-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VyY54IulY5vypUWFt8R3727b/DOjNxQMcIsT/Mc0o53sFXZiLxzPk3Xa6Ofsw1kp IqPGFZSe8BWYaXII20E9VQ== 0000950005-97-000379.txt : 19970402 0000950005-97-000379.hdr.sgml : 19970402 ACCESSION NUMBER: 0000950005-97-000379 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIS LEASE FINANCE CORP CENTRAL INDEX KEY: 0001018164 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 680070656 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-28774 FILM NUMBER: 97571925 BUSINESS ADDRESS: STREET 1: 180 HARBOR DR STREET 2: STE 200 CITY: SAUSALITO STATE: CA ZIP: 94965 BUSINESS PHONE: 4153315281 MAIL ADDRESS: STREET 1: 180 HARBOR DR STREET 2: SUITE 200 CITY: SAUSALITO STATE: CA ZIP: 94965 10-K405 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: WILLIS LEASE FINANCE CORPORATION (Exact name of registrant as specified in its charter) California 68-0070656 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 180 Harbor Drive, Suite 200, Sausalito, CA 94965 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 331-5281 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ---------------- None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ------------------- None 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 Registration S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 21, 1997 was approximately $31,980,464 (based on a closing sale price of $13.88 per share as reported on the NASDAQ National Market System). Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the registrant's Common Stock outstanding as of March 21,1997 was 5,430,861. WILLIS LEASE FINANCE CORPORATION 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I Page ---- Item 1. Business 3 Item 2. Properties 10 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Equity and related Stockholder Matters 11 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III Item 10. Directors and Executive Officers of the Registrant 23 Item 11. Executive Compensation 23 Item 12. Security Ownership of Certain Beneficial Owners and Management 23 Item 13. Certain Relationships and Related Transactions 23 PART IV Item 14. Exhibits, Financial Schedules and Reports on Form 8-K 24
2 PART I ITEM 1. BUSINESS Willis Lease Finance Corporation and subsidiaries (the "Company") provides operating leases of spare commercial aircraft engines worldwide. The Company is primarily engaged in acquiring spare commercial aircraft engines in the aftermarket and providing operating leases of such engines to foreign and domestic airlines, manufacturers and overhaul/repair facilities. As of December 31, 1996, the Company had 32 engines and related equipment on lease to 22 customers in 12 countries. The Company also engages in the purchase and resale of used and refurbished commercial aircraft engines and airframe and engine components. The Company is a California corporation which commenced its leasing business in 1988. Its executive offices are located at 180 Harbor Drive, Suite 200, Sausalito, California 94965. The Company transacts business directly and through its subsidiaries unless otherwise indicated. Industry Background Commercial airlines typically maintain a number of spare aircraft engines to ensure that their aircraft are not grounded when engines are removed for normal maintenance or as a result of engine failure. Industry analysts estimate that the worldwide fleet of approximately 11,000 commercial aircraft utilizes approximately 30,000 engines, including approximately 5,000 spare engines valued at over $11 billion. Boeing Commercial Airplane Group's publication, 1996 Current Market Outlook (the "Boeing Report"), estimates 15,900 new aircraft will be delivered over the next 20 years, resulting in a projected worldwide fleet of approximately 23,000 aircraft in 2015, net of 3,900 retired aircraft. These 15,900 new deliveries which represent a mixture of two-, three- and four-engined aircraft, will require approximately 39,000 installed engines. Airlines have increasingly turned to operating leases as an alternative to traditional financing of their aircraft, engines and spare parts. According to the Boeing Report, the fleets of operating lessors have grown from just over 200 aircraft in 1986 to over 1,000 in 1995, representing approximately 10% of total commercial aircraft at year-end 1995. Advantages to airlines of leasing include greater flexibility in fleet management, off-balance sheet reporting of operating leases, the ability to augment funds without affecting debt-to-equity ratios, and the shifting of residual value risk to a third party. Strategy The Company's strategy for its leasing business is to focus on operating leases of commercial aircraft engines worldwide while maximizing residual values. In order to maximize the value of engines when they are re-leased or sold at the end of a lease, the Company focuses on commercial jet aircraft engines, particularly the noise compliant Stage III aircraft engines. As of December 31, 1996, all of the Company's engines were Stage III engines and were generally suitable for use on one or more commonly used aircraft such as Boeing 747, 757, 767, 737-300/400/500, McDonnell Douglas MD-80 Series, DC 10-30, MD-11 and Airbus A-300 and A-320. Through the spare parts and component sales operations of Willis Aeronautical Services, Inc. ("WASI"), its subsidiary, the Company sells aircraft spare parts to commercial passenger airlines, air cargo carriers, overhaul/repair facilities and other spare parts distributors. WASI provides parts for maintenance and overhaul of the Company's engines at prices lower than the Company could obtain from third parties. Similarly, WASI provides engine components to the Company's lessees, thus satisfying more of the lessees' needs with respect to their leased engines. Aircraft Engine Leasing All of the Company's current leases to air carriers, manufacturers and overhaul/repair facilities are operating leases rather than finance leases. Under an operating lease, the Company retains title to the engine thereby retaining the benefit and assuming the risk of the residual value of the aircraft engine. Operating leases allow airlines greater fleet and financial flexibility due to their shorter-term nature and the relatively small initial capital outlay necessary to obtain use of the aircraft engine. Operating lease rates are generally priced higher than finance lease rates, in part because of the risks associated with the residual value. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results - Ownership Risks." 3 The Company targets the medium-term engine lease market, which generally consists of leases with three to ten year terms. Airlines, manufacturers and overhaul/repair facilities leasing for this term do so when their projected utilization of a specific engine is deemed to be less than its useful life, or when they are seeking to manage their cash flow more efficiently while strengthening their balance sheets. Most of the Company's lease transactions are triple-net leases with a specified non-cancelable lease term. A triple-net lease requires the lessee to make the full lease payment and pay any other expenses associated with the use of the engine, such as maintenance, casualty and liability insurance, sales or use taxes and personal property taxes. The leases contain detailed provisions specifying maintenance standards and the required condition of the aircraft engine upon redelivery. During the term of the lease, the Company generally requires the lessee to maintain the aircraft engine in accordance with an approved maintenance program designed to ensure that the aircraft engine meets applicable regulatory requirements in the jurisdictions in which the lessee operates. Under short-term leases and certain medium-term leases, the Company undertakes a portion of the maintenance and regulatory compliance risk. The Company attempts to minimize its currency and exchange risks by negotiating all of its aircraft engine lease transactions in U.S. Dollars. In addition, all guarantees obtained to support various lease agreements are denominated and payable in U.S. Dollars. See " Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results - International Risks." The Company typically collects maintenance reserves and security deposits from the lessee. Generally, the Company collects, in advance, a security deposit equal to at least one month's lease payment, together with one month's estimated maintenance reserve. The security deposit is returned to the lessee after all return conditions have been met. Maintenance reserves are accumulated in accounts maintained by the Company or its lenders and are used when normal repair associated with engine use or maintenance is required. In most cases, to the extent that cumulative maintenance reserves are inadequate to fund normal repairs required prior to return of the engine to the Company, the lessee is obligated to cover the shortfall. In most cases, any maintenance reserves remaining in a restricted account after the lease has expired and the return conditions have been met are retained by the Company unless the engine is returned with no flight hours since the last refurbishment. The Company makes an independent analysis of the credit risk associated with each lease before entering into such lease. The Company's credit analysis consists of evaluating the prospective lessee's financial statements for the past three years, trade and banking references, working with the Company's lenders to evaluate country and political risk, insurance of hull and liability and expropriation risk. The process for credit approval is a joint undertaking between the Company and the senior lender providing the debt financing for the lease. The Company obtains extensive financial information regarding the lessee and, in certain circumstances where the Company or its lenders believe necessary, requires guarantees from banks or a third party. In addition, the Company continually monitors and evaluates the political and economic climate of the countries involved. While the Company has experienced some collection problems, including delay in lease rental payments, to date the Company has not experienced material losses attributable to such problems; however, there can be no assurance that the Company will not experience collection problems or significant losses in the future. During 1996, the Company began acquiring high-value spare parts packages for its portfolio. These spare parts packages are leased to the same customers as those leasing engines from the Company and are leased at essentially the same profit margin. During a given lease period, the Company's leases require that the leased engines undergo regular maintenance and inspection at pre-approved engine maintenance facilities certified by the FAA or its foreign equivalent. In addition, when engines come off-lease, they undergo thorough inspections to verify compliance with lease return conditions. Regular maintenance and thorough inspections during and after the lease term help ensure that the Company's leased engines maintain their residual value. While there can be no assurance that the Company's rigorous maintenance and inspection requirements will result in a realized return to the Company upon termination of a lease, the Company believes that its emphasis on maintenance and inspection generally helps it to recover its original investment in the engines. Upon termination of a lease, the Company will re-lease or sell the aircraft engine or dismantle the engine and sell the parts. The demand for aftermarket aircraft engines for either sale or re-lease may be affected by a number of variables including general market conditions, regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft engines), changes in the supply and cost of aircraft engines and technological developments. In addition, the value of a particular used aircraft engine varies greatly depending upon its condition, the maintenance services performed during the lease term and the number of hours remaining until the next major maintenance of the engine is required. If the Company is unable to re-lease or sell an engine on favorable terms, its ability to service debt may be adversely affected. See " Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results - Ownership Risks" and "Business - Aircraft Engine Portfolio." 4 Engine Portfolio As of December 31, 1996, the Company owned 31 engines and related equipment and had 1 engine on capital lease. These engines and equipment were on lease to 22 customers in 12 countries throughout the world, with no single country, other than the United States, accounting for more than 14% of the Company's lease revenue for the year ended December 31, 1996. The following table displays the regional profile of the Company's lessee customer base by operating lease revenue for the year ended December 31, 1996: Operating Lease Revenue Percentage ------- ---------- United States 5,295,084 39% Europe 2,840,428 21% Mexico 1,865,118 14% Canada 1,291,000 9% Australia/New Zealand 1,029,600 7% Asia 889,208 6% South America 530,000 4% -------------------------------------------- Total 13,740,438 100% ============================================ For the year ended December 31, 1996, Aerovias de Mexico, S.A. de C.V., a lessee customer of the Company, contributed 14% of operating lease revenue. The Company markets its operating leases through a direct marketing campaign and relies, to a lesser extent, on referrals and advertising in industry publications. The Company also subscribes to a data package that provides it with access to lists composed of operators and their specific engine requirements. Aircraft Engine Portfolio The Company's management frequently reviews opportunities to acquire suitable aircraft engines based on market demand, customer airline requirements and in accordance with the Company's engine portfolio mix criteria and planning strategies for leasing. Before committing to purchase specific engines, the Company takes into consideration such factors as estimates of future values, potential for remarketing, trends in supply and demand for the particular make, model and configuration of engines and anticipated obsolescence. As a result, certain types and configurations of engines do not necessarily fit the profile for inclusion in the Company's portfolio of engines owned and used in its leasing operation. The Company focuses particularly on the noise compliant Stage III aircraft engines, for use on commonly used aircraft. As of December 31, 1996, all of the Company's engines were Stage III engines and were generally suitable for use on one or more commonly used aircraft such as Boeing 747, 757, 767, 737-300/400/500, McDonnell-Douglas MD-80 Series, DC 10-30, MD-11 and Airbus A-300 and A-320. The Company purchases a majority of its engines in the aftermarket, primarily from airlines or other leasing companies. 5 The Company's commercial aircraft engine portfolio consists of aircraft engines manufactured by CFM International (CFM), General Electric (CF), Pratt & Whitney (JT and PW) and Rolls Royce (RB). The following table shows by engine type the number of engines, the aircraft type on which each engine type is generally used, and the scheduled lease terminations of the Company's lease portfolio at December 31, 1996:
Engine Type Number Aircraft Application ----------- ------ -------------------- Off Scheduled Lease Terminations Lease 1997 1998 1999 2000 2001 2002 2006 ----- ---- ---- ---- ---- ---- ---- ---- CF6-50 C2 3 A300, DC10-30, 3 B-747-200, CF6-80 C2 1 747-400, 1 767-200ER/300/300ER, MD11, A300-600/600R/600F/ST, 600ST A310-200, ADV/300 CFM56-3B 7 737-300/400/500 3 1 1 1 1 CFM56-3C 4 737-300/400/500 1 1 2 CFM56-5A 2 A320/100/200, A319 1 1 JT8D-219 4 MD80 1 3 JT9D-7A 1 747-100/200 1 JT9D-7J 2 747-200/SP 1 1 (OFF-LEASE ENGINE) JT9D-7R4D 1 767-200, B-747-200 1 PW2040 1 757-200 1 PW4060 1 747-400, 767-300 1 A 310, MD 11 RB211-535 2 757-200 1 1 JT8D-217C 1 MD83 1 CF6-80E1 1 AIRBUS 330 1 PW 2037 1 B-757 1 ----------- ------------------------------------------------------------------- Total 32 1 6 9 5 4 5 1 1
6 Engine Portfolio Value The Company has obtained appraisals of its engines from Aircraft Information Services, Inc. ("AISI"), a recognized appraiser of aircraft engines. AISI has rendered its opinion that the aggregate "Current Fair Market Value" of the Company's aircraft engine portfolio, assuming the engines are in average half-life condition, is $98.5 million, which compares favorably to the aggregate net book value at December 31, 1996 of $93.1 million of the Company's current portfolio of owned engine. "Current Fair Market Value" is the appraiser's opinion as to the value of the aircraft engines under market conditions that are perceived to exist at a specific point in time for a sale between equally willing and knowledgeable buyers and sellers, neither under compulsion to buy or sell, in a cash transaction with no hidden value or liability. "Average half-life condition" assumes that every component or maintenance service which has a prescribed interval that determines its service life, overhaul interval or interval between maintenance services is at a condition which is one-half of the total interval. The Company, through the return conditions required by its leases and the maintenance reserves collected by the Company from its lessees, attempts to put its engines in the equivalent of a "freshly refurbished" condition, after application of the maintenance reserves. "Freshly refurbished" condition is defined to be that of an engine immediately after a major shop visit which refurbished all engine modules or all engine compressor and combustor/turbine stages, as appropriate, with all life-limited components at half-life. AISI has rendered its opinion that the "Current Fair Market Value" of the Company's aircraft engine portfolio, assuming the engines were in freshly refurbished condition, is $108.6 million. The following table sets forth the opinion of AISI as to the aggregate "Future Value Forecast" for the Company's current aircraft engine portfolio for the periods indicated: 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (in millions) AISI Future Value Forecast ...... $107.1 $105.4 $102.1 $98.9 $95.8 "Future Value Forecast" is the appraiser's opinion as to the expected value of an asset at a specific date in the future and assumes "Base Value" criteria, half-life condition and an assumed annual inflation rate of 3.0%. "Base Value" is similar to Current Fair Market Value; however it assumes theoretically balanced market conditions rather than actual present market conditions or assumed market conditions at a specified future date. Since appraisals are only estimates of resale values, there can be no assurance that such appraised values are accurate or that they will not materially change due to factors beyond the Company's control, including but not limited to, obsolescence and changing market conditions, lack of support by relevant airframe, engine or component manufacturers, or that upon expiration of the leases, due to the absence of purchasers or re-lease demand for the Company's engines, the Company will not realize the then book or appraised value through either sale or re-leasing of the engines. AISI was paid $9,500, plus out-of-pocket expenses, for its services to the Company in connection with its appraisal. 7 Financing/Source of Funds The Company acquires the engines it leases primarily with funds borrowed from banks and finance companies. The Company borrows 80% to 85% of the engine purchase price on a recourse or non-recourse basis. Under the terms of the loans, the lender is entitled to receive most of the lease payments to apply to debt service and takes a security interest in the engine. The Company retains ownership of the engine, subject to the lender's security interest. Loan interest rates are negotiated on a transaction-by-transaction basis and reflect the financial condition of the lessee (and for recourse loans, the financial condition of the Company), the terms of the lease and the amount of the loan. The Company has historically paid the balance of the purchase price of the engine, the "equity" portion, from internally generated funds. The loans available to the Company under recourse arrangements are secured by the financed engines and the assignment of lease payments due under the related leases. Upon default under a loan covering engines financed through recourse borrowings, the lender providing the financing can foreclose on the engine and sell it and seek any balance due on such financing from the Company. Under certain of the Company's lease arrangements, the financial institution providing the financing may seek recourse only at the subsidiary level and not to the Company. The credit standing of certain of the Company's customers and the long operating life of aircraft engines allows the Company to finance some of its equipment on a non-recourse basis. Non-recourse loans represent loans to subsidiaries which own only the assets which secure the loan and as to which the Company has not guaranteed the loan. The Company and its subsidiaries at December 31, 1996 had borrowings of $18.8 million in four loans on a non-recourse basis and $53.5 million in seven loans on a recourse basis. The Company is not liable for the repayment of the non-recourse loans unless the Company breaches certain limited representations and warranties under the applicable pledge agreement. The lender assumes the credit risk of each such lease, and its only recourse, upon a default under a lease, is against the lessee and the leased engine. The Company has negotiated a sharing of residual proceeds with certain lenders in exchange for a higher percentage financing of six aircraft engines. The Company provides for its residual sharing obligation in each period, sufficient to adjust the residual share payable at the balance sheet date to the amount that would be payable at that date if applicable engines were sold on the balance sheet date at their net book values. Spare Parts Sales In October 1994, the Company established WASI as an international provider of aftermarket airframe rotable parts, engine parts, engines and modules. WASI purchases individual engine parts from airlines and others in the aftermarket or acquires whole airframes or engines and dismantles the airframes or engines into their component parts for resale. The component parts acquired are typically overhauled for WASI by an FAA-authorized repair agency and then offered for sale to airlines, maintenance and repair facilities, and distributors. To date, WASI has targeted primarily General Electric CF6-50, Pratt & Whitney JT9D engines and early model Pratt & Whitney JT8D aircraft engines and components. These engines are the most widely used aircraft engines in the world, powering the Boeing 747, 727 and 737, McDonnell Douglas DC10 and DC9 and Airbus A-300 series of aircraft. WASI currently expects to expand into engine components for the CFM-56, a high thrust engine used on the popular Boeing 737. To date, WASI's operations have afforded the Company additional contacts and opportunities in the aircraft engine market. WASI provides parts for maintenance and overhaul of the Company's engines at prices lower than the Company could obtain from third parties. Similarly, WASI provides engine components to the Company's lessees, thus satisfying more of the lessees' needs with respect to their leased engines. As engines in the Company's leasing portfolio age and reach the point at which they are more valuable as component parts, the Company expects that WASI will be able to break them down, salvaging valuable components and thereby maximizing the residual value of the engines. WASI has strict guidelines regulating how parts are procured and overhauled. When procuring aircraft parts, great emphasis is placed on source and traceability. At December 31, 1996, 98% of WASI's inventory on hand was acquired from a certified commercial air carrier or others operating under recognized regulatory agencies accepted by the FAA. Less than 2% of the inventory was acquired from trading companies and in all such cases the parts are certified by the seller as to origin. WASI does not trade in consumable parts such as hardware/fasteners. Hardware/fasteners are the most difficult to identify as unapproved material and in many cases are impossible to identify as unapproved material without conducting detailed analysis. WASI's trades in life-limited parts are restricted to parts that have complete traceability back to the original equipment manufacturer ("OEM") or in few cases traceability from a commercial air carrier back to the OEM. See " Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results - Government Regulation." 8 WASI advertises its aircraft engine parts availability on the Inventory Locator Service ("ILS") and the Airline Inventory Redistribution System ("AIRS") electronic databases. Users of ILS and AIRS can access the databases and determine which companies have the desired inventory. The Company also advertises in industry publications and receives a number of customers through referrals. WASI also provides aircraft engine management and technical services to airlines. Certain air carriers outsource the management of heavy maintenance and the overhaul of engines to reduce operational overhead and staffing. These services include negotiating engine maintenance agreements and providing repair agencies with engine work orders. As the representative for an airline, WASI collects engine removal data, establishes formal work orders, reviews test cell data and revises, if necessary, the engine work order. The monitoring of aircraft engines enables WASI to have frequent contact with airline clients, source replacement parts and identify parts that have been designated for sale. Further, WASI observes test cell acceptance runs, evaluates the results, reviews invoices for repair and requests warranties on behalf of its airline clients. Currently, WASI manages all engine tests for the Company and monitors the Company's engines that are subject to leases. WASI may from time to time enter into consignment agreements with airlines or related companies to acquire surplus inventories for the purpose of marketing and sales of such consigned parts. Consignment allows WASI to access inventory for sale without the cost and risk of ownership. Equipment Acquired for Resale The Company engages in the short-term trading of commercial aircraft engines in the aftermarket to complement its engine leasing business. It is the Company's general policy to minimize risk by not purchasing engines on speculation; however occasionally the Company purchases engines without having a commitment for the engines' resale. The Company normally makes a contractual commitment to purchase specific engines for its own account only after, or concurrently with, obtaining a firm customer commitment to purchase. Although the Company usually has sale commitments for engines at delivery, it would have financial exposure if it purchased an engine which could not immediately be resold. The Company markets the resale of its engines through a direct marketing campaign and relies, to a lesser extent, on referrals and advertising in industry publications. The Company also subscribes to a data package that provides it with access to lists composed of operators and their specific engine requirements. The Company does not refurbish or perform other maintenance on the engines it resells; however, from time to time, the Company has hired third party contractors to refurbish or repair such engines. Competition In the medium-term engine lease market segment, which is the Company's target market, the Company principally competes with Shannon Engine Services, headquartered in Shannon, Ireland, which is owned in part by SNECMA and CFMI, and Rolls Royce. Rolls Royce limits its leasing activities to products of its parent company and related parties. The Bank of Tokyo, through its recent acquisition of Engine Lease Finance in Shannon, Ireland, also competes with the Company. Each of these competitors is substantially larger and has greater financial resources than the Company which may permit, among other things, greater access to capital markets at more favorable terms. In addition, major aircraft lessors, including International Lease Finance Corporation and General Electric Capital Aviation Services, compete with the Company to the extent that they include spare engine leases with their aircraft leases. With respect to engine marketing and spare parts and component sales, the Company competes with airlines, aircraft manufacturers, aircraft, engine and parts brokers, and parts distributors. The Company's major competitors include the Allen Aircraft division of AAR Corp., The AGES Group and Aviation Sales Company. Certain of these competitors may have, or may have access to, financial resources substantially greater than the Company. Significant increases in competition encountered by the Company in the future may limit the Company's ability to expand its business, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that the primary competitive factors in the aircraft engine leasing industry are flexibility in leasing terms, including price, return conditions and term of lease, and availability of engines. The Company believes that it is able to compete favorably in leasing commercial aircraft engines due to its experience in the industry, reputation and expertise in acquiring and leasing commercial aircraft engines at economical prices and therefore allowing the Company to re-lease or sell such engines at a competitive price. See " Management's Discussion and Analysis of Financial Condition and Results of Operations Factors That May Affect Future Results - Competition." 9 Insurance The Company requires its lessees to carry the types of insurance customary in the air transportation industry, including comprehensive liability insurance and casualty insurance. In addition to requiring full indemnification under the terms of the lease, the Company is named as an additional insured on liability insurance policies carried by lessees, with the lender normally identified as the payee for loss and damage to the equipment. All policies contain a breach of warranty endorsement or severability of interest clause so that the Company continues to be protected even if the operator/lessee violates one or more of the warranties or conditions of the insurance policy. The Company monitors compliance with the insurance provisions of the leases. Government Regulation The Company's customers are generally subject to a high degree of regulation in the various jurisdictions in which they operate. Such regulations also indirectly affect the Company's business operations. Under the provisions of the Federal Aviation Act of 1958, as amended, the FAA exercises regulatory authority over the air transportation industry. The FAA regulates the manufacture, repair and operation of all aircraft engines operated in the United States. Its regulations are designed to insure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for the various types of aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. Presently, whenever necessary, with respect to a particular engine or engine component, the Company utilizes FAA and/or Joint Aviation Authority certified repair stations to repair and certify engines and components to ensure worldwide marketability. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with regulations and ground aircraft if their airworthiness is in question. In addition, by the year 2000, federal regulations will stipulate that all aircraft engines hold, or be capable or holding, a noise certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention, or have been shown to comply with Stage III noise levels set out in Section 36.5 of Appendix C of Part 36 of the Federal Aviation Regulations of the United States. Employees As of December 31, 1996, the Company had 25 full-time employees and 2 part-time employees, including 15 employees in equipment leasing and trading and 12 employees in the airframe and engine component sales. None of the Company's employees is covered by a collective bargaining agreement and the Company believes its employee relations are good. ITEM 2. PROPERTIES The Company's principal offices are located at 180 Harbor Drive, Suite 200, Sausalito, California 94965. The Company occupies space in Sausalito under a lease that covers approximately 5,500 square feet of office space and expires on March 14, 1999. Engine financing, sales, trading and general administrative activities are conducted from the Sausalito location. The Company also leases approximately 22,500 square feet of office and warehouse space for WASI's operations at 291 Harbor Way, South San Francisco, California 94080. The lease expires on May 31, 1998. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year 1996. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information relates to the Company's Common Stock, which is listed on the NASDAQ National Market under the symbol WLFC. As of March 21, 1997, there were 1,170 stockholders of record of the Company's Common Stock. The foregoing number does not include beneficial holders of the Company's common stock. The high and low sales price of the Common Stock for each quarter since the effective date of the Initial Public Offering (the "Offering"), September 18, 1996, as reported by NASDAQ, are set forth below: 1996 ---- High Low Third Quarter $ 10 $ 8 1/2 Fourth Quarter $ 12 7/8 $ 8 3/4 The Company did not declare any dividends for the year ended December 31, 1996. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected consolidated financial data and operating information of the Company. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
Years Ended December 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenue: Operating lease revenue $ 13,740 13,740 13,636 10,323 8,744 Gain (loss) on sale of leased engines 2 (483) 633 (281) 659 Spare parts sales 5,843 3,859 795 -- -- Sale of equipment acquired for resale 12,105 5,472 2,184 -- 3,598 Interest and other income 618 119 542 938 70 ------------------------------------------------------- $ 32,308 22,738 17,790 10,980 13,071 Expenses: Cost of spare parts sales $ 3,308 2,546 659 -- -- Cost of equipment acquired for resale 10,789 2,742 1,863 -- 3,140 All other expenses 13,351 14,168 13,295 9,857 9,117 Gain on modification of credit facility -- 2,203 -- -- -- Income before income taxes and minority interest 4,860 5,485 1,973 1,123 814 Net income 2,804 3,216 1,172 669 487 Balance Sheet Data: Total assets $124,933 91,437 83,542 68,632 69,711 Debt financing 73,186 69,911 69,456 59,840 64,349 Shareholders' equity 23,202 4,812 1,959 1,151 463 Lease Portfolio: Engine portfolio at the end of the period 32 31 26 25 26
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company's primary businesses are the leasing of spare replacement aircraft engines, spare parts packages and the strategic acquisition and resale of aircraft engines and parts to the worldwide commercial airline aftermarket. The Company commenced leasing operations in 1988 and established WASI to conduct its spare parts resale operation in October 1994. Revenue consists primarily of operating lease revenue, income from the sale of leased engines, sales of spare parts and components and equipment sales. Summary of Financial Results for the year ended December 31, 1996. Total revenue for the year ended December 31, 1996 was $32.3 million, compared to $22.7 million in 1995. Net income for the year ended December 31, 1996 was $2.8 million, compared to $3.2 million in 1995, primarily due to the gain on modification of the Company's primary credit facility ($2.2 million) and higher gain on sales of equipment acquired for resale ($1.4 million) in 1995, whereas 1996 had increased margin on spare parts sales ($1.2 million) and lower depreciation and interest expense ($2.9 million) compared to 1995, offset by higher operating expenses ($1.8 million) in 1996 compared to 1995. Leasing Operations. The Company accounts for its leases as operating leases. Under an operating lease, the Company retains title to the engine, thereby retaining the potential benefit and assuming the risk of the residual value of the engine. Operating leases require the Company to re-lease or sell an engine in a timely manner upon termination of a lease. Lease payments are recorded as operating lease revenue and depreciation expense is recognized on a straight-line basis over 15 years to a 55% residual. Third party lenders generally provide 80% to 85% of the financing for the acquisition of engines to be leased on an operating lease basis. In some instances, third party lenders have provided more than 85% of the financing of engines, in which case the lenders have generally required a sharing of the residual value of the engine upon the sale of the engine. The Company provides for the residual sharing obligation as a charge or credit to income or expense each period in an amount sufficient to adjust the residual share payable at the balance sheet date to the amount that would be payable at the balance sheet date if all engines subject to residual sharing were sold on the balance sheet date at their net book values. 12 Year Ended December 31, 1996 compared to Year Ended December 31, 1995 Revenue is summarized as follows:
Years ended December 31, ---------------------------------------------------------------- 1996 1995 ---------------------------------------------------------------- Amount % Amount % ------ --- ------ --- (dollars in thousands) Revenue: Operating lease revenue $13,740 42.5 $13,771 60.6 Gain (loss) on sale of leased engines 2 0.0 (483) (2.1) Spare parts sales 5,843 18.1 3,859 17.0 Sale of equipment acquired for resale 12,105 37.5 5,472 24.0 Interest and other income 618 1.9 119 0.5 ---------------------------------------------------------------- Total $32,308 100.00 $22,738 100.0 ================================================================
The Company's results of operation are significantly impacted by changes in the portfolio of owned equipment. Lease Portfolio. At December 31, 1995, the Company had 31 engines in its operating lease portfolio. During 1996, four engines were transferred from the lease portfolio to the equipment sale portfolio and subsequently sold. One engine was transferred at its net book value to WASI to be dismantled and is held for sale as spare parts inventory. Another engine was sold under a sale and leaseback agreement and is now reflected on the Company's balance sheet as an engine on capital lease. The remaining three engines were sold to third parties. In the third quarter of 1996, the Company acquired one engine for $2.8 million and in the fourth quarter, the Company acquired four engines for a total cost of approximately $16.3 million as well as two auxiliary power units (APU's) and a spare parts package for a total cost of approximately $3.2 million. At December 31, 1996, the Company owned 31 engines in its lease portfolio and had 1 engine on a capital lease. Operating Leases. Operating lease revenue for the year-ended December 31, 1996 decreased to $13.7 million from $13.8 million from the corresponding period in 1995. This decrease is primarily due to a decrease in revenue from one engine which was off-lease and in a repair facility for eight months in 1996 and two engines which were sold in 1996, offset slightly by five engines purchased and leased late in 1996. In 1996, expenses directly related to operating lease activity dropped 23% to $8.1 million from $10.6 million in 1995. The reduction in expenses in 1996 was due to a reduction in depreciation expenses of $1.6 million (33%) as a result of two engines subject to component depreciation in 1995 that were fully depreciated and the sale of two engines in the 3rd quarter of 1996. Interest expense dropped $1.2 million (22%) in 1996 from 1995, due primarily to the modification of the existing term loan in June 1995 resulting in more favorable interest rates. Residual sharing expenses, however, increased 77% to $723,000 in 1996 from the corresponding period in 1995 due to changes in the Company's portfolio of engines subject to such agreements. Gain (Loss) on Sale of Leased Engines. The loss in 1995 was attributable to unanticipated overhaul expenses of $373,000 required in order to prepare an engine for resale and a $110,000 loss on the sale of the engine. Spare Parts Sales. Revenues from spare parts sales increased 51% to $5.8 million and the gross margin rose to 43% in 1996 from 34% in the corresponding period in 1995, primarily due to a changed inventory mix and increased volume. 13 Equipment Sales. During the year ended December 31, 1996, the Company sold 4 engines for proceeds of $12.1 million, generating gains of $1.3 million. In 1995, the Company sold three engines for $4.8 million, a fuselage and miscellaneous components it acquired in connection with an aircraft purchase for $572,000 and other components for $100,000. The aggregate cost of the equipment was $10.8 million and $2.7 million in 1996 and 1995, repectively. The Company expects that equipment sales opportunities and profitability will continue to vary materially from period to period. Interest and Other Income. Interest and other income for 1996 increased to $617,000 from $119,000 in 1995, an increase of 418%. This increase is due primarily to increased marketing/brokerage fee income earned on one engine, nonrecurring credits due the Company regarding excessive engine overhaul costs and increased interest earned on the proceeds from the Offering in September 1996, as well as interest earned on certain engine security deposits. General and Administrative Expenses. General and administrative expenses increased 53% to $5.1 million in 1996, up from $3.3 million in 1995. This increase reflects additional compensation due to an increased workforce and increased bonus payments; increased telephone and travel costs due to increased marketing personnel and activity; increased rent due to the expansion of the WASI facility and an increase in professional fees and insurance as a result of the Offering in 1996. Gain on Modification of Credit Facility. In 1995, the Company modified the terms of a significant credit facility. The gain of $2.2 million in 1995 on the modification of credit facility reflects a gain from the removal of residual sharing provisions of $2.4 million and a $199,000 loss on the sale of two engines to the lender. Income Taxes. Income taxes decreased to $2 million in 1996 from $2.2 million in 1995. The Company's effective tax rates for Federal and State taxes is approximately 41% and 40% in 1996 and 1995, respectively. Therefore, the decrease in tax expense is due to the decrease in the Company's income before taxes and minority interest offset by a slight increase in the effective tax rate. 14 Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenue is summarized as follows:
Years ended December 31, ---------------------------------------------------------------- 1995 1994 ---------------------------------------------------------------- Amount % Amount % ------ --- ------ --- (dollars in thousands) Revenue: Operating lease revenue $13,771 60.6 $13,636 76.7 Gain (loss) on sale of leased engines (483) (2.1) 633 3.6 Spare parts sales 3,859 17.0 795 4.4 Sale of equipment acquired for resale 5,472 24.0 2,184 12.3 Interest and other income 119 0.5 542 3.0 ---------------------------------------------------------------- Total $22,738 100.0 $17,790 100.0 ================================================================
The Company's results of operation are significantly impacted by changes in the portfolio of equipment. Lease Portfolio. During 1995, the Company acquired a total of eight engines and sold three, for a net increase of five. Two of the acquired engines were overhauled in 1995 and became available for sale or lease in 1996 and two additional engines were purchased in late December 1995, both subject to existing leases. Thus, these four engines did not impact results in 1995. The four remaining engines were acquired in July 1995 and were leased on a short-term basis. At December 31, 1995, two of these remaining engines four engines were on lease and the other two engines were being refurbished for ultimate sale. See "Business Aircraft Engine Portfolio." Two of the engines sold during 1995 were sold as part of the Facility Modification and the third engine was sold in June 1995. Operating Leases. Operating lease revenue increased to $13.8 million in 1995 from $13.6 million in 1994, an increase of 1.5%. Although the Company's lease portfolio increased by a net of five engines in 1995, as discussed above a number of the engines acquired did not impact revenue during 1995 and the lease revenue from the engines acquired in July 1995 were offset by the reduction in lease revenue from the engines sold in 1995. Expenses directly related to operating lease activities declined to $10.6 million in 1995 from $11.6 million in 1994, a 9% decrease. The reduction in expenses was largely due to a $877,000 reduction in residual sharing in conjunction with the Facility Modification. A decrease in interest expense to $5.5 million in 1995 from $5.9 million in 1994 as a result of lower interest rates due to the Facility Modification contributed to the overall expense decrease. These decreases in expenses were partially offset by a $256,000 increase in depreciation as a result of a $300,000 write-down of one of the Company's engines in 1995 due to the Company's implementation of Statement of Financial Accounting Standard No. 121 as of December 31, 1995 and increases in the lease portfolio discussed above. Gain (loss) on Sale of Leased Engines. The Company recorded a loss on the sale of an engine at lease termination of $483,000 in 1995 compared to a gain of $633,000 recorded in 1994, resulting in a $1.1 million reduction in total revenue. The loss in 1995 was attributable to unanticipated overhaul expenses of $373,000 required in order to prepare an engine for resale and a $110,000 loss on the sale of the engine. Spare Parts Sales. Revenue from spare parts sales increased to $3.9 million in 1995 from $795,000 in 1994, a 385% increase, while costs of sales increased to $2.5 million from $659,000, a 286% increase. Gross margin increased to 34% in 1995 from 17% in 1994. Interest expense related to spare parts sales activities was $187,000 in 1995 as compared to $51,000 in 1994, an increase of 267%. These increases resulted primarily from commencement of operations by WASI in October of 1994. 15 Equipment Sales. In 1995, the Company sold three engines for $4.8 million, a fuselage and miscellaneous components it acquired in connection with an aircraft purchase for $572,000 and other components for $100,000. The aggregate cost of this equipment was $2.7 million. In 1994, the Company sold an engine for $2.2 million with a related cost of equipment acquired for resale of $1.9 million. Interest and Other Income. Interest and other income decreased to $119,000 in 1995 from $542,000 in 1994 primarily due to the termination of remarketing fee arrangement with the lender in connection with the Facility Modification. In addition, the Company earned broker fees of $137,000 in 1994 which will not reoccur as the related agreement was terminated in 1994. The remaining decrease was due to management fees earned in 1994 for which no similar services were performed in 1995. General and Administrative Expense. General and administrative expense increased to $3.3 million in 1995 from $1.6 in 1994, an increase of 106% . The increase resulted primarily from an increase in compensation and related benefits as a result of a full year of operations at WASI and the addition of staff in marketing and finance as well as increased travel, promotional and insurance expenses. Gain on Modification of Credit Facility. In 1995, the Company modified the terms of a significant credit facility. The gain of $2.2 million on modification of credit facility reflects a gain from the removal of residual sharing provisions of $2.4 million and a $199,000 loss on the sale of two engines to the lender. Income Taxes. Income tax expense increased to $2.2 million in 1995 from $797,000 in 1994, an increase of 178%. The Company's effective tax rate for Federal and state taxes is approximately 40% for both 1995 and 1994; therefore, the increase in tax expense is directly related to the increase in the Company's income before taxes and minority interest to $5.5 million in 1995 from $2.0 million in 1994. 16 Liquidity and Capital Resources Historically, the Company has financed its growth through leveraged financing of its lease portfolio. Approximately $16.1 million, $15.7 million and $19.3 million in 1996, 1995 and 1994, respectively, was derived from this activity. In these same years, $13.5 million, $9.3 million and $11.5 million, respectively, was used to pay down related debt. In 1996, proceeds from the Company's Initial Public Offering generated approximately $15.9 million of cash flow as discussed below. Cash flows from operating activities generated approximately $9.6 million, $0.5 million and $8.9 million in 1996, 1995 and 1994, respectively. The Company's primary uses of funds are for the purchase of equipment for lease. Approximately $25.3 million, $9.3 million and $17.6 million of funds were used for this purpose in 1996, 1995 and 1994, respectively. Additional funds were used in these years to finance the growth of inventories to support parts sales. In September, 1996, the Company completed the Offering for 2,000,000 shares of its Common Stock at $8.00 per share. An additional 300,000 shares of stock were sold in connection with an Over-Allotment Option granted to the Underwriters. The net proceeds to the Company, net of all expenses, was $15,926,101. These proceeds were used to prepay $1.3 million of indebtedness under an existing term facility, and to purchase an interest rate cap to hedge a portion of its exposure to increases in interest rates on its variable rate borrowings ($460,000). The balance of the proceeds, together with debt financing, will be used to acquire additional engines for lease, to acquire engine and airframe component inventory, and for working capital and other general corporate purposes. The Company has a $15.0 million secured term facility for the acquisition of engines for lease. At December 31, 1996, $9.5 million was available under this facility. This term facility bears interest on each drawdown at the rate equal to the rate on five-year Treasury notes at the date of drawdown plus 5.55% and expires on June 29, 1997. Advances against the facility are for not more than 80% of the appraised value of the engine. The loan is repaid by applying not less than 90% of the underlying lease payment to debt service, except that at the end of 60 months the loan must have amortized not less than 40% of its original balance. The Company also has a $15.0 million term facility for the acquisition of engines for lease. This term facility allows for an advance rate of 80% of fair market value of the equipment, not to exceed 100% of the purchase price. The facility is to be used for domestic lessees. Interest rate under this facility will be dependent upon the quality of the credit and the underlying collateral. As of December 31, 1996, no drawdowns had taken place under this facility. As of December 31, 1996, the Company also has a $3 million secured working capital facility for the acquisition of engines to be dismantled and sold for parts through WASI. This facility provides for 80% advances against the purchase price of parts for resale and bears interest at prime plus 1%. This facility requires interest-only payments with the principal balance due six months after drawdown and expires on October 31, 1997. The Company directly guarantees payment under this facility. This facility replaced a comparable facility with a $1.5 million credit limit. In February, 1997 the Company, replaced its $44 million note payable. The note was repaid at a discount which resulted in an extraordinary gain of approximately $2.9 million (pre-tax), net of related costs. The transaction was financed through a note payable for $41,500,000 at an interest rate of LIBOR plus 250 basis points. This note matures on March 1, 1998. The Company has the option to convert the note to an amortizing term loan due in the year 2004. The Company believes that its current and anticipated credit facilities, internally generated funds and the net proceeds of the Offering will be sufficient to fund the Company's anticipated operations until the first quarter of 1998, at which time additional equity capital is anticipated to be required to fund projected growth. The Company is also exploring a possible securitization of its lease portfolio. There can be no assurance that the necessary amount of such capital or debt will continue to be available to the Company on favorable terms or at all. If the Company were unable to continue to obtain any portion of required financing on favorable terms, the Company's ability to add new engines to its portfolio would be impaired, which would have a material adverse effect on the Company's business, financial condition and results of operations. 17 Factors That May Affect Future Results In addition to other information in this Report, the following risk factors should be considered carefully by potential purchasers in evaluating an investment in the Common Stock of the Company. Except for historical information contained herein, the discussion in this Report contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear in this Report. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein. Ownership Risks The Company leases its portfolio of aircraft engines primarily under operating leases rather than finance leases. Under an operating lease, the Company retains title to the aircraft engines and assumes the risk of not recovering its entire investment in the aircraft engine through the re-leasing and remarketing process. Operating leases require the Company to re-lease or sell aircraft engines in its portfolio in a timely manner upon termination of the lease in order to minimize off-lease time and recover its original investment in the aircraft engine. Numerous factors, many of which are beyond the control of the Company, may have an impact on the Company's ability to re-lease or sell an aircraft engine on a timely basis. Among the factors are general market conditions, regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft engines), changes in the supply or cost of aircraft engines and technological developments. Further, the value of a particular used aircraft engine varies greatly depending upon its condition, the number of hours remaining until the next major maintenance of the aircraft engine is required and general conditions in the airline industry. In addition, the success of an operating lease depends in part upon having the aircraft engine returned by the lessee in marketable condition as required by the lease. Consequently, there can be no assurance that the Company's estimated residual value for aircraft engines will be realized. As of December 31, 1996, the Company had 32 engines under lease to 22 customers in 12 countries. If the Company is unable to re-lease or resell aircraft engines on favorable terms, its business, financial condition, cash flow, ability to service debt and results of operations could be adversely affected. The Company also engages in the short-term trading of commercial aircraft engines in the aftermarket. Although it is the Company's general policy not to purchase engines on speculation, the Company has and, if it deems appropriate, may in the future occasionally purchase engines without having a commitment for the engines' resale. If the Company were to purchase an engine without having a firm commitment for its resale or if a firm commitment for resale were to exist but not be consummated for whatever reason, the Company would be subject to all the risks of ownership of the engine as described above. The Company also engages in the purchase and resale of aftermarket airframe rotable parts, engine parts, engines and modules. Before parts may be installed in an aircraft, they must meet certain standards of condition established by the Federal Aviation Administration ("FAA") and/or the equivalent regulatory agencies in other countries. See "Government Regulations" below. Parts must also be traceable to sources deemed acceptable by such agencies. See "Business - Spare Parts Sales." Parts owned by the Company may not meet applicable standards or standards may change, causing parts which are already in the Company's inventory to be scrapped or modified. Engine manufacturers may also develop new parts to be used in lieu of parts already contained in the Company's inventory. In all such cases, to the extent the Company has such parts in its inventory, their value may be reduced. Industry Risks The Company is in the business of providing leases of commercial aircraft engines to international and domestic airlines. Consequently, the Company is affected by downturns in the air transportation industry in general. Substantial increases in fuel costs or interest rates, increasing fare competition, slower growth in air traffic, or any significant downturn in the general economy could adversely affect the air transportation industry and may therefore negatively impact the Company's business, financial condition and results of operations. In addition, in recent years, a number of commercial airlines have experienced financial difficulties, in some cases resulting in bankruptcy proceedings. During the three years ended December 31, 1996, two lessees of the Company filed for bankruptcy protection or otherwise became insolvent or ceased operations. While the Company believes that its lease terms protect its engines and the Company's investment in such engines, there can be no assurance that the financial difficulties experienced by a number of airlines will not have an adverse effect on the Company's business, financial condition and results of operations. 18 Customer Credit Risks A lessee may default in performance of its lease obligations and the Company may be unable to enforce its remedies under a lease. A majority of the Company's existing and prospective customers are smaller domestic and foreign passenger airlines, freight and package carriers and charter airlines, which, together with major passenger airlines, may suffer from the factors which have historically affected the airline industry. As a result, certain of these customers may pose credit risks to the Company. The Company's inability to collect receivables under a large dollar engine lease or to repossess engines in the event of a default by a lessee could have a material adverse effect on the Company's business, financial condition and results of operations. A number of airlines have experienced financial difficulties, and certain airlines have filed for bankruptcy and a number of such airlines have ceased operations. In most cases where a debtor seeks protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), creditors are stayed automatically from enforcing their rights. In the case of United States certified airlines, Section 1110 of the Bankruptcy Code provides certain relief to lessors of the aircraft engines. Specifically, the airline has 60 days from the date the lessor makes its claim to agree to perform its obligations and to cure any defaults. If it does not do so, the lessor may repossess the aircraft engine. The scope of Section 1110 has been the subject of significant litigation and there can be no assurance that the provisions of Section 1110 will protect the Company's investment in an aircraft engine in the event of a lessee's bankruptcy. In addition, Section 1110 does not apply to lessees located outside of the United States and applicable foreign laws may not provide comparable protection. International Risks In 1996, approximately 61% of the Company's lease revenue was generated by leases to foreign customers. Such leases may present greater risks to the Company because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. In addition, many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company attempts to minimize its currency and exchange risks by negotiating all of its aircraft engine lease transactions in U.S. Dollars and all guarantees obtained to support various lease agreements are denominated for payment in U.S. Dollars. To date, the Company has experienced some collection problems under certain leases with foreign airlines, and there can be no assurance that the Company will not experience such collection problems in the future. The Company may also experience collection problems related to the enforcement of its lease agreements under foreign local laws and the attendant remedies in such locales. Consequently, the Company is subject to the timing and access to courts and the remedies local laws impose in order to collect its lease payments and recover its assets. In addition, political instability abroad and changes in international policy also present risks associated with expropriation of the Company's leased engines. To date, the Company has experienced limited problems in reacquiring assets; however, there can be no assurance that the Company will not experience more serious problems in the future. Certain countries have no registration or other recording system with which to locally establish the Company's or its lender's interest in the engines and related leases, potentially making it more difficult for the Company to prove its interest in an engine in the event that it needs to recover an engine located in such a country. The Company's engines and the aircraft on which they are installed can be subject to certain foreign taxes and airport fees. Unexpected liens on an engine or the aircraft on which it is installed could be imposed in favor of a foreign entity, such as Eurocontrol or the airports of the United Kingdom. 19 Dependence Upon Availability of Financing The operating lease business is a capital intensive business. The Company's typical operating lease transaction requires a cash investment by the Company of approximately 15% to 20% of the aircraft engine purchase price, commonly known as an "equity investment." The Company's equity investments have historically been financed from internally generated cash, and in the future will include a substantial portion of the net proceeds of the Offering. The balance of the purchase price is typically financed with the proceeds of secured borrowings. Accordingly, the Company's ability to successfully execute its business strategy and to sustain its operations is dependent, in part, on the availability of debt and equity capital. There can be no assurance that the necessary amount of such capital will continue to be available to the Company on favorable terms, or at all. If the Company were unable to continue to obtain any portion of required financing on favorable terms, the Company's ability to add new leases to its portfolio would be limited, which would have a material adverse effect on the Company's business, financial condition and results of operations. Interest Rate Risks The Company's engine leases are generally structured at fixed rental rates for specified terms. As of December 31, 1996, borrowings subject to interest rate risk totaled $40.8 million or 56.4% of the Company's total borrowings. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue the Company realizes under its leases and the interest rate that the Company pays under its lines of credit or loans. The Company has purchased an interest rate cap to limit its interest rate exposure; however, there can be no assurance that the Company's business, operating results and financial condition will not be adversely affected during any period of increases in interest rates. Competition In the medium-term engine lease market segment, which is the Company's target market, the Company principally competes with Shannon Engine Services, headquartered in Shannon, Ireland, which is owned in part by SNECMA and CFM International ("CFMI"), and Rolls Royce Finance Ltd. ("Rolls Royce"). Rolls Royce limits its leasing activities to products of its parent company and related parties. The Bank of Tokyo, through its recent acquisition of Engine Lease Finance in Shannon, Ireland, also competes with the Company. Each of these competitors is substantially larger and has greater financial resources than the Company which may permit, among other things, greater access to capital markets at more favorable terms. In addition, major aircraft lessors, including International Lease Finance Corporation and General Electric Capital Aviation Services, compete with the Company to the extent that they include spare engine leases with their aircraft leases. With respect to engine marketing and spare parts and component sales, the Company competes with airlines, aircraft manufacturers, aircraft, engine and parts brokers, and parts distributors. The Company's major competitors include the Allen Aircraft division of AAR Corp., The AGES Group and Aviation Sales Company. Certain of these competitors may have, or may have access to, financial resources substantially greater than the Company. Significant competition encountered by the Company in the future may limit the Company's ability to expand its business, which would have a material adverse effect on the Company's business, financial condition and results of operations. Certain of the Company's competitors have substantially greater resources than the Company, including greater name recognition, larger inventories, a broader range of material, complementary lines of business and greater financial, marketing and other resources. In addition, OEMs, aircraft maintenance providers, FAA certified repair facilities and other aviation aftermarket suppliers may vertically integrate into the aircraft engine leasing or aircraft engine/spare parts sales industry, thereby significantly increasing industry competition. A variety of potential actions by any of the Company's competitors, including a reduction of product prices or the establishment by competitors of long-term relationships with new or existing customers, could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will continue to compete effectively against present and future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations. Management of Growth The Company has recently experienced significant growth in revenues. Such growth has placed, and is expected to continue to place, a significant strain on its managerial, operational and financial resources. There can be no assurance that the Company will be able to effectively manage the expansion of its operations, or that the Company's systems, procedures or controls will be adequate to support the Company's operations. Any inability to effectively manage growth, if any, could have a material adverse effect on the Company's business, financial condition and results of operations. 20 Product Liability Risks The Company is exposed to product liability claims in the event that the use of its aircraft engines is alleged to have resulted in bodily injury or property damage. In addition to requiring indemnification under the terms of the lease, the Company requires its lessees to carry the types of insurance customary in the air transportation industry, including comprehensive liability insurance and casualty insurance. The Company is named as an additional insured on liability insurance policies carried by lessees, with the Company's lenders normally identified as the payee for loss and damage to the equipment. The Company monitors compliance with the insurance provisions of the leases. To date, the Company has not experienced any significant uninsured or insured aviation-related claims, and has not experienced any product liability claims related to its aircraft engines. However, an uninsured or partially insured claim, or claim for which third-party indemnification is not available, could have a material adverse effect upon the Company's business, financial condition and results of operations. Risk of Changes in Tax Laws or Accounting Principles The Company's leasing activities generate significant depreciation allowances that provide the Company with substantial tax benefits on an ongoing basis. In addition, the Company's lessees currently enjoy favorable accounting and tax treatment by entering into operating leases. Any change to current tax laws or accounting principles that make operating lease financing less attractive could adversely affect the Company's business, financial condition and results of operations. Dependence on Key Management The Company's business operations are dependent in part upon the expertise of certain key employees. Loss of the services of such employees, particularly Charles F. Willis, IV, Chief Executive Officer or William L. McElfresh, Executive Vice President, would have a material adverse effect on the Company's business. The Company has entered into an employment agreement with Mr. McElfresh and the Company maintains key man life insurance of $2.5 million on each of Messrs. Willis and McElfresh. Government Regulation The Company's customers are generally subject to a high degree of regulation in the various jurisdictions in which they operate. Such regulations also indirectly affect the Company's business operations. Under the provisions of the Federal Aviation Act of 1958, as amended, the FAA exercises regulatory authority over the air transportation industry. The FAA regulates the manufacture, repair and operation of all aircraft engines operated in the United States. Its regulations are designed to insure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for the various types of aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. Presently, whenever necessary with respect to a particular engine or engine component, the Company utilizes FAA and/or Joint Aviation Authority certified repair stations to repair and certify engines and components to ensure worldwide marketability. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with regulations and ground aircraft if their airworthiness is in question. In addition, by the year 2000, federal regulations will stipulate that all aircraft engines hold, or be capable of holding, a noise certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention, or have been shown to comply with Stage III noise levels set out in Section 36.5 of Appendix C of Part 36 of the Federal Aviation Regulations of the United States. Control by Principal Shareholder The Company's principal shareholder, Mr. Willis, beneficially owns approximately 57.3% of the outstanding shares of Common Stock of the Company and therefore effectively controls the Company. Accordingly, Mr. Willis has the power to contest the outcome of substantially all matters, including the election of the Board of Directors of the Company, submitted to the shareholders for approval. In addition, future sales by the Company's principal shareholder of substantial amounts of Common Stock, or the potential for such sales, could adversely effect the prevailing market price of the Common Stock. 21 Possible Volatility of Stock Price and Shares Eligible for Future Sale The market price of the Common Stock could be subject to significant fluctuations in response to operating results of the Company, changes in general conditions in the economy, the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or its lessees, or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance, and changes in earnings estimates or recommendations by securities analysts. As of March 21, 1997, the Company had 5,426,793 shares of Common Stock outstanding. Of those shares, 2,300,000 shares of Common Stock are freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 3,126,793 shares were issued by the Company in private transactions prior to the Offering in 1996 and are "restricted securities" as that term is defined in Rule 144 and are tradeable subject to compliance with Rule 144. The Company is unable to predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price for the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect market prices for the Common Stock and could impair the Company's future ability to obtain capital through an offering of equity securities. Anti-Takeover Provisions Certain provisions of law, and the Company's Articles of Incorporation and Bylaws, could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise, and the removal of incumbent officers and directors. These provisions include authorization of the issuance of up to 5,000,000 shares of Preferred Stock, with such characteristics that may render it more difficult or tend to discourage a merger, tender offer or proxy contest. The Company's Articles of Incorporation also provide that, for as long as the Company has a class of stock registered pursuant to the Exchange Act of 1934, as amended (the "Exchange Act"), shareholder action can be taken only at an annual or special meeting of shareholders and may not be taken by written consent. The Company's Bylaws also limit the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice. In addition, upon qualification of the Company as a "listed corporation" as defined in Section 301.5(d) of the California Corporation Code, cumulative voting will be eliminated. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids, and to encourage persons seeking to acquire control of the Company to negotiate first with the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is submitted as a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the Company's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2): Financial Statements and Financial Schedules: The response to this portion of Item 14 is submitted as a separate section of this report beginning on page 28. (a) (3) and (c): Exhibits: The response to this portion of Item 14 is submitted as a separate section of this report beginning on page 25. (b) Reports on Form 8-K: The Company filed no reports on Form 8-K during the last quarter of 1996. 24 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Exhibit Number Description -------------- ----------- 3.1 Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-5126-LA filed on June 21, 1996 3.2 Amended and Restated Articles of Incorporation, filed September 11, 1996, together with Certificate of Amendment of Amended and Restated Articles of Incorporation filed on September 24, 1996. 3.3 Bylaws. Incorporated by reference to Exhibit 3.3 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.1 1996 Stock Option/Stock Issuance Plan and form of agreement thereunder. Incorporated by reference to Exhibit 10.1 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.2 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.2 to Registration Statement No. 333-5126- LA filed on June 21, 1996. 10.3 Form of Indemnification Agreement entered into between the Company and its directors and officers. Incorporated by reference to Exhibit 10.3 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.4 Lease dated May 23, 1995 for facilities located in South San Francisco, California, together with amendment thereto dated March 18, 1996. Incorporated by reference to Exhibit 10.4 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.5 Lease dated February 4, 1997, between Atlas Metal Spinning Company and Willis Aeronautical Services, Inc., for an office and a warehouse facility located in South San Francisco. 25 10.6 Lease dated March 16, 1992 for facilities located in Sausalito, California, together with amendments thereto. 10.7 Employment Agreement between the Company and William McElfresh. Incorporated by reference to Exhibit 10.5 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.8 Employment Agreement between the Company and Steven Oldenburg. Incorporated by reference to Exhibit 10.6 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.9 Legal Services Agreement between the Company and John Votruba. Incorporated by reference to Exhibit 10.7 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.10 Assignment and Assumption of Leases and Purchase and Sale of Engines Agreement, dated September 11, 1992 between Terandon Leasing Corporation and International Lease Finance Corporation. Incorporated by reference to Exhibit 10.8 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.11 Engine Loan Agreement dated April 22, 1994, between T-5, Inc. and Ryoshin Leasing (USA) Inc. Incorporated by reference to Exhibit 10.11 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.12 Loan Agreement dated March 1, 1994 between T-7 Inc. and Heller Financial Inc. Incorporated by reference to Exhibit 10.12 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.13 Loan Agreement dated April 1, 1994 between T-7 Inc. and Heller Financial Inc. Incorporated by reference to Exhibit 10.13 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.14 Secured Loan Agreement dated December 29, 1995 between T-10, Inc. and Finova Capital Corporation. Incorporated by reference to Exhibit 10.14 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.15 Credit Agreement dated June 30, 1995 between the Company and Svenska Finans International BV. Incorporated by reference to Exhibit 10.15 to Registration Statement No. 333-5126-LA filed on June 21, 1996. 10.16 Loan Agreement dated January 28, 1997, together with related documents. 10.17 Loan Agreement dated November 6, 1996, between Willis Aeronautical Services, Inc. and The Pacific Bank, N.A., together with related documents. 11.1 Statement regarding computation of per share earnings. 21.1 Subsidiaries of the Company. Incorporated by reference to Exhibit 21.1 to Registration Statement No. 333-5126- LA filed on June 21, 1996. 23.1 Consent of KPMG Peat Marwick, LLP 27.1 Financial Data Schedule 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. March 31, 1996 Willis Lease Finance Corporation By: /s/ CHARLES F. WILLIS, IV --------------------------------- Charles F. Willis, IV Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the followings persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date Title Signature ---- ----- --------- Date: March 31, 1997 Chief Executive Officer /s/ CHARLES F. WILLIS, IV (Principal Executive Officer) --------------------- Charles F. Willis, IV Date: March 31, 1997 Executive Vice President and /s/ WILLIAM L. McELFRESH Director -------------------- William L. McElfresh Date: March 31, 1997 Chief Financial Officer and /s/ ELLIOT M. FISCHER Chief Accounting Officer ----------------- (Principal Financial and Elliot M. Fischer Principal Accounting Officer) Date: March 31, 1997 Director /s/ ROSS K. ANDERSON ---------------- Ross K. Anderson Date: March 31, 1997 Director /s/ WILLIAM M. LEROY ---------------- William M. LeRoy Date: March 31, 1997 Director /s/ WILLARD H. SMITH, JR -------------------- Willard H. Smith, Jr.
27
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES FORM 10-KSB Item 8, 14(a), and 14(c) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Accountants Page 29 Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995. Page 30 Consolidated Statements of Income for the years ended December 31, 1996, December 31, 1995 and December 31, 1994. Page 31 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, December 31, 1995 and December 31, 1994. Page 32 Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and December 31, 1994. Page 33 Notes to Consolidated Financial Statements Page 34
All other financial statement schedules have been omitted as the required information is not pertinent to the Registrant or is not material or because the information required is included in the financial statements and notes thereto. 28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Willis Lease Finance Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Willis Lease Finance Corporation and subsidiaries (formerly Charles F. Willis Company) (the "Company") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Willis Lease Finance Corporation and subsidiaries (formerly Charles F. Willis Company) as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, the Company changed its method of computing depreciation in 1995. KPMG PEAT MARWICK LLP San Francisco, California March 6, 1997 29 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
December 31, ------------------------------ 1996 1995 ------------- ------------- ASSETS Cash and cash equivalents $ 6,573,241 $ 815,649 Deposits 13,600,204 11,320,617 Aircraft engines held for operating lease, less accumulated 93,131,972 74,704,379 depreciation of $16,372,418 in 1996 and $13,681,211 in 1995 Aircraft engines on capital lease 2,960,457 -- Property, equipment and furnishings, less accumulated 458,780 207,784 depreciation of $160,407 in 1996 and $86,695 in 1995 Spare parts inventory 4,057,648 2,916,003 Maintenance billings receivable 1,107,283 408,454 Operating lease rentals receivable 405,601 73,658 Receivables from spare parts sales 854,566 772,474 Other receivables 829,522 10,481 Other assets 953,419 207,894 ------------- ------------- $ 124,932,693 $ 91,437,393 Total assets ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: $ 2,753,641 $ 1,052,455 Accounts payable and accrued expenses Salaries and commissions payable 538,658 163,961 Deferred income taxes 5,949,676 4,092,325 Deferred gain 209,774 -- Notes payable and accrued interest 73,185,657 69,910,797 Capital lease obligation 2,960,457 -- Residual share payable 1,199,279 476,526 Maintenance deposits 11,680,525 8,717,170 Security deposits 1,978,505 1,270,021 Unearned lease revenue 1,274,269 857,087 ------------- ------------- $ 101,730,441 $ 86,540,342 Total liabilities Minority interest in net assets of subsidiary -- 84,774 Shareholders' equity: Common stock, no par value. Authorized 20,000,000 and 10,000 shares; 5,426,793 and 1,500 issued and outstanding at December 31, 1996 and 1995, respectively 16,055,689 500 Retained earnings 7,146,563 5,293,566 Advances to shareholders -- (481,789) ------------- ------------- Total shareholders' equity 23,202,252 4,812,277 ------------- ------------- $ 124,932,693 $ 91,437,393 Total liabilities and shareholders' equity ============= ============= See accompanying notes to the consolidated financial statements
30 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income
Years ended December 31, ------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ REVENUE Operating lease revenue $ 13,740,438 $ 13,770,730 $ 13,635,934 Gain (loss) on sale of leased engines 2,208 (482,894) 632,578 Spare part sales 5,842,607 3,858,610 795,262 Sale of equipment acquired for resale 12,105,315 5,472,362 2,184,000 Interest and other income 617,144 119,188 541,900 ------------ ------------ ------------ Total revenue 32,307,712 22,737,996 17,789,674 EXPENSES Interest expense 4,323,276 5,721,811 5,947,843 Depreciation expense 3,181,216 4,703,487 4,447,082 Residual share 722,753 407,684 1,284,523 Cost of spare part sales 3,307,928 2,545,872 658,864 Cost of sold equipment acquired for resale 10,788,730 2,742,262 1,863,000 General and administrative 5,123,813 3,334,768 1,615,585 ------------ ------------ ------------ Total expenses 27,447,716 19,455,884 15,816,897 Gain on modification of credit facility -- 2,202,928 -- ------------ ------------ ------------ Income before income taxes and minority interest 4,859,996 5,485,040 1,972,777 Income taxes (1,976,471) (2,212,280) (797,159) ------------ ------------ ------------ Income before minority interest 2,883,525 3,272,760 1,175,618 Less: minority interest in net income of subsidiary (79,053) (56,343) (3,431) ------------ ------------ ------------ Net income $ 2,804,472 $ 3,216,417 $ 1,172,187 ============ ============ ============ Net income per share (pro forma for 1995 and 1994) 0.74 1.03 0.38 ============ ============ ============ Weighted average number of shares outstanding 3,796,182 3,110,657 3,110,657 ============ ============ ============ See accompanying notes to the consolidated financial statements
31 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1996, 1995 and 1994
Issued and outstanding Advances Total shares of Common Retained to shareholders' common stock stock earnings shareholders equity (deficit) ------------ ----- -------- ------------ ---------------- Balances at December 31, 1994 1,500 $ 500 $2,332,149 ($373,845) $1,958,804 Advances to shareholders, net of repayments -- -- -- (107,944) (107,944) Dividends -- -- (255,000) -- (255,000) Net income -- -- 3,216,417 -- 3,216,417 --------- ----------- ---------- ------- ----------- Balances at December 31, 1995 1,500 500 5,293,566 (481,789) 4,812,277 Common stock issue and proceeds from IPO, net 5,425,293 16,055,189 -- -- 16,055,189 Advances to shareholders, net of repayments -- -- -- 481,789 481,789 Dividends -- -- (951,475) -- (951,475) Net income -- -- 2,804,472 -- 2,804,472 --------- ----------- ---------- ------- ----------- Balances at December 31, 1996 5,426,793 $16,055,689 $7,146,563 $ -- $23,202,252 ========= =========== ========== ======= =========== See accompanying notes to the consolidated financial statements.
32 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years ended December 31, ------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 2,804,472 $ 3,216,417 $ 1,172,187 Adjustments to reconcile income to net cash provided by (used in) operating activities: Depreciation of aircraft engines held for operating lease 3,103,601 4,663,949 4,431,039 Depreciation of property, equipment and furnishings 77,615 39,538 16,043 Gain on modification on credit facility -- (2,202,928) -- Loss (gain) on sale of property, equipment, furnishings 5,701 (5,536) (1,530) Loss (gain) on sale of aircraft engines (2,208) 482,894 (632,578) Increase in residual share payable 722,753 407,684 1,284,523 Minority interest in net income of subsidiary 79,053 56,343 3,431 Changes in assets and liabilities: (Increase) in deposits (2,279,587) (11,061,221) (56,564) (Increase) in spare parts inventory (1,176,384) (940,494) (100,871) (Increase) in receivables (1,931,905) (359,173) (538,921) (Increase) decrease in other assets (745,525) 54,785 (67,248) Increase in accounts payable and accrued expenses 1,701,186 606,656 239,797 Increase in salaries and commission payable 374,697 77,201 46,760 Increase in deferred income taxes 1,857,351 2,179,381 791,559 Increase in deferred gain on sale of aircraft engine 209,774 -- -- Increase (decrease) in accrued interest 666,571 (341,379) 259,918 Increase in maintenance deposits 2,963,355 3,294,179 1,637,050 Increase in security deposits 708,484 124,444 407,697 Increase in unearned lease revenue 417,182 243,726 44,702 ------------ ------------ ------------ Net cash provided by operating activities 9,556,186 536,466 8,936,994 Cash flows from investing activities: Proceeds from sale of aircraft engines (net of selling expenses) 3,748,035 2,600,000 2,000,644 Proceeds from sale of property, equipment and furnishings 28,198 38,500 3,000 Purchase of aircraft engines held for operating lease (25,277,021) (9,258,379) (17,634,027) Purchase of property, equipment and furnishings (362,510) (194,403) (62,603) ------------ ------------ ------------ Net cash (used in) investing activities (21,863,298) (6,814,282) (15,692,986) Cash flows from financing activities: Repayments from ( advances to ) shareholder, net 481,789 (107,944) (18,827) Proceeds from issuance of notes payable 16,086,621 15,730,277 19,300,445 Proceeds from issuance of common stock 15,926,101 -- -- Principal payments on notes payable (13,478,332) (9,337,852) (11,473,474) Cash dividends paid on common stock (951,475) (255,000) (345,280) Minority interest in net assets of subsidiary -- -- 25,000 ------------ ------------ ------------ Net cash provided by financing activities 18,064,704 6,029,481 7,487,864 Increase (decrease) in cash and cash equivalents 5,757,592 (248,335) 731,872 Cash and cash equivalents at beginning of period 815,649 1,063,984 332,112 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 6,573,241 $ 815,649 $ 1,063,984 ============ ============ ============ See accompanying notes to the consolidated financial statements
33 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Organization and Summary of Significant Accounting Policies (a) Organization Willis Lease Finance Corporation (formerly Charles F. Willis Company) (Willis) is a California corporation which began leasing operations in 1988. Willis is a provider of operating leases of spare commercial aircraft engines worldwide. Willis is primarily engaged in acquiring aftermarket commercial aircraft, spare engines and providing operating leases of such engines to foreign and domestic airlines, manufacturers and overhaul/repair facilities. Terandon Leasing Corporation (Terandon), T-2 Inc. (T-2), T-4 Inc. (T-4), T-5 Inc. (T-5), T-7 Inc. (T-7), T-8 Inc. (T-8) and T-10 Inc. (T-10) are wholly-owned subsidiaries of Willis. They are all California corporations and were established to purchase and lease commercial aircraft engines. Terandon, T-2 and T-5 were incorporated in 1986, 1991 and 1993, respectively, T-7 and T-8 were both incorporated in 1994, and T-10 was incorporated in 1995. T-4 was acquired by Willis in 1996 and was incorporated in 1993. Willis Aeronautical Services, Inc. (WASI) is a wholly-owned subsidiary of Willis. WASI is a California corporation established in 1994 for the purpose of commercial aircraft, airframe and powerplant component marketing and sales. (b) Principles of Consolidation The consolidated financial statements include the accounts of Willis, Terandon, T-2, T-4, T-5, T-7, T-8, T-10, and WASI (together, the Company). Minority interest includes a twenty percent minority interest in WASI which was acquired by the Company on September 18, 1996 through the issuance of $129,088 in Common Stock. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Advances to Shareholder The advances to the sole shareholder are noninterest bearing (except for a $10,000 interest bearing note). All such notes were repaid in 1996. Advances are accounted for through a reduction of shareholders' equity. (d) Revenue Recognition Revenue from leasing of aircraft engines is recognized as operating lease revenue over the terms of the applicable lease agreements. The Company includes in operating lease revenue non-refundable maintenance payments received from lessees to the extent that, in the Company's opinion, it would not be economically advantageous to overhaul the engine the next time the life-limited parts need to be replaced. In this circumstance, the engines are normally dismantled and sold as parts. (e) Aircraft Engines Held for Operating Lease and Capital Lease Aircraft engines held for operating lease are stated at cost, less accumulated depreciation. Certain professional fees incurred in connection with the acquisition of aircraft engines are capitalized as part of the cost of the engines. Effective January 1, 1995, the Company changed its depreciation policy with respect to engines on long-term lease and has restated its previously issued financial statements. Previously, the Company depreciated such assets on a straight line basis over their estimated useful life of 25 years to a salvage value of 15%. The Company has changed its methodology to depreciate the engine on a straight line basis over a 15 year period from the acquisition date to a 55% residual value. The Company believes that this methodology more accurately reflects the Company's typical holding period for the assets and, further, that the residual value assumption reasonably approximates the selling price of the assets in 15 years from date of acquisition. The effect of this change in accounting principle was a reduction of depreciation expense of $357,999 and $405,657 for the years ended December 31, 1995 and 1994, respectively. 34 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) This change in accounting principle also resulted in an increase in net loss on sale of leased aircraft engines of $48,237 in 1995 and a reduction in net gain on sale of leased aircraft engines of $176,788 in 1994. Engines that in the Company's opinion would not be economically advantageous to overhaul the next time the life-limited parts need to be replaced, are depreciated over the remaining life using component depreciation based on usage as reported monthly by the lessees. In March of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," (SFAS 121). SFAS 121 requires that (i) long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and (ii) long-lived assets and certain identifiable intangibles to be disposed of generally be reported at the lower of carrying amount or fair value less cost to sell. The Company adopted SFAS 121 in 1995 and reviewed the carrying value of its equipment considering residual values and release rates. This review resulted in a loss on revaluation related to one engine of $300,000 in 1995, which has been included in depreciation expense. There were no write-downs required during 1996. (f) Spare Parts Inventory The Company, through one or more of its subsidiaries, buys used aircraft spare parts for resale. This inventory is valued at the lower of cost or market value. Costs of such sales are specifically identified. (g) Loan Commitment and Related Fees To the extent that the Company is required to pay loan commitment fees in order to secure debt, such fees are amortized over the life of the related loan on a straight-line basis. (h) Maintenance Costs Maintenance costs under the Company's long-term leases are generally the responsibility of the lessees. Maintenance deposits in the accompanying balance sheet include refundable maintenance payments and certain non-refundable maintenance payments received from the lessees. If in the Company's opinion, it would not be economically advantageous to overhaul the engine the next time the life-limited parts need to be replaced, the maintenance fees are included in operating lease revenue. Major overhauls paid for by the Company are capitalized and depreciated over the estimated remaining useful life of the engine. (i) Interest Rate Hedge In 1996, the Company purchased an interest rate cap in order to hedge its exposure to increases in interest rates on a portion of its variable rate borrowings. The instrument minimizes the Company's exposure to interest rate fluctuations for a period of four years. The cost of this instrument is amortized on a straight-line basis over the four year period. (j) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in the tax rates is recognized in income in the period that includes the enactment date. (k) Property, Equipment and Furnishings Property, equipment and furnishings are recorded at cost and depreciated by the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. 35 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (l) Residual Sharing with Lenders Certain of the Company's credit agreements require the Company to share "residual proceeds" as defined in the agreements with the lenders upon sale of engines held for operating lease. The Company provides for its residual sharing obligation with respect to each engine by a charge or credit to income or expense, each period, sufficient to adjust the residual share payable at the balance sheet date to the amount that would be payable at that date if all engines under said agreements were sold on the balance sheet date at their net book values. Residual share payable totaled $1,199,279 and $476,526 as of December 31, 1996 and 1995, respectively. As of December 31, 1996 and 1995, a total of six and nine engines, respectively, with a net book value of $16,457,439 and $17,866,935, respectively, were subject to residual value arrangements (notes 4, 5 and 14). (m) Equipment Acquired for Resale The Company periodically engages in transactions involving the purchase and immediate resale of aircraft engines. Generally, the Company makes a contractual commitment to purchase specific assets for its own account for resale only after or concurrently with obtaining a firm order from a customer. All aircraft engines purchased by the Company for such transactions during 1996 and 1995 were sold in the year acquired. (n) Reclassifications Certain items in the consolidated financial statements of prior years have been reclassified to conform to the current year's presentation. (o) Management Estimates These financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (p) Per share information Per share information is computed using the weighted average number of common and diluted common equivalent shares outstanding. For primary and fully diluted earnings per share, common equivalent shares consist of the incremental shares issued upon the assumed exercise of diluted stock options, using the treasury stock method. 36 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (2) Aircraft Engines Held For Operating Lease At December 31, 1996, the Company owned 31 aircraft engines and related equipment with an aggregate original cost of $109,504,390. At December 31, 1995, the Company owned 31 aircraft engines with an aggregate original cost of $88,385,590. As of December 31, 1996, minimum future rentals under the noncancelable operating leases of these aircraft engines are as follows: 1997 ................................... $13,845,290 1998 ................................... 10,828,463 1999 ................................... 7,423,338 2000 ................................... 5,736,712 2001 ................................... 2,926,444 Thereafter ............................. 2,021,000 ----------------- $42,781,247 ================= Approximately 90% of these future rentals will be applied to service principal and interest payments on outstanding notes payable (notes 5 and 14). Contingent rentals included in operating lease revenue totaled $266,000, $362,000 and $145,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Certain of the Company's aircraft engines are leased and operated internationally. All leases relating to this equipment are denominated and payable in U.S. dollars. The Company leases its aircraft engines to lessees domiciled in seven geographic regions: United States, Canada, Mexico, Australia/New Zealand, Europe, South America and Asia. The tables below set forth geographic information about the Company's aircraft engines grouped by domicile of the lessee:
Region Years ended December 31, -------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Operating lease revenue: United States $5,295,084 $4,560,472 $4,851,286 Canada 1,291,000 1,080,000 964,666 Mexico 1,865,118 1,900,699 1,178,474 Australia/New Zealand 1,029,600 1,339,433 1,689,600 Europe 2,840,428 3,858,792 2,762,629 South America 530,000 308,316 716,575 Asia 889,208 723,018 1,472,704 -------------------------------------------------------- Total operating lease revenue $13,740,438 $13,770,730 $13,635,934 ========================================================
37 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (2) Aircraft Engines Held for Operating Lease (Continued)
Years ended December 31, -------------------------------------------------------------- Region 1996 1995 1994 - ------ ---- ---- ---- Operating lease revenue less depreciation, interest, spare parts interest and residual share: United States $2,405,061 $463,336 $275,681 Canada 548,769 301,039 185,746 Mexico 306,007 348,900 307,843 Australia/New Zealand 471,293 271,355 410,112 Europe 1,409,631 1,521,563 675,408 South America 185,297 77,569 82,059 Asia 339,545 185,196 125,121 Off-lease and other (60,711) (231,210) (105,484) -------------------------------------------------------------- Total operating lease revenue less depreciation, interest, spare parts interest and residual share $5,604,892 $2,937,748 $1,956,486 ============================================================== Years ended December 31, -------------------------------------------------------------- Region 1996 1995 1994 - ------ ---- ---- ---- Net book value of engines: United States $31,352,388 $24,138,266 $23,601,123 Canada 7,115,984 7,356,011 7,596,038 Mexico 13,441,445 9,255,029 9,506,072 Australia/New Zealand 5,509,070 5,706,410 9,332,036 Europe 30,051,738 19,056,190 16,921,539 South America 2,033,831 1,951,012 4,829,647 Asia 4,109,446 4,243,830 7,202,126 Off-lease 2,498,527 2,997,631 -- -------------------------------------------------------------- Total net book value of engines owned and on Capitol Lease $76,092,429 $74,704,379 $78,988,581 ==============================================================
38 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (3) Property, Equipment and Furnishings Property, equipment and furnishings consist of the following: As of December 31, ------------------------------ 1996 1995 ---- ---- Automobiles $140,297 $36,049 Computer equipment 186,272 93,726 Furniture and equipment 292,618 164,704 ------------------------------ 619,187 294,479 Accumulated depreciation (160,407) (86,695) ------------------------------ Net book value $458,780 $207,784 ============================== (4) Gain on Modification of Credit Facility In June 1995, the Company's primary credit facility was modified into a 10 year full payout loan. As part of this transaction, the residual sharing agreement was terminated. Furthermore, the lender agreed to acquire two engines from the portfolio, with a net book value of $5,724,045, as payment in full for the respective outstanding loan balance on each of the engines. The modification resulted in a net gain of $2,202,928. (5) Notes Payable and Accrued Interest Notes payable consisted of the following:
As of December 31, --------------------------------- 1996 1995 ---- ---- Notes payable with an interest rate of LIBOR plus 1%. Secured by aircraft engines and rental payments on leased aircraft engines. The loan requires quarterly payments in arrears, through June 30, 2005. This note is the result of the credit modification (notes 4 and 14). $44,221,306 $48,400,889 Notes payable with fixed interest rates ranging between 8% and 10%. Secured by aircraft engines and rental payments on leased aircraft engines. These notes mature in 1998 or are due upon the sale of the collateral property. 5,982,236 6,513,190 Notes payable with an interest rate of LIBOR plus 5%. Secured by aircraft engines and rental payments on leased aircraft engines. The notes mature in the year 2001 or are due upon the sale of the collateral property. 5,189,286 6,617,509 Notes payable for a spare parts purchase. Interest accrued at 8% on the unpaid balance. This note was secured by the spare parts. The note matured in August 1996. -- 1,332,641
39 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)
As of December 31, ------------------------------------- 1996 1995 ---- ---- Notes payable at an interest rate of 11.03%. Secured by aircraft engines. The notes mature on December 29, 2000. 3,128,943 3,360,000 Note payable at an interest rate of 11.68%. Secured by an aircraft engine. The note matures on December 31, 2001. This note and the preceding 11.03% notes are part of a $15 million secured term facility for the acquisition of engines. 2,368,242 -- Note payable at a fixed interest rate of 9.0%. Secured by aircraft engines and subordinated to the $3,128,943 note discussed above. -- 420,000 Notes payable with variable interest rate of LIBOR plus 1.5% secured by four engines. Fixed principal payments plus interest are made monthly, and the notes have maturity dates ranging from August 1996 through July 1997. 325,000 1,358,333 Note payable, secured by two engines. The note was noninterest bearing beginning August, 1996 at the Paris Interbanking Operations Rate plus 2% and was paid on December 30, 1996. -- 1,395,874 Capital line of credit extended to WASI not to exceed $1,000,000. Interest accrued at prime plus 1%, with repayment terms of interest only for 6 months. The loan was secured by all of the assets of WASI. This facility expired on October 31, 1996. -- 282,139 Capital line of credit extended to WASI for $3,000,000. Interest accrues at prime plus 1%, with repayment terms of interest only for 6 months. The loan is secured by all of the assets of WASI. This facility expires on October 31, 1997. 661,000 -- Notes payable to two employees of the Company ($25,000 of the notes at 8% interest). The remaining balance was noninterest bearing and both notes were paid on September 18, 1996. -- 50,000 Short-term bridge note with an interest rate of 7%. Secured by aircraft engines and spare parts purchased 12/31/96. The note matures on January 31, 1997 (note 14). 8,632,313 -- Note payable at a fixed interest rate of 7%. Secured by aircraft engines and spare parts. This note is subordinated to the bridge note discussed above and also to the permanent notes replacing the bridge note. The note matures on June 30, 2004. 1,830,538 -- ===================================== $72,338,864 $69,730,575 =====================================
40 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The Company also has a $15.0 million term facility for the acquisition of engines for lease. This term facility allows for an advance rate of 80% of fair market value of the equipment, not to exceed 100% of the purchase price. The facility is to be used for domestic lessees. Interest rate under this facility will be dependent upon the quality of the credit and the underlying collateral. As of December 31, 1996, no drawdowns had taken place under this facility. The fair value of the Company's long-term debt is estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company's debt is estimated by the Company to be $72,202,487 at December 31, 1996. The fair value of the interest rate cap as estimated by the financial institution providing the instrument is $266,257 at December 31, 1996. In accordance with three of the loan agreements, the Company must maintain certain net worth levels and, additionally, with respect to one of these loans, must maintain a certain current ratio and certain earnings levels. In addition, the Company must prepay loan amounts in the event a collateral engine is sold or otherwise disposed of. Repayment schedules as of December 31, 1996 for the notes payable for each of the next five years are presented below. A substantial amount of operating lease revenue is applied to the repayment of principal and interest. Principal outstanding at December 31, 1996 is repayable as follows: Year ---- 1997 ................................... $14,516,505 1998 ................................... 10,194,820 1999 ................................... 4,492,805 2000 ................................... 7,920,608 2001 ................................... 12,667,933 Thereafter ............................. 22,546,193 ----------------- Total .................................. $72,338,864 ================= As of December 31, 1996 and 1995, accrued interest in the amounts of $846,793 and $180,222, respectively, is included in notes payable and accrued interest. At December 31, 1996 and 1995, the Company held deposits in the amount of $13,600,204 and $11,320,617, respectively, consisting of bank accounts that are subject to withdrawal restrictions as per lease or loan agreements. The deposits received in prior years are reflected as a reduction of the note payable balance in accordance with the terms of the previous loan agreement (note 4). Certain lease agreements require prepayments to the Company for periodic engine maintenance. In addition, this account includes security deposits held. Substantially all of the deposits bear interest for the Company's benefits. In February 1997, the Company obtained a new credit facility for $41.5 million and repaid the $44.2 million existing note payable (note 14). In February 1997, the Bridge Loan noted in above was replaced with permanent financing in the amount of $11,010,875. This financing has an interest rate of 10.52% and has a maturity date of January 30, 2002 (note 14). 41 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (6) Income Taxes Federal State Total ------- ----- ----- December 31, 1996 Current $93,864 $25,256 $119,120 Deferred 1,580,360 276,991 1,857,351 -------------------------------------------------------- $1,674,224 $302,247 $1,976,471 ======================================================== December 31, 1995 Current $25,833 $7,066 $32,899 Deferred 1,670,220 509,161 2,179,381 -------------------------------------------------------- $1,696,053 $516,227 $2,212,280 ======================================================== December 31, 1994 Current $0 $5,600 $5,600 Deferred 612,877 178,682 791,559 -------------------------------------------------------- $612,877 $184,282 $797,159 ======================================================== The following is a reconciliation of the statutory federal income tax expense to the effective income tax expense: Years ended December 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- Statutory federal income tax expense $1,652,397 $1,864,914 $ 670,744 State taxes, net of federal benefit 298,307 340,710 121,626 Other 25,767 6,656 4,789 ------------------------------------ Effective income tax expense $1,976,471 $2,212,280 $ 797,159 ==================================== 42 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (6) Income Taxes (Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below: As of December 31, ---------------------------- 1996 1995 ---- ---- Deferred tax assets: Prepaid rent $ 511,466 $ 344,018 Residual sharing expenses 481,367 191,268 Uniform capitalization expenses 48,166 26,394 Other 7,462 2,403 Passive activity loss carryforwards 6,185,615 4,325,565 ----------- ---------- Total gross deferred tax assets 7,234,076 4,889,648 Less valuation allowances -- -- ----------- ---------- Net deferred tax assets 7,234,076 4,889,648 Deferred tax liabilities: Depreciation on aircraft engines (13,183,752) (8,981,973) ----------- ---------- Net deferred tax liability (5,949,676) (4,092,325) =========== ========== As of December 31, 1996 the Company has passive activity loss carryforwards totaling $17,706,748 for federal and $2,693,391 for state income tax purposes which have no expiration date and will be available to offset future passive revenue. (7) Supplementary Disclosures of Cash Flow Information During the years ended December 31, 1996 and 1995, the Company paid interest totaling $3,656,707 and $6,063,190, respectively. Income taxes paid were $31,552 and $13,218 for the years ended December 31, 1996 and 1995. During the years ended December 31,1996, 1995 and 1994, the Company made loans of $265,478, $165,635 and $19,600 to a Company shareholder. Repayments on such loans for the years ended December 31, 1996, 1995 and 1994 were $747,267, $57,691 and $773, respectively. The outstanding balance as of December 31, 1996 and 1995 were $0 and $481,789, respectively. (8) Dividends During the years ended December 31, 1996 and 1995, the Company paid dividends totaling $951,475 and $255,000 to a Company shareholder, respectively. 43 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (9) Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits and receivables. The Company places its cash deposits with financial institutions and other creditworthy issuers and limits the amount of credit exposure to any one party. Concentrations of credit risk with respect to lease receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across different geographic areas. As of December 31, 1996 and 1995, management believes the Company had no significant concentrations of credit risk. For the years ended December 31, 1996, the Company had one significant customer, Aerovias Mexico, S.A. de C.V., which accounted for approximately 14 % of lease revenue. The Company does not believe that the loss of this customer would have a material impact on its operations. (10) Commitments The Company has two leases for its office and warehouse space. The annual lease rental commitments are $123,408 and $124,692 and the leases expire on March 14, 1999 and May 31, 1998, respectively. Maturities of capital lease obligation as of December 31, 1996 are as follows: 1997............................................ $ 376,536 1998............................................. 376,536 1999............................................. 376,536 2000............................................. 376,536 2001............................................. 376,536 Thereafter....................................... $2,568,841 ----------- Net Minimum Lease Payments $4,451,521 Less: Amount Representing Interest (1,491,064) ----------- Present Value of Net Minimum Lease Payments $2,960,457 =========== (11) Related party transaction During 1996, the Company had a note payable to two employees of the Company, who were minority shareholders of a subsidiary of the company. This amount was repaid in September of 1996. (12) Security deposit and maintenance reserve In connection with the Bridge Loan (note 4) for the purchase of an engine and parts package, the Company recorded a liability for maintenance reserves and security deposits relating to such equipment and a corresponding receivable from the seller. These funds continued to be held by the seller until permanent financing was in place. Upon completion of permanent financing in February 1997, these funds were transferred from the seller to the new lender. 44 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (13) Accounting for Stock Based Compensation (SFAS 123) In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 encourages all entities to adopt a fair value based method of accounting for stock based compensation plans in which compensation cost is measured at the date the award is granted based on the value of the award and is recognized over the employee service period. However, SFAS 123 allows an entity to continue to use the method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), with pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. APB 25 requires compensation expense to be recognized over the employee service period based on the excess, if any, of the quoted market price of the stock at the date the award is granted or other measurement date, as applicable, over an amount an employee must pay to acquire the stock. SFAS 123 is effective for financial statements for fiscal years beginning after December 31, 1995. At December 31, 1996, the Company has two stock-based compensation plans and has issued warrants, which are described below. The Company applies APB 25 in accounting for its plans. According, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plan. Had compensation cost for the Company's two stock-based compensation plans and warrants been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to $2,398,699 and $.63, respectively. Employee Stock Purchase Plan Under the 1996 Stock Purchase Plan, the Company is authorized to issue up to 75,000 shares of its Common Stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, the employees may elect to have up to 10% of their annual base salary, to a maximum of $25,000 per year, withheld for the purchase of the Company's Common Stock. Purchase intervals are six months each, ending on January 31 and July 31. The purchase price is the lesser of 85% of the market price of the Common Stock at the beginning of each purchase interval or 85% of the market price of the Common Stock at the end of each purchase interval. The first stock purchase date was January 31, 1997; accordingly, the Company had sold no shares to employees under the plan through December 31, 1996. Under FASB Statement 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black Scholes model with the following assumptions for 1996: Dividend yield of zero; an expected life of 1.25 years; expected volatility of 84 percent; and weighted average risk-free interest rate of 6.22 percent. The weighted average fair value of those purchase rights granted in 1996 was $3.08. 1996 Stock Option/Stock Issuance Plan Under the 1996 Stock Option/Stock Issuance Plan, 525,000 shares of the Company's shares have been set aside to provide eligible persons with the opportunity to acquire a proprietary interest in the Company. The plan includes a Discretionary Option Grant Program, a Stock Issuance Program, and an Automatic Option Grant Program for eligible non-employee Board members. The fair value of each option grant was estimated on the date of grant using the Black Scholes option-pricing model with the following assumptions for 1996: weighted average risk-free interest rate of 6.22 percent; dividend yield of zero; expected life of 2.43 years, and volatility of 84 percent. 45 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) A summary of the status of the Company's Stock Option/Stock Issuance Plan as of December 31, 1996, and changes during the year then ended is as follows: 1996 ------------------------ Weighted Average Exercise Shares Price Outstanding at beginning of year 0 0 Granted 315,000 $8.00 Exercised 0 -- Forfeited 0 -- Outstanding at end of year 315,000 $8.00 Options exercisable at end of year 90,000 $8.00 Weighted-average fair value of options granted during the year $4.19 As of December 31, 1996, the 315,000 options outstanding under the Plan are all exercisable at $8.00 per share, and have a weighted average remaining contractual life of 9.71 years. The Company expects that approximately 90 percent of the non-vested options awarded at December 31, 1996 will eventually vest. Warrants In conjunction with the Offering, the Company sold five-year purchase warrants for $.01 per warrant covering an aggregate of 100,000 shares of Common Stock exercisable at a price equal to 130% of the initial public offering price. The warrants are exercisable commencing 24 months after the effective date of the Offering or earlier, but not earlier that 12 months after the effective date of this Offering, if and when the Company files a registration for the sale by the Company of shares of Common Stock or securities exercisable for, convertible into or exchangeable for shares of Common Stock (other than pursuant to a stock option or other employee benefit or similar plan, or in connection with a merger or an acquisition). The warrants' exercise price and the number of shares of Common Stock are subject to adjustment to protect the warrant holders against dilution in certain events. (14) Subsequent Events In February 1997, the Company obtained a new credit facility for $41.5 million to replace the existing note of $44.2 million. The transaction resulted in an extraordinary gain of approximately $2.9 million (pre-tax) (note 5). In February 1997, the Company's Bridge Loan was replaced with permanent financing in the amount of $11,010,875 (note 5). 46 EX-10.5 2 MULTI-TENANT LEASE EXHIBIT 10.5 STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This lease ("Lease"), dated for reference purposes only, February 4, 1997, is made by and between ATLAS METAL SPINNING COMPANY, a California corporation ("Lessor") and WILLIS AERONAUTICAL SERVICES, INC., a California corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2(a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 470 South Airport, located in the City of South San Francisco, County of San Mateo, State of California, with zip code 94080, as outlined on Exhibit __ attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): approximately 6,000 square feet, part of a larger office and warehouse building, situated on assessor's Parcel No.015-172-110 in addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements hereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2(b) Parking: Four (4) unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and None reserved vehicle parking spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6.) 1.3 Term:-0- years and six (6) months ("Original Term") commencing February 10, 1997 ("Commencement Date") and ending August 9, 1997 ("Expiration Date"). (Also see Paragraph 3.) 1.4 Early Possession: - - - - - - - - - - ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $2,100.00 per month ("Base Rent"), payable on the 10th day of each month commencing February 10, 1997 (Also see Paragraph 4.) [ ] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum - - - , attached hereto. 1.5(a) Base Rent Paid Upon Execution: $2,100.00 as Base Rent for the period February 10, 1997 through March 9, 1997. 1.6(b) Lessee's Share of Common Area Operating Expenses: - - - - - - - - percent ( %) ("Lessee's Share") as determined by [ ] prorata square footage of the Premises as compared to the total square footage of the Building or [ ] other criteria as described in Addendum___. 1.7 Security Deposit: $2,100.00 ("Security Deposit"). (Also see Paragraph 5.) 1.8 Permitted Use: Warehouse and distribution of aircraft engines and parts ("Permitted Use") (Also see Paragraph 6.) 1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10(a) Real Estate Brokers. The following real estate brokers(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [ ] __________________________represents Lessor exclusively ("Lessor's Broker"); [ ] _______________________represents Lessee exclusively ("Lessee's Broker"); or [ ] Poletti Realty represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.) 1.10 (b) Payment to Brokers. Upon the execution of this Lease by both Parties, Lessor shall pay to said Brokers(s) 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(s) (or in the event there is no separate written agreement between Lessor and said Brokers(s), the sum of $_______) for brokerage services rendered by said Broker(s) in connection with this transaction. 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by - - - - - - - - - - - - - - - - - - - - - - - - ("Guarantor"). (Also see Paragraph 37.) 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 52, and Exhibits - - - through - - - , all of which constitute a part of this Lease. Premises, Parking and Common Areas. 2.1 Letting. Lessor hereby lessee 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 and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b) 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, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems 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 non-compliance, 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 that any improvements (other than those constructed by Lessee or in Lessee's direction) on or in the Premises which have been constructed or installed by Lessor or with Lessor's consent or at Lessor's direction shall comply with if applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said warranties shall not apply to any Alterations or Utility installations (defined in Paragraph 7.2(a)) made or to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity the nature and extent of such non-compliance, take such action, at Lessor's expense, as may be reasonable or appropriate to rectify the non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable Laws (as defined in Paragraph 2.4). 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Broker(s) to satisfy itself with respect to the condition of a Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made each investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same date to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written presentations or warranties with respect to said matters other than as set forth in this Lease. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect it 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. Initials:__________ MULTI-TENANT--GROSS __________ American Industrial Real Estate Association 1993 2.6 Vehicle Parking. Lessee shall be entitled to use at no charge the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use ore parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein call "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice. In addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law. 2.7 Common Areas--Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas--Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use. In common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice. In addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas--Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas--Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 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 an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay in Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if 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. If 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 after the end of said sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder: provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences. If possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforeasid, 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 the period during which the Lessee would have otherwise 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 pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to 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 full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address state herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof. In addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of its Lease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Areas lighting facilities, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler directories. (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Any increase above the Base Real Property Taxes (as defined in Paragraph 10.2(b)) for the Building and the Common Areas. (vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1). (vii) The cost of insurance carried by Lessor with respect to the Common Areas. (viii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (ix) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Industrial Center. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall to be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same. Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12-month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as Indicated on said statement, Lessee shall be credited the amount of such over- Initials:__________ MULTI-TENANT--GROSS __________ American Industrial Real Estate Association 1993 -2- payment against Lessee's Share of Common Area Operating Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's 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 Lese (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 attorney's 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 therefore deposit monies 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 monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times boar the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5. 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 monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted use set forth in Paragraph 1.8, or any other legal use which is reasonable comparable thereto, and for not other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonable withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 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 potential 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 or by-products thereof. Lessee shall not engage in any activity in 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 Requirements (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, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance 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 therefor, including but not limited to the installation (and, at Lessor's option, 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 has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with 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 concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (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 damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) 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 consultants' and attorneys' 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, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean 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), now in effect or which may hereafter come into effect. 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 Requirements 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 Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") 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 inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultant in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance 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 by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to 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 such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expense 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 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations). 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion, of the Premises), including, without limiting the generality of the foregoing all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. 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. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligation on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection Initials:__________ MULTI-TENANT--GROSS __________ American Industrial Real Estate Association 1993 -3- systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving he Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace window, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions: Consent Required. The term "Utility Installments" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, the protection systems, communications 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 which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease, other than Utility Installments or Trade Fixtures "Lessee-Owned Alterations and/or Utility Installations" are deemed as Alterations and/or Utility Installations made by Lessor that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made by 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) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (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 Lesser in written term with 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 all 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 be in compliance with all Applicable Requirements. 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 $2,500.00 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. (c) Lien Protection. 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 mechanic's 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, than 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 the 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 attorneys' fees and costs in participating in such action if 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 and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations 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 Lesseed-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 the Premises and be surrendered with the Premises by Lessee. (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 that their Installation may have been consented to be Lessor.Lessor may require the removal at any time of all or any part of any 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, 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 herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the Alterations and 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 Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Leassee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lesee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lesee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. B.1 Payment of Premium Increases. (a) As used herein, the term "Insurance Cost Increase" is defined as any increase in the actual cost of the insurance applicable to the Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b). ("Required Insurance"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. "Insurance Cost Increase" shall include, but not be limited to requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, and/or a general premium rate increase. The term "Insurance Cost Increase" shall not, however, include any premium increases resulting from the nature of the occupancy of any other lessee of the Building. If the parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "Base Premium". If a dollar amount has not been inserted in Paragraph 1.9 and if the Building has been previously occupied during the twelve (12) month period immediately preceding the Commencement Date, the "Base Premium" shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the Commencement Date, assuming the most nominal use possible of the Building. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b). (b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 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 projecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) 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 occurence basis providing single limit coverage in an amount not less than $1,000,000 per occurence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement 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. 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. Lessor 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 any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), 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. Lessee-Owned Alterations and Utility installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flooded and/or earthquake unless required by a Lender or included in the Base Premium), 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 Building 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 loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver or 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. (b) Rental Value. Lessor shall also 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 any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the 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 co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income. Real Property Taxes. Insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period, Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increases in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. Initials: ED MA MULTI-TENANT-GROSS (c) American Industrial Real Estate Association 1993 -4- (d) Lessee's Improvements. Since Lessor is the Insuring Party, 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. 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. Trade Fixtures and Lessee-Owned Alterations and Utility installations in, an, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee 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 Policyholders Rating" of at least B+, V, or such other rating as may be required by Lender, 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. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except 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. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor 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 or damage to their 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. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for lessor's negligence and /or breach of express warranties. Lessee shall indemnity, 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, judgements, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, ommission or neglect of Lessee, its agents, contractors, employees or invitees, occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, ommission 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 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 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, 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 unless due to Lessor's negligence and/or breech of express warranty. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. 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 Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (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 fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Leasee-Owned Alterations and Utility Installations and Trade Fixtures, 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 occurence or discovery of a condition involving the presence of, or a contamination by a Hazardous Substance as defined in Paragraph 6.2(a), in, or under the Premises. 9.2 Premises Partial Damage--Insured Loss. If 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. In the event, however, that there is a shortage of 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 adequate assurance thereof within said ten (10) day period. Lessor 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 Lessor does not receive such funds or assurances within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurence of the damage or destruction. Unless otherwise agree, 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 earthquake shall 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. 9.3 Partial Damage--Uninsured Loss. If 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). 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 occurence is such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date 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 such commitment from Lessee. 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 after 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 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 will full 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 9.7. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition. Its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses 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 damage, destruction, repair, remediation or restoration. Initials: ED MA MULTI-TENANT -- GROSS (c) American Industrial Real Estate Association 1993 -5- (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the 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 Lender's 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 the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 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 remeditation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and 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 rediate such condition exceeds 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 said commitment by Lessee. 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 after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 Termination--Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and 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 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present of future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any increases in such amounts over the Base Real Property Taxes shall be included in the calculation of Common Area Operation Expenses in accordance with the provisions of Paragraph 4.2. 10.2 Real Property Tax Definitions (a) 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 industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, ????? drainage, or other improvement district thereof, leaned against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof. 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, fee, levy, assessment or change, or any increase therein, imposed by reason of events occuring, or changes in Applicable Law taking effect, during the term of this Lease including but not limited to a change in ownership of the Industrial Center 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. (b) As used herein, the term "Base Real Property Taxes" shall be the amount of Real Property Taxes, which are assessed against the Premises, Building or Common Areas in the calendar year during which the Lease is executed. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive employment of such other lessees. Notwithstanding Paragraph 10.1 hereof. Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2 the entirety of any increase in Real Property Taxes if asserted solely by reason of Alterations, Trade Fixtures or Utility installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed. Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination, thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and leveled upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, 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 property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 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, "assign") 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. (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 full execution and delivery 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. or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable 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 for the Premises to the greater of the then fair market rental value, if 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 rental 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 as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolecense, 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, (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 rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 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, nor (iii) after 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 any rent for 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 assignee or 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 under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. Initials: ED MA MULTI-TENANT--GROSS (c) American Industrial Real Estate Association 1993 -6- (d) In the event of any Default or Breach of Lessee's obligation under this Lease. Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (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 monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, 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. 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) Lease hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising form 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 the foregoing provision 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 such 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 under a sublease approved by Lessor 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 to 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 occurence 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" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified 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. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder 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 Requirements per Paragraph 6.3, (ii) the inspection , the maintenance and service contracts required under Paragraph 7.1(b). (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (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 (vii) 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 13.1(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 occurence of any of the following events: (i) the making by Lessee of any general arrangement or assignment or assignment for the benefit of creditors: (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 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 a 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 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If 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 assurances of 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 own 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 Premises 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 Lease 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 any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). 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 13.2. If termination of obtained through the provisional remedy of unlawful detainer. Lessor shall have the right to recover in such pro- Initials: ED MA MULTI-TENANT -- GROSS (c) American Industrial Real Estate Association 1993 -7- ceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 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 Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period 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 (2) 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 recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the Limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, shorts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this 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 case 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 Search (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Providor shall automatically be deemed deleted from this Lease and of no further force or ????, 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 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessees 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 deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 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 and 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 any Lender(s) whose name and address shall have been furnished to 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 portion of the Common Areas designated for Lessee's parking, 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 have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the 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 Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. 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 of 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 Lessee's Share of the leagal and other expenses incurred by lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Brokers' Fees. 15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the procuring cause of this Lease. 15.2 Additional Terms. Unless Lessor and Broker(s) have other wise agreed in writing. Lessor agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) granted under this Lease or any Option subsequently granted, or (b) if Lessee acquires any rights to the Premises or other premises in which Lessor has an interest, or (c) if Lessee remains in possession of the Premises with the consent of Lessor after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor hass an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions. Lessor shall pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect at the time of the execution of this Lease. 15.3 Assumption of Obligations. 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 an intended third party beneficiary of the provisions of Paragraph 1.10 and 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. 15.4 Representations and Warranties. 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 as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the comsummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) 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, and/or attorneys' fees reasonably incurred with respect thereto. 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. 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 a 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 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors 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 lendeer 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. In the event of a transfer of Leasor'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, 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 ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law. In addition to the potential 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. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Initials: ED MA MULTI-TENANT--GROSS An American Industrial Real Estate Association 1993 -8- 23. Notices. 23.1 Notice Requirements. 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 during normal business hours, 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 Date of Notice. 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 if 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 or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a 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 any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such 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 Default or Breach by Lessee of any provision hereof. 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 theewith, which such statments 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. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) (150%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. 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 lassee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. 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 ownershop 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, 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 Promises. 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 state, financing or refinancing of 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. Attorneys' Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as here-after defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' 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 attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in 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 Broker(s) shall be intended third party beneficiaires of this Paragraph 31. 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 additions to the Premises or to the Building, 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 eighty (180) 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 exterior of the Premises or the Building, 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 so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by lessor. 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 of the Building, and the right to install advertising signs on the Building, Including the roof, which do not unreasonably interfere with the conduct of Lessee's business: Lessor shall be entitled to all revenues from such advertising signs. 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' and 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, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(a), 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 calcualated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. 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 impositions by Lessor at the time of consent of such further or other conditions as the then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 Form of Guaranty. 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 such 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 required in Paragraph 18. Initials: ED MA MULTI-TENANT--GROSS (c) American Industrial Real Estate Association 1933 -9- 37.2 Additional Obligation of Guarantor. 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 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 statments of Guarantors 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 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 Lease, 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 involutarily 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. 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 separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inablility 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 (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable written rules and regulations provided to Lessee ("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 the Building and the Industrial Center and their invitees. 41. Security Measure. 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 the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably 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 of 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 was not legally required to pay under this 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 either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered 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 the Lease. As long as they do no 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, if 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 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 YOUR ATTORNEYS REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, 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 IN A STATE OTHER THAN CALIFORNIA, AND ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: South San Francisco, CA Executed at: South San Francisco, CA on: February __, 1997 on: February __, 1997 By LESSOR: By LESSOR: Atlas Metal Spinning Company Willis Aeronautical Services, Inc. a California corportion a California corportion By: /s/ Marion A. Adamis By: /s/ Edwin F. Dibbie Name Printed: Marion A. Adamis Name Printed: Edwin F. Dibbie Vice President Title: Title: By: By: Name Printed: Name Printed: Title: Title: Address: Address: Telephone: ( ) Telephone: ( ) Facsimile: ( ) Facsimile: ( ) BROKER: BROKER: Executed at: South San Francisco, CA Executed at: South San Francisco, CA on: on: By: By: Name Printed: Raymond Zapletal Name Printed: Title: Agent/Broker Title: Address: 333 El Camino Real Address: South San Francisco, CA Telephone: (415) 589-7300 Telephone: Facsimile: (415) 589-7327 Facsimile: NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write of call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777. Initials: ED MA MULTI-TENANT -- GROSS (c) American Industrial Real Estate Association 1993 49. RENT: Rent shall be paid in lawful money of the United States of America, at the following address: Atlas Metal Spinning Company, 470 South Airport Boulevard, South San Francisco, CA 94080, or at such other place as Lessor may designate in writing, free from all claims, demands, or set-offs against lessor of any kind or character whatsoever. Lessee understands that no monthly rental invoices will be sent to Lessee. 50. PREMISES: Premises are to be leased in an "AS IS" condition. 51. SHIPPING AND RECEIVING: Lessee is to have shipping and receiving priveleges and the use of the dock and ground level door. 52. OPERATIONS: Lessee understands that the hours of operations will coincide with Lessor's hours of operation, 7:30 A.M., through 3:30 P.M. excluding weekends and holidays. 53. Lessee shall have the right to extend lease on a month-to-month basis. -12- A481301 ENDORSED FILED In the office of the Secretary of State of the State of California SEP 11 1996 /s/ Bill Jones BILL JONES, Secretary of State AMENDED AND RESTATED ARTICLES OF INCORPORATION CHARLES F. WILLIS, IV and LYNN MAILLIARD certify that: ONE. They are the President and the Secretary, respectively, of WILLIS LEASE FINANCE CORPORATION, a California corporation. TWO. The Articles of Incorporation of this corporation are amended and restated in full to read as follows: . ARTICLE I The name of this corporation is WILLIS LEASE FINANCE CORPORATION (the "Corporation"). ARTICLE II The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the Practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. Any repeal or modification of the foregoing provisions of this Article II shall not adversely affect any right of indemnification or limitation of liability of an agent of this Corporation relating to acts or omissions occurring prior to such repeal or modification. ARTICLE IV The aggregate number of shares which the Corporation is authorized to issue is 25,000,000 shares, consisting of two classes, namely 20,000,000 shares herein designated shares of Common Stock and 5,000,000 shares herein designated shares of Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. Subject to the provisions of the laws of the State of California and of this Article IV, the Board of Directors is hereby authorized to fix and alter the terms, including any dividend right, dividend rate, conversion rights, voting rights, rights and terms of redemption (including any sinking fund provisions), redemption price or prices, and liquidation preferences, of any wholly unissued series of Preferred Stock, and the number of shares of Preferred Stock constituting any such series and the designation thereof, or all or any thereof; and to increase or decrease the number of shares of Preferred Stock of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of Preferred Stock of any series shall be so deceased, the shares of Preferred Stock constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of Preferred Stock of such series. Upon the filing of these amended and restated Articles of Incorporation, all outstanding Shares of Common Stock shall be subject to a 2,073.77133333333 for one stock split. ARTICLE V In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is authorized to make, alter or repeal any or all of the Bylaws of the Corporation; provided, however, that any Bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of Directors shall require the affirmative vote of a majority of the total number of Directors which the Corporation would have if there were no vacancies. In addition, new Bylaws may be adopted or the Bylaws may be amended or repealed by the affirmative vote of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least 66-2/3% Of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article V. ARTICLE VI Any action required or permitted to be taken by the shareholders of the Corporation must be effected at an annual or special meeting of shareholders of the Corporation and may not be effected by any consent in writing of such shareholders. 2. Special meetings of shareholders of the Corporation may be called only (i) by the Board of Directors, (ii) by the Chairman of the Board of Directors, (iii) by the President, or (iv) by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, upon not fewer than 10 nor more than 60 days' written notice to each shareholder entitled to vote thereat, Any request for a special meeting of shareholders shall be sent to the Chairman and the Secretary and shall state the purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock may be called in the manner and for the purposes provided in the resolutions of the Board of Directors providing for the issue of such stock. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice of meeting. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article VI. ARTICLE VI Subject to Corporations Code Section 212(a), the number of directors of this Corporation shall be fixed from time to time by the Bylaws or a bylaw amendment thereof duly adopted by the Board of Directors or by the shareholders. ARTICLE VII The Corporation reserves the right to amend, alter, change or repeal any provision contained in thee Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. **** THREE: The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the Board of Directors. FOUR: The foregoing amendment and restatement of the Articles of Incorporation of this Corporation were approved by the holders of the requisite number of shares in accordance with Sections 902 and 903 of the California Corporations Code; the total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment and restatement was 1,500 shares of Common Stock. The member of shares voting in favor of the foregoing amendment and restatement equaled or exceeded the vote required, such required vote being a majority of the outstanding of Common Stock. 3. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in these amended and restated articles are true and correct of our own knowledge; Date: September 11, 1996 /s/ Charles F. Willis ------------------------------ Charles F. Willis, IV President /s/ Lynn Mailliard ------------------------------- Lynn Mailliard Secretary 4. A481759 ENDORSED FILED In the office of the Secretary of State of the State of California SEP 24 1996 /s/ Bill Jones BILL JONES, Secretary of State CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF WILLIS LEASE FINANCE CORPORATION Charles F. Willis, IV and Lynn Mailliard certify that: 1. They are the President and the Secretary, respectively, of Willis Lease Finance Corporation, a California corporation. 2. Article V of the Amended and Restated Articles of Incorporation of this corporation is amended to read as follows: "In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is authorized to make, alter or repeal any or all of the Bylaws of the Corporation; provided, however, that any Bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of Directors shall require the affirmative vote of a majority of the total number of Directors which the Corporation would have if there were no vacancies. In addition, new Bylaws may be adopted or the Bylaws may be amended or repealed by the affirmative vote of at least a majority of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least a majority of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article V." l. 3. Article VI of the Amended and Restated Articles of Incorporation of this corporation is amended to read as follows: "For so long as the Corporation has a class of stock registered pursuant to the Securities Exchange Act of 1934, as amended, any action required or permitted to be taken by the shareholders of the Corporation must be effected at an annual or special meeting of shareholders of the Corporation and may not be effected by any consent in writing of such shareholders. Special meetings of shareholders of the Corporation may be called only (i) by the Board of Directors, (ii) by the Chairman of the Board of Directors, (iii) by the President, or (iv) by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, upon not fewer than 10 nor more than 60 days' written notice to each shareholder entitled to vote there at. Any request for a special meeting of shareholders shall be sent to the Chairman and the Secretary and shall state the purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock may be called in the manner and for the purposes provided in the resolutions of the Board of Directors providing for the issue of such stock. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice of meeting. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least a majority of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article VI." 4. The foregoing amendment of the Amended and Restated Articles of Incorporation of this corporation has been duly approved by the Board of Directors. 5. The foregoing First Amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code; the total number of outstanding shares of the corporation is 3,110,657; the number of shares voting in favor of the amendment equaled or exceeded the vote required; and the percentage vote required was more than 66-2/3%. 2. The undersigned declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of their own knowledge. Executed at San Francisco, California, on September 20, 1996. /s/ Charles F. Willis -------------------------------- Charles F. Willis, IV, President /s/ Lynn Mailliard -------------------------------- Lynn Mailliard, Secretary 3. EX-10.6 3 SECOND ADDENDUM TO LEASE EXHIBIT 10.6 818 FIFTH AVENUE ROBERT H. GREENE REAL ESTATE, INC / (415) 456-5323 FAX 456-1531 SECOND ADDENDUM TO LEASE SAN RAFAEL, CA 94901 Dated February 21, 1992 between Harbor Drive Associates, Lessor and Charles F. Willis Company, Lessee for the premises at 180 Harbor Drive, Suite 200, Sausalito, California. It is agreed between the parties that the above referenced lease is to be amended and the Second Addendum to the original lease be incorporated as follows: 1. The lease term shall be extended for the period of one year commencing March 15, 1994 and terminating March 14, 1995. 2. The new monthly rental rate shall be $5,280 plus CAM at the same rate of $396 for a total of $5676.00 per month. 3. An additional security deposit of $165.00 to be paid to Lessor upon execution of this Addendum equal to one month's rent. All other terms and conditions of the above referenced Lease not in conflict with these terms shall remain in full force and effect during the term of this Lease. LESSEE: CHARLES F. WILLIS COMPANY Dated: 1-18-94 /s/ Charles F. Willis, President --------------------------------- By: Charles F. Willis, President LESSOR: HARBOR DRIVE ASSOCIATES Dated: 1-14-94 /s/ Robert B. Greene -------------------------------- By: Robert B. Greene, President JBNH CORP. COMMERCIAL AND INVESTMENT BROKERS / LEASING AND SALES / DEVELOPMENT / MANAGEMENT SPECIALISTS 818 FIFTH AVENUE ROBERT H. GREENE REAL ESTATE, INC / (415) 456-5323 FAX 456-1531 THIRD ADDENDUM TO LEASE SAN RAFAEL, CA 94901 Dated on or about February 21, 1992 between Harbor Drive Associates, Lessor and Charles F. Willis Company, Lessee for the premises at 180 Harbor Drive, Suite 200, Sausalito, California. It is agreed between the parties that the above referenced Lease is to be amended and the Third Addendum to the original Lease be incorporated as follows: 1. The Lease term shall be extended for a one year period commencing March 15, 1995 and terminating March 14, 1996. 2. The new monthly rental rate shall be increased 5 cents per square foot ( see Article 31 Option to Renew of the original Lease) over the last month's rent or $165.00 for a total monthly rental rate of $5,841.00 including CAM. 3. An additional security deposit of $165 to be paid upon the execution of this Third Addendum 4. Lessor at Lessor's sole expense will clean Lessee's carpet upon execution of this addendum. All other work done at Lessee's expense. All other terms and conditions of the above referenced Lease not in conflict with these terms shall remain in full force and effect during the term of this Lease. LESSEE: CHARLES F. WILLIS COMPANY Dated: 2-21-95 /s/ Charles F. Willis, President --------------------------------- By: Charles F. Willis, President LESSOR: HARBOR DRIVE ASSOCIATES -------------------------------- Dated: By: Robert B. Greene, President JBNH Corp., General Partner, Harbor Drive Associates COMMERCIAL AND INVESTMENT BROKERS / LEASING AND SALES / DEVELOPMENT / MANAGEMENT SPECIALISTS FOURTH ADDENDUM TO LEASE Lease dated on or about February 21, 1992 between HARBOR DRIVE ASSOCIATES, Lessor and CHARLES F. WILLIS COMPANY, Lessee for the premises at 180 Harbor Drive, Suite 200, Sausalito, California. It is agreed between the parties that the above referenced Lease shall be amended as follows: 1. Suite 204 existing of approximately 280 sq. ft. shall be added to the existing square footage of 3300. 2. The lease term shall be on a month-to-month basis effective December l, 1995. 3. The rental rate shall be $490.00 per month, including Common area maintenance and utilities. 4. Lessor shall waive the Security Deposit for this Suite. 5. Lessee to give Lessor 30 day written notice shall he intend to vacate this Suite. All other terms and conditions of the above referenced Lease not in conflict with these terms shall remain in full force and effect. LESSEE: CHARLES F. WILLIS COMPANY Date: 12-15-95 /s/ Charles F. Willis, President --------------------------------- By: Charles F. Willis, President LESSOR: HARBOR DRIVE ASSOCIATES Date: -------------------------------- By: Robert B. Greene, General Partner 818 FIFTH AVENUE ROBERT H. GREENE REAL ESTATE, INC / (415) 456-5323 FAX 456-1531 FIFTH ADDENDUM TO LEASE SAN RAFAEL, CA 94901 Dated on or about February 21, 1992 between Harbor Drive Associates, Lessor and Charles F. Willis Company, Lessee for the premises at 180 Harbor Drive, Suite 200, Sausalito, California. It is agreed between the parties that the above referenced Lease is to be amended and the FIFTH Addendum to the original Lease be incorporated as follows: 2. The lease term for Suite 200 (3300 sq. ft.) shal1 be extended for one year commencing March 15, 1996 and terminating March 14, 1997 3. The new monthly rental rate for Suite 200 shall be increased 5 cents per square foot ( see Article 31 Option to Renew of the original Lease) over the last month's rent or $165.00 for a monthly rental rate of $6,006.00 including CAM. 3. An additional security deposit of $165 to be paid upon the execution of this Addendum. 4. The total monthly rental rate for all Willis suites (200, 204) is $6,496.00. (6,006+490 = $6,496.00). All other terms and conditions of the above referenced Lease not in conflict with these terms shall remain in full force and effect during the term of this Lease. LESSEE: CHARLES F. WILLIS COMPANY Dated: 2-26-96 /s/ Charles F. Willis, President --------------------------------- By: Charles F. Willis, President LESSOR: HARBOR DRIVE ASSOCIATES Dated: 3-4-96 /s/ Robert B. Greene -------------------------------- By: Robert B. Greene, President JBNH Corp. General Partner, Harbor Drive Associates COMMERCIAL AND INVESTMENT BROKERS / LEASING AND SALES / DEVELOPMENT / MANAGEMENT SPECIALISTS 818 FIFTH AVENUE BERT H. GREENE REAL ESTATE, INC / (415) 456-5323 FAX 456-1531 SAN RAFAEL, CA 94901 SIXTH ADDENDUM TO LEASE Dated on or about February 21, 1992 between Harbor Drive Associates, Lessor and Charles F. Willis Company, Lessee for the premises at 180 Harbor Drive, Suite 200, Sausalito, California. It is agreed between the parties that the above referenced Lease is to be amended and the SIXTH Addendum to the original Lease be incorporated as follows: 1. Suite 204A consisting of approximately 420 sq. ft. shall be added to the existing lease. The lease term for suite 204A shall begin when Lessee vacates suite 204 and run consecutively with the lease term of Suite 200 which terminates March 14, 1997. 2. The monthly rental rate for suite 204A shall be $1.82 per sq. ft. or $$764.40 per month. 3. An additional security deposit of $764.40 to be paid to Lessor upon the execution of this Addendum to equal one month's rent. 4. The total monthly rental rate for all Willis Co. suites is now $6,770.40. All other terms and conditions of the above referenced Lease not in conflict with these terms shall remain in full force and effect during the term of this Lease. LESSEE: CHARLES F. WILLIS Dated: 6-17-96 /s/ Charles F. Willis, President --------------------------------- By: Charles F. Willis, President LESSOR: HARBOR DRIVE ASSOCIATES Dated: 6-17-96 /s/ Robert B. Greene -------------------------------- By: Robert B. Greene, President JBNH Corp. General Partner, Harbor Drive Associates COMMERCIAL AND INVESTMENT BROKERS / LEASING AND SALES / DEVELOPMENT / MANAGEMENT SPECIALISTS 818 FIFTH AVENUE BERT H. GREENE REAL ESTATE, INC / (415) 456-5323 FAX 456-1531 SAN RAFAEL, CA 94901 SEVENTH ADDENDUM To the Lease dated on or about February 21, 1992 by and between HARBOR DRIVE ASSOCIATES, Lessor and CHARLES F. WILLIS CO., Lessee for the premises at 180 Harbor Drive, Suite 200, Sausalito, CA. It is agreed between the parties that the Lease shall be amended as follows: 1. Suite 204 consisting of approximately 280 sq. ft. shall be added to the exiting Lease. The Lease term shall begin on February 1l, 1997 and run consecutively with the Lease for suite 200. 2. The monthly lease rate for Suite 204 shall be $1.87 sq. ft. or $523.60 per month. 3. An additional security deposit of $523.60 to be paid to Lessor upon execution of this Seventh Addendum to equal one month's rent. 4. The total monthly rental rate for all Willis Co. suites including suites 200,205-207, 204A and 204 is now $10,284. Suites 200 and 204A are due for a 5 cents a sq. ft. increase effective March 15, 1997. All other terms and conditions of the above referenced Lease not in conflict with the terms of this Seventh Addendum shall remain in full force and effect during the term of this Lease. LESSEE: CHARLES F. WILLIS COMPANY Dated: FEB. 14, 1997 By: /s/ Charles F. Willis, President --------------------------------- Charles F. Willis, President LESSOR: HARBOR DRIVE ASSOCIATES Dated: FEB. 14, 1997 By: /s/ Robert B. Greene -------------------------------- Robert B. Greene, General Partner COMMERCIAL AND INVESTMENT BROKERS / LEASING AND SALES / DEVELOPMENT / MANAGEMENT SPECIALISTS EX-10.16 4 EXHIBIT 10.16 EXHIBIT 10.16 MASTER LOAN AND SECURITY AGREEMENT [ * ] 1.0 PARTIES, COLLATERAL AND OBLIGATIONS 1.1 This Agreement is dated as of January 28, 1997. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Willis Lease Finance Corporation ("Willis") & Terandon Leasing Corporation ("Terandon"), as CoBorrowers (collectively referred to herein as "Debtor") with offices at 180 Harbor Drive, Suite 200, Sausalito, California 94965 intending to be legally bound, hereby promises to pay to [ * ] (hereinafter called "Secured Party"), any amounts set forth on any Schedule to Master Loan and Security Agreement hereunder (the "Schedule(s)", all the terms of which are incorporated herein) and Terandon hereby grants a security interest in and assigns, transfers and sets over to Secured Party and to the successors and assigns thereof, the property specified in the Exhibit "A" hereto regarding engines hereunder wherever located, and any and all proceeds thereof, insurance recoveries, and all replacements, additions, accessions, accessories and substitutions thereto or therefor (hereinafter called the "Collateral"). The security interest granted hereby is to secure payment of any and all liabilities or obligations of Debtor to the Secured Party, matured or unmatured, direct or indirect, absolute or contingent, under this Agreement (all hereinafter called the "obligations" and/or the "liabilities"). 1.2 Assignment and Security Interest. Terandon hereby collaterally assigns, transfers and sets over to Secured Party, and Secured Party hereby acknowledges and consents to and takes collateral assignment of, the aircraft engine lease agreements as fully described on Exhibit "A" hereto, (collectively, the "Leases") and all of Terandon's right, title and interest in and to the property leased pursuant to the Leases (hereinafter called the "Engines") and all rights, powers and remedies therein. Each lessee which is a party to each such Lease (as described in more detail on Exhibit "A") shall be referred to herein as a "Lessee." Should an Event of Default (as defined herein) occur and continue, and after all applicable cure periods, Secured Party shall have the right, either in its own name, or in Terandon's name, to notify each Lessee that Secured Party should thereafter be regarded by such Lessee as Lessor under each Lease and that Terandon shall no longer have any right title or interest in or to such Lease, except with respect to Terandon's rights to recover from each Lessee any payments arising from either the general or tax indemnity provisions of the Leases or payments pursuant to liability insurance proceeds. Thereafter, Secured Party may take any action under the provisions of the Leases as assignee of Terandon's interest in such Leases in accordance with the terms thereof and subject to the rights of each Lessee, and may release any rights against, grant extensions of time to, and compromise claims with, each Lessee and may repossess and resell or release the Engines which are the subject thereof. Terandon and/or Willis will reimburse Secured Party for all expenses of collection and repossession incurred by Secured Party in connection with enforcing its rights hereunder, including but not limited to, reasonable attorney's fees, court costs, expenses of repossession and sale and interest on overdue payments. Terandon agrees that Secured Party may, upon reasonable prior notice and at a reasonable time, audit Terandon's books and records relating to the Leases and the Engines. 1.3 Joint and Several Liability; Payment Terms. All obligations to make payments to Secured Party hereunder shall be considered as joint and several obligations of both Willis and Terandon regardless of the source of Collateral. The liability of Willis hereunder shall be limited to the obligation to make such payments in the event that Terandon fails to do so. Except insofar as Willis exercises control over Terandon, Willis shall have no obligations with respect to the Collateral. Interest shall be calculated on the basis of a 360-day year. All payments on any Schedule hereunder shall be made in lawful money of the United States at the post office address of the Secured Party or at such other place as the Secured Party may designate to Debtor in writing from time to time. In no event shall any Schedule hereunder be enforced in any way which permits Secured Party to collect interest in excess of the maximum lawful rate. Should interest collected exceed such rate, Secured Party shall refund such excess interest to Debtor. In such event, Debtor agrees that Secured Party shall not be subject to any penalties for contracting for or collecting interest in excess of the maximum lawful rate. 1.4 Late Charge. If any of the obligations remains overdue for more than ten (10) days, Debtor hereby agrees to pay on demand, as a late charge, an amount equal to the lesser of (i) One percent (1.0%) of each such overdue amount; or (ii) the maximum percentage of any such overdue amount permitted by applicable law as a late charge. Debtor agrees that the amount of such late charge represents a reasonable estimate of the cost to Secured Party of processing a delinquent payment and that the acceptance of any late charge shall not constitute a waiver of default with respect to the overdue amount or prevent Secured Party from exercising any other available rights and remedies. [ * ] - ------------- [ * ] Confidential Treatment Requested 2 2.0 WARRANTIES AND COVENANTS OF DEBTOR Debtor hereby represents, warrants and covenants that: 2.1 Business Organization Status and Authority. (i) Debtor is duly organized, validly existing and in good standing under the laws of the state of its incorporation; (ii) Debtor has the lawful power and authority to own its assets and to conduct the business in which it is engaged; and to execute and comply with the provisions of this Agreement and any related documents; (iii) the execution and delivery of this Agreement and any related documents have been duly authorized by all necessary action; (iv) no authorization, consent, approval, license or exemption of, or filing or registration with, any or all of the owners of Debtor or any governmental entity in the United States of America was, is or will be necessary to the valid execution, delivery, performance or full enforceability of this Agreement and any related documents, except for appropriate Federal Aviation Authority filings and Uniform Commercial Code filings. Except as specifically disclosed to Secured Party, Debtor utilizes no trade names in the conduct of its business and/or has not changed its name within the past five years. Secured Party is advised that Willis Lease Finance Corporation does business as The Willis Group and was formerly known as Charles F. Willis Company. 2.2 Merger; Transfer of Assets. Debtor will not consolidate or merge with or into any other entity, liquidate or dissolve, distribute, sell, lease, transfer or dispose of all of its properties or assets or any substantial portion thereof other than in the ordinary course of its business, unless Debtor shall advise Secured Party of such event, and the surviving, or successor entity or the transferee of such assets, as the case may be, shall, at the time of such event: 1) have a tangible net worth which is equal to or greater than that of Debtor; and, 2) assume, by a written instrument which is legal, valid and enforceable against such surviving or successor entity or transferee, all of the obligations of Debtor under this Agreement to Secured Party or any affiliate of Secured Party. 2.3 No Violation of Covenants or Laws. Except as previously disclosed, Debtor is not party to any agreement or subject to any restriction which materially and adversely affects its ability to perform its obligations under this Agreement and any related documents. The execution of and compliance with the terms of this Agreement and any related documents does not and will not (i) violate any provision of law, or (ii) conflict with or result in a breach of any order, injunction, or decree of any court or governmental authority or the formation documents of Debtor, or (iii) constitute or result in a default under any agreement, bond or indenture by which Debtor is bound or to which any of its property is subject, or (iv) result in the imposition of any lien or encumbrance upon any of Debtor's assets, except for any liens created hereunder or under any related documents. 2.4 Accurate Information. To the best of Debtor's knowledge, all financial information submitted to the Secured Party in regard to Debtor or any shareholder, officer director, member, or partner thereof, or any guarantor of any of the obligations thereof, was prepared in accordance with generally accepted accounting principles, consistently applied, and fairly and accurately depicts the financial position and results of operations of Debtor or such other person, as of the respective dates or for the respective periods, to which such information pertains. To the best of Debtor's knowledge, Debtor had good and valid title to all the properties and assets reflected as being owned by it on any balance sheets of Debtor submitted to Secured Party as of the dates thereof subject to the liens of lenders which financed specific assets and further subject to the Leases described in 1.2 above. 2.5 Judgments; Pending Legal Action. There are no judgments outstanding against Debtor, and there are no actions or proceedings pending or, to the best knowledge of Debtor, threatened against or affecting Debtor or any of its properties in any court or before any governmental entity which, if determined adversely to Debtor, would result in any material adverse change in the business, properties or assets, or in the condition, financial or otherwise, of Debtor or would materially and adversely affect the ability of Debtor to satisfy its obligations under this Agreement and any related documents. 2.6 No Breach of Other Agreements; Compliance with Applicable Laws. To the best of Debtor's knowledge: 1) Debtor is not in breach of or in default under any loan agreement, indenture, bond, note or other evidence of indebtedness, or any other material agreement or any court order, injunction or decree or any lien, statute, rule or regulation; 2) the operations of Debtor comply with all laws, ordinances and governmental rules and regulations applicable to them; and, 3) Debtor has filed all Federal, state and municipal income tax returns which are required to be filed and has paid all taxes as shown on said returns and on all assessments billed to it to the extent that such taxes or assessments have become due. Debtor does not know of any other proposed tax assessment against it. [ * ] - ------------- [ * ] Confidential Treatment Requested 3 2.7 Sale Prohibited. Except as to the interest in the Engines conveyed to the Lessees by virtue of the Leases and, subject to the reasonable approval of Secured Party any future leases, Debtor will not sell, dispose of or otherwise transfer the Collateral or any interest therein unless Debtor shall remit to Secured Party the pro rata share of the then principal balance attributable to that item of Collateral. All such future leases (along with all current Leases) shall be referred to herein as "Leases". All such future lessees (along with all current Lessees) shall be referred to herein as "Lessees". 2.8 Operation of Collateral. Within Thirty (30) days after the end of each calendar quarter, Debtor will provide to Secured Party the most recent report received by Debtor from each Lessee as to the operation of each Engine. 2.9 Perfection of Security Interest. Except for (i) the security interest granted hereby and (ii) the interest conveyed to Lessees by virtue of the Leases and any documents relating thereto, Debtor is, to the best of its knowledge, the owner of the Collateral free from any adverse lien, security interest or encumbrance. Debtor will defend the Collateral against all claims and demands of all persons at any time claiming any interest therein. At the request of Secured Party, Debtor will execute, acknowledge and deliver to Secured Party in recordable or fileable form, any document or instrument reasonably required by Secured Party to further the purposes of this Agreement, or to perfect its interest in the Collateral or to maintain such perfected interest in full force and effect, including (without limitation) any financing statements and any amendments and continuation statements thereto pursuant to the Uniform Commercial Code, in form satisfactory to Secured Party, and will pay the cost of filing the same or filing or recording this Agreement in all public offices wherever filing or recording is deemed by Secured Party to be reasonably necessary. Debtor hereby agrees that this Agreement shall be and constitute a financing statement for purposes of the Uniform Commercial Code. 2.10 Insurance. At its expense, Debtor shall maintain or shall require each Lessee to maintain, in force, at all times from delivery of the Engines to Debtor and each Lessee until surrender thereof, insurance of types or amounts as required under each Lease, protecting Secured Party, as an additional insured, or loss payee, or both at the option of the Secured Party, and providing for Thirty (30) days advance written notice to Secured Party of modification or cancellation; provided however, that if any notice period specified above is not commercially available, such policies shall provide for as long a period of prior notice as is then commercially available. Debtor shall within Thirty (30) days of the date hereof for Leases to domestic Lessees and within Sixty (60) days of the date hereof for foreign Lessees (and, in each case, annually thereafter) deliver to Secured Party satisfactory evidence of such insurance coverage. In the event Debtor fails to provide satisfactory evidence of coverage within ten (10) days of a written request thereof by Secured Party, then Secured Party may, at Secured Party's option, in addition to any other rights available to Secured Party, obtain coverage, and any sum paid therefor by Secured Party shall be immediately due and payable to Secured Party by Debtor. Without limitation of the insurance provisions set out in the preceding paragraph, it is agreed that Debtor will carry or cause to be carried at its own or at each Lessee's expense: (a) Comprehensive Airline liability (including, without limitation, passenger legal liability) insurance and property damage insurance (exclusive of manufacturer's product liability insurance) with respect to the Engines in an amount not less than $20,000,000 per occurrence; and, (b) Insurance against Loss or damage, consisting of all-risk hull insurance covering the Engines, and all-risk coverage of the Engines and parts while removed from any aircraft and not replaced by similar components. Such insurance shall at times while the Engines are subject to this Agreement be for not less than 41,500,000.00 in the aggregate for all Engines or a lesser amount equal to the then remaining balance due hereunder. Any policies carried in accordance with this section shall name the Secured Party as an additional insured, without imposing upon Secured Party any liability to pay premiums with respect to such insurance. If any material change shall be made in the insurance that adversely affects the interest of Secured Party, any cancellation or change shall not be effective as to the Secured Party for thirty (30) days after receipt by Secured Party of written notice by such insurer; provided, however, that if any notice period specified above is not commercially available, such policies shall provide for as long a period of prior notice as is then commercially available. Such insurance shall be primary without any right of contribution from any other insurance that is carried by the Secured Party. [ * ] - ------------- [ * ] Confidential Treatment Requested 4 Insurance payments for any property damage loss to the Engines will be applied in payment for repairs or for replacement property. All such insurance proceeds remaining after compliance with this section will be paid to the Debtor. During any period that any Engine is in storage and reasonable precautions have been taken to insure that the Engine will not be used or operated without the insurance required hereunder, Debtor may carry or cause to be carried, in lieu of the insurance otherwise required above, insurance otherwise conforming to that carried by Debtor or each Lessee for aircraft engines similar to the Engines in similar storage. Such insurance shall be in an amount equal to the lesser of the Initial Principal Balance allocated to such Engine as set forth on Exhibit "A" or the amount required pursuant to each Lease. 2.11 Use, Location and Maintenance of the Collateral. Debtor may use and operate, or permit the use and operation of, the Engines within and without the continental limits of the United States of America. Debtor agrees not to knowingly suffer the Engines to be maintained, used or operated in violation of any law or any rule, regulation or order of any domestic or foreign governmental authority having jurisdiction over the Engines or registration relating to the Engines issued by any such authority. Debtor also agrees not to suffer the Engines to be used or operated, in any area not fully covered by each insurance policy in effect with respect to the Engines and required by the terms hereof. At its own risk, Debtor shall use or permit the use of the Engines. Debtor shall not use or permit the use of the Engines in any unintended, injurious or unlawful manner and shall not change or alter or permit the change or alteration of the Engines (except pursuant to the Leases or future leases) without Secured Party's written consent which shall not be unreasonably withheld. Debtor, at its own cost and expense, shall comply (or cause each Lessee to comply) with all applicable service, maintenance, repair and overhaul regulations, directives and instructions of applicable governmental authority, and all applicable maintenance, service, repair and overhaul manuals and service bulletins published by the manufacturers of the Engines or the accessories, equipment and parts installed on the Engines. Debtor shall maintain (or cause each Lessee to maintain) all records, logs and other materials required by the aeronautics authority to be maintained in respect to the Engines after delivery, regardless of upon whom such requirements are, by their terms, normally imposed. Debtor shall comply (or cause each Lessee to comply) with all laws of the jurisdiction in which the Engines may be operated and within all rules of the FAA and other legislative, executive, administrative or judicial body exercising any power or jurisdiction over the Engines, to the extent that such laws and rules affect the operation, maintenance or use of the Engines. In the event that such laws or rules require the alteration of the Engines, Debtor shall conform or obtain conformance therewith at no expense of Secured Party, and shall maintain (or cause each Lessee to maintain) the Engines in proper condition for operation under such laws and rules; provided, however, that Debtor may in good faith contest, or permit the Lessees to contest, the validity and application of any such law or rule in any reasonable manner which does not adversely affect the Engines or rights of Secured Party hereunder, or to the Engines. No technical or non-substantial non-compliance with the provisions of this paragraph shall be deemed a material breach if Debtor shall have obtained, or caused to be obtained, from the appropriate authorities permissions, extensions or continuances. 2.12 Taxes and Assessments. Debtor will pay (or cause to be paid) promptly when due all taxes, assessments, levies, imposts, duties and charges, of any kind or nature, imposed upon the Collateral or for its use or operation or upon this Agreement or upon any instruments evidencing the obligations except for (i) taxes on Secured Party's net income, or (ii) taxes being contested in good faith. 2.13 Financial Statements. Debtor shall furnish to Secured Party, within sixty (60) days of the end of each calendar quarter, the Form 10Q submitted by Debtor to the Securities and Exchange Commission for that quarter. Debtor shall furnish Secured Party within one hundred twenty (120) days after the close of each fiscal year of Debtor, its financial statements (including, without limitation, a balance sheet, a statement of income and surplus account and a statement of changes in financial position) for the immediately preceding fiscal year, setting forth the corresponding figures for the prior fiscal year in comparative form, all in reasonable detail without any qualification or exception deemed material by Secured Party. Such financial statements shall be prepared at least as a review by Debtor's independent certified accountants and, if prepared as an audit, shall be certified by such accountants. Debtor shall also furnish Secured Party with any other financial information reasonably deemed necessary by Secured Party. Each financial statement submitted by Debtor to Secured Party shall be accompanied by a certificate signed by the chief executive officer, the chief operating officer or the chief financial officer of Debtor, certifying that (i) such financial statement was prepared in accordance with generally accepted accounting principles consistently applied and fairly and accurately presents the Debtor's financial condition and results of operations for the period to which it pertains, and (ii) that no Event of Default has occurred under this Agreement during the period to which such financial statement pertains. [ * ] - ------------- [ * ] Confidential Treatment Requested 5 3.0 EVENTS OF DEFAULT 3.1 The following shall be considered Events of Default: (i) failure on the part of Debtor to promptly perform in complete accordance with its representations, warranties and covenants made in this Agreement, including, but not limited to, the payment of any liability, with interest, when due; (ii) the dissolution of Debtor; (iii) the filing of any petition or complaint under the Federal Bankruptcy Code or other federal or state acts of similar nature, by or against Debtor; or an assignment for the benefit of creditors by Debtor; (iv) an application for or the appointment of a Receiver, Trustee or Conservator, voluntary or involuntary, by or against Debtor or for any substantial assets of Debtor; (v) insolvency of Debtor under either the Federal Bankruptcy Code or applicable principles of equity; (vi) entry of judgment, issuance of any garnishment or attachment, or filing of any lien, claim (which can be reasonably substantiated) or government attachment against the Collateral in excess of Five Million Dollars ($5,000,000.00) in the aggregate which remains undischarged, unvacated, unbonded, or unstayed for more than Thirty (30) days; (vii) a material misrepresentation of fact has been made by Debtor in this Agreement or in any writing supplementary or ancillary hereto; or (viii) bankruptcy, insolvency, termination, dissolution or default of any guarantor for Debtor. Upon an Event of Default resulting from a material misrepresentation by Debtor, Secured Party shall be entitled to exercise its remedies immediately. Upon an Event of Default resulting from the failure on the part of Debtor in regard to the payment of any liability arising hereunder when due, Secured Party shall give Debtor ten (10) days written notice and an opportunity to cure. Upon any other Event of Default as set forth herein, Secured Party shall give Debtor thirty (30) days written notice and an opportunity to cure. 4.0 REMEDIES 4.1 Upon the happening of any Event of Default which is not cured within the applicable grace period and at any time thereafter and subject to the Lessees' rights under the Leases: (i) all liabilities of Debtor shall, at the option of Secured Party, become immediately due and payable; (ii) Secured Party shall have and may exercise all of the rights and remedies granted to a secured party under the Uniform Commercial Code; (iii) should such Event of Default occur during the first year of this transaction Secured Party shall have the right, immediately, and without notice or other action, to set-off against any of Debtor's liabilities to Secured Party the Cash Collateral (as defined in the Schedule), and Secured Party shall be deemed to have exercised such right of set-off and to have made a charge against any such Cash Collateral immediately upon the occurrence of such Event of Default and the expiration of any applicable grace period, though actual book entries may be made at some time subsequent thereto; (iv) Secured Party may proceed with or without judicial process to take possession of all or any part of the Collateral; Debtor agrees that upon receipt of notice of Secured Party's intention to take possession of all or any part of said Collateral, Debtor will do everything necessary to make same available to Secured Party (including, without limitation, assembling the Collateral and making it available to Secured Party at a place designated by Secured Party which is reasonably convenient to Debtor and Secured Party); and so long as Secured Party acts in a commercially reasonable manner, Debtor agrees to assign, transfer and deliver at any time the whole or any portion of the Collateral or any rights or interest therein in accordance with the Uniform Commercial Code and without limiting the scope of Secured Party's rights thereunder; (v) Secured Party may sell the Collateral at public or private sale or in any other commercially reasonable manner and, at the option of Secured Party, in bulk or in parcels and with or without having the Collateral at the sale or other disposition, and Debtor agrees that in case of sale or other disposition of the Collateral, or any portion thereof, Secured Party shall apply all proceeds first to all costs and expenses of disposition, including reasonable attorneys' fees, and then to Debtors obligations to Secured Party; (vi) Secured Party may elect to retain the Collateral or any part thereof in satisfaction of all sums due from Debtor upon notice to Debtor and any other party as may be required by the Uniform Commercial Code. All remedies provided in this paragraph shall be cumulative. Secured Party may exercise any one or more of such remedies in addition to any and all other remedies Secured Party may have under any applicable law or in equity. 4.2 Expenses; Disposition. Upon the occurrence of an Event of Default and until same is cured, all amounts due and to become due hereunder shall, without notice, bear interest at the lesser of (i) twelve percent (12%) per annum or (ii) the maximum rate per annum which Secured Party is permitted by law to charge from the date such amounts are due until paid. Debtor shall pay all reasonable expenses of realizing upon the Collateral hereunder upon the occurrence of an Event of Default and the expiration of any applicable grace period and collecting all liabilities of Debtor to Secured Party, which expenses shall include reasonable attorneys' fees, whether or not litigation is commenced and whether incurred at trial, on appeal, or in any other proceeding. Any notification of a sale or other disposition of Collateral or of other action by Secured Party required to be given by Secured Party, will be sufficient if given personally, mailed, or delivered by facsimile machine or overnight carrier not less than five (5) business days prior to the day on which such sale or other disposition will be made or action taken, and such notification shall be deemed reasonable notice. [ * ] - ------------- [ * ] Confidential Treatment Requested 6 5.0 MISCELLANOUS 5.1 No Implied Waivers; Entire Agreement. The waiver by Secured Party of any default hereunder or of any provisions hereof shall not discharge any party hereto from liability hereunder and such waiver shall be limited to the particular event of default and shall not operate as a waiver of any subsequent default. This Agreement and any Schedule hereunder are non-cancelable. No modification of this Agreement or waiver of any right of any party hereunder shall be valid unless in writing and signed by an authorized officer of the parties hereto. No failure on the part of Secured Party to exercise, or delay in exercising, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy. This Agreement and any Schedule hereunder (a "Transaction") embody the entire agreement between the parties and supersede all prior agreements and understandings relating to the same subject matter. 5.2 Choice of Law. This Agreement and the rights of the parties hereto shall be governed by applicable Federal law and the laws of the State of California. Any action arising out of this Agreement may be litigated under the laws of California and submitted to the non-exclusive jurisdiction of the courts of such state, and that service of process by certified mail, return receipt requested, will be sufficient to confer personal jurisdiction over the Debtor. 5.3 Protection of the Collateral. At its option, upon the occurrence of an Event of Default and the expiration of any applicable grace period, Secured Party may discharge taxes, liens or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party on demand for any payment made or any expense incurred by Secured Party pursuant to the foregoing authorization. Any such payments made by Secured Party shall be immediately due and payable by Debtor and shall bear interest at the rate of Twelve percent (12%) per annum. Until the occurrence of an Event of Default and the expiration of any applicable grace period, Debtor may retain possession of the Collateral and use it in any lawful manner not inconsistent with the provisions of this Agreement and any other agreement between Debtor and Secured Party, and not inconsistent with any policy of insurance thereon. 5.4 Binding Agreement; Time of the Essence. This Agreement shall take effect as a sealed instrument and shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors and assigns. Time is of the essence with respect to the performance of Debtor's obligations under this Agreement. 5.5 Enforceability. Any term, clause or provision of this Agreement or of any evidence of indebtedness from Debtor to Secured Party which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining terms or clauses of such provision or the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such term, clause or provision in any other jurisdiction. 5.6 Notices. Any notices or demands required to be given herein shall be given to the parties in writing by facsimile with an original sent via Federal Express (or other recognized express carrier) or by United States first class mail (express, certified or otherwise) at the addresses set forth on page 1 of this Agreement or to such other addresses as the parties may hereafter substitute by written notice given in the manner prescribed in this paragraph via facsimile. 5.7 Discharge of the Agreement. This Agreement and the related Schedule and all agreements contained herein and therein shall cease and terminate when all the obligations of Debtor to Secured Party under the Agreement and the Schedule have been satisfied in full. Upon such termination and cessation of this Agreement and the Schedule, the Secured Party shall execute and deliver such instruments as shall be reasonably requested by Debtor (at Debtor's expense) to satisfy, discharge, release and clear the public record of the security interest granted to Secured Party in the Collateral under this Agreement and the Schedule. In addition, if an Engine is sold pursuant to Section 2.7 of the Agreement or if the loan is prepaid in part pursuant to Section 6 of the Schedule and the Schedule is terminated with respect to that Engine pursuant to Section 8 of the Schedule, then Secured Party shall execute and deliver such instruments as shall be reasonably requested by Debtor (at Debtor's expense) to satisfy, discharge, release and clear the public record of the security interest granted to Secured Party in such Engine and any related Lease. [ * ] - ------------- [ * ] Confidential Treatment Requested 7 6.0 ASSIGNMENT 6.1 UPON THIRTY DAYS PRIOR NOTICE TO DEBTOR, SECURED PARTY MAY SELL OR ASSIGN ANY AND ALL RIGHT, TITLE AND INTEREST IT HAS IN THE COLLATERAL AND/OR ARISING UNDER THIS AGREEMENT, SUBJECT TO AND IN ACCORDANCE WITH THE TERMS OF THE LEASES AND ANY RELATED DOCUMENTS. DEBTOR SHALL, UPON THE DIRECTION OF SECURED PARTY: 1) EXECUTE ALL DOCUMENTS REASONABLY NECESSARY TO EFFECTUATE SUCH ASSIGNMENT AND, 2) PAY DIRECTLY AND PROPERLY TO SECURED PARTY'S ASSIGNEE ALL AMOUNTS WHICH HAVE BECOME DUE UNDER THE ASSIGNED AGREEMENTS. SECURED PARTY'S ASSIGNEE SHALL HAVE ANY AND ALL RIGHTS, IMMUNITIES AND DISCRETION OF SECURED PARTY HEREUNDER AND SHALL BE ENTITLED TO EXERCISE ANY REMEDIES OF SECURED PARTY HEREUNDER. ALL REFERENCES HEREIN TO SECURED PARTY SHALL INCLUDE SECURED PARTY'S ASSIGNEE (EXCEPT THAT SAID ASSIGNEE SHALL NOT BE CHARGEABLE WITH ANY OBLIGATIONS OR LIABILITIES HEREUNDER OK IN RESPECT HEREOF). 6.2 NOTWITHSTANDING THE FOREGOING, SECURED PARTY SHALL NOT ASSIGN ITS INTEREST HEREUNDER PRIOR TO JUNE 1, 1998 AND, THEREAFTER, SHALL NOT ASSIGN ITS INTEREST HEREUNDER EXCEPT TO AN "INSTITUTIONAL" INVESTOR WHICH IS NOT A DIRECT COMPETITOR OF DEBTOR. IN THE EVENT THAT SECURED PARTY ASSIGNS ITS INTEREST HEREUNDER TO MORE THAN ONE SUCH INSTITUTIONAL INVESTOR, SECURED PARTY SHALL REMAIN RESPONSIBLE FOR SERVICING THIS AGREEMENT. 6.3 EXCEPT AS OTHERWISE SET FORTH IN THIS AGREEMENT, DEBTOR SHALL NOT ASSIGN OR IN ANY WAY DISPOSE OF ALL OR ANY OF ITS RIGHTS OR OBLIGATIONS UNDER THIS AGREEMENT OR ENTER INTO ANY AGREEMENT REGARDING ALL OR ANY PART OF THE COLLATERAL WITHOUT THE PRIOR WRITTEN CONSENT OF SECURED PARTY WHICH SHALL NOT BE UNREASONABLY WITHHELD. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day set forth above. [ * ] WILLIS LEASE FINANCE CORPORATION By: /s/ Charles F. Willis ----------------------------- An Authorized Officer Thereof TERANDON LEASING CORPORATION By: /s/ Charles F. Willis ----------------------------- An Authorized Officer Thereof [ * ] - ------------- [ * ] Confidential Treatment Requested Exhibit A To Master Loan and Security Agreement Dated as of January 28, 1997 Between Terandon Leasing Corporation and Willis Lease Finance Corporation as Debtor and [ * ] ENGINES Manufacturer Model No. and Manufacturer's Allocation of Initial - ------------ ---------------------------- --------------------- Serial No. Principal Balance and ---------- --------------------- Cash Collateral --------------- General Electric Model No. CF6-50C2 4.82% Serial No. 455423 Rolls Royce Model No. RB-211-535-E-4 8.01% Serial No. 30771 General Electric Model No. CF6-50C2 4.77% Serial No. 530114 Pratt & Whitney Model No. JT9D-7J 5.88% Serial No. 685971 Pratt & Whitney Model No. JT9D-7J 5.96% Serial No. P689462 General Electric Model No. CF6-80C2B6 10.16% Serial No. 695444 Pratt & Whitney Model No. JT9D-7R4D 5.83% Serial No. P709685 Pratt & Whitney Model No. JT8D-219 5.90% Serial No. P718262 CFM International Model No. CFM 56-3B-2 6.14% Serial No. 720190 CFM International Model No. CFM-56-3B2 3.65% Serial No. 721397 CFM International Model No. CFM 56-3C-1 4.68% Serial No. 725180 CFM International Model No. CFM-56-3B-2 3.14% Serial No. 725192 - ------------- [ * ] Confidential Treatment Requested Page 1 of 5 CFM International Model No. CFM-56-3B2 3.23% Serial No. 725557 CFM International Model No. CFM 56-5A3 10.09% Serial No. 731570 CFM International Model No. CFM-56-3C1 4.53% Serial No. 856173 (Previous Serial No. 620173) CFM International Model No. CFM-56-3C1 4.45% Serial No. 856256 General Electric Model No. CF6-50C2 4.84% Serial No. 455788 Pratt & Whimey Model No. JT8D-219 3.91% Serial No. P718210D [THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK] Page 2 of 5 (Pages 3, 4 and 5 of 5) [ * ] - ------------- [ * ] Confidential Treatment Requested SCHEDULE TO MASTER LOAN [ * ] AND SECURITY AGREEMENT Willis Lease Finance Corporation & Terandon Leasing Corporation 180 Harbor Drive, Suite 200 Sausalito, California 94965 $41,500,000.00 Effective Date ______________ Loan Transaction Number 1. THIS SCHEDULE is made between Willis Lease Finance Corporation & Terandon Leasing Corporation, as Co-Debtors, (referred to herein as "Debtor") and [ * ] (which, together with its successor and permited assigns, will be called the "Secured Party") pursuant to the Master Loan and Security Agreement dated as of January 28, 1997 (the "Loan Agreement"), the terms of which (including the definitions) are incorporated herein. If any terms hereof are inconsistent with the terms of the Loan Agreement, the terms hereof shall prevail. 2. FOR VALUE RECEIVED, Debtor hereby promises to pay to the order of Secured Party the principal amount of Forty-One Million, Five Hundred Thousand and 00/100 Dollars ($41,500,000.00) with interest on any outstanding principal balance at the rate(s) specified herein from the Effective Date hereof until this Schedule shall have been paid in full, in accordance with the following payment schedule: Eleven (11) installments of $520,705.65 each, including the entire amount of interest accrued on this Schedule at the time of payment of each installment, followed by one installment of approximately $38,104,879.49 (the "Final Installment"), including the entire amount of interest accrued on this Schedule at the time of payment of such Final Installment (this Twelve (12) month period shall be referred to herein as the "Initial Term"). The first payment shall be due on April 1, 1997 and a payment shall be due on the same day of each succeeding month thereafter until the entire principal and interest have been paid. The Final Installment shall be due on March 1, 1998. At the time of the Final Installment hereon, all unpaid principal and interest shall be due and owing. Each payment shall be applied first to accrued and unpaid interest, and the balance to the outstanding principal hereof. Simultaneously with and in addition to the first installment due hereunder, Debtor shall pay per diem interest in the total amount of $65,372.63, based upon per diem interest of $7,263.63 per day from February 20, 1997 through, and including, February 28, 1997. 3. EXTENDED TERM OPTION. Debtor may elect to pay the Final Installment over a 72 month term (the "Extended Term"). Debtor shall notify Secured Party in writing of such election not less than Thirty (30) days prior to the date on which such Final Installment is due. In connection with such notification, Debtor shall pay to Secured Party a fee in the amount of .625% of the amount of the Final Installment. The first payment due during the Extended Term shall be due on March 1, 1998 and a payment shall be due on the same day of each succeeding month thereafter until the entire principal and interest have been paid. The final installment during the Extended Term shall be due on February 1, 2004. 4 [ * ] 5 FLOATING RATE ADJUSTMENTS. During the Extended Term, Secured Party may, from time to time, increase or decrease the amount of unpaid installments to an amount Secured Party deems necessary to amortize the outstanding principal balance of this Schedule by the due date of the last installment. Secured Party shall notify Debtor of each such change in writing. Whether or not the installment amount is increased or decreased, Debtor understands that, as a result of increases or decreases in the rate of interest in accordance herewith, the Final Installment and/or the last installment due during the Extended Term may be substantially more or substantially less than the amount originally estimated. - ------------- [ * ] Confidential Treatment Requested 6. PREPAYMENT. This Schedule may be prepaid in whole or in part at any time without penalty. In connection with partial prepayments, Debtor shall remit to Secured Party the pro rata share of the then principal balance attributable to the item of Collateral with respect to which this Schedule is being prepaid. Upon receipt of such partial prepayment, Secured Party shall remit to Debtor a portion of the Cash Collateral (as defined in Paragraph 9) equal to the percentage reduction in the then outstanding principal balance. 7. COLLATERAL DESCRIPTION. The following property is hereby made Collateral for all purposes under the Loan Agreement: Those certain Aircraft Engine Lease Agreements between Terandon Leasing Corporation as Lessor and various Lessees (the "Lessees") all more particularly described on Exhibit "A" attached to the Loan Agreement (the "Leases"), and related schedules, documents, and proceeds thereof, including but not limited to, all rents, engine reserve payments, security deposits and all other sums whatsoever payable by Lessees to Lessor in regard to the following Aircraft Engines and subject to the rights of the Lessees under such Leases. Eighteen (18) Aircraft Engines as more particularly described on Exhibit "A" (the "Engines") complete as equipped including, but not limited to, all accessories, improvements, components, furnishings, substitutions, additions, replacements, parts, tools, equipment, and books and records now or hereafter affixed to or used in connection with such Engines. As well as all income, rents, lease payments, rates, fees, accounts receivable, and proceeds (including any recoveries from physical damage insurance), whether now existing or hereafter arising, plus any and all interest in such Engines whether or not such Engines are or may be construed as inventory of Terandon Leasing Corporation. 8. ALLOCATION OF INITIAL PRINCIPAL BALANCE. Debtor and Secured Party agree that, for purposes of this Schedule and the Loan Agreement, each of the Engines shall be valued at the amount set forth on Exhibit "A" and that, Debtor may terminate this Schedule with respect to any Engine by paying to Secured Party an amount equal to the proportionate share of that Engine to the total amount advanced hereunder multiplied by the then outstanding principal balance of this Schedule. 9. CASH COLLATERAL. As additional collateral security for this transaction, Debtor hereby pledges to Secured Party all of Debtor's right, title and interest in and to the amounts deposited in an account titled Terandon Leasing Corporation Maintenance Reserve Deposit Account, Account Number 750-46051-2, located at Marine Midland Bank, Buffalo, New York, ABA Number 021-001-088 (the "Account"). Immediately following funding by Secured Party in the amount of $41,500,000, Debtor shall deposit with (or cause to be deposited with) Secured Party the sum of Eight Million Dollars ($8,000,000) to be held by Secured Party as additional collateral security for this transaction during the Initial Term (the "Cash Collateral"). Upon receipt of the Cash Collateral by Secured Party, Secured Party shall advise Marine Midland Bank that Secured Party has no further interest in the Account and Debtor's pledge of such Account to Secured Party shall terminate without any other or further action on the part of Debtor or Secured Party. The Cash Collateral is pledged by Debtor to Secured Party as security for all Debtor's obligations during the Initial Term under the Loan Agreement and this Schedule. In the event that, during the Initial Term, an Event of Default should occur and continue beyond any applicable grace period, Secured Party may apply the Cash Collateral to cure any such Event of Default, and upon such application, Debtor shall immediately restore to Secured Party the full value of such Cash Collateral. At the end of the Initial Term, Secured Party shall apply the Cash Collateral against the Final Installment unless Debtor elects to extend the term hereof. At the commencement of the Extended Term, Secured Party shall have the option to either reduce the opening principal balance of the Extended Term by the amount of the Cash Collateral or to transfer such amount to an account in the name of Debtor, to be pledged by Debtor to Secured Party and held by Secured Party as an Engine Reserve. 3 10. ENGINE RESERVES. During the Initial Term, Debtor shall collect and use engine reserve payments from each Lessee in accordance with the terms and conditions of each Lease and Debtor shall provide to Secured Party, on a quarterly basis, an accounting of all receipts and disbursements in this regard. As set forth above, at the commencement of the Extended Term, the Cash Collateral may, at the option of Secured Party, be combined with such engine reserve payments. The share of the Cash Collateral which has been remitted to Debtor by each Lessee is set forth on Exhibit "A." The total of the Cash Collateral and any engine reserve payments collected by Debtor during the Initial Term but not used by Debtor shall be referred to herein as the "Engine Reserve." The Engine Reserve shall be allocated among the Engines and the Leases subject to the rights of the Lessees under the Leases. Such Engine Reserve shall be held at [ * ] and shall be pledged in support of Debtor's obligations hereunder. At least Thirty (30) days prior to the end of the Initial Term, Debtor and Secured Party shall enter into an Engine Reserve Agreement which shall specify the terms and conditions governing the use of such Engine Reserve. 11. ENGINE APPRAISAL. On of before each anniversary date of the Extended Term, Debtor shall provide to Secured Party, at Debtor's sole expense, an appraisal of the Engines conducted by a qualified appraiser reasonably acceptable to Secured Party. In the event that such appraisal indicates that the total "Half Life Liquidation Value" of the Engines is less than the then outstanding principal balance hereunder, Debtor shall remit to Secured Party an amount necessary to reduce the then outstanding principal balance to such appraisal value. 12. [ * ] 13. PAY PROCEEDS INSTRUCTIONS. Debtor hereby instructs and authorizes Secured Party to disburse the proceeds to be funded hereunder as follows: $41,500,000.00 to Marine Midland Bank, Buffalo, New York, ABA Number 021-001-088 IN WITNESS WHEREOF, Debtor has executed this Schedule as of the 28th day of January, 1997. [ * ] WILLIS LEASE FINANCE CORPORATION By: /s/ Charles F. Willis ----------------------------- An Authorized Officer Thereof TERANDON LEASING CORPORATION By: /s/ Charles F. Willis ----------------------------- An Authorized Officer Thereof - ------------- [ * ] Confidential Treatment Requested EX-10.17 5 EXHIBIT 10.17 EXHIBIT 10.17 The Pacific Bank National Association November 6, 1996 Willis Aeronautical Services, Inc. c/o Willis Lease Finance Corp. 180 Harbor Drive, Suite 200 Sausalito, CA 94965 Mr. Charles F. Willis, IV President Re: Line of Credit Dear Mr. Willis, IV This letter supersedes our previous letters dated September 6, 1996, and September 26, 1996. We are pleased to advise that The Pacific Bank, N.A. ('Bank') has approved credit facilities to Willis Aeronautical Services, Inc. ("Borrower" in the amount of $3,000,000. The credit facilities, as set forth below, shall be subject to the terms and conditions of this letter ("Letter Agreement") and other usual Bank documentation. AVAILABILITY 3,000,000 Line of Credit (a) (3,000,000) Within the overall line of credit, up to $3,000,000 is available to finance the acquisition ("Projects") of used aircraft engines and spare parts: cash advances are available up to 80% of the purchase cost of the engines and aeronautical spare parts, and prior to disbursement, each Project is to be supported by a copy of the seller's invoice and/or purchase contract, schedule of proposed Cash Requirement (Exhibit A), Transaction Cash Flow (Exhibit B), and a Net Sales Revenue (Exhibit C) projection, as applicable, for the engines or aeronautical spare parts being financed. Interest to be paid monthly and principal to be repaid periodically upon collection of accounts receivable from the sale of engines or aeronautical spare parts, with all remaining principal for each Project, and accrued interest, to be paid in full 180 days from date of initial disbursement for each Project. A 90-day renewal 351 California Street San Francisco, CA 94104 (415) 576-2700 Fax: (415) 421-2007 Telex: 6771223 Willis Aeronautical Services, Inc. November 6, 1996 Page 2 of the remaining principal balance, if any, for each Project is available at the Bank's discretion. (b) (5OO,OOO) Within the overall line of credit, a sub-limit of $500,000 is available for cash advances for operating expenses on a revolving Promissory Note, subject to a Borrowing Base against Eligible Accounts Receivable and Eligible Inventory. Interest to be paid monthly, with principal due at the expiry of the line of credit. Borrowing Base: Total outstandings under Sub-facility (b) shall not exceed the lesser of $500,000.00 or a Borrowing Base formula of 80% of Eligible Accounts Receivable plus 25% of Eligible Inventory. Eligible Accounts Receivable: Shall be defined as receivables of not more than 90 days from invoice date. Contra accounts, intercompany accounts, U.S. government accounts, consignment accounts, and CODs are not eligible for advances and the otherwise eligible portion of accounts receivable from any account debtor whose account aging reflects 20% or more of the total account balance unpaid and outstanding more than 90 days from invoice date. Any account concentrations over 25% at any one time will be excluded unless pre-approved by Bank. Any accounts receivable which have been specifically identified as supporting advances under Facility (a) will be excluded. Ineligible accounts shall also be deemed to include account debtors who have filed petitions for bankruptcy under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts, and account debtors who have suffered material adverse deterioration in their financial condition and creditworthiness based on Bank's receipt of bank, trade, or commercial credit reports. Eligible Inventory: Shall be defined as aeronautical spare parts available for sale, not consigned, not obsolete, and where applicable with the appropriate documentation supporting FAA acceptance requirements. Any inventory which has been specifically identified as supporting advances under Facility (a) will be excluded. $3,000,000 Total Available - The aggregate outstandings under both tranches (a) and (b) shall not exceed $3,000,000. Willis Aeronautical Services, Inc. November 6, 1996 Page 3 Interest Rate: The Pacific Bank's Guidance Rate plus 1.00% per annum, on a daily floating basis. Facility Fee: A fee of $3,000 (equal to 0.10% of the commitment amount) shall be due and payable upon acceptance of the commitment. Expiration Date: October 31, 1997 Project Transaction Fee: $500.00 per Project under facility (a). Minimum Advance: $100,000.00 This Agreement is made with the understanding that the terms of our financial facilities are available to Borrower based upon all the terms and conditions of the Bank's usual documentation, the content of which must be in form and content satisfactory to Bank, Borrower, and Guarantor, and this letter is supplemental to such terms. The Bank's "Guidance Rate" is that rate of interest determined by the Bank from time to time and advised to Borrower. The effective date of any change in the Guidance Rate will be the date of its change, and interest will be charged on a 360-day annual basis for the days actually elapsed. Our extension of credit to Borrower shall be subject to the following terms and conditions: 1. Security Agreement and Uniform Commercial Code Financing Statement (UCC-1) filing in first position, covering accounts receivable, inventory, contract rights, furniture, fixtures, equipment, general intangibles, all deposits with The Pacific Bank, and all other corporate assets, to be filed in California or such other states where Borrower may have inventory, and Federal Aviation Administration or other appropriate filings in the first position coveting any aircraft engines. No junior liens are permitted to be filed behind The Pacific Bank's first position without prior approval. 2. Continuing Guaranty of Willis Lease Finance Corporation ("Guarantor") in the amount of $3,000,000. 3. Key-man life insurance policy on Edwin F. Dibble in the amount of $1,500,000, issued by an insurance underwriter acceptable to Bank, to be assigned to Bank within ninety (90) days of acceptance of this facility. No borrowings are permitted against this policy. Willis Aeronautical Services, Inc. November 6, 1996 Page 4 4. Borrower to maintain adequate fire, casualty, general liability, product liability, and inventory insurance issued by insurance underwriters acceptable to Bank. Bank to be named as first loss payee on inventory insurance. 5. Borrower to submit the following financial exhibits and any other information Bank may require at its discretion from time to time: With Each Project Request Under Facility (a): o Supplier's invoice and/or purchase contract o Schedule of proposed Cash Requirement (Exhibit A) and Transaction Cash Flow (Exhibit B) schedule o Net Sales Revenue (Exhibit C) projection Monthly (within 30 days after each month-end): o Company-prepared financial statements certified by an authorized officer of the company; o Accounts receivable aging; o Accounts payable aging; o Inventory position report to include an inventory summary report by engine purchased (Exhibit D); o Borrowing Base Certificate indicating all deductions for accounts receivable and inventory defined as ineligible as set forth in facility (b) above. Annually: o Company prepared fiscal year-end financial statement (in accordance with generally accepted accounting principles) to include balance sheet, income statement, statement of cash flows, reconciliation of net worth, and schedule of expenses within one hundred and twenty (120) days of fiscal year-end; o Guarantor Willis Lease Finance Corporation to provide CPA audited consolidated and consolidating fiscal year-end financial statement to include balance sheet, income statement, statement of cash flows, reconciliation of net worth, and related notes within one hundred twenty (120) days of fiscal year-end. 6. Bank reserves the fight to audit the Borrower's books with reasonable notice to Borrower, with the cost to be paid by Borrower. The annual costs for regularly scheduled field exams shall not exceed $450.00 per day or $1,350 per audit. 7. Prior to making any advances, there must be no material adverse change in Borrower's financial position or its operations. Willis Aeronautical Services, Inc. November 6, 1996 Page 5 8. All loans from shareholders/officers/related parties are to be subordinated to Bank debt at all times. Principal payments of subordinated debt are not permitted without prior Bank approval. 9. Borrower shall maintain its entire banking relationship, inclusive of deposit accounts, with The Pacific Bank. No outside bank borrowings are permitted without the prior consent of Bank. 10. Borrower agrees to notify Bank of any litigation pending against Borrower and Borrower further agrees to advise Bank of any lawsuits filed against Borrower within ten (10) days of such event. 11. Without prior approval of Bank, Borrower shall not: o incur any indebtedness for borrowed money, other than incurred with vendors in the normal course of business, or become liable as a guarantor, or hypothecate or encumber any of its real or personal property, other than in the normal course of business, whether now owned or hereafter acquired; o incur obligations for the purchase or lease of additional fixed or capital assets in excess of $150,000 per annum; o make loans to shareholders or officers or related entities; o sell, assign or transfer the business or any assets material to its operation out of the ordinary course of business. 12. Borrower to adhere to the following financial covenants with compliance to be measured at each quarter-end: a) Minimum Current Ratio of 1.20 to 1.00. Current Ratio is defined as total current assets divided by total current liabilities. b) Minimum Tangible Net Worth of $850,000. Tangible Net Worth is defined as total tangible assets, excluding general intangibles and advances to officers/shareholders or related parties, less total liabilities plus subordinated debt. c) Ratio of Total Debt to Tangible Net Worth not greater than 5.00 to 1.00. Total Debt is defined as current liabilities plus non-current liabilities less subordinated debt. Total Debt to Tangible Net Worth Ratio is defined as Total Debt divided by Tangible Net Worth. d) Maintain profitable operations on an annual basis. Willis Aeronautical Services, Inc. November 6, 1996 Page 6 The financial facilities offered will expire on the date indicated above and, with respect to further advances, are subject to cancellation, suspension or termination at the sole and absolute discretion of the Bank if Borrower or Guarantor suffers any material adverse change in their respective financial condition or breaches any material agreement entered into with this Bank. We are pleased to extend these credit facilities and thank you for your interest in entering into a relationship with our Bank. If the above terms are acceptable to you, please sign a copy of this letter and return it, along With the facility fee, to my attention by no later than December 6, 1996. Sincerely, THE PACIFIC BANK N.A. /s/ Henry Yung Henry Yung Vice President - ------------------------------------------------------------------------------- ACCEPTANCE The above described financial facilities and terms hereof are agreed to and accepted this 20th day of November, 1996, subject to Board approval and entry into final mutually acceptable documentation: WILLIS AERONAUTICAL SERVICES, INC. By: /s/ Charles F. Willis ----------------------------- Title: President Elliot M. Fischer -------------------------- --------------------------- CFO/Controller GUARANTOR ACKNOWLEDGMENT The above described financial facilities and terms hereof are agreed to and accepted this 21st day of November, 1996, subject to Board approval and entry into final mutually acceptable documentation. WILLIS LEASE FINANCE CORPORATION By: /s/ Elliot M. Fischer Charles F. Willis ----------------------------- Title: CFO / CONTROLLER -------------------------- President COMMERCIAL SECURITY AGREEMENT - ------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $3,000,000 11-06-1996 10-31-1997 5076 410 UC 20324 2223 ????? - ------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------------------------------
Borrower: WILLIS AERONAUTICAL SERVICES, INC. Lender: THE PACIFIC BANK, N.A. 291 HARBOR WAY INTERNATIONAL DIVISION SOUTH SAN FRANCISCO, CA 94080 361 CALIFORNIA STREET SAN FRANCISCO, CA 94104 ================================================================================ THIS COMMERCIAL SECURITY AGREEMENT is entered into between WILLIS AERONAUTICAL SERVICES, INC. (referred to below as "Grantor"); and THE PACIFIC BANK, N.A. (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agree that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: All inventory, chattel paper, accounts, equipment and general intangibles, together with the following specifically described property: ALL DEBTOR'S PRESENT AND FUTURE ACCOUNTS, ACCOUNTS RECEIVABLE, CONTRACT RIGHTS, INSTRUMENTS, DOCUMENTS, CHATTEL PAPER, GENERAL INTANGIBLES (INCLUDING BUT NOT LIMITED TO TRADEMARKS, TRADENAMES, PATENTS, COPYRIGHTS AND ALL OTHER FORMS OF INTELLECTUAL PROPERTY, AND TAX REFUNDS), WAREHOUSE RECEIPTS, BILLS OF LADING, RETURNED AND REPOSSESSED GOODS AND ALL DEBTOR'S RIGHTS AS A SELLER OF GOODS; ALL COLLATERAL SECURING ANY OF THE FOREGOING; ALL DEPOSIT ACCOUNTS, SPECIAL AND GENERAL, WHETHER ON DEPOSIT WITH SECURED PARTY OR OTHERS; ALL DEBTOR'S NOW OWNED AND HEREAFTER ACQUIRED INVENTORY, INCLUDING RAW MATERIALS, WORK-IN-PROCESS AND FINISHED GOODS WHEREVER LOCATED; ALL SHIPPING AND PACKING SUPPLIES USED OR USABLE IN CONNECTION WITH THE SALE OF INVENTORY; ALL DEBTOR'S PRESENT AND FUTURE CLAIMS AGAINST ANY SUPPLIER OF ANY OF THE FOREGOING, INCLUDING CLAIMS FOR DEFECTIVE GOODS OR OVERPAYMENTS TO OR UNDERSHIPMENTS BY SUPPLIERS; ALL PROCEEDS ARISING FROM THE LEASE OR RENTAL OF ANY OF THE FOREGOING; ALL DEBTOR'S NOW-OWNED AND HEREAFTER ACQUIRED EQUIPMENT, INCLUDING FURNITURE AND FIXTURES, NONE OF WHICH THE DEBTOR IS AUTHORIZED TO SELL, LEASE OR OTHERWISE DISPOSE OF WITHOUT THE WRITTEN CONSENT OF SECURED PARTY. ALL PRESENT AND FUTURE WARRANTY AND OTHER CLAIMS WHICH DEBTOR MAY HAVE AGAINST ANY VENDOR OR LESSOR OF ANY OF THE FOREGOING; ALL CASH AND NON-CASH PROCEEDS OF ANY OF THE FOREGOING, IN WHATEVER FORM (INCLUDING PROCEEDS IN THE FORM OF INVENTORY, EQUIPMENT OR ANY OTHER FORM OF PERSONAL PROPERTY), INCLUDING PROCEEDS OF PROCEEDS; ALL BOOKS AND RECORDS RELATING TO ANY OF THE FOREGOING COLLATERAL, AND ALL COMPUTERS AND OTHER EQUIPMENT (AND COMPUTER SOFTWARE USED IN CONNECTION THEREWITH) USED IN CONNECTION WITH THE RECORD-KEEPING FOR THE COLLATERAL. NOTICE - PURSUANT TO AN AGREEMENT BETWEEN DEBTOR AND SECURED PARTY, DEBTOR HAS AGREED NOT TO FURTHER ENCUMBER THE COLLATERAL DESCRIBED HEREIN In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter existing, and wherever located: (a) All attachments, accessions, accessories, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above, excluding inventory in Grantor's possession on consignment or other similar arrangements where Grantor does not hold title. (b) All products and produce of any of the property described in this Collateral section. ' (c) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section. (e) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Event of Default. The words "Event of Default: mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means WILLIS AERONAUTICAL SERVICES, INC., its successors and assigns Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. Indebtedness. The word "Indebtedness" means the Indebtedness evidenced by the Note, including all principal and interest, together with all other Indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus interest thereon, of Grantor, or any one or more of them, to Lender, as well as all claims by Lender against Grantor, or any one or more of them, whether existing now or later; whether they are voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others; whether Grantor may be obligated as guarantor, surety, accommodation party or otherwise; whether recovery upon such Indebtedness may be or thereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means THE PACIFIC BANK, N.A., its successors and assigns. Note. The word "Note" means the notes and Letter Agreement dated November 6, 1996, in the principal amount of $3,000,000.00 from WILLIS AERONAUTICAL SERVICES, INC. to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the foregoing. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, Letter Agreement dated November 6, 1996, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security interest in and hereby assigns, conveys, delivers, pledges, and transfers all of Grantor's right, title and interest in and to Grantor's accounts with Lender (whether checking, savings, or some other account), including all accounts held jointly with someone else and all accounts Grantor may open in the future, excluding, however, all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all Indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: Perfection of Security Interest. Grantor agrees to execute such financing statements and to take whatever actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. If any of the Events of Default occurs as set forth below in the section titled "Events of Default", Grantor will appoint Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a 11-06-1996 COMMERCIAL SECURITY AGREEMENT Page 2 (Continued) ================================================================================ financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. This continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral IS enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide Indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor; there shall be no setoffs or counterclaims against any such account; and no agreement under which any deductions or discounts may be claimed shall have been made with the account debtor except those disclosed to Lender in writing. Location of the Collateral. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without the prior written consent of Lender. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it. holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. To the best of Grantor's knowledge, no financing statement executed by Grantor covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shell defend Lender's rights in the Collateral against the claims and demands of all other persons. Collateral Schedules and Locations. As often as Lender shall require, and insofar as the Collateral consists of accounts and general intangibles, Grantor shall deliver to Lender schedules of such Collateral including such information as Lender may require, including without limitation names and addresses of account debtors and agings of accounts and general intangibles. Insofar as the Collateral consists of inventory and equipment, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. Maintenance and Inspection of Collateral. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments end liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges !hat could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surely bond furnished in the contest proceedings. Compliance With Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and Issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. 11-06-1996 COMMERCIAL SECURITY AGREEMENT Page 3 (Continued) ================================================================================ premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any reasonable amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. Default in Favor of Third Parties. Should Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person in excess of Fifty Thousand And No/100 Dollars ($50,000,000.00) that may materially affect any of Grantor's property or materially affect Grantor's ability to repay the Loans or perform its obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. Defective Collateralizatlon. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forefeiture proceeding and deposits with Lender monies or a surely bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Guarantor defaults under its guarantee. Insecurity. Lender, in good faith, deems itself insecure. Right to Cure. If any default, other than a Default on Indebtedness, is curable and if Grantor has not been given a prior notice of a breach of the same provision of this Agreement, It may be cured (and no Event of Default will have occurred) if Grantor, after Lender sends written notice demanding cure of such default, (a) cures the default within fifteen (15) days; or (b), if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event o! Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all Collateral of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor alter repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor receive open and dispose of mail addressed to Grantor change any address to which mail and payments 11-06-1996 COMMERCIAL SECURITY AGREEMENT Page 4 (Continued) ================================================================================ are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgement against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the right provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any and all other rights and remedies it may have available at law, in equity, or otherwise. Cumulative Remedies. All of Lender's right and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If the is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of SAN FRANCISCO County, the State of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Attorneys' Fee; Expenses. Grantor agrees to pay upon demand all of Lender's cost and expenses, including attorneys' fees and Lender's reasonable legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgement collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Grantor shall be entitled to its reasonable attorney's fees and costs if it is successful in bringing or defending a claim against Lender. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of the Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Preference Payments. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the Indebtedness and, at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. Severability. If a court of competent jurisdiction finds any provisions of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforcable as to any other persons or circumstances. If feasible, any such offering provision shall be deemed to be modified to be within the limits or enforceability or validity; however, if the offering provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Waiver of Co-obligor's Rights. If more than one person is obligated for the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. 11-06-1996 COMMERCIAL SECURITY AGREEMENT Page 5 (Continued) ================================================================================ GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED NOVEMBER 6, 1996. GRANTOR: WILLIS AERONAUTICAL SERVICES, INC. X Charles F. Willis X Elliot M. Fischer ------------------------------- ------------------------------- Authorized Officer Authorized Officer ================================================================================ FORM 107 (12-88) COPYRIGHT C 1987, BY PROFESSIONAL PUBLISHING CORP, 122 PAUL DR., SAN RAFAEL, CA 94903 (415) 472-1964 [LOGO] PROFESSIONAL PUBLISHING THE PACIFIC BANK National Association INDEMNITY AGREEMENT This Agreement is executed this 20th day of November 1996, by Willis Aeronautical Services, Inc, (the "Company") in favor of THE PACIFIC BANK, N.A. (the "Bank"'). RECITALS WHEREAS, Bank may from time to time issue at the request of Company letters of guaranty, bonds to produce bills of lading, bonds in lieu of production of original bills of lading, or bonds indemnifying the issuer of duplicate bills of lading (collectively, "Steamship Bonds"), in order to permit the delivery of goods to the Company before delivery of the related original bills of lading and/or other shipping documents to the appropriate steamship company; WHEREAS, Bank may from time to time at the request of Company authorize certain air carriers to release to Company goods imported by the Company and consigned to Bank ("Consigned Goods"); WHEREAS, Bank is willing to issue Steamship Bonds and to authorize release to Company of Consigned Goods only if Company indemnifies Bank against any and all losses, claims, damages, liabilities, penalties, judgments, demands and causes of action arising in connection with such issuance or such authorization. NOW, THEREFORE, Company agrees as follows: 1. Company hereby agrees to indemnify Bank against and to hold Bank harmless from any and all losses, claims, damages, liabilities, penalties, judgments, demands and causes of action of whatever kind or nature, presently existing or hereafter arising, known or unknown, in connection with or arising out of (a) the issuance by Bank of any Steamship Bond; or (b) any authorization by Bank to any air carrier to release Consigned Goods to Company or such party as Company may designate, or the release of any such Consigned Goods pursuant to any such authorization (collectively, "Liabilities") 2. Company shall reimburse Bank immediately upon demand for any Liabilities incurred by Bank, including, but not limited to, all costs, expenses and reasonable attorneys' fees incurred by Bank on account of or in connection with the Liabilities or enforcing Bank's rights under this agreement. 3. If the importation of any goods released to Company upon the issuance by Bank of a Steamship Bond or any Consigned Goods is financed by a letter of credit issued by Bank for the account of Company, (collectively, such goods are referred to herein as 'Letter of Credit Goods") Company agrees that Bank may pay or accept all drafts presented under such letter of credit and drawn wholly or in part on account of such Letter of Credit Goods, and Company agrees to reimburse to Bank the amount of all such drafts in accordance with the terms and provisions of any letter of credit agreement executed by the Company in connection with such letter of credit, notwithstanding the failure of the beneficiary thereunder to comply with any term, provision, or condition of such letter of credit, including but not limited to failure of the beneficiary to make timely presentation of a draft conforming to the requirements of such letter of credit. 4. If Bank authorizes release of any Consigned Goods that are not Letter of Credit Goods, and one or more drafts and other documents relating in whole or in part to such Consigned Goods are forwarded to Bank for collection, Company agrees to pay such drafts promptly and in full. Company's obligation hereunder to pay such drafts, and to reimburse to Bank the amounts described in paragraph 3 of this Agreement, shall not be affected by: (a) any failure of such Consigned Goods or of any Letter of Credit Goods (collectively, "Imported Goods") to conform to Company's understanding or expectation as to their quantity, quality, condition, character, packing, or value; (b) any breach or alleged breach of any warranty, express or implied, of the vendor or shipper of such Imported Goods with respect to the quality, merchantability, or fitness for a particular purpose of said Goods; (c) the amount, form, validity, sufficiency, correctness, genuineness, falsification or legal effect of any draft or other document relating to any Imported Goods, or of any signature or endorsements on any such drafts or other documents; (d) the fact that the Imported Goods constitute only a partial or incomplete shipment; (e) any deviation from instructions, delay, default or fraud by the vendor or shipper of such Imported Goods; (f) any delay in arrival or failure to arrive of any documents relating to any Imported Goods; or (g) any other breach or alleged breach of any contract between the Company and the vendor or shipper of such Imported Goods. 5. Company acknowledges and agrees that, notwithstanding execution of this Agreement by Company, Bank is not obligated to honor any request by Company to Bank to issue a Steamship Bond or to authorize release of any Consigned Goods, and that Bank may in its sole discretion refuse any such request. 6. This Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Company has executed this Agreement as of the date set forth above. Willis Aeronautical Services, Inc. ----------------------------------------- By: Charles F. Willis Elliot M. Fischer -------------------------------------- Title: President CFO ----------------------------------- COMMERCIAL LEASE AND DEPOSIT RECEIPT RECEIVED FROM CHARLES F. WILLIS COMPANY , hereinafter referred to as LESSEE, the sum of $10,692.00 (Ten thousand six hundred ninety two and 00/100 DOLLARS), evidenced by check, as a deposit which, upon acceptance of this lease, shall belong to Lessor and shall be applied as follows:
TOTAL RECEIVED BALANCE DUE PRIOR TO OCCUPANCY ------- ---------- -------------------------------- RENT FOR THE PERIOD FROM 3/16 TO 4.15 $4,950.00 $ $4,950.00 SECURITY DEPOSIT $5,346.00 $ $5,346.00 OTHER COMMON AREA MAINTENANCE $ 396.00 $ $ 396.00 TOTAL $10,692.00 $ $10,692.00
In the event that this lease is not accepted by the Lessor within _____ days, the total deposit received shall be refunded. Lessee hereby offers to lease from Lessor the premises situated in the City of Sausalito, County of Marin, State of California, described as 180 Harbor Drive, Suite 200, consisting of approx. 3300 sf, including 10 parking spaces, upon the following TERMS and CONDITIONS: 1. TERM: The term hereof shall commence on March 16, 1992, and expire on March 15, 1994. 2. RENT: The total rent shall be $120,780.00, payable as follows: $4,950.00 per month for the 1st year; $5,115.00 per month for the second year, Common area maintenance of 12 cents ???? or $396.00/mo. Lessee granted a reduction for six months of 700 sq. ft. or $1,050.00 per month rent from the 1st year monthly rent shown above. All rents shall be paid to Owner or his authorized agent, at the following address: HARBOR DRIVE ASSOCIATES, 818 Fifth Ave., Suite 207, San Rafael, CA 94901, or at such other places as may be designated by Owner from time to time. 3. USE: The premises are to be used for the operation of offices and for no other purpose, without prior written consent of Lessor. 4. USES PROHIBITED: Lessee shall not use any portion of the premises for purposes other than those specified hereinabove, and no use shall be made or permitted to be made upon the premises, nor acts done, which will increase the existing rate of insurance upon the property, or cause cancellation of insurance policies covering said property. Lessee shall not conduct or permit any sale by auction on the premises. 5. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this lease or sublet any portion of the premises without prior written consent of the Lessor, which shall not be unreasonably withheld. Any such assignment or subletting without consent shall be void and, at the option of the Lessor, may terminate this lease. 6. ORDINANCES AND STATUTES: Lessee shall comply with all statutes, ordinances and requirements of all municipal, state and federal authorities now in force, or which may hereafter be in force, pertaining to the premises, occasioned by or affecting the use thereof by Lessee. The commencement or pendency of any state or federal court abatement proceeding affecting the use of the premises shall, at the option of the Lessor, be deemed a breach hereof. 7. MAINTENANCE, REPAIRS, ALTERATIONS: See Exhibit C No improvement or alteration of the premises shall be made without the prior written constant of the Lessor. Prior to the commencement of any substantial repair, improvement, or alteration, Lessee shall give Lessor at least two (2) days written notice in order that Lessor may post appropriate notices to avoid any liability for liens. Lessee shall not commit any waste upon the premises, or any nuisance or act which may disturb the quiet enjoyment of any tenant in the building. 8. ENTRY AND INSPECTION: Lessee shall permit Lessor or Lessor's agents to enter upon the premises at reasonable times and upon reasonable notice, for the purpose of inspecting the same, and will permit Lessor at any time within sixty (60) days prior to the expiration of this lease, to place upon the premises any usual "To Let" or "For Lease" signs, and permit persons desiring to lease the same to inspect the premises thereafter. 9. INDEMNIFICATION OF LESSOR: Lessor shall not be liable unless caused by the act or omission of Lessor for any damage or injury to Lessee, or any other person, or to any property, occurring on the demised premises or any part thereof, and Lessee agrees to hold Lessor harmless from such claims for damages. 10. POSSESSION: If Lessor is unable to deliver possession of the premises at the commencement hereof, Lessor shall not be liable for any damage caused thereby, nor shall this lease be void or voidable, but Lessee shall not be liable for any rent until possession is delivered. Lessee may terminate this lease if possession is not delivered within ten (10) days of the commencement of the term hereof. 11. INSURANCE: Lessee, at his expense, shall maintain plate glass and public liability insurance including bodily injury and property damage insuring Lessee and Lessor with minimum coverage as follows: $500,000/$100,000. Lessee shall provide Lessor with a Certificate of Insurance showing Lessor as additional insured. The Certificate shall provide for a ten-day written notice to Lessor in the event of cancellation or material change of coverage. To the maximum extent permitted by insurance policies which may be owned by Lessor or Lessee, Lessee and Lessor, for the benefit of each other, waive any and all rights of subrogation which might otherwise exist. 12. UTILITIES: Lessor shall be responsible for the payment of all utilities, including water, gas, electricity, heat and other services delivered to the premises. 13. SIGNS: Lessor reserves the exclusive right to the roof, side and rear walls of the Premises. Lessee shall not construct any projecting sign or awning without the prior written consent of Lessor which consent shall not be unreasonably withheld. 14. ABANDONMENT OF PREMISES: Lessee shall not vacate or abandon the premises at any time during the term hereof, and if Lessee shall abandon or vacate the premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee left upon the premises shall be deemed to be abandoned, at the option of Lessor. 15. CONDEMNATION: If any part of the premises shall be taken or condemned for public use, and a part thereof remains which is susceptible of occupation hereunder, this lease shall, as to the part taken, terminate as of the date the condemnor acquires possession, and thereafter Lessee shall be required to pay such proportion of the rent for the remaining term as the value of the premises remaining bears to the total value of the premises at the date of condemnation; provided however, that Lessor may at his option, terminate this lease as of the date the condemnor acquired possession. in the event that the demised premises are condemned in whole, or that such portion is condemned that the remainder is not susceptible for use hereunder, this lease shall terminate upon the date upon which the condemnor acquires possession. All sums which may be payable on account of any condemnation shall belong to the Lessor, and Lessee shall not be entitled to any part thereof, provided however, that Lessee shall be entitled to retain any amount awarded to him for his trade fixtures or moving expenses. 16. TRADE FIXTURES: Any and all improvements made to the premises during the term hereof shall belong to the Lessor, except trade fixtures of the Lessee. Lessee may, upon termination hereof, remove all his trade fixtures, but shall repair or pay for all repairs necessary for damages to the premises occasioned by removal. 17. DESTRUCTION OF PREMISES: in the event of a partial destruction of the premises during the term hereof, from any cause, Lessor shall forthwith repair the same, provided that such repairs can be made within sixty (60) days under existing governmental laws and regulations, but such partial destruction shall not terminate this lease, except that Lessee shall be entitled to a proportionate reduction of rent while such repairs are being made, based upon the extent to which the making of such repairs shall interfere with the business of Lessee on the premises. If such repairs cannot be made within said sixty (60) days, Lessor, at his option, may make the same within a reasonable time, this lease continuing in effect with the rent proportionately abated as aforesaid, and in the event that Lessor shall not elect to make such repairs which cannot be made within sixty (60) days, this lease may be terminated at the option of either party. In the event that the building in which the demised premises may be situated is destroyed to an extent of not less than one-third of the replacement costs thereof, Lessor may elect to terminate this lease whether the demised premises be injured or not. A total destruction of the building in which the premises may be situated shall terminate this lease. In the event of any dispute between Lessor and Lessee with respect to the provisions hereof, the matter shall be settled by arbitration in such a manner as the parties may agree upon, or if they cannot agree, in accordance with the rules of the American Arbitration Association. 18. HAZARDOUS MATERIALS: Lessee shall not use, store, or dispose of any hazardous substances upon the premises, except use and storage of such substances if they are customarily used in lessee's business, and such use and storage complies with all environmental laws. Hazardous substances means any hazardous waste, substance or toxic materials regulated under any environmental laws or regulations applicable to the property. FORM 107 (12-88) COPYRIGHT C 1987, BY PROFESSIONAL PUBLISHING CORP, 122 PAUL DR., SAN RAFAEL, CA 94903 (415) 472-1964 LOGO PROFESSIONAL PUBLISHING 19. INSOLVENCY: in the event a receiver, appointed to take over the business of Lessee, or in the event Lessee makes a general assignment for the benefit of creditors, or Lessee takes or suffers any action under any insolvency or bankruptcy act, the same shall constitute breach of this lease by Lessee. 20. REMEDIES OF OWNER ON DEFAULT: In the event of any breach of this lease by Lessee, Lessor may, at his option, terminate the lease and recover from Lessee: (a) the worth at the time of award of the unpaid rent which was earned at the time of termination; (b) 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 the award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (c) 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 Lessee proves could be reasonably avoided; and (d) any other amount necessary to compensate Lessor for all detriment proximately caused by Lessee's failure to perform his obligations under the lease or which in the ordinary course of things would be likely to result therefrom. Lessor may, in the alternative, continue this lease in effect, as long as Lessor does not terminate Lessee's right to possession, and Lessor may enforce all his rights and remedies under the lease, including the right to recover the rent as it becomes due under the lease. If said breach of lease continues, Lessor may, at any time thereafter, elect to terminate the lease. Nothing contained herein shall be deemed to limit any other rights or remedies which Lessor may have. 21. SECURITY: The security deposit set forth above, if any, shall secure the performance of the Lessee's obligations hereunder. Lessor may, but shall not be obligated to apply all or portions of said deposit on account of Lessee's obligations hereunder. Any balance remaining upon termination shall be returned to Lessee. Lessee shall not have the right to apply the Security Deposit in payment of the last month's rent. 22. DEPOSIT REFUNDS: The balance of all deposits shall be refunded within four weeks from date possession is delivered to Owner or his authorized Agent, together with a statement showing any charges made against such deposits by Owner. 23. ATTORNEY'S FEES: In case suit should be brought for recovery of the premises, or for any sum due hereunder, or because of any act which may arise out of the possession of the premises, by either party, the prevailing party shall be entitled to all costs incurred in connection with such action, including a reasonable attorney's fee. 24. WAIVER: No failure of Lessor to enforce any form hereof shall be deemed to be a waiver. 25: NOTICES: Any notice which either party may or is required to give, shall be given by mailing the same, postage prepaid, to Lessee at the premises, or Lessor at the address shown below, or at such other places as may be designated by the parties from time to time. 26: HOLDING OVER: Any holding over after the expiration of this lease, with the consent of Lessor, shall be construed as a month-to-month tenancy at a rental of 15% over the last month rent per month, otherwise in accordance with the terms hereof, as applicable. 27. TIME: Time is of the essence of this lease. 28. HEIRS, ASSIGNS, SUCCESSORS: This lease is binding upon and inures to the benefit of the heirs, assigns and successors in interest to the parties. 29. TAX INCREASE: In the event there is any increase during any year of the term of this lease in the City, County or State real estate taxes over and above the amount of such taxes assessed for the tax year during which the term of this lease commences, whether because of increased rate or valuation, Lessee shall pay to Lessor upon presentation of paid bax bills an amount equal to 13% of the increase in taxes upon the land and building in which the leased premises are situated. In the event that such taxes are assessed for a tax year extending beyond the term of the lease, the obligation of Lessee shall be proportionate to the portion of the lease term included in such year. Base year 1991/92. See Exhibit C. 30. N/A 31. OPTION TO RENEW: Provided that Lessee is not in default in the performance of this lease, Lessee shall have the option to renew the lease for five (5) additional one (1) year terms commencing at the expiration of the initial lease term. All of the terms and conditions of the lease shall apply during each renewal term except that the monthly rent shall be the sum of 5 cents per square foot increase each option year. Each option shall be exercised by written notice given to Lessor not less than 90 days prior to the expiration of the initial lease or renewal term if notice is not given in the manner provided herein within the time specified, this option shall expire. 32. LESSOR'S LIABILITY: The term "Lessor," as used in this paragraph, shall mean only the owner of the real property or a Lessee's interest in a ground lease of the premises. In the event of any transfer of such title or interest, the Lessor named herein (or the grantor in case of any subsequent transfers) shall be relieved of all liability related to Lessor's obligations to be performed after such transfer. Provided, however, that any funds in the hands of Lessor or Grantor at the time of such transfer shall be delivered to Grantee and returned to Lessee in accordance with the terms of this Agreement. Lessor's aforesaid obligations shall be binding upon Lessor's successors and assigns only during their respective periods of ownership. 33. ESTOPPEL CERTIFICATE: (a) Lessee shall at any time upon not less than ten (10) days' prior written notice from Lessor execute, acknowledge and deliver to Lessor a statement in writing (1) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect), the amount of any security deposit, and the date to which the rent and other charges are paid in advance, if any, and (2) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer to the Premises. (b) At Lessor's option, Lessee's failure to deliver such statement within such time shall be a material breach of this Lease or shall be conclusive upon Lessee (1) that this Lease is in full force and effect, without modification except as may be represented by Lessor, (2) that there are no uncured defaults in lessor's performance, and (3) that not more than one month's rent has been paid in advance or such failure may be considered by Lessor as a default by Lessee under this Lease. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 34. COMMON AREA EXPENSES: In the event the demised premises are situated in a shopping center or in a commercial building in which there are common areas, Lessee agrees to pay his pro-rata share of maintenance, taxes, and insurance for the common area. 35. ADDENDUM: An addendum, signed by the parties, [xxx] is attached, [ ] is not attached hereto. CAM ADDENDUM Exhibit A, Exhibit B, Exhibit C 36. A late fee of 6% will be assessed for rents not received by the 10th of the month. 37. See Exhibit C ENTIRE AGREEMENT: The foregoing constitutes the entire agreement between the parties and may be modified only by a writing signed by both parties. The following Exhibits, if any, have been made a part of this lease before the parties' execution hereof: The undersigned Lessee hereby acknowledges receipt of a copy hereof. Dated: -------------------------- /s/ Charles F. Willis Agent Lessee - ----------------------------- --------------------------- Charles F. Willis Company Address Lessee - ----------------------------- --------------------------- Phone Address - ----------------------------- --------------------------- By Phone - ----------------------------- --------------------------- Robert H. Greene Real Estate /s/ unreadable Owner's Authorized Agent Lessor - ----------------------------- --------------------------- 818 Fifth Ave., Ste. 207 Harbor Drive Associates Address Lessor - ----------------------------- --------------------------- San Rafael, CA 94901 (415) 456-5323 Phone Address - ----------------------------- --------------------------- By Phone - ----------------------------- --------------------------- FORM 107(a) (12-88) COPYRIGHT C 1987, BY PROFESSIONAL PUBLISHING CORP, 122 PAUL DR., SAN RAFAEL, CA 94903 (415) 472-1984 LOGO PROFESSIONAL PUBLISHING EXHIBIT A The premises consist of second floor space totaling +/- 3300 square feet as shown in the layout following: GRAPHIC OF FLOORPLAN OF PREMISES GOES HERE Total area of building: 26,000 sq. ft. CHARLES F. WILLIS COMPANY Area of premises: 3,300 sq. ft. /S/ CHARLES F. WILLIS --------------------------- Pro-rata portion: 13% LESSEE Charles F. Willis HARBOR DRIVE ASSOCIATES Date of Exhibit: February 14, 1992 /s/ Holt Greene Date of lease: March 16, 1992 --------------------------- LESSOR Holt Greene ROBERT H. GREENE REAL ESTATE/LEASE FORM 111A EXHIBIT B SCOPE OF WORK As the Tenant improvement allowance, Lessor will furnish the following at no cost to the Lessee: Please see drawing below for details: - - build out two equal size offices 1 and 2. Windows facing interior open area - - take out wall between office 7 and 8 - - take out door to 7 - - remove door and window of reception area 10 (facing office #4) - - cutdown and build wall 42 inches high from closet to opening (marked red) - - construct opening between reception area 10 and open area 11 - - but wall between 10 and 11 to a height matching #3, install windows - - trim to be installed in all areas as needed where walls meet ceilings to create a clean and finished appearance - - patch and remove extra phone lines and electrical outlet plates - - paint entire area, blue trim to be painted white. - - install carpeting in areas 200 and 201 with Stevens Carpet Gulistan, #500 Pacific Teal, Alpha Supreme, per Craftsman Floor Coverings GRAPHIC OF FLOOR PLAN GOES HERE All work to be performed by the Lessor's contractor. Date of Exhibit: CHARLES F. WILLIS COMPANY - ------------------------------- /S/ CHARLES F. WILLIS Date of Lease: ------------------------------- - ------------------------------- LESSEE Charles F. Willis HARBOR DRIVE ASSOCIATES /s/ Holt Greene ------------------------------- LESSOR Holt Greene ROBERT H. GREENE REAL ESTATE/LEASE FORM 111A Exhibit C 5. Assignment and Subletting Any assignment by Lessor shall provide that the assignee shall be bound by the terms of this agreement, including the obligation to return any Lessee deposits held by such assignee. 7. Maintenance, Repairs, Alterations Lessee shall be responsible for maintaining the interior of the office premises in good and safe condition and shall surrender the same, at termination hereof, in as good condition as received, normal wear and tear excepted. In addition, Lessee will be responsible for any loss or damage caused by lessee, its agents, employees or clients. Lessor shall be otherwise responsible for maintaining the premises, including public and common areas, stairways and restrooms, in good and safe condition, including plate glass, electrical wiring, plumbing and heating installations and any other system or equipment installed on the premises by Lessor, or its agents, and for exterior repairs to the premises such as the roof, exterior wall and structural foundation. Lessor also agrees to perform the work set forth in Exhibit B hereto prior to March 16, 1992, subject to punch list items agreed upon by Lessor and Lessee. 29. Tax Increase Lessor agrees to provide Lessee with lessor's tax statement for the 1991/1992 Base year. 37. Lessee shall be provided access to the office premises on a 24 hour, 7 day a week basis. 38. Lessor shall be responsible for providing heating and air conditioning reasonably required for the comfortable occupation of the premises. Lessor Lessee Harbor Drive Associates Charles F. Willis Company By: /s/ Holt Greene By: /s/ Charles F. Willis -------------------------------- -------------------------- ADDENDUM TO LEASE USE AND MAINTENANCE OF COMMON AREAS Lessor hereby grants to Lessee, for the term of this Lease, a nonexclusive easement of right of way and for parking purposes, appurtenant to the leased premises, over and upon the Common Areas. Said easement is for the ingress and egress of premises and the public streets adjacent to the lease premises for both vehicular and pedestrian traffic and for the parking of vehicles, and shall be used by customers, tenants of the leased premises. The Common Areas shall be maintained and used pursuant to the following regulations: (a) rules and Regulations: Lessor may adopt reasonable rules and regulations for the use of the Common Areas, provided that such rules and regulations are equally applicable to all of the tenants and occupants of the building. Such rules and regulations may be changed at any time and from time to time upon reasonable notice to Lessee. (b) Changes: Lessor reserves the right at any time and from time to time to make reasonable changes in, additions to and deletions from the Common Areas. (c) Maintenance: Lessor, at all time, will provide and maintain the Common Areas in good condition and repair, in conformity with all applicable laws, rules and regulations, together with adequate facilities therefor such as walkways, driveways, sewers, lighting, utilities, parking areas, planning and landscaping. (d) Expenses: In order to defray the expenses incurred by Lessor in operating maintaining, repairing and policing the Common Areas, Lessee agreed to pay to Lessor $396.00 per month or _______ of such expenses, whichever is greater. Said charge shall be paid monthly. Such expenses shall include upkeep, repair and replacements of and to improvements in the Common Areas, janitorial services and supplies of hallways, bathrooms, utility services, police protection, watchmen, window washing, water, landscaping, sweeping, trash collection, heating and ventilation, air conditioning, plumbing, sign maintenance, premiums for property damage insurance, taxes and assessments on real property, and any and all other expenses related to the Common Areas and as applicable to the individual building. The manner and method of operation, maintenance, upkeep and repair of the Common Areas shall be at the sole and absolute discretion of the Lessor and all costs incurred in connection therewith by Lessor in good faith shall be conclusive and binding upon Lessee. LESSEE: CHARLES F. WILLIS COMPANY LESSOR: HARBOR DRIVE ASSOCIATES /s/ Charles F. Willis /s/ Holt Greene - -------------------------------- -------------------------------- Charles F. Willis Holt Greene Date: Date: - -------------------------------- -------------------------------- EX-11.1 6 COMPUTATION OF EARNINGS EXHIBIT XI Willis Lease Finance Corporation Computation of Earnings Per Share(a) Years Ended December 31,
1996 1995 1994 --------------------------------------------- (in thousands, except per share data) Primary Earnings: Net income to common shares: $ 2,804 3,216 1,172 ============================================= Shares: Weighted average number of common shares outstanding 3,796 3,111 3,111 ============================================= Primary earnings per common share $ 0.74 1.03 0.38 ============================================= Assuming Full Dilution Earnings: Net income $ 2,804 3,216 1,172 ============================================= Shares: Weighted average number of common shares outstanding and common stock equivalents 3,796 3,111 3,111 ============================================= Earnings per common share assuming full dilution $ 0.74 1.03 0.38 ============================================= (a) See accompanying notes to December 31, 1996, 1995, and 1994 Financial Statements.
47 EX-27 7 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 20,173,445 0 3,196,972 0 4,057,648 0 96,551,209 16,532,825 124,932,693 0 0 16,055,689 0 0 7,146,563 124,932,693 17,947,922 32,307,712 14,096,658 22,323,903 5,123,813 0 0 4,859,996 1,976,471 0 0 0 0 2,804,472 0.74 0.74
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