsidiary thereof for the purpose of purchasing or carrying
margin stock within the meaning of Regulation U, or in any manner that might
cause the borrowing or the application of such proceeds to violate Regulation T
or Regulation X or any other regulation of the Board of Governors of the Federal
Reserve System or to violate the Exchange Act or the Companies Act.
5.8 Bailee. If any Collateral is at any time in the possession or control
------
of any warehouseman, bailee or any of any Borrower's agents or processors, the
applicable Borrower shall, upon the request of Agent, notify such warehouseman,
bailee, Agent or processor of the security interests in favor of Agent or
Collateral Agent, as the case may be, for the benefit of
34
<PAGE>
Lenders, created hereby and shall instruct such Person to hold all such
Collateral for Agent's or Collateral Agent's account subject to Agent's or
Collateral Agent's instructions.
5.9 Year 2000. Each Borrower has made an assessment of the microchip and
---------
computer-based systems and the software used in its business and based upon such
assessment believes that it will be Year 2000 Compliant by January 1, 2000. For
purposes of this paragraph, "Year 2000 Compliant" means that all software,
-------------------
embedded microchips and other processing capabilities utilized by, and material
to the business operations or financial condition of, any Borrower are able to
interpret, store, transmit, receive and manipulate data on and involving all
calendar dates correctly and without causing any abnormal ending scenarios in
relation to dates in and after the Year 2000. From time to time, at the request
of Agent, Borrowers shall provide to Agent such updated information as is
requested regarding the status of their efforts to become Year 2000 Compliant.
5.10 Maintenance of Certifications. Each Borrower shall at all times
-----------------------------
maintain, in full force and effect, all certifications, licenses, permits and
any similar authorizations issued or otherwise granted by any Governmental
Authority and necessary or desirable for the conduct of such Borrower's
business, including without limitation any issued or granted by the Federal
Aviation Authority of the United States or the Civil Aviation Authority of the
United Kingdom. All such certifications, licenses, permits and similar
authorizations issued to or otherwise held by either such Borrower as of the
Closing Date are listed on Schedule 5.10.
-------------
SECTION 6. FINANCIAL COVENANTS
-------------------
Borrowers covenant and agree that so long as any of the Commitments remain
in effect and until indefeasible payment in full of all Obligations and
termination of all Lender Letters of Credit, Borrowers shall comply with and
shall cause each of their respective Subsidiaries to comply with all covenants
contained in the Financial Covenant Rider.
------------------------
SECTION 7. NEGATIVE COVENANTS
-------------------
Borrowers covenant and agree that so long as any of the Commitments remain
in effect and until indefeasible payment in full of all Obligations and
termination of all Lender Letters of Credit, Borrowers shall not and shall not
permit any of their respective Subsidiaries to:
7.1 Indebtedness and Liabilities. Directly or indirectly create, incur,
----------------------------
assume, guaranty, or otherwise become or remain directly or indirectly liable,
on a fixed or contingent basis, with respect to any Indebtedness except: (a)
the Obligations; (b) intercompany Indebtedness, not to exceed $30,000,000
outstanding at any time in the aggregate, among Borrowers and their
Subsidiaries; provided that such Indebtedness (and any Lien securing such
--------
Indebtedness) is subordinated in right of payment to the Obligations; (c)
Indebtedness (excluding Capital Leases) not to exceed $2,000,000 in the
aggregate at any time outstanding secured by purchase money Liens; (d)
Indebtedness under Capital Leases not to exceed $2,000,000 outstanding at any
time in the aggregate; and (e) Indebtedness existing on the Closing Date (after
giving effect to the consummation of the transactions contemplated hereunder)
and identified on Schedule 7.1. Borrowers will not, and will not permit any of
------------
their Subsidiaries to, incur any Liabilities except for Indebtedness permitted
herein and trade payables and normal accruals in the ordinary course
35
<PAGE>
of business not yet due and payable or with respect to which the applicable
Borrower or the applicable Subsidiary is contesting in good faith the amount or
validity thereof by appropriate proceedings and then only to the extent that
such Borrower or such Subsidiary has established adequate reserves therefor
under GAAP.
7.2 Guaranties. Except for endorsements of instruments or items of
----------
payment for collection in the ordinary course of business, guaranty, endorse, or
otherwise in any way become or be responsible for any obligations of any other
Person, whether directly or indirectly by agreement to purchase the indebtedness
of any other Person or through the purchase of goods, supplies or services, or
maintenance of working capital or other balance sheet covenants or conditions,
or by way of stock purchase, capital contribution, advance or loan for the
purpose of paying or discharging any indebtedness or obligation of such other
Person or otherwise.
7.3 Transfers, Liens and Related Matters.
------------------------------------
(A) Transfers. Sell, assign (by operation of law or otherwise) or
---------
otherwise dispose of, or grant any option with respect to, any of the Collateral
or the assets of such Person, except that Borrowers and their Subsidiaries may
(i) sell and exchange Inventory in the ordinary course of business; and (ii)
make Asset Dispositions if all of the following conditions are met: (1) the
market value of assets sold or otherwise disposed of in any single transaction
or series of related transactions does not exceed $100,000 and the aggregate
market value of assets sold or otherwise disposed of in any Fiscal Year does not
exceed $300,000; (2) the consideration received is at least equal to the fair
market value of such assets; (3) the sole consideration received is cash; (4)
the net proceeds of such Asset Disposition are applied as required by subsection
----------
2.4(B); (5) after giving effect to the sale or other disposition of the assets
- ------
included within the Asset Disposition and the repayment of the Obligations with
the proceeds thereof, Borrowers are in compliance on a pro forma basis with the
covenants set forth in the Financial Covenant Rider recomputed for the most
------------------------
recently ended month for which information is available and are in compliance
with all other terms and conditions contained in this Agreement; and (6) no
Default or Event of Default shall then exist or result from such sale or other
disposition.
(B) Liens. Except for Permitted Encumbrances, directly or indirectly
-----
create, incur, assume or permit to exist any Lien on or with respect to any of
the Collateral or the assets of such Person or any proceeds, income or profits
therefrom.
(C) No Negative Pledges. Enter into or assume any agreement (other
-------------------
than the Loan Documents) prohibiting the creation or assumption of any Lien upon
its properties or assets, whether now owned or hereafter acquired.
(D) No Restrictions on Subsidiary Distributions to Borrowers. Except
--------------------------------------------------------
as provided herein, directly or indirectly create or otherwise cause or suffer
to exist or become effective any consensual encumbrance or restriction of any
kind on the ability of any Subsidiary of any Borrower to: (1) pay dividends or
make any other distribution on any of such Subsidiary's capital stock or other
equity interests owned by such Borrower or any Subsidiary of such Borrower; (2)
pay any indebtedness owed to Borrowers or any other Subsidiary; (3) make loans
or advances to Borrowers or any other Subsidiary; or (4) transfer any of its
property or assets to any Borrower or any other Subsidiary.
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<PAGE>
7.4 Investments and Loans. Make or permit to exist investments in or
---------------------
loans to any other Person, except: (a) U.K. Borrower may make investments in
Cash Equivalents so long as no Redirection Notice has been given by Collateral
Agent; and (b) Borrowers may make loans and advances to employees for moving,
entertainment, travel and other similar expenses in the ordinary course of
business in an aggregate outstanding amount not in excess of $250,000 at any
time.
7.5 Restricted Junior Payments. Directly or indirectly declare, order,
--------------------------
pay, make or set apart any sum for any Restricted Junior Payment, except that
(a) Subsidiaries of any Borrower may make Restricted Junior Payments with
respect to their common stock (or equivalent equity interests) to the extent
necessary to permit such Borrower to pay the Obligations, to make Restricted
Junior Payments permitted under clauses (b), (c), (d) and (e) below, and to
permit such Borrower to pay expenses incurred in the ordinary course of business
(b) U.S. Borrower may pay management fees to Unique in the amounts and on the
respective dates required pursuant to the Unique Management Agreement, so long
as (i) such payments do not exceed an aggregate of $150,000 per Fiscal Year, and
(ii) at the time any such payment is made and after giving effect thereto, no
Default or Event of Default shall have occurred and be continuing; (c) U.S.
Borrower may repay up to $2,500,000 in principal amount of the Subordinated Debt
in full on the Closing Date, so long as after giving effect to such repayment
and after giving effect to the consummation of all of the other transactions
contemplated hereunder on the Closing Date and the payment by Borrowers of all
costs, fees and expenses relating thereto, Borrowers shall have Availability
(determined on a pro forma basis, with Borrowers having no accounts payables
which are more than 60 days past due, and expenses and liabilities being paid in
the ordinary course of business and without acceleration of sales) of at least
$7,000,000; (d) following the Closing Date, U.S. Borrower may pay accrued and
unpaid interest due and owing on an unaccelerated basis in respect to the
Subordinated Debt, so long as at the time of any such payment and after giving
effect thereto, no Default or Event of Default shall have occurred and be
continuing and such payment is otherwise permitted to be made pursuant to the
Subordination Agreement; and (e) following the Closing Date, U.S. Borrower may
make annual repayments of the principal balance of the Subordinated Debt from a
portion of its Excess Cash Flow, if any, for the immediately preceding Fiscal
Year, commencing with Borrowers' 1999 Fiscal Year (i.e., assuming there is
Excess Cash Flow available therefor, the first such principal repayment
permitted hereunder would be made during Fiscal Year 2000) so long as (i) the
mandatory prepayment from Excess Cash Flow payable for the most recently ended
Fiscal Year preceding the date of such payment pursuant to subsection 2.4(B)(3)
--------------------
shall have been paid prior to the making of such principal payment; (ii) the
amount of such principal payment does not exceed 25% of Excess Cash Flow for the
most recently ended Fiscal Year; (iii) at the time of such principal payment and
after giving effect thereto and to the mandatory prepayment of the Obligations
payable pursuant to subsection 2.4(B)(3), Borrowers shall have Availability as
--------------------
of such date, and shall have had average daily excess Availability during the
immediately preceding 60 day period prior to such date (determined in each case
on a pro forma basis as of such date or for such period, as the case may be,
with Borrowers having no accounts payables which are more than 60 days past due,
and expenses and liabilities being paid in the ordinary course of business and
without acceleration of sales) of at least $3,000,000; and (iv) at the time of
any such payment and after giving effect thereto, no Default or Event of Default
shall have occurred and be continuing and such payment is otherwise permitted to
be made pursuant to the Subordination Agreement.
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7.6 Restriction on Fundamental Changes. (a) Enter into any transaction of
----------------------------------
merger, consolidation, amalgamation or reconstruction; (b) liquidate, wind-up
or dissolve itself or take any other action having substantially equivalent
consequences (or suffer any liquidation or dissolution or similar event having
substantially equivalent consequences); (c) convey, sell, lease, sublease,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its business or assets, or the
capital stock or other equity interests of any of its Subsidiaries, whether now
owned or hereafter acquired; or (d) acquire by purchase or otherwise all or any
substantial part of the business or assets of, or stock or other beneficial
ownership of, any Person.
7.7 Transactions with Affiliates. Directly or indirectly, enter into or
----------------------------
permit to exist any transaction (including the purchase, sale or exchange of
property or the rendering of any service) with any Affiliate or with any
officer, director or employee of any Loan Party, except for transactions in the
ordinary course of the applicable Borrower's business and upon fair and
reasonable terms which are fully disclosed to Agent and Lenders and which are no
less favorable to such Borrower than it would obtain in a comparable arm's
length transaction with an unaffiliated Person.
7.8 Conduct of Business. From and after the Closing Date, engage in any
-------------------
business other than businesses of the type engaged in by such Loan Party on the
Closing Date.
7.9 Tax Consolidations. File or consent to the filing of any consolidated
------------------
income tax return with any Person other than any other Borrower or any of their
Subsidiaries.
7.10 Subsidiaries. Establish, create or acquire any new Subsidiaries.
------------
7.11 Fiscal Year; Tax Designation. Change its Fiscal Year; or elect to be
----------------------------
designated as an entity other than a sub-chapter C corporation as defined in
IRC.
7.12 Press Release; Public Offering Materials. Disclose the name of Agent,
----------------------------------------
Funding Agent, Collateral Agent or any Lender in any press release or in any
prospectus, proxy statement or other materials filed with any governmental
entity relating to a public offering of the capital stock of any Loan Party
except as may be required by law or as approved in writing in advance by Agent,
Funding Agent, Collateral Agent or such Lender, as the case may be.
7.13 Bank Accounts. Establish any new bank accounts, or attempt to amend
-------------
or terminate any Blocked Account or lockbox agreement without Agent's prior
written consent.
7.14 Exchange Inventory and Work in Process Purchases. Purchase any
------------------------------------------------
Exchange Inventory and Work in Process during the period commencing on the
Closing Date through December 31, 1998; thereafter, Borrowers may purchase or
otherwise acquire Exchange Inventory and Work in Process so long as (A) at the
time of such purchase and after giving effect to the payment by the applicable
Borrower of the purchase price for such Exchange Inventory and Work in Process,
Borrowers have Availability of at least $2,500,000 (determined as set forth
herein but after deducting therefrom the aggregate amount of any accounts
payable of Borrowers which are more than 60 days past due, if any), and (B) the
aggregate amount of Exchange Inventory and Work in Process purchased in any
Fiscal Year does not exceed $9,000,000.
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<PAGE>
7.15 Changes Relating to Subordinated Debt. Change or amend the terms of
-------------------------------------
the Subordinated Debt if the effect of such amendment is an attempt to: (a)
increase the interest rate on such Indebtedness; (b) change the dates upon which
payments of principal or interest are due on such Indebtedness; (c) change any
event of default or add any covenant with respect to such Indebtedness; (d)
change the payment provisions of such Indebtedness; (e) change the subordination
provisions thereof; or (f) change or amend any other term if such change or
amendment would materially increase the obligations of the obligor or confer
additional material rights on the holder of such Indebtedness in a manner
Lender.
SECTION 8. DEFAULT, RIGHTS AND REMEDIES
----------------------------
8.1 Event of Default. "Event of Default" shall mean the occurrence or
---------------- ----------------
existence of any one or more of the following:
(A) Payment. Failure to make payment of any of the Obligations when
-------
due; or
(B) Default in Other Agreements. (1) Failure of any Loan Party to pay
---------------------------
when due any principal or interest on any Indebtedness (other than the
Obligations) or (2) breach or default by any Loan Party with respect to any
Indebtedness (other than the Obligations); if such failure to pay, breach or
default entitles the holder to cause such Indebtedness having an individual
principal amount in excess of $100,000 or having an aggregate principal amount
in excess of $250,000 to become or be declared due prior to its stated maturity;
or
(C) Breach of Certain Provisions. Failure of any Loan Party to
----------------------------
perform or comply with any term or condition contained in paragraphs (A) and (B)
-------------- ---
of the Reporting Rider and subsections 5.3, 5.5 or 5.6 or contained in Section
--------------- --------------- --- --- -------
4, Section 6, Section 7 or the Financial Covenants Rider; or
- - --------- --------- -------------------------
(D) Breach of Warranty. Any representation, warranty, certification
------------------
or other statement made by any Loan Party in any Loan Document or in any
statement or certificate at any time given by such Person in writing pursuant or
in connection with any Loan Document is false in any material respect on the
date made; or
(E) Other Defaults Under Loan Documents. Any Borrower or any other
-----------------------------------
Loan Party defaults in the performance of or compliance with any term contained
in this Agreement or the other Loan Documents and such default is not remedied
or waived within 10 days after receipt by Borrowers of notice from Agent, or
Requisite Lenders, of such default (other than occurrences described in other
provisions of this subsection 8.1 for which a different grace or cure period is
--------------
specified or which constitute immediate Events of Default); or
(F) Involuntary Bankruptcy; Appointment of Receiver, etc. (1) A court
----------------------------------------------------
enters a decree or order for relief with respect to any Loan Party in an
involuntary case under any applicable federal, state or foreign bankruptcy,
insolvency or other similar law now or hereafter in effect, which decree or
order is not stayed or other similar relief is not granted under any
39
<PAGE>
applicable federal, state or foreign law; or (2) the continuance of any of the
following events for 60 days unless dismissed, bonded or discharged: (a) an
involuntary case is commenced against any Loan Party under any applicable
federal, state or foreign bankruptcy, insolvency or other similar law now or
hereafter in effect; or (b) a receiver, liquidator, sequestrator, trustee,
custodian or other fiduciary having similar powers over any Loan Party or over
all or a substantial part of any Loan Party's property, is appointed; or (3) a
petition is presented, or a meeting is convened for the purpose of considering a
resolution, or other steps are taken, for making an administration order against
or for the winding up of any Loan Party or an administration order or a winding
up order is made against any Loan Party (other than for the purposes of and
followed by a reconstruction previously approved by Lenders, unless during or
following such reconstruction any Loan Party becomes or is declared to be
insolvent); or
(G) Voluntary Bankruptcy; Appointment of Receiver, etc. (1) Any Loan
--------------------------------------------------
Party commences a voluntary case under any applicable federal, state or foreign
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case or to the
conversion of an involuntary case to a voluntary case under any such law or
consents to the appointment of or taking possession by a receiver, trustee or
other custodian for all or a substantial part of its property; or (2) any Loan
Party makes any assignment for the benefit of creditors; or (3) the board of
directors of any Loan Party adopts any resolution or otherwise authorizes action
to approve any of the actions referred to in this subsection 8.1(G); or
-----------------
(H) Liens. Any lien, levy or assessment is filed or recorded with
-----
respect to or otherwise imposed upon all or any part of the Collateral or the
assets of any Loan Party by any Governmental Authority (other than Permitted
Encumbrances) and such lien, levy or assessment is not stayed, vacated, paid or
discharged within 10 days; or
(I) Judgment and Attachments. Any money judgment, writ or warrant of
------------------------
attachment, or similar process involving (1) an amount in any individual case in
excess of $250,000 or (2) an amount in the aggregate at any time in excess of
$500,000 (in either case not adequately covered by insurance as to which the
insurance company has acknowledged coverage) is entered or filed against any
Loan Party or any assets of any Loan Party and remains undischarged, unvacated,
unbonded or unstayed for a period of 30 days, but in any event not later than 5
days prior to the date of any proposed sale thereunder; or
(J) Dissolution. Any order, judgment or decree is entered against any
-----------
Loan Party decreeing the dissolution or split up of such Loan Party and such
order remains undischarged or unstayed for a period in excess of 20 days, but in
any event not later than 5 days prior to the date of any proposed dissolution or
split up; or
(K) Solvency. Any Borrower ceases to be solvent (as represented by
--------
such Borrower in subsection 4.15) or admits in writing its present or
---------------
prospective inability to pay its debts as they become due; or
(L) Injunction. Any Loan Party is enjoined, restrained or in any way
----------
prevented by the order of any court or any administrative or regulatory agency
from conducting all or any material part of its business and such order
continues for 30 days or more; or
40
<PAGE>
(M) Invalidity of Loan Documents. Any of the Loan Documents for any
----------------------------
reason, other than a partial or full release in accordance with the terms
thereof, ceases to be in full force and effect or is declared to be null and
void, or any Loan Party denies that it has any further liability under any Loan
Documents to which it is party, or gives notice to such effect; or
(N) Failure of Security. Agent or Collateral Agent, as applicable, on
-------------------
behalf of Lenders, does not have or ceases to have a valid and perfected first
priority security interest in the Collateral (subject to Permitted
Encumbrances), in each case, for any reason other than the failure of Agent or
Collateral Agent or any Lender to take any action within its control; or
(O) Damage, Strike, Casualty. Any material damage to, or loss, theft
------------------------
or destruction of, any Collateral, whether or not insured, or any strike,
lockout, labor dispute, embargo, condemnation, act of God or public enemy, or
other casualty which causes, for more than 15 consecutive days, the cessation or
substantial curtailment of revenue producing activities at any facility of any
Loan Party if any such event or circumstance could reasonably be expected to
have a Material Adverse Effect; or
(P) Licenses and Permits. The loss, suspension or revocation of, or
--------------------
failure to renew, any license, permit now held or hereafter acquired by any Loan
Party (including without limitation any of those set forth on Schedule 5.10), if
-------------
such loss, suspension, revocation or failure to renew could reasonably be
expected to have a Material Adverse Effect; or
(Q) Forfeiture. There is filed against any Loan Party any civil or
----------
criminal action, suit or proceeding under any federal, state or foreign
racketeering or similar statute (including, without limitation, the Racketeer
Influenced and Corrupt Organization Act of 1970), which action, suit or
proceeding (1) is not dismissed within 120 days; and (2) could reasonably be
expected to result in the confiscation or forfeiture of any material portion of
the Collateral;
(R) Termination of Certain Contracts. (1) Any Customer Contract with a
--------------------------------
Material Customer is terminated in whole or in part (if after giving effect to
such partial termination such customer would no longer constitute a Material
Customer) prior to its stated expiration or termination date; or (2) any
Customer Contract with a Material Customer expires in whole or in part (if after
giving effect to such partial expiration such customer would no longer
constitute a Material Customer) in accordance with its terms and is not renewed
in writing by such Material Customer; or (3) within a ninety (90) day period,
Customer Contracts with customers which collectively accounted for ten percent
(10%) or more of Borrowers' consolidated gross revenues as of the last day of
the most recently completed fiscal quarter for the trailing twelve month period
then ended are terminated prior to their stated expiration or termination date
or expire without written renewal by the applicable customers; or (4) any
Borrower receives notice from any customer or customers of its or their
intention to wholly or partially terminate, or not renew, the Customer Contract
to which it or they are parties, if such termination(s) or expiration(s) without
renewal, once effected, would constitute an event described in clauses (1)
-----------
through (3) above; or
---
(S) Change in Control or Management. Any of the following occurs:
-------------------------------
(1) all or substantially all of the assets of any Borrower or any of its
Subsidiaries are sold, leased or otherwise disposed of (in a single transaction
or in a series of related transactions); (2) the
41
<PAGE>
Persons listed on Schedule 8.1(S) hereto which owned equity interests in U.S.
--------------
Borrower immediately prior to U.S. Borrower's initial public offering, or
members of their immediate families or trusts for the benefit of members of
their immediate families, fail to own, beneficially and of record, and control
the power to vote, 35% of the equity securities of U.S. Borrower entitled to
ordinary voting power during the two year period following the Closing Date, or
30% thereafter; (3) any person or entity or "affiliated group" (other than
existing shareholders described on Schedule 8.1(S)) acquires more than 30% of
---------------
the equity securities of U.S. Borrower entitled to ordinary voting power; (4)
less than a majority of those persons constituting the board of directors of
U.S. Borrower as of the Closing Date fail to remain as members of the board of
directors of U.S. Borrower; (5) David Lokken, Brian Aune, Brian Carr or Michael
Riley ceases to be actively involved on a full time basis in their current
capacities as executive level employees of U.S. Borrower at any time and a
replacement acceptable to Requisite Lenders is not appointed (or another plan
for replacement which is acceptable to the Requisite Lenders is not in place)
within 90 days; (6) Dennis Biety ceases to be actively involved on a full time
basis in his current capacity as managing director of U.K. Borrower at any time
during the one year period following the Closing Date and a replacement
acceptable to Requisite Lenders is not appointed (or another plan for
replacement which is acceptable to the Requisite Lenders is not in place) within
90 days; or (7) U.K. Borrower ceases to be a wholly owned subsidiary of U.S.
Borrower.
8.2 Suspension of Commitments. Upon the occurrence of any Default or
-------------------------
Event of Default, notwithstanding any grace period or right to cure, Agent may
and may direct Funding Agent to, or, upon demand by Requisite Lenders, Agent and
Funding Agent shall, without notice or demand, immediately cease making
additional Loans and issuing additional Lender Letters of Credit and the
Commitments shall be suspended; provided that, in the case of a Default, if the
--------
subject condition or event is waived or cured within any applicable grace or
cure period, the Commitments shall be reinstated.
8.3 Acceleration. Upon the occurrence of any Event of Default described
------------
in the foregoing subsections 8.1(F) or 8.1(G), all Obligations shall
----------------------------
automatically become immediately due and payable, without presentment, demand,
protest or other requirements of any kind, all of which are hereby expressly
waived by Borrowers, and the Commitments shall thereupon terminate. Upon the
occurrence and during the continuance of any other Event of Default, Agent may,
and upon demand by Requisite Lenders, Agent shall, by written notice to
Borrowers, (a) declare all or any portion of the Obligations to be, and the same
shall forthwith become, immediately due and payable and the Commitments shall
thereupon terminate and (b) demand that Borrowers immediately deposit with Agent
an amount equal to 105% of the Letter of Credit Reserve to enable Agent or any
Lender that has issued any Lender Letter of Credit to make payments under the
Lender Letters of Credit when required and such amount shall become immediately
due and payable.
8.4 Remedies. If any Event of Default shall have occurred and be
--------
continuing, in addition to and not in limitation of any other rights or remedies
available to Agent, Funding Agent, Collateral Agent and Lenders at law or in
equity, each of Agent and, with the consent of Agent, Collateral Agent may, and
upon the request of Requisite Lenders, each or either of Agent and Collateral
Agent shall, exercise in respect of the Collateral, in addition to all other
rights and remedies provided for herein or otherwise available to it, all the
rights and remedies of a secured party on default under the UCC (whether or not
the UCC applies to the affected Collateral) and
42
<PAGE>
may also (a) require Borrowers to, and each Borrower hereby agrees that it will,
at its expense and upon request of Agent or Collateral Agent, as the case may
be, forthwith, assemble all or part of the Collateral as directed by Agent or
Collateral Agent and make it available to Agent or Collateral Agent at a place
to be designated by Agent or Collateral Agent which is reasonably convenient to
both applicable parties; (b) withdraw all cash in the Blocked Accounts and apply
such monies in payment of the Obligations in the manner provided in subsection
----------
8.7; and (c) without notice or demand or legal process, enter upon any premises
- ---
of each or any Borrower and take possession of any or all of the Collateral.
Each Borrower agrees that, to the extent notice of sale of the Collateral or any
part thereof shall be required by law, at least 10 days notice to such Borrower
of the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification. At any sale of the
Collateral (whether public or private), if permitted by law, Agent, Collateral
Agent (with the prior written consent of Agent) or any Lender may bid (which bid
may be, in whole or in part, in the form of cancellation of indebtedness) for
the purchase of the Collateral or any portion thereof for the account of Agent,
Collateral Agent or such Lender. Neither Agent nor Collateral Agent shall be
obligated to make any sale of Collateral regardless of notice of sale having
been given. Borrowers shall remain jointly and severally liable for any
deficiency. Agent or, with the consent of Agent, Collateral Agent, may adjourn
any public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at the
time and place to which it was so adjourned. To the extent permitted by law,
each Borrower hereby specifically waives all rights of redemption, stay,
appraisal or similar or substantially equivalent rights which it has or may have
under any law now existing or hereafter enacted. Neither Agent nor Collateral
Agent shall be required to proceed against any Collateral but may proceed
against Borrowers or any Borrower directly, provided that in the case of
--------
Collateral Agent, Agent shall have given its prior written consent.
8.5 Appointment of Attorney-in-Fact. Each Borrower hereby constitutes and
-------------------------------
appoints each of Agent, Funding Agent and Collateral Agent as such Borrower's
attorney-in-fact with full authority in the place and stead of such Borrower and
in the name of such Borrower, Agent, Funding Agent, Collateral Agent or
otherwise, from time to time in Agent's discretion or, with the consent of
Agent, Funding Agent's or Collateral Agent's discretion, while an Event of
Default is continuing to take any action and to execute any instrument that
Agent, Funding Agent or Collateral Agent, as applicable, may deem necessary or
advisable to accomplish the purposes of this Agreement, including: (a) to ask,
demand, collect, sue for, recover, compound, receive and give acquittance and
receipts for moneys due and to become due under or in respect of any of the
Collateral; (b) to adjust, settle or compromise the amount or payment of any
Account, or release wholly or partly any customer or obligor thereunder or allow
any credit or discount thereon; (c) to receive, endorse, and collect any drafts
or other instruments, documents and chattel paper, in connection with clause (a)
above; (d) to file any claims or take any action or institute any proceedings
that Agent or, with the prior consent of Agent, Funding Agent, Collateral Agent,
may deem necessary or desirable for the collection of or to preserve the value
of any of the Collateral or otherwise to enforce the rights of Agent, Funding
Agent, Collateral Agent and Lenders with respect to any of the Collateral; and
(e) to sign and endorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, assignments, verifications and notices in
connection with Accounts and other documents relating to the Collateral. The
appointment of each of Agent, Funding Agent and Collateral Agent, each
Borrower's attorney, and each of Agent's, Funding
43
<PAGE>
Agents's and Collateral Agent's rights and powers, are coupled with an interest
and are irrevocable until indefeasible payment in full and complete performance
of all of the Obligations.
8.6 Limitation on Duty of Agent with Respect to Collateral. Beyond the
------------------------------------------------------
safe custody thereof, none of Agent, Funding Agent, Collateral Agent or any
Lender shall have any duty with respect to any Collateral in its possession or
control (or in the possession or control of any Agent or bailee) or with respect
to any income thereon or the preservation of rights against prior parties or any
other rights pertaining thereto. Agent, Funding Agent, Collateral Agent and
each Lender shall each be deemed to have exercised reasonable care in the
custody and preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which Agent, Funding Agent,
Collateral Agent or such Lender, as applicable, accords its own property.
Neither Agent, Funding Agent, Collateral Agent nor any Lender shall be liable or
responsible for any loss or damage to any of the Collateral, or for any
diminution in the value thereof, by reason of the act or omission of any
warehouseman, carrier, forwarding agency, consignee, broker or other Agent or
bailee selected by any Borrower or selected by Agent, Funding Agent, Collateral
Agent or any Lender in good faith.
8.7 Application of Proceeds. Upon the occurrence and during the
-----------------------
continuance of an Event of Default, (a) each Borrower irrevocably waives the
right to direct the application of any and all payments at any time or times
thereafter received by Agent or Funding Agent from or on behalf of Borrowers,
and each Borrower hereby irrevocably agrees that Agent shall have the continuing
exclusive right to apply and to reapply any and all payments received at any
time or times after the occurrence and during the continuance of an Event of
Default against the Obligations in such manner as Agent may deem advisable
notwithstanding any previous entry by Agent or Funding Agent upon any books and
records and (b) the proceeds of any sale of, or other realization upon, all or
any part of the Collateral shall be applied (it being understood that Agent
shall have the right to convert, at a rate of exchange equal to the Spot Rate as
of such conversion date and at the Borrowers' expense, any of such payments or
proceeds of Collateral into any Available Currency or Available Currencies in
which any such Obligations are denominated): first, to all fees, costs and
-----
expenses incurred by or owing to Agent, Collateral Agent and Funding Agent with
respect to this Agreement, the other Loan Documents or the Collateral; second,
------
to all fees, costs and expenses incurred by or owing to any Lender with respect
to this Agreement, the other Loan Documents or the Collateral; third, to accrued
-----
and unpaid interest on the Obligations; fourth, to the principal amounts of the
------
Obligations outstanding; and fifth, to any other indebtedness or obligations of
-----
any Borrower owing to Agent, Funding Agent, Collateral Agent or any Lender.
8.8 License of Intellectual Property. Each Borrower hereby assigns,
--------------------------------
transfers and conveys to each of Agent and Collateral Agent, for the benefit
Lenders, effective upon the occurrence of any Event of Default hereunder, the
non-exclusive right and license to use all Intellectual Property owned or used
by such Borrower together with any goodwill associated therewith, all to the
extent necessary to enable Agent or Collateral Agent, as the case may be, to
realize on the Collateral and any successor or assign to enjoy the benefits of
the Collateral. This right and license shall inure to the benefit of all
successors, assigns and transferees of Agent, Collateral Agent and their
respective successors, assigns and transferees, whether by voluntary conveyance,
operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure
or otherwise. Such right and license is granted free of charge.
44
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8.9 Waivers, Non-Exclusive Remedies. No failure on the part of Agent,
-------------------------------
Funding Agent, Collateral Agent or any Lender to exercise, and no delay in
exercising and no course of dealing with respect to, any right under this
Agreement or the other Loan Documents shall operate as a waiver thereof; nor
shall any single or partial exercise by Agent, Funding Agent, Collateral Agent
or any Lender of any right under this Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right. The rights in this Agreement and the other Loan Documents are cumulative
and shall in no way limit any other remedies provided by law.
SECTION 9. AGENT, FUNDING AGENT AND COLLATERAL AGENT
-----------------------------------------
9.1 Agents.
------
(A) Appointment. (1) Appointment of Agent. Each Lender hereto and,
----------- --------------------
upon obtaining an interest in any Loan, any participant, transferee or other
assignee of any Lender, irrevocably appoints, designates and authorizes Heller
as Agent to take such actions or refrain from taking such action as its Agent on
its behalf and to exercise such powers hereunder as are delegated to Agent by
the terms hereof or of any other Loan Document, together with such powers as are
reasonably incidental thereto. Neither Agent nor any of its directors,
officers, employees or agents shall be liable for any action so taken.
(2) Appointment of Funding Agent. Each Lender hereto and, upon obtaining
----------------------------
an interest in any Loan, any participant, transferee or other assignee of any
Lender, irrevocably appoints, designates and authorizes NMB-Heller as Funding
Agent to (a) at the request of Agent, make Revolving Advances to Borrowers on
behalf of each Lender in accordance with the applicable provisions of Section 2,
---------
and (b) take such actions or refrain from taking such action as its funding
agent on its behalf and to exercise such powers hereunder as are delegated to
Funding Agent by the terms hereof and of any other Loan Document, together with
such powers as are reasonably incidental thereto. Neither Funding Agent nor any
of its directors, officers, employees or agents shall be liable for any action
so taken. Notwithstanding the foregoing or any other provision of the Loan
Documents to the contrary, the parties hereto acknowledge and agree that until
such time, if any, as Agent and Funding Agent shall have entered into agreements
satisfactory to them (and to Borrower Representative to the extent the
provisions of any such agreement affect Borrowers) setting forth the details of
the funding and settlement procedures between or among Agent, Funding Agent and
Lenders, and establishing the compensation and any other amounts payable to
Funding Agent for its services in such capacity (i) neither Borrower
Representative on behalf of Borrowers nor Agent shall be entitled to request
that any Advances be made by Funding Agent on behalf of Lenders pursuant to
subsection 2.1(E), and (ii) Funding Agent shall not be required to perform any
- -----------------
of the duties or obligations imposed upon Funding Agent in its capacity as such
hereunder or under any other Loan Document.
(3) Appointment of Collateral Agent. Each Lender hereto and, upon
-------------------------------
obtaining an interest in any Loan, any participant, transferee or other assignee
of any Lender, irrevocably appoints, designates and authorizes NMB-Heller
(together with any sub-agents appointed by NMB-Heller with the prior consent of
Agent, in the event such sub-agents are required to take, hold, maintain,
perfect or enforce Liens on Collateral located outside of the United States or
the United Kingdom) as Collateral Agent to (a) take, hold, maintain, perfect and
enforce Liens on the Collateral of any
45
<PAGE>
Borrower at any time located in the United Kingdom, the Netherlands or any other
jurisdiction other than the United States of America, and (b) take such actions
or refrain from taking such action as its collateral agent on its behalf and to
exercise such powers hereunder as are delegated to Collateral Agent by the terms
hereof and of any other Loan Document, together with such powers as are
reasonably incidental thereto. Neither Collateral Agent nor any of its
directors, officers, employees or agents shall be liable for any action so
taken. In the event Collateral Agent seeks to appoint any sub-agents as
aforesaid, Collateral Agent shall obtain and deliver to Agent a written
agreement of such sub-agent that it will agree to be bound by and will comply
with all of the provisions of this Agreement and the other Loan Documents
pertaining to Collateral Agent, with the same effect as if such sub-agent had
originally been a "Collateral Agent" hereunder.
(4) The provisions of this subsection 9.1 are solely for the benefit of
--------------
Agent, Funding Agent, Collateral Agent and Lenders and neither any Borrower nor
any other Loan Party shall have any rights as a third party beneficiary of any
of the provisions hereof. Each of Agent, Funding Agent and Collateral Agent may
perform any of its duties hereunder, or under the Loan Documents, by or through
its agents or employees.
(B) Nature of Duties. Neither Agent, Funding Agent nor Collateral
----------------
Agent shall have any duties, obligations or responsibilities except those
expressly set forth in this Agreement or in the Loan Documents. The duties of
Agent, Funding Agent and Collateral Agent shall be mechanical and administrative
in nature. Neither Agent, Funding Agent nor Collateral Agent shall have by
reason of this Agreement a fiduciary, trust or agency relationship with or in
respect of any Lender, any Borrower or any other Loan Party. Each Lender shall
make its own appraisal of the credit worthiness of Borrowers, and shall have
independently taken whatever steps it considers necessary to evaluate the
financial condition and affairs of Borrowers, and neither Agent, Funding Agent
nor Collateral Agent shall have any duty or responsibility, either initially or
on a continuing basis, to provide any Lender with any credit or other
information with respect thereto, whether coming into its possession before the
Closing Date or at any time or times thereafter. If any of Agent, Funding Agent
or Collateral Agent seeks the consent or approval of any Lenders to the taking
or refraining from taking any action hereunder, then Agent (on behalf of Funding
Agent or Collateral Agent, in any case in which such consent or approval is
sought by Funding Agent or Collateral Agent) shall send notice thereof to each
Lender, provided that Agent shall have given its prior approval to any request
--------
by Funding Agent or Collateral Agent to seek the consent or approval of any
Lenders. Agent shall promptly notify each Lender any time that the applicable
percentage of Lenders have instructed Agent, Funding Agent or Collateral Agent
to act or refrain from acting pursuant hereto.
(C) Rights, Exculpation, Etc. Neither Agent, Funding Agent nor
------------------------
Collateral Agent, nor any of their respective officers, directors, employees or
agents, shall be liable to any Lender for any action taken or omitted by them
hereunder or under any of the Loan Documents, or in connection herewith or
therewith, except that each of Agent, Funding Agent and Collateral Agent shall
be obligated on the terms set forth herein for performance of their respective
express obligations hereunder and under the other Loan Documents, and except
that each of Agent, Funding Agent and Collateral Agent shall be liable with
respect to its own gross negligence or willful misconduct. Neither Agent,
Funding Agent nor Collateral Agent shall be liable for any apportionment or
distribution of payments made by it in good faith and if any such apportionment
or distribution is subsequently determined to have been made in error, the sole
recourse of any
46
<PAGE>
Lender to whom payment was due but not made, shall be to recover from other
Lenders any payment in excess of the amount to which they are determined to be
entitled (and such other Lenders hereby agree to return to such Lender any such
erroneous payments received by them). In performing its functions and duties
hereunder, each of Agent, Funding Agent and Collateral Agent shall exercise the
same care which it would in dealing with loans for its own account, but neither
Agent, Funding Agent nor Collateral Agent shall be responsible to any Lender for
any recitals, statements, representations or warranties herein or for the
execution, effectiveness, genuineness, validity, enforceability, collectibility,
or sufficiency of this Agreement or any of the Loan Documents or the
transactions contemplated thereby, or for the financial condition of any Loan
Party. Neither Agent, Funding Agent nor Collateral Agent shall be required to
make any inquiry concerning either the performance or observance of any of the
terms, provisions or conditions of this Agreement or any of the Loan Documents
or the financial condition of any Loan Party, or the existence or possible
existence of any Default or Event of Default. Agent may and, with the prior
approval of Agent, each of Funding Agent and Collateral Agent may, at any time
request instructions from Lenders with respect to any actions or approvals which
by the terms of this Agreement or of any of the Loan Documents Agent, Funding
Agent or Collateral Agent, as applicable, is permitted or required to take or to
grant, and each of Agent, Funding Agent and Collateral Agent, as applicable,
shall be entitled to refrain from taking any action or to withhold any approval
and shall not be under any liability whatsoever to any Person for refraining
from any action or withholding any approval under any of the Loan Documents
until it shall have received such instructions from the applicable percentage of
the Lenders. Without limiting the foregoing, no Lender shall have any right of
action whatsoever against any of Agent, Funding Agent or Collateral Agent as a
result of Agent, Funding Agent or Collateral Agent acting or refraining from
acting under this Agreement or any of the other Loan Documents in accordance
with the instructions of the applicable percentage of the Lenders and
notwithstanding the instructions of Lenders, none of Agent, Funding Agent or
Collateral Agent shall have any obligation to take any action if it, in good
faith, believes that such action exposes it to any liability.
(D) Reliance. Neither Agent, Funding Agent nor Collateral Agent shall
--------
be under any duty to examine, inquire into, or pass upon the validity,
effectiveness or genuineness of this Agreement, any other Loan Document, or any
instrument, document or communication furnished pursuant hereto or in connection
herewith. Each of Agent, Funding Agent and Collateral Agent shall be entitled
to rely upon and assume that any written notices, statements, certificates,
orders or other documents or any telephone message or other communication
(including any writing, telex, telecopy or telegram) are genuine, valid,
effective and correct and to have been signed, sent or made by the proper
Person, and with respect to all matters pertaining to this Agreement or any of
the Loan Documents and its duties hereunder or thereunder. Each of Agent,
Funding Agent and Collateral Agent shall be entitled to rely upon the advice of
legal counsel, independent accountants, and other experts selected by such
Person in its sole discretion.
(E) Indemnification. Each Lender, in proportion to its Pro Rata
---------------
Share, severally, agrees to reimburse and indemnify each of Agent, Funding Agent
and Collateral Agent for and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses, advances
or disbursements of any kind or nature whatsoever which may be imposed on,
incurred by, or asserted against Agent, Funding Agent or Collateral Agent in any
way relating to or arising out of this Agreement or any of the Loan Documents or
any action taken or omitted by Agent, Funding Agent or Collateral Agent under
this Agreement or any of the Loan
47
<PAGE>
Documents; provided, however, that no Lender shall be liable to Agent, Funding
-------- -------
Agent or Collateral Agent, as the case may be, for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses, advances or disbursements resulting from Agent's, Funding
Agent's or Collateral Agent's, as applicable, gross negligence or willful
misconduct as determined by a court of competent jurisdiction. The obligations
of Lenders under this subsection 9.1(E) shall
-----------------
survive the payment in full of the Obligations and the termination of this
Agreement.
(F) Heller and NMB-Heller Individually. With respect to its
----------------------------------
Commitments, if any, and any Loans made by it, each of Heller and NMB-Heller
shall have and may exercise the same rights and powers hereunder and are subject
to the same obligations and liabilities as and to the extent set forth herein
for any other Lender. The terms "Lenders" or "Requisite Lenders" or any similar
terms shall, unless the context clearly otherwise indicates, include Heller and
NMB-Heller in their respective individual capacities as a Lender, if applicable.
Each of Heller and NMB-Heller may lend money to, and generally engage in any or
other business with, any Loan Party as if it were not acting as Agent or as
Funding Agent and Collateral Agent, as the case may be, pursuant hereto.
(G) Successor Agents.
----------------
(1) Resignation. Each of Agent, Funding Agent and Collateral
-----------
Agent may resign from the performance of all their respective functions and
duties hereunder at any time by giving at least 30 Business Days' prior written
notice to Borrowers, Lenders and, in the case of a resignation by Funding Agent
or Collateral Agent, to Agent; provided that in the case of Funding Agent and
--------
Collateral Agent, any such resignation must apply to it in both such capacities.
Any such resignation shall take effect upon the acceptance by a successor Agent
or a successor Funding Agent and Collateral Agent, as applicable, of appointment
as provided below.
(2) Appointment of Successor. Upon any such notice of
------------------------
resignation pursuant to clause (G)(1) above, Requisite Lenders shall, upon
-------------
receipt of Borrowers' prior consent which shall not unreasonably be withheld,
appoint a successor Agent or a successor Funding Agent and Collateral Agent, as
the case may be, provided that the prior consent of Agent shall be required to
--------
the appointment of any successor Funding Agent or Collateral Agent and provided,
--------
further that, unless Agent gives its prior consent otherwise, any successor
- -------
Funding Agent and Collateral Agent must be the same Person. In the case of a
resignation by Agent, if a successor Agent shall not have been so appointed
within said 30 Business Day period, the retiring Agent, upon notice to
Borrowers, shall then appoint a successor Agent who shall serve as Agent until
such time as Requisite Lenders appoint a successor Agent as provided above. In
the case of a resignation by Funding Agent and Collateral Agent, if a successor
Funding Agent and Collateral Agent shall not have been so appointed within said
30 Business Day period, Agent, upon notice to Borrowers, shall then appoint a
successor Funding Agent and Collateral Agent who shall serve as Funding Agent
and Collateral Agent until such time as Requisite Lenders appoint a successor
Funding Agent and Collateral Agent as provided above.
(3) Successor Agents. Upon the acceptance of any appointment as Agent
----------------
or as Funding Agent and Collateral Agent under the Loan Documents by a successor
Agent or a successor Funding Agent and Collateral Agent, such successor shall
thereupon succeed to and
48
<PAGE>
become vested with all the rights, powers, privileges and duties of the retiring
Agent or the retiring Funding Agent and Collateral Agent, as the case may be,
and the retiring Agent or retiring Funding Agent and Collateral Agent shall be
discharged from its duties and obligations under the Loan Documents. After any
retiring Agent's or retiring Funding Agent's and Collateral Agent's resignation
as such under the Loan Documents, the provisions of this Section 9 shall inure
---------
to its benefit as to any actions taken or omitted to be taken by it while it was
Agent or Funding Agent and Collateral Agent under the Loan Documents.
(H) Collateral Matters.
------------------
(1) Release of Collateral. Lenders hereby irrevocably authorize
---------------------
each of Agent and, with the prior written consent of Agent, Collateral Agent, at
its option and in Agent's discretion, to release any Lien granted to or held by
Agent or Collateral Agent upon any property covered by this Agreement or the
other Loan Documents (i) upon termination of the Commitments and upon final and
indefeasible payment in full in cash and satisfaction of all Obligations and
termination of this Agreement; (ii) constituting property being sold or disposed
of in accordance with this Agreement if the applicable Borrower certifies to
each of Agent and Collateral Agent that the sale or disposition is made in
compliance with the provisions of this Agreement (and each of Agent and
Collateral Agent may rely in good faith conclusively on any such certificate,
without further inquiry); or (iii) constituting property leased to any Borrower
under a lease which has expired or been terminated in a transaction permitted
under this Agreement or is about to expire and which has not been, and is not
intended by such Borrower to be, renewed or extended. In addition during any
Fiscal Year (x) Agent may and, upon the written direction of Agent, Collateral
Agent may, release Collateral having a book value of not more than $250,000 and
(y) Agent and/or Collateral Agent, with the consent of all Lenders, may release
all or any portion of the Collateral. Without limiting any of the foregoing,
each Lender agrees to confirm in writing, upon request by Borrowers, the
authority to release any property covered by this Agreement or the Loan
Documents conferred upon Agent and Collateral Agent under this subsection.
(2) Execution of Releases. So long as no Event of Default is then
---------------------
continuing, upon confirmation from the requisite percentage (as set forth in
subsection 9.1(H)(1) above) of Lenders of Agent's or Collateral Agent's
- --------------------
authority to release any Collateral, and upon at least 10 Business Days prior
written request by Borrowers, Agent and/or Collateral Agent, as applicable,
shall, and each is hereby irrevocably authorized by Lenders to, execute such
documents as may be necessary to evidence the release of the Liens upon such
Collateral; provided, however, that (i) neither Agent nor Collateral Agent shall
-------- -------
be required to execute any such document on terms which, in Agent's or
Collateral Agent's, as applicable, opinion, would expose Agent or Collateral
Agent, as applicable, to liability or create any obligation or entail any
consequence other than the release of such Liens without recourse or warranty,
and (ii) such release shall not in any manner discharge, affect or impair the
Obligations or any Liens granted to Agent or Collateral Agent, as applicable, on
behalf of Lenders upon (or obligations of any Loan Party, in respect of), all
interests retained by any Loan Party, including, without limitation, the
proceeds of any sale, all of which shall continue to constitute part of the
property covered by this Agreement or the Loan Documents, and (iii) such release
is not consistent with the terms of this Agreement.
49
<PAGE>
(3) Absence of Duty. Neither Agent, Funding Agent nor Collateral
---------------
Agent shall have any obligation whatsoever to any Lender or any other Person to
assure that the property covered by this Agreement or the Loan Documents exists
or is owned by any Borrower or is cared for, protected or insured or has been
encumbered or that the Liens granted to Agent or Collateral Agent on behalf of
Lenders herein or pursuant hereto have been properly or sufficiently or lawfully
created, perfected, protected or enforced or are entitled to any particular
priority, or to exercise at all or in any particular manner or under any duty of
care, disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to Agent, Funding Agent or
Collateral Agent in this Agreement or in any of the Loan Documents, it being
understood and agreed that in respect of the property covered by this Agreement
or the Loan Documents or any act, omission or event related thereto, each of
Agent, Funding Agent and Collateral Agent may act in any manner it may deem
appropriate, in its discretion (subject to the prior written approval of Agent,
in the case of Funding Agent and Collateral Agent), given, in the case of Agent,
Agent's own interest in property covered by this Agreement or the Loan Documents
as one of the Lenders, and that neither Agent, Funding Agent nor Collateral
Agent shall have any duty or liability whatsoever to any of the other Lenders.
(I) Agency for Perfection. Each Lender hereby appoints each other
---------------------
Lender as Agent for the purpose of perfecting Lenders' security interest in
Collateral which, in accordance with Article 9 of the Uniform Commercial Code in
---------
any applicable jurisdiction, can be perfected only by possession. Should any
Lender (other than Agent or Collateral Agent) obtain possession of any such
Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's
request therefor, shall deliver such Collateral to Agent or in accordance with
Agent's instructions. Agent may and, with the prior written consent of Agent,
Collateral Agent may, file such proofs of claim or other similar or equivalent
documents as may be necessary or advisable in order to have the claims of Agent,
Funding Agent, Collateral Agent and the Lenders (including any claim for the
reasonable compensation, expenses, disbursements and advances of Agent, Funding
Agent, Collateral Agent and the Lenders, and their respective agents, financial
advisors and counsel), allowed in any federal, state or foreign judicial
proceedings relative to any Borrower and/or any Subsidiary of any Borrower, or
any of their respective creditors or property, and shall be entitled and
empowered to collect, receive and distribute any monies, securities or other
property payable or deliverable on any such claims. Any custodian in any
federal, state or foreign judicial proceedings relative to any Borrower and/or
any Subsidiary of any Borrower is hereby authorized by each Lender to make
payments to Agent (or, if requested in writing by Agent, to Collateral Agent)
and, in the event that Agent shall consent to the making of such payments
directly to the Lenders, to pay to each of Agent, Funding Agent and Collateral
Agent any amount due to each such Person for the reasonable compensation,
expenses, disbursements and advances of Agent, Funding Agent, Collateral Agent,
and their respective agents, financial advisors and counsel, and any other
amounts due Agent, Funding Agent or Collateral Agent. Nothing contained in this
Agreement or the other Loan Documents shall be deemed to authorize Agent,
Funding Agent or Collateral Agent to authorize or consent to or accept or adopt
on behalf of any Lender any plan of reorganization, arrangement, adjustment or
composition affecting the Loans, or the rights of any holder thereof, or to
authorize Agent, Funding Agent or Collateral Agent to vote in respect of the
claim of any Lender in any such proceeding, except as specifically permitted
herein.
(J) Exercise of Remedies. Each Lender agrees that it will not have
--------------------
any right individually to enforce or seek to enforce this Agreement or any Loan
Document or to realize
50
<PAGE>
upon any collateral security for the Loans, it being understood and agreed that
such rights and remedies may be exercised only by Agent or by Collateral Agent
with the prior written consent of Agent.
9.2 Notice of Default.
-----------------
In the event that Agent, Funding Agent, Collateral Agent or any Lender
shall acquire actual knowledge, or shall have been notified of any Event of
Default, then Agent, Funding Agent, Collateral Agent or such Lender, as the case
may be, shall promptly notify Lenders and Agent, Funding Agent and Collateral
Agent.
9.3 Action by Agents.
----------------
Each of Agent, Funding Agent and Collateral Agent shall be entitled to
use its discretion with respect to exercising or refraining from exercising any
rights which may be vested in it by, and with respect to taking or refraining
from taking any action or actions which it may be able to take under or in
respect of, this Agreement and the other Loan Documents, unless such Person
shall have been instructed by Agent, in the case of Funding Agent and Collateral
Agent, and/or by either Requisite Lenders or all of the Lenders, as applicable,
required for an action hereunder or thereunder to exercise or refrain from
exercising such rights or to make or refrain from taking such action; provided
--------
that the exercise of discretion by Funding Agent and Collateral Agent shall
require the prior consent of Agent. Neither Agent, Funding Agent nor Collateral
Agent shall incur any liability under or in respect of this Agreement or any
other Loan Document with respect to anything which it may do or refrain from
doing in the reasonable exercise of its judgment or which may seem to it to be
necessary or desirable in the circumstances, except for its gross negligence or
willful misconduct. Neither Agent, Funding Agent nor Collateral Agent shall be
liable to Lenders or to any Lender in acting or refraining from acting under
this Agreement in accordance with the instructions of the Requisite Lenders, or
all of the Lenders, as the case may be, and any action taken or failure to act
pursuant to such instructions shall be binding on all Lenders.
9.4 Amendments, Waivers and Consents.
--------------------------------
(A) Except as otherwise provided herein, no amendment, modification,
termination or waiver of any provision of this Agreement or any other Loan
Document, or consent to any departure by any Loan Party therefrom, shall in any
event be effective unless the same shall be in writing and signed by Borrowers
and Requisite Lenders; provided however, no amendment, modification,
----------------
termination, waiver or consent shall be effective, unless in writing and signed
by all Lenders, to do any of the following: (i) increase any of the Commitments;
(ii) reduce the rate of interest on or fees payable with respect to any Loan or
Lender Letter of Credit; (iii) extend the scheduled due date for all or any
portion of principal of the Loans or any interest or fees due hereunder; (iv)
amend or waive the definition of the term "Requisite Lenders"; (v) amend or
waive this subsection 9.4; (vi) amend the definition of the term "Borrowing
--------------
Base" or any of the associated defined terms used therein; (vii) amend the
definition of the term "Available Currency" if the effect of such amendment is
to include a new currency therein; (viii) amend or waive the definition of
"Maximum Swingline Loan Amount" or the provisions of subsection 2.1(D) relating
---------- -----------------
to the terms of the Swingline Loan; or (ix) amend the provisions of subsection
----------
51
<PAGE>
9.10; provided, further, that no amendment, modification, termination, waiver or
- ---- -------- -------
consent affecting the rights or duties of Agent, Funding Agent or Collateral
Agent under this Agreement or any other Loan Document shall in any event be
effective, unless in writing and signed by Agent, Funding Agent or Collateral
Agent, as applicable, in addition to the Lenders required to take such action,
and provided further, that no amendments, modification, termination, waiver or
-------- -------
consent of or with respect to any provision relating to the Swingline Loan shall
be effective unless in writing and signed by the Swingline Lender;
(B) Each amendment, modification, termination, waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which it was given. No amendment, modification, termination, waiver or consent
shall be required for Agent or Collateral Agent to take additional Collateral;
(C) Each Lender grants Agent the right to purchase all, but not less
than all, of such Lender's Commitment, in the event Agent requests the consent
of a Lender and such consent is denied. In such circumstances, Agent may, at
its option, require such Lender to assign its interest in the Loans to Agent or
Agent's designee for a price equal to the then outstanding principal amount
thereof plus accrued and unpaid interest and fees due such Lender, which
----
interest and fees will be paid when collected from Borrowers;
Notwithstanding anything in this subsection 9.4, Agent and Borrowers, without
--------------
the consent of either Requisite Lenders or all Lenders or of Funding Agent or
Collateral Agent, may execute amendments to this Agreement and the Loan
Documents, which consist solely of the making of typographical corrections.
9.5 Assignments and Participations in Loans.
---------------------------------------
(A) Each Lender may assign its rights and delegate its obligations
under this Agreement to an Eligible Assignee; provided that (a) such Lender
--------
shall first obtain the written consent of Agent, which shall not be unreasonably
withheld, (b) the amount of Commitments and Loans of the assigning Lender being
assigned shall in no event be less than the lesser of (i) $5,000,000 or (ii) the
entire amount of the Commitments and Loans of such assigning Lender and (c)(i)
each such assignment shall be of a pro rata portion of all such assigning
Lender's Loans and Commitments hereunder, and (ii) the parties to such
assignment shall execute and deliver to Agent for acceptance and recording an
Assignment and Assumption Agreement together with (x) a processing and recording
fee of $3,500 payable to Agent and (y) each of the Notes originally delivered to
the assigning Lender. Upon receipt of all of the foregoing, Agent shall notify
Borrowers, Funding Agent and Collateral Agent of such assignment and Borrowers
shall comply with their obligations under the last sentence of subsection
----------
2.1(G). To the extent of an assignment authorized under this subsection 9.5,
- ------ --------------
upon Agent's receipt and acceptance of the Assignment and Acceptance Agreement
and Agent's receipt of the recording fee set forth above, the assignee shall be
considered to be a "Lender" hereunder and each Borrower hereby acknowledges and
agrees that any assignment will give rise to a direct obligation of Borrowers to
the assignee. The assigning Lender shall be relieved of its obligations
hereunder with respect to the assigned portion of its Commitment.
52
<PAGE>
(B) Each Lender may sell participations in all or any part of any
Loans made by it to another Person; provided that any such participation shall
--------
be in a minimum amount of $5,000,000, and provided, further, that all amounts
-------- -------
payable by Borrowers hereunder shall be determined as if that Lender had not
sold such participation and the holder of any such participation shall not be
entitled to require such Lender to take or omit to take any action hereunder
except action directly effecting (a) any reduction in the principal amount or an
interest rate on any Loan in which such holder participates; (b) any extension
of the Termination Date or the date fixed for any payment of interest payable
with respect to any Loan in which such holder participates; and (c) any release
of substantially all of the Collateral. Each Borrower hereby acknowledges and
agrees that the participant under each participation shall for purposes of
subsections 2.8, 2.9, 2.10, 9.6 and 10.2 be considered to be a "Lender".
- ----------------------------------------
(C) Except as otherwise provided in subsection 9.5(A) no Lender shall,
-----------------
as between Borrowers and that Lender, be relieved of any of its obligations
hereunder as a result of any sale, assignment, transfer or negotiation of, or
granting of participation in, all or any part of the Loans or other Obligations
owed to such Lender. Each Lender may furnish any information concerning the
Loan Parties in the possession of that Lender from time to time to Eligible
Assignees and participants (including prospective assignees and participants)
provided that the Persons obtaining such information agrees to maintain the
- --------
confidentiality of such information to the extent required by subsection 10.18.
----------------
(D) Notwithstanding any other provision set forth in this Agreement,
any Lender may at any time create a security interest in all or any portion of
its rights under this Agreement or the other Loan Documents in favor of any
Federal Reserve Bank in accordance with Regulation A of the Board of Governors
of the Federal Reserve System.
9.6 Set Off and Sharing of Payments. In addition to any rights now or
-------------------------------
hereafter granted under applicable law and not by way of limitation of any such
rights, upon the occurrence and during the continuance of any Event of Default,
each Lender is hereby authorized by each Borrower at any time or from time to
time, with reasonably prompt subsequent notice to Borrowers or to a directly
affected Subsidiary (any prior or contemporaneous notice being hereby expressly
waived) to set off and to appropriate and to apply any and all (a) balances held
by such Lender at any of its offices for the account of any Borrower or any
Subsidiary thereof (regardless of whether such balances are then due to such
Borrower or such Subsidiary), and (b) other property at any time held or owing
by such Lender to or for the credit or for the account of any Borrower or any
Subsidiary thereof, against and on account of any of the Obligations which are
not paid when due; provided that no Lender shall exercise any such right without
--------
the prior written consent of Agent. Any Lender which has exercised its right to
set off shall purchase for cash (and the other Lenders shall sell)
participations in each such other Lender's Pro Rata Share of the Obligations as
would be necessary to cause each Lender to share such amount so set off with
each other Lender in accordance with their respective Pro Rata Shares. Each
Borrower agrees, to the fullest extent permitted by law, that (a) any Lender may
exercise its right to set off with respect to amounts in excess of its Pro Rata
Share of the Obligations and may sell participations in such amount so set off
to other Lenders, and (b) any Lender so purchasing a participation in the Loans
made or other Obligations held by other Lenders may exercise all rights of set-
off, bankers' lien, counterclaim or similar rights with respect to such
participation as fully as if such Lender were a direct holder of Loans and other
Obligations in the amount of such participation.
53
<PAGE>
9.7 Disbursement of Funds. Each of Agent and, to the extent permitted by
---------------------
subsection 2.(1)(E)(2), Funding Agent, may, on behalf of Lenders, disburse funds
- ----------------------
to Borrowers for Loans requested. Each Lender shall reimburse each of Agent and
Funding Agent on demand for all funds disbursed on its behalf by Agent or
Funding Agent, as applicable, or if Agent so requests, each Lender will remit to
Agent its Pro Rata Share of any Loan or Advance before Agent disburses same to
any Borrower. If Agent elects to require that funds be made available prior to
disbursement to any Borrower, Agent shall advise each Lender by telephone, telex
or telecopy of the amount of such Lender's Pro Rata Share of such requested Loan
no later than (a) two Business Days prior to the Funding Date applicable thereto
for LIBOR Loans and (b) by 1:00 p.m. Chicago time on the Funding Date for Base
Rate Loans, and each such Lender shall pay Agent such Lender's Pro Rata Share of
such requested Loan, in same day funds, by wire transfer to Agent's account not
later than 10:00 a.m. Chicago time on such Funding Date for LIBOR Loans and 3:00
p.m. Chicago time for Base Rate Loans.
9.8 Settlements, Payments and Information.
-------------------------------------
(A) Revolving Advances and Payments; Fee Payments.
---------------------------------------------
(1) Payments of principal in respect of the Term Loans will be
settled on the Business Day received in accordance with the provisions of
Section 2. The Revolving Loan may fluctuate from day to day through Agent's and
- ---------
Funding Agent's disbursement of funds to, and receipt of funds from, Borrowers.
In order to minimize the frequency of transfers of funds between or among Agent,
Funding Agent and each Lender, notwithstanding terms to the contrary set forth
in Section 2 and subsection 9.7, Revolving Advances and repayments (except as
--------- --------------
set forth in subsection 2.1(F)) may be settled according to the procedures
-----------------
described in this subsection 9.8. Notwithstanding these procedures, each
--------------
Lender's obligation to fund its Pro Rata Share of Advances made by Agent or
Funding Agent to any Borrower will commence on the date such Advances are made
by Agent or Funding Agent, as the case may be. Such payments will be made by
such Lender without set-off, counterclaim or reduction of any kind.
(2) Once each week for the Revolving Loan or more frequently
(including daily), if Agent so elects (each such day being a "Settlement Date"),
---------------
Agent will advise each Lender by 1:00 p.m. Chicago time by telephone, telex, or
telecopy of the amount of each such Lender's Pro Rata Share of the Revolving
Loan. Such advice will specify the aggregate amount of Revolving Advances made
by each of Agent and Funding Agent since the immediately preceding Settlement
Date and shall further specify the aggregate amount of Revolving Advances made
in each Available Currency since the immediately preceding Settlement Date. In
the event payments are necessary to adjust the amount of such Lender's share of
the Revolving Loan to such Lender's Pro Rata Share of the Revolving Loan, the
following settlement procedures shall apply:
(a)(i) each Lender shall pay to Funding Agent an amount equal to the
difference, if a positive number, between (i) such Lender's Pro Rata Share
of all Revolving Advances made by Funding Agent on behalf of Agent and
Lenders since the immediately preceding Settlement Date , and (ii) such
Lender's Pro Rata Share of all principal payments, if any, in respect of
the Revolving Loan for which good funds have been received by Funding Agent
since the immediately preceding Settlement Date, which amount shall be paid
by each Lender to Funding Agent in
54
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the applicable Available Currencies in which such Revolving Advances were
so made by Funding Agent; or
(a)(ii) Funding Agent shall pay to each Lender an amount equal to the
difference, if a positive number, between (i) such Lender's Pro Rata Share
of all principal payments in respect of the Revolving Loan for which good
funds have been received by Funding Agent or Collateral Agent since the
immediately preceding Settlement Date, and (ii) such Lender's Pro Rata
Share of all Revolving Advances made by Funding Agent on behalf of Agent
and Lenders since the immediately preceding Settlement Date, which amount
shall be paid by Funding Agent to each such Lender in the applicable
Available Currencies in which such principal payments were so received by
Funding Agent or Collateral Agent;
and
---
(b)(i) each Lender shall pay to Agent an amount equal to the difference, if
a positive number, between (i) such Lender's Pro Rata Share of all
Revolving Advances and payments under Lender Letters of Credit made by
Agent since the immediately preceding Settlement Date, and (ii) such
Lender's Pro Rata Share of all principal payments in respect of the
Revolving Loan for which good funds have been received by Agent since the
immediately preceding Settlement Date, which amount shall be paid by each
Lender to Agent in the applicable Available Currencies in which such
Advances or payments were so made by Agent; or
(b)(ii) Agent shall pay to each Lender an amount equal to the difference,
if a positive number, between (i) such Lender's Pro Rata Share of all
principal payments in respect of the Revolving Loan for which good funds
have been received by Agent since the immediately preceding Settlement
Date, and (ii) such Lender's Pro Rata Share of all Revolving Advances and
payments under Lender Letters of Credit made by Agent since the immediately
preceding Settlement Date, which amount shall be paid by Agent to each such
Lender in the applicable Available Currencies in which such principal
payments were so received by Agent.
The part(ies) from which any such payments are due will pay the other part(ies),
in same day funds, by wire transfer to the other's account not later than (x)
3:00 p.m. Chicago time on the Business Day following the Settlement Date, in the
case of payments between Agent and any Lender, and (y) 3:00 p.m. London time on
the Business Day following the Settlement Date, in the case of payments between
Funding Agent and any Lender.
(3) On the first Business Day of each month ("Interest Settlement
-------------------
Date"), Agent will advise each Lender by telephone, telefax or telecopy of the
- ----
amount of interest and fees charged to and collected from Borrowers for the
preceding month. Provided that such Lender has made all payments required to be
made by it under this Agreement, Agent will pay to such Lender, by wire transfer
to such Lender's account (as specified by such Lender on the signature page of
this Agreement as amended by such Lender from time to time after the date hereof
or in the applicable Assignment and Assumption Agreement) not later than 3:00
p.m.
55
<PAGE>
Chicago time on the next Business Day following the Interest Settlement Date
such Lender's share of such interest and such Lender's Pro Rata Share of such
fees, which amounts shall be paid to each such Lender in the Available
Currencies in which such interest and fees were charged to or collected from
Borrowers by Agent.
(B) Return of Payments.
------------------
(1) If Agent or Funding Agent pays an amount to a Lender under
this Agreement in the belief or expectation that a related payment has been or
will be received by Agent or Funding Agent, as the case may be, from a Borrower
and such related payment is not received by Agent or Funding Agent, then Agent
or Funding Agent, as applicable, will be entitled to recover such amount from
such Lender without set-off, counterclaim or deduction of any kind.
(2) If Agent or Funding Agent determines at any time that any
amount received by it under this Agreement must be returned to any Borrower or
paid to any other Person pursuant to any federal, state or foreign solvency law
(or similar or equivalent law) or otherwise, then, notwithstanding any other
term or condition of this Agreement, neither Agent nor Funding Agent will be
required to distribute any portion thereof to any Lender. In addition, each
Lender will repay to each of Agent and Funding Agent on demand any portion of
such amount that Agent or Funding Agent, as applicable, has distributed to such
Lender, together with interest at such rate, if any, as Agent or Funding Agent
is required to pay to any Borrower or such other Person, without set-off,
counterclaim or deduction of any kind.
9.9 Dissemination of Information. Agent will provide Lenders with any
----------------------------
information received by Agent from Borrowers which is required to be provided to
a Lender hereunder; provided, however, that Agent shall not be liable to Lenders
-------- -------
for any failure to do so, except to the extent that such failure is attributable
to Agent's gross negligence or willful misconduct.
9.10 Discretionary Advances. Agent may, in its sole discretion, during
----------------------
the continuance of an Event of Default, make (and direct Funding Agent to make)
Revolving Advances in an aggregate amount of not more than $250,000 in excess of
the limitations set forth in the Borrowing Base for the purpose of preserving or
protecting the Collateral or for incurring any costs associated with collection
or enforcing rights or remedies against the Collateral, or incurred in any
action to enforce this Agreement or any other Loan Document.
SECTION 10. MISCELLANEOUS
-------------
10.1 Expenses and Attorneys' Fees. Whether or not the transactions
----------------------------
contemplated hereby shall be consummated, Borrowers jointly and severally agree
to promptly pay all fees, costs and expenses incurred in connection with any
matters contemplated by or arising out of this Agreement or the other Loan
Documents including the following, and all such fees, costs and expenses shall
be part of the Obligations, payable on demand and secured by the Collateral:
(a) fees, costs and expenses incurred by Agent, Funding Agent or Collateral
Agent (including attorneys' fees, allocated costs of internal counsel and fees
of environmental consultants, accountants and other professionals retained by
Agent or by Funding Agent or Collateral Agent with the prior approval of Agent)
incurred in connection with the examination, review, due diligence
investigation, documentation and closing of the financing arrangements evidenced
by
56
<PAGE>
the Loan Documents; (b) fees, costs and expenses incurred by Agent, Funding
Agent or Collateral Agent (including attorneys' fees, allocated costs of
internal counsel and fees of environmental consultants, accountants and other
professionals retained by Agent or by Funding Agent or Collateral Agent with the
prior approval of Agent) incurred in connection with the review, negotiation,
preparation, documentation, execution, syndication, and administration of the
Loan Documents, the Loans, and any amendments, waivers, consents, forbearances
and other modifications relating thereto or any subordination or intercreditor
agreements; (c) fees, costs and expenses incurred by Agent, Funding Agent,
Collateral Agent or any Lender in creating, perfecting and maintaining
perfection of Liens in favor of Agent or Collateral Agent, on behalf of Lenders;
(d) fees, costs and expenses incurred by Agent or Funding Agent in connection
with forwarding to any Borrower the proceeds of Loans including Agent's and
Funding Agent's standard wire transfer fee and including any fees, costs, losses
or expenses associated with currency translations, howsoever arising; (e) fees,
costs, expenses and bank charges, including bank charges for returned checks,
incurred by Agent, Funding Agent, Collateral Agent or any Lender in
establishing, maintaining and handling lock box accounts, blocked accounts or
other accounts for collection of the Collateral; (f) fees, costs, expenses
(including attorneys' fees and allocated costs of internal counsel) of Agent,
Funding Agent, Collateral Agent or any Lender and costs of settlement incurred
in collecting upon or enforcing rights against the Collateral or incurred in any
action to enforce this Agreement or the other Loan Documents or to collect any
payments due from any Borrower or any other Loan Party under this Agreement or
any other Loan Document or incurred in connection with any refinancing or
restructuring of the credit arrangements provided under this Agreement, whether
in the nature of a "workout" or in connection with any insolvency or bankruptcy
proceedings or otherwise.
10.2 Indemnity; Value Added Tax.
--------------------------
(A) Indemnity. In addition to the payment of expenses pursuant to
---------
subsection 10.1, whether or not the transactions contemplated hereby shall be
- ---------------
consummated, Borrowers jointly and severally agree to indemnify on an after tax
basis, pay and hold Agent, Funding Agent, Collateral Agent and each Lender, and
the officers, directors, employees, agents, consultants, auditors, persons
engaged by any of Agent, Funding Agent, Collateral Agent or any Lender to
evaluate or monitor the Collateral, affiliates and attorneys of any of Agent,
Funding Agent, Collateral Agent, any Lender and such holders (collectively
called the "Indemnitees") harmless from and against any and all liabilities,
-----------
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, expenses and disbursements of any kind or nature whatsoever (including
the fees and disbursements of counsel for such Indemnitees in connection with
any investigative, administrative or judicial proceeding commenced or
threatened, whether or not such Indemnitee shall be designated a party thereto)
that may be imposed on, incurred by, or asserted against that Indemnitee, in any
manner relating to or arising out of this Agreement or the other Loan Documents,
the consummation of the transactions contemplated by this Agreement, the
statements contained in the commitment letters, if any, delivered by Agent,
Funding Agent or any Lender, Agent's, Funding Agent's and each Lender's
agreement to make the Loans hereunder, the use or intended use of the proceeds
of any of the Loans or the exercise of any right or remedy hereunder or under
the other Loan Documents (the "Indemnified Liabilities"); provided that no
----------------------- --------
Borrower shall have any obligation to an Indemnitee hereunder with respect to
Indemnified Liabilities arising from the gross negligence or willful misconduct
of that Indemnitee as determined by a court of competent jurisdiction.
57
<PAGE>
(B) Value Added Tax. For the avoidance of doubt, the amounts stated
---------------
in this Agreement to be payable by any Borrower are exclusive of United Kingdom
value added tax ("VAT") and accordingly:
---
(i) each Borrower shall pay on demand any VAT properly chargeable
in respect of supplies to each Borrower contemplated by this Agreement
(including any VAT chargeable by Agent, Funding Agent, Collateral Agent or
any Lender in respect of its supplies to such Borrower under this
Agreement); and
(ii) in the case of goods or services supplied to or other costs,
fees and expenses incurred by Agent, Funding Agent, Collateral Agent or any
Lender in connection with this Agreement, and which are to be met by any
Borrower or in respect of which a Borrower is to indemnify Agent, Funding
Agent, Collateral Agent or any Lender, such Borrower (for the avoidance of
doubt) shall pay to Agent (for itself or for the benefit of the relevant
party) by way of additional remuneration such amount as shall represent any
associated VAT (whether charged by the supplier or suffered by reason of
the reverse charge provisions contained in section 8 of the Value Added Tax
Act 1994 (England and Wales).
10.3 Notices. Unless otherwise specifically provided herein, all notices
-------
shall be in writing addressed to the respective party as set forth below and may
be personally served, telecopied or sent by overnight courier service or United
States mail and shall be deemed to have been given: (a) if delivered in person,
when delivered; (b) if delivered by telecopy, on the date of transmission if
transmitted on a Business Day before 4:00 p.m. Chicago time or, if not, on the
next succeeding Business Day; (c) if delivered by overnight courier, two days
after delivery to such courier properly addressed; or (d) if by U.S. Mail, four
Business Days after depositing in the United States mail, with postage prepaid
and properly addressed.
If to U.S. Borrower: HAWKER PACIFIC AEROSPACE
11240 Sherman Way
Sun Valley, California 91352
Attn: Brian S. Aune
Telecopy No.: (818) 765-8073
With a copy to: TROY & GOULD PROFESSIONAL
CORPORATION
1801 Century Park East, Suite 1600
Los Angeles, California 90067
Attn: Yvonne E. Chester, Esq.
Telecopy No.: (310) 201-4746
If to U.K. Borrower: HAWKER PACIFIC AEROSPACE LIMITED
Technical Block A (5362)
P.O. Box 10, London Heathrow Airport
Hounslow, Middlesex TW6 2JA
United Kingdom
Attn: Dennis Biety
58
<PAGE>
Telecopy No.: 011-44-181-513-3596
With a copy to: PARIS, SMITH & RANDALL, SOLICITORS
Number 1, London Road
Southampton, Hampshire S015 2AE
United Kingdom
Attn: Andrew Heathcock
Telecopy No.: 011-44-170-363-1835
If to Agent or to Heller: HELLER FINANCIAL, INC.
500 West Monroe
Chicago, Illinois, 60661
Attn: Group Portfolio Officer
Telecopy No.: (312) 441-7367
With a copy to: HELLER FINANCIAL, INC.
500 West Monroe
Chicago, Illinois 60661
Attn: Legal Department
Senior Counsel, Corporate
Finance
Telecopy No.: (312) 441-7367
If to Funding Agent or
Collateral Agent: NMB-HELLER LIMITED
Park House
22 Park Street
Croydon CRG 1RD
United Kingdom
Attn: Robin Archibald
Telecopy No.: 011-44-181-680-2084
With a copy to: Agent (as set forth above)
If to any Lender: Its address indicated on the signature page hereto,
in an Assignment and Assumption Agreement or in a notice to Agent, Funding
Agent, Collateral Agent and Borrowers or to such other address as the party
addressed shall have previously designated by written notice to the serving
party, given in accordance with this subsection 10.3.
---------------
10.4 Survival of Representations and Warranties and Certain Agreements.
-----------------------------------------------------------------
All agreements, representations and warranties made herein shall survive the
execution and delivery of this Agreement and the making of the Loans hereunder.
Notwithstanding anything in this Agreement or implied by law to the contrary,
the agreements of Borrowers and Agent, Funding Agent, Collateral Agent and
Lenders set forth in subsections 10.1, 10.2, 10.6, 10.11, 10.14, and 10.15
------------------------------------------------------
(Borrowers' agreement to pay fees, agreement to indemnify Agent, Funding Agent,
Collateral Agent and Lenders, the reinstatement of Obligations, agreement as to
choice of law and jurisdiction and the waiver of a jury trial by the parties
hereto) shall survive the payment of the Loans and the termination of this
Agreement.
59
<PAGE>
10.5 Indulgence Not Waiver. No failure or delay on the part of Agent,
---------------------
Funding Agent, Collateral Agent, any Lender or any holder of any Note in the
exercise of any power, right or privilege hereunder or under any Note shall
impair such power, right or privilege or be construed to be a waiver of any
default or acquiescence therein, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.
10.6 Marshaling; Payments Set Aside. Neither Agent, Funding Agent,
------------------------------
Collateral Agent nor any Lender shall be under any obligation to marshal any
assets (or take any similar or equivalent action under applicable law) in favor
of any Loan Party or any other party or against or in payment of any or all of
the Obligations. To the extent that any Loan Party makes a payment or payments
to Agent, Funding Agent, Collateral Agent and/or any Lender, or Agent, Funding
Agent, Collateral Agent and/or any Lender enforces its security interests or
exercise its rights of setoff, and such payment or payments or the proceeds of
such enforcement or setoff 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 federal, state or
foreign bankruptcy law, other federal, state or foreign law, common law or
equitable cause, then to the extent of such recovery, the Obligations or part
thereof originally intended to be satisfied, and all Liens, rights and remedies
therefor, shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
10.7 Entire Agreement. This Agreement and the other Loan Documents embody
----------------
the entire agreement among the parties hereto and supersede all prior
commitments, agreements, representations, and understandings, whether written or
oral, relating to the subject matter hereof, and may not be contradicted or
varied by evidence of prior, contemporaneous, or subsequent oral agreements or
discussions of the parties hereto.
10.8 Severability. The invalidity, illegality or unenforceability in any
------------
jurisdiction of any provision in or obligation under this Agreement or the other
Loan Documents shall not affect or impair the validity, legality or
enforceability of the remaining provisions or obligations under this Agreement,
or the other Loan Documents.
10.9 Lenders' Obligations Several; Independent Nature of Lenders' Rights.
-------------------------------------------------------------------
The obligation of each Lender hereunder is several and not joint and neither
Agent, Funding Agent, Collateral Agent nor any Lender shall be responsible for
the obligation or Commitment of any other Lender hereunder. In the event that
any Lender at any time should fail to make a Loan as herein provided, the
Lenders, or any of them, at their sole option, may make the Loan that was to
have been made by the Lender so failing to make such Loan. Nothing contained in
any Loan Document and no action taken by Agent, Funding Agent, Collateral Agent
or any Lender pursuant hereto or thereto shall be deemed to constitute Lenders
to be a partnership, an association, a joint venture or any other kind of
entity. The amounts payable at any time hereunder to each Lender shall be a
separate and independent debt, and, provided Agent or Collateral Agent fails or
refuses to exercise any remedies against any Borrower after receiving the
direction of the Requisite Lenders, each Lender shall be entitled to protect and
enforce its rights arising out of this Agreement and it shall not be necessary
for any other Lender to be joined as an additional party in any proceeding for
such purpose.
60
<PAGE>
10.10 Headings. Section and subsection headings in this Agreement are
--------
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
10.11 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL
--------------
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
10.12 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors and
assigns, provided, however, that no Borrower may assign its rights or
-------- -------
obligations hereunder without the written consent of Lenders.
10.13 No Fiduciary Relationship; No Duty; Limitation of Liabilities.
-------------------------------------------------------------
(A) No provision in this Agreement or in any of the other Loan
Documents and no course of dealing between the parties shall be deemed to create
any fiduciary duty by Agent, Funding Agent, Collateral Agent or any Lender to
any Borrower.
(B) All attorneys, accountants, appraisers, and other professional
Persons and consultants retained by Agent, Funding Agent, Collateral Agent or
any Lender shall have the right to act exclusively in the interest of Agent,
Funding Agent, Collateral Agent or such Lender and shall have no duty of
disclosure, duty of loyalty, duty of care, or other duty or obligation of any
type or nature whatsoever to Borrowers or any of Borrowers' shareholders or any
other Person.
(C) Neither Agent, Funding Agent, Collateral Agent nor any Lender,
nor any affiliate, officer, director, shareholder, employee, attorney or Agent
of Agent, Funding Agent, Collateral Agent or any Lender shall have any liability
with respect to, and each Borrower hereby waives, releases, and agrees not to
sue any of them upon, any claim for any special, indirect, incidental, or
consequential damages suffered or incurred by any Borrower in connection with,
arising out of, or in any way related to, this Agreement or any of the other
Loan Documents, or any of the transactions contemplated by this Agreement or any
of the other Loan Documents. Each Borrower hereby waives, releases, and agrees
not to sue Agent, Funding Agent, Collateral Agent or any Lender, or any of
Agent's, Funding Agent's, Collateral Agent's or any Lender's affiliates,
officers, directors, employees, attorneys or agents, for punitive damages in
respect of any claim in connection with, arising out of, or in any way related
to, this Agreement or any of the other Loan Documents, or any of the
transactions contemplated by this Agreement or any of the transactions
contemplated hereby.
10.14 CONSENT TO JURISDICTION. EACH BORROWER HEREBY CONSENTS TO THE
-----------------------
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK,
STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL
ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER
LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH BORROWER EXPRESSLY
SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY
DEFENSE OF FORUM NON CONVENIENS. EACH BORROWER HEREBY WAIVES
61
<PAGE>
PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF
PROCESS MAY BE MADE UPON SUCH BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN
RECEIPT REQUESTED, ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET FORTH IN THIS
AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE 10 DAYS AFTER THE SAME HAS BEEN
POSTED.
10.15 WAIVER OF JURY TRIAL. EACH BORROWER, AGENT, FUNDING AGENT,
--------------------
COLLATERAL AGENT AND EACH LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS. EACH BORROWER, AGENT, FUNDING AGENT,
COLLATERAL AGENT AND EACH LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL
INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE
WAIVER IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THAT
EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH
BORROWER, AGENT, FUNDING AGENT, COLLATERAL AGENT AND EACH LENDER WARRANT AND
REPRESENT THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH
LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS.
10.16 Construction. Each Borrower, Agent, Funding Agent, Collateral
------------
Agent and each Lender each acknowledge that it has had the benefit of legal
counsel of its own choice and has been afforded an opportunity to review this
Agreement and the other Loan Documents with its legal counsel and that this
Agreement and the other Loan Documents shall be construed as if jointly drafted
by Borrowers, Agent, Funding Agent, Collateral Agent and each Lender.
10.17 Counterparts; Effectiveness. This Agreement and any amendments,
---------------------------
waivers, consents, or supplements may be executed via telecopier or facsimile
transmission in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all of which counterparts together shall constitute one
and the same instrument. This Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties hereto.
10.18 Confidentiality. Agent, Funding Agent, Collateral Agent and Lenders
---------------
shall hold all nonpublic information obtained pursuant to the requirements
hereof and identified as such by Borrowers in accordance with such Person's
customary procedures for handling confidential information of this nature and in
accordance with safe and sound business practices and in any event may make
disclosure to such of its respective affiliates, officers, directors, employees,
agents and representatives as need to know such information in connection with
the Loans. Agent, Funding Agent, Collateral Agent and Lenders may also make
disclosure reasonably required by a bona fide offeree or assignee (or
participation), or as required or requested by any Governmental Authority or
representative thereof, or pursuant to legal process, or to its accountants,
lawyers and other advisors, and shall require any such offeree or assignee (or
participant) to agree (and require any of its offerees, assignees or
participants to agree) to comply with this subsection 10.18. In no event shall
----------------
Agent, Funding Agent, Collateral Agent or any Lender be obligated or required to
return any materials furnished by any Borrower provided,
--------
62
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however, each offeree shall be required to agree that if it does not become an
- -------
assignee (or participant) it shall return all materials furnished to it by any
Borrower in connection herewith.
10.19 Judgment Currency. (a) If for the purposes of obtaining judgment in
-----------------
any court it is necessary to convert a sum due hereunder or under the other Loan
Documents in any currency to another currency the parties hereto agree, to the
fullest extent that they may effectively do so, that the rate of exchange used
shall be the Spot Rate on the 2nd Business Day preceding that on which judgment
is given.
(b) The obligation of any Borrower in respect of any sum due in the
original currency from it to Agent, Funding Agent, Collateral Agent or any
Lender hereunder or under any other Loan Document shall, notwithstanding any
judgment in any other currency, be discharged only to the extent that on the
Business Day following receipt by Agent, Funding Agent, Collateral Agent or such
Lender (as the case may be) of any sum adjudged to be so due in such other
currency, Agent, Funding Agent, Collateral Agent or such Lender (as the case may
be) may in accordance with normal banking procedures purchase the original
currency with such other currency. If the amount of such original currency so
purchased is less than the sum originally due to such Person in the original
currency, each Borrower agrees, as a separate obligation and notwithstanding any
such judgment, to indemnify Agent, Funding Agent, Collateral Agent or such
Lender (as the case may be) against such loss, and if the amount of the original
currency so purchased exceeds the sum originally due to Agent, Funding Agent,
Collateral Agent or such Lender (as the case may be) in the original currency,
such Person agrees to remit to such Borrower such excess.
SECTION 11. DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
11.1 Defined Terms. The following terms used in this Agreement shall have
-------------
the following meanings:
"Accounts" means all "accounts" (as defined in the UCC), accounts
--------
receivable, contract rights and general intangibles relating thereto, notes,
drafts and other forms of obligations owed to or owned by any Borrower arising
or resulting from the sale of goods or the rendering of services, whether or not
earned by performance.
"Adjustment Date" means, with respect to any determination of the Base Rate
---------------
Margin or the LIBOR Margin, February 1, May 1, August 1 and November 1 of each
year.
"Advance" shall mean an advance under the Revolving Loan or the Swingline
-------
Loan.
"Affiliate" means any Person (other than Agent, Funding Agent, Collateral
---------
Agent or any Lender): (a) directly or indirectly controlling, controlled by, or
under common control with, any Loan Party; (b) directly or indirectly owning or
holding 5% or more of any equity interest in any Loan Party; (c) 5% or more of
whose stock or other equity interest having ordinary voting power for the
election of directors or the power to direct or cause the direction of
management, is directly or indirectly owned or held by any Loan Party; or (d)
which has a senior officer who is also a senior officer of a Loan Party. For
purposes of this definition, "control" (including with
-------
63
<PAGE>
correlative meanings, the terms "controlling", "controlled by" and "under common
----------- ------------- ------------
control with") means the possession directly or indirectly of the power to
- ------------
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities or other equity interest, or
by contract or otherwise.
"Agent" means Heller in its capacity as Agent for the Lenders under the
-----
Loan Documents and any successor in such capacity appointed pursuant to
subsection 9.1(G).
- -----------------
"Agent's Account" means ABA No. 0710-0001-3, Account No. 52-98695 at First
---------------
National Bank of Chicago, One First National Plaza, Chicago, IL 60670,
Reference: Heller Business Credit for the benefit of Hawker Pacific Aerospace.
"Agreement" means this Loan and Security Agreement as it may be amended,
---------
restated, supplemented or otherwise modified from time to time.
"Applicable Percentage" means, with respect to Advances against Eligible
---------------------
Exchange Inventory and Work in Process (a) during the period commencing on the
Closing Date through and including the last day of the second Loan Year, 80%;
(b) during the period commencing on the first day of the third Loan Year through
and including the last day of the third Loan Year, 75%; (c) during the period
commencing on the first day of the fourth Loan Year through and including the
last day of the fourth Loan Year, 70%; and (d) at all times from and after the
first day of the fifth Loan Year, 65%.
"Appraiser" has the meaning assigned to that term in paragraph (I)(2) of
--------- ----------------
the Reporting Rider.
---------------
"Asset Disposition" means the disposition, whether by sale, lease,
-----------------
transfer, loss, damage, destruction, condemnation or otherwise, of any or all of
the assets of any Borrower or any of their respective Subsidiaries other than
sales or exchanges of Inventory in the ordinary course of business.
"Assignment and Assumption Agreement" shall mean an Assignment and
-----------------------------------
Assumption Agreement substantially in the form of Exhibit A.
---------
"Available Currency" means Dollars and each Optional Currency.
------------------
"Availability" means, as of any date of determination, the Maximum
------------
Revolving Loan Amount less the outstanding principal balance of the Revolving
----
Loan.
"Bank Letter of Credit" means each letter of credit issued by a bank
---------------------
acceptable to and approved by Agent for the account of U.S. Borrower and
supported by a risk participation agreement issued by Agent.
"Base Rate" means (a) with respect to Obligations denominated in Dollars, a
---------
variable rate of interest per annum equal to the higher of (a) the rate of
interest from time to time published by the Board of Governors of the Federal
Reserve System as the "Bank Prime Loan" rate in Federal Reserve Statistical
---------------
Release H.15(519) entitled "Selected Interest Rates" or any successor
64
<PAGE>
publication of the Federal Reserve System reporting the Bank Prime Loan rate or
its equivalent, or (b) the Federal Funds Effective Rate. In the event the Board
of Governors of the Federal Reserve System ceases to publish a Bank Prime Loan
rate or its equivalent, the term "Base Rate" shall mean a variable rate of
interest per annum equal to the highest of the "prime rate", "reference rate",
"base rate", or other similar rate announced from time to time by any of the
three largest banks located in New York City, New York (with the understanding
that any such rate may merely be a reference rate and may not necessarily
represent the lowest or best rate actually charged to any customer by any such
bank); (b) with respect to Obligations denominated in an Optional Currency
(other than Euros), the term "Base Rate" shall mean a variable rate of interest
per annum equal to the highest of the "prime rate", "reference rate", "base
rate", or other similar rate announced from time to time by any of the three
largest banks located in the principal financial center of the applicable
country in respect of such Optional Currency (e.g. London, England, with respect
to Pounds; Paris, France, with respect to Francs, and Amsterdam, the
Netherlands, with respect to Guilders; in each case with the understanding that
any such rate may merely be a reference rate and may not necessarily represent
the lowest or best rate actually charged to any customer by any such bank; and
(c) with respect to Obligations denominated in Euros, the term "Base Rate" shall
mean such variable rate of interest per annum as may be agreed upon in writing
by Agent, Borrowers and Lenders following the Euro Commencement Date.
"Base Rate Loans" means Loans bearing interest at rates determined by
---------------
reference to the applicable Base Rate.
"Base Rate Margin" shall mean (a) as of the Closing Date through July 31,
----------------
1999 (i) 0% per annum with respect to the Revolving Loan and all other
Obligations (other than the Term Loans), (ii) 0% per annum, with respect to Term
Loan A, (iii) 0% per annum, with respect to Term Loan B, and (iv) 0% per annum
with respect to the Swingline Loan; and (b) thereafter, as of each Adjustment
Date, commencing on August 1, 1999, the Base Rate Margin shall be adjusted, if
necessary, to the applicable percent per annum set forth in the pricing table
below opposite the Fixed Charge Coverage calculated for the applicable
Calculation Period. If Borrower Representative shall fail to deliver a
Compliance Certificate by the date required pursuant to paragraph (E) of the
-------------
Reporting Rider effective as of the 10th Business Day following the date on
- ---------------
which such Compliance Certificate was due, each applicable Base Rate Margin
shall be conclusively presumed to equal the highest applicable Base Rate Margin
specified in the pricing table set forth below until the date of delivery of the
Compliance Certificate.
PRICING TABLE
-------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fixed Charge Base Rate Margin
Coverage
- ------------------------------------------------------------------------------
Term Term Swingline
Revolving Loan Loan A Loan B Loan
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equal to or greater than
1.00:1.00 0% 0% 0% 0%
- ------------------------------------------------------------------------------
Less than 1.00:1.00, but
equal to or greater than
.90:1.00 .25% .50% .75% .25%
- ------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------
Fixed Charge Base Rate Margin
Coverage
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than .90:1.00 .50% .75% 1.00% .50%
- ------------------------------------------------------------------------------
</TABLE>
"Blocked Accounts" means, collectively, the U.S. Blocked Accounts and the
----------------
U.K. Blocked Accounts.
"Borrower Representative" means U.S. Borrower in its capacity as Borrower
-----------------------
Representative pursuant to subsection 2.15.
---------------
"Borrowers' Accountants" means the independent certified public accountants
----------------------
selected by Borrowers and their Subsidiaries and reasonably acceptable to Agent,
which selection shall not be modified during the term of this Agreement without
Agent's prior written consent.
"Borrowing Base" has the meaning assigned to that term in subsection
-------------- ----------
2.1(B)(2).
- ---------
"Borrowing Base Certificate" means a certificate and schedule duly
--------------------------
executed by an officer of Borrower Representative appropriately completed and in
substantially the form of Exhibit B.
---------
"British Airways Acquisition" means the acquisition by U.K. Borrower of the
---------------------------
landing gear repair and overhaul business of British Airways Plc ("British
Airways") pursuant to that certain Agreement relating to the Sale and Purchase
of part of the Business of British Airways Plc dated as of December 20, 1997
among U.S. Borrower, U.K Borrower and British Airways Plc, which acquisition was
consummated on January 23, 1998.
"Business Day" means any day excluding Saturday, Sunday and any day which
------------
is a legal holiday under the laws of the States of Illinois, Pennsylvania or
California (or, in relation to a payment or rate fixing in or other matter
related to an Optional Currency, the principal financial center of the country
of such Optional Currency) or is a day on which banking institutions located in
any such state (or any such principal financial center) are closed, or for the
purposes of LIBOR Loans, the making of Revolving Advances by Funding Agent or
other matters relating to Funding Agent, a London Banking Day.
"Calculation Period" means, with respect to any determination of the Base
------------------
Rate Margin or the LIBOR Margin, the trailing twelve month period ending on
the last day of the most recently completed calendar quarter prior to the
applicable Adjustment Date
"Capital Expenditures" means all expenditures (including deposits but
--------------------
excluding all expenditures for Exchange Inventory and Work in Process and
excluding assets purchased pursuant to the British Airways Acquisition) for, or
contracts for expenditures (excluding contracts for expenditures under or with
respect to Capital Leases, but including cash down payments for assets acquired
under Capital Leases) with respect to any fixed assets or improvements, or for
replacements, substitutions or additions thereto, which have a useful life of
more than one year, including the direct or indirect acquisition of such assets
by way of increased product or service charges, offset items or otherwise.
66
<PAGE>
"Capital Lease" means any lease of any property (whether real, personal or
-------------
mixed) that, in conformity with GAAP, should be accounted for as a capital
lease.
"Cash Equivalents" means: (a) marketable direct obligations issued or
----------------
unconditionally guaranteed by the United States Government or the United Kingdom
Government or issued by any agency of either such government and backed by the
full faith and credit of the United States or the United Kingdom, as the case
may be, in each case maturing within six months from the date of acquisition
thereof; (b) commercial paper maturing no more than six months from the date
issued and, at the time of acquisition, having a rating of at least A-1 from
Standard & Poor's Corporation ("S&P") or at least P-1 from Moody's Investors
Service, Inc. ("Moody's"); and (c) certificates of deposit or bankers'
acceptances maturing within six months from the date of issuance thereof issued
by, or overnight reverse repurchase agreements from (i) any commercial bank
organized under the laws of the United States of America, or any state thereof
or the District of Columbia, having combined capital and surplus of not less
than $250,000,000 or (ii) any bank organized under the laws of the United
Kingdom having a long term unsecured and unsubordinated debt rating of at least
A-1 from S&P or at least P-1 from Moody's, and in any case not subject to setoff
rights in favor of any such bank.
"Closing Date" means December 22, 1998.
------------
"Closing Date Inventory Appraisal" means that certain Inventory appraisal
--------------------------------
dated November 19, 1998 prepared by Sage-Popovich, Inc.
"Collateral" means, collectively (a) all of the real or personal property
----------
or interests therein described in subsection 2.7, (b) any Mortgaged Property,
--------------
and (c) any real or personal property or interest therein, in which a Lien in
favor of Agent or Collateral Agent, for the benefit of Agent and Lenders, is
granted or established pursuant to any Foreign Security Document.
"Collateral Agent" means NMB-Heller (and any sub-agents thereof appointed
----------------
in accordance with the terms of this Agreement) in its capacity as collateral
agent for the Lenders under the Loan Documents and any successor in such
capacity appointed pursuant to subsection 9.1(G).
-----------------
"Collateral Value" means (a) with respect to any Eligible Account, the
----------------
Dollar Equivalent of the unpaid face amount of such Eligible Account, and (b)
with respect to any item of Eligible Exchange Inventory and Work in Process,
Eligible Repair Parts and Unserviceable Parts, the Dollar Equivalent of the
Orderly Liquidation Value of such Eligible Parts.
"Commitment" or "Commitments" means the commitment or commitments of
---------- -----------
Lenders to make Loans as set forth in subsections 2.1(A) and/or 2.1(B) and to
--------------------------------
provide Lender Letters of Credit as set forth in subsection 2.1(H).
-----------------
"Companies Act" means the Companies Act 1985 as enacted and in effect from
-------------
time to time in the United Kingdom.
67
<PAGE>
"Compliance Certificate" means a certificate duly executed by the chief
----------------------
executive officer or chief financial officer of Borrower Representative
appropriately completed and in substantially the form of Exhibit D.
---------
"Customer Contract" with respect to any customer of any Borrower means the
-----------------
contract between such Borrower and such customer providing for the provision of
landing gear repair and overhaul services by such Borrower for such customer.
In the event a Borrower is party to more than one such contract with a given
customer, the term "Customer Contract" shall mean all of such contracts with
-----------------
such customer, collectively.
"Default" means a condition, act or event that, after notice or lapse of
-------
time or both, would constitute an Event of Default if that condition, act or
event were not cured or removed within any applicable grace or cure period.
"Defaulted Amount" means, with respect to any Lender at any time, any
----------------
amount required to be paid by such Lender to Agent, Funding Agent, Collateral
Agent or any other Lender hereunder or under any other Loan Document which has
not been so paid.
"Defaulting Lender" means, at any time, any Lender that owes a Defaulted
-----------------
Amount.
"Default Rate" has the meaning assigned to that term in subsection 2.2.
------------ --------------
"Dollar" or "$" means lawful currency of the United States of America.
------ -
"Dollar Equivalent" means, as of any date of determination with respect
-----------------
to any amount denominated in an Optional Currency, the equivalent of such
amount in Dollars determined at the rate of exchange equal to the Spot Rate on
such date of determination.
"EBITDA" means, for any period, without duplication, the total of the
------
following for Borrowers and their Subsidiaries on a consolidated basis, each
calculated for such period: (1) net income determined in accordance with GAAP
(but determined without deduction of up to $750,000 in expenses incurred by
Borrowers in connection with the contemplated move by U.K. Borrower from
Heathrow to a new facility in Dawley Park); plus, to the extent included in the
----
calculation of net income, (2) the sum of (a) income and franchise taxes paid or
accrued; (b) interest expense, net of interest income, paid or accrued; (c)
amortization and depreciation; (d) other non-cash charges (including any
occurring on an extraordinary or non recurring basis, but excluding accruals for
cash expenses made in the ordinary course of business); and (e) extraordinary or
non-recurring "cash" losses; less, to the extent included in the calculation of
----
net income, (3) the sum of (a) the income of any Person (other than wholly-owned
Subsidiaries of a Borrower) in which a Borrower or a wholly owned Subsidiary of
a Borrower has an ownership interest except to the extent such income is
received by such Borrower or such wholly-owned Subsidiary in a cash distribution
during such period; (b) gains from sales or other dispositions of assets (other
than Inventory in the normal course of business); and (c) extraordinary or non-
recurring gains.
68
<PAGE>
"ECU" means the ECU, as defined in Council Regulation (EC) No. 3320/94,
---
that is from time to time used as the unit of account of the European
Communities; changes to the ECU may be made by the European Communities, in
which event the ECU will change accordingly.
"Eligible Assignee" shall mean (a) a commercial bank, commercial finance
-----------------
company or savings bank organized under the laws of the United States, or any
state thereof, and having a combined capital and surplus of at least
$100,000,000 (or $250,000,000 in the case of an assignment of a Revolving Loan
Commitment); (b) a commercial bank organized under the laws of any other country
which is a member of the Organization for Economic Cooperation and Development
(the "OECD"), or a political subdivision of any such country, and having a
----
combined capital and surplus of at least $100,000,000 (or $250,000,000 in the
case of an assignment of a Revolving Loan Commitment), provided that such bank
--------
is acting through a branch or agency located in the country in which it is
organized or another country which is also a member of the OECD; (c) any other
entity which is an "accredited investor" (as defined in Regulation D under the
Securities Act) which extends credit or buys loans as one of its businesses,
including but not limited to, insurance companies, mutual funds and lease
financing companies, and (d) a Person that is primarily engaged in the business
of lending that is (i) a Subsidiary or Affiliate of a Lender, (ii) a Subsidiary
or Affiliate of a Person of which a Lender is a Subsidiary or Affiliate, or
(iii) a Person of which a Lender is a Subsidiary or Affiliate; provided,
---------
however, that no Affiliate of any Borrower shall be an Eligible Assignee.
- -------
"Employee Benefit Plan" means any employee benefit plan within the meaning
---------------------
of Section 3(3) of ERISA which (a) is maintained for employees of any Loan
Party or any ERISA Affiliate or (b) has at any time within the preceding 6 years
been maintained for the employees of any Loan Party or any current or former
ERISA Affiliate.
"EMU" means Economic and Monetary Union as contemplated in the Treaty on
---
European Union.
"EMU Legislation" means legislative measures of the European Council for
---------------
the introduction of, changeover to or operation of the Euro.
"Environmental Claims" means claims, liabilities, investigations,
--------------------
litigation, administrative proceedings, judgments or orders relating to
Hazardous Materials.
"Environmental Laws" means any present or future federal, state, local or
------------------
foreign law, rule, regulation or order relating to pollution, waste, disposal or
the protection of human health or safety, plant life or animal life, natural
resources or the environment.
"Equipment" means all "equipment" (as defined in the UCC), all furniture,
---------
furnishings, fixtures, machinery, motor vehicles, trucks, trailers, vessels,
aircraft and rolling stock and all parts thereof and all additions and
accessions thereto and replacements therefor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and any successor statute and all rules and
regulations promulgated thereunder.
69
<PAGE>
"ERISA Affiliate", as applied to any Loan Party, means any Person who is a
---------------
member of a group which is under common control with any Loan Party, who
together with any Loan Party is treated as a single employer within the meaning
of Section 414(b) and (c) of the IRC.
"Euro" means the single currency of Participating Member States of the
----
European Union.
"Euro Commencement Date" means the date of the commencement of the third
----------------------
stage of EMU or on which circumstances arise which (in the opinion of Requisite
Lenders) have substantially the same effect and result in substantially the same
consequences as commencement of the third stage of EMU as contemplated by the
Treaty on European Union.
"Euro Unit" means the currency unit of the Euro.
---------
"Excess Cash Flow" means, for any period, the greater of (A) zero (0); or
----------------
(B) without duplication, the total of the following for Borrowers and their
Subsidiaries on a consolidated basis, each calculated for such period: (1)
EBITDA; plus (2) tax refunds actually received; less (3) Capital Expenditures
---- ----
(to the extent actually made in cash and/or due to be made in cash within such
period but in no event more than the amount permitted by paragraph (C) of the
-------------
Financial Covenants Rider; less (4) income and franchise taxes paid or accrued
- ------------------------- ----
excluding any provision for deferred taxes included in the determination of net
income; less (5) decreases in deferred income taxes resulting from payments of
----
deferred taxes accrued in prior periods; less (6) cash interest paid or accrued
----
and less (7) scheduled amortization of Indebtedness (excluding mandatory
----
prepayments required under subsection 2.4 actually paid in cash and/or due to be
--------------
paid in cash within such period but only, in the case of Indebtedness
subordinated to the Obligations (if any), to the extent such payments were
permitted under subsection 7.5).
--------------
"Exchange Inventory and Work in Process" means repair parts allocated to
--------------------------------------
jobs, and components or assembly of a landing gear, flap track or flap carriage
for a fixed wing aircraft or helicopter, and shall include core sets received in
exchange for overhauled units, core sets purchased, core sets in the process of
being repaired and overhauled and completed and tagged serviceable landing
gears, flap tracks or flap carriage, or any such items treated as fixed assets
according to GAAP.
"Existing Indebtedness" means all of the obligations of U.S. Borrower, as
---------------------
borrower, and of U.K. Borrower, as guarantor, under and pursuant to that certain
Amended and Restated Business Loan Agreement dated as of January 23, 1998 by and
among U.S. Borrower and Bank of America National Trust and Savings Association
and each of the other "Loan Documents" as therein defined, in each case as in
effect as of the Closing Date.
"Fair Market Value" means, with respect to any item of Exchange Inventory
-----------------
and Work in Process as of any date of determination, the price that a buyer
would be willing to pay to purchase such Exchange Inventory and Work in Process
from a seller unaffiliated with such buyer on an arms length basis, with neither
the buyer nor the seller under any compulsion to effect such transaction, as
more specifically determined by the Appraiser as of any such date.
"Federal Funds Effective 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
70
<PAGE>
Federal funds brokers, as published on the immediately following Business Day by
the Board of Governors of the Federal Reserve System as the Federal Funds Rate
or Federal Reserve Statistical Release H.15(519) entitled "Selected Interest
Rates" or any successor publication of the Federal Reserve System reporting the
Federal Funds Effective Rate or its equivalent or, if such rate is not published
for any Business Day, the average of the quotations for the day of the requested
Loan received by Agent from three Federal funds brokers of recognized standing
selected by Agent.
"Fiscal Year" means each twelve month period ending on the last day of
-----------
December in each year.
"Fixed Asset Appraisal" means, collectively, those certain fixed asset
---------------------
appraisals dated November 5, 1998 (in the case of U.S. Borrower's fixed assets)
and November 13, 1997 (in the case of U.K. Borrower's fixed assets), each
prepared by T/A Appraisal, Inc.
"Fixed Charge Coverage" means, for any period, Operating Cash Flow divided
--------------------- -------
by Fixed Charges.
- --
"Fixed Charges" means, for any period, and each calculated for such period
-------------
(without duplication) for Borrowers and their Subsidiaries on a consolidated
basis, (a) Interest Expense of Borrowers and their Subsidiaries; plus (b)(i)
----
with respect to the period from December 31, 1998 through November 30, 1999, an
amount equal to the higher of (x) $2,011,000 and (y) the current maturities of
long term Indebtedness for such period as reported on Borrowers' consolidated
and consolidating financial statements for such period prepared in accordance
with GAAP; and (ii) at all times from and after December 1, 1999, scheduled
payments of principal with respect to all Indebtedness of Borrowers and their
Subsidiaries (excluding mandatory prepayments required under subsection 2.4
--------------
actually paid in cash and/or due to be paid in cash within such period); plus
----
(c) any provision for (to the extent it is greater than zero) income or
franchise taxes included in the determination of net income, excluding any
provision for deferred taxes; plus (d) payment of deferred taxes accrued in any
----
prior period; plus (e) Restricted Junior Payments made in cash to the extent
----
permitted under subsection 7.5, other than those made under subsections 7.5(b),
-------------- ------------------
7.5(c) or 7.5(e).
- ------ ------
"Foreign Security Documents" means, collectively, that certain Deed of
--------------------------
Charge executed and delivered on the Closing Date by U.K. Borrower in favor of
Collateral Agent, each of the documents, instruments and agreements executed and
delivered with respect thereto or in connection therewith, and any other deeds
of charge, Mortgages, security agreements, pledge agreements or other documents,
instruments or agreements at any time delivered by any Borrower in order to
grant, maintain or perfect a Lien in favor of Collateral Agent, for the benefit
of Agent and Lenders, in any Collateral of such Borrower located outside the
United States of America.
"Francs" means lawful currency of France.
------
"Funding Agent" means NMB-Heller in its capacity as funding Agent for the
-------------
Lenders under the Loan Documents and any successor in such capacity appointed
pursuant to subsection 9.1(G).
-----------------
71
<PAGE>
"Funding Date" means the date of each funding of a Loan or issuance of a
------------
Lender Letter of Credit.
"GAAP" means generally accepted accounting principles in the United States
----
of America as set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board that
are applicable to the circumstances as of the date of determination.
"Governmental Authority" means any nation or government, any federal,
----------------------
state, provincial, territorial, local or other political subdivision or
instrumentality thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions (or any combination of such
functions) of or pertaining to government.
"Guilders" means lawful currency of the Kingdom of the Netherlands.
--------
"Hazardous Material" means all or any of the following: (a) substances that
------------------
are defined or listed in, or otherwise classified pursuant to, any Environmental
Laws or regulations as "hazardous substances", "hazardous materials", "hazardous
wastes", "toxic substances" or any other formulation intended to define, list or
classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, or toxicity; (b) oil, petroleum or
petroleum derived substances, natural gas, natural gas liquids or synthetic gas
and drilling fluids, produced waters and other wastes associated with the
exploration, development or production of crude oil, natural gas or geothermal
resources; (c) any flammable substances or explosives or any radioactive
materials; and (d) asbestos in any form or electrical equipment which contains
any oil or dielectric fluid containing polychlorinated biphenyls.
"Indebtedness", as applied to any Person, means without duplication: (a)
------------
all indebtedness for borrowed money; (b) obligations under leases which in
accordance with GAAP constitute Capital Leases; (c) notes payable and drafts
accepted representing extensions of credit whether or not representing
obligations for borrowed money; (d) any obligation owed for all or any part of
the deferred purchase price of property or services if the purchase price is due
more than six months from the date the obligation is incurred or is evidenced by
a note or similar written instrument; (e) all indebtedness secured by any Lien
on any property or asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that Person or is non
recourse to the credit of that Person; (f) obligations in respect of letters of
credit; and (g) any advances under any factoring arrangement.
"Intangible Assets" means all intangible assets (determined in conformity
-----------------
with GAAP) including, without limitation, goodwill, Intellectual Property,
licenses, organizational costs, deferred amounts, covenants not to compete,
unearned income and restricted funds.
"Intellectual Property" means all present and future designs, patents,
---------------------
patent rights and applications therefor, trademarks and registrations or
applications therefor, trade names, inventions, copyrights and all applications
and registrations therefor, software or computer programs, license rights, trade
secrets, methods, processes, know-how, drawings, specifications, descriptions,
and all memoranda, notes and records with respect to any research and
development,
72
<PAGE>
whether now owned or hereafter acquired, all goodwill associated with any of the
foregoing, and proceeds of all of the foregoing, including, without limitation,
proceeds of insurance policies thereon.
"Interest Coverage" means, for any period, Operating Cash Flow divided by
----------------- ----------
Interest Expense.
"Interest Determination Date" for a LIBOR Loan will be the second London
---------------------------
Banking Day preceding the beginning of the next Interest Period elected by
Borrower Representative.
"Interest Expense" means, without duplication, for any period, the
----------------
following, for Borrowers and their Subsidiaries on a consolidated basis, each
calculated for such period: interest expenses deducted in the determination of
net income (excluding (i) the amortization of fees and costs with respect to the
transactions contemplated by this Agreement which have been capitalized as
transaction costs in accordance with the provisions of subsection 11.2; and
---------------
(ii) interest paid in kind).
"Interest Period" means with respect to any LIBOR Loan (a) at any time
---------------
prior to the Primary Syndication Completion Date, a two week period, and (b)
at any time thereafter, either a one, two, three or six month period as elected
by Borrower Representative to be applicable to such Loan in a Notice of
Borrowing or in a Notice of Conversion/Continuation, provided that any such
--------
election shall be subject to the following:
(1) the initial Interest Period for any LIBOR Loan shall commence on the
Funding Date of such Loan;
(2) in the case of successive Interest Periods, each successive Interest
Period shall commence on the day on which the immediately preceding Interest
Period expires;
(3) if an Interest Period expiration date is not a Business Day, such
Interest Period shall expire on the next succeeding Business Day; provided that
--------
if any Interest Period expiration date is not a Business Day but is a day
of the month after which no further Business Day occurs in such month, such
Interest Period shall expire on the immediately preceding Business Day;
(4) any Interest Period that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall, subject to part (5)
below (and other than in the case of a two week Interest Period), end on the
last Business Day of a calendar month;
(5) no Interest Period shall extend beyond the Termination Date;
(6) no Interest Period may extend beyond a scheduled principal payment date
unless the sum of (a) the aggregate principal amount of Loans that are Base Rate
Loans or that have Interest Periods expiring on or before such date and (b)
Availability as of such date equals or exceeds the principal amount required to
be paid on the Loans on such date; and
73
<PAGE>
(7) there shall be no more than 4 Interest Periods relating to LIBOR Loans
outstanding at any time.
"Inventory" means all "inventory" (as defined in the UCC), including,
---------
without limitation, finished goods, raw materials, work in process and other
materials and supplies used or consumed in a Person's business, and goods which
are returned or repossessed, and specifically includes all Exchange Inventory
and Work in Process, Repair Parts and Unserviceable Parts.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
---
time, and any successor statute and all rules and regulations promulgated
thereunder.
"Lender Letter of Credit" has the meaning assigned to that term in
-----------------------
subsection 2.1(H).
- -----------------
"Letter of Credit Liability" means, all reimbursement and other
--------------------------
liabilities of Borrowers or any of their Subsidiaries with respect to each
Lender Letter of Credit, whether contingent or otherwise, including: (a) the
amount available to be drawn or which may become available to be drawn; (b) all
amounts which have been paid or made available by Agent or any Lender issuing a
Lender Letter of Credit or any bank issuing a Bank Letter of Credit to the
extent not reimbursed; and (c) all unpaid interest, fees and expenses related
thereto.
"Letter of Credit Reserve" means, at any time, an amount equal to (a) the
------------------------
aggregate amount of Letter of Credit Liability with respect to all Lender
Letters of Credit outstanding at such time plus, without duplication, (b) the
----
aggregate amount theretofore paid by Agent or any Lender under Lender Letters of
Credit and not debited to Borrowers' Loan account pursuant to subsection
----------
2.1(H)(2) or otherwise reimbursed by Borrowers.
- ---------
"Liabilities" shall have the meaning given that term in accordance with
-----------
GAAP and shall include Indebtedness.
"LIBOR" means, for each Interest Period, a rate equal to the rate for
-----
deposits in the relevant Available Currency for the relevant Interest Period,
commencing on the second London Banking Day immediately following that Interest
Determination Date that appears on the Telerate Page 3750 (in the case of
Dollars, or such other applicable Telerate Page, in the case of any Optional
Currency) as of 11:00 a.m., London time, on that Interest Determination Date
("LIBOR Telerate"); provided that if no rate appears on the Telerate Page 3750
- ---------------- --------
(or other applicable Telerate Page), LIBOR in respect of that Interest
Determination Date will be determined on the basis of the rates at which
deposits in the relevant Available Currency for the relevant Interest Period are
offered at approximately 11:00 a.m. London time, on that Interest Determination
Date by four major banks in the London interbank market selected by Agent
("Reference Banks") to prime banks in the London interbank market commencing on
- -----------------
the second London Banking Day immediately following that Interest Determination
Date and in a principal amount equal to an amount of not less than $1,000,000
(or, in the case of any Optional Currency, such other minimum amount as may be
agreed upon by Agent and Borrower Representative at the time the applicable
Notice of Borrowing or Notice of Conversion/Continuation is delivered, which
shall be calculated so as to approximate, as nearly as practicable, the minimum
amount applicable to LIBOR Loans denominated in Dollars) that is representative
for a single transaction in such market at such time. Agent will request the
principal London office of each of the Reference Banks to provide a
74
<PAGE>
quotation of its rate. If at least two such quotations are provided, LIBOR in
respect of that Interest Determination Date will be the arithmetic mean of such
quotations. If fewer than two quotations are provided, LIBOR in respect of that
Interest Determination Date will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m. New York City time, on that Interest Determination Date
by three major banks in the City of New York selected by Agent for loans in the
relevant Available Currency to leading European banks for the relevant Interest
Period commencing on the second London Banking Day immediately following that
Interest Determination Date and in a principal amount equal to an amount of not
less than $1,000,000 (or such other amount as may be agreed upon as aforesaid in
the case of an Optional Currency) that is representative for a single
transaction in such market at such time; provided, however, that if the banks
-------- -------
selected as aforesaid by Agent are not quoting as mentioned in this sentence,
LIBOR with respect to such Interest Determination Date will be the rate of LIBOR
in effect on such date. "Telerate Page 3750" means the display designated as
------------------
page "3750" on the Telerate Services (or such other page as may replace the 3750
page on that service or such other service or services as may be nominated by
the British Bankers' Association for the purpose of displaying London interbank
offered rates for Dollar deposits), and "Telerate Page" in the context of an
-------------
Optional Currency means the display, designated as a page, on the Telerate
Services with respect to such Optional Currency (including any replacements
therefor on that service or another service nominated by the British Bankers'
Association for the purpose of displaying London interbank offered rates for
deposits in the applicable Optional Currency).
The rate determined pursuant to the foregoing shall be divided by a number
----------
equal to 1.0 minus the aggregate (but without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on the day
which is two (2) Business Days prior to the beginning of such Interest Period
(including, without limitation, basic, supplemental, marginal, special emergency
or other reserves under any regulations of the Board of Governors of the Federal
Reserve System or other Governmental Authority having jurisdiction with respect
thereto, as now and from time to time in effect) for Eurocurrency funding
(currently referred to as "Eurocurrency Liabilities" in Regulation D of such
------------------------
Board) which are required to be maintained by a member bank of the Federal
Reserve System (such rate to be adjusted to the nearest (1/16 of 1%) or, if
there is not a nearest (1/16 of 1%), to the next higher (1/16 of 1%). In the
case of any Obligations denominated in an Optional Currency, the rate determined
pursuant to the foregoing shall be increased (and adjusted to the nearest 1/16
of 1% as set forth above) to reflect any reserve requirements or mandatory costs
(including, without limitation, any cost attributable to such Obligations
resulting from the imposition from time to time under or pursuant to the Bank of
England Act 1998 and/or by the Bank of England and/or the Financial Services
Authority (the "FSA") (or other United Kingdom Governmental Authorities) of a
requirement to place non-interest bearing deposits or Special Deposits (whether
interest bearing or not) with the Bank of England and/or pay fees to the FSA
calculated by reference to liabilities used to fund such Obligations which may
be required to be maintained, or which may be payable, by Lenders in respect of
LIBOR Loans denominated in such Optional Currency in accordance with such
Lender's customary practices.
"LIBOR Loans" means at any time that portion of the Loans bearing interest
-----------
at rates determined by reference to the applicable LIBOR.
75
<PAGE>
"LIBOR Margin" shall mean (a) as of the Closing Date through July 31, 1999
------------
(i) 2.00% per annum with respect to the Revolving Loan and all other Obligations
(other than the Term Loans), (ii) 2.25% per annum, with respect to Term Loan A,
and (iii) 2.50% per annum, with respect to Term Loan B; and (b) thereafter, as
of each Adjustment Date, commencing on August 1, 1999, the LIBOR Margin shall be
adjusted, if necessary, to the applicable percent per annum set forth in the
pricing table below opposite the Fixed Charge Coverage calculated for the
applicable Calculation Period. If Borrower Representative shall fail to
deliver a Compliance Certificate by the date required pursuant to paragraph (E)
-------------
of the Reporting Rider, effective as of the 10th Business Day following the date
---------------
on which such Compliance Certificate was due, each applicable LIBOR Margin shall
be conclusively presumed to equal the highest applicable LIBOR Margin specified
in the pricing table set forth below until the date of delivery of the
Compliance Certificate.
PRICING TABLE
-------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Fixed Charge LIBOR Margin
Coverage
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revolving Term Loan A Term Loan B
Loan
- -------------------------------------------------------------------------------
Equal to or greater than 1.90:1.00 1.75% 2.00% 2.25%
- -------------------------------------------------------------------------------
Less than 1.90:1.00, but equal to
or greater than 1.00:1.00 2.00% 2.25% 2.50%
- -------------------------------------------------------------------------------
Less than 1.00:1.00, but equal to
or greater than .90:1.00 2.25% 2.50% 2.75%
- -------------------------------------------------------------------------------
Less than .90:1.00 2.50% 2.75% 3.00%
- -------------------------------------------------------------------------------
</TABLE>
"Lien" means any lien, mortgage, pledge, security interest, charge or
----
encumbrance of any kind, whether voluntary or involuntary, (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest).
"Loan" or "Loans" means an advance or advances under the Term Loan
---- -----
Commitment or the Revolving Loan Commitment or the Swingline Loan. For
purposes of determining the amount of any Loan (or any component thereof)
which is denominated in an Optional Currency, such amount shall, as of any date
of determination, equal the Dollar Equivalent of such amount as of such date.
"Loan Documents" means this Agreement, each of the Foreign Security
--------------
Documents and all other documents, instruments and agreements executed by or
on behalf of any Borrower, any Borrower's Subsidiaries or any other Loan Party
and delivered concurrently herewith or at any time hereafter to or for Agent,
Funding Agent, Collateral Agent or any Lender in connection with the Loans, any
Lender Letter of Credit, and any other transaction contemplated by this
Agreement, all as amended, restated, supplemented or modified from time to time.
"Loan Party" means each of each Borrower, each Borrower's Subsidiaries
----------
and any other Person (other than Agent, Funding Agent, Collateral Agent or any
Lender or any U.S. Collecting Bank or U.K. Collecting Bank) which is or becomes
a party to any Loan Document.
76
<PAGE>
"Loan Year" means each period of 12 consecutive months commencing on the
---------
Closing Date and on each anniversary thereof.
"London Banking Day" means any day on which dealings in deposits in U.S.
------------------
dollars are transacted in the London Interbank market.
"Material Adverse Effect" means a material adverse effect upon (a) the
-----------------------
business, operations, prospects, properties, assets or condition (financial or
otherwise) of any Loan Party on an individual basis or the Loan Parties taken as
a whole or (b) the ability of any Loan Party to perform its obligations under
any Loan Document to which it is a party or of Agent, Funding Agent, Collateral
Agent or any Lender to enforce or collect any of the Obligations.
"Material Customer" means, as of any date of determination with respect
-----------------
to any Borrower, a customer of such Borrower which accounted for ten percent
(10%) or more of Borrowers' consolidated gross revenues as of the last day of
the most recently completed fiscal quarter for the trailing twelve month period
then ended.
"Maximum Revolving Loan Amount" has the meaning assigned to that term in
-----------------------------
subsection 2.1(B)(1).
- --------------------
"Maximum Swingline Loan Amount" means at any time the lesser of (i)
-----------------------------
$5,000,000, (ii) the Revolving Loan Commitments of all Lenders at such time or
(iii) that amount which is the Borrowing Base at such time less the sum of (x)
----
the Revolving Loan at such time, and (y) the Letter of Credit Reserve at such
time.
"Mortgage" means each of the mortgages, deeds of trust, leasehold
--------
mortgages, leasehold deeds of trust, collateral assignments of leases or other
real estate security documents delivered by any Loan Party to Agent or
Collateral Agent, as applicable, on behalf of Lenders, with respect to any
Mortgaged Property, all in form and substance satisfactory to Agent.
"Mortgaged Property" means all real property owned or leased by any
------------------
Borrower or any of their respective Subsidiaries in which after the Closing
Date Agent requires a Mortgage to secure the Obligations.
"National Currency Unit" means the unit of currency (other than a Euro
----------------------
unit) of a Participating Member State.
"Net Book Value" means, as of any date of determination, the book value of
--------------
Borrowers' Exchange Inventory and Work in Process (referred to as "landing gear
exchange assets" on Borrowers' books and records) as reflected on Borrowers'
books and records as of such date, less accumulated depreciation thereon (based
----
on the straight line method of depreciation), all as determined in accordance
with GAAP.
"Net Worth" means, as of any date, the sum of the capital stock and
---------
additional paid-in capital plus retained earnings (or less accumulated deficit)
----
calculated in conformity with GAAP.
"Notes" means the Revolving Notes, the Term Notes and the Swingline Note.
-----
77
<PAGE>
"Notice of Borrowing" means a Notice duly executed by an authorized
-------------------
representative of Borrower Representative appropriately completed and in the
form of Exhibit C.
---------
"Obligations" means all obligations, liabilities and indebtedness of every
-----------
nature of each Loan Party from time to time owed to Agent, Funding Agent,
Collateral Agent or any Lender under the Loan Documents (whether incurred before
or after the Termination Date) including the principal amount of all debts,
claims and indebtedness, accrued and unpaid interest and all fees, costs and
expenses, whether primary, secondary, direct, contingent, fixed or otherwise,
heretofore, now and/or from time to time hereafter owing, due or payable
including, without limitation, all interest, fees, cost and expenses accrued or
incurred after the filing of any petition under any bankruptcy or insolvency
law. For purposes of determining the amount of the Obligations (or any
component thereof) in respect of any Obligations which are denominated in an
Optional Currency, such amount shall, as of any date of determination, equal the
Dollar Equivalent of such amount as of such date.
"Operating Cash Flow" means, for any period, (a) EBITDA less (b) Unfinanced
------------------- ----
Capital Expenditures.
"Optional Currency" means any of Pounds, Guilders or Francs or, from and
-----------------
after the Euro Commencement Date, the Euro.
"Orderly Liquidation Value" means, with respect to any Collateral, the
-------------------------
proceeds (net of expenses incurred to inventory the Collateral and process it
for sale and to complete work in process to a serviceable/overhauled unit) from
a forced sale of such Collateral, held under a professionally managed and
negotiated conditions, after an assumed business failure. The Orderly
Liquidation Value of Borrowers' Inventory as of the Closing Date shall be as set
forth in the Closing Date Inventory Appraisal, and shall thereafter be
determined based on the then most recent Periodic Inventory Appraisal or Semi-
Annual Inventory Appraisal delivered pursuant to paragraph (I)(2) of the
----------------
Reporting Rider.
- ---------------
"Participating Member State" means, at any time, each state participating
--------------------------
in EMU at such time.
"Periodic Inventory Appraisal" is defined in paragraph (I)(2) of the
---------------------------- ----------------
Reporting Rider.
- ---------------
"Permitted Encumbrances" means the following types of Liens: (a) Liens
----------------------
(other than Liens relating to Environmental Claims or ERISA) for taxes,
assessments or other governmental charges not yet due and payable; (b) statutory
Liens of landlords, carriers, warehousemen, mechanics, materialmen and other
similar liens imposed by law, which are incurred in the ordinary course of
business for sums not more than 30 days delinquent; (c) Liens (other than any
Lien imposed by ERISA) incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security, statutory obligations, surety and appeal bonds,
bids, leases, government contracts, trade contracts, performance and return-of-
money bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money); (d) easements, rights-of-way, restrictions, and
other similar charges or encumbrances not interfering in any material respect
with the ordinary conduct of the business of any Loan Party or any of its
Subsidiaries; (e) Liens for purchase money
78
<PAGE>
obligations, provided that (i) the purchase of the asset subject to any such
--------
Lien is permitted under subsection 6.5, (ii) the Indebtedness secured by any
--------------
such Lien is permitted under subsection 7.1, and (iii) such Lien encumbers only
--------------
the asset so purchased; (f) Liens in favor of Agent or Collateral Agent, as the
case may be, on behalf of Lenders, and (g) Liens set forth on Schedule 7.3(B).
---------------
"Person" means and includes natural persons, corporations, limited
------
partnerships, general partnerships, limited liability companies, limited
liability partnerships, joint stock companies, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts or other
organizations, whether or not legal entities, and governments and agencies and
political subdivisions thereof.
"Pounds" means the lawful currency of the United Kingdom of Great Britain
------
and Northern Ireland..
"Pro Rata Share" means (a) with respect to matters relating to a particular
--------------
Commitment of a Lender, the percentage obtained by dividing (i) such Commitment
of that Lender by (ii) all such Commitments of all Lenders and (b) with respect
to all other matters, the percentage obtained by dividing (i) the Total Loan
Commitment of a Lender by (ii) the Total Loan Commitments of all Lenders, in
either case as such percentage may be adjusted by assignments permitted pursuant
to subsection 9.5; provided, however, if any Commitment is terminated pursuant
-------------- -------- -------
to the terms hereof, then "Pro Rata Share" means the percentage obtained by
dividing (x) the aggregate amount of such Lender's outstanding Loans related to
such Commitment by (y) the aggregate amount of all outstanding Loans related to
such Commitment.
"Projections" means Borrowers' forecasted consolidated and, in the case of
-----------
month-by-month projections for the forthcoming Fiscal Year delivered pursuant to
paragraph (L) of the Reporting Rider, consolidating: (a) balance sheets; (b)
- ------------- ---------------
profit and loss statements; (c) cash flow statements; and (d) capitalization
statements, all prepared on a division by division and Subsidiary by Subsidiary
basis consistent with Borrowers' historical financial statements and based upon
good faith estimates and assumptions by Borrowers believed to be reasonable at
the time made, together with appropriate supporting details and a statement of
underlying assumptions.
"Redirection Notice" has the meaning assigned to that term in subsection
------------------ ----------
4.26(B).
- -------
"Repair Parts" means parts which are inventoried and used in the process of
------------
repair and overhaul and which are not allocated to jobs, and shall includes
parts commonly referred to as "rotables" (e.g., parts for which repair or
overhaul criteria is defined and which can be returned to service after such
defined criteria is met but which do not constitute Exchange Inventory and Work
in Process), and parts commonly referred to as "expendables" (e.g., parts which
are not generally re-used, including gaskets, fasteners, packing and other parts
for which there is no general process to return to service or re-certify for
use).
"Requisite Lenders" means Lenders (other than a Defaulting Lender), holding
-----------------
or being responsible for 66.67% or more of the sum of (a) outstanding Loans, (b)
outstanding Letter of Credit Liability and (c) unutilized Commitments of all
Lenders which are not Defaulting Lenders.
79
<PAGE>
"Restricted Junior Payment" means: (a) any dividend or other distribution,
-------------------------
direct or indirect, on account of any shares of any class of stock of any Loan
Party now or hereafter outstanding, except a dividend payable solely with shares
of the class of stock on which such dividend is declared; (b) any payment or
prepayment of principal of, premium, if any, or interest on, or any redemption,
conversion, exchange, retirement, defeasance, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, of any Subordinated
Debt or any shares of any class of stock of any Loan Party now or hereafter
outstanding, or the issuance of a notice of an intention to do any of the
foregoing; (c) any payment made to retire, or to obtain the surrender of, any
outstanding warrants, options or other rights to acquire shares of any class of
stock of any Loan Party now or hereafter outstanding; and (d) any payment by any
Loan Party of any management, consulting or similar fees to any Affiliate,
whether pursuant to a management agreement or otherwise.
"Revolving Advance" means each advance made by Lender(s) (or by Agent or
-----------------
Funding Agent on behalf of Lenders) pursuant to subsection 2.1(B).
-----------------
"Revolving Loan" means the outstanding balance of all Revolving Advances
--------------
andd any amounts added to the principal balance of the Revolving Loan pursuant
to this Agreement.
"Revolving Loan Commitment" means (a) as to any Lender, the commitment of
-------------------------
such Lender to make Revolving Advances pursuant to subsection 2.1(B), to
-----------------
purchase participations in Lender Letters of Credit pursuant to subsection
----------
2.1(H) and, without duplication, to purchase participations in the Swingline
- ------
Loan pursuant to subsection 2.1(D) in the aggregate amount set forth on the
-----------------
signature page of this Agreement opposite such Lender's signature or in the most
recent Assignment and Assumption Agreement, if any, executed by such Lender and
(b) as to all Lenders, the aggregate commitment of all Lenders to make Revolving
Advances and to purchase participations in Lender Letters of Credit and
Swingline Loans.
"Revolving Note" means each promissory note of Borrowers in form and
--------------
substance reasonably acceptable to Agent, issued to each Lender to evidence
the Revolving Loan Commitment of such Lender.
"Scheduled Installment" has the meaning assigned to that term in subsection
--------------------- ----------
2.1(A).
- ------
"Semi-Annual Appraisal" is defined in paragraph (I)(2) of the Reporting
--------------------- ---------------- ---------
Rider.
- -----
"Spot Rate" means, as of any date of determination with respect to the
---------
conversion of an amount in one currency (the "Original Currency") to another
-----------------
currency (the "Other Currency"), the rate of exchange quoted by a major bank
--------------
acceptable to Agent located in any of New York, New York, Chicago, Illinois or
London, England at 11:00 a.m. (New York, Chicago or London time, as applicable)
on such date of determination to prime banks in such city for the spot purchase
in the foreign exchange market of such city of such amount of the Original
Currency with such Other Currency.
"Subordinated Debt" means all Indebtedness owing by U.S. Borrower to
-----------------
Unique.
80
<PAGE>
"Subordination Agreement" means that certain Subordination Agreement dated
-----------------------
as of the Closing Date among Borrowers, Agent, Unique and Melanie Bastian.
"Subsidiary" means, with respect to any Person, any corporation,
----------
association or other business entity of which more than 50% of the total
voting power of shares of stock (or equivalent ownership or controlling
interest) entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by that Person or one or more of the
other subsidiaries of that Person or a combination thereof.
"Swingline Advance" means each advance made by Swingline Lender pursuant to
-----------------
subsection 2.1(D).
- -----------------
"Swingline Lender" means Heller, or if Heller shall resign as Swingline
----------------
Lender, another Lender selected by Agent and reasonably acceptable to U.S.
Borrower.
"Swingline Loan" means the outstanding balance of all Swingline Advances
--------------
and any amounts added to the principal balance of the Swingline Loan pursuant to
this Agreement.
"Swingline Note" means the promissory note of U.S. Borrower in form and
--------------
substance acceptable to Agent, issued to evidence the Swingline Loan.
"Tangible Net Worth" of any Person means as of any date, an amount equal
------------------
to: (a) Net Worth of such Person; less (b) Intangible Assets of such Person;
----
less (c) prepaid expenses of such Person; less (d) all obligations owed to such
- ---- ----
Person by any Affiliate of such Person or any of its Subsidiaries; and less (e)
----
all loans by such Person to its officers, stockholders, Subsidiaries or
employees (determined in each case in conformity with GAAP).
"Term Loans" mean the unpaid balance of the term loans made pursuant to
----------
subsection 2.1(A).
- -----------------
"Term Loan A" means the advances made pursuant to subsection 2.1(A)(1).
----------- --------------------
"Term Loan B" means the advances made pursuant to subsection 2.1(A)(2).
----------- --------------------
"Term Loan A Commitment" means (a) as to any Lender, the commitment of such
----------------------
Lender to make its Pro Rata share of Term Loan A in the maximum aggregate amount
set forth on the signature page of this Agreement opposite such Lender's
signature or in the most recent Assignment and Assumption Agreements, if any,
executed by such Lender and (b) as to all Lenders, the aggregate commitment of
all Lenders to make Term Loan A.
"Term Loan B Commitment" means (a) as to any Lender, the commitment of such
----------------------
Lender to make its Pro Rata share of Term Loan B in the maximum aggregate amount
set forth on the signature page of this Agreement opposite such Lender's
signature or in the most recent Assignment and Assumption Agreements, if any,
executed by such Lender and (b) as to all Lenders, the aggregate commitment of
all Lenders to make Term Loan B.
81
<PAGE>
" Term Loan Commitments" means (a) as to any Lender, a collective reference
---------------------
to such Lender's Term Loan A Commitment and Term Loan B Commitment, and (b) as
to all Lenders, the aggregate Term Loan A Commitments and Term Loan B
Commitments of all Lenders.
"Term Note" or "Term Notes" means each promissory note of Borrowers in form
--------- ----------
and substance acceptable to Agent, issued to each Lender to evidence the Term
Loan Commitment of each such Lender.
"Termination Date" means the date set forth in subsection 2.5.
---------------- --------------
"Total Loan Commitment" means as to any Lender the aggregate commitments of
---------------------
such Lender with respect to its Revolving Loan Commitment and Term Loan
Commitment.
"Treaty on European Union" means the Treaty of Rome of 25 March 1957, as
------------------------
amended by the Single European Act 1986 and the Maastricht Treaty (which was
signed at Maastricht on 7 February 1992 and came into force on 1 November 1993),
as amended from time to time.
"UCC" means the Uniform Commercial Code as in effect on the date hereof
---
in the State of Illinois, as amended from time to time, and any successor
statute.
"Unfinanced Capital Expenditures" shall mean Capital Expenditures which are
-------------------------------
not financed with the proceeds of Indebtedness.
"Unique" means Unique Investment Corporation, a California corporation.
------
"Unique Management Agreement" means that certain Management Services
---------------------------
Agreement dated November 14, 1997 between U.S. Borrower and Unique.
"Unserviceable Parts" means as of any date of determination, Inventory
-------------------
consisting of parts which are repairable in accordance with the then-prevailing
customs and standards of Borrowers' industry or in accordance with the
regulatory requirements of any applicable Government Authority but which in the
exercise of reasonable business judgment Borrowers have elected not to repair at
such time.
11.2 Accounting Terms. For purposes of this Agreement, all accounting
----------------
terms not otherwise defined herein shall have the meanings assigned to such
terms in conformity with GAAP. Financial statements and other information
furnished to Agent, Funding Agent, Collateral Agent or any Lender pursuant to
subsection 5.1 and the Reporting Rider shall be prepared in accordance with GAAP
- -------------- ---------------
(as in effect at the time of such preparation) on a consistent basis. In the
event any Accounting Changes (as defined below) shall occur and such changes
affect financial covenants, standards or terms in this Agreement, then Borrowers
and Lenders agree to enter into negotiations in order to amend such provisions
of this Agreement so as to equitably reflect such Accounting Changes with the
desired result that the criteria for evaluating the financial condition of
Borrowers shall be the same after such Accounting Changes as if such Accounting
Changes had not been made, and until such time as such an amendment shall have
been executed and delivered by Borrowers and Requisite Lenders, (A) all
financial covenants, standards and terms in this Agreement shall be calculated
and/or construed as if such Accounting Changes had not
82
<PAGE>
been made, and (B) Borrowers shall prepare footnotes to each Compliance
Certificate and the financial statements required to be delivered hereunder that
show the differences between the financial statements delivered (which reflect
such Accounting Changes) and the basis for calculating financial covenant
compliance (without reflecting such Accounting Changes). "Accounting Changes"
------------------
means: (a) changes in accounting principles required by GAAP and implemented by
any Borrower; (b) changes in accounting principles recommended by Borrowers'
Accountants; and (c) changes in carrying value of any Borrower's or any of their
Subsidiaries' assets, liabilities or equity accounts resulting from the
application of purchase accounting principles (A.P.B. 16 and/or 17 and EITF 88-
16 and FASB 109) to the British Airways Acquisition. All such adjustments
resulting from expenditures made subsequent to the Closing Date (including, but
not limited to, capitalization of costs and expenses or payment of pre-Closing
Date liabilities) shall be treated as expenses in the period the expenditures
are made and deducted as part of the calculation of EBITDA in such period.
11.3 Other Definitional Provisions. References to "Sections",
----------------------------- --------
"subsections", "Riders", "Exhibits" and "Schedules" shall be to Sections,
----------- ------ -------- ---------
subsections, Riders, Exhibits and Schedules, respectively, of this Agreement
unless otherwise specifically provided. Any of the terms defined in subsection
----------
11.1 may, unless the context otherwise requires, be used in the singular or the
- ----
plural depending on the reference. In this Agreement, words importing any
gender include the other genders; the words "including," "includes" and
--------- --------
"include" shall be deemed to be followed by the words "without limitation";
------- ------------------
references to agreements and other contractual instruments shall be deemed to
include subsequent amendments, assignments, and other modifications thereto, but
only to the extent such amendments, assignments and other modifications are not
prohibited by the terms of this Agreement or any other Loan Document; references
to Persons include their respective permitted successors and assigns or, in the
case of Persons which are Governmental Authorities, Persons succeeding to the
relevant functions of such Governmental Authorities; and all references to
statutes and related regulations shall include any amendments of same and any
successor statutes and regulations and shall further include, in the case of any
references herein or in any other Loan Document to statutes or regulations of
any United States Governmental Authority, any similar or equivalent statutes or
regulations of any other applicable Governmental Authority to the extent similar
or equivalent statutes or regulation exist in the applicable jurisdiction.
11.4 Dollar Equivalents. The parties hereto acknowledge and agree
------------------
that various Liabilities of Borrower may be denominated in any of the Available
Currencies, and hereby agree that, whenever in this Agreement or the other Loan
Documents Borrowers' compliance with any covenant, representation or warranty or
similar provision must be determined by reference to a minimum or maximum
permitted Dollar amount of any Liabilities, such compliance shall, as of any
date of determination, be determined on the basis of the Dollar Equivalent
amount of the applicable Liabilities as of such date.
11.5 Change of Currency. (A) The provisions of this subsection 11.5
------------------ ---------------
shall come into effect on the Euro Commencement Date provided that, if and to
-------------
the extent that any such provision relates to any jurisdiction (or the
currency of such jurisdiction) which shall not be a Participating Member State
on the Euro Commencement Date, such provision shall come into effect in relation
to such jurisdiction (and the currency of such jurisdiction) on and from the
date on which such jurisdiction becomes a Participating Member State.
83
<PAGE>
(B) Redenomination and Alternate Currencies. Each obligation
---------------------------------------
under the Loan Documents which has been denominated in a National Currency
Unit shall be redenominated into the Euro unit in accordance with EMU
legislation provided that, if and to the extent that any EMU Legislation
--------
provides that an amount denominated either in the Euro or in the National
Currency Unit of a given Participating Member State can be paid by the debtor
either in the Euro unit or in that National Currency Unit, U.K. Borrower shall
be entitled to pay or repay any such amount either in the Euro unit or in such
National Currency Unit.
(C) Advances. Any Advance denominated in Euros shall be made
--------
in the Euro unit.
(D) Basis of Accrual. If, in relation to the currency of any
----------------
Participating Member State, the basis of accrual of interest or any other
amounts expressed in the Loan Documents in respect of that currency shall be
inconsistent with any convention or practice in the London Interbank Market for
the basis of accrual of interest or any other amounts in respect of the Euro,
such expressed basis shall be replaced by such convention or practice.
(E) Rounding and Other Consequential Changes. Without
----------------------------------------
prejudice and in addition to any method of conversion or rounding prescribed by
any EMU Legislation and without prejudice to the respective liabilities for the
obligations of Borrowers to Agent, Funding Agent, Collateral Agent and Lenders
and the obligations of Agent, Funding Agent, Collateral Agent and Lenders to
Borrowers under or pursuant to this Agreement:
(a) each reference in the Loan Documents to an amount in a
National Currency Unit to be paid to or by Agent, Funding
Agent, Collateral Agent or any Lender shall be replaced
by a reference to such reasonably comparable and
convenient amount in the Euro unit as the Agent may from
time to time specify; and
(b) save as expressly provided in this subsection 11.5, each
---------------
provision of this Agreement shall be subject to such
changes of construction as Agent may from time to time
specify to be necessary or appropriate to reflect the
introduction of or changeover to the Euro in
Participating Member States.
(F) Euro Increased Costs. Each Borrower shall, from time to time on
--------------------
demand of the Agent, pay to the Agent for the account of Agent or any Lender the
amount of any cost or increased cost incurred by, or of any reduction in any
amount payable to or in the effective return on its capital to, or of interest
or other return forgone by, a Lender or any holding company of such Lender as a
result of the introduction of, changeover to or operation of the Euro including,
without limitation, compliance with any reserve requirement of the European
Central Bank in any Participating Member State.
84
<PAGE>
Witness the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.
HAWKER PACIFIC AEROSPACE, as
a Borrower and as Borrower Representative
By: /s/ Brian Aune
--------------------------------------
Title: VP & CFO
-----------------------------------
FEIN: 05- 3528840
------------------------------------
HAWKER PACIFIC AEROSPACE
LIMITED, as a Borrower
By: /s/ Brian Aune
--------------------------------------
Title: Director
-----------------------------------
Revolving Loan Commitment: HELLER FINANCIAL, INC., as Agent and
$55,000,000 as a Lender
Pro Rata Share: 100%
By: /s/ Terry A. Rothe
--------------------------------------
Title: SVP
-----------------------------------
Term Loan A Commitment:
$4,280,000
Pro Rata Share: 100%
Term Loan B Commitment:
$7,000,000
Pro Rata Share: 100%
NMB-HELLER LIMITED, in its capacity
as Funding Agent and Collateral Agent
By: /s/ John Oslow
--------------------------------------
Title: Director of Underwriting
-----------------------------------
85
<PAGE>
EXHIBITS
A Assignment and Assumption Agreement
B Borrowing Base Certificate
C Notice of Borrowing
D Compliance Certificate
E [Reserved]
F Reconciliation Report
G Notice of Conversion/Continuation
H Excess Cash Flow Certificate
A-1
<PAGE>
SCHEDULES
3.1(A) List of Closing Documents
4.1(B) Capitalization of Loan Parties
4.6 Business and Trade Names (Present and Past Five Years); Location of
Principal Place of Business, Books and Records and Collateral
4.8 Pending Litigation
4.12 Intellectual Property
4.19 Bank Accounts
4.20 Employee Matters
5.10 Certifications, Licenses and Permits
7.1 Indebtedness
7.3(b) Other Liens
8.1(S) Certain Shareholders
2
<PAGE>
RIDERS
A. Conditions Rider
B. Reporting Rider
C. Financial Covenants Rider
A-3
<PAGE>
CONDITIONS RIDER
This Conditions Rider is attached to and made a part of that certain Loan
and Security Agreement dated as of December 22, 1998 and entered into among
Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as Borrowers,
Agent, Funding Agent, Collateral Agent and Lenders.
(A) Closing Deliveries. Agent shall have received, in form and
------------------
substance satisfactory to Agent, all documents, instruments and information
identified on Schedule 3.1(A) and all other agreements, notes, certificates,
---------------
orders, authorizations, financing statements, mortgages and other documents
which Agent may at any time reasonably request.
(B) Security Interests. Agent and Collateral Agent shall have
------------------
received satisfactory evidence that all security interests and liens granted to
Agent or Collateral Agent for the benefit of Lenders pursuant to this Agreement
or the other Loan Documents have been duly perfected and constitute first
priority liens on the Collateral, subject only to Permitted Encumbrances.
(C) Closing Date Availability. After giving effect to the
-------------------------
consummation of the transactions contemplated hereunder on the Closing Date and
the payment by Borrowers of all costs, fees and expenses relating thereto,
Borrowers shall have Availability (determined on a pro forma basis, with
Borrowers having no accounts payables which are more than 60 days past due, and
expenses and liabilities being paid in the ordinary course of business and
without acceleration of sales) of least $7,000,000.
(D) Representations and Warranties. The representations and
------------------------------
warranties contained herein and in the Loan Documents shall be true, correct and
complete in all material respects on and as of that Funding Date to the same
extent as though made on and as of that date, except for any representation or
warranty limited by its terms to a specific date and taking into account any
amendments to the Schedules or Exhibits as a result of any disclosures made by
Borrowers to Agent after the Closing Date and approved by Agent.
(E) Fees. With respect to Loans or Lender Letters of Credit to be
----
made or issued on the Closing Date, Borrowers shall have paid all fees due to
Agent, Funding Agent or any Lender and payable on the Closing Date.
(F) No Default. No event shall have occurred and be continuing or
----------
would result from funding a Loan or issuing a Lender Letter of Credit requested
by any Borrower that would constitute an Event of Default or a Default.
(G) Performance of Agreements. Each Loan Party shall have performed
-------------------------
in all material respects all agreements and satisfied all conditions which any
Loan Document provides shall be performed by it on or before that Funding Date.
A-4
<PAGE>
(H) No Prohibition. No order, judgment or decree of any court,
--------------
arbitrator or Governmental Authority shall purport to enjoin or restrain Agent,
Funding Agent or any Lender from making any Loans or issuing any Lender Letters
of Credit.
(I) No Litigation. There shall not be pending or, to the knowledge of
-------------
any Borrower, threatened, any action, charge, claim, demand, suit, proceeding,
petition, governmental investigation or arbitration by, against or affecting any
Loan Party or any of its Subsidiaries or any property of any Loan Party or any
of its Subsidiaries that has not been disclosed to Agent by Borrowers in
writing, and there shall have occurred no development in any such action,
charge, claim, demand, suit, proceeding, petition, governmental investigation or
arbitration that, in the opinion of Agent, would reasonably be expected to have
a Material Adverse Effect.
A-5
<PAGE>
REPORTING RIDER
This Reporting Rider is attached and made a part of that certain Loan and
Security Agreement, dated as of December 22, 1998 and entered into among Hawker
Pacific Aerospace and Hawker Pacific Aerospace Limited, as Borrowers, Agent,
Funding Agent, Collateral Agent and Lenders.
(A) Monthly Financials. As soon as available and in any event within
------------------
30 days after the end of each month, Borrower Representative will deliver (1)
the consolidated and consolidating balance sheet of Borrowers and their
Subsidiaries as at the end of such month and the related consolidated and
consolidating statements of income, stockholders' equity and cash flow for such
month and for the period from the beginning of the then current Fiscal Year to
the end of such month, and (2) a schedule of the outstanding Indebtedness for
borrowed money of Borrowers and their Subsidiaries describing in reasonable
detail each such debt issue or loan outstanding and the principal amount and
amount of accrued and unpaid interest with respect to each such debt issue or
loan.
(B) SEC Filings and Press Releases. Promptly upon their becoming
------------------------------
available, U.S. Borrower will deliver copies of (1) all financial statements,
reports, notices and proxy statements sent or made available by U.S. Borrower or
any of its Subsidiaries to its security holders, (2) all regular and periodic
reports and all registration statements and prospectuses, if any, filed by U.S.
Borrower or any of its Subsidiaries with any securities exchange or with the
Securities and Exchange Commission or any governmental or private regulatory
authority, and (3) all press releases and other statements made available by
Borrower or any of its Subsidiaries to the public concerning developments in the
business of any such Person.
(C) Year-End Financials. As soon as available and in any event within
-------------------
90 days after the end of each Fiscal Year, Borrower Representative will deliver:
(1) the consolidated balance sheet of Borrowers and their Subsidiaries as at the
end of such year and the related consolidated statements of income,
stockholders' equity and cash flow for such Fiscal Year; (2) a schedule of the
outstanding Indebtedness of Borrowers and their Subsidiaries describing in
reasonable detail each such debt issue or loan outstanding and the principal
amount and amount of accrued and unpaid interest with respect to each such debt
issue or loan; and (3) a report with respect to the financial statements from
Borrowers' Accountants, which report shall be unqualified as to going concern
and scope of audit of Borrowers and their Subsidiaries and shall state that (a)
such consolidated financial statements present fairly the consolidated financial
position of Borrowers and their Subsidiaries as at the dates indicated and the
results of their operations and cash flow for the periods indicated in
conformity with GAAP applied on a basis consistent with prior years and (b) that
the examination by Borrowers' Accountants in connection with such consolidated
financial statements has been made in accordance with generally accepted
auditing standards; and (4) copies of the consolidating financial statements of
Borrowers and their Subsidiaries, including (a) consolidating balance sheets of
Borrowers and their Subsidiaries as at the end of such Fiscal Year showing
intercompany eliminations and (b) related consolidating statements of income of
Borrowers and their Subsidiaries showing intercompany eliminations.
A-6
<PAGE>
(D) Accountants' Certification and Reports. Together with each
--------------------------------------
delivery of consolidated financial statements of Borrowers and their
Subsidiaries pursuant to paragraph (C) above, Borrower Representative will
deliver or cause to be delivered a written statement by Borrowers' Accountants
(1) stating that the examination has included a review of the terms of this
Agreement as same relate to accounting matters and (2) stating whether, in
connection with the examination, any condition or event that constitutes a
Default or an Event of Default has come to their attention and, if such a
condition or event has come to their attention, specifying the nature and period
of existence thereof. Promptly upon receipt thereof, Borrower Representative
will deliver copies of all significant reports submitted to any Borrower by
Borrowers' Accountants in connection with each annual, interim or special audit
of the financial statements of Borrowers made by Borrowers' Accountants,
including the comment letter submitted by Borrowers' Accountants to management
in connection with their annual audit.
(E) Compliance Certificate. Together with the delivery of each set of
----------------------
financial statements referenced in paragraphs (A) and (C) above, Borrower
Representative will deliver a Compliance Certificate, together with copies of
the calculations and work-up employed to determine Borrowers' compliance or
noncompliance with the financial covenants set forth in the Financial Covenants
-------------------
Rider.
- -----
(F) Borrowing Base Certificates, Registers and Journals. Within 15
---------------------------------------------------
Business Days after the last day of each month (or more frequently if requested
by Agent at any time during which a Default or an Event of Default shall have
occurred and be continuing), Borrower Representative shall deliver to Agent and
to Funding Agent: (1) a Borrowing Base Certificate as of the last Business Day
of the such month (or as of such other date as Agent may specify) updated to
reflect (a) all sales and collections of Borrowers during such month (or such
other period specified by Agent) and an assignment schedule of all Accounts
created by Borrowers during such month (or such other period specified by
Agent), (b) all Revolving Advances made by Agent, Funding Agent and Lenders
during such month (or such other period specified by Agent), and (c) the
aggregate Dollar Equivalent amount of Borrowers' Inventory then subject to any
title retention arrangement or similar arrangement in favor of the seller or
vendor of such Inventory (and, in connection therewith, Borrower Representative
shall also deliver a separate certificate duly executed by its chief financial
officer certifying that no Inventory subject to any such arrangement is included
in the Borrowing Base); (2) a schedule setting forth projected shipments to
customers of Exchange Inventory and Work in Process for the 12 month period
commencing as of the first day of the then current month, which schedule shall
identify the applicable Exchange Inventory and Work in Process to be shipped,
the estimated shipping dates and customers and jurisdictions to which such
Exchange Inventory and Work in Process are projected to be shipped; and (3) each
or any of the following, if requested by Agent: (a) an invoice register or sales
journal describing all sales of Borrowers during such month (or such other
period specified by Agent), in form and substance satisfactory to Agent, and, if
Agent so requests, copies of invoices evidencing such sales and proofs of
delivery relating thereto; (b) a cash receipts journal; (c) a credit memo
journal; and (d) an adjustment journal, setting forth all adjustments to each
Borrower's accounts receivable. The certificate and information described in
this paragraph (F) shall be delivered by Borrower Representative in a manner
-------------
that is compatible with Agent's "Stars" computer software program.
A-7
<PAGE>
(G) Reconciliation Reports and Listings and Agings. (1) On the
----------------------------------------------
Closing Date and within 15 Business Days after the last day of each month and
from time to time upon the request of Agent, Borrower Representative will
deliver to Agent an aged trial balance of all then existing Accounts; and (2) as
soon as available and in any event within 15 Business Days after the last day of
each month, and from time to time upon the request of Agent, Borrower
Representative will deliver to Agent: (a) a Reconciliation Report duly executed
by the chief executive officer or chief financial officer of Borrower
Representative and substantially in the form of Exhibit F as at the last day of
---------
such period; (b) an aged trial balance of all then existing accounts payable;
and (c) if requested by Agent, a detailed inventory listing and cover summary
report. All such reports shall be in form and substance satisfactory to Agent.
The information described in clauses (1) and (2(b)) of this paragraph (G) shall
----------- ------ -------------
be delivered by Borrower Representative in a manner that is compatible with
Agent's "Stars" computer software program.
(H) Management Report. Together with each delivery of financial
-----------------
statements of Borrowers and their Subsidiaries pursuant to paragraphs (A) and
(C) above, Borrower Representative will deliver a management report: (1)
describing the operations and financial condition of Borrowers and their
Subsidiaries for the month then ended and the portion of the current Fiscal Year
then elapsed; (2) setting forth in comparative form the corresponding figures
for the corresponding periods of the previous Fiscal Year and the corresponding
figures from the most recent Projections for the current Fiscal Year delivered
to Lenders pursuant to paragraph (L) below; and (3) discussing the reasons for
any significant variations. The information above shall be presented in
reasonable detail and shall be certified by the chief financial officer of
Borrower Representative to the effect that such information fairly presents the
results of operations and financial condition of Borrowers and their
Subsidiaries as at the dates and for the periods indicated.
(I) (1) Appraisals. Without limitation of the provisions of paragraph
-------------- ---------
(I)(2) below, from time to time, upon the request of Agent, Borrowers will
- ------
obtain and deliver to Agent, at Borrowers' expense, appraisal reports in form
and substance and from appraisers satisfactory to Agent, stating the then
current fair market and Orderly Liquidation Values of all or any portion of the
Collateral; provided, however, so long as no Default or Event of Default is
-------- -------
continuing, Agent shall not request an appraisal as to any particular category
of Collateral to be performed more than once every Loan Year at Borrowers'
expense.
(2) Inventory Appraisals. Within 20 days after the end of each month
--------------------
following the Closing Date, commencing with the month ending December 31, 1998,
Borrowers, at their expense, shall deliver to Agent desktop appraisals (meaning
appraisals prepared without an on-site inspection by the appraiser; based on
information provided to the appraiser by Borrowers) (each, a "Periodic Inventory
------------------
Appraisal") of the Exchange Inventory and Work in Process, Repair Parts and
- ---------
Unserviceable Parts of Borrowers. Such Periodic Inventory Appraisals shall be
prepared by Sage Popovich, Inc. (so long as such appraiser is available and
remains satisfactory to Agent or, if such is not the case, by another
independent appraiser reasonably acceptable to Agent; Sage Popovich or such
other appraiser shall be referred to herein as the "Appraiser"), shall be in
---------
form and scope acceptable to Agent, and shall set forth the respective Orderly
Liquidation Values and Fair Market Values of Borrowers' Exchange Inventory and
Work in Process, Repair Parts and Unserviceable Parts as of the last day of the
most recently ended month. In addition, within 45 days after June 30 and
December 31 of each year following the Closing Date, commencing with
A-8
<PAGE>
June 30, 1999, Borrowers shall deliver to Agent full, on-site appraisals (each,
a "Semi-Annual Appraisal") of the Exchange Inventory and Work in Process, Repair
---------------------
Parts and Unserviceable Parts of Borrowers. Such Semi-Annual Appraisals shall be
prepared by the Appraiser, shall be in form and scope acceptable to Agent, and
shall set forth the respective Orderly Liquidation Values and Fair Market Values
of Borrowers' Exchange Inventory and Work in Process, Repair Parts and
Unserviceable Parts as of June 30 or December 31, as applicable, of the relevant
year.
(J) Government Notices. Borrowers will deliver to Agent promptly
------------------
after receipt copies of all notices, requests, subpoenas, inquiries or other
writings received from any governmental agency concerning any Employee Benefit
Plan, the violation or alleged violation of any Environmental Laws, the storage,
use or disposal of any Hazardous Material, the violation or alleged violation of
the Fair Labor Standards Act or any Borrower's payment or non-payment of any
taxes including any tax audit.
(K) Events of Default, etc. Promptly upon any officer of any Borrower
-----------------------
obtaining knowledge of any of the following events or conditions, Borrower
Representative shall deliver to Agent and each Lender a certificate of Borrower
Representative's chief executive officer specifying the nature and period of
existence of such condition or event and what action Borrowers have taken, are
taking and propose to take with respect thereto: (1) any condition or event that
constitutes an Event of Default or Default; (2) any notice of default that any
Person has given to any Loan Party or any other action taken with respect to a
claimed default; or (3) any Material Adverse Effect.
(L) Projections. As soon as available and in any event no later than
-----------
(i) January 31, 1999, in the case of Fiscal Year 1999, and (ii) 30 days prior to
the end of each Fiscal Year of Borrowers thereafter, Borrower Representative
will deliver Projections of Borrowers and their Subsidiaries for the forthcoming
three Fiscal Years, year by year, and for the forthcoming Fiscal Year, month by
month.
(M) Other Information. With reasonable promptness, Borrowers will
-----------------
deliver such other information and data as Agent, any Lender, Funding Agent or
Collateral Agent may reasonably request from time to time.
A-9
<PAGE>
FINANCIAL COVENANTS RIDER
This Financial Covenants Rider is attached and made a part of that certain
Loan and Security Agreement, dated as of December 22, 1998 and entered into
among Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as
Borrowers, Agent, Funding Agent, Collateral Agent and Lenders.
A. Tangible Net Worth. Borrowers shall at all Worth of at least the
------------------
amounts set forth below at times maintain Tangible Net the end of each month
during the periods set forth below. As used below, the term "NPAT" means
Borrowers' consolidated net profits after taxes (if greater than $0.00), as
determined in accordance with GAAP.
A-10
<PAGE>
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Closing Date through December 30, 1999 $21,500,000
December 31, 1999 through December 30, 2000 $22,000,000 plus 50%
----
of NPAT for Fiscal Year 1999
December 31, 2000 through December 30, 2001 an amount equal to the sum
of (a) the minimum tangible
net worth required for the
period from 12/31/99
through 12/30/00,
determined as set forth
above, plus (b) 50% of
NPAT for Fiscal Year 2000
December 31, 2001 through December 30, 2002 an amount equal to the sum
of (a) the minimum tangible
net worth required for the
period from 12/31/00
through 12/30/01,
determined as set forth
above, plus (b) 50% of
NPAT for Fiscal Year 2001
December 31, 2002 through December 30, 2003 an amount equal to the sum
of (a) the minimum tangible
net worth required for the
period from 12/31/01
through 12/30/02,
determined as set forth
above, plus (b) 50% of
NPAT for Fiscal Year 2002
</TABLE>
B. Minimum EBITDA. Borrowers shall at all times maintain EBITDA of at
--------------
least (a) $7,000,000 as of December 31, 1998 for the Fiscal Year then ended; (b)
$1,900,000 as of March 31, 1999 for the three months then ended; (c) $4,200,000
as of June 30, 1999 for the six months then ended; and (d) $6,200,000 as of
September 30, 1999 for the nine months then ended. Thereafter, Borrowers shall
maintain EBITDA as of the last day of each fiscal quarter during the periods set
forth below for the rolling twelve month period then ended of not less than the
amount set forth below for such period.
A-11
<PAGE>
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
October 1, 1999 through September 30, 2000 $ 8,700,000
October 1, 2000 through September 30, 2001 $10,000,000
October 1, 2001 and thereafter $12,000,000
</TABLE>
C. Capital Expenditure Limits. The aggregate amount of all Capital
--------------------------
Expenditures, Capital Leases with respect to fixed assets of Borrowers and their
Subsidiaries (which shall be considered to be expended in full on the date such
Capital Lease is entered into) and other contracts with respect to fixed assets
initially capitalized on any Borrower's or any Subsidiary's balance sheet
prepared in accordance with GAAP (which shall be considered to be expended in
full on the date such contract is entered into) (excluding, in each case,
expenditures for trade-ins and replacement of assets to the extent funded with
casualty insurance proceeds) will not exceed the amount set forth below for each
period set forth below. Notwithstanding the provisions set forth below, in no
event shall the aggregate amount of all Capital Expenditures (determined as set
forth above) for Fiscal Years 1999 and 2000, collectively, exceed $8,500,000.
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Fiscal Year 1999 $5,000,000
Fiscal Year 2000 $5,000,000
Fiscal Year 2001
and each Fiscal Year thereafter $3,500,000
</TABLE>
D. Fixed Charge Coverage. Borrowers shall not permit their Fixed Charge
---------------------
Coverage for the rolling 12 month period ending on the last day of each month
from and after the Closing Date to be less than 1.00:1.00.
A-12
<PAGE>
EXHIBIT 10.38
DATED 1999
LEASE
relating to
Unit 3
Dawley Park
Hayes
Middlesex
SUN LIFE ASSURANCE SOCIETY PLC (1)
HAWKER PACIFIC AEROSPACE LIMITED
and HAWKER PACIFIC AEROSPACE (2)
Ref: 538/A11952.18/PP2:219526.10/kdc
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PARTIES 1
1 Definitions and Construction 1
2 Demise 6
3 Tenant's Covenants 7
3.1 Rents 7
3.2 Outgoings 7
3.3 Gas and electricity charges 8
3.4 Repair 8
3.5 Reinstatement after damage 9
3.6 Inside painting 9
3.7 Landlord's right of inspection 10
3.8 Compliance with notices to remedy 10
3.9 Window cleaning 11
3.10 Yielding up 11
3.11 Reimbursement of Landlord's expenses 11
3.12 Alterations and waste 11
3.13 Signs 13
3.14 Notices of a competent authority 13
3.15 Requirements of any Act or competent authority 14
3.16 Planning Acts 14
3.17 User permitted 16
3.18 User prohibited 16
3.19 General alienation restrictions 18
3.20 Assignment of whole 19
3.21 Underletting 20
3.22 Undertenant provisions 20
3.23 Direct covenants from undertenant 22
3.24 Landlord's approval of underlease 23
3.25 Obligations relating to underletting 23
3.26 Registration of dealings 24
3.27 Notice of damage 25
3.28 Defective Premises Act 1972 25
3.29 Glass insurance 25
3.30 Third Party Insurance 26
3.31 No other insurance 26
3.32 Indemnities 26
3.33 Boards 27
3.34 Landlord's costs 27
3.35 Interest 28
3.36 Value Added Tax 28
3.37 Regulations affecting Estate 28
3.38 Obstructions and encroachments 29
3.39 Car Parking 29
3.40 Surety 30
3.41 Covenants and provisions affecting Landlord's title 30
4 LANDLORD'S COVENANTS 31
4.1 Quiet enjoyment 31
4.2 Insurance 31
4.3 Reinstatement 32
4.4 Repair of Estate and provision of services 33
5 PROVISOS 33
5.1 Re-entry 33
5.2 Payment of rent not waiver 35
</TABLE>
<PAGE>
<TABLE>
<S> <C>
5.3 Suspension of rent 36
5.5 No warranty as to use 36
5.6 Exclusion of Landlord's liability 37
5.7 Service of notices 37
5.8 Modification of compensation 37
5.9 Distress 38
5.10 Removal of Goods 38
5.11 Disputes between Tenants 38
5.12 No Building Scheme 38
5.13 No other Easements 39
5.14 Value Added Tax 39
THE FIRST SCHEDULE................................................... 41
Part 1 41
The Estate 41
Part 2 41
The Premises 41
SECOND SCHEDULE...................................................... 42
Part 1 42
Rights granted 42
Part 2 43
Rights reserved 43
THIRD SCHEDULE....................................................... 46
Review of Principal Rent 46
FOURTH SCHEDULE...................................................... 53
Service Charge 53
FIFTH SCHEDULE....................................................... 59
Surety's Covenants Guarantee of Tenant's performance 59
SIXTH SCHEDULE....................................................... 62
Landlord's Fixtures 62
SEVENTH SCHEDULE..................................................... 63
Works to be Disregarded on Rent Review 63
</TABLE>
<PAGE>
DATE
1999
PARTIES
(1) SUN LIFE ASSURANCE SOCIETY PLC (registered number 776273) whose registered
office is at 107 Cheapside London EC2V 6DU ("the Landlord")
(2) HAWKER PACIFIC AEROSPACE LIMITED (registered number 3459428) whose
registered office is at 1 London Road Southampton SO15 2AE and HAWKER
PACIFIC AEROSPACE of 11240 Sherman Way Sun Valley CA 91352-4942 USA
("the Tenant")
1 Definitions and Construction
1.1 In this Lease (unless the context otherwise requires or admits) the
following words and phrases shall have the following meanings
<TABLE>
<S> <C>
Word or Phrase Meaning
Act any Act of Parliament now or hereafter during the Term
to be passed
Common Parts the roadways ramps service yard service roads car parks
accessways forecourt loading areas landscaped areas
entrances in the Estate from time to time intended for
general use and any other parts of the Estate from time to
time intended for general use
consent of the Landlord prior consent in writing signed by the Landlord
Estate the property described in Part 1 of the First Schedule
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Group Company a company which is in the same group as the Tenant
within the meaning of section 736 of the Companies Act
1985
Insured Risks loss or damage by fire storm tempest flood lightning
explosion aircraft (other than hostile aircraft) articles
dropped therefrom riot or civil commotion malicious
damage impact bursting and overflowing of pipes and
such other risks as the Landlord shall from time to time
during the Term determine
Lettable Areas those parts of the Estate leased or intended to be leased
to occupational tenants whether or not actually let
Landlord includes the estate owner for the time being of the
reversion immediately expectant on the termination of
the Term
Landlord's fixtures the fixtures and fittings brief particulars of which are
listed in the Sixth Schedule
Landlord's Surveyor the duly qualified surveyor for the time being of the
Landlord
last year of the Term the year of the Term ending on the termination of the
Term
notice notice in writing
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Permitted Part such parts of the Premises (up to two) as is/are approved
by the Landlord (such approval not to be unreasonably
withheld or delayed) subject to the Premises never being
divided into more than three parts
Permitted Underlease an underlease of the Premises to be granted upon the date
hereof by the Tenant to the said Hawker Pacific
Aerospace Limited such underlease to be in the form of
this Lease save only for amendment of the parties thereto
Perpetuity Period the period of eighty (80) years from the date hereof
Plan the plan annexed hereto
Planning Acts the Act or Acts for the time being in force relating to
town and country planning
Premises the property described in Part 2 of the First Schedule
together with all additions and improvements thereto and
all fixtures and fittings therein or thereon other than
tenant's or trade fixtures and fittings
Prescribed Rate either the base rate of Barclays Bank PLC (or such other
Bank being a member of the Committee of London and
Scottish Clearing Bankers as the Landlord may from
time to time nominate) or if no such base rate can be
ascertained then the rate at the relevant time which such
Bank (or alternative Bank as aforesaid) shall utilise for
equivalent purposes
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Principal Rent the rent FIRST reserved in clause 2
Rent Commencement Date
Rent Payment Dates the twenty fifth day of March the twenty fourth day of
June the twenty ninth day of September and the twenty
fifth day of December of each calendar year
Rents the rents reserved in clause 2
Retained Parts the entirety of the Estate excluding the Lettable Areas
Service Conduits and Appliances gas pipes water pipes drains ducts sewers cables
electric mains wires supply lines conduits appliances
air-conditioning apparatus and services
Service Rent the rent THIRDLY reserved in clause 2
Service Road the roadway shown coloured brown on the Plan
Tenant includes the successors in title of the Tenant and those
deriving title under it
Term the term hereby granted
termination of the Term the determination of the Term whether by effluxion
of time re-entry notice surrender (whether by operation of
law or otherwise) or by any other means whatsoever
underlease and include an agreement for underlease or
sub-underlease sub-underlease
</TABLE>
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<PAGE>
underlet includes an agreement to underlet
<TABLE>
<S> <C>
1.2 In this Lease where the context requires
1.2.1 words importing the singular include the plural and vice versa
1.2.2 words importing the masculine include the feminine and neuter
1.2.3 where a party consists of more than one person covenants and obligations
of that party shall take effect as joint and several covenants and
obligations
1.3 References to any Act include references to any statutory modification
or re-enactment thereof for the time being in force and any order
instrument regulation or by-law made or issued thereunder
1.4 The clause headings shall not in any way affect the construction of this
Lease
1.5 It shall be a breach of the covenants and conditions on the part of the
Tenant herein contained to permit or suffer any act in breach of such
covenants and conditions
2 Demise
The Landlord demises the Premises to the Tenant TOGETHER WITH the rights
granted in Part 1 of the Second Schedule RESERVING to the Landlord and
all others authorised by the Landlord the rights set out in Part 2 of
the Second Schedule TO HOLD for the term of Twenty five (25) years
from (and including) 19 and expiring on (and
including) determinable as herein provided SUBJECT TO all rights
easements quasi-easements covenants and stipulations affecting the
Premises including the matters contained in or referred to in the deeds
and documents listed in the Fifth Schedule paying during the Term FIRST
from the date hereof until the Rent Commencement Date the yearly rent of
one peppercorn and from the Rent Commencement Date until (and including)
day of 19 the yearly rent (and proportionately for any
part of a year) of POUNDS ((Pounds) ) and thereafter the
</TABLE>
-5-
<PAGE>
yearly rent payable under the Third Schedule such rent to be paid
without any deduction or set off whether legal or equitable (except as
required by any Act) by four equal quarterly payments in advance on the
Rent Payment Dates the first payment for the period beginning on (and
including) day of 19 and ending on (and including) day of
19 to be made on the day of 19 SECONDLY a yearly rent equal
to 38 per centum per annum of the sum or sums (including the cost of
periodic valuations for insurance purposes (but not more than once a
year)) incurred or to be incurred by the Landlord in performance of the
Landlord's covenant for insurance in clause 4.2 such yearly rent to be
paid on demand THIRDLY the yearly rent ascertained in accordance with
the provisions of the Fourth Schedule such rent to be paid in accordance
with the Fourth Schedule and FOURTHLY by way of additional rent the
interest payable pursuant to clause 3.35
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<PAGE>
3 Tenant's Covenants
The Tenant covenants with the Landlord
3.1 Rents
To pay the Rents at the times and in manner aforesaid if so required by
banker's standing order without any deduction (except as aforesaid) by
way of set off (whether legal or equitable or of any other description)
or otherwise
3.2 Outgoings
3.2.1 To defray or in the absence of direct assessment on the Premises to pay
to the Landlord a fair proportion (to be conclusively determined by the
Landlord) of all existing and future rates taxes assessments charges
and outgoings payable in respect of the Premises or any part thereof by
any estate owner landlord tenant or occupier thereof (save only for any
occasioned by the receipt of Rents or as a result of any disposition of
or dealing with or the ownership of any estate or interest expectant in
reversion on the termination of the Term other than a deemed disposal
or dealing arising as a consequence of any act or default of the Tenant
its undertenants licensees agents or servants)
3.2.2 To pay to the Landlord on demand the amount of any rates or surcharge
payable by the Landlord after the termination of the Term through the
Landlord's inability to claim void rate relief for the maximum period
(commencing with the date of termination of the Term) which would have
been allowed had the Premises been occupied up to the date of the
termination of the Term
3.2.3 Not to agree any valuation of the Premises for rating purposes or agree
any alteration in the rating list in respect thereof without the prior
written consent of the Landlord (such consent not to be unreasonably
withheld or delayed)
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<PAGE>
3.2.4 Not to make any proposal to alter the rating list so far as the list
relates to the Premises or lodge an appeal in respect thereof without
the prior written consent of the Landlord (such consent not to be
unreasonably withheld or delayed)
3.2.5 Without prejudice to clause 3.12 forthwith upon receipt to provide the
Landlord with a copy of any notice of an alteration or proposed
alteration in the rating list which will or may affect the Premises
3.3 Gas and electricity charges
3.3.1 To pay to the suppliers thereof all charges for gas electricity and
water (including meter rents) consumed in the Premises during the Term
3.3.2 To comply with the requirements and regulations of the supply authority
with regard to the electrical wiring installations and equipment in the
Premises and not without the consent of the Landlord (such consent not
to be unreasonably withheld or delayed) to carry out any electrical
work whatsoever or make any alteration to or extension of the
electrical installations in the Premises or the Estat e
3.4 Repair
3.4.1 To put and keep the Premises and every part thereof in good and
substantial repair and condition throughout the Term and when necessary
to rebuild the same (damage by the Insured Risks excepted subject to
exclusions of the policy or policies effected by the Landlord and save
to the extent that such policies shall have been vitiated or payment of
the policy monies refused in consequence of some act or default on the
part of or suffered by the Tenant its undertenant or their respective
servants agents licensees or invitees)
3.4.2 To keep all parts of the Premises which are not built upon in a good
and clean condition adequately surfaced and free from weeds and all
landscaped areas properly cultivated and maintained
-8-
<PAGE>
3.4.3 To keep all plant machinery apparatus and equipment in the Premises
properly maintained and in good working order and condition and when
necessary renew or replace the same
3.5 Reinstatement after damage
In the event that the Premises shall be destroyed or damaged by any of
the Insured Risks and if the Term shall not have been determined under
clause 5.4 if so required to join with the Landlord (at the parties'
joint cost insofar as the costs are not recoverable from insurance) in
making application for any planning or other permission necessary for
rebuilding or reinstating the Premises
3.6 Inside painting
3.6.1 As often as reasonably required (having regard to the nature of the
surfaces and the materials used in the construction of the Premises)
(but no more often than once in every fifth year of the Term) and in
the last three months of the last year of the Term in a proper and
workmanlike manner to prepare and paint all inside surfaces of the
Premises usually painted with two coats of good quality paint and to
restore all other inside surfaces to their proper condition and
appearance
3.6.2 In complying with this covenant in the last three months of the last
year of the Term to use only materials approved by the Landlord (such
approval not to be unreasonably withheld or delayed)
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<PAGE>
3.7 Landlord's right of inspection
Subject to the provisions of clause 5.17 hereof to permit the Landlord
and any authorised person at all reasonable times and (save in the case
of emergency) upon previous notice to enter upon the Premises for any
of the following purposes
3.7.1 to view and examine the state and condition of the Premises and to take
schedules or inventories of the Landlord's fixtures and fittings and
3.7.2 to exercise any of the rights excepted and reserved by this Lease and
3.7.3 to comply with the covenants on the part of the Landlord herein
contained and
3.7.4 for any other reasonable purpose connected with the interest of the
Landlord in the Premises including but not limited to the valuation or
disposal of any interest of the Landlord
3.8 Compliance with notices to remedy
3.8.1 Forthwith to commence and thereafter diligently to proceed with any
works to the Premises which are necessary to comply with any notice
properly given by the Landlord requiring the Tenant to remedy any
breach of the Tenant's covenants relating to the state and condition of
the Premises found upon any inspection
3.8.2 If the Tenant shall not within a period of ninety (90) days or sooner
if requisite comply with any such notice to permit the Landlord and any
authorised person to enter the Premises to remedy any such breach
3.8.3 To pay to the Landlord on demand all the reasonable costs and expenses
reasonably and properly incurred by the Landlord under the provisions
of clause
3.8.2 which sums shall at the option of the Landlord be recoverable by action
or as rent in arrears
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<PAGE>
3.9 Window cleaning To clean the window glazing in the Premises as often as
reasonably necessary and in any event at least once in every two months
3.10 Yielding up
At the termination of the Term
3.10.1 to yield up the Premises (Tenant's or trade fixtures and fittings only
excepted) in good and substantial repair and condition and fully in
accordance with the foregoing Tenant's covenants and
3.10.2 to make good to the satisfaction of the Landlord any damage caused to
the Premises by the removal of the Tenant's fixtures fittings furniture
and effects or any signs or notices installed by the Tenant pursuant to
the provisions hereafter contained and by the reinstatement of the
Premises pursuant to any covenant with the Landlord
3.11 Reimbursement of Landlord's expenses
To reimburse to the Landlord all expenditure reasonably incurred by the
Landlord after the termination of the Term in repairing rebuilding
renewing painting and decorating the Premises so as to put them into
the condition required by the foregoing Tenant's covenants and to pay
to the Landlord a sum equivalent to the loss of rent suffered by the
Landlord during the period from such termination until all such works
have been completed
3.12 Alterations and waste
3.12.1 Subject to the provisions of sub-clauses 3.12.2 and 3.12.3 not to erect
or permit or suffer to be erected any other building structure pipe
wire mast or post upon the Premises nor to make or permit or suffer to
be made any alteration in or addition to the Premises nor to commit or
permit or suffer any waste spoil or destruction in or upon the Premises
nor to cut injure or remove or
-11-
<PAGE>
suffer to be cut injured or removed any of the roofs walls (whether
outside or inside) floors joists timbers wires pipes drains
appurtenances or fixtures of the Estate or the Premises
3.12.2 Not to make any alterations of any nature to the Premises (whether
structural or not) or any part thereof without the consent of the
Landlord such consent not to be unreasonably withheld or delayed
provided always that the Landlord shall be entitled
(a) to require that the Works are carried out in a good and
workmanlike manner and
(b) as a condition of giving consent to stipulate that the Tenant
enter into such covenants with the Landlord as the Landlord shall
require with regard to the carrying out of the works including
(without limitation) a covenant for reinstatement
3.12.3 In the event that the Tenant shall at any time carry out works to the
Premises in breach of the provisions of this clause the Landlord will
be entitled without notice to enter the Premises and remove such works
or any part thereof and reinstate the Premises PROVIDED THAT the costs
thereby incurred including interest calculated at the rate of Four per
centum per annum above the Prescribed Rate on a day to day basis from
the date of expenditure until the date of payment shall be recoverable
by action or at the option of the Landlord as rent in arrears
3.12.4 Notwithstanding the above and subject to the provisions of clauses 3.17
and 3.19 the Tenant shall be entitled (without the consent of the
Landlord) to install alter and remove demountable partitions which do
not affect the structure PROVIDED THAT
(a) the Tenant shall deposit with the Landlord plans showing the
location of the partitions immediately after the installation
alteration relocation of the same and
(b) the Tenant shall at the termination of the Term remove such
partitions and make good to the satisfaction of the Landlord all
damage to the Premises thereby caused
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<PAGE>
3.13 Signs
3.13.1 Not to affix any sign on the exterior of the Premises without the
Landlord's prior written consent (such consent not to be unreasonably
withheld or delayed)
3.13.2 Subject to clause 3.13.1 above and save as provided in paragraph 5 of
Part 1 of the Second Schedule not to affix or display or permit or
suffer to be affixed or displayed upon any part of the exterior of the
Premises or the Estate or to or through any window thereof any placard
poster notice advertisement name or sign whatsoever Any sign erected by
the Tenant in breach of the provisions of this clause may be removed by
the Landlord and the costs thereby incurred including interest
calculated at the rate of Four per centum per annum above the
Prescribed Rate in respect of the period from the date of expenditure
until the date of payment shall be recoverable by action or at the
option of the Landlord as rent in arrears
3.14 Notices of a competent authority
Within fourteen days (or sooner if reasonably requisite having regard
to the requirements of the same) of the receipt by the Tenant of any
notice order requisition direction or plan given made or issued to or
by a competent authority affecting the Premises or the occupation or
user thereof to supply a copy thereof to the Landlord and to make or
join in making (at the Landlord's cost) such objections or
representations against or in respect thereof as the Landlord may
reasonably require
3.15 Requirements of any Act or competent authority
3.15.1 To comply in every respect with the provisions of any Act or the
requirements of any competent authority in respect of the Premises or
any part thereof or in respect of the occupation or user thereof and to
indemnify the Landlord against all claims demands expenses and
liability in respect thereof and to pay all costs charges and expenses
incurred by the Landlord in connection with any such provision or
requirement
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<PAGE>
3.15.2 In the event that at any time the Tenant shall not carry out such works
as are necessary to comply with the provisions and requirements
referred to in clause 3.15.1 then the Landlord may (but shall not be
obliged to) enter the Premises and carry out such works itself and the
reasonable costs thereby incurred including interest calculated at the
rate of Four per centum per annum above the Prescribed Rate on a day to
day basis from the date or expenditure until the date or repayment
shall be recoverable by action or at the option of the Landlord as rent
in arrears and
3.15.3 Not at any time to make application whether to the Court or otherwise
for any apportionment of the costs or expenses incurred or to be
incurred by the Tenant in compliance with the provisions and
requirements referred to in clause
3.16 Planning Acts
Without prejudice to the generality of the last preceding Sub-clause in
relation to the Planning Acts
3.16.1 to comply with the provisions of the Planning Acts and of any planning
permissions relating to or affecting the Premises and
3.16.2 not to make any application for planning permission in respect of the
Premises without the consent of the Landlord such consent not to be
unreasonably withheld or delayed and
3.16.3 at the expense of the Tenant to obtain and if appropriate to renew all
planning permissions and any other consents and to serve all necessary
notices required for the carrying out by the Tenant of any operations
or the commencement of any work on the Premises which may constitute
Development which the meaning of the Planning Acts and
3.16.4 not to implement any planning permission before it has been produced to
the Landlord and acknowledged as satisfactory but such acknowledgement
not to be unreasonably withheld or delayed PROVIDED THAT the Landlord
may refuse to approve such planning permission on the grounds that any
condition contained in it or anything omitted from it or the period
referred to in
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<PAGE>
it would in the reasonable opinion of the Landlord be or
be likely to be prejudicial to the Landlord's interest in the Premises
or in any adjoining property and
3.16.5 unless the Landlord shall otherwise direct in writing to carry out and
complete before the termination of the Term any works required to be
carried out to the Premises as a condition of any planning permission
granted during the Term and implemented by the Tenant whether or not
the date by which the planning permission requires such works to be
carried out is within the Term and
3.16.6 to produce to the Landlord on demand all plans documents and other
evidence as the Landlord may reasonably require in order to satisfy
itself that the provisions of this clause have been complied with and
3.16.7 in any case where a planning permission has been granted subject to
conditions the Landlord shall be entitled (where it is reasonable to do
so) to require the Tenant to provide security for the compliance with
such covenants
3.17 User permitted Not to use or occupy the Premises other than for the
purposes specified in Use Classes B1 (b) and (c) B2 and B8 of the Town
and Country Planning (Use Classes) Order 198 7
3.18 User prohibited
3.18.1 Not to store or bring upon the Premises any materials or liquid of a
specially combustible inflammable dangerous or offensive nature save
for any such materials or liquids the nature of which have been
previously disclosed to the Landlord (subject to the same being stored
and used in accordance with any statutory provisions relating thereto)
3.18.2 Not to do any act or thing whereby any insurance effected on the Estate
or Premises or any neighbouring property may be rendered void or
voidable or unless the Tenant shall pay such
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<PAGE>
increased premium the rate of premium thereon may be increased and to
comply with all requirements of the insurers as to fire precautions
relating to the Premises
3.18.3 To keep the Premises supplied and equipped with such fire fighting
equipment as may be required by statute or the insurers and not at any
time to obstruct the means of access to or means of working of any such
equipment
3.18.4 Not to do on the Premises or any part thereof any act or thing
whatsoever which may be or tend to be a nuisance annoyance damage or
disturbance to the Landlord or the owners or occupiers of any adjoining
or neighbouring property PROVIDED ALWAYS that the carrying on by the
Tenant (here meaning Hawker Pacific Aerospace Limited and Hawker
Pacific Aerospace Incorporated only) of its business at the Premises in
a usual and reasonable manner for a business of that type shall not in
any event be deemed to be a breach of the provisions of this sub clause
or any other provision contained or referred to in this Lease
3.18.5 Not to use the Premises or any part thereof for any illegal or immoral
purpose
3.18.6 Not to bring into or upon the Estate and/or the Premises or do anything
which might throw on the Estate and/or the Premises any load or weight
in excess of that which the Estate and/or the Premises are designed or
constructed to bear with due margin for safety nor to cause any undue
vibration to the Premises or any part of the Estate by machinery or
otherwise
3.18.7 Not to discharge into any of the Service Conduits and Appliances any
oil or grease or other noxious or deleterious effluent or substance
which may cause an obstruction or be or become a source of danger or
which might injure the Service Conduits and Appliances or the drainage
system of the Estate or which might overload the Service Conduits and
Appliances or which is calculated or likely to pollute the water of any
stream or river
3.18.8 Not to hold in the Premises any sale by public auction public
exhibition or political meeting
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<PAGE>
3.18.9 Not to obstruct the Common Parts or any means of escape nor to do
anything which might be or become a source of danger to persons using
the Common Parts or means of escape
3.18.10 Not to deposit in the Common Parts or on any land forming part of the
Premises any rubbish refuse or trade empties of any kind other than in
proper receptacles
3.18.11 Not to store stack or load out upon any land forming part of the
Premises any materials equipment plants bins crates or any other item
which is or might become in the reasonable opinion of the Landlord
untidy unsightly unclean or in any way detrimental to the amenity of
the Estate
3.18.12 Not to load or unload any goods amongst or dispatched from the Premises
except within the curtilage of the Premises and in such a way that
access to egress from other parts of the Estate is not obstructed
3.18.13 Not to post outside the Premises or in the Common Parts nor to expose
from the windows of the Premises any articles goods or things of any
kind
3.19 General alienation restrictions
3.19.1 Save for one or more underlettings of a Permitted Part or Permitted
Parts not to assign charge or underlet part only of the Premises
3.19.2 Not to part with or share possession or occupation of the Premises or
any part of them except that the Tenant may share occupation of the
Premises or any part of them with a Group Company on condition that
(a) no relationship of landlord and tenant is created
(b) the Tenant gives the Landlord immediate notice in writing of the
name of the Group Company its relationship to the Tenant the area
occupied the date of occupation and the date of vacation and
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<PAGE>
(c) the Tenant procures (and covenants to this effect) that the Group
Company shall vacate the Premises immediately upon the earlier of
the Termination of the Term or the date on which the company ceases
to be a Group Company
3.19.3 Not to charge the whole of the Premises without the consent of the
Landlord not to be unreasonably withheld or delayed
3.20 Assignment of whole
3.20.1 Not to assign the whole of the Premises without the consent of the
Landlord not to be unreasonably withheld or delayed but the Landlord
and Tenant agree for the purposes of Section 19(1A) of the Landlord and
Tenant Act 1927 that the Landlord may withhold its consent in any of
the circumstances specified in clause 3.20.2 and may impose all or any
of the conditions specified in clause 3.20.3 as a condition of its
consent
3.20.2 The circumstances referred to in clause 3.20.1 are
(a) if there are any outstanding arrears of rent
(b) if the proposed assignee is not a person who in the Landlord's
reasonable opinion is able to comply with the Tenant's obligations
contained in this Lease
(c) if the proposed assignee has the right to claim diplomatic
immunity or exemption from the Tenant's covenants contained in this
Lease
3.20.3 The conditions referred to in clause 3.20.1 are
(a) that the Tenant and the Surety (if any) enter into a deed of
guarantee (being an authorised guarantee agreement within Section
16 of the Landlord and Tenant (Covenants) Act 1995) with the
Landlord on or before completion of the assignment in such form as
the Landlord shall reasonably require
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(b) that (if the Landlord reasonably so requires) the proposed assignee
provides a guarantor or guarantors acceptable to the Landlord
(acting reasonably) who shall covenant (jointly and severally if
more than one) with the Landlord on the terms contained in the
Sixth Schedule
3.20.4 The circumstances and conditions set out in clauses 3.20.2 and 3.20.3
shall not operate to limit the Landlord's right to withhold such
consent on any other ground or grounds where it would be reasonable to
do so or to impose any other reasonable conditions upon the grant of
such consent
3.21 Underletting
Not to underlet the whole or a Permitted Part or Parts of the Premises
without the consent of the Landlord not to be unreasonably withheld or
delayed and on condition that in every case
3.21.1 the rents reserved by such underlease shall not be less than the
greater of the rents for the time being payable by the Tenant under
this Lease or a due proportion of them (such proportion in the case of
dispute to be conclusively determined by the Landlord's Surveyor) and
the best rent reasonably obtainable in the open market for the premises
to be underlet without taking a fine or premium and shall not be
commuted or payable more than one quarter in advance and
3.21.2 an underlease of a Permitted Part (but not an underlease of the whole)
incorporates an agreement authorised beforehand by an order of the
Court excluding Sections 24 to 28 of the Landlord and Tenant Act 1954
in relation to such underlease
3.22 Undertenant provisions
To incorporate (or procure the incorporation of) in every permitted
(mediate or immediate) underlease
3.22.1 a covenant that the undertenant shall not underlet the whole or part of
the underlet premises without the consent of both the Landlord and the
Tenant (each such consent not to be
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unreasonably withheld or delayed) and not save in the case of the
Permitted Underlease (where such a restriction shall not be required)
without incorporating in such underlease an absolute restriction
against further underletting whether of the whole or part of the
underlet premises
3.22.2 a covenant that the undertenant shall not assign or charge part only of
the underlet premises
3.22.3 a covenant that the undertenant shall not assign the whole of the
underlet premises without the consent of both the Landlord and the
Tenant (each such consent not to be unreasonably withheld or delayed)
and without the undertenant on or before completion of the assignment
entering into an authorised guarantee agreement within Section 16 of
the Landlord and Tenant (Covenants) Act 1995 with the Tenant in such
form as the Landlord shall reasonably require
3.22.4 a covenant that the undertenant shall not charge the whole of the
underlet premises without the consent of both the Landlord and the
Tenant (each such consent not to be unreasonably withheld or delayed)
3.22.5 a covenant that the undertenant shall not part with or share possession
or occupation of the underlet premises except by way of assignment sub-
underletting (in the case only of the Permitted Underlease) or charge
pursuant to the provisions contained in this clause 3.22
3.22.6 a covenant by the undertenant to observe and perform all the Tenant's
covenants contained in this Lease (other than payment of the Rents)
insofar as they relate to the underlet premises
3.22.7 a covenant by the undertenant (which the Tenant covenants to enforce)
prohibiting the undertenant from causing or suffering any act or thing
upon or in relation to the underlet premises inconsistent with or in
breach of the provisions of this Lease
3.22.8 a condition for re-entry on the breach of any covenant by the
undertenant
3.22.9 such provisions as are necessary to ensure that the rent reserved by
the underlease is reviewed on the dates and upon the terms provided for
review of rent in this Lease
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3.23 Direct covenants from undertenant
Upon any permitted underlease to procure that the undertenant shall
give a direct covenant under seal in favour of the Landlord
3.23.1 to observe and perform the covenants and conditions on the part of the
Tenant contained in this Lease (save as to payment of Rents) insofar as
they relate to the underlet premises and
3.23.2 that in the event that this Lease shall be forfeited or a liquidator or
trustee in bankruptcy shall disclaim the Lease the undertenant shall if
the Landlord so requires by notice in writing given to the undertenant
within three (3) months after such event take a new lease of the
premises demised by the underlease for the residue of the underlease
term unexpired at the date of such event and at the rents then payable
under the underlease and subject to the terms of the underlease in
every respect and to execute and deliver to the Landlord a counterpart
of such lease and pay to the Landlord on demand the costs incurred in
its preparation and completion
3.23.3 and (if reasonably required) to procure that a guarantor or guarantors
reasonably acceptable to the Landlord guarantee such covenants in such
terms as the Landlord may from time to time reasonably require and
covenant with the Landlord to enter into any new lease required
pursuant to the covenant contained in clause 3.23.2 to guarantee the
lessee's covenants contained in such lease in such terms as the
Landlord may from time to time reasonably require
3.24 Landlord's approval of underlease
Without prejudice to the other provisions relating to underletting
contained in this Lease the Tenant shall obtain the approval of the
Landlord's solicitors (such approval not to be unreasonably withheld or
delayed) in relation to the form of underlease finally agreed with the
proposed undertenant before granting it
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3.25 Obligations relating to underletting
3.25.1 To enforce all the covenants and obligations of the undertenant contained
in any underlease and not expressly or by implication waive any breach of
them
3.25.2 Not to give consent to or participate in any variation or addition to or
accept any surrender of any permitted underlease
3.25.3 Duly and efficiently to operate and effect all reviews of rent pursuant
to the terms of any permitted underlease but not to agree the amount of
any reviewed rent without the consent of the Landlord (such consent not
to be unreasonably withheld or delayed)
If such review is referred to a third party for determination then the
Tenant shall
(a) include in its representations such third party representations as
the Landlord may reasonably require
(b) if at the date of such determination the rent payable under this
Lease is being reviewed in accordance with the provisions of the
Third Schedule and the determination has been referred to a third
party then at the option of the Landlord use its reasonable
endeavours to procure the agreement of the undertenant to such third
party determining the revised rent under the underlease
3.25.4 Not to agree the amount of any interim rent payable under Section 24A of
the Landlord and Tenant Act 1954 without the consent of the Landlord not
to be unreasonably withheld or delayed
3.25.5 If the amount of interim rent or the terms of any underlease shall be
determined by the Court under the provisions of Part II of the Landlord
and Tenant Act 1954 then to make to the Court such representations with
regard to the amount of such rent and the terms of such tenancy as the
Landlord may reasonably require to the reasonable satisfaction of the
Landlord and
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3.25.6 From time to time on demand during the Term the Tenant shall provide the
Landlord with full particulars of all occupiers and derivative interests
in the Premises (however remote) and disclose whether there are any
grounds known to the Tenant on which an application under Section 24(1)
or Section 26(1) of the Landlord and Tenant Act 1954 might reasonably be
opposed by the Competent Landlord (as defined in the Sixth Schedule of
that Act)
3.26 Registration of dealings
3.26.1 Within one month after any assignment underlease assent transfer
assignment of underlease mortgage charge or other disposition or
devolution of the Premises or any part of them whether mediate or
immediate to give notice of it in duplicate to the Landlord's solicitors
and provide a copy (certified as true) of the deed instrument or other
document evidencing or effecting such disposition and pay to the
Landlord's solicitors a reasonable fee (but not less than (Pounds)25) for
its registration
3.26.2 The registration of any document in accordance with clause 3.26.1 shall
be evidence of notification of such transaction to the Landlord but shall
not require the Landlord to consider the terms of such transaction
3.27 Notice of damage
In the event of the Premises being destroyed or materially damaged to
give notice thereof immediately to the Landlord stating (if possible) the
cause of such destruction or damage
3.28 Defective Premises Act 1972
Immediately upon becoming aware of the same to give notice to the
Landlord of any defect in the Premises which might give rise to an
obligation on the Landlord to do or refrain from doing any act or thing
under the Defective Premises Act 1972 and to display and maintain in the
Premises all notices which the Landlord may from time to time reasonably
require to be displayed in relation to such Act
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3.29 Glass insurance
To insure and keep insured in the joint names of the Landlord and Tenant
against loss or damage by accident all glass in the windows doors and
partitions in the Premises to the full replacement value thereof in such
insurance office of repute as may be approved by the Landlord and to
produce evidence of the existence of the policy and the payment of the
last premium receipt to the Landlord within seven days following demand
and forthwith lay out all monies received from such insurance and such
other monies as may be necessary in reinstating the glass with glass of
the same quality
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3.30 Third Party Insurance
To effect and maintain for such a sufficient amount and with reputable
insurers insurance against liability to employees and third parties and
contingencies arising under the Defective Premises Act 1972 and any other
Act or at common law and to produce evidence of the existence of the
policy and payment of the last premium to the Landlord within seven days
following demand once a year
3.31 No other insurance
Not to effect or maintain any insurance in respect of the Premises
(except as to Tenant's fixtures and contents and except for the Tenant's
usual and normal business insurances)
3.32 Indemnities
3.32.1 To indemnify the Landlord against all costs and expenses including
professional fees properly incurred by the Landlord in connection with
all and every loss and damage whatsoever incurred or sustained by the
Landlord as a consequence of every breach of covenants by and conditions
on the part of the Tenant set out (or implied) herein PROVIDED THAT such
indemnity shall extend to and cover all reasonable costs and expenses
incurred by the Landlord in connection with any steps which the Landlord
may take to remedy any such breach and be without prejudice to any rights
or remedies of the Landlord in respect of any such breach
3.32.2 To indemnify the Landlord against all actions claims liabilities costs
and expenses alleged or demanded by the owners or occupiers of any
adjoining or neighbouring property or other parties arising through the
use or occupation of the Premises the existence of any article in or
about the Premises or the execution or omission of any works upon the
Premises except insofar as the same may be due solely to the Landlord's
own act or default or the act or default of the Landlord's employees or
agents
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3.33 Boards
To permit the Landlord during the last six months of the Term to affix
and retain without interference upon any suitable and conspicuous part of
the Estate or the Premises (but not so as materially to affect the access
of light and air to the Premises or the Tenant's use and enjoyment of the
Premises) a notice for re-letting the same or at any time during the Term
for selling or other dealing with the Landlord's interest in the Premises
3.34 Landlord's costs
To pay to the Landlord on demand all reasonable costs charges and
expenses (including legal and surveyor's fees and costs) properly
incurred of and incidental to
3.34.1 every application made by the Tenant for the consent of the Landlord
whether the same be granted or lawfully refused or proffered subject to
any lawful qualification or condition or whether the application be
withdrawn including and without prejudice to the foregoing any costs
incurred by the Landlord in compliance with the requirements of the
Landlord and Tenant Act 1988
3.34.2 the preparation and service of a notice under Section 146 of the Law of
Property Act 1925 and of any proceedings under Sections 146 or 147 of the
Act notwithstanding that any right of re-entry has been waived or the
Tenant obtains relief or forfeiture is avoided otherwise than by relief
granted by the Court
3.34.3 any schedule relating to wants of repair to the Premises whether served
during or within six months after the termination of the Term and
3.34.4 the recovery of any arrears of the Rents or other moneys payable under
this Lease or the remedying of any breach of covenant by the Tenant
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3.35 Interest
If any sum payable by the Tenant to the Landlord under this Lease shall
not be paid on the due date or shall not be accepted by the Landlord for
a reasonable period so as not to waive any existing breach or alleged
breach of covenant to pay to the Landlord interest thereon at the rate of
two per centum per annum above the Prescribed Rate calculated on a day to
day basis from the date of the same becoming due down to the date of
payment and the aggregate amount for the time being so payable shall at
the option of the Landlord be recoverable by action or as rent in arrears
3.36 Value Added Tax
Whenever any sum is payable by the Tenant on which value added tax or any
other tax is payable (whether or not such tax is imposed at the election
of or with the consent of the Landlord) then (subject to the Landlord
providing a VAT invoice addressed to the Tenant) to pay to the Landlord
in addition to such sum the amount of the value added or other tax
thereon at the rate applicable to that payment and such sums shall at the
option of the Landlord be recoverable by action or as rent in arrears
3.37 Regulations affecting Estate
To comply in all respects with the regulations for the time being made by
the Landlord for the maintenance of the amenity and good order of the
Estate provided that such regulations do not conflict with the terms of
this Lease or derogate from the rights granted to the Tenant by this
Lease
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3.38 Obstructions and encroachments
Not to obstruct or permit or suffer to be obstructed any of the windows
lights or ventilators belonging to the Premises nor to permit or suffer
any new window light ventilator passage drainage or other encroachment or
easement to be made into against or over the Premises or any part thereof
AND in case any encroachment or easement whatsoever shall be attempted to
be made or acquired by any person whomsoever to give notice thereof to
the Landlord immediately the same shall come to the knowledge of the
Tenant and at the cost of the Landlord do all such things as may be
reasonable and proper for preventing any new encroachment or easement
being made or acquired
3.39 Car Parking
3.39.1 Not to do or permit or suffer to be done anything in or about the parking
spaces which from time to time form part of the Premises ("the Parking
Spaces") or the service road or accessways leading thereto which would or
could constitute a nuisance annoyance obstruction disturbance or cause
damage or inconvenience to the Landlord or the Tenants or occupiers of
the Estate
3.39.2 To comply and ensure that the Tenant's visitors comply with such
reasonable regulations as the Landlord may make for the regulation of the
traffic to and from the Premises
3.39.3 Not to do or permit any person to wash any motor car carry out works of
repair or maintenance to a motor car or pour petrol or other fuel into
the tank of such a car whilst parked in the Parking Spaces
PROVIDED THAT the Landlord shall not incur any liability or
responsibility to the Tenant or any other person firm or corporation
(a) for any loss of or damage to or from any motor car using the Parking
Spaces nor for any damage or injury suffered by any driver or
passenger in such motor car or by the Tenant or any visitor of the
Tenant and
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(b) if any person other than the Tenant shall use or occupy the Parking
Spaces without the consent of the Landlord
3.40 Surety
In the event that any person firm or body corporate which has or shall
have guaranteed the Tenant's obligations contained in this Lease shall
die or an event shall occur in relation to such person firm or body
corporate of the type referred to in clauses 5.1.3 5.1.4 5.1.5 or 5.1.6
then to give immediate notice thereof to the Landlord and if so required
by the Landlord at the expense of the Tenant within 30 working days
thereafter to procure that some other guarantor or guarantors reasonably
acceptable to the Landlord execute a guarantee in respect of the Tenant's
obligations contained in this Lease in the form referred in the Sixth
Schedule
3.41 Covenants and provisions affecting Landlord's title
By way of indemnity to observe and perform the covenants and conditions
contained or referred to in Entry 1 of the Charges Register of Title
Number NGL 346507 and insofar as they relate to any act carried out by
the Tenant the covenants and conditions contained or referred to in
clause 3 of the Transfer dated 31 March 1992 referred to in Entry No 4 of
the Charges Register of Title Number NGL 346507 so far as the same affect
the Premises and to keep the Landlord fully and effectually indemnified
from and against all actions costs proceedings claims and demands arising
from any breach or non-observance or non-performance thereof
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4 LANDLORD'S COVENANTS
The Landlord covenants with the Tenant as follows
4.1 Quiet enjoyment
That the Tenant paying the Rents and performing and observing the
covenants and stipulations on the part of the Tenant herein shall
peaceably hold and enjoy the Premises during the Term without any
interruption by the Landlord or any person rightfully claiming under or
in trust for the Landlord
4.2 Insurance
To insure the Estate (other than plate glass) and keep the same insured
subject to such exclusions excesses and limitation as may be imposed by
the insurers and which are notified to the Tenant against
4.2.1 loss or damage by the Insured Risks in such amount as is from time to
time sufficient to cover the full amount of the costs of completely
rebuilding or reinstating the Estate including reasonable provision for
escalation of such costs between the date of destruction or damage and
the date of rebuilding or reinstating the Estate professional fees and
expenses in such amount as the Landlord shall from time to time deem
appropriate and the cost of site clearance including demolition and
debris removal and value added tax on all such sums including any value
added tax arising on a deemed self supply pursuant to paragraphs 5 and 6
of Schedule 6A to the Value Added Tax Act 1983 as amended by the Finance
Act 1989 or otherwise and
4.2.2 loss of rent and Service Rent of the Estate at the rate for the time
being payable or prospectively payable taking into account any review of
the rent for Three (3) years
4.2.3 (to the extent to which the same is not covered by sub-clause 4.2.1)
breakdown and where applicable explosion of the boilers lifts and other
plant in the Estate and
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4.2.4 property owner's liability and such other insurances as the Landlord may
from time to time reasonably deem necessary to effect
AND to effect such insurance with an insurance company or underwriters of
repute and through such agency as the Landlord from time to time deems
fit and proper and to produce to the Tenant upon written request (but not
more than once in every year) particulars of the policy or policies of
such insurance and evidence of payment of the premium therefore
4.3 Reinstatement
4.3.1 If the Estate or any part shall be destroyed or damaged by any of the
Insured Risks so as to render the Premises unfit for use and occupation
(a) subject to the Landlord obtaining any planning or other permission
necessary for rebuilding or reinstating the Premises (which the
Landlord shall use reasonable endeavours to obtain as soon as
reasonably practicable) and subject to the necessary labour and
materials being and remaining available to rebuild or reinstate the
Premises substantially as the same were prior to such destruction or
damage (but not so as to provide accommodation identical in layout
if it would not be reasonably practical so to do) and
(b) in the event that the Landlord is prevented from rebuilding or
reinstating the Premises or in the event that such rebuilding and
reinstatement shall not be commenced within two (2) years and
completed within 3 years after the date of such destruction or
damage either party may by notice to the other determine this Lease
but without prejudice to any claim by either party against the other
in respect of any antecedent breach of covenant PROVIDED THAT upon
any such determination the Landlord will be entitled to all the
insurance monies and the Tenant shall have no claim with regard
thereto
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4.3.2 The Landlord's obligations under this clause shall cease if and to the
extent that the insurance shall be vitiated or the policy monies withheld
as a consequence of any act or default of the Tenant or its servants
agents licensees and invitees
4.4 Repair of Estate and provision of services
Unless prevented by strikes lockouts electrical breakdown or interruption
works of repair or replacement or other causes beyond the Landlord's
control to comply with the obligations in paragraph 2 of the Fourth
Schedule so far as consistent with the principles of good estate
management
5 PROVISOS
Provided as follows
5.1 Re-entry
If
5.1.1 the Rents or any part thereof shall be in arrears for 21 days next after
becoming payable (whether formally demanded or not) or
5.1.2 there shall be any breach non-performance or non-observance of any of the
Tenant's covenants or
5.1.3 the Tenant shall enter into any arrangement or composition for the
benefit of the Tenant's creditors or convene a meeting of the Tenant's
creditors (or a nominee calls such a meeting on its behalf) or shall
suffer any distress or execution to be levied on the Tenant's goods on
the Premises or
5.1.4 the Tenant or a surety for the Tenant
(a) is the subject of an interim order under Part VIII of the Insolvency
Act 1986 or makes application to the Court for such an order or
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(b) makes a voluntary arrangement under that Part or
(c) has a bankruptcy order made against him or a bankruptcy petition
presented against him or
5.1.5 a receiver receiver and manager or administrative receiver is appointed
of all or any of the assets of the Tenant or any surety of the Tenant or
5.1.6 the Tenant or a surety for the Tenant (being a company)
(a) makes a voluntary arrangement or submits to its creditors or any of
them a proposal under Part I of the Insolvency Act 1986 or
(b) makes an application to the Court under section 425 of the Companies
Act 1985 or resolves to make such an application or
(c) has a petition for an administration order under Part II of the
Insolvency Act 1986 presented against it or is the subject of such an
order or is subject to a resolution passed by its directors or
shareholders for the presentation of a petition for such an order or
(d) has a petition for winding up presented against it or is the subject
of a resolution for voluntary winding up otherwise than for the
purpose of an amalgamation or reconstruction of a solvent company
which has been approved by the Landlord (such approval not to be
unreasonably withheld or delayed) or in the event that a meeting of
creditors is called to consider a resolution for winding up or
(e) has an interim order or winding up order made against it or
(f) ceases to exist
it shall be lawful for the Landlord at any time thereafter to re-enter
the Premises or any part thereof in the name of the whole and thereupon
the Term shall absolutely determine but without
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prejudice to any rights of action of the Landlord or the Tenant in
respect of any antecedent breach by the other of any of the covenants
herein
5.1.7 it is hereby agreed and declared that in the event that the Tenant
comprises more than one person firm or body then the Landlord will be
entitled to re-enter the Premises and the Term shall thereupon absolutely
determine upon the happening of any of the events referred to in clauses
5.1.3 5.1.4 5.1.5 and 5.1.6 hereof in relation to any one of them
5.2 Payment of rent not waiver
No demand for or receipt or acceptance of any part of the Rents or any
payment on account thereof or any other act or deed by or on behalf of
the Landlord shall operate as a waiver by the Landlord of any right which
the Landlord may have to forfeit this Lease by reason of any breach of
covenant by the Tenant and the Tenant shall not in any proceedings for
forfeiture be entitled to rely on any such demand receipt acceptance act
or deed as aforesaid as a defence PROVIDED THAT with regard to the demand
receipt and acceptance of the Rents this proviso shall have effect in
relation only to a demand receipt or acceptance made during such period
as may in all the circumstances be reasonable for enabling the Landlord
to conduct any negotiations with the Tenant for remedying the breach such
period commencing when the Landlord becomes aware of such breach
5.3 Suspension of rent
If the Premises shall at any time during the Term be so damaged or
destroyed by any of the Insured Risks as to be unfit for occupation and
use then (unless the insurance money shall be wholly or partly
irrecoverable by reason solely or in part of any act or default of the
Tenant or its servants agents or licensees) the Principal Rent or a fair
proportion thereof according to the nature and extent of the damage
sustained shall be suspended until the date when the Premises shall again
be rendered fit for occupation and use or until the date Three (3) years
from the date of such damage or destruction whichever date shall be the
earlier and any dispute with reference to this
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proviso shall be referred to a single arbitrator to be appointed in
default of agreement upon the application of either party by or on behalf
of the President or other competent official of the Royal Institution of
Chartered Surveyors
5.4 Jurisdiction
This Lease is subject to and governed by the laws of England & Wales
5.5 No warranty as to use
5.5.1 Nothing herein shall be deemed to constitute any warranty by the Landlord
that the Premises or any part thereof are under the Planning Acts
authorised for use for any specific purpose and the Tenant hereby
acknowledges and admits that the Landlord has not given or made at any
time any representation or warranty that such use is or will be or will
remain a permitted use under the Planning Acts
5.5.2 Notwithstanding that the permitted use is not an authorised use under the
Planning Acts the Tenant will remain fully liable to the Landlord in
respect of any covenants or obligations on its part contained in this
Lease for the residue of the Term
5.6 Exclusion of Landlord's liability
5.6.1 Subject to the provisions of the Unfair Contract Terms Act 1977 the
Landlord shall not be responsible to the Tenant (save as and to the
extent hereinbefore expressly provided) or its employees or visitors for
any injury death damage destruction or financial or consequential loss
whether to person property or goods sustained on or by reason of the
condition of the Estate or of the Premises and
5.6.2 The Landlord will not be liable to the Tenant in respect of any failure
by the Landlord to perform or provide the services referred to in the
Fourth Schedule unless and until the Tenant has notified
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the Landlord of such failure and the Landlord has failed within a
reasonable time to remedy the same
5.7 Service of notices
Section 196 of the Law of Property Act 1925 as amended by the Recorded
Delivery Service Act 1962 shall apply to the service of any notice
required to be served under this Lease
5.8 Modification of compensation
Subject to Section 38(2) of the Landlord and Tenant Act 1954 neither the
Tenant nor any assignee or undertenant of the Term or of the Premises or
any part of the Premises shall be entitled on quitting the Premises or
any part to any compensation under Section 37 of the Act
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5.9 Distress
In the event of any rent or other monies due under this Lease being in
arrears for 14 days whether demanded or not the Landlord shall be
entitled to enter into the Premises or any part thereof and to distrain
and to apply the proceeds thereof in or towards the payment of the said
rents or other monies
5.10 Removal of Goods
If the Tenant shall leave any property on the Premises after the
termination of the Term and shall not have removed the same within twenty
working days of notice from the Landlord requiring such removal then the
Landlord may on behalf of the Tenant (and the Landlord is hereby
appointed by the Tenant to act in that behalf) sell such property and
hold the proceeds of sale after deducting the costs of removal storage
and sale incurred by it to the order of the Tenant provided always that
the Tenant will indemnify the Landlord against all costs and claims
proceedings and expenses arising out of or in connection with any such
sale
5.11 Disputes between Tenants
Any dispute between the Tenant and any other tenant of the Estate shall
be referred to and settled by the Landlord's Surveyor whose opinion shall
be binding save as to matters of law
5.12 No Building Scheme
Nothing contained in this Lease shall give the Tenant a right to enforce
or prevent the release or modification of any covenant or condition
entered into by any other tenant of the Estate
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5.13 No other Easements
Nothing herein contained shall impliedly grant or confer on the Tenant
any rights save as expressly herein set out
5.14 Value Added Tax
Any rent or other sum payable by the Tenant hereunder is exclusive of
value added tax or other tax that is or may be payable thereon
5.15 It is hereby agreed that this Lease is a new tenancy for the purposes of
Section 1 of the Landlord and Tenant (Covenants) Act 1995 ("the 1995
Act")
5.16 The Landlord may let transfer or otherwise dispose of any land or
premises now or formerly or within 21 years from the date of this Lease
comprised in the Estate and any buildings now or hereafter erected
thereon on such terms and for such purposes as the Landlord may desire or
approve
5.17 Where any rights of entry are reserved to the Landlord (and any persons
authorised by the Landlord) hereunder such rights of entry shall only be
exercised strictly subject to the following conditions
(a) where the purpose for which the right of entry is to be exercised
cannot reasonably be undertaken without access to the Premises
(b) only after the giving of at least 48 hours written notice to the
Tenant (save in case of emergency when no notice shall be required)
(c) in such a way as to cause the minimum damage and inconvenience
possible to the Tenant and the Tenant's business
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(d) subject to the person exercising such rights forthwith making good to
the reasonable satisfaction of the Tenant any damage or inconvenience
caused to the Tenant and/or the Premises and/or the business carried
on thereat and/or the stock and fixtures and fittings therein or
thereon
(e) such rights of entry only being exercised during normal business
hours (save in case of emergency)
(f) subject to such reasonable provisions and stipulations as the Tenant
may lay down having due regard to Health and Safety issues and the
nature of the Business carried on at and from the Premises
EXECUTED AS A DEED by the parties
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THE FIRST SCHEDULE
Part 1
The Estate
ALL THOSE the land and premises at Dawley Park Dawley Road Hayes
Middlesex registered at H M Land Registry under Title Number NGL346507
together with the buildings from time to time erected or standing thereon
known as land and premises at Dawley Park Dawley Road Hayes Middlesex
all of which are shown edged green on the Plan
Part 2
The Premises
ALL THOSE land and buildings constructed at Dawley Park Dawley Road
Hayes Middlesex all which said premises are for the purposes of
identification only shown and edged red on the Plan hereto together also
with the appurtenances thereof and all items in the nature of Landlord's
fixtures and fittings from time to time in on or about or annexed to the
Premises and all Service Media which are situate within and which
exclusively serve the Premises
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SECOND SCHEDULE
Part 1
Rights granted
In common with the Landlord and all other persons similarly entitled
1 The rights contained or referred to in registered title number NGL546507 so
far as the same relate to the Premises are still subsisting and are capable
of taking effect
2 Subject to the Tenant paying the Service Charge
2.1 the right at all times whether by day or night with or without vehicles of
any description to pass and repass along the Service Road leading to and
from the public highway from and to the Premises for all purposes connected
with the use and enjoyment of the Premises
2.2 The right of way on foot at all times and for all purposes over any
footpaths pavements or other pedestrian areas situate upon or within the
Estate from and to the Premises for all purposes connected with the use and
enjoyment of the Premises
2.3 full and free right and liberty for the Tenant (jointly and in common with
the Landlord any occupiers of adjoining or neighbouring premises and their
respective successors in title) to use the Service Conduits and Appliances
serving the Premises now or to be laid during the term of this Lease under
over and in the Estate and any adjoining or neighbouring property
3 The right of support shelter and protection for the Premises from the
remainder of the Estate and all other parts of any building erected or to
be erected thereon of which the Premises may form part as are at present
enjoyed or intended to be enjoyed by the Premises
4 Such rights of access to and entry upon any adjoining or neighbouring part
of the Estate as are necessary for the repair and maintenance of the
Premises and/or for the proper performance and observance of the
restrictions stipulations and conditions herein contained or the exercise
of the
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Tenant's rights hereunder the Tenant giving to the occupiers of such
adjoining parts at least 48 hours' notice of exercise of such rights
(except in case of emergency) and in the exercise of such rights the Tenant
shall cause as little damage and interference to the fabric of the Estate
as is reasonably practicable and shall make good forthwith all damage to
the fabric of any property occasioned by the exercise of such rights to the
reasonable satisfaction of the Landlord or the Surveyor
5 The right to display a sign showing the name and description of the
Tenant's business upon any communal signboard provided upon the Estate
together with the right to erect such other reasonable directional signs
situate within the Common Parts of the Estate in order to direct visitors
to the Premises
Part 2
Rights reserved
The following rights are excepted and reserved out of the Premises for the
benefit of the Landlord and all the other tenants and occupiers of the
Estate and persons authorised by the Landlord
1 Subject as provided in clause 5.17 the right at reasonable times on
reasonable prior notice (except in case of emergency) to enter upon the
Premises as often as may be necessary for all the purposes for which the
Tenant covenants in this Lease to permit entry and for all purposes in
connection with the compliance with any statutory requirements subject to
the person or persons exercising such rights causing as little damage and
interference to the fabric of the Estate as is reasonably practicable and
making good as soon as practicable any damage caused to the Premises
2 The right for the Landlord to rebuild or alter any of the buildings upon
the Estate now or hereafter adjoining or near to the Premises and to build
upon or use any land upon the Estate now or hereafter belonging to the
Landlord and adjoining or near to the Premises at any time or times and for
any purposes whatsoever notwithstanding any temporary interference or
damage caused thereby with or to the Premises (the Landlord causing as
little damage and interference to the
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Premises as reasonably practicable making good as soon as reasonably
practicable any damage so caused to the reasonable satisfaction of the
Tenant) or any interference to the enjoyment of light or air to or in
respect of the Premises (and the said enjoyment of light and air whether to
the existing or to any future windows or apertures of any structures of any
description for the time being on the Premises is hereby agreed to be
enjoyed under the express consent of the Landlord who may interfere with
such enjoyment in manner aforesaid without any formal revocation of such
consent)
3 Subject to clause 5.17 hereof the right with or without workmen and others
as often as may be necessary and at all reasonable times upon reasonable
prior written notice (except in case of emergency) to enter in and upon the
Premises for the purpose of cleansing redecorating repairing altering
removing renewing or rebuilding any other premises in the Estate or
repairing or restoring any premises affording support shelter or protection
to any other part of the Estate the person or persons exercising such
rights causing as little damage as reasonably possible to the Premises and
making good as soon as reasonably practicable any damage so caused to the
reasonable satisfaction of the Tenant
4 The right of support shelter and protection for the remainder of the Estate
from the Premises as are at present enjoyed or intended to be enjoyed by
the remainder of the Estate
5 Subject to 5.17 hereof the right to the free passage and running of water
soil gas electricity telephone and other services through the Service
Conduits and Appliances which may now or hereafter during the Term be in on
under over or through the Premises and serve the Estate with liberty to
make connections with the Service Conduits and Appliances or any of them
together further with the right with or without workmen and others as often
as may be necessary and at all reasonable times upon reasonable prior
written notice (except in case of emergency) to enter in and upon the
Premises for the purpose of cleansing repairing altering or renewing the
Service Conduits and Appliances and upon those parts of the Premises from
time to time unbuilt upon for
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the purposes of laying removing or constructing the Service Conduits and
Appliances the person or persons exercising such rights causing as little
damage as possible and making good as soon as reasonably practicable any
damage occasioned thereby to the Premises
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<PAGE>
THIRD SCHEDULE
Review of Principal Rent
1 In this Schedule (unless the context otherwise required admits) the
following words and phrases shall have the following meanings
Word or Phrase Meaning
Review Date the day of in
the years and any other date that
becomes a Review Date pursuant to
Paragraph 6 of this Schedul
Market Rent the rent at which the Premises might
reasonably be expected to be let with
vacant possession by a willing lessor
to a willing lessee without any
premium or other consideration in the
open market at the relevant Review
Date for a term of the same duration
as the residue of the Term or a term
of Fifteen years whichever shall be
the greater with vacant possession and
for the use or uses permitted under
this Lease and otherwise upon the
terms of this Lease (other than the
amount of rent hereby reserved but
including the provisions for rent
review) on the following assumptions
(a) that all the Tenant's covenants in
this Lease have been complied
with and
(b) that the Premises are fit and
fitted out for immediate
occupation and use and
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(c) that in case the Premises have
been destroyed or damaged or have
become inaccessible they have been
completely rebuilt reinstated or
rendered accessible and
(d) that the Premises are in a good
state of repair and decorative
condition and
(e) that the Premises may lawfully be
used for the uses permitted under
this Lease and
BUT DISREGARDING
(a) any goodwill attached to the
Premises by reason of the carrying
on thereat by the Tenant or any
undertenant of any business and
(b) any effect on rent of any
improvement to the Premises made
(otherwise than pursuant to any
obligation (other than an
obligation to comply with statutes
and the like) to the Landlord of
the Tenant or any undertenant to
carry out such work) by the Tenant
or any undertenant during the Term
at the sole expense of the Tenant
or any undertenant and with the
consent of the Landlord where the
same is required pursuant to the
terms of this Lease and in
accordance with all necessary
statutory and by-law consents and
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(c) the effect on rent of any works to
or alterations of the Premises
which reduce their rental value
and
(d) the effect on rent of any rent
free period or other concession or
inducement which would or might be
given to an incoming tenant on the
grant of a lease of the Premises
at the relevant Review Date to the
intent that no discount shall be
made in ascertaining the Market
Rent to reflect such rent free
period or other concession or
inducement and that the Market
Rent shall be that which would be
payable after the expiry of every
such rent free period and after
receipt of such concession or
inducement and
(e) any restraint or restriction on
the right to recover or increase
rent imposed by any Act
(f) the effect on rent of the works to
the Premises listed in the Seventh
Schedule hereto
President the President for the time being of
the Royal Institution of Chartered
Surveyors or his duly appointed deputy
or any person authorised by the
President to make appointments on his
behalf
Surveyor a surveyor agreed upon by the Landlord
and the Tenant or in default of
agreement appointed by the President
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<PAGE>
agree or agreed agree or agreed in writing between the
Landlord and the Tenant
2 From each Review Date the Principal Rent shall be such as may at any time
be agreed between the Landlord and the Tenant as the Principal Rent payable
from that Review Date or (in default of such agreement) whichever is the
greater of
2.1 the Market Rent and
2.2 the Principal Rent contractually payable immediately before that Review
Date
3 If by a date two months before the Review Date the rent payable from that
Review Date has not been agreed the Landlord and the Tenant may agree upon
a person to act as the Surveyor who shall determine the Market Rent but in
default of such agreement then the Landlord or the Tenant may at any time
whether before or after the Review Date make application to the President
to appoint a surveyor to determine the Market Rent and such application
shall request that the surveyor to be appointed shall if practicable be a
specialist in the letting of industrial/warehouse premises in the area in
which the Premises are situate
4 The Surveyor shall act as an arbitrator and the provisions of the
Arbitration Acts for the time being in force shall apply
4.2 If the Surveyor refuses to act or is incapable of acting or dies or fails
to give notice of his determination within the period stipulated above the
Landlord or the Tenant may apply to the President for the further
appointment of a surveyor which procedure may be repeated as many times as
necessary
4.3 Any Surveyor appointed under this clause shall be required to produce a
statement of reasons when making his determination
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<PAGE>
5 If by a Review Date the Principal Rent payable from that Review Date has
not been ascertained pursuant to this Schedule the Tenant shall continue to
pay the Principal Rent at the rate previously payable and on the quarter
day next after such ascertainment the Tenant shall pay to the Landlord the
difference for the period ending on that quarter day between the Principal
Rent paid and the Principal Rent so ascertained together with interest on
such difference for such period at the Prescribed Rate prevailing upon the
day upon which the shortfall is paid on each instalment of the Principal
Rent due on or after the relevant Review Date on the difference between
what would have been paid on each rent day had the revised rent been
determined and the amount actually paid on account the interest being
payable for the period from that date upon which each part of the
instalment was due up to the date of payment of the shortfall
6 If at any Review Date there is by virtue of any Act a restriction upon the
Landlord's right to review the Principal Rent or if at any time there is by
virtue of any Act a restriction upon the right of the Landlord to recover
the Principal Rent otherwise payable then upon the ending removal or
modification of such restriction the Landlord may at any time thereafter
give to the Tenant not less than one month's notice requiring an additional
rent review upon a subsequent quarter day specified therein which quarter
day shall for the purposes of this Schedule be a Review Date
7 A memorandum of the Principal Rent ascertained from time to time in
accordance with this Schedule shall be signed by and on behalf of the
Tenant and the Landlord respectively and exchanged between them
8 Time shall not be of the essence in agreeing or determining the reviewed
rent or appointing an arbitrator or expert
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<PAGE>
FOURTH SCHEDULE
Service Charge
In this Schedule (and where appropriate the other schedules hereto unless
the context otherwise requires) the following words and expressions shall
have the meanings set out below
"the Landlord's Costs" the reasonable costs and expenses from
time to time properly incurred by the
Landlord in providing the services
herein mentioned
"the Service Charge" the proportion of the Landlord's Costs
attributable to the Premises and
payable by the Tenant in accordance
with the provisions of this Schedule
being 38% until the date all land on
the Estate has been developed by the
construction of buildings for
occupation by commercial tenants (as
evidenced by the issue of certificates
of practical completion for all of the
buildings on the Estate copies of
which shall be delivered to the
Tenant) when it will be such
proportion of the Landlord's Costs as
is reasonably and properly determined
by the Landlord to be equal to the
proportion that the gross internal
floor area of the Building on the
Premises bears to the gross internal
floor area of all the buildings on the
Estate
"the Amenity Areas" such landscaped areas as from time to
time may be provided by the Landlord
within the Common Parts of the Estate
"the Common Parts" all parts of the Estate from time to
time made available or provided by the
Landlord for general use by the
tenants or
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occupiers of the Estate in common
including without prejudice to the
generality of the foregoing the
Amenity Areas the Service Road and all
other vehicular and pedestrian ways
and areas external or fire escape
routes service and other areas the
Service Conduits and Appliances and
all building or parts thereof reserved
by the Landlord for the housing of
plant machinery and equipment or
otherwise in connection with or
required for the provision of
Landlord's services but excluding any
of the aforesaid which are available
for letting or specifically let or
included in a demise to a particular
tenant or tenants
2 The Landlord's Costs are those reasonable costs and expenses properly
incurred for
2.1 repairing maintaining cleansing draining repainting and where necessary
replacing and renewing the Common Parts
2.2 the maintenance of boundary fences or walls to the Estate
2.3 the provision of such control of traffic on the Service Road as the
Landlord may from time to time reasonably consider necessary or desirable
2.4 repairing and maintaining or where necessary replacing any apparatus or
equipment fixtures fittings decorations in or about the Common Parts or
which are necessary for the provision of the services comprised herein
2.5 maintaining repairing cleansing emptying draining extending and amending
the Service Media serving the Estate other than those for whose maintenance
individual tenants are responsible
2.6 paying all rates taxes charges assessments and outgoings whatsoever
(whether parliamentary parochial local or of any other description)
assessed charged or imposed upon or payable in
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respect of the Common Parts or any part thereof and the Service Media
serving the same except insofar as the same are the responsibility of the
Tenant or any other tenant
2.7 all reasonable costs charges and expenses of abating a nuisance and of
executing all such works as may be necessary for complying with any notice
served by a local authority in connection with the Common Parts or any part
thereof or the Service Media serving the same insofar as the same is not
the liability of or attributable to the fault of any individual tenant of
any part thereof or the Landlord
2.8 looking after and providing for those areas (if any) of the Common Parts as
may be grassed or planted or may be suitable for grassing or planting
2.9 paying any special costs which may be made or imposed by the local or other
competent authority on the Common Parts or the Service Media serving the
same and relate to or arise from the administration thereof and/or the
provision of the service herein mentioned
2.10 providing maintaining renewing and insuring such equipment as may from time
to time be reasonably necessary or desirable for the carrying out of the
acts and things mentioned in this Schedule and any other services which the
Landlord may in accordance with the principles of good estate management
from time to time consider reasonably necessary and providing such
accommodation as may in the Landlord's reasonable opinion seem necessary to
house vehicles and equipment employed in providing services in accordance
herewith to the Estate or the Service Conduits and Appliances serving the
same
2.11 the proper and reasonable costs charges remuneration of the Landlord or any
agent or agents employed by the Landlord to manage and administer the
Estate or the Service Conduits and Appliances serving the same and also any
other proper and reasonable expenses incurred by the Landlord in the
administration or protection of the Estate or the amenities thereof or the
Service Conduits and Appliances serving the same
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<PAGE>
2.12 the reasonable costs charges and expenses of preparing and supplying to
tenants copies of regulations made by the Landlord governing the use of the
Estate or any part thereof
2.13 the provision maintenance and renewal of a board for the display of the
names and locations of the tenants on the Estate and of any structure or
any other board advertising the same
2.14 keeping proper records of all costs charges and expenses incurred by the
Landlord in carrying out its obligations hereunder and if necessary
employing a qualified accountant to audit the same
2.15 the insurance of any risks in relation to the Common Parts and all parts of
the Estate for the time being unbuilt upon (but not any parts thereof which
are or are intended to be available for sale or let) or which the Landlord
has not yet developed) in respect of any public liability property owners
and third party liability of the Landlord and risks arising by virtue of
the employment of any person working on or engaged in the administration or
maintenance of the Estate
2.16 the cost of electricity gas water and other services required for providing
any of the Landlord's services
2.17 any irrecoverable Value Added Tax or other similar taxes levied or charged
and paid in respect of the above mentioned heads of expenditure or
otherwise in connection with provision of the services as aforesaid
Provided that the Landlord shall be at liberty at any time to review the
heads of expenditure or charge included in the Service Charge and to add
thereto any items of expenditure not previously included therein which are
in accordance with the principles of good estate management and reasonable
in all the circumstances and from and after the relevant date of such
review such additional items of expenditure charge allowance provision or
value shall be included in the calculation of the service charge
3 Audited accounts for the Landlord's costs reasonably and properly incurred
in connection with the provision of the services and amenities and in
complying with the obligations in clause 6 of this
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<PAGE>
Lease for the period ending on the 31st day of December 1999 and for each
subsequent year ending on the 31st day of December during the Term shall be
prepared and a copy of each set of such Accounts shall be supplied by the
Landlord to the Tenant within three months of the expiration of the period
to which it relates together with a copy of the certificate from the
Surveyor that such Account is correct and such certificate shall (apart
from any manifest error) be final and binding on both parties and the
Landlord shall also supply to the Tenant on request such evidence that any
item of the Landlord's costs has been or will be incurred as the Tenant may
reasonably require
4 The Surveyor shall determine and certify the Service Charge and such
certificate shall apart from any manifest error be final and binding on
both parties
5 The Tenant shall pay to the Landlord the amount of the Service Charge in
the following manner
5.1 on the usual quarter days in each year during the said Term the Tenant
shall pay to the Landlord in advance one quarter of the amount reasonably
and properly estimated by the Landlord or the Surveyor to be the Service
Charge for the current period of twelve months Provided always that the
first payment thereunder shall be made on the signing hereof and shall be a
proper proportion of the amount estimated by the Landlord or the Surveyor
to be the Service Charge for the period between the date of this Lease and
the day before the quarter day immediately after the date of this Lease
5.2 within twenty-one days after service by the Landlord on the Tenant of the
copy of any account and certificates as referred to aforesaid the Tenant
shall pay to the Landlord or be entitled to receive from the Landlord the
balance by which the Service Charge exceeds or falls short of the total sum
payable by the Tenant to the Landlord pursuant to the provisions of this
clause for the year to which such account relates
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<PAGE>
FIFTH SCHEDULE
Surety's Covenants Guarantee of Tenant's performance
1 The Surety hereby covenants with the Landlord as a primary obligation that
1.1 the Tenant will pay the Rents on the days and in manner aforesaid and will
duly perform and observe all the Tenant's covenants herein and that in case
of default the Surety will pay and make good to the Landlord on demand all
loss damages costs and expenses thereby arising or incurred by the Landlord
1.2 the Surety will enter into any further lease granted by the Landlord to the
Tenant whether pursuant to the Landlord and Tenant Act 1954 or otherwise to
guarantee the obligations of the Tenant under such lease such guarantee to
be on terms identical (mutatis mutandis) to the terms of this guarantee or
on such other terms as may be reasonably required by the Landlord
1.3 in the event that a liquidator or trustee in bankruptcy shall disclaim or
surrender the Lease or the Lease shall be forfeited the Surety shall if the
Landlord so requires by notice given to the Surety within three (3) months
after such event take from the Landlord a new lease of the Premises for the
residue of the Term unexpired at the date of such event and at the Rents
then payable and subject to the terms of this Lease in every respect and to
execute and deliver to the Landlord a counterpart thereof and to pay to the
Landlord the reasonable costs thereof
1.4 in the event that the Landlord shall not require the Surety to take up a
lease in accordance with the provisions of paragraph 1.2 then the Surety
shall pay to the Landlord a capital sum equal to three months' Rents that
would have otherwise have been payable under this Lease
2 PROVIDED THAT AND IT IS HEREBY AGREED THAT
2.1 The Surety shall not be released or discharged in any way from its
obligations under this Lease by
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<PAGE>
2.1.1 any neglect or forbearance of the Landlord in endeavouring to obtain
payment of the Rents when the same become payable or to enforce
performance or observance of the Tenant's covenants herein and any time
which may be given by the Landlord to the Tenant or
2.1.2 any variation of the terms of this Lease (save as provided by the 1995
Act) or
2.1.3 the transfer of the Landlord's reversionary interest immediately
expectant on the termination of the Term or
2.1.4 any refusal by the Landlord to accept rent tendered by or on behalf of
the Tenant at a time when the Landlord was entitled to re-enter the
Premises or
2.1.5 any legal limitation and/or incapacity of Tenant and/or any change in the
constitution or powers of the Tenant the Surety or the Landlord or
2.1.6 any liquidation administration or bankruptcy of the Tenant or the Surety
or
2.1.7 any other act omission matter or thing whatsoever whereby but for this
provision the Surety would be released
2.2 The Surety shall not be entitled to participate in or be subrogated to any
security held by the Landlord in respect of the Tenant's obligations or
otherwise to stand in the place of the Landlord in respect of any such
security
2.3 The Surety hereby waives any right to require the Landlord to pursue
against the Tenant any rights which may be available to the Landlord
before proceeding against the Surety
2.4 The benefit of this guarantee shall enure for the successors in title of
the Landlord without the requirement of any express assignment
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SIXTH SCHEDULE
Landlord's Fixtures
1 Sanitary fittings in main office and warehouse area (including but not
limited to toilets wash hand basins showers vanity counters sanitary
ironmongery soap dishes dispensers hat and coat hooks and toilet roll
holders)
2 Supports for signage
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SEVENTH SCHEDULE
Works to be Disregarded on Rent Review
1 Item cancelled
2 Revised partition layout to entrance lobby
3 Item cancelled
4 Revised partitions to blending/prunus and paint
5 Steam cleaning pit
6 Machine pit to shot peen area
7 Machine pit to prunus area
8 Item cancelled
9 Drainage point for canteen
10 Item cancelled
11 Revised openings to internal partitions specifically the
introduction of steel
12 Revised floor boxes to offices
13 Revised transformers and switchgear
14 Revised machine base details
15 Revised ducts to machine shop
16 Omit schedule of main services penetrations required for Hawker
Pacific equipment
17 Revert to original location of loading bay door to stores between
Grid Lines N and O
18 Item cancelled
19 Not current - HPA to resolve issue with Environment Agency
20 Revised edge detail for plating pit
21 Alterations to M&E at first floor offices to suit internal
partitions, rejected
22 Increase size of cable ladder to facilitate machine shop cabling
23 Provide un-metered hose reel water supply
24 Item cancelled
25 Supply and install two pairs of double doors in lieu of two single
doors to main works access corridor (under office plant room, grids
12-13/P-R)
26 Floor sealer and hardener to the steam clean pit and adjacent area
of the floor slab, as indicated on sketch ref LB2723/SK11 (an epoxy
coating will be applied to this area as part of the fit out works)
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<PAGE>
THE COMMON SEAL of )
SUN LIFE ASSURANCE SOCIETY PLC )
was hereto affixed in the presence of )
Authorised Signatory
Signatory
THE COMMON SEAL of )
HAWKER PACIFIC AEROSPACE LIMITED )
was hereto affixed in the presence of )
Director
/s/ David L Lokken Secretary/Director
/s/ Dennis Biety
EXECUTED as a Deed by )
HAWKER PACIFIC AEROSPACE )
acting by DAVID L LOKKEN ) /s/ DAVID L LOKKEN
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<PAGE>
EXHIBIT 10.39
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(Short-form to be used with post 1995 AIR leases)
1. Parties. This Sublease, dated, for reference purposes only, January 14
,1999, is made by and between Hawker Pacific Aerospace, a California Corporation
("Sublessor") and Abex Display Systems, Inc., a California
Corporation ("Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 7103 Fair
Avenue, North Hollywood, CA 91605 located in the County of Los Angeles , State
of California and generally described as (describe briefly the nature of the
property) An approximately 17,010 square foot building ("Premises").
3. Term.
3.1 Term. The term of this Sublease shall be for Twenty-four (24)
months commencing on January 1, 1999 and ending on December 31, 2000 unless
sooner terminated pursuant to any provision hereof.
3.2 Delay in Commencement. Sublessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises by the
commencement date. If, despite said efforts, Sublessor is unable to deliver
possession as agreed, the rights and obligations of Sublessor and Sublessee
shall be as set forth in Paragraph 3.3 of the Master Lease (as modified by
Paragraph 7.3 of this Sublease).
4. Rent.
4.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent for the
Premises equal monthly payments of $8, 845. 00 in advance, on the First day of
each month of the term hereof. Sublessee shall pay Sublessor upon the execution
hereof 8,845.00 as Base Rent for January 1999. Base 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.
4.2 Rent Defined. All monetary obligations of Sublessee to Sublessor
under the terms of this Sublease (except for the Security Deposit) are deemed to
be rent ("Rent"). Rent shall be payable in lawful money of the United States to
Sublessor at the address stated herein or to such other persons or at such other
places as Sublessor may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon execution
hereof $8, 845. 00 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. The rights and obligations of Sublessor and
Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of
the Master Lease (as modified by Paragraph 7.3 of this Sublease).
6. Use.
6.1 Agreed Use. The Premises shall be used and occupied only for
Storage and warehouse of display materials only.and for no other purpose.
6.2 Compliance. Sublessor warrants that the improvements on the
Premises comply with all applicable covenants or restrictions of record and
applicable building codes, regulations and ordinances ("Applicable
Requirements") in effect on the commencement date. Said warranty does not apply
to the use to which Sublessee will put the Premises or to any alterations or
utility installations made or to be made by Sublessee. NOTE: Sublessee is
responsible for determining whether or not the zoning is appropriate for its
intended use, and acknowledges that past uses of the Premises may no longer be
allowed. If the Premises do not comply with said warranty, or in the event that
the Applicable Requirements are hereafter changed, the rights and obligations of
Sublessor and Sublessee shall be as provided in Paragraph 2.3 of the Master
Lease (as modified by Paragraph 7.3 of this Sublease).
6.3 Acceptance of Premises and Lessee. Sublessee acknowledges that:
(a) it has been advised by Brokers to satisfy itself with respect to
the condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Sublessee's intended use,
(b) Sublessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Sublease.
In addition, Sublessor acknowledges that:
(a) Broker has made no representations, promises or warranties concerning
Sublessee's ability to honor the Sublease or suitability to occupy the Premises,
and
(b) it is Sublessor's sole responsibility to investigate the financial
capability and/or suitability of all proposed tenants.
7. Master Lease
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein ASP Burbank, LLC is the lessor, hereinafter the "Master
Lessor"
7.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever In the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the word
"Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom:
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys' fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless from
all liability, Judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
Page 1 of 3
REVISED
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7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any Party to the
Master Lease.
8. Assignment of Sublease and Default.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease, subject however to the provisions of
Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
Default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing
under this Sublease. However, if Sublessor shall Default in the performance of
its obligations to Master Lessor then Master. Lessor may, at its option, receive
and collect, directly from Sublessee, all Rent owing and to be awed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the Rent from the Sublessee, be deemed liable
to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
8.3 Sublessor hereby Irrevocably authorizes and directs Sublessee upon
receipt of any written notice from the Master Lessor stating that a Default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the Rent due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such Rent
to Master Lessor without any obligation or right to inquire as to whether such
Default exists and notwithstanding any notice from or claim from Sublessor to
the contrary and Sublessor shall have no right or claim against Sublessee for
any such Rent so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
the consent of Master Lessor.
9. Consent of Master Lessor.
9.1 In the event that the Master Lease requires that Sublessor obtain
the consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within ten days of the date hereof, Master Lessor
signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then neither this Sublease, nor the
Master Lessor's consent, shall be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving their consent to this
Sublease.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent shall not release Sublessor of its obligations or
alter the primary liability of Sublessor to pay the Rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of Rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to
any subsequent subletting or assignment.
(d) In the event of any Default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor or any one else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
(f) In the event that Sublessor shall Default in its obligations
under the Master Lease, then Master Lessor, at its option and without being
obligated to do so, may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master Lessor shall not be liable for any prepaid Rent nor any
Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any
other Defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor
at the end of this document shall constitute their consent to the terms of this
Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no Default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor Defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any Default of Sublessor described in any notice of default within
ten days after service of such notice of default on Sublessee. If such Default
is cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessor shall pay to The
Seeley Company a licensed real estate broker, ("Broker"), a fee as set forth in
a separate agreement between Sublessor and Broker, or in the event there is no
such separate agreement, the sum of $2, 122.00 for brokerage services rendered
by Broker to Sublessor in this transaction.
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REVISED
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ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION
OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
Executed at: Sun Valley, CA Hawker Pacific Aerospace
-------------------------- -----------------------------------
on: January ,1999 By /s/ David Lokken
---------------------------------- --------------------------------
David Lokken, C.E.O.
Address: 11240 Sherman Way, Sun Valley, CA By
---------------------------------- --------------------------------
"Sublessor" (Corporate Seal)
(818) 765-6201
Executed at: North Hollywood, CA Abex Display Systems, Inc.
-------------------------- -----------------------------------
on: January 28, 1999 By /s/ Robble Blumenfeld
---------------------------------- --------------------------------
Robble Blumenfeld, President
Address: 7101 Fair Avenue, North Hollywood, CA By
---------------------------------- --------------------------------
"Sublessee" (Corporate Seal)
(818) 765-5126
Executed at: Glendale, CA ASP Burbank, LLC
-------------------------- -----------------------------------
on: January , 1999 By /s/ Scott R. Fitzgerald
---------------------------------- --------------------------------
Address: 801 N. Brand Blvd., #195, "Master Lessor" (Corporate Seal)
Glendale, CA By
Scott R. Fitzgerald
Vice President
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower
St., Suite 600, Los Angeles, CA 90017.
(213) 6874777.
Page 3 of 3
REVISED
<PAGE>
CORPORATE RESOLUTION
The undersigned Director of HAWKER PACIFIC, INC., A California
Corporation, hereby certifies that the following is a true and correct copy of a
resolution duly and legally adopted by the Board of Directors of said
Corporation on July 14, 1997, and that said resolution is unmodified and has not
been revoked and is presently in full force and effect:
RESOLVED
1) That this Corporation shall enter into a Lease with ALLSTATE
INSURANCE COMPANY for the Premises described as 7103 FAIR AVENUE, NORTH
HOLLYWOOD, CA 91605 for the rent and upon the terms and conditions of that
certain Lease dated June 24, 1997, which has been presented to and reviewed by
the Board of Directors.
2) That DAVID LOKKEN the Chief Executive Officer of said Corporation is
hereby authorized to execute and deliver such Lease on behalf of the
Corporation.
Dated: July 14, 1997
(SEAL)
/s/ Brian Aune
------------------------------------
Brian Aune
Director and Chief Financial Officer
CORPRES
<PAGE>
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only, June
24 , 1997 is made by and between ALLSTATE INSURANCE COMPANY, An Illinois
Insurance Corporation ("Lessor") HAWKER PACIFIC. INC.. A California Corporation.
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 7103 Fair Avenue, North Hollywood, CA 91605
located in the County of Los Angeles, State of California and generally
described as (describe briefly the nature of the property) approximately 17,010
sq. ft. building in a 358,392 sq. ft. industrial park (See Exhibit "A").
("Premises"). (See Paragraph 2 for further provisions.)
1.3 Term: seven (7) years and -0- months ("Original Term") commencing
October 1, 1997 ("Commencement Date") and ending September 30, 2004 ("Expiration
Date"). (See Paragraph 3 for further provisions)
1.4 . Early Possession: N/A ("Early Possession Date"). (See Paragraphs 3.2
and 3.3 for further provisions.)
1.5 Base Rent: $ 8,845.00 per month ("Base Rent"), payable on the 1st day
of each month commencing October 1, 1997 (See Paragraph 4 for further
provisions.)
[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $ 8,845.00 as Base Rent for the period
October 1-31, 1997
1.7 Security Deposit: $8,845.00 ("Security Deposit"). (See Paragraph 5 for
further provisions.)
1.8 Permitted Use: manufacturing/overhaul of aircraft components and all
legal activities related thereto only. (See Paragraph 6 for further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes): DELPHI BUSINESS PROPERTIES
represents
[X] Lessor exclusively ("Lessor's Broker"); both Lessor and Lessee, and THE
SEELEY COMPANY represents
[X] Lessee exclusively ("Lessee's Broker"); both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (See Paragraph 37 for further provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 60 and Exhibits A all of which constitute a part of
this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms.
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of
debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such noncompliance, rectify same at Lessor's expense. If Lessee does not give
Lessor written notice of a non-compliance with this warranty within thirty (30)
days after the Commencement Date, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been
advised by the Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease, however,
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall be in effect during such
period, Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
INITIALS
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3.3 Delay In Possession. If for any reason Lessor cannot deliver possession
of the Premises to Lessee as agreed herein by the Early Possession Date, if one
is specified in Paragraph 1.4, or, it no Early Possession Date is specified, by
the Commencement Date, Lessor shall not be subject to any liability therefor,
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,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. It possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement: Date, Lessee
may, at its 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, however, that if such written notice
by Lessee is not received by Lessor within said ten (10) day period, Lessee's
right to cancel this Lease shall terminate and be of no further force or effect.
Except as may be otherwise provided, and regardless of when the term actually
commences, if possession is not tendered to Lessee when required by this Lease
and Lessee does not terminate this Lease, as aforesaid, the period free of the
obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed
shall run from the date of delivery of possession and continue for a period
equal to what Lessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which Is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month Involved. Payment of Base Rent and other charges
shall be made to Lessor at Its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional moneys
with Lessor sufficient to maintain the same ratio between the Security Deposit
and the Base Rent as those amounts are specified In the Basic Provisions. Lessor
shall not be required to keep all or any part of the Security Deposit separate
from its general accounts. Lessor shall, at the expiration or earlier
termination of the term hereof and after Lessee has vacated the Premises, return
to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest herein), that portion of the Security Deposit not used or applied by
Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any moneys to be paid by
Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes set
forth in Paragraph 1.8, or any other use which Is comparable thereto, and for
no other purpose; Lessee shall not use or permit the use of the Premises in a
manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in
this Lease shall mean any product, substance, chemical, material or waste whose
presence, nature, quantity and/or Intensity of existence, use, manufacture,
disposal, transportation, spill, release or effect, either by itself or in
combination with other materials expected to be on the Premises, is either: (i)
potentially Injurious to the public health, safety or welfare, the environment
or the Premises, (ii) regulated or monitored by any governmental authority, or
(iii) a basis for liability of Lessor to any governmental agency or third party
under any applicable statute or common law theory. Hazardous Substance shall
include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or
any products, by-products or fractions thereof. Lessee shall not engage in any
activity in, on or about the Premises which constitutes a Reportable Use (as
hereinafter defined) of Hazardous Substances without the express prior written
consent of Lessor and compliance in a timely manner (at Lessee's sole cost and
expense) with all Applicable Law (as defined in Paragraph 6.3)."Reportable Use"
shall mean (I) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or
disposal of a Hazardous Substance that requires a permit from, or with respect
to which a report, notice, registration or business plan is required to be
filed with, any governmental authority. Reportage Use shall also include
Lessee's being responsible for the presence in, on or about the Premises of a
Hazardous Substance with respect to which any Applicable Law requires that a
notice be given to persons entering or occupying the Premises or neighboring
properties. In addition, Lessor may (but without any obligation to do so)
condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in Its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall immediately give written notice
of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure
to, any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, If any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
but not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
Investigation (including consultant's and attorney's fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in
this Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire Insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any
manner to the Premises (Including but not limited to matters pertaining to (i)
Industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or
not reflecting a change in policy from any previously existing policy. Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or
the Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time,: in
the case of an emergency, and otherwise at reasonable time"., for the purpose
of inspecting the condition of the Premises and for verifying compliance by
Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3),
and to employ experts and/or consultants in connection therewith and/or to
advise Lessor with respect to Lessee's activities, including but not limited to
the installation, operation, use, monitoring, maintenance. or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee Is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance; Repairs; Utility installations; Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as
to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2
(Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall,at Lessee's sole co expense and at all times, keep
the Premises and every part thereof In good order, condition and repair,
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
INITIAL
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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 equipment or facilities serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired 'pressure vessels, fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing system, including fire alarm and/or
smoke detection systems and equipment, fire hydrants, fixtures, walls (interior
and exterior), foundations, ceilings, roofs, floors, windows, doors, plate
glass, skylights, landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent to the Premises
Lessee shall not cause or permit any Hazardous Substance to be spilled or
released in, on, under or about the Premises (including through the plumbing or
sanitary sewer system) and shall promptly, at Lessee's expense, take all
Investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of, the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Paragraphs 2;2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 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, the
improvements located thereon, or 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. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it Is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of, any
needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is
used in this Lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the Improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor as defined
In Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with proposed detailed plans. All consents given by
Lessor; whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities, (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon, and
(iii) the compliance by Lessee with ail conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and in compliance with all Applicable Law.
Lessee shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor. Lessor may (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation that
costs $10,000 or more upon Lessee's providing Lessor with a lien and completion
bond in an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation and/or upon Lessee's posting an additional
Security Deposit with Lessor under Paragraph 36 hereof.
(c) Indemnification. 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 on 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, on or about 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 and protect itself, Lessor
and the Premises 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. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action U Lessor shall decide it is to its best interest to do so.
7.4 Ownership;- Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect In writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations, and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain
upon and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with all
of the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good practice, Lessee's Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums
for policy periods commencing prior to or extending beyond the Lease term
shall be prorated to correspond to the Lease term. Payment shall be made by
Lessee to Lessor within ten (10) days following receipt of an invoice for any
amount due.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional Insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) Carried By Lessor. In the event Lessor is the Insuring Party, Lessor
shall also maintain liability insurance described in Paragraph 8.2(a), above.
In addition to, and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss
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or damage to the Pemises. The amount of such insurance shall be equal to the
full replacement cost of the Premises, as the same shall exist from time to
time, or the amount required by Lenders, but in no event more than the
commercially reasonable and available insurable value thereof If, by reason of
the unique nature or age of the improvements involved, such latter amount is
less than full replacement cost. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall Insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision In lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. 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 in the event of an Insured
Loss, as defined In Paragraph 9.1(c).
(b) Rental Value. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Adjacent Premises. 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, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. It Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at Its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policy holders
Rating" of at least B+, V, or such other rating 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." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to In this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insureds and loss payable clauses as
required by this Lease. No such policy shall be cancellable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall at least thirty (30) days prior to the expiration of such policies,
furnish Lessor with evidence of renewals or "insurance binders" evidencing
renewal thereof, or Lessor may order such insurance and charge the cost thereof
to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the
Insuring Party shall fail to procure and maintain the Insurance required to be
carried by the Insuring Party under this Paragraph 8, the other Party may, but
shall not be required to, procure and maintain the same, but at Lessee's
expense.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8, The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises. Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in-the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall Include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to Judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee In such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
Injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, Invitees, customers, or any other
person in or about the Premises, 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, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage 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 accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is
less than 50% of the then Replacement Cost of the Premises immediately prior
to such damage or destruction, excluding from such calculation the value of
the land and Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations
the repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible
amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building
codes, ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage-Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total
cost to repair of which is $10,000 or less, and, in such event, Lessor shall
make the insurance proceeds available to Lessee on a reasonable basis for
that purpose. Notwithstanding the foregoing, if the required insurance was
not In force or the insurance proceeds are not sufficient to effect such
repair, the Insuring Party shall promptly contribute the shortage in
proceeds (except as to the deductible which is Lessee's responsibility) as
and when required to complete said repairs. In the event, however, the
shortage in proceeds was due to the fact that, by reason of the unique
nature of the improvements, full replacement cost insurance coverage was not
commercially reasonable and available, Lessor shall have no obligation to
pay for the shortage in insurance proceeds or to fully restore the unique
aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If Lessor does not receive such funds or assurance within said
period, Lessor may nevertheless elect by written notice to Lessee within ten
(10) days thereafter to make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case this
Lease shall remain in full force and effect. If in such case Lessor does not
so elect, then this Lease shall terminate sixty (60) days following the
occurrence of the damage or destruction. Unless otherwise agreed, Lessee
shall in no event have any right to reimbursement from Lessor for any funds
contributed by. Lessee to repair any such damage or destruction. Premises
Partial Damage due to flood or earth e hall be subject to Paragraph 9.3
rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available
for the repairs if made by either Party.
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9.3 Partial Damage-Uninsured Loss. If a Premises Partial Damage that is not an
Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in
which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect. but subject to Lessor's rights under
Paragraph 13), 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 receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60) days
following the giving of such notice. In the event Lessor elects to give such
notice of Lessor's intention to 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 commitment to pay for the repair of such damage
totally at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof within
thirty (30) days following Lessee's said commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible and the required funds are available. If
Lessee does not give such notice and provide the funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for Its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, 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 and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise 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 Paragraph 9.2 (Partial
Damage-Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, it any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, If any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph S and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "Commence" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (I) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, In which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of 'such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to 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 commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or,assurance thereof
within the times specified above, this Lease shall terminate as of the date,
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve months.
9.8 Termination-Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, an equitable adjustment shall be made concerning advance
Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such
taxes have been paid. If any such taxes to be paid by Lessee shall cover any
period of time prior to or after the expiration or earlier termination 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 this Lease is in
effect, and Lessor shall reimburse Lessee for any overpayment after such
proration. If Lessee shall fail to pay any Real Property Taxes required by
this Lease to be paid by Lessee, Lessor shall have the right to pay the same,
and Lessee shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to
the Premises, and to require such current year's Real Property Taxes to be
paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal
to the installment due, at least twenty (20) days prior to the applicable
delinquency date, or (ii) monthly in advance with the payment of the Base
Rent. If Lessor elects to require payment monthly in advance, the monthly
payment shall be that equal monthly amount which, over the number of months
remaining before the month in which the applicable tax installment would
become delinquent (and without Interest thereon), would provide a fund large
enough to fully discharge before delinquency the estimated installment of
taxes to be paid. When the actual amount of the applicable tax bill is known,
the amount of such equal monthly advance payment shall be adjusted as
required to provide the fund needed to pay the applicable taxes before
delinquency. If the amounts paid to Lessor by Lessee under the provisions of
this Paragraph are insufficient to discharge the obligations of Lessee to pay
such Real Property Taxes as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the
provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional
Security Deposit under Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" 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 upon 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, levied against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises. The term "Real Property
Taxes" shall also include any tax, tee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring, or changes in
applicable law taking effect, during the term of this Lease, including but
not limited to a change in the ownership of the Premises or in the
improvements thereon, the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated by the
Parties.
10.3 Joint Assessment If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of 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.
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10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. 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 ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal 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.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), Increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, it disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, In the event of such Breach and market value
adjustment, (I) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or any
one else responsible for the performance of the Lessee's obligations under this
Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent Lessee agrees to provide Lessor with such
other or additional Information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurence of a transaction described in Paragraph 12.1(c) shall
give Lessor the right (but not the obligation) to require that the Security
Deposit be increased to an amount equal to six (6) times the then monthly Base
Rent, and Lessor may make the actual receipt by Lessor of the amount required to
establish such Security Deposit a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what Is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided In this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "Default" Is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specific herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same, or
the abandonment of the Premises.
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<PAGE>
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent or any other monetary payment required
to be made by Lessee hereunder, whether to Lessor or to a third party, as and
when due, the failure by Lessee to provide Lessor with reasonable evidence of
insurance or surety bond required under this Lease, or the failure of Lessee to
fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) days following
written notice thereof by or on behalf of Lessor to Lessee
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with applicable law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default Is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) 'day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S)101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (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 thirty (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 thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to Lessor
by Lessee or any Guarantor of Lessee's obligations hereunder was materially
false.
(g) It the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's-failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Pemises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such' event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, 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 attorneys' fees, and that portion of the leasing
commission paid by Lessor applicable to the unexpired term of this Lease. The
worth at the time of award of the amount referred to in provision (iii) of the
prior sentence shall be computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of award plus one
percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or
Breach of this Lease shall not waive Lessor's right to recover damages under
this Paragraph. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve therein the right to recover all or any part thereof in a separate suit
for such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two such grace periods
shall constitute both an unlawful detainer and a Breach of this Lease entitling
Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(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.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, Inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which Initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 Late Charge 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 upon Lessor by the
terms of any ground lease, 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 five (5) 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 six percent (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 or Breach 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 Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any ground lease, mortgage or deed of trust covering the
Premises whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days after such notice are reasonably
required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
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 ten percent (10%) of the
floor area of the Premises, or more than twenty-five percent 25%) of the land
area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing 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
<PAGE>
have taken possession) terminate this Lease as 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 Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the building located on the Premises.
No reduction of Base Rent shall occur if the only portion of the Premises taken
is land on which there is no building. 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 compensation, separately awarded
to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade
Fixtures. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall to the extent of its net severance damages received,
over and above the legal and other expenses incurred by Lessor in the
condemnation matter, 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 be responsible for the payment of any
amount in excess of such net severance damages required to complete such repair.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said
Brokers Jointly, or in such separate shares as they may mutually designate in
writing, a fee as set forth in a separate written agreement between Lessor and
said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $ ) for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.4 Any buyer or 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. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent
of its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers
is entitled to any commission or finder's fee in connection with said
transaction. Lessee and Lessor do each hereby agree to indemnify, protect,
defend and hold the other harmless from and against liability for compensation
or charges which may be claimed by any such unnamed broker, finder or other
similar party by reason of any dealings or actions of the indemnifying Party,
including any costs, expenses, attorneys' fees reasonably incurred with
respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the
Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee
and such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. 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 the owner
or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the lessee's interest in the prior lease. In the event
of a transfer of Lessor's title or interest In the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment Except as provided in Paragraph 15, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior
Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined.
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. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear Interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but
not exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified In this Paragraph
23. The addresses noted adjacent to a Party's signature on this Lease shall be
that Party s address for delivery or mailing of notice purposes. Either Party
may by written 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 the purpose of mailing or
delivering notices to Lessee. 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 written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or it no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery
of the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail.
If notice is received on a Sunday or legal holiday, it shall be deemed
received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
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 or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of( Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any preceding Default or Breach by Lessee of any provision hereof, other than
the failure of Lessee to pay the particular rent so accepted. Any payment
given Lessor by Lessee may be accepted by Lessor on account of moneys or
damages due Lessor, notwithstanding any qualifying statements or conditions
made by Lessee in connection therewith, which such statements and/or
conditions shall be of no force or effect whatsoever unless specifically
agreed to in writing by Lessor at or before the time of deposit of such
payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
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.
<PAGE>
28. Covenants and Conditions All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State In which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee Is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall .execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action. or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, Judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or addition's to the Premises or to the
building of which they are a part, as Lessor may reasonably deem necessary.
Lessor may at any time place on or about the Premises or building any ordinary
"For Sale" signs and Lessor may at any time during the last one hundred twenty
(120) days of the term hereof place on or about the Premises any ordinary "For
Lease" signs. All such activities of Lessor shall be without abatement 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, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install,
and all revenues from the installation of, such advertising signs on the
Premises, Including the roof, as do not unreasonably interfere with the
conduct of Lessee's business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give:
(a) evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signatures of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options
39.1 Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right 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; (b) the 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; (c) the right 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 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.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
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 Options to extend or renew this Lease have been validly exercised.
<PAGE>
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 period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) In the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1, whether or not the Defaults
are cured, during the twelve (12) month period Immediately preceding the
exercise of the 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 thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three or more notices of Default under Paragraph 13.1 during any twelve
month period, whether or not the Defaults are cured, or (iii) if Lessee commits
a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, 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 grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
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 the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as 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 either Party hereto 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 its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
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. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, Insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, it
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the Joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE 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 FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A
STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates
specified above to their respective signatures.
Executed at Northbrook, Ill Executed at Sun Valley, CA
-------------------------- -----------------------------------
on on 7-14-97
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by LESSOR: by LESSEE:
ALLSTATE INSURANCE COMPANY HAWKER PACIFIC, INC.
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By /s/ Barbara S. Brown By /s/ David Lokken
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Name Printed: Barbara S. Brown Name Printed: David Lokken
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Title: Authorized Signatories Title: C.E.0.
---------------------------------- --------------------------------
By By
---------------------------------- --------------------------------
Name Printed: Name Printed:
---------------------------------- --------------------------------
Title: c/o CB COMMERCIAL REAL ETATE Title:
---------------------------------- --------------------------------
Address: 533 S. Fremont Avenue Address: 11310 Sherman Way
---------------------------------- --------------------------------
Los Angeles, CA 90071 Sun Valley, CA 91352
---------------------------------- --------------------------------
Tel. No. (818) 502-8037 Tel. No. (818) 765-6201
Fax No. (818) 240-0294 Fax No. (818) 265-8073
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NET PAGE 10
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, CA 90071, (213) 687-6777. Fax No. (213)
687-8616.
<PAGE>
ADDENDUM TO LEASE AGREEMENT
THIS ADDENDUM TO LEASE AGREEMENT is dated June 24, 1997, by and between
ALLSTATE INSURANCE COMPANY, AN ILLINOIS INSURGENCE CORPORATION, ("Lessor"), and
HAWKER PACIFIC, INC., A CALIFORNIA CORPORATION, ("Lessee") for the Premises
commonly known as 7103 Fair Avenue, North Hollywood, CA 91605.
This Addendum is attached to, and made a part of, the above referenced
Standard Industrial/Commercial Single-Tenant Lease-Net (together with this
Addendum, the "Lease"). The provisions of this Addendum shall govern and
supersede any, and all, contrary or inconsistent provisions of the preprinted
portion of the Lease.
49. INSURANCE: Lessor agrees that during the Lease Term it will insure the
Building (excluding any property which Lessee is obligated in insure) for its
full replacement cost against loss due to fire and other casualties included in
standard "extended coverage insurance. In addition, Lessor will maintain public
liability and loss of rental income insurance.
Lessee shall, at its own expense, procure and maintain during the Lease Term,
commercial general liability insurance with respect to the Leased Premises and
Lessee's activities in the Leased Premises and in the Building, providing
bodily injury, broad form property with a maximum $10,000.00 deductible, or
such other amount approved by Lessor in writing, as follows:
a. $1,000,000., with respect to bodily injury or death to any one person;
b. $1,000,000., with respect to bodily injury or death arising out of any
one occurrence;
c. $1,000,000., with respect to property damage or other loss arising out
of any one occurrence;
d. Fire and extended casualty insurance covering Lessee's trade fixtures,
merchandise and other personal property in an amount not less than 100%
of their actual replacement cost, and;
e. Worker's Compensation insurance in at least the statutory amounts.
Nothing in this Paragraph shall prevent Lessee from obtaining insurance of the
kind and in the amount provided for under this Paragraph under a blanket
insurance policy covering other properties as well as the Leased Premises,
provided, however, that any such policy of blanket insurance (i) shall provide
that the amount of insurance or the coverage required hereunder shall not be
prejudiced by any other losses under such blanket policy, and (ii) such amounts
so specified shall be sufficient to prevent any one of the assured from
becoming a co-insurer within the terms of the applicable policy, and (iii)
shall, as to the Leased Premises, otherwise comply as to endorsements and
coverage with the Provisions of the Paragraph.
Lessee's insurance shall be with a Best's Insurance Reports A+ rated company
(or A rated, if Class XIII or larger). Lessor and Lessor's mortgagee, if any,
shall be named as "Additional Insurers" under Lessee's insurance, and such
Lessee's insurance shall be primary and non-contributing with Lessor's
insurance. Lessee's insurance policies shall contain endorsements requiring 30
day's notice to Lessor and Lessor's mortgagee, if any, prior to any
cancellation, lapse, or non-renewal or and reduction in amount of coverage.
Lessee shall deliver to Lessor, as a condition precedent to its taking
occupancy of the Leased Premises, a certificate (or certificates) evidencing
such insurance.
1 of 4
<PAGE>
50. WAIVER OF CERTAIN CLAIMS: Lessee, to the extent permitted by law, waives all
claims it may have against Lessor, and against Lessor's agents and employees,
for any damages sustained by Lessee or by any occupant of the Leased Premises,
or by any other person, resulting from any cause arising at any time, except for
those claims arising from Lessor's gross negligence or willful misconduct.
Lessee agrees to hold Lessor harmless and indemnified against claims and
liability for injuries to all persons and for damages to or loss of property
occurring in or about the Leased Premises or the Building, due to Lessee's
breach of this Lease or any act of negligence or default under the Lease by
Lessee, its contractors, agents, employees, licensees and invitees, except for
those claims arising from Lessor's gross negligence or willful misconduct.
51. LIMITATION OF LESSOR'S LIABILITY: The obligations of Lessor under this Lease
do not constitute personal obligations of the individual partners, shareholders,
directors, officers, employees or agents of Lessor, and Lessee shall look solely
to Lessor's interest in the building and Land (and the proceeds thereof) and to
no other assets of Lessor for satisfaction of any liability in respect of this
Lease. Lessee will not seek recourse against the individual partners,
shareholders, directors, officers, employees or -agents of Lessor, or any of
their personal assets for such satisfaction. Notwithstanding any other
provisions contained herein, Lessor shall not be liable to Lessee, its
contractors, agents, or employees for any consequential damages or damages for
loss of profits.
52. RENTAL ADJUSTMENTS: See Addendum attached hereto and made a part hereof
by reference.
53. MAINTENANCE AND REPAIRS: Notwithstanding anything contained in Paragraph 7.1
or 7.2 herein to the contrary, Lessor agrees that at all times during the Term
of this Lease, it will maintain the structural portions of the Premises,
including without limitation the foundation, floor/slab, roof structure and
exterior roof covering, columns, and beams (collectively, "Building Structure")
in good condition and repair, at Lessor's sole cost and expense. In the event
the damage or needed repair is a result of Lessee's actions, use of the Premises
and/or failure to properly maintain, the repair shall be at the sole cost and
expense of Lessee.
54. CONDITION OF PREMISES: Premises shall be delivered to Lessee in their "As
Is" condition, subject to, and without in any way limiting, the warranties
contained within the Lease (including without limitation Paragraph 2.2 and 2.3
of this Lease), except that prior to occupancy being tendered to Lessee, Lessor
at its sole cost and expense shall perform the following work upon the Premises:
A. Paint the exterior front (east side) of the Premises and the interior
office and bathroom areas;
B. Install new carpeting in the existing offices (Lessor's Standard).
55. LESSEE'S IMPROVEMENTS: Lessee shall have the right to perform the
following improvements upon the Premises at its sole cost and expense:
A. Install a fire sprinkler system;
B. Install a "paint room"'
C. Install two-ton overhead cranes (subject to a structural engineer
report);
D Install metal halide lighting throughout the warehouse area;
All said work shall be performed subject to any, and all, applicable
governmental rules and regulations and permit processes. Lessor shall reserve
the right to request that Lessee remove said improvements at the expiration of
the Lease Term, as extended, and restore the building to its original condition
2 of 4
<PAGE>
All such improvements not permanently affixed to the Premises shall remain
the property of Lessee, and may be removed at the expiration of the Lease Term,
as extended, and Lessee shall repair any damage to the Premises caused by such
removal.
56. IMPOUND FOR NET CHARGES: Lessee shall pay to Lessor, on the first day
of every month of the Lease Term, as extended, as additional rental, the sum of
$1,445.85 as its estimated cost for Real Property Tax, Premise Insurance and
Common Area Expense applicable to the Premises, subject to an annual recap of
the actual expense. Lessor may increase or decrease this estimated payment
during the Lease Term based upon the actual amounts.
Common Area Expense shall be defined as either the direct costs associated
with Lessee's Premises (i.e., landscaping maintenance) and/or Lessee's pro-rata
share of the general cost of maintaining all of Lessor's property at the Burbank
Airport Business Park, such as maintenance staff and supplies. Lessee and Lessor
acknowledge that the Premises are equal to 9.6% of the total square footage in
the Park (358,392).
57. RENTAL ABATEMENT: The Base Monthly Rental specified in Paragraph 1.5 herein
during the second (2nd), third (3rd), fourth (4th) and fifth (5th) months of the
initial Lease Term only shall be Abated ("Free") by fifty (50%) percent. The
portion of the Base Monthly Rental not paid pursuant to this Paragraph, together
with any postponed rent or other rental concessions under this Lease is
collectively referred to as "Abated Rent". The Abated Rent set forth in this
Paragraph shall be subject to all of the provisions set forth in Paragraph 13.3
of the Lease.
58. SURFACE WATER ABATEMENT: During the term of this Lease, Lessor, at its sole
cost and expense, shall be responsible to make necessary repairs to the Premises
to prevent "surface water" from entering the Premises. Provided that Lessor is
using its reasonable best efforts to correct any such condition, Lessor shall
have no responsibility for any damage caused as a result of surface water
entering the Premises.
59. HAZARDOUS MATERIALS: Lessee shall not store, use and/or dispose of any
Hazardous Substances on, or within, the Premises without the explicit prior
written consent of Lessor. Lessee hereby discloses to Lessor that the following
materials shall be stored within, and used upon, the Premises, in compliance
with all applicable laws, and Lessor hereby grants its consent to the use of
these materials provided they are stored, used and disposed of in compliance
with all applicable laws and governmental rules and regulations:
A. Oil and water mixtures;
B. Solvents;
C. Paint shop related wastes;
D. Used "blast media";
E. Assorted abrasives.
Should Lessee desire to store any different materials within the Premises,
it shall first notify Lessor in writing and receive Lessor's written permission
before bringing said new materials onto the Premises.
60. EXISTING RAMP: Lessor and Lessee acknowledge that a prior Tenant of the
Premises constructed a "ramp" to the building directly to the west of the
Premises. Lessor will not be held responsible for, or warrant that it meets all
applicable building codes and permit requirements. Lessee may use same during
the Lease Term, but shall be responsible for any modifications to same to meet
any, and all, applicable building codes.
3 of 4
<PAGE>
This Addendum to Lease is executed as of the date first written above.
LESSOR: ALLSTATE INSURANCE COMPANY
By: /s/ Barbara S. Brown
-----------------------------------
Barbara S. Brown
Its: Authorized Signatories
LESSEE: HAWKER PACIFIC, INC.
By: /s/ David Lokken
-----------------------------------
David Lokken
Its: Chief Executive Officer
4 of 4
<PAGE>
[LOGO]
RENT ADJUSTMENT(S)
ADDENDUM TO STANDARD LEASE
Dated June 24, 1997
--------------------------------------------
By and Between (Lessor) ALLSTATE INSURANCE COMPANY
--------------------------
(Lessee) HAWKER PACIFIC, INC.
--------------------------
Property Address: 7103 Fair Avenue, North Hollywood, CA
-------------------------------------
Paragraph 52
--
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified
below shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
[X] 1. Cost of Living Adjustment(s) (COL)
(a) On (Fill in COL Adjustment Date(s): April 1, 1999; October 1, 2000;
------------------------------
April 1, 2002 and October 1, 2003 the monthly rent payable under paragraph 1.5
- ---------------------------------
("Base Rent") of the attached Lease shall be adjusted by the change, if any,
from the Base Month specified below, in the Consumer Price Index of the Bureau
of Labor Statistics of the U.S. Department of Labor for (select one): CPI W
(Urban Wage Earners and Clerical Workers) or [X] CPI U (All Urban Consumers),
for (Fill In Urban Area): Los Angeles, Anaheim, Riverside , All Items (1982-1984
-------------------------------
= 100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph Al(a) of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph AI(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
---------------------------
month which is two (2) months prior to (select one): [X] the first month of the
term of this Lease as set forth in paragraph 1.3 ("Base Month") or [_] (Fill in
Other "Base Month"): ______________________________.
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency
or shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculation. In the event that Lessor and Lessee
cannot agree on such alternative index, then the matter shall be submitted for
decision to the American Arbitration Association in accordance with the then
rules of said association and the decision of the arbitrators shall be binding
upon the parties. The cost of said Arbitrators shall be paid equally by Lessor
and Lessee.
[_] II. Market Rental Value Adjustment(s) (MRV)
(a) On (Fill in MRV Adjustment Date(s): N/A _____________________________
________________________________________________________________________________
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted to the "Market Rental Value" of the property as follows:
1) Four months prior to the Market Rental Value (MRV)
Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an
agreed upon new MRV for the specified term. If agreement cannot be reached,
then:
i) Lessor and Lessee shall immediately appoint a
mutually acceptable appraiser or broker to establish the new MRV within
the next 30 days. Any associated costs will be split equally between the
parties, or
ii) Both Lessor and Lessee shall each immediately select and
pay the appraiser or broker of their choice to establish a MRV within the next
30 days. If, for any reason, either one of the appraisals is not completed
within-the next 30 days, as stipulated, then the appraisal that is completed at
that time shall automatically become the new MRV. If both appraisals are
completed and the two appraisers/brokers cannot agree on a reasonable average
MRV then they shall immediately select a third mutually acceptable
appraiser/broker to establish a third MRV within the next 30 days. The average
of the two appraisals closest in value shall then become the new MRV. The costs
of the third appraisal will be split equally between the parties.
** The sum so calculated shall constitute the new monthly
rent hereunder, but in no event shall any new monthly rent be less than four
and one-half (4 1/2%) percent greater than, nor more than nine (9%) percent
higher than the rent payable for the month immediately preceding the date for
the rent adjustment. As an example, at the first adjustment on April 1, 1999,
the minimum new monthly rent shall be $9,243.03, and the maximum new monthly
rent shall be $9,641.05.
Initials: BB Initials: DL
----------- -----------
RENT ADJUSTMENT(S)
Pages 1 of 2
<PAGE>
2) In any events the new MRV shall not be less than the rent payable
for the month immediately preceding the date for rent adjustment.
b) Upon the establishment of each New Market Rental Value as described in
paragraph All:
1) the monthly rental sum so calculated for each term as
specified in paragraph All(a) will become the new "Base Rent" for the
purpose of calculating any further Cost of Living Adjustments as specified in
paragraph Al(a) above and 2) the first month of each Market Rental Value term as
specified in paragraph All(a) shall become the new "Base Month" for the purpose
of calculating any further Cost of Living Adjustments as specified In paragraph
Al(b).
III. Fixed Rental Adjustment(s) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment Date(s)): The New Base Rental shall be:
N/A $
------------------------------------ ----------------------------
$
------------------------------------ ----------------------------
$
------------------------------------ ----------------------------
$
------------------------------------ ----------------------------
B. NOTICE:. Unless specified otherwise herein, notice of any escalations
other than Fixed Rental Adjustment(s) shall be made as specified in paragraph 23
of the attached Lease.
C. BROKER'S FEE:
Initials: BB Initials: DL
--------------- ------------
RENT ADJUSTMENT(S) Page 2 of 2
NOTICE: These forms are often modified to meet changing requirements of law
and Industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213)
687-8616.
<PAGE>
BURBANK AIRPORT BUSINESS PARK
Plot Plan
EXHIBIT "A"
<PAGE>
EXHIBIT 10.40
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
312 441 7000
Heller Financial
March 10, 1999
Hawker Pacific Aerospace Hawker Pacific Aerospace Limited
11240 Sherman Way Technical Block A (5362)
Sun Valley, California 91352 P.O. Box 10, London Heathrow Airport
Attention: Philip Panzera Hounslow, Middlesex TW6 2JA
United Kingdom
Attention: Dennis Biety
Re: Forbearance Letter
Gentlemen:
This letter is delivered pursuant to that certain Loan
and Security Agreement dated as of December 22, 1998 (as from time to time
amended, restated, supplemented or otherwise modified, the "Loan
Agreement") by and among Hawker Pacific Aerospace ("U.S. Borrower"),
Hawker Pacific Aerospace Limited ("U.K. Borrower" and, collectively with
U.S. Borrower, the "Borrowers"), Heller Financial, Inc., as Agent and as a
Lender (the "Agent"), NMB-Heller Limited, as Funding Agent and Collateral
Agent, and the other Lenders from time to time party thereto. All
capitalized terms used but not otherwise defined herein shall have the
respective meanings ascribed thereto in the Loan Agreement.
Pursuant to paragraph (A) of the Financial Covenants Rider to the
Loan Agreement, the minimum Tangible Net Worth required to be maintained
as of December 31, 1998 was $21,500,000. Pursuant to paragraph (B) of the
Financial Covenants Rider to the Loan Agreement, the minimum EBITDA
required for the Fiscal Year ended as of December 31, 1998 was $7,000,000.
Pursuant to paragraph (D) of the Financial Covenants Rider, the minimum
Fixed Charge Coverage permitted for the twelve month period ended as of
December 31, 1998 was 1.00:1.00. Based upon your monthly financial
statements for the month ended December 31, 1998 and for the Fiscal Year
ended as of such date and the Compliance Certificate for such period
delivered in connection therewith, actual Tangible Net Worth as of
December 31, 1998 was $20,601,394, actual EBITDA for the Fiscal Year ended
as of December 31, 1998 was $4,808,129 and actual Fixed Charge Coverage
for the twelve months ended as of December 31, 1998 was .45:1:00. In
addition, pursuant to paragraph (L) of the Reporting Rider, Borrowers were
required to deliver, no later than January 31, 1999, Projections for
Fiscal Year 1999, prepared on a month-by-month basis, which Projections
have not delivered as of the date hereof; this letter hereby serves as
notice to you of such Default. Pursuant to subsection 8.1(C) of the Loan
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
March 10, 1999
Page 2 of 5
Agreement, such breaches of the covenants set forth in paragraphs (A), (B) and
(D) of the Financial Covenants Rider constitute immediate Events of Default
under the Loan Agreement and, pursuant to subsection 8.1(E) of the Loan
Agreement, the breach of the covenant set forth in paragraph (L) of the
Reporting Rider will constitute an Event of Default if not remedied within ten
days after the date of this letter. Such Events of Default and such Default
shall be collectively referred to herein as the "Existing Events of Default".
Borrowers hereby recognize and acknowledge that the Existing Events of
Default have occurred and are continuing. Borrowers hereby further recognize and
acknowledge that, absent the effectiveness of this letter agreement, Agent,
Funding Agent, Collateral Agent and Lenders have the right, in accordance with
the provisions of the Loan Agreement and the other Loan Documents, to (i)
immediately cease making additional Loans and issuing Lender Letters of Credit
and to cause their obligation to lend their respective Pro Rata Shares of the
Commitments to be suspended; (ii) declare all or any portion of the Loans and
all or some of the other Obligations to be immediately due and payable together
with accrued interest thereon, and to terminate the obligations of Agent,
Funding Agent, Collateral Agent and Lenders to make Loans and issue Lender
Letters of Credit; (iii) demand that Borrowers immediately deposit with Agent an
amount equal to 105% of the aggregate outstanding Letter of Credit Reserve to
enable Agent or any Lender to make payments under the Lender Letters of Credit
when required; and (iv) exercise such other rights and remedies available to
Agent, Funding Agent, Collateral Agent and Lenders under the Loan Documents or
at law or in equity, including without limitation the right to immediately
enforce their Liens on the Collateral.
As a result of the Existing Events of Default, you are hereby
formally notified that, pursuant to and in furtherance of the verbal notice
given to you by Agent on February 19, 1999, Agent has, as of such date,
established a reserve against the Borrowing Base of $5,000,000, which reserve
shall remain in effect at all times from and after February 19, 1999 until such
time, if any, as Agent shall give Borrowers written notice to the contrary.
You are hereby advised that from and after the date of this
letter, and continuing for so long as the Existing Events of Default are
continuing, Agent, Funding Agent, Collateral Agent and Lenders hereby agree to
forbear from exercising the rights and remedies afforded Agent and Lenders under
the Loan Agreement and the other Loan Documents as a result of the Existing
Events of Default (other than the establishment of a reserve against the
Borrowing Base as set forth above, which reserve may be maintained or modified
at any time by Agent in its sole discretion notwithstanding the terms of this
letter), but only for the period commencing on the Effective Date of this letter
through the earlier of (a) the date on which a Forbearance Default shall have
occurred and be continuing, and (b) March 30, 1999 (the "Forbearance Period"),
and only subject to the terms and conditions set forth in paragraphs (1) through
(6) below (collectively, the "Forbearance Conditions"):
(1) Notwithstanding anything contained in the Loan Documents
to the contrary (including without limitation that certain Post Closing
Matters and Waiver Agreement dated as of the Closing Date), Borrowers shall
(a) as promptly as practicable following the date hereof, establish or
cause to be established the U.S. Blocked Accounts
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
March 10, 1999
Page 3 of 5
as required pursuant to subsection 4.26(A) of the Loan Agreement, and
(b) use their best efforts to, as promptly as practicable following the
date hereof, establish or cause to be established the U.K. Blocked
Accounts as required pursuant to subsection 4.26(B) of the Loan
Agreement;
(2) Notwithstanding anything contained in the Loan Documents
to the contrary (including without limitation the provisions of
paragraph (F) of the Reporting Rider to the Loan Agreement), from and
after the Effective Date and at all times thereafter until Agent shall
give Borrower Representative written notice to the contrary, Borrower
Representative shall deliver to Agent and Funding Agent Borrowing Base
Certificates on the second Business Day of each week (as appropriate
for weekly use), setting forth the calculation of the Borrowing Base as
of the last Business Day of the immediately preceding week, and
otherwise in the form and containing the information required pursuant
to paragraph (F) of the Reporting Rider;
(3) As promptly as practicable and in any event no later than
March 30, 1999, Borrowers shall retain the services of a third party
turnaround consultant acceptable to Agent to evaluate and assist, if
necessary, in the turnaround efforts for the U.K. Borrower (including
without limitation those efforts described in the turnaround
implementation plan required to be delivered pursuant to paragraph (4)
below);
(4) On or prior to the Effective Date (notwithstanding the ten
day grace period which might otherwise be available under subsection
8.1(E) of the Loan Agreement), Borrowers shall deliver to Agent
Projections for Borrowers' Fiscal Year 1999, prepared on a
month-by-month basis, which Projections shall not forecast any material
decline in Borrowers' financial condition or financial performance for
such Fiscal Year from that set forth in the quarter-by-quarter
Projections for such Fiscal Year delivered as of the Closing Date,
other than any such decline resulting from the downward adjustment in
Borrowers' EBITDA of $3,546,000 effected as of December 31, 1998. In
addition, on or prior to the Effective Date, Borrowers shall deliver to
Agent a turnaround implementation plan with respect to the U.K.
Borrower, which plan shall be satisfactory to Agent in form, scope and
substance; and
(5) On the Effective Date, and in consideration of the
execution and delivery of this letter by Agent, Borrowers shall pay to
Agent a forbearance fee of $75,000, and thereafter, without limitation
of the provisions of subsection 10.1 of the Loan Agreement, Borrowers
shall pay or reimburse Agent and Funding Agent for all fees, costs and
expenses incurred by them in connection with this letter, the Existing
Events of Default, any Forbearance Default and/or any third party
consultants, accountants or other professionals retained by Agent or
Funding Agent in connection with the analysis or implementation of any
turnaround plans regarding the U.K. Borrower or the Borrowers
collectively.
3
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
March 10, 1999
Page 4 of 5
By execution of this letter agreement, Borrowers hereby
represent and warrant that as of the date hereof, no Forbearance Default has
occurred and is continuing. For purposes of this letter:
(i) the term "Forbearance Default" means the occurrence and continuance
of any Default or Event of Default under the Loan Agreement or any of
the other Loan Documents other than the Existing Events of Default, or
the failure by Borrowers or either of them as of any date of
determination to satisfy any of the Forbearance Conditions required to
be satisfied as of such date; and
(ii) the term "Effective Date" shall mean the date on which a
counterpart of this letter, duly executed by each Borrower, is
delivered to Agent, together with payment of the forbearance fee
required pursuant to paragraph (5) of the Forbearance Conditions, which
date shall occur no later than March 6, 1999 (and the foregoing
agreement to forbear shall be of no force or effect if the Effective
Date does not occur on or prior to March 6. 1999).
The foregoing agreement to forbear shall be limited
precisely as written and, except as expressly set forth in this letter, shall
not be deemed to (i) be a waiver of the Existing Events of Default or of
Agent's, Funding Agent's, Collateral Agent's or Lenders' right to exercise or
enforce any of their rights and remedies under the Loan Agreement or the other
Loan Documents, as more fully described above; (ii) be a waiver or modification
of any other term or condition of the Loan Agreement or of any of the other Loan
Documents; or (iii) prejudice any right or rights which Agent, Funding Agent,
Collateral Agent or Lenders may now have or may have in the future under or in
connection with the Loan Agreement or any of the other Loan Documents.
You are hereby further advised that, during the Forbearance
Period, the Agent may, in its sole discretion, consider working with Borrowers
on a potential restructuring of the credit facilities provided under the Loan
Agreement and the other Loan Documents, provided that you hereby acknowledge and
agree that (a) neither Agent, Funding Agent, Collateral Agent or any Lender is
obligated or in any way committed to enter into any such restructuring, (b) none
of Agent, Funding Agent, Collateral Agent or any Lender has sought or obtained
the approval of their respective internal credit authorities as to any such
restructuring or any potential terms and conditions thereof, (c) this letter
shall not be deemed or construed as obligating any of Agent, Funding Agent,
Collateral Agent or any Lender to seek or obtain any such approval, and (d) the
terms and conditions of any such restructuring, if one should occur, are not
known at this time. However, you are hereby advised that in the event any such
restructuring were to be consummated, one condition precedent thereto would be
that, prior to or contemporaneously with any such restructuring, the portion of
the Subordinated Debt of U.S. Borrower repaid to Unique on the Closing Date
(which repayment was in the amount of $2,500,000) would be required to be
reinvested by Unique in Subordinated Debt or other junior capital of U.S.
Borrower, in such form and on such terms and conditions as may be acceptable to
Agent at such time.
You are hereby further advised that, except for the agreement
of Agent, Funding Agent, Collateral Agent and Lenders to forbear from exercising
their rights and remedies during the Forbearance
4
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
March 10, 1999
Page 5 of 5
Period as set forth above, Agent, Funding Agent, Collateral Agent and Lenders
expressly reserve the right to exercise any or all of their rights and remedies
under the Loan Agreement and the other Loan Documents or otherwise now or at any
time hereafter. None of the statements set forth in this letter, any prior oral
or written statements by Agent, Funding Agent, Collateral Agent or any Lender to
Borrowers, the making of further advances or other extensions of credit to
Borrowers, or the failure of Agent, Funding Agent, Collateral Agent or any
Lender to exercise any of its rights and remedies against Borrowers now or at
any time in the future, shall be deemed a waiver of the Existing Events of
Default described herein, a waiver of any such rights and remedies or a waiver
or modification of any of the terms of the Loan Agreement or any of the other
Loan Documents, all of which remain in full force and effect.
Very truly yours,
HELLER FINANCIAL, INC., as Agent
By: /s/ Anthony Vizgirda
-----------------------------
Title: Vice President
ACKNOWLEDGED AND AGREED TO
this 11 day of March, 1999 by
HAWKER PACIFIC AEROSPACE
By: /s/ David L. Lokken
-------------------------------
Title: Chief Executive Officer
ACKNOWLEDGED AND AGREED TO
this 11 day of March, 1999 by
HAWKER PACIFIC AEROSPACE LIMITED
By: /s/ David L. Lokken
------------------------------
Title: Director
cc: Yvonne E. Chester, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, Suite 1600
Los Angeles, California 90067
and
Andrew Heathcock, Esq.
Paris, Smith & Randall, Solicitors
Number 1, London Road
Southhampton, Hampshire S015 2AE
United Kingdom
5
<PAGE>
EXHIBIT 10.41
April 13, 1999
Hawker Pacific Aerospace Hawker Pacific Aerospace Limited
11240 Sherman Way Technical Block A (5362)
Sun Valley, California 91352 P.O. Box 10, London Heathrow Airport
Attention: Philip M. Panzera Hounslow, Middlesex TW6 2JA
United Kingdom
Attention: Dennis Biety
Re: Second Forbearance Letter
GENtLEMEN:
This letter is delivered pursuant to that certain Loan and
Security Agreement dated as of December 22, 1998 (as from time to
time amended, restated, supplemented or otherwise modified, the
"Loan Agreement") by and among Hawker Pacific Aerospace ("U.S.
Borrower"), Hawker Pacific Aerospace Limited ("U.K. Borrower" and,
collectively with U.S. Borrower, the "Borrowers"), Heller Financial,
Inc.,. as Agent and as a Lender (the "Agent"), NMB-Heller Limited,
as Funding Agent and Collateral Agent, and the other Lenders from
time to time party thereto. All capitalized terms used but not
otherwise defined herein shall have the respective meanings ascribed
thereto in the Loan Agreement.
Pursuant to paragraph (A) of the Financial Covenants Rider
to the Loan Agreement, the minimum Tangible Net Worth required to be
maintained as of December 31, 1998 was $21,500,000. Pursuant to
paragraph (B) of the Financial Covenants Rider to the Loan
Agreement, the minimum EBITDA required for the Fiscal Year ended as
of December 31, 1998 was $7,000,000. Pursuant to paragraph (D) of
the Financial Covenants Rider, the minimum Fixed Charge Coverage
permitted for the twelve month period ended as of December 31, 1998
was 1.00:1.00. Based upon your monthly financial statements for the
month ended December 31, 1998 and for the Fiscal Year ended as of
such date and the Compliance Certificate for such period delivered
in connection therewith, actual Tangible Net Worth as of December
31, 1998 was $20,601,394 actual EBITDA for the Fiscal Year ended as
of December 31, 1998 was $4,808,129 and actual Fixed Charge Coverage
for the twelve months ended as of December 31, 1998 was 45:1:00.
Pursuant to subsection 8.l(C) of the Loan Agreement, such breaches
of the covenants set forth in paragraph (A), (B) and (D) of the
Financial Covenants Rider constitute immediate Events of Default
under the Leon Agreement; such Events of Default shall be
collectively referred to herein as the "Existing Events of Default".
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
April 13, 1999
Page 2 of 7
Borrowers hereby recognize and acknowledge that (a) in
connection with the Existing Events of Default, Agent and
Borrowers entered into those certain letter agreements dated as of
March 4, 1999 and March 10, 1999 (collectively, the "Prior
Forbearance Letter"), that the "Forbearance Period" as defined in
the Prior Forbearance Letter (the "Prior Forbearers Period")
expired as of March 30, 1999, and that the agreement to forbear set
forth in the Prior Forbearance Period is thus of no further force
and effect, and (b) the Existing Events of Default continue to
exist as of the date hereof Based on the foregoing, Borrowers
hereby further recognize and acknowledge that, absent the
effectiveness of this letter agreement, Agent, Funding Agent,
Collateral Agent and Lenders have the right, in accordance with the
provisions of the Loan Agreement and the other Loan DOCUMENTS , to
(i) immediately cease making additional Loans and issuing Lender
Letters of Credit and to cause their obligation to lend their
respective Pro Rata Shares of the Commitments to be suspended; (ii)
declare all or any portion of the Loans end all or some of the
other Obligations to be immediately due and payable together with
accrued interest thereon, and to terminate the obligations of
Agent, Funding Agent, Collateral Agent and Lenders to make Loans
and issue Lender Letters of Credit; (iii) demand that Borrowers
immediately deposit with Agent an amount equal to 105% of the
aggregate outstanding Letter of Credit Reserve to enable Agent or
any Lender to make payments under the Lender Letters of Credit when
required and (iv) exercise such other rights and remedies available
to Agent, Funding Agent, Collateral Agent and Lenders under the
Loan Documents or at law or in equity, including without limitation
the right to immediately enforce their Liens on the Collateral.
As set forth in the Prior Forbearance Latter, as a result
of the Existing Events of Default, you were formally noted that, as
of February 19, 1999, Agent has established a reserve against the
Borrowing Base of $5,000,000. You are hereby notified that such
reserve continues to remain in effect as of the date hereof and
shall remain in effect until such time as Agent receives duly
executed copies of the Guaranty and Letter of Credit described (and
defined) in paragraph (6) below.
You are hereby advised that from and after the date of this
letter, and continuing for so long as the Existing Events of
Default are continuing, Agent, Funding Agent, Collateral Agent and
Lenders hereby agree to further forbear from exercising the rights
and remedies afforded Agent and Lenders under the Loan Agreement
and the other Loan Documents as a result of the Existing Events of
Default (other than (x) the establishment of the reserve against
the Borrowing Base as set forth above, which reserve may, subject
to the provisions of paragraph (6) below, be maintained or modified
at any time by Agent in its sole discretion notwithstanding the
terms of this letter, and (y) the elimination of the LIROR option
as described below), but only for the period commencing on the
Effective Date of this letter through the earlier of (a) the date
on which a Forbearance Default shall have occurred and be
continuing, and (b) April 30, 1999 (the "Second Forbearance
Period"), and only subject to the terms and conditions set forth in
paragraphs(l) through (6) below (collectively, the "Second
Forbearance Conditions"):
(l) Notwithstanding anything contained in
the Loan Documents to the contrary (including without
limitation that certain Post Closing Matters and Waiver
Agreement dated as of the Closing Date), Borrowers shall
(a) as promptly as practicable following the date hereof,
establish or cause to be established the U.S. Blocked
Accounts as required pursuant to subsection 4.26(A) of the
Loan Agreement, to the extent not previously established
pursuant to the Prior Forbearance Letter, and (b) continue
to use their best efforts to, as promptly as practicable
following the date hereof, establish or cause to be
established the
2
<PAGE>
Hawker Pacific
Hawker Pacific Aerospace Limited
April 13, 1999
Page 3 of 7
U.K. Blocked Accounts as required pursuant to subsection
4.26(B) of the Loan Agreement, to the extent not previously
established pursuant to the Prior Forbearance Letter;
(2) Notwithstanding anything contained in the Loan
Documents to the contrary (including without limitation the
provisions of paragraph (F) of the Reporting Rider to the
Loan Agreement),until Agent shall give Borrower
Representative written notice to the contrary, Borrower
Representative shall continue to deliver to Agent and
Funding Agent Borrowing Base Certificates on the second
Business Day of each week, setting forth the calculation of
the Borrowing Base as of the last Business Day of the
immediately preceding week, and otherwise in the form and
containing the information required pursuant to paragraph
(F) of the Reporting Rider;
(3) As promptly as practicable and in any event no
later than April 16, 1999, Borrowers shall retain the
services of a third party turnaround consultant acceptable
to Agent to assist in the turnaround efforts for the U.K.
Borrower (including without limitation those efforts
described in the turnaround implementation plan delivered
pursuant to the Prior Forbearance Letter);
(4) On or prior to April 15, 1999, Borrowers shall
deliver to Agent restated annual financial statements for
Borrowers' Fiscal Year 1998 conforming to the requirements
of paragraph (C) of the Reporting Rider to the Loan
Agreement; Borrowers' EBITDA set forth in such restated
annual Financial statements shall not be less than
$3,500,000;
(5) From and after April 1, 1909 and at all times
thereafter until Agent shall give Borrowers written notice
to the contrary, and notwithstanding anything contained in
the Loan Documents to the contrary including without
limitation the definition of the term "Base Rate Margin")
(a) Borrowers shall no longer be entitled to elect the
LIBOR option with respect to any Loans, and each
outstanding LIBOR Loan shall automatically convert to a
Base Rate Loan denominated in the same Available Currency
as such LIBOR Loan as of the equation of the Interest
Period applicable thereto, and (b) the Base Rate Margin
shall equal one and one-half of one percent (1.50%), which
margin shall not be subject to adjustment as of any
Adjustment Date. The parties hereto acknowledge and agree
that this paragraph (5) effectively eliminates the pricing
matrix currently embodied in the terms "LIBOR Margin" and
"Base Rate Margin" in the Loan Agreement in the course of
considering potential restructurings of the Credit
facilities as discussed in the last paragraph of this
letter, Agent and Lenders may consider providing an
alternative pricing matrix, but as more fully stated in
such last paragraph of this letter, there are no assurances
that any such alternative will be offered or approved by
Agent and Lenders; and
(6) No later than April 23, 1999;
(a) Unique or Melanic Bastian, as the case may be
(either such person, the "Term B Guarantor") will
execute and deliver to Agent (i) a Guaranty of up to
$2,500,000 of the Obligations in respect of Term
Loan B (the
3
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
April 13, 1909
Page 4 of 7
"Guaranty"), Which Guaranty must be in form and
substance satisfactory to agent, and (ii)a stand-by
letter of credit securing the obligations of the
Term B Guarantor under the Guaranty, which letter
of credit (the "Letter of Credit")must be in a face
amount of $2,500,000, must name Agent, for the
benefit of Agent and Lenders, as sole
beneficiaries, and must be issued by a bank
satisfactory to Agent. Sole recourse under the
GuaRANty will be limited to drawing under the
Letter of Credit. Further, the Letter of Credit
will(i) provide that drawings thereunder may be
made upon Agent's demand at anytime during the
period commencing on the issuance date thereof
through December 31, 2003, so long as at the time
any such demand is made, a 'material Event of
Default' (as such term will be mutually agreed upon
in the GuaRANty) has occurred and is then
continuing, and (ii) otherwise be acceptable in
form and substance to Agent. Proceeds of drawings
under the Letter of Credit will be applied in
repayment of Term Loan B. U.S. Borrower and the
Term B Guarantor will execute and deliver such
agreements as may be necessary to provide that,
upon any drawing by Agent under the Letter of
Credit (x) the amount drawn will constitute
additional Subordinated Debt of U.S. Borrower owed
to the Term B Guarantor, subject in all respect to
the terms and conditions set forth in the existing
Subordination Agreement (which agreement will be
amends to so provide), and (y) the Term B Guarantor
shall be entitled to receive from U.S. Borrower and
U.S. Borrower shall issue to the Term B Guarantor,
such warrants or similar equity rights as may be
agreed upon by the Term B Guarantor and U.S.
Borrower, provided that any such agreements and any
warrants or similar equity rights to be issued
thereunder must be acceptable to Agent.
Notwithstanding anything contained to the contrary
in the Loan Agreement, in consideration of the
issuance of such Guaranty and the delivery of such
Letter of Credit, U.S. Borrower will be permitted
to pay to the Term B Guarantor a fee, in an annual
amount not exceeding 3% of the face amount of such
Letter of Credit, which foe may be paid annually in
advance in cash on the date such Guaranty and
Letter of Credit is executed and delivered to Agent
and on each anniversary of such date thereunder so
long as such Guaranty and Letter of Credit remain
outstanding.
(b) Upon delivery of the Guaranty and Letter of
Credit as required above (i) the $5,000,000 reserve
against the Borrowing Base shall be released, (ii)
U.S. Borrower shall request, and Lenders shall
make, a Revolving Advance in Dollars in an amount
equal to the lesser of (x) $4,150,000 (e.g., the
then outstanding principal balance of Term Loan B
less the $2,500,000 portion thereof secured by the
Letter of Credit), and (y) Availability as of such
date, and (iii) U.S. Borrower shall direct Agent to
apply the proceeds of such Revolving Advance as a
permanent prepayment of the principal
4
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
April 13, 1999
Page 5 of 7
balance of Term Loan B, which prepayment will be
made without premium or penalty.
(c) Notwithstanding anything contained in the Loan
Agreement to the contrary, no further Scheduled
Installments shall be require to be paid in respect
of Term Loan B from and after the earlier of (i)
the date the Revolving Advance referred to in
paragraph 6(b) is made and applied to Term Loan B,
if Availability as of such date is sufficient to
permit U.S. Borrower to repay $4,150,000 of Term
Loan B on such date, and (ii) such subsequent date
on which the outstanding principal balance of Term
Loan B has been reduced to $2,500,000 (and until
such date, Borrowers shall continue to make
payments of Scheduled Installments of Term Loan B
on the dates required pursuant to the Loan
Agreement, each such Scheduled Installment to be in
an amount equal to the lesser of (x) the amount of
the Scheduled Installment due on the relevant
payment date pursuant to the Loan Agreement, or (y)
the amount required to reduce the outstanding
principal balance of Term Loan B to $2,500,000.
By execution of this letter agreement, Borrower
hereby represent and warrant that as of the date hereof, no
Forbearance Default has occurred and is continuing. For purposes of
this letter:
(i) the term "Forbearance Default" means the occurrence and
continuance of any Default or Event of Default under the Loan
Agreement or any of the other Loan Documents other than the
Existing Events of Default, or the failure by Borrowers or
either of them as of any date of determination to satisfy any
of the Second Forbearance Conditions required to be satisfied
as of such date; and
(ii) the term "Effective Date" Shall mean the date on which a
counterpart of this letter, duly executed by each Borrower,
is delivered to Agent, which date shall occur no later than
April 13, 1999 (and the foregoing agreement to forbear shall
be of no force or effect if the Effective Date does not occur
on or prior to April 13, 1999).
The foregoing agreement to forbear shall be limited
precisely as written and shall not be deemed to (i) be a waiver of
the Existing Events of Default or of Agent's, Funding Agent's,
Collateral Agent's or Lenders' right to exercise or enforce any of
their rights and remedies under the Loan Agreement or the other Loan
Documents, as more fully described above; (ii) be a waiver or
modification of any other term or condition of the Loan Agreement or
of any of the other Loan Documents; or(iii) prejudice any right or
rights which Agent, Funding Agent, Collateral Agent or Lenders may
now have or may have in the future under or in connection with the
Loan Agreement or any of the other Loan Documents.
You are hereby further advised that, except for the
agreement of Agent, Funding Agent, Collateral Agent and Lender to
forbear from exercising their rights and remedies during the Second
Forbearance Period as set forth above, Agent, Funding Agent,
Collateral Agent and Lenders expressly reserve the right to exercise
any or all of their rights and remedies under the Loan Agreement and
the other
5
<PAGE>
Hawker Pacific Aerospace Hawker
Pacific Aerospace Limited
April 13, 1999
Page 6 of 7
Loan Documents or otherwise now or at any time hereafter. None of the
statements set forth in this letter, any prior oral or written
statements by Agent, Funding Agent, Collateral Agent or at any Lender
to Borrowers (including without limitation the Prior Forbearance
Letter), the making of further advances or other extensions of credit
to Borrowers, or the failure of Agent, Funding Agent, Collateral
Agent or any Lender to exercise any of its rights and remedies
against Borrowers now or at any time in the future, shall be deemed a
waiver of the Existing Events of Default described herein, a waiver
of any such right and remedies or a waiver or modification of any of
the terms of the Loan Agreement or any of the other Loan Documents,
all of which remain in full force and effect.
You are hereby further advised that, during the
Second Forbearance, the Agent may, in its sole discretion, consider
working with Borrowers on a potential restructuring of the facilities
provided under the Loan Agreement and the other Loan Document,
provided that you hereby acknowledge and agree that (a) neither
Agent, Funding Agent, Collateral Agent or any Lender is obligated or
in any way committed to enter into any such restructuring, (b) none
of Agent, Funding Agent, Collateral Agent or any Lender has Sought or
obtained the approval of their respective internal credit authorities
as to any such restructuring or any potential terms and conditions
thereof, (c) this letter shall not be deemed or construed as
obligating any of Agent, Funding Agent, Collateral Agent or any
Lender to seek or obtain any such approval, and (d) the terms and
conditions of any such restructuring, if one should occur, are not
known at this time.
Very truly yours,
HELLER FINANCIAL, INC., as Agent
By:
Title: Vice President
(signatures continue on next page)
6
<PAGE>
Hawker Pacific Aerospace
Hawker Pacific Aerospace Limited
April 13, 1999
Page 7 of 7
ACKNOWLEDGED AND AGREED TO
this 13th day of April, 1999 by
HAWKER PACIFIC AEROSPACE
By:
Title:
ACKNOWLEDGE AND AGREED TO
this 13th day of April, 1999 by
HAWKER PACIFIC AEROSPACE LIMITED
By:
Title:
cc: Yvonne E. Chester, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, Suite 1600
Los Angeles, California 90067
and
Andrew Heathcock, Esq.
Paris, Smith & Randall, Solicitors
Number 1, London Road
Southhampton, Hampshire S015 2AE
United Kingdom
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF HAWKER PACIFIC AEROSPACE FOR THE YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 560,000
<SECURITIES> 0
<RECEIVABLES> 12,604,000
<ALLOWANCES> 301,000
<INVENTORY> 21,645,000
<CURRENT-ASSETS> 35,239,000
<PP&E> 51,475,000
<DEPRECIATION> 4,301,000
<TOTAL-ASSETS> 87,237,000
<CURRENT-LIABILITIES> 64,334,000
<BONDS> 0
0
0
<COMMON> 21,108,000
<OTHER-SE> (941,000)
<TOTAL-LIABILITY-AND-EQUITY> 87,237,000
<SALES> 65,151,000
<TOTAL-REVENUES> 65,151,000
<CGS> 55,059,000
<TOTAL-COSTS> 55,059,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 301,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,000,000)
<INCOME-TAX> (1,402,000)
<INCOME-CONTINUING> (1,598,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (600,000)
<CHANGES> 0
<NET-INCOME> (2,198,000)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
