-----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, ISEJaN7ni9gY1WHgpq6agEW3IBNYoBPcJ4hDlrlacEXd/9RjdWt+Jet2eT4tuuxR BmDy6P1mTdvBeL2w4A8trg== 0001047469-98-010787.txt : 19980323 0001047469-98-010787.hdr.sgml : 19980323 ACCESSION NUMBER: 0001047469-98-010787 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 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-K SEC ACT: SEC FILE NUMBER: 000-28774 FILM NUMBER: 98570207 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-K 1 FORM 10K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 / / 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 (IRS EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 180 HARBOR DRIVE, 94965 SUITE 200, SAUSALITO, CA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 - ------------------------------------------------------ ------------------------------------------------------ Common Stock NASDAQ
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. / / The aggregate market value of voting stock held by non-affiliates of the registrant as of March 9, 1998 was approximately $60,099,041 million (based on a closing sale price of $21.125 per share as reported on the NASDAQ National Market). 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 9, 1996 was 7,210,598. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WILLIS LEASE FINANCE CORPORATION 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
PAGE --------- Item 1. Business....................................................................................... Item 2. Properties..................................................................................... Item 3. Legal Proceedings.............................................................................. Item 4. Submission of Matters to a Vote of Security Holders............................................ PART II Item 5. Market for Registrant's Common Equity and related Stockholder Matters.......................... Item 6. Selected Financial Data........................................................................ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... Item 8. Financial Statements and Supplementary Data.................................................... Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... PART III Item 10. Directors and Executives Officers of the Registrant............................................ Item 11. Executive Compensation......................................................................... Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions................................................. PART IV Item 14. Exhibits, Financial Schedules and Reports on Form 8-K..........................................
2 PART I ITEM 1. BUSINESS Willis Lease Finance Corporation and its subsidiaries (the "Company") is a provider of operating leases of aircraft equipment and aircraft parts worldwide. The Company's core business is acquiring and leasing commercial aircraft spare engines and other aircraft equipment to domestic and international airlines, manufacturers and overhaul/repair facilities pursuant to operating leases. As a significant corollary to its core business, the Company through its wholly owned subsidiary Willis Aeronautical Services, Inc. ("WASI"), acquires engine parts and other aviation equipment, such as whole engines and aircraft, which can be dismantled and sold as parts. In addition, the Company engages in the selective purchase and resale of commercial aircraft engines and engine components in the aftermarket. 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 or parts are removed for normal maintenance or as a result of failure. Industry analysts estimate that the worldwide fleet of approximately 11,500 commercial aircraft utilizes approximately 30,000 engines, including approximately 5,000 spare engines valued at over $11 billion. The Boeing 1997 Current Market Outlook (the "Boeing Report") estimates 16,160 new commercial aircraft will be added over the next 20 years, resulting in a projected worldwide fleet of approximately 23,600 commercial aircraft in 2016, net of retired aircraft. These 16,160 new deliveries, which represent a mixture of two-, three- and four-engined aircraft, will require approximately 35,000 installed engines and, assuming a ratio of approximately 15% spare engines to installed engines, approximately 5,300 additional spare engine acquisitions over the next 20 years. The Boeing Report, and the foregoing numbers, do not address the additional number of aircraft and engines which will be required to service the commuter or corporate markets. Airlines have increasingly turned to operating leases as an alternative to traditional financing of their aircraft, engines and spare parts. Aviation Week and Space Technology ("Aviation Week") reports that leasing will be the primary means by which the global air transport industry acquires new aircraft between now and 1999, and probably beyond. Aviation Week, based upon data provided by GE Capital Aviation Services, states that in 1986, 41% of the world's airlines owned all of their equipment, 15% leased all of their equipment and 44% used a mix of the two (with 80% owned and 20% leased). By contrast, in 1996, only 16% owned all of their equipment, while 42% leased all of their equipment and 42% used a mix of the two (with 40% owned and 60% leased). Advantages to airlines of leasing include greater flexibility in fleet management, off-balance sheet treatment of operating leases, the ability to employ funds without affecting debt-to-equity ratios, and the shifting of residual value risk to a third party. The Company believes that airlines are increasingly considering their spare aircraft engines and spare parts as significant capital assets suitable for lease. Due to the increasing cost of newer aircraft equipment, the anticipated modernization of the worldwide aircraft fleet and the significant cost associated therewith, and the emergence of new niche-focused airlines which generally use leasing for capital asset acquisitions, the Company believes this trend toward operating leases will continue. STRATEGY The Company's strategy for its leasing business is to focus primarily on operating leases of commercial aircraft engines and aircraft parts worldwide while maximizing residual values. The Company purchases 3 primarily aftermarket commercial aircraft equipment for lease and resale. The Company focuses on noise compliant Stage III commercial jet aircraft engines for its lease portfolio. As of December 31, 1997, all of the Company's engines were Stage III engines and were generally suitable for use on one or more commonly used aircraft. Additionally, the Company has made a selective investment in aircraft for lease and may make further such investments in the future. This investment, which occurred in late 1997, involved the purchase of three commuter aircraft for the lease portfolio. Through the spare parts and component sales operations of its WASI subsidiary, the Company sells aircraft spare parts to commercial passenger airlines, air cargo carriers, overhaul/repair facilities and other spare parts distributors. WASI can provide some parts for maintenance and overhaul of the Company's engines at prices lower than the Company could obtain from third parties. 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 sell engine components from such engines. AIRCRAFT EQUIPMENT LEASING Most of the Company's current leases to air carriers, manufacturers and overhaul/repair facilities are operating leases as opposed to finance leases. Under an operating lease, the Company retains title to the aircraft equipment thereby retaining the benefit and assuming the risk of the residual value of the aircraft equipment. 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 equipment. 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--Ownership Risks." The Company primarily targets the medium-term lease market, which generally consists of leases with three to ten year lease terms. Airlines, manufacturers and overhaul/repair facilities leasing for this term generally do so when their projected utilization of specific equipment is deemed to be less than its useful life, or when they seek to manage their cash flow more efficiently while strengthening their balance sheets. All of the Company's lease transactions with three to ten year lease terms are triple-net leases. A triple-net lease requires the lessee to make the full lease payment and pay any other expenses associated with the use of the equipment, 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 equipment upon return at the end of the lease. 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 may undertake a portion of the maintenance and regulatory compliance risk. To date, the Company has attempted to minimize its currency and exchange risks by negotiating all of its lease transactions in U.S. Dollars. In addition, to date, 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--International Risks." The Company recently made its first investment in the aircraft leasing market by purchasing three turbo-prop commuter aircraft and three spare engines which are leased to a domestic commuter airline. Generally, the same benefits, issues and risks that apply to aircraft engine leasing apply to the lease of aircraft. The Company anticipates that it may invest in additional aircraft for lease in the future. In addition to the benefits, issues and risks that apply to the leasing of aircraft equipment generally, leases of spare parts may involve additional risks. For example, it is likely to be more difficult to recover parts in the event of a lessee default and the residual value of parts may be less ascertainable than an engine. 4 The Company typically collects maintenance reserves and security deposits from engine lessees and security deposits from its aircraft lessee and its parts lessees. 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 many 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. Parts leases generally require that the parts be returned in the condition they were in at lease inception. The Company makes an independent analysis of the credit risk associated with each lessee before entering into a lease transaction. The Company's credit analysis generally consists of evaluating the prospective lessee's financial standing utilizing financial statements, trade references and/or banking references. In certain circumstances, where the Company or its lenders believe necessary, the Company may require its lessees to obtain a partial letter of credit or a guarantee. The Company also evaluates insurance and expropriation risk and evaluates and monitors the political and legal climate of the country in which a particular lessee is located in order to determine its ability to repossess its collateral should the need arise. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Customer Credit Risks." During a given lease period, the Company's leases require that the leased equipment undergo maintenance and inspection at qualified maintenance facilities certified by the FAA or its foreign equivalent. In addition, when equipment comes off-lease, it undergoes thorough inspection to verify compliance with lease return conditions. Maintenance, overhaul and thorough inspections during and after the lease term help ensure that the Company's leased equipment maintains its residual value. While there can be no assurance that the Company's 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 investment in leased equipment. Upon termination of a lease, the Company will re-lease or sell the aircraft equipment or will dismantle or have equipment dismantled and will sell the parts. The demand for aftermarket aircraft equipment 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 equipment and technological developments. In addition, the value of a particular used aircraft, spare parts or aircraft engines varies greatly depending upon their condition, the maintenance services performed during the lease term and as applicable the number of hours remaining until the next major maintenance is required. If the Company is unable to re-lease or sell aircraft equipment 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-- Ownership Risks" and "Business--Aircraft Equipment Portfolio." AIRCRAFT EQUIPMENT LESSEES As of December 31, 1997, the Company had 42 engines under leases to 28 customers in 17 countries, 3 aircraft on lease to one customer and 8 spare parts packages on lease to 7 customers in 7 countries. The following table displays the regional profile of the Company's operating lease customer base by revenue for the years ended December 31, 1996 and December 31, 1997. No single country other than the 5 United States accounted for more than 13% and 14% of the Company's lease revenue for the years ended December 31, 1997 and December 31, 1996 respectively.
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------------- ---------------------------- OPERATING LEASE OPERATING LEASE REVENUE PERCENTAGE REVENUE PERCENTAGE --------------- ----------- --------------- ----------- (DOLLARS IN THOUSANDS) United States.......................................... $ 6,718 35% $ 5,295 39% Europe................................................. 5,432 29% 2,840 21% Mexico................................................. 2,479 13% 1,865 14% Canada................................................. 1,521 8% 1,291 9% Australia/New Zealand.................................. 1,027 6% 1,030 7% Asia................................................... 807 4% 889 6% South America.......................................... 778 4% 530 4% Middle East............................................ 251 1% -- -- ------- ----- ------- ----- Total.................................................. $ 19,013 100% $ 13,740 100% ------- ----- ------- ----- ------- ----- ------- -----
For the years ended 1997 and 1996, Aerovias de Mexico, S.A. de C.V., a lessee customer of the Company, contributed approximately 13% and 14% respectively of operating lease revenue. As of December 31, 1997, the Company had 2 engines under finance lease to one Asia based lessee which generated $0.4 million of revenue in 1997. The Company had no such leases in 1996. AIRCRAFT EQUIPMENT 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 generally 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 the engines and their 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. As of December 31, 1997, all of the engines in the Company's lease portfolio were Stage III engines and were generally suitable for use on one or more commonly used aircraft. The Company purchases a majority of its engines in the aftermarket, primarily from airlines or other leasing companies. The Company applies the same general review process it uses for acquisition of aircraft engines to possible acquisitions of aircraft and parts for lease. The Company's investment in aircraft in late 1997 involved the purchase of three de Havilland DHC-8 commuter aircraft. These aircraft are Stage III compliant. The Company's parts packages consist of rotable parts for use on commercial aircraft or the engines appurtenant to such aircraft. 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"). AIRCRAFT EQUIPMENT HELD FOR LEASE At December 31, 1997, the Company had 44 aircraft engines and related equipment, 8 spare parts packages and 3 aircraft with an aggregate original cost of $163.9 million in its lease portfolio. At December 31, 1996, the Company had 32 aircraft engines with an aggregate original cost of $112.5 million, 3 spare parts packages and no aircraft in its lease portfolio. 6 As of December 31, 1997, minimum future rentals under the noncancelable leases of these aircraft assets was as follows:
(IN YEAR THOUSANDS) - ------------------------------------------------------------------------------- ------------- 1998........................................................................... $ 20,230 1999........................................................................... 16,182 2000........................................................................... 11,817 2001........................................................................... 8,560 2002........................................................................... 5,957 Thereafter..................................................................... 7,018 ------------- $ 69,764 ------------- -------------
AIRCRAFT EQUIPMENT FINANCING/SOURCE OF FUNDS The Company typically acquires the engines it leases with a combination of equity capital and funds borrowed from financial institutions. The Company can typically borrow 80% to 100% of the engine purchase price on a recourse, non-recourse or partial recourse basis. Under most of the Company's term loans, the lender is entitled to receive most of the lease payments associated with the financed engines to apply to debt service. Under the Company's warehouse facilities, the lender is paid interest only until such time as loans under the facilities become due. Generally, lenders take a security interest in the engines. The Company retains ownership of the engines, subject to such security interest. Loan interest rates often reflect the financial condition of the underlying lessees, the terms of the lease and percentage of purchase price advanced, and for full or partial recourse loans, the financial condition of the Company. The Company obtains the balance of the purchase price of the engine, the "equity" portion, from internally generated funds, cash-on-hand, and the net proceeds of prior common stock offerings. 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 equipment financed through recourse borrowings, the lender providing the financing can foreclose on the equipment, repossess and sell such equipment and seek any balance due on such financing from the Company to the extent of the recourse. 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 or partial recourse basis. Certain of the Company's engines are owned in wholly-owned subsidiaries set up for financing purposes. Non-recourse loans represent loans to the Company's subsidiaries which own only the assets securing the loan and as to which the Company has not guaranteed the loan. The Company and its subsidiaries at December 31, 1997 had borrowings of $7.1 million of non-recourse loans and $93.7 million of full or partial recourse loans. 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 certain aircraft engines. Residual sharing arrangements apply to 5 of the Company's engines as of December 31, 1997. The Company accrues for its residual sharing obligations using net book value as a proxy for residual proceeds. Generally, the Company has borrowed to finance the acquisition of aircraft and parts packages on terms similar to those for engines. Such borrowings have generally been on a recourse basis. 7 Additionally, the Company and WASI have borrowed to finance the acquisition of spare parts for resale. The advance rates on such financing range from 70% to 85%. To date, such borrowings have been on a recourse basis or in the case of borrowings by WASI, guaranteed by the Company. SPARE PARTS SALES The Company, through WASI, specializes in the purchase and resale of aftermarket engine parts, engines, modules and rotable components. WASI purchases individual engine parts from airlines and others in the aftermarket or acquires whole airframes or engines and contracts to have the airframes or engines dismantled into their component parts for resale by WASI. Some of the acquired component parts are overhauled for WASI by FAA-authorized repair agencies 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, PW 4000 and 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 has begun to expand into engine components for the CFM-56, an engine used on the Boeing 737. WASI's operations have afforded the Company additional contacts and opportunities in the aircraft engine market. WASI can provide some parts for maintenance and overhaul of the Company's engines at prices lower than the Company could obtain from third parties. 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 have them dismantled, salvage valuable components and thereby maximize the residual value of the engines. WASI has strict guidelines regulating how parts are procured and overhauled. After the completion of an extensive facilities audit and numerous meetings with the Company's management, the Airline Suppliers Association, an FAA recognized independent quality assurance organization, accredited WASI as an aftermarket parts supplier. When procuring aircraft parts, great emphasis is placed on source and traceability. At December 31, 1997, at least 95% 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 5% 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 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--Government Regulation." WASI advertises its aircraft engine parts availability on the Inventory Locator Service ("ILS") electronic database. Users of ILS can access the database and determine which companies have the desired inventory. The Company also advertises in industry publications and receives customers through referrals. 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 selling 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 selective purchase and resale of commercial aircraft engines and engine components in the aftermarket to complement its engine and parts leasing business. It is the Company's general policy to minimize risk by not purchasing engines or components on speculation; however, on occasion, the Company purchases engines and components without having a commitment for their sale. The Company normally makes a contractual commitment to purchase specific engines or components for its own account only after, or concurrently with, obtaining a firm customer purchase commitment. 8 Although the Company usually has purchase commitments at delivery, it would have financial exposure if it purchased an engine or components which could not immediately be resold. The Company assesses the supply and demand of target engines and components through its sales force 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 inventories and engines on order. The Company does not refurbish or perform other maintenance on the engines or components it sells; however, from time to time, the Company has hired third party contractors to refurbish or repair such engines and components. 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 by CFM, a joint venture between General Electric and SNECMA. The Company also competes with Rolls Royce Capital ("Rolls Royce"). Rolls Royce limits its leasing activities to products of its parent company and related parties. The Bank of Tokyo-Mitsubishi, through its affiliate Engine Lease Finance in Shannon, Ireland, also competes with the Company. Some of these competitors are substantially larger and each has greater financial resources than the Company which may permit, among other things, greater access to capital markets at more favorable terms. In addition, certain major aircraft lessors, including International Lease Finance Corporation and General Electric Capital Aviation Services ("GECAS"), compete with the Company to the extent that they include spare engine leases with their aircraft leases or may compete on transactions involving numerous engines. With respect to engine marketing and spare parts and component sales, the Company competes with airlines, engine manufacturers, aircraft, engine and parts brokers, and parts distributors. The Company's major competitors include the Allen Aircraft division of AAR Corp. ("AAR"), The AGES Group ("AGES"), The Memphis Group, Aviation Sales Company, Kellstrom Industries and AVTEAM, Inc. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Competition." 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 and parts due to its experience in the industry and reputation and expertise in acquiring commercial aircraft engines which allows the Company to re-lease or sell such engines and parts at a competitive price. In the spare parts package leasing market, the Company competes with AAR, AGES, Aviation Sales Company, Kellstrom Industries and others. In the commuter aircraft leasing market, the Company competes with The Ages Group, GECAS, the leasing arms of certain commuter aircraft manufacturers and others. 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 Company or its lenders 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 9 more of the warranties or conditions of the insurance policy. The Company monitors compliance with the insurance provisions of the leases. The Company also carries contingency and product liability insurance. 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 Transportation Act, as amended, the FAA exercises regulatory authority over the air transportation industry. The FAA regulates the manufacture, repair and operation of all aircraft and their components 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 commercial 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 most commercial aircraft that fly in the United States and the engines appurtenant thereto 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. As of December 31, 1997, all of the engines and aircraft in the Company's lease portfolio were Stage III engines. EMPLOYEES As of December 31, 1997, the Company had 45 full-time employees and 2 part-time employees (excluding consultants), including 24 employees in equipment leasing and trading and 23 employees in 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. Aircraft asset leasing, financing, sales, trading and general administrative activities are conducted from the Sausalito location. In February 1998, the company signed a lease for approximately 9,300 square feet of office space into which it anticipates moving its Sausalito operations in the second quarter of 1998. The Company also leases approximately 16,600 square feet of office and warehouse space for WASI's operations at 291 Harbor Way, South San Francisco, California. This lease expires on May 31, 1998. WASI leases approximately 6,000 square feet of warehouse space at a second South San Francisco location. This lease is a month-to-month lease. In addition, the Company leases approximately 10,730 square feet of space at 1769 West University Drive, Suite 177, Tempe, Arizona 85821, which is used for parts storage and distribution. This lease expires on July 31, 1999. See Note 10 to the Audited Financial Statements. In March 1998, the Company contingently agreed to lease approximately 125,000 square feet of warehouse and office space for WASI in San Diego, California. The initial term of the lease is 6 years. WASI intends to move substantially all of its South San Francisco operations into this facility. 10 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 1997. 11 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 9, 1998, there were 1,239 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 of 1997, as reported by NASDAQ, are set forth below:
1997 1996 -------------------- -------------------- HIGH LOW HIGH LOW --------- --------- --------- --------- First Quarter.................................................................... 14.50 12.25 n/a n/a Second Quarter................................................................... 12.63 10.31 n/a n/a Third Quarter.................................................................... 23.50 12.25 10.00 8.50 Fourth Quarter................................................................... 24.13 15.25 12.88 8.75
The Company did not declare any dividends during the years ended December 31, 1997 and 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, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenue: Operating lease revenue............................... $ 19,013 $ 13,740 $ 13,771 $ 13,636 $ 10,323 Gain (loss) on sale of leased engines................. 4,165 2 (483) 633 (281) Spare parts sales..................................... 14,110 5,843 3,859 795 -- Sale of equipment acquired for resale................. 12,748 12,105 5,472 2,184 -- Interest income in direct finance lease............... 443 -- -- -- -- Interest and other income............................. 728 618 119 542 938 ---------- ---------- --------- --------- --------- $ 51,207 $ 32,308 $ 22,738 $ 17,790 $ 10,980 Expenses: Cost of spare parts sales............................. $ 9,469 $ 3,308 $ 2,546 $ 659 -- Cost of equipment acquired for resale................. 10,678 10,789 2,742 1,863 -- All other expenses.................................... 22,245 13,351 14,168 13,295 9,857 Gain on modification of credit facility............... -- -- 2,203 -- -- ---------- ---------- --------- --------- --------- Income before income taxes and minority interest...... $ 8,815 $ 4,860 $ 5,485 $ 1,973 $ 1,123 Net income............................................ $ 7,338 $ 2,804 $ 3,216 $ 1,172 $ 669 Balance Sheet Data: Total assets.......................................... $ 198,430 $ 124,933 $ 91,437 $ 83,542 $ 68,632 Debt (includes capital lease obligation).............. 104,235 76,146 69,911 69,456 59,840 Shareholders' equity.................................. 54,601 23,202 4,812 1,959 1,151
12
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- --------- --------- --------- (DOLLARS IN THOUSANDS) Lease Portfolio: Engine portfolio at the end of the period............. 44 32 31 26 25 Spare parts package portfolio at the end of the period................................... 8 3 -- -- -- Aircraft portfolio at the end of the period........... 3 -- -- -- --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's core business is acquiring and leasing, primarily pursuant to operating leases, commercial aircraft spare engines and other aircraft equipment. The Company, through WASI, also specializes in the purchase and resale of aftermarket airframe and engine parts, engines, modules and rotable components. In addition, the Company engages in the selective purchase and resale of commercial aircraft engines. Revenue consists primarily of operating lease revenue, income from the leasing and sale of spare parts and components and income from the sale of engines and equipment. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Revenue is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 -------------------- -------------------- AMOUNT % AMOUNT % --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Operating lease revenue............................................... $ 19,013 37.1% $ 13,740 42.5% Gain on sale of leased equipment...................................... 4,165 8.1% 2 0.0% Spare parts sales..................................................... 14,110 27.6% 5,843 18.1% Sale of equipment acquired for resale................................. 12,748 24.9% 12,105 37.5% Finance lease revenue................................................. 443 0.9% -- -- Interest and other income............................................. 728 1.4% 618 1.9% --------- --------- --------- --------- Total................................................................. $ 51,207 100.0% $ 32,308 100.0% --------- --------- --------- --------- --------- --------- --------- ---------
LEASE PORTFOLIO. During 1997, 21 engines, 3 aircraft, and 5 spare parts packages were added to the Company's lease portfolio at a total cost of $68.1 million. Nine engines were sold or transferred from the portfolio. LEASING ACTIVITIES. Operating lease revenue for the year ended December 31, 1997, increased 38% to $19.0 million from $13.7 million for the comparable period in 1996. This increase reflects lease revenues from additional engines and spare parts packages. In late June 1997, the Company entered into two finance leases. Finance lease income generated from these transactions totaled $442,542 for the period ended December 31, 1997. There were no comparable transactions for the year ended December 31, 1996. Expenses directly related to operating lease activity increased 48% to $12.5 million. Interest expense related to all leasing activities increased 72% to $7.5 million for the year ended December 31, 1997, from the comparable period in 1996, due primarily to an increased loan base and the replacement of an existing facility with a new loan agreement in the first quarter of 1997 bearing a higher interest rate. Depreciation expense increased 32% to $4.1 million for the year ended December 31, 1997, from the comparable period 13 in 1996, due to the larger asset base in 1997. Residual sharing expense increased 24% to $0.9 million for the year ended December 31, 1997, from the $0.7 million for the comparable period in 1996. This expense is calculated by comparing the net book value of the engines subject to such agreements to their related debt balances and adjusting the residual share payable to the appropriate amount representing the sharing percentage of any excess of the net book value over the corresponding debt balance for the engines subject to residual sharing. GAIN ON SALE OF LEASED ENGINES. During the year ended December 31, 1997, the Company sold 6 engines from the lease portfolio. These engines had a net book value of $11.5 million and they were sold for a gain of $4.2 million. SPARE PARTS SALES. Revenues from spare parts sales increased 142% to $14.1 million. The gross margin, decreased to 33% in 1997, from 43% in the corresponding period in 1996. SALE OF EQUIPMENT ACQUIRED FOR RESALE. During the year ended December 31, 1997, the Company sold 10 engines for $12.7 million which resulted in a gain of $2.1 million, compared to the year ended December 31, 1996, during which the Company sold 4 engines for $12.1 million resulting in a gain of $1.3 million. Included in the 1997 sales was one transaction involving the sale of four engines acquired at a cost of $600,000 and sold for a gain of $100,000. Equipment sales opportunities and profitability may vary materially from period to period. INTEREST AND OTHER INCOME. Interest and other income for the year ended December 31, 1997, increased to $0.7 million from $0.6 million for the year ended December 31, 1996. This is a result of interest earned on deposits held, primarily the proceeds from the Initial Public Offering. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 82% to $9.3 million for the year ended December 31, 1997, from the comparable period in 1996. This increase reflects expenses associated with staff additions, increased rent due to the expansion of the WASI facility, as well as an increase in professional fees, insurance expense and public company costs. INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for the year ended December 31, 1997, increased to $3.5 million from $2.0 million for the comparable period in 1996. This increase reflects an increase in the Company's pre-tax earnings. EXTRAORDINARY ITEM. In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2 million, net of tax. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 -------------------- -------------------- AMOUNT % AMOUNT % --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenue: Leasing activities................................................. $ 13,740 42.5% $ 13,771 60.6 % Gain (Loss) on sale of leased equipment............................ 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.............................................................. $ 32,308 100.0% $ 22,738 100.0 % --------- --------- --------- --------- --------- --------- --------- ---------
14 LEASE PORTFOLIO. At December 31, 1995, the Company had 31 engines in its operating lease portfolio. During 1996, four engines were either transferred or sold from the lease portfolio. One of the four engines was transferred at its net book value to WASI and dismantled for spare parts sales. The remaining three engines were sold to third parties. In addition, another engine from the lease portfolio was sold under a sale and leaseback agreement and is now reflected on the Company's balance sheet as an engine on capital lease. In the third quarter of 1996, the Company acquired one engine for $2.8 million and in the fourth quarter of 1996, 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 held 32 engines and 3 spare parts packages in its lease portfolio. OPERATING LEASES. Operating lease revenue for the year ended December 31, 1996 decreased to $13.7 million from $13.8 million for 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 in 1995 that were fully depreciated and the sale of two engines in the third quarter of 1996. Interest expense dropped $1.2 million (22%) in 1996 from 1995, due primarily to the modification of the then-existing term loan with Marine Midland Bank (the "Midland 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. This expense is calculated by comparing the net book value of these engines to their related debt balances and adjusting the residual share payable to the appropriate amount representing the sharing percentage of any excess of the net book value over the corresponding debt balance for the six engines subject to residual sharing. 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 primarily due to increased volume. Gross margin rose to 43% in 1996 from 34% in the corresponding period in 1995, primarily due to a change in the mix of parts sold and the gross margins related thereto. SALE OF EQUIPMENT ACQUIRED FOR RESALE. During the year ended December 31, 1996, the Company sold four 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 sold was $10.8 million and $2.7 million in 1996 and 1995, respectively. 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 was due primarily to increased marketing/brokerage fee income earned on one engine, nonrecurring credits due the Company regarding excessive engine overhaul costs and an increase in interest earned on the net proceeds from the Initial Public Offering, 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 Initial Public Offering. 15 GAIN ON MODIFICATION OF CREDIT FACILITY. In 1995, the Company modified the terms of the Midland Loan. 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 was approximately 41% and 40% in 1996 and 1995, respectively. Therefore, the decrease in tax expense was due to the decrease in the Company's income before taxes and minority interest offset by a slight increase in the effective tax rate. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its growth through borrowings secured by its lease portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" above and "Business--Aircraft Equipment Financing/Source of Funds." Cash of approximately $165.6 million, $16.1 million, and $15.7 million in the years ended December 31, 1997, 1996 and 1995, respectively, was derived from this activity. In these same time periods, $137.1 million, $13.5 million and $9.3 million, respectively, was used to pay down related debt. In December 1997, net proceeds from a secondary common stock offering were approximately $23.8 million, as discussed below. In 1996, net proceeds from the Initial Public Offering were approximately $15.9 million, as discussed below. Cash flows from operating activities generated approximately $6.5 million, $9.6 million and $0.5 million in the years ended December 31, 1997, 1996 and 1995, respectively. The Company's primary use of funds is for the purchase of equipment for operating and finance lease. Approximately $68.1 million, $25.3 million, and $9.3 million of funds were used for this purpose in the years ended December 31, 1997, 1996 and 1995, respectively. Additional funds were used in these periods to finance the growth of inventories to support parts sales. The secondary offering which occurred in December 1997 was for 1,725,000 shares of Common Stock at $15.00 per share. The proceeds to the Company, net of all expenses, were $23.8 million. The primary use of these proceeds was repayment of amounts outstanding under the Company's revolving credit facility. The Initial Public Offering which occurred in September 1996 was for 2,300,000 shares of Common Stock at $8.00 per share. The proceeds to the Company, net of all expenses, were $15.9 million. These proceeds were used to prepay $1.3 million of indebtedness under an existing term facility, and to purchase an amortizing interest rate cap to hedge a portion of the Company's exposure to increases in interest rates on its variable rate borrowings for a cost of $469,000. The balance of the proceeds, together with debt financing, were used to acquire additional engines for lease, to acquire engine and airframe component inventory, and for working capital and other general corporate purposes. Until February 1997, the Company's primary lender was Marine Midland Bank ("Midland"). Prior to June 1995, the Midland loan provided, among other things, for interest payable at LIBOR plus 3.5% to 5%, required a specified percentage of lease payments to be applied to debt service but required final payment only upon the sale of the subject engine, and provided to the lender a share of the residual value of financed engines. In June 1995, the Company modified the Midland loan. As part of the modification, the Midland loan was converted to a ten-year, full payout loan, the existing residual sharing arrangement with the lender was terminated, the interest rate was reduced to LIBOR plus 1%, and the lender acquired two engines from the Company with a net book value of $5.7 million. This modification resulted in a gain to the Company of $2.2 million. In February, 1997, the Company repaid the Midland loan at a discount which resulted in an extraordinary book gain, net of tax and related costs, of approximately $2.0 million. The transaction was financed through a loan of $41.5 million from a financial institution at an interest rate of LIBOR plus 2.5%. In December 1997, a substantial portion of this loan was repaid from proceeds of the Funding Corp. Facility defined below. The remainder of the loan was to mature in February 1998 but has been extended to June 1998. As of December 31, 1997, $13.4 million was outstanding under this facility. 16 The Company has a revolving credit facility to finance the acquisition of engines and high-value spare parts for sale or lease. Assuming compliance with the facility's terms, including sufficiency of collateral, at December 31, 1997 and March 17, 1998, $45 million and $18.1 million was available under this facility, respectively. Fifteen million of this facility matures on May 31, 1998 and the remainder of the facility expires on June 12, 1998. The facility bore interest at prime plus .25% on December 31, 1997 and may be renewed annually. The Company has an $80 million warehouse facility, available to a special purpose finance subsidiary of the Company, for the financing of jet aircraft engines transferred by the Company to such finance subsidiary (the "Funding Corp. Facility"). This transaction's structure facilitates future public or private securitized note issuances by the special purpose finance subsidiary. This facility has an eight year term and bears interest at LIBOR plus 2.25%. This facility requires the issuer to hedge 50% of the facility against interest rate changes no later than April 30, 1998. Assuming compliance with the facilities terms, including sufficiency of collateral, as of December 31, 1997 and March 17, 1998, $45.6 million and $34.2 million was available under this facility, respectively. WASI 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 advances against the purchase price of parts for resale and bears interest at prime plus 1%. This facility requires interest-only payments for the first five months with the principal balance due six months after drawdown and expires on April 30, 1998. The Company directly guarantees WASI's obligations under this facility. Assuming compliance with the facilities terms, including sufficiency of collateral, as of December 31, 1997 and March 17, 1998, approximately $0.4 million and $1.3 million was available under this facility respectively. Approximately $27.3 million of the Company's debt is repayable during 1998. The majority of such repayments consist of scheduled balloon payment maturities on term loans. The balance of the repayments consist of scheduled installments due under term loans. A portion of the balloon payment maturities was refinanced subsequent to year-end 1997 under the Company's $80 million warehouse facility. The Company anticipates that it will refinance the remaining balloon payment maturities during the course of 1998. The Company believes that its current equity base and internally generated funds are sufficient to fund the Company's anticipated equity requirements operations for at least 12 months, at which time additional equity may be required to fund projected growth. The Company believes its current credit facilities are sufficient to fund the Company's debt capital needs into the second quarter of 1998. The Company is seeking to expand its existing revolving credit facility and make other borrowing arrangements to fund future growth. The Company's ability to successfully execute its business strategy is dependent in part on its ability to raise equity capital and to obtain debt capital. There can be no assurance that the necessary amount of such equity or debt capital will continue to be available to the Company on favorable terms, or at all. If the Company were unable to continue to obtain required financing on favorable terms, the Company's ability to add new engines and parts packages to its portfolio or to conduct profitable operations with its existing asset base would be impaired, which would have a material adverse effect on the Company's business, financial condition and results of operations. As of December 31, 1997, the Company had 3 engines and 5 spare parts packages which had not been financed. The Company will likely seek financing for this equipment, although no assurance can be given that such financing will be available on favorable terms, if at all. In addition, certain of the Company's engines have been financed under floating rate facilities. Until fixed rate financing for these assets is in place, the Company is subject to interest rate risk, since the underlying lease revenue is fixed. See "Managements Discussion and Analysis of Financial Condition and Results of Operations--Interest Rate Risks" below. 17 Between December 31, 1997 and March 17, 1998, the Company and WASI purchased nine engines for the lease portfolio and one engine for the parts operation. The total cost of these purchases was approximately $39.2 million. These purchases were funded with cash and borrowings under the Company's revolving line of credit and the Funding Corp. Facility. Additionally, the Company committed, subject to documentation, to purchase, during 1998 and 1999, certain used aircraft for its WASI parts operation. Certain deposits have and will be made in connection with this commitment and the total commitment to purchase over the course of 1998 and 1999 is not more than $38 million. MANAGEMENT OF INTEREST RATE EXPOSURE At December 31, 1997, $53.5 million of the Company's borrowings were on a variable rate basis at various interest rates tied to either LIBOR or the prime rate. The Company's equipment leases are generally structured at fixed rental rates for specified terms. To date, this variable rate borrowing has resulted in lower interest expense for the Company. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue the Company realizes under its leases and the interest rate that the Company pays under its borrowings. See "Risk Factors--Interest Rate Risks." In September 1996, the Company purchased an amortizing interest rate cap in order to limit its exposure to increases in interest rates on a portion of its variable rate borrowings. Pursuant to this cap, the Counter Party will make payments to the Company, based on the notional amount of the cap, if the three month LIBOR RATE is in excess of 7.66%. As of December 31, 1997, the notional principal amount of the cap was 36.2 million and said amount will decline to $26 million at the end of its term. The cost of the cap is being amortized as an expense over a four-year period. The company will be exposed to credit risk in the event of non-performance of the interest rate cap counter party. RISK FACTORS 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 discussions in this Report contain 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, aircraft and spare parts packages primarily under operating leases as opposed to finance leases. Under an operating lease, the Company retains title to the aircraft equipment and assumes the risk of not recovering its entire investment in the aircraft equipment through the re-leasing and remarketing process. Operating leases require the Company to re-lease or sell aircraft equipment in its portfolio in a timely manner upon termination of the lease in order to minimize off-lease time and recover its investment in the aircraft equipment. 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 aircraft equipment 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 the aircraft equipment and technological developments. Further, the value of a particular used aircraft engine or aircraft varies greatly depending upon its condition, the number of hours remaining until the next major maintenance of the aircraft engine aircraft part or aircraft is required and general conditions in the airline industry. In addition, the success of an operating lease depends in part upon having the aircraft equipment returned by the lessee in marketable 18 condition as required by the lease. Consequently, there can be no assurance that the Company's estimated residual value for the aircraft equipment will be realized. As of December 31, 1997, the Company had 42 engines, 3 aircraft and 8 parts packages under lease to 33 customers in 20 countries (2 additional engines were off lease, one of which was leased in January 1997.) If the Company is unable to re-lease or sell the aircraft equipment on favorable terms, its business, financial condition, cash flow, ability to service debt and results of operations could be adversely affected. The Company, through WASI, also acquires aviation equipment such as whole engines and aircraft which can be dismantled and sold as parts. Before parts may be installed in an aircraft, they must meet certain standards of condition established by the Federal Aviation Administration. See "Government Regulations" below. Parts must also be traceable to sources deemed acceptable by the FAA. 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. In addition, if the Company does not sell airframe and engine component parts that it purchases in the time frame contemplated at acquisition, the Company may be subject to unanticipated inventory financing costs as well as all the risks of ownership described above. The Company also engages in the selective purchase and resale of commercial aircraft engines and engine components in the aftermarket. On occasion, the Company purchases engines or components without having a commitment for their sale. If the Company were to purchase an engine or component without having a firm commitment for its sale or if a firm commitment for sale were to exist but not be consummated for whatever reason, the Company would be subject to all the risks of ownership described above. INDUSTRY RISKS Downturns in the air transportation industry affect each of the three components of the Company's business. In particular, substantial increases in fuel costs or interest rates, increased 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. While the Company believes that its lease terms protect its aircraft equipment and the Company's investment in such aircraft equipment, 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 or results of operations. In recent years and as discussed in "Customer Credit Risks" below, a number of commercial airlines have experienced financial difficulties, in some cases resulting in bankruptcy proceedings. 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. The Company's existing and prospective customers include 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 due under a lease or to repossess aircraft equipment in the event of a default by a lessee could have a material adverse effect on the Company's business, financial condition or results of operations. A number of airlines have experienced financial difficulties, certain airlines have filed for bankruptcy and a number of such airlines have ceased operations. In most cases where a debtor seeks protection under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), creditors are 19 automatically stayed from enforcing their rights. In the case of United States certified airlines, Section 1110 of the Bankruptcy Code provides certain relief to lessors of the aircraft equipment. Specifically, the debtor airline has 60 days from the date the airline seeks protection under Chapter 11 of the Bankruptcy Code to agree to perform its obligations and to cure any defaults. If it does not do so, the lessor may repossess the aircraft equipment. 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. During the three years ended December 31, 1997, four lessees of the Company filed for bankruptcy protection or otherwise became insolvent or ceased operations. In two of these cases the Company's engines were returned and re-leased. In the third case, the lessee was acquired by another airline and the lease continues. On October 5, 1997, Western Pacific Airlines, Inc., ("West Pac") a domestic lessee of three of the Company's engines with a combined net book value of $8.7 million, filed a petition under Chapter 11 of the Bankruptcy Code in the District of Colorado. In that case, West Pac cured all defaults under its leases with the Company. In March 1998, West Pac and the Company entered into a stipulation wherein the three engines have been returned to the Company. The Company believes it will not have a problem re-leasing these engines. On February 26, 1998, Pan American Airways Corporation, a domestic lessee with one spare parts package with a book value of $0.3 million (the "Pan Am Lease"), filed a petition under Chapter 11 the Bankruptcy Code in Florida. The Company believes its lawfully terminated the Pan Am lease prior to the bankruptcy. It has possession of the majority of the spare parts in the Pan Am lease in value terms and believes it should obtain possession of most of the remaining spare parts. The Company intends to re-lease or sell these spare parts. FLUCTUATIONS IN OPERATING RESULTS The Company has experienced fluctuations in its quarterly operating results and anticipates that these fluctuations may continue. Such fluctuations may be due to a number of factors, including the timing of sales of engines and spare parts and engine marketing activities fluctuation of and activities margins on such, unanticipated early lease terminations, the timing of engine acquisitions or a default by a lessee. Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations for preceding quarters are not necessarily meaningful and that results for any prior quarter should not be relied upon as an indication of future performance. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's Common Stock. INTERNATIONAL RISKS In 1997, approximately 65% of the Company's lease revenue was generated by leases to foreign customers of which 6% of lease revenue which was generated by leases to Asian customers. Such international leases may present greater risks to the Company because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. 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 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, 20 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. Consequently, 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. 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 25% of the aircraft equipment purchase price, commonly known as an "equity investment." The Company's equity investments have historically been financed from internally generated cash, the net proceeds of the Company's initial public offering which was completed on September 18, 1996 at a price of $8.00 per share (the "Initial Public Offering"), and the net proceeds of the secondary offering which was completed on December 19, 1997 at a price of $15 per share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 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 required financing on favorable terms, the Company's ability to add new leases to its portfolio and parts inventory would be limited, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company typically acquires the engines it leases with a combination of equity capital and funds borrowed from financial institutions. In some circumstances, the Company acquires assets before it has obtained debt financing. There can be no assurance that debt financing will be available after the asset has been acquired or, if available, at attractive rates or terms. Factors that could cause debt financing to be more expensive or unavailable include changes in interest rates, financial conditions of the lessee or the Company, prospects for the airline industry or the asset type as well as general economic conditions. If debt financing is not available, a like amount of the Company's equity capital would be unavailable for use to acquire additional assets, which could have a material adverse effect on the Company's business, financial condition or 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, 1997, borrowings subject to interest rate risk totaled $53.5 million or 53% 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. In 1996, the Company purchased an amortizing interest rate cap which had a notional principal amount of $36.2 million as of December 31, 1997, to reduce its interest rate exposure; however, there can be no assurance that the Company's business, operating results or financial condition will not be adversely affected during any period of increases in interest rates. 21 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 by CFM. The Company also competes with Rolls Royce. Rolls Royce limits its leasing activities to products of its parent company and related parties. The Bank of Tokyo-Mitsubishi, through its affiliate 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, certain major aircraft lessors, including International Lease Finance Corporation and GECAS, compete with the Company to the extent that they include spare engine leases with their aircraft leases or may compete on transactions involving numerous engines. With respect to engine marketing and spare parts and component sales, the Company competes with airlines, engine manufacturers, aircraft, engine and parts brokers, and parts distributors. The Company's major competitors include AAR, AGES, The Memphis Group, Aviation Sales Company, Kellstrom Industries and AVTEAM, Inc. 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. In the spare parts package leasing market, the Company competes with AAR, AGES, Aviation Sales Company, Kellstrom Industries and others. In the commuter aircraft leasing market, the Company competes with AGES, GECAS, the leasing arms of certain commuter aircraft manufacturers and others. 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, original equipment manufacturers ("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 or 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 the Company's managerial, operational and financial resources. Due to the Company's rapid pace of growth during 1997, the Company hired three new officers (an Executive Vice President and Chief Administrative Officer, an Executive Vice President and Chief Financial Officer and a Senior Vice President and General Counsel). 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. An inability to effectively manage growth could have a material adverse effect on the Company's business, financial condition or results of operations. YEAR 2000 The Company's operations are not highly dependent on systems technology and management believes the Company's exposure to loss as a result of year 2000 issues is minimal. The Company does not believe 22 that the Year 2000 issue will have a bearing on lessees' ability to adhere to the terms of their lease agreements with the Company. However, it has been reported in the general press that airlines and the FAA may have material Year 2000 issues, which could effect their operations. Such an effect could impact future dealings with lessees and other customers. ACQUISITION AND EXPANSION RISKS One of the components of the Company's growth strategy is the possible select acquisition of businesses complementary to the Company's existing businesses and possible expansion into new aviation-related activities. The inability of the Company to identify suitable acquisition candidates or to complete acquisitions or expansions on reasonable terms could adversely affect the Company's ability to grow. In addition, any acquisition or expansion made by the Company may result in potentially dilutive issuances of equity securities, the incurrence of additional debt and future charges to earnings related to the amortization of goodwill and other intangible assets. The Company also may experience difficulties in the assimilation of operations, services, products and personnel, an inability to sustain or improve historical revenue levels, the diversion of management's attention from ongoing business operations and the potential loss of key employees. Any of the foregoing could have a material adverse effect on the Company's business, financial condition or results of operations. The acquisition of other equipment leasing companies or portfolios creates certain additional risks. For example, because acquired leases have been originated by other companies, they are not subject to the Company's underwriting policies and procedures and, therefore, may be subject to greater risks of payment delinquencies and charge-offs. In addition, acquired leases may consist of products not currently offered by the Company, or offered only on a limited basis. Acquired leases may also increase the concentration of the Company's portfolio of leases serviced in certain geographical regions or change the relative concentration of such portfolio among geographical regions. Acquired leases may not contain the same indemnification provisions, maintenance provisions, equipment residual value assumptions and other material terms as the Company's current leases. Finally, the provisions of acquired leases may not adequately protect the Company from claims arising out of the lessee's use of the acquired lease equipment. PRODUCT LIABILITY RISKS The Company is exposed to product liability claims in the event that the use of its aircraft engines or parts 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 and, if applicable its lenders, are named as an additional insured on liability insurance policies carried by lessees, with the Company or its 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 or parts. 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 or 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 or results of operations. 23 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, President and Chief Executive Officer or Edwin F. Dibble, the President of WASI, would have a material adverse effect on the Company's business. The Company has entered into an employment agreement with Mr. Dibble and the Company maintains key man life insurance of $2.5 million on Mr. Willis and $1.5 million on Mr. Dibble. 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 Transportation Act, 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 commercial 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 most commercial aircraft that fly in the United States and the engines appurtenant thereto 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. As of December 31, 1997, all of the engines in the Company's lease portfolio were Stage III engines. See "Business--Government Regulation." CONTROL BY PRINCIPAL SHAREHOLDER The Company's principal shareholder, Mr. Willis, beneficially owns approximately 42% of the outstanding shares of Common Stock of the Company and therefore effectively controls the Company. Accordingly, Mr. Willis will have 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 affect the prevailing market price of the Common Stock. POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Company's 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. 24 ANTI-TAKEOVER PROVISIONS Certain provisions of law, and the Company's Amended and Restated Articles of Incorporation (the "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 Articles of Incorporation also provide that, for as long as the Company has a class of stock registered pursuant to the Securities 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, the Company has qualified as a "listed corporation" as defined in Section 301.5(d) of the California Corporation Code and cumulative voting has been 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. 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. 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 29. (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 26. (b) Reports on Form 8-K: The Company filed no reports on Form 8-K during the last quarter of 1997. 25 EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 3.1 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. Incorporated by reference to Exhibit 3.2 of the Company's report on Form 10-K for the year ended December 31, 1996. 3.2 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. Incorporated by reference to Exhibit 10.5 of the Company's report on Form 10-K for the year ended December 31, 1996. 10.6 Lease dated March 16, 1992 for facilities located in Sausalito, California, together with amendments thereto. Incorporated by reference to Exhibit 10.6 of the Company's report on Form 10-K for the year ended December 31, 1996. 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 Employment Agreement between the Company and Edwin Dibble. Incorporated by reference to Exhibit 10.9 to Registration Statement No. 333-39865 filed on December 11, 1997. 10.10 Employment Agreement between the Company and Donald Nunemaker dated July 16, 1997. 10.11 Loan Agreement dated June 12, 1997 with CoreStates Bank, together with related documents for a $15 million revolving credit facility. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended June 30, 1997. 10.12 Amendment dated July 28, 1997, to loan agreement dated June 12, 1997, for the increasing of the revolving credit facility to $30 million from $15 million. Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended June 30, 1997. 10.13 Amendment dated November 18, 1997, to loan agreement dated June 12, 1997, for the increasing of the revolving credit facility to $45 million from $30 million. Incorporated by reference to Exhibit 10.21 to Registration Statement No. 333-39865 filed on December 11, 1997.
26
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 10.14 Engine Sales Agreement dated August 14, 1997, together with related documents, for a $25 million purchase from Pratt & Whitney for nine bare Pratt & Whitney 4056 engines. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended September 30, 1997. 10.15 Aircraft Sale Agreement dated as of November 17, 1997, between Finova Capital Corporation as seller and Willis Lease Finance Corporation as buyer. Incorporated by reference to Exhibit 10.25 to Registration Statement No. 333-39865 filed on December 11, 1997. 10.16* Indenture dated as of September 1, 1997, between WLFC Funding Corporation and The Bank of New York, as Indenture Trustee. 10.17* Series 1997-1 Supplement dated as of September 1, 1997 between WLFC Funding Corporation and the Bank of New York, as Indenture Trustee. 10.18 Class A Note Purchase Agreement dated as of September 1, 1997 between the Company, WLFC Funding Corporation and First Union National Bank of North Carolina. 10.19* Administration Agreement dated as of September 1, 1997 between WLFC Funding Corporation, the Company, First Union Capital Markets Corp. and The Bank of New York. 11.1 Statement regarding computation of per share earnings. 21.1 Subsidiaries of the Company. 27.1 Financial Data Schedule
- ------------------------ * Portions of these exhibits have been omitted pursuant to a request for confidential treatment. 27 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 20, 1998 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: Chief Executive Officer /s/ CHARLES F. WILLIS, IV (Principal Executive Officer) -------------------------------- Charles F. Willis, IV Date: Executive Vice President and /s/ WILLIAM L. MCELFRESH Director -------------------------------- William L. McElfresh Date: Chief Financial Officer /s/ JAMES D. MCBRIDE (Principal Financial and -------------------------------- Accounting Officer) James D. McBride Date: Director /s/ ROSS K. ANDERSON -------------------------------- Ross K. Anderson Date: Director /s/ WILLIAM M. LEROY -------------------------------- William M. LeRoy Date: Director /s/ WILLARD H. SMITH, JR -------------------------------- Willard H. Smith, Jr.
28 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants......................................................... Page 30 Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996................. Page 31 Consolidated Statements of Income for the years ended December 31, 1997, December 31, 1996 and December 31, 1995................................................. Page 32 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, December 31, 1996 and December 31, 1995................................................. Page 33 Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1996 and December 31, 1995................................................. Page 34 Notes to Consolidated Financial Statements................................................ Page 35
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. 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Willis Lease Finance Corporation and Subsidiaries: We have audited the accompanying consolidated financial statements of Willis Lease Finance Corporation (formerly The Charles F. Willis Company) and subsidiaries (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 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 (formerly The Charles F. Willis Company) and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Francisco, California February 16, 1998 30 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1997 1996 -------------- -------------- ASSETS Cash and cash equivalents........................................................ $ 13,095,303 $ 6,573,241 Deposits......................................................................... 18,461,456 13,600,204 Equipment held for lease, less accumulated depreciation of $15,193,313 at December 31, 1997 and $16,372,418 at December 31, 1996......................... 128,119,683 96,092,429 Aircraft held for lease, less accumulated depreciation of $74,370 at December 31, 1997 and $0 at December 31, 1996............................................... 10,415,960 -- Net investment in direct finance lease........................................... 9,821,854 -- Property, equipment and furnishings, less accumulated depreciation of $275,109 at December 31, 1997 and $160,407 at December 31, 1996............................ 540,856 458,780 Spare parts inventory............................................................ 10,334,113 4,057,648 Maintenance billings receivable.................................................. 1,547,765 1,107,283 Operating lease rentals receivable............................................... 520,466 405,601 Receivables from spare parts sales............................................... 2,908,175 854,566 Other receivables................................................................ 375,878 829,522 Other assets..................................................................... 2,288,547 953,419 -------------- -------------- Total assets..................................................................... $ 198,430,056 $ 124,932,693 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses.......................................... $ 4,010,976 $ 2,753,641 Salaries and commissions payable............................................... 1,070,051 538,658 Deferred income taxes.......................................................... 8,476,040 5,949,676 Deferred gain.................................................................. 183,278 209,774 Notes payable and accrued interest............................................. 101,433,200 73,185,657 Capital lease obligation....................................................... 2,802,119 2,960,457 Residual share payable......................................................... 2,092,140 1,199,279 Maintenance deposits........................................................... 20,018,195 11,680,525 Security deposits.............................................................. 2,435,987 1,978,505 Unearned lease revenue......................................................... 1,306,613 1,274,269 -------------- -------------- Total liabilities................................................................ $ 143,828,599 $ 101,730,441 Shareholders' equity: Common stock, no par value. Authorized 20,000,000 shares; 7,177,320 and 5,426,793 issued and outstanding at December 31, 1997 and December 31, 1996, respectively................................................................. 40,117,223 16,055,689 Retained earnings.............................................................. 14,484,234 7,146,563 -------------- -------------- Total shareholders' equity....................................................... 54,601,457 23,202,252 -------------- -------------- Total liabilities and shareholders' equity....................................... $ 198,430,056 $ 124,932,693 -------------- -------------- -------------- --------------
See accompanying notes to the consolidated financial statements 31 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- REVENUE Operating lease revenue............................................. $ 19,012,822 $ 13,740,438 $ 13,770,730 Finance lease revenue............................................... 442,542 -- -- Gain/loss on sale of leased engines................................. 4,165,443 2,208 (482,894) Spare part sales.................................................... 14,110,102 5,842,607 3,858,610 Sale of equipment acquired for resale............................... 12,747,840 12,105,315 5,472,362 Interest and other income........................................... 727,995 617,144 119,188 ------------- ------------- ------------- Total revenue....................................................... 51,206,744 32,307,712 22,737,996 EXPENSES Interest expense.................................................... 7,797,446 4,323,276 5,721,811 Depreciation expense................................................ 4,223,286 3,181,216 4,703,487 Residual share...................................................... 892,861 722,753 407,684 Cost of spare part sales............................................ 9,468,953 3,307,928 2,545,872 Cost of equipment acquired for resale............................... 10,677,716 10,788,730 2,742,262 General and administrative.......................................... 9,331,972 5,123,813 3,334,768 ------------- ------------- ------------- Total expenses...................................................... 42,392,234 27,447,716 19,455,884 Gain on modification of credit facility............................. -- -- 2,202,928 ------------- ------------- ------------- Income before income taxes, minority interest and extraordinary item.............................................................. 8,814,510 4,859,996 5,485,040 Income taxes........................................................ (3,484,768) (1,976,471) (2,212,280) ------------- ------------- ------------- Income before minority interest and extraordinary item.............. 5,329,742 2,883,525 3,272,760 Less: minority interest in net income of subsidiary................. -- (79,053) (56,343) ------------- ------------- ------------- Income before extraordinary item.................................... 5,329,742 2,804,472 3,216,417 Extraordinary item net of applicable income taxes................... 2,007,929 -- -- ------------- ------------- ------------- Net Income.......................................................... $ 7,337,671 $ 2,804,472 $ 3,216,417 ------------- ------------- ------------- ------------- ------------- ------------- BASIC EARNINGS PER SHARE Net income before extraordinary item................................ $ 0.97 $ 0.75 $ 1.03 Extraordinary item.................................................. 0.36 -- -- ------------- ------------- ------------- Basic earnings per share............................................ $ 1.33 $ 0.75 $ 1.03 ------------- ------------- ------------- ------------- ------------- ------------- FULLY DILUTED EARNINGS PER SHARE Net income before extraordinary item................................ $ 0.94 $ 0.74 $ 1.03 Extraordinary item.................................................. 0.35 -- -- ------------- ------------- ------------- Fully diluted earnings per share.................................... $ 1.29 $ 0.74 $ 1.03 ------------- ------------- ------------- ------------- ------------- ------------- Basic average shares outstanding.................................... 5,497,358 3,756,040 3,110,657 Fully diluted average shares outstanding............................ 5,673,425 3,787,788 3,110,657
See accompanying notes to the consolidated financial statements 32 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ISSUED AND OUTSTANDING TOTAL SHARES OF ADVANCES TO SHAREHOLDERS' COMMON STOCK COMMON STOCK RETAINED EARNINGS SHAREHOLDERS EQUITY -------------- -------------- ----------------- ------------ ------------- Balances at December 31, 1995.... 1,500 $ 500 $ 5,293,566 $ (481,789) $ 4,812,277 Common stock issued and proceeds from IPO, net.................. 5,425,293 16,055,189 -- -- 16,055,189 Repayments to shareholders, net.............. -- -- -- 481,789 481,789 Dividends........................ -- -- (951,475) -- (951,475) Net income....................... -- -- 2,804,472 -- 2,804,472 -------------- -------------- ----------------- ------------ ------------- Balance at December 31, 1996..... 5,426,793 16,055,689 7,146,563 -- 23,202,252 Shares issued under Employee Stock Purchase Plan............ 25,527 221,244 -- -- 221,244 Common stock issued and proceeds from secondary offering, net... 1,725,000 23,840,290 23,840,290 Net income....................... -- -- 7,337,671 -- 7,337,671 -------------- -------------- ----------------- ------------ ------------- Balances at December 31, 1997.... 7,177,320 $ 40,117,223 $ 14,484,234 -- $ 54,601,457 -------------- -------------- ----------------- ------------ ------------- -------------- -------------- ----------------- ------------ -------------
See accompanying notes to the consolidated financial statements 33 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 --------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................................... $ 7,337,671 $ 2,804,472 $ 3,216,417 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of equipment and aircaft held for lease.......... 4,098,348 3,103,601 4,663,949 Depreciation of property, equipment and furnishings........... 124,938 77,615 39,538 Gain on modification on credit facility....................... -- -- (2,202,928) (Gain) loss on sale of property, equipment and furnishings.... (45,122) 5,701 (5,536) (Gain) loss on sale of leased equipment....................... (4,165,443) (2,208) 482,894 Increase in residual share payable............................ 892,861 722,753 407,684 Minority interest in net income of subsidiary................. -- 79,053 56,343 Changes in assets and liabilities: Increase in deposits.......................................... (4,861,252) (2,279,587) (11,061,221) Increase in spare parts inventory............................. (6,276,465) (1,176,384) (940,494) Increase in receivables....................................... (2,155,312) (1,931,905) (359,173) (Increase) decrease in other assets........................... (1,335,128) (745,525) 54,785 (Decrease) increase in accounts payable and accrued expenses.................................................... 1,257,335 1,701,186 606,656 Increase in salaries and commission payable................... 531,393 374,697 77,201 Increase in deferred income taxes............................. 2,526,364 1,857,351 2,179,381 (Decrease) increase in deferred gain.......................... (26,496) 209,774 -- (Decrease) increase in accrued interest....................... (247,821) 666,571 (341,379) Increase in maintenance deposits.............................. 8,337,670 2,963,355 3,294,179 Increase in security deposits................................. 457,482 708,484 124,444 Increase in unearned lease revenue............................ 32,344 417,182 243,726 --------------- -------------- -------------- Net cash provided by operating activities..................... 6,483,367 9,556,186 536,466 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment held for operating lease (net of selling expenses)............................................. 15,672,655 3,748,035 2,600,000 Proceeds from sale of property, equipment and furnishings....... 80,500 28,198 38,500 Purchase of equipment held for lease............................ (68,143,774) (25,277,021) (9,258,379) Purchase of property, equipment and furnishings................. (242,392) (362,510) (194,403) Principal payments received on direct finance lease............. 273,146 -- -- --------------- -------------- -------------- Net cash used in investing activities........................... (52,359,865) (21,863,298) (6,814,282) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments from (advances to) shareholder, net.................. -- 481,789 (107,944) Proceeds from issuance of notes payable......................... 165,590,908 16,086,621 15,730,277 Proceeds from issuance of common stock.......................... 24,061,534 15,926,101 -- Principal payments on notes payable............................. (137,095,544) (13,478,332) (9,337,852) Principal payments on capital lease obligation.................. (158,338) -- -- Cash dividends paid on common stock............................. -- (951,475) (255,000) --------------- -------------- -------------- Net cash provided by financing activities....................... 52,398,560 18,064,704 6,029,481 Increase (decrease) in cash and cash equivalents................ 6,522,062 5,757,592 (248,335) Cash and cash equivalents at beginning of period................ 6,573,241 815,649 1,063,984 --------------- -------------- -------------- Cash and cash equivalents at end of period...................... $ 13,095,303 $ 6,573,241 $ 815,649 --------------- -------------- -------------- --------------- -------------- --------------
See accompanying notes to the consolidated financial statements 34 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 The Charles F. Willis Company) ("Willis") provides operating leases of commercial aircraft engines, certain aircraft and aircraft equipment and sells aircraft engines and parts to air carriers, manufacturers and overhaul/repair facilities worldwide. Willis' core business is acquiring and leasing, primarily pursuant to operating leases, commercial aircraft spare engines and other aircraft equipment. Willis also, through its wholly-owned subsidiary Willis Aeronautical Services, Inc. ("WASI") purchases and resells aftermarket airframe and engine parts, engines, modules and rotable components. Willis also engages in the selective purchase and resale of commercial aircraft engines. 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), T-10 Inc. (T-10), T-11 (T-11), and T-12 (T-12) are wholly-owned subsidiaries of Willis. They are all California corporations and were established to purchase and lease and resell commercial aircraft engines and parts. 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. WLFC Funding Corporation ("WLFC-FC") is a wholly-owned subsidiary of Willis. WLFC-FC is a Delaware corporation and was established in 1997 for the purpose of financing aircraft engines. WLFC Engine Pooling Company ("WLFC--Pooling") is a wholly-owned subsidiary of Willis. WLFC-Pooling is a California Corporation and was established in 1997 for the purpose of acquiring and leasing aircraft engines. (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, T-11, T-12, WASI, WLFC-FC and WLFC--Pooling (together, the Company). All significant intercompany balances and transactions have been eliminated in consolidation. (C) REVENUE RECOGNITION Revenue from leasing of aircraft assets is recognized as operating lease or finance 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. The Company records an allowance for estimated returns of spare parts based on recent experience. Such returns occur in the ordinary course of the Company's business. 35 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (D) EQUIPMENT HELD FOR OPERATING LEASE Aircraft assets held for operating lease are stated at cost, less accumulated depreciation. Certain professional fees incurred in connection with the acquisition and leasing of aircraft assets are capitalized as part of the cost of such assets. The Company generally depreciates engines 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 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. 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. The spare parts packages owned by the Company are depreciated on a straight-line basis over an estimated useful life of 15 years to a 25% residual value. The aircraft owned by the Company are depreciated on a straight line basis over an estimated useful life of 13 years to a 17% residual value. 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 or 1997. (E) 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 based on actual purchase price or allocated cost of parts purchased in a pool or from dismantled engine based on relative projected sales price. (F) 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. 36 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (G) 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. (H) INTEREST RATE CAP In 1996, the Company purchased an interest rate cap in order to mitigate 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. (I) 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. (J) 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. (K) ADVANCES TO SHAREHOLDER The advances to the sole shareholder are non-interest 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. (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. 37 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Residual share payable totaled $2.1 million and $1.2 million as of December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996, a total of five and six engines, respectively, with a net book value of $15.3 million and $16.5 million, respectively, were subject to residual sharing arrangements (notes 4 and 5). (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 1997 and 1996 were sold in the year acquired. (N) CASH AND CASH EQUIVALENTS The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of 90 days or less, as cash equivalents. (O) RECLASSIFICATIONS Certain items in the consolidated financial statements of prior years have been reclassified to conform to the current year's presentation. (P) 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. (Q) PER SHARE INFORMATION In February 1997, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which required the Company to replace its presentation of primary earnings per share with a presentation of basic and fully diluted earnings per share on the face of the income statement, effective December 15, 1997. The principal difference between primary earnings per share and basic earnings per share under the new statement is that basic earnings per share does not consider common stock equivalents such as stock options and warrants. Basic earnings per common share is computed by dividing net income to common shares by weighted-average number of shares outstanding during the period. The computation of fully diluted earnings per share is similar to the computation of basic earnings per share, except for the inclusion of all potentially dilutive common shares. 38 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The statement required restatement of all prior periods presented. Basic and fully diluted earnings per share are presented below:
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) Basic: Net Income................................................................... $ 7,338 $ 2,804 $ 3,216 Basic earnings per common share.............................................. $ 1.33 $ 0.75 $ 1.03 Fully diluted: Net income................................................................... $ 7,338 $ 2,804 $ 3,216 Shares: Weighted-average number of common shares outstanding......................... 5,497 3,756 3,111 Potentially dilutive common shares........................................... 176 32 -- --------- --------- --------- Total Shares............................................................... 5,673 3,788 3,111 Fully diluted earnings per weighted-average common share..................... $ 1.29 $ 0.74 $ 1.03
(R) ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued two new statements: SFAS No. 130, "Reporting Comprehensive Income," which requires enterprises to report, by major component and in total, all changes in equity from non-owner sources; and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for a public company's operating segments and related disclosures about its products, services, geographic areas, and major customers. Both statements are effective for the Company's fiscal year ended December 31, 1998, with earlier application permitted. The effect of adoption of these statements will be limited to the form and content of the Company's disclosures and will not impact the company's results of operations, cash flow, or financial position. (2) EQUIPMENT HELD FOR LEASE At December 31, 1997, the Company had 44 aircraft engines and related equipment with an aggregate original cost of $146.3 million, 8 spare parts packages with an aggregate original cost of $7.1 million and 3 commuter aircraft with an aggregate original cost of $10.5 million in its lease portfolio. At December 31, 1996, the Company owned 32 aircraft engines and 3 spare parts packages with an aggregate original cost of $112.5 million. The Company owned no aircraft at December 31, 1996. Certain of the Company's aircraft equipment is leased and operated internationally. All leases relating to this equipment are denominated and payable in U.S. dollars. 39 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) EQUIPMENT HELD FOR LEASE (CONTINUED) The Company leases its aircraft equipment to lessees domiciled in eight geographic regions: The tables below set forth geographic information about the Company's operating leased aircraft equipment grouped by domicile of the lessee:
YEARS ENDED DECEMBER 31, ------------------------------------------- REGION 1997 1996 1995 - -------------------------------------------------------------------- ------------- ------------- ------------- Operating lease revenue: United States..................................................... $ 6,718,408 $ 5,295,084 $ 4,560,472 Canada............................................................ 1,521,278 1,291,000 1,080,000 Mexico............................................................ 2,478,620 1,865,118 1,900,699 Australia/New Zealand............................................. 1,027,026 1,029,600 1,339,433 Europe............................................................ 5,431,681 2,840,428 3,858,792 South America..................................................... 777,849 530,000 308,316 Asia.............................................................. 806,627 889,208 723,018 Middle East....................................................... 251,333 -- -- ------------- ------------- ------------- Totals.............................................................. $ 19,012,822 $ 13,740,438 $ 13,770,730 ------------- ------------- ------------- ------------- ------------- -------------
YEARS ENDED DECEMBER 31, ------------------------------------------- REGION 1997 1996 1995 - -------------------------------------------------------------------- ------------- ------------- ------------- Operating lease revenue less applicable depreciation, interest and residual share: United States..................................................... $2,750,911 $2,405,061 $463,336 Canada............................................................ 580,203 548,769 301,039 Mexico............................................................ 553,981 306,007 348,900 Australia/New Zealand............................................. 402,446 471,293 271,355 Europe............................................................ 2,076,342 1,409,631 1,521,563 South America..................................................... 266,947 185,297 77,569 Asia.............................................................. 123,329 339,545 185,196 Middle East....................................................... 100,223 -- -- Off-lease and other............................................... (69,942) (60,711) (231,210) ------------- ------------- ------------- Totals.............................................................. $6,784,440 $5,604,892 $2,937,748 ------------- ------------- ------------- ------------- ------------- -------------
40 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) EQUIPMENT HELD FOR LEASE (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------------------- REGION 1997 1996 1995 - ------------------------------------------------------------------- -------------- ------------- ------------- Net book value of operating leased assets: United States.................................................... $ 46,852,525 $ 31,332,388 $ 24,138,266 Canada........................................................... 11,167,483 7,115,984 7,356,011 Mexico........................................................... 13,031,662 13,441,445 9,255,029 Australia/New Zealand............................................ 5,311,730 5,509,070 5,706,410 Europe........................................................... 35,963,753 30,051,738 19,056,190 South America.................................................... 11,205,328 2,033,831 1,951,012 Asia............................................................. 7,436,879 4,109,446 4,243,830 Middle East...................................................... 4,832,970 -- -- Off-lease........................................................ 2,733,313 2,498,527 2,997,631 -------------- ------------- ------------- Totals............................................................. $ 138,535,643 $ 96,092,429 $ 74,704,379 -------------- ------------- ------------- -------------- ------------- -------------
Finance leased assets, the lessee of which is domiciled in Asia, generated $442,542 of revenue in 1997. After interest expense such assets generated $171,684. The net investment in direct finance leases on December 31, 1997 was as follows: Minimum payments receivable................................ $ 9,280 Estimated residual value of leased assets.................. 4,950 Unearned income............................................ (4,408) --------- Net investment in finance lease............................ $ 9,822 --------- ---------
As of December 31, 1997, minimum future payments under noncancelable leases were as follows:
YEAR OPERATING FINANCE - --------------------------------------------------------------------------------------------- ----------- --------- (IN THOUSANDS) 1998......................................................................................... $ 18,773 $ 1,458 1999......................................................................................... 14,724 1,458 2000......................................................................................... 10,359 1,458 2001......................................................................................... 7,102 1,458 2002......................................................................................... 4,498 1,458 Thereafter................................................................................... 4,831 2,187 ----------- --------- $ 60,287 $ 9,477 ----------- --------- ----------- ---------
41 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, ------------------------ 1997 1996 ----------- ----------- Automobiles......................................................... $ 155,636 $ 140,297 Computer equipment.................................................. 259,418 186,272 Furniture and equipment............................................. 400,911 292,618 ----------- ----------- 815,965 619,187 Accumulated depreciation............................................ (275,109) (160,407) ----------- ----------- Net book value...................................................... $ 540,856 $ 458,780 ----------- ----------- ----------- -----------
(4) EXTRAORDINARY GAIN AND GAIN ON MODIFICATION OF CREDIT FACILITY In February 1997, the Company obtained a new loan agreement for $41.5 million to replace an existing loan of $44.2 million. The transaction resulted in an extraordinary gain of $2 million net of tax. 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 $5.7 million as payment in full for the respective outstanding loan balance on each of the engines. The modification resulted in a gain of $2.2 million. (5) NOTES PAYABLE AND ACCRUED INTEREST Notes payable consisted of the following:
AS OF DECEMBER 31, ----------------------------- 1997 1996 -------------- ------------- Note payable at a floating interest rate of LIBOR plus 1%. Secured by aircaft engines and the proceeds thereof. This note was repaid in 1997.................... -- $ 44,221,306 Notes payable at fixed interest of 8.05% and 10%. Secured by aircraft engines and the proceeds thereof. The notes mature in May 2003 and November 1998.............. $ 5,263,108 5,982,236 Note payable at a floating interest rate of LIBOR plus 5%. Secured by aircraft engines and the proceeds thereof. The note matures in 2001 or upon sale of such engines........................................................................... 3,015,642 5,189,286 Note payable at a floating interest rate of LIBOR plus 2.25% secured by engines, the proceeds thereof and certain deposits. This facility has committed amount of $80 million. Assuming compliance with the facility's terms, including sufficiency of collateral, $45.6 million was available under this facility at December 31, 1997. The facility matures in February 2006..................................................................... 34,400,000 --
42 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) NOTES PAYABLE AND ACCRUED INTEREST (CONTINUED)
AS OF DECEMBER 31, ----------------------------- 1997 1996 -------------- ------------- Note payable at a floating rate of interest of Prime Rate plus 0.25%. Secured by engines, parts and the proceeds thereof. This facility has a committed amount of $45 million. Assuming compliance with the facility's terms, including sufficiency of collateral, $45 million was available under this facility at December 31, 1997. Fifteen million of this facility matures on May 31, 1998 and the remainder on June 12, 1998.......................................................................... -- -- Note payable at a floating interest rate of LIBOR plus 2.5%. Secured by aircraft engines and the proceeds thereof. The note matures in June 1998......................................................................... 13,433,039 -- Notes payable at fixed interest rates ranging from 10.23% to 10.77%. Secured by aircraft engines and parts and the proceeds thereof. The notes mature between December 2001 and February 2002................................................... 18,747,851 -- Notes payable at fixed interest rates of 11.03%. Secured by aircraft engines and the proceeds thereof. The notes mature on December 2000..................................................................... 2,892,846 3,128,943 Note payable at a fixed interest rate of 11.68%. Secured by an aircraft engine and the proceeds thereof. The note matures on December 2001........................... 2,189,465 2,368,242 Note payable at a fixed interest rate of 8.18% secured by aircraft and the proceeds thereof. The note matures January 2003................................... 10,500,000 -- Notes payable at fixed interest rates of 10% and 8.89%. Secured by aircraft engines and the proceeds thereof. The notes mature May 1998 and August 2002....... 6,178,807 -- Note payable at a floating interest rate of LIBOR plus 1.5%. Secured by an engine and the proceeds thereof. The note was repaid in 1997............................. -- 325,000 Notes payable under a line of credit in the amount of $3,000,000. Interest is variable at prime plus 1%. The loan is secured by the assets of WASI. This facility expires on April 30, 1998................................................ 2,627,000 661,000 Note payable at a fixed interest rate of 7%. Secured by aircraft engines, spare parts and the proceeds thereof. The note was repaid in 1997....................... -- 8,632,313 Subordinated note payable at a fixed interest rate of 7%. Secured by aircraft engines, spare parts and the proceeds thereof. The note matures in June 2004...... 1,586,470 1,830,538 -------------- ------------- $ 100,834,228 $ 72,338,864 -------------- ------------- -------------- -------------
43 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) NOTES PAYABLE AND ACCRUED INTEREST (CONTINUED) 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 $102.2 million at December 31, 1997. The fair value of the interest rate cap as estimated by the financial institution providing the instrument is $(38,805) at December 31, 1997. 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. A substantial amount of operating lease revenue is applied to the repayment of principal and interest. Principal outstanding at December 31, 1997 is repayable as follows:
(DOLLARS IN YEAR THOUSANDS) - ------------------------------------------------------------------------ 1998.................................................................... $ 27,328 1999.................................................................... 7,308 2000.................................................................... 8,332 2001.................................................................... 12,882 2002.................................................................... 20,312 Thereafter.............................................................. 24,671 -------- $ 100,834 -------- --------
As of December 31, 1997 and 1996, accrued interest in the amounts of $598,972 and $846,793, respectively, is included in notes payable and accrued interest. At December 31, 1997 and 1996, the Company held deposits in the amount of $18,461,456 and $13,600,204, respectively, consisting of bank accounts that are subject to withdrawal restrictions as per lease or loan agreements. Certain lease agreements require prepayments to the Company for periodic engine maintenance. These accounts also include security deposits held. Substantially all of the deposits bear interest for the Company's benefit. (6) INCOME TAXES
FEDERAL STATE TOTAL ------------ ---------- ------------ December 31, 1997 Current................................................................. $ 1,683,474 $ 604,338 $ 2,287,812 Deferred................................................................ 2,252,159 274,205 2,526,364 ------------ ---------- ------------ $ 3,935,633 $ 878,543 $ 4,814,176 ------------ ---------- ------------ ------------ ---------- ------------ 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 ------------ ---------- ------------ ------------ ---------- ------------
44 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) INCOME TAXES (CONTINUED)
FEDERAL STATE TOTAL ------------ ---------- ------------ 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 ------------ ---------- ------------ ------------ ---------- ------------
The following is a reconciliation of the statutory federal income tax expense to the effective income tax expense:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Statutory federal income tax expense.................................... $ 4,131,628 $ 1,652,397 $ 1,864,914 State taxes, net of federal benefit..................................... 709,806 298,307 340,710 Other................................................................... (27,258) 25,767 6,656 ------------ ------------ ------------ Effective income tax expense............................................ $ 4,814,176 $ 1,976,471 $ 2,212,280 ------------ ------------ ------------ ------------ ------------ ------------
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, ------------------------------ 1997 1996 -------------- -------------- Deferred tax assets: Prepaid rent.................................................................... $ 520,476 $ 511,466 Residual sharing expenses....................................................... 833,383 481,367 Uniform capitalization expenses................................................. 94,539 48,166 State Taxes..................................................................... 201,470 7,462 Reserves........................................................................ 76,313 -- Alternative minimum tax credit.................................................. 1,440,762 -- Passive activity loss carryforwards............................................. 2,439,582 6,185,615 -------------- -------------- Total gross deferred tax assets............................................... 5,606,525 7,234,076 Less valuation allowances..................................................... -- -- -------------- -------------- Net deferred tax assets....................................................... 5,606,525 7,234,076 Deferred tax liabilities: Depreciation on aircraft engines................................................ (14,082,565) (13,183,752) -------------- -------------- Net deferred tax liability.................................................... $ (8,476,040) $ (5,949,676) -------------- -------------- -------------- --------------
As of December 31, 1997 the Company had passive activity loss carryforwards totaling $7,175,240 for federal income tax purposes which have no expiration date and will be available to offset future passive and active revenue. Management believes that no valuation allowance is required on deferred tax assets as all amounts are recoverable through future operations. 45 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION During the years ended December 31, 1997, 1996 and 1995, the Company paid interest totaling $7,951,352, $3,656,707, and $6,063,190 respectively. Income taxes paid were $104,850, $31,552 and $13,218 for the years ended December 31, 1997, 1996, and 1995 respectively. (8) DIVIDENDS AND ADVANCES TO SHAREHOLDERS During the years ended December 31, 1997, 1996, and 1995 the Company paid dividends totaling $0, $951,475 and $255,000 to Company shareholder(s), respectively. During the years ended December 31, 1997, 1996 and 1995, the Company made loans of, $0, $265,478 and $165,635 to a Company shareholder. Repayments on such loans and loans made in prior periods, for the years ended December 31, 1997, 1996 and 1995 were, $0, $747,267, and $57,691 respectively. The outstanding balances of such loans, as of December 31, 1997 and 1996, were $0 and $0, respectively. (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, 1997 and 1996, management believes the Company had no significant concentrations of credit risk. For the year ended December 31, 1997, the Company had one significant customer, Aerovias Mexico, S.A. de C.V., which accounted for approximately 13% 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 four leases for its office and warehouse space. The annual lease rental commitments are $125,640, $97,872, $72,372 and $25,200 and the leases expire on March 14, 1999, May 31, 1998, and July 31, 1999 respectively. The last lease is on a month to month basis. In February 1998, the Company signed a lease for office space into which it anticipates moving its Sausalito operations. The initial term of this lease is 5 years and the annual rental commitments under the lease are approximately $0.3 million. In March 1998, the Company contingently agreed to lease warehouse and office space for WASI in San Diego, California into which it anticipates moving substantially all of WASI's South San Francisco operations. The initial term of this lease is 6 years and the annual rental commitments under the lease are approximately $0.4 million. These new leases will replace the leases associated with the $125,640, $97,872 and $25,200 annual lease rental commitments noted above. To the extent that the Company has obligations remaining under its current leases after the relocations described above, the Company expects that it can sublease to cover such obligations. 46 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) COMMITMENTS (CONTINUED) The Company finances one of its engines under a capital lease. The Maturities of capital lease obligation as of December 31, 1997 are as follows: 1998............................................................ $ 376,536 1999............................................................ 376,536 2000............................................................ 376,536 2001............................................................ 376,536 2002............................................................ 376,536 Thereafter...................................................... $2,192,305 ---------- Net Minimum Lease Payment....................................... $4,074,985 Less: Amount Representing Interest.............................. $(1,272,866) ---------- Present Value of Net Minimum Lease Payment...................... $2,802,119 ----------
In March 1998, the Company committed, subject to documentation, to purchase, during 1998 and 1999, certain aircraft for its WASI parts operation. Certain deposits have and will be made in connection with this commitment and the total commitment to purchase over the course of 1998 and 1999 is not more than $38 million. 47 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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 note payable was repaid in September of 1996. (12) EMPLOYEE BENEFIT PLANS EMPLOYEE STOCK PURCHASE PLAN The Company has a 1996 Employee Stock Purchase Plan (the "Purchase Plan") under which 75,000 shares of common stock have been reserved for issuance. This plan was effective in September 1996. Eligible employees may designate not more than 10% of their cash compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan, and participants may purchase not more than $25,000 of common stock in any one calendar year. Each January 31 and July 31 shares of common stock are purchased with the employees' payroll deductions over the immediately preceding six months at a price per share of 85% of the lesser of the market price of the common stock on the purchase date or the market price on the date of entry into an offering period. In fiscal 1997, 10,527 shares were issued under the Purchase Plan. The weighted average per share fair value of the employee's purchase rights under the Purchase Plan for the rights granted in 1997 and 1996 were $3.47 and $3.08 respectively. 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 nonemployee Board members. A summary of the activity under the plan is as follows:
OPTIONS OUTSTANDING ------------------------------------- WEIGHTED OPTIONS AVERAGE WEIGHTED AVAILABLE EXERCISE AVERAGE FOR GRANT OPTIONS PRICE FAIR VALUE ---------- --------- ------------- ----------- Balances at June 21, 1996 (Inception)........................... 525,000 -- -- Options Granted............................................... (315,000) 315,000 $ 8.00 $ 4.19 Options Exercised............................................. -- -- Options Canceled.............................................. -- -- ---------- --------- ------ ----- Balances at December 31, 1996................................... 210,000 315,000 $ 8.00 Options Granted............................................... (191,000) 191,000 $ 13.99 $ 5.83 Options Exercised............................................. (15,000) $ 8.00 Options Canceled.............................................. 52,500 (52,500) $ 10.86 ---------- --------- ------ ----- Balances at December 31, 1997................................... 71,500 438,500 $ 10.27 ---------- --------- ------ ---------- --------- ------
48 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) EMPLOYEE BENEFIT PLANS (CONTINUED) A summary of the outstanding, exercisable options and their weighted average exercise prices is as follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------------- --------------- At December 31, 1996............................................ 90,000.00 $ 8.00 At December 31, 1997............................................ 192,500.00 $ 9.33
The following table summarizes information concerning outstanding and exercisable options at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE - ----------------------------------------- ----------- ------------------- ------------- ----------- ------------- $8.00.................................... 277,500 8.7 $ 8.00 150,000 $ 8.00 $10.63 to $14.75......................... 128,000 8.4 $ 12.81 34,250 $ 12.71 $19.50................................... 33,000 9.7 $ 19.50 8,250 $ 19.50 -- ----------- ------ ----------- ------ $8.00 to $19.50.......................... 438,500 8.7 $ 10.27 192,500 $ 9.33
WARRANTS In conjunction with the initial public 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 than 12 months after the initial public offering, if and when the Company files a registration statement 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 secondary offering in December 1997 constituted such a registration. 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. On February 26, 1998, a holder of 50,000 of the warrants exercised the warrants under the net issuance rights of the warrants. Based on the closing price on such date, the exercise resulted in the issuance of 25,238 shares to the holder of the warrants. 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 49 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) EMPLOYEE BENEFIT PLANS (CONTINUED) 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 15, 1995. At December 31, 1997 and 1996, the Company had two stock-based compensation plans, as described above. The Company applies APB 25 in accounting for its plans. Accordingly, 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 as follows:
1997 1996 ------------ ------------ Net Income as reported............................................ $ 7,337,671 $ 2,804,472 Net Income pro forma.............................................. $ 6,900,477 $ 2,393,485 Net Income per Common Share as reported........................... $ 1.29 $ 0.74 Net Income per Common Share pro forma............................. $ 1.22 $ 0.63
The fair value of the purchase rights under the Purchase Plan, the options and the warrants is estimated using the Black-Scholes option pricing model with the following weighted average assumptions: The assumptions underlying the estimates derived using the Black Scholes model are as follows:
1996 STOCK OPTION/ EMPLOYEE STOCK STOCK ISSUANCE PLAN PURCHASE PLAN -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Expected Dividend Yield............................ 0% 0% 0% 0% Risk-free Interest Rate............................ 6.05% 6.22% 5.12% 5.96% Expected Volatility................................ 54% 84% 54% 84% Expected Life (in Years)........................... 3.0 2.4 0.5-2.0 1.3
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of the Company's options. EMPLOYEE 401(K) PLAN The Company adopted The Willis 401(k) Plan (the "Plan") effective as of January 1997. The Plan provides for deferred compensation as described in Section 401(k) of the Internal Revenue Code. The Plan is a contributory plan available to essentially all full-time and part-time employees of the Company in the United States. In 1997, employees who participated in the Plan could elect to defer and contribute to the Plan up to 20% of pretax salary or wages up to $9,600. 50
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ----------- ------------------------------------------------------------------------------------------- ------------- 3.1 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. Incorporated by reference to Exhibit 3.2 of the Company's report on Form 10-K for the year ended December 31, 1996........................................... 3.2 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 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 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 warehouse facility located in South San Francisco. Incorporated by reference to Exhibit 10.5 of the Company's report on Form 10-K for the year ended December 31, 1996............................................................. 10.6 Lease dated March 16, 1992 for facilities located in Sausalito, California, together with amendment thereto. Incorporated by reference to Exhibit 10.6 of the Company's report on Form 10-K for the year ended December 31, 1996........................................... 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 Employment Agreement between the Company and Edwin Dibble. Incorporated by reference to Exhibit 10.9 to Registration Statement No. 333-39865 filed on December 11, 1997.......... 10.10 Employment Agreement between the Company and Donald Nunemaker dated July 16, 1997.......... 10.11 Loan Agreement dated June 12, 1997 with CoreStates Bank, together with related documents for a $15 million revolving credit facility. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended June 30, 1997..................
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ----------- ------------------------------------------------------------------------------------------- ------------- 10.12 Amendment dated July 28, 1997, to loan agreement dated June 12, 1997, for the increasing of the revolving credit facility to $30 million from $15 million. Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 10-Q for the period ended June 30, 1997..................................................................................... 10.13 Amendment dated November 18, 1997, to loan agreement dated June 12, 1997, for the increasing of the revolving credit facility to $45 million from $30 million. Incorporated by reference to Exhibit 10.21 to Registration Statement No. 333-39865 filed on December 11, 1997................................................................................. 10.14 Engine Sales Agreement dated August 14, 1997, together with related documents, for a $25 million purchase from Pratt & Whitney for nine bare Pratt & Whitney 4056 engines. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the period ended September 30, 1997.......................................................... 10.15 Aircraft Sale Agreement dated as of November 17, 1997, between Finova Capital Corporation as seller and Willis Lease Finance Corporation as buyer. Incorporated by reference to Exhibit 10.25 to Registration Statement No. 333-39865 filed on December 11, 1997......... 10.16* Indenture dated as of September 1, 1997, between WLFC Funding Corporation and The Bank of New York, as Indenture Trustee........................................................... 10.17* Series 1997-1 Supplement dated as of September 1, 1997 between WLFC Funding Corporation and the Bank of New York, as Indenture Trustee............................................... 10.18 Class A Note Purchase Agreement dated as of September 1, 1997 between the Company, WLFC Funding Corporation and First Union National Bank of North Carolina...................... 10.19* Administration Agreement dated as of September 1, 1997 between WLFC Funding Corporation, the Company, First Union Capital Markets Corp. and The Bank of New York.................. 11.1 Statement regarding computation of per share earnings...................................... 21.1 Subsidiaries of the Company................................................................ 27.1 Financial Data Schedule....................................................................
- ------------------------ * Portions of these exhibits have been omitted to a request for confidential treatment. 2 EX-10.10 2 EXHIBIT 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 16th day of July, 1997, by and between Willis Lease Finance Corporation ("Employer"), a California corporation, and Donald A. Nunemaker (hereinafter referred to as "Employee"); WITNESSETH: WHEREAS, Employer desires to employ Employee, and Employee desires to be employed by Employer, upon the terms and conditions set forth in this Employment Agreement; and WHEREAS, Employee acknowledges that he has had an opportunity to consider this Agreement and consult with independent advisor(s) of his choosing with regard to the terms of this Agreement, and enters this Agreement voluntarily and with a full understanding of its terms; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth, Employer and Employee agree as follows: 1. EMPLOYMENT AND TERM. Employer agrees to employ Employee as Executive Vice President, Chief Administrative Officer for a period of two (2) years ("Initial Employment Period") commencing on or about July 30, 1997, and ending on or about July 31, 1999 unless terminated prior thereto in accordance with Section 4 hereof. Each full twelve month period Employee is employed by Employer shall be referred to herein as an "Employment Year." The entire duration of Employee's employment by Employer hereunder shall be referred to herein as the "Employment Period." Employee shall devote his full time and attention, with undivided loyalty, to the business and affairs of Employer during the Employment Period. Employee shall not engage in any other business or job activity during the Employment Period without Employer's prior written consent. Employee shall in good faith perform those duties and functions as are required by his position and as are determined and assigned to him from time to time by the Board of Directors of Employer of its designate(s). Notwithstanding the foregoing or any other provision in this Agreement, Employer shall have the right to modify from time to time the title and duties assigned to Employee. After the expiration of the Initial Employment Period pursuant to this Agreement, Employee's employment will automatically renew for a period of one year, each year, on the same terms and conditions as are set forth herein, unless either party gives the other notice of nonrenewal at least six(6) months prior to the end of the last applicable Employment Year. Employer may in its sole discretion elect to pay Employee the equivalent of six months base salary in lieu of notice in the event of nonrenewal of this Agreement. 2. COMPENSATION. During the Employment Period, Employee shall receive compensation from Employer for his services hereunder determined as follows: Nunemaker Employment Agreement Page 2 BASE SALARY. Employer agrees to pay to Employee during the Employment Period a base salary (hereinafter referred to as the "Base Salary"), in the amount of One Hundred Fifty Thousand Dollars ($150,000.00) per Employment Year, to be paid not less frequently than monthly in accordance with Employer's usual payroll practices. The Board of Directors will review Employee's Base Salary no less than once annually, and shall have sole discretion to increase or decrease the Base Salary, so long as the Base Salary is not set below $150,000.00. PROFIT INCENTIVE PLAN. Employee will be eligible to participate in the Willis Lease Profit Incentive Plan under which Employee will be eligible for an annual bonus. As currently written for the calendar year 1997 Employee would be entitled to a bonus of 85% of his Base Salary if the Employer meets the analysts projections as to new lease volume and after-tax profit. Bonuses will increase if projections are exceeded, and will be reduced if they fall below projections, with no bonus paid if the actual results are less than 75% of projections. Because the terms of Employee's Employment Period will commence in the middle of the calendar year, Employee will be eligible for a pro rata portion of his bonus based upon that period of the calendar year for which he has actually been employed. The complete terms and conditions of the Profit Incentive Plan are set forth in the separate documents governing such plan and Employee agrees to be bound by the provisions contained therein. RELOCATION/TRANSITIONAL EXPENSE COMPENSATION. Employer shall pay to Employee the amount of $24,000.00 to compensate Employee for costs and expenses associated with relocating to accept employment with Employer. Employer shall gross up for tax purposes $14,000 of the $24,000 relocation expense. This relocation expense payment shall be delivered to Employee no later than twenty (20) days subsequent to the date on which the Employee commences employment pursuant to this Agreement. Employee shall be required to reimburse Employer for the full amount of the relocation expense payment in the event that Employee terminates this Agreement within twelve months of the commencement of employment hereunder or is terminated for cause. Employee shall be required to reimburse Employer for one-half the amount of the relocation expense payment ($12,000.00) in the event that Employee terminates this Agreement after twelve months, but within twenty four months of the commencement of employment hereunder, or is terminated for cause. SIGNING BONUS. Employer shall pay to Employee the amount of $50,000 as a signing bonus to compensate Employee for money he would have received as a bonus had he remained employed by this previous employer. The signing bonus shall be delivered to Employee no later than twenty (20) days subsequent to the date on which the Employee commences employment pursuant to this Agreement. Employee shall be required to reimburse Employer for the full amount of the signing bonus in the event that Employee terminates this Agreement within twelve months of the commencement of employment hereunder or is terminated for cause. Employee shall be required to reimburse Employer for one-half the amount of the signing bonus ($25,000.00) in the event that Employee terminates this Agreement after twelve months, but within twenty four months of the commencement of employment hereunder, or is terminated for cause. 3. FRINGE BENEFITS. During the Employment Period, Employer agrees to provide Employee with the following fringe benefits: Nunemaker Employment Agreement Page 3 (A) BUSINESS EXPENSE REIMBURSEMENT. Employee shall be authorized to incur reasonable business expenses in performing his duties under this Agreement, including, but not limited to, expenses for entertainment, long distance telephone calls, lodging, meals, air fare, transportation and travel. Employer will reimburse Employee for all such reasonable expenses upon presentation by Employee, from time to time, of an itemized account or other appropriate documentation of such expenses. (B) VACATION. Employee shall be entitled to three (3) weeks of paid vacation during each Employment Year, provided, however, that Employer and Employee must mutually agree as to the time during any Employment Year when such vacation may be taken. (C) BENEFITS. Employee will be eligible to participate in benefit plans and policies provided to other Employer employees of similar status, on the terms and conditions existing, and as may be changed from time to time, for participation in those plans and policies. (D) STOCK OPTIONS. Employee will be eligible to participate in the Employee Stock Option Plan and Employee Stock Purchase Plan subject to the terms and conditions set forth in detail in the separate Stock Option and Stock Purchase Plan documents. The terms of vesting applicable to Employee are set forth in detail in the separate plan documents, and Employee agrees to be bound by the provisions contained therein, except as otherwise provided in this Agreement. Pursuant to the Employee Stock Option Plan, Employee shall be granted 30,000 shares of Willis Lease Finance Corporation stock exercisable at the market value per share at the close of business on the date that Employee executes this Employment Agreement. Twenty five (25) per cent of these stock options shall be vested and exercisable on the grant date, on or about August 4, 1997. The balance of the shares shall be come exercisable in three (3) equal successive annual installments, so long as Employee continues his employment with Employer. 4. TERMINATION. Either Employer or Employee may terminate Employee's employment in accordance with the following provisions: (A) TERMINATION BY EMPLOYER. The employment of Employee may be terminated by Employer for any reason or no reason, with or without cause or justification, subject to the following: (i) In the event that Employee's employment is terminated by Employer for cause, or due to death or due to Employee's inability to properly perform his duties by reason of incapacity for a period of more than ninety (90) days, Employer's total liability to Employee or his heirs shall be limited to payment of Employee's Base Salary and benefits through the effective date of termination, and Employee shall not entitled to any further compensation or benefits provided under this Agreement. (a) Cause for termination shall include, but shall not be limited to: (1) Employee's conviction of or plea of nolo contendere to any felony or gross misdemeanor charges brought in any Court of competent jurisdiction; (2) Any fraud, misrepresentation or gross misconduct by Employee against Employer; (3) Employee's breach of this Agreement. Nunemaker Employment Agreement Page 4 (ii) In the event Employee's employment is terminated by Employer other than for cause, Employer will provide not less than six (6) months notice of termination or an amount equal to six (6) months of Employee's Base Salary in lieu of notice and Employee will be paid his Base Salary and Benefits through the date of termination. The notice period and/or payments in lieu of notice provided herein shall be terminated in the event Employee obtains new employment after receiving notice of termination from Employer. (B) TERMINATION BY EMPLOYEE. If Employee's employment with Employer is terminated by Employee for any reason, Employee shall be entitled only to his Base Salary and benefits through the date of termination and shall not be entitled to any further compensation or benefits pursuant to this Agreement. Employee agrees to give Employer at least ninety (90) days prior written notice of termination of his employment. Employer shall have the right in its sole discretion to continue to employ Employee for ninety days, or for a shorter period with pay in lieu of notice to Employee in the amount to which Employee would have been entitled if employed for the ninety-day notice period. 5. MAINTENANCE OF CONFIDENTIALITY AND DUTY OF LOYALTY. Employee acknowledges that, pursuant to his employment with Employer, he will necessarily have access to trade secrets and information that is confidential and proprietary to Employer in connection with the performance of his duties. In consideration for the disclosure to Employee of, and the grant to Employee of access to such valuable and confidential information and in consideration of his employment, Employee shall comply in all respects with the provisions of this Section 5. (A) NONDISCLOSURE. During the Employment Period and thereafter, Confidential and Proprietary Information of Employer of which Employee gains knowledge during the Employment Period or prior thereto in connection with his hiring shall be used by Employee only for the benefit of Employer in connection with Employee's performance of his employment duties, and Employee shall not, and shall not allow any other person that gains access to such information in any manner or form, disclose, communicate, divulge or otherwise make available, or use, any such information, other than for the immediate benefit of Employer and without the prior written consent of Employer. For purposes of this Agreement, the term "Confidential and Proprietary Information" means information not generally known to the public and which is proprietary to Employer and relates to Employer's existing or reasonably foreseeable business or operations, including but not limited to trade secrets, business plans, advertising or public relations strategies, financial information, budgets, personnel information, customer information and lists, and information pertaining to research, development, manufacturing, engineering, processing, product designs (whether or not patented or patentable), purchasing and licensing, and may be embodied in reports or other writings or in blue prints or in other tangible forms such as equipment and models. Employee will refrain from any acts or omissions that would jeopardize the confidentiality or reduce the value of any Employer Confidential and Proprietary Information. (B) COVENANT OF LOYALTY. During the Employment Period and for any period Employee is receiving compensation from Employer, Employee shall not, on his own account or as an employee, agent, promoter, consultant, partner, officer, director, or shareholder of any other person, firm, entity, partnership or corporation, own operate, lease, franchise, conduct, engage in, Nunemaker Employment Agreement Page 5 be connected with, have any interest in, or assist any person or entity engaged in any business in the continental United States that is in any way competitive with or similar to the business that is conducted by Employer or is in the same general field or industry as Employer. Without limiting the generality of the foregoing, Employee does hereby covenant not to, during the Employment Period and for any period that he is receiving compensation from Employer: (i) solicit, accept or receive any compensation from any customer of Employer or any business competitive to that of Employer; or (ii) contact, solicit or call upon any customer or supplier of Employer on behalf of any person or entity other than Employer for the purpose of selling, providing or performing any services of the type normally provided or performed by Employer; or (iii) induce or attempt to induce any person or entity to curtail or cancel any business or contracts which such person or entity had with Employer; or (iv) induce or attempt to induce any person or entity to terminate, cancel or breach any contract which such person or entity has with Employer, or receive or accept any benefits from such termination, cancellation or breach. (C) NO SOLICITATION. During the Employment Period, during any period Employee is receiving compensation from Employer and for one year thereafter, Employee agrees not directly or indirectly to solicit, induce or attempt to solicit or induce any employee of Employer to terminate his or her employment with Employer in order to become employed by any other person or entity. (D) INJUNCTIVE RELIEF. Employee expressly agrees that the covenants set forth in this Section 5 are reasonable and necessary to protect Employer and its legitimate business interest, and to prevent the unauthorized dissemination of Confidential Information to competitors of Employer. Employee also agrees that Employer will be irreparably harmed and that damages alone cannot adequately compensate Employer if there is a violation of this Section 5 by Employee, and that injunctive relief against Employee is essential for the protection of Employer. Therefore, in the event of any such breach, it is agreed that, in addition to any other remedies available, Employer shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction, plus attorneys' fees actually incurred for the securing of such relief. Furthermore, Employee agrees that Employer shall not be required to post a bond or other collateral security with the court if Employer seeks injunctive relief. To the extent any provision of this Section 5 is deemed unenforceable by virtue of its scope or limitation, Employee and Employer agree that the scope and limitation provisions shall nevertheless be enforceable to the fullest extent permissible under the laws and public policies applied in such jurisdiction where enforcement is sought. 6. NOTICES. Any notice which either party may wish or be required to give to the other party pursuant to this Agreement shall be in writing and shall be either personally served or Nunemaker Employment Agreement Page 6 deposited in the United States mail, registered or certified and with proper postage prepaid, addressed as follows: TO EMPLOYER: Willis Lease Finance Corporation Charles F. Willis, President and CEO 180 Harbor Drive, Suite 200 Sausalito, CA 94965 TO EMPLOYEE: Donald A. Nunemaker 803 Beaumont Drive Naperville, IL 60540 or to such other address as the parties may designate from time to time by written notice to the other party given in the above manner. Notice given by personal service shall be deemed effective upon service. Notice given by registered or certified mail shall be deemed effective three (3) days after deposit in the mail. 7. MISCELLANEOUS. (A) MODIFICATIONS. This agreement supersedes all prior agreements and understandings between the parties relating to the employment of Employee by Employer, and it may not be changed or terminated orally. No modification, termination, or attempted waiver of any other provisions of this Agreement shall be valid unless in writing signed by the party against whom the same is sought to be enforced. (B) ENFORCEABILITY AND SEVERABILITY. If any terms of this Agreement is deemed void, voidable, invalid or unenforceable for any reason, such term shall be deemed severable from all other terms of this Agreement, which shall continue in full force and effect. (C) PRIOR OBLIGATIONS OF EMPLOYEE. Employee represents and warrants that by entering this Agreement he is not breaching any contractual relationship or obligation toward any person or entity. Furthermore, he understands that Employer is hiring him solely for the purpose of engaging his skill and expertise and not to acquire trade secrets or confidential information belonging to any other person or entity. Employee further understands that he is prohibited from disclosing such trade secrets and proprietary information to Employer. (D) ARBITRATION. Any disputes or controversy between the parties to this Agreement, including allegations of fraud and misrepresentation, arising from or as a result of this Agreement, the resulting business dealings between Employer and Employee, Employee's employment or the termination thereof, including any claims of discrimination or other claims under any federal, state, or local law or regulation now in existence or hereinafter enacted concerning in any way the subject of Employee's employment with Employer or its termination, shall be resolved, after the parties attempt informal resolution, exclusively by arbitration in accordance with the Rules and Regulations of the American Arbitration Association. All Arbitration hearings shall be held in San Francisco County, California within one hundred twenty (120) days from the date Arbitration is demanded by any of the parties and the Arbitrator shall Nunemaker Employment Agreement Page 7 render his/her written decision within thirty (30) day after the Arbitration hearing has concluded. The decision of the Arbitrator shall be final and binding on all parties, and may be entered as a judgment by any party with any federal or state court of competent jurisdiction. The parties to the Arbitration hearing shall share any filing fees and Arbitrator's fees which must be paid in advance of the hearing equally; however, as set forth below the prevailing party shall be entitled to recover from the losing party all costs that is has incurred as a result of the Arbitration hearing, including fees paid to the arbitrator, travel costs and attorneys' fees. This provision shall not alter the rights of the parties to seek and obtain the provisional equitable remedies provided under any applicable state or federal law. Employee represents, by his signature, that he is making a voluntary and knowing waiver of his right to pursue any and all employment-related claims in court. (E) SUCCESSORS. This Agreement shall extend to and be binding upon Employee, his legal representatives, heirs and distributees, and upon Employer, its successors and assigns. (F) GOVERNING LAW. This Agreement and all remedies hereunder shall be construed and enforced in accordance with the laws of the State of California. (G) JURISDICTION; VENUE; ATTORNEYS' FEES. The parties do hereby agree and submit to personal jurisdiction in the State of California for the purposes of any proceedings brought to enforce or construe the terms of this Agreement or to resolve any dispute or controversy arising under, as a result of, or in connection with this Agreement, and do hereby agree and stipulate that any such proceedings shall be venued and held in San Francisco County, California. The prevailing party in any such proceeding shall be entitled to recover from the losing party all costs that it has incurred as a result of such proceeding including but not limited to all travel costs and attorneys' fee. (H) EFFECTIVE DATE. This Agreement shall be effective as of the date first above written. Nunemaker Employment Agreement Page 8 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the date first set forth above. Employer: WILLIS LEASE FINANCE CORPORATION By: /s/ Charles F. Willis ------------------------------------- President and CEO Employee: /s/ Donald A. Nunemaker - ---------------------------------------- DONALD A. NUNEMAKER EX-10.16 3 EXHIBIT 10.16 WLFC FUNDING CORPORATION Issuer and THE BANK OF NEW YORK Indenture Trustee ----------------------------------- INDENTURE Dated as of September 1, 1997 ----------------------------------- TABLE OF CONTENTS
Page ---- ARTICLE IDEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 101. DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . 3 Section 102. OTHER DEFINITIONAL PROVISIONS. . . . . . . . . . . . . . .21 Section 103. COMPUTATION OF TIME PERIODS. . . . . . . . . . . . . . . .22 Section 104. DUTIES OF ADMINISTRATIVE AGENT . . . . . . . . . . . . . .22 ARTICLE IITHE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Section 201. AUTHORIZATION OF NOTES . . . . . . . . . . . . . . . . . .23 Section 202. FORM OF NOTES. . . . . . . . . . . . . . . . . . . . . . .23 Section 203. EXECUTION; RECOURSE OBLIGATION . . . . . . . . . . . . . .23 Section 204. CERTIFICATE OF AUTHENTICATION. . . . . . . . . . . . . . .24 Section 205. REGISTRATION; REGISTRATION OF TRANSFER AND EXCHANGE OF NOTES . . . . . . . . . . . . . . . . . . . . . . .24 Section 206. MUTILATED, DESTROYED, LOST AND STOLEN NOTES. . . . . . . .26 Section 207. DELIVERY, RETENTION AND CANCELLATION OF NOTES. . . . . . .27 ARTICLE IIIPAYMENT OF NOTES; STATEMENTS TO NOTEHOLDERS . . . . . . . . . . . .29 Section 301. PRINCIPAL AND INTEREST . . . . . . . . . . . . . . . . . .29 Section 302. DIRECTION TO LESSEES . . . . . . . . . . . . . . . . . . .29 Section 303. TRUST ACCOUNT. . . . . . . . . . . . . . . . . . . . . . .29 Section 304. INVESTMENT OF MONIES HELD IN THE TRUST ACCOUNT, THE RESTRICTED CASH ACCOUNT, ENGINE RESERVE ACCOUNT, THE SECURITY DEPOSIT ACCOUNT AND SERIES ACCOUNTS. . . . . . . . . .30 Section 305. REPORTS TO NOTEHOLDERS . . . . . . . . . . . . . . . . . .31 Section 306. RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . .31 Section 307. RESTRICTED CASH ACCOUNT. . . . . . . . . . . . . . . . . .31 Section 308. ENGINE RESERVE ACCOUNT . . . . . . . . . . . . . . . . . .31 Section 309. SECURITY DEPOSIT ACCOUNT . . . . . . . . . . . . . . . . .31 Section 310. SECURITIES ACCOUNTS. . . . . . . . . . . . . . . . . . . .32 ARTICLE IVCOLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Section 401. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . .33 Section 402. PRO RATA INTEREST. . . . . . . . . . . . . . . . . . . . .34 Section 403. INDENTURE TRUSTEE'S APPOINTMENT AS ATTORNEY-IN-FACT. . . .34 Section 404. RELEASE OF SECURITY INTEREST . . . . . . . . . . . . . . .35 Section 405. ADMINISTRATION OF COLLATERAL . . . . . . . . . . . . . . .36 Section 406. QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . .38 Section 407. ACKNOWLEDGMENT . . . . . . . . . . . . . . . . . . . . . .38 ARTICLE VRIGHTS OF NOTEHOLDERS; ALLOCATIONAND APPLICATION OF COLLECTIONS;REQUISITE GLOBAL MAJORITY . . . . . . . . . . . . . . . . . .39 Section 501. RIGHTS OF NOTEHOLDERS. . . . . . . . . . . . . . . . . . .39 Section 502. COLLECTIONS AND ALLOCATIONS. . . . . . . . . . . . . . . .39 Section 503. DETERMINATION OF REQUISITE GLOBAL MAJORITY . . . . . . . .39 ARTICLE VICOVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Section 601. PAYMENT OF PRINCIPAL AND INTEREST; PAYMENT OF TAXES. . . .40 Section 602. MAINTENANCE OF OFFICE. . . . . . . . . . . . . . . . . . .40 Section 603. CORPORATE EXISTENCE. . . . . . . . . . . . . . . . . . . .40 Section 604. PROTECTION OF COLLATERAL . . . . . . . . . . . . . . . . .40 Section 605. PERFORMANCE OF OBLIGATIONS . . . . . . . . . . . . . . . .41 Section 606. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . .41 Section 607. NON-CONSOLIDATION OF ISSUER. . . . . . . . . . . . . . . .42 Section 608. NO BANKRUPTCY PETITION . . . . . . . . . . . . . . . . . .42 Section 609. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . .43 Section 610. OTHER DEBT . . . . . . . . . . . . . . . . . . . . . . . .43 Section 611. GUARANTEES, LOANS, ADVANCES AND OTHER LIABILITIES. . . . .43 Section 612. CONSOLIDATION, MERGER AND SALE OF ASSETS . . . . . . . . .43 Section 613. OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . .43 Section 614. CHARTER DOCUMENTS. . . . . . . . . . . . . . . . . . . . .44 Section 615. CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . .44 Section 616. PERMITTED ACTIVITIES . . . . . . . . . . . . . . . . . . .44 Section 617. INVESTMENT COMPANY ACT . . . . . . . . . . . . . . . . . .44 Section 618. PAYMENTS OF COLLATERAL . . . . . . . . . . . . . . . . . .44 Section 619. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . .44 Section 620. BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . .45 Section 621. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . .45 Section 622. SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . .45 Section 623. INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . .45 Section 624. USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . .45 Section 625. ASSET BASE CERTIFICATE . . . . . . . . . . . . . . . . . .45 Section 626. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . .45 Section 627. SERVICING REPORT . . . . . . . . . . . . . . . . . . . . .45 Section 628. CASH RECEIPTS REPORT . . . . . . . . . . . . . . . . . . .46 Section 629. RESERVED . . . . . . . . . . . . . . . . . . . . . . . . .46 ARTICLE VIIDISCHARGE OF INDENTURE; PREPAYMENTS . . . . . . . . . . . . . . . .47 Section 701. FULL DISCHARGE . . . . . . . . . . . . . . . . . . . . . .47 Section 702. PREPAYMENT OF NOTES. . . . . . . . . . . . . . . . . . . .47 Section 703. UNCLAIMED FUNDS. . . . . . . . . . . . . . . . . . . . . .48 ARTICLE VIIIDEFAULT PROVISIONS AND REMEDIES. . . . . . . . . . . . . . . . . .49 Section 801. EVENT OF DEFAULT . . . . . . . . . . . . . . . . . . . . .49 Section 802. ACCELERATION OF STATED MATURITY; RESCISSION AND ANNULMENT . . . . . . . . . . . . . . . . . . . . . . . . . . .50 Section 803. COLLECTION OF INDEBTEDNESS . . . . . . . . . . . . . . . .51 Section 804. REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . .51 Section 805. INDENTURE TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES . . . . . . . . . . . . . . . . . . . . . .52 Section 806. ALLOCATION OF MONEY COLLECTED. . . . . . . . . . . . . . .52 Section 807. LIMITATION ON SUITS. . . . . . . . . . . . . . . . . . . .53 Section 808. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND INTEREST. . . . . . . . . . . . . . . . . . . . .53 Section 809. RESTORATION OF RIGHTS AND REMEDIES . . . . . . . . . . . .54 Section 810. RIGHTS AND REMEDIES CUMULATIVE . . . . . . . . . . . . . .54 Section 811. DELAY OR OMISSION NOT WAIVER . . . . . . . . . . . . . . .54 Section 812. CONTROL BY THE CONTROL PARTY OF THE AFFECTED SERIES. . . .54 Section 813. WAIVER OF PAST DEFAULTS. . . . . . . . . . . . . . . . . .55 Section 814. UNDERTAKING FOR COSTS. . . . . . . . . . . . . . . . . . .55 Section 815. WAIVER OF STAY OR EXTENSION LAWS . . . . . . . . . . . . .55 Section 816. SALE OF COLLATERAL . . . . . . . . . . . . . . . . . . . .55 Section 817. ACTION ON NOTES. . . . . . . . . . . . . . . . . . . . . .56 ARTICLE IX CONCERNING THE INDENTURE TRUSTEE. . . . . . . . . . . . . . . . . .57 Section 901. DUTIES OF INDENTURE TRUSTEE. . . . . . . . . . . . . . . .57 Section 902. CERTAIN MATTERS AFFECTING THE INDENTURE TRUSTEE. . . . . .58 Section 903. INDENTURE TRUSTEE NOT LIABLE . . . . . . . . . . . . . . .59 Section 904. INDENTURE TRUSTEE MAY OWN NOTES. . . . . . . . . . . . . .60 Section 905. INDENTURE TRUSTEE'S FEES AND EXPENSES. . . . . . . . . . .60 Section 906. ELIGIBILITY REQUIREMENTS FOR INDENTURE TRUSTEE . . . . . .61 Section 907. RESIGNATION AND REMOVAL OF INDENTURE TRUSTEE . . . . . . .61 Section 908. SUCCESSOR INDENTURE TRUSTEE. . . . . . . . . . . . . . . .62 Section 909. MERGER OR CONSOLIDATION OF INDENTURE TRUSTEE . . . . . . .62 Section 910. SEPARATE INDENTURE TRUSTEES, CO-INDENTURE TRUSTEES AND CUSTODIANS . . . . . . . . . . . . . . . . . . . .62 Section 911. REPRESENTATIONS, WARRANTIES AND COVENANTS. . . . . . . . .64 Section 912. INDENTURE TRUSTEE OFFICES. . . . . . . . . . . . . . . . .65 Section 913. NOTICE OF EVENT OF DEFAULT . . . . . . . . . . . . . . . .65 ARTICLE XSUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . . . . .66 Section 1001. SUPPLEMENTAL INDENTURES NOT CREATING A NEW SERIES WITHOUT CONSENT OF HOLDERS. . . . . . . . . . . . . . . . . . .66 Section 1002. SUPPLEMENTAL INDENTURES NOT CREATING A NEW SERIES WITH CONSENT OF HOLDERS. . . . . . . . . . . . . . . . .67 Section 1003. EXECUTION OF SUPPLEMENTAL INDENTURES . . . . . . . . . . .68 Section 1004. EFFECT OF SUPPLEMENTAL INDENTURES. . . . . . . . . . . . .68 Section 1005. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES. . . . . . .68 Section 1006. ISSUANCE OF SERIES OF NOTES. . . . . . . . . . . . . . . .68 ARTICLE XIHOLDERS LISTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .70 Section 1101. ISSUER TO FURNISH INDENTURE TRUSTEE NAMES AND ADDRESSES OF HOLDERS. . . . . . . . . . . . . . . . . . . . . .70 Section 1102. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS . .70 ARTICLE XIIEARLY AMORTIZATION EVENT. . . . . . . . . . . . . . . . . . . . . .71 Section 1201. EARLY AMORTIZATION EVENT . . . . . . . . . . . . . . . . .71 ARTICLE XIIIMISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . .72 Section 1301. COMPLIANCE CERTIFICATES AND OPINIONS . . . . . . . . . . .72 Section 1302. FORM OF DOCUMENTS DELIVERED TO INDENTURE TRUSTEE . . . . .72 Section 1303. ACTS OF HOLDERS. . . . . . . . . . . . . . . . . . . . . .73 Section 1304. INSPECTION . . . . . . . . . . . . . . . . . . . . . . . .73 Section 1305. LIMITATION OF RIGHTS . . . . . . . . . . . . . . . . . . .74 Section 1306. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . .74 Section 1307. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . .74 Section 1308. CONSENT TO JURISDICTION. . . . . . . . . . . . . . . . . .75 Section 1309. CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . .75 Section 1310. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . .75 Section 1311. NO PETITION. . . . . . . . . . . . . . . . . . . . . . . .75 Section 1312. GENERAL INTERPRETIVE PRINCIPLES. . . . . . . . . . . . . .75 Section 1313. EFFECTIVE DATE OF TRANSACTION. . . . . . . . . . . . . . .76 Section 1314. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . .76 EXHIBIT A - Reserved EXHIBIT B - Intentionally Omitted EXHIBIT C - Manufacturers, Engines Types EXHIBIT D - Transfer Certificate (Rule 144A) EXHIBIT E - Transfer Certificate (other than Rule 144A) EXHIBIT F - Form of Non-Recourse Release SCHEDULE 1 Certain Terms
This Indenture, dated as of September 1, 1997 (as amended or supplemented from time to time as permitted hereby, the "Indenture"), between WLFC Funding Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Issuer") and The Bank of New York, a New York banking corporation, as Indenture Trustee (the "Indenture Trustee"). W I T N E S S E T H : In consideration of the mutual agreements herein contained, each party agrees as follows for the benefit of the other parties, the Noteholders and any Series Enhancer. GRANTING CLAUSE To secure the payment of the Outstanding Obligations of each Series and amounts owing by the Issuer under any Interest Rate Hedge Agreement and the performance of all of the Issuer's covenants and agreements in this Indenture and the related Supplement, the Issuer hereby grants, assigns, conveys, mortgages, pledges, hypothecates and transfers to Indenture Trustee, for the benefit of Noteholders of such Series, any Series Enhancer and any Interest Rate Hedge Provider, a security interest in and to all of the Issuer's right, title and interest in, to and under the following, whether now existing or hereafter created: (i) the Eligible Engines, related Lease Agreements (other than indemnification payments) and other Contributed Assets identified in the related Supplement, (ii) the Trust Account, Restricted Cash Account, Engine Reserve Account, Security Deposit Account and Series Account and all amounts and Eligible Investments on deposit from time to time in any such account to the extent that such amounts (including Excess Cash Available for Distribution) and Eligible Investments therein are specifically identified or allocated to such Series in accordance with the terms of this Indenture or the related Supplement, (iii) the Contribution and Sale Agreement and the Servicing Agreement, the Administration Agreement, in each case, as such agreements relate to an Eligible Engine specifically identified or allocated to a particular Series in accordance with the terms of this Indenture and the related Supplement, (iv) all Excess Cash Available for Distribution, (v) all income, payments and proceeds of the foregoing and of the items identified in clause (vi), and (vi) all of the following which arise out of or in any way relate to (but only to the extent they relate to) an Eligible Engine identified in the related Supplement: (a) All Accounts; (b) All Chattel Paper; (c) All Contracts; (d) All Documents; 1 (e) All General Intangibles; (f) All Instruments; (g) All Inventory; (h) All property of the Issuer held by the Indenture Trustee including, without limitation, all property of every description now or hereafter in the possession or custody of or in transit to the Indenture Trustee for any purpose, including, without limitation, safekeeping, collection or pledge, for the account of the Issuer, or as to which the Issuer may have any right or power; (i) To the extent not included above and without limiting the foregoing, all Chattel Paper, all Leases and all schedules, supplements, amendments, modifications, renewals, extensions, and guarantees thereof in every case whether now owned or hereafter acquired and all amounts, rentals, proceeds and other sums of money due and to become due under the Engine Related Agreements, including (in each case only to the extent related to an Eligible Engine), without limitation, (i) all rentals, payments and other moneys, including all insurance payments and claims for losses due and to become due to the Issuer under, and all claims for damages arising out of the breach of, any Engine Related Agreement; (ii) the right of the Issuer to terminate, perform under, or compel performance of the terms of the Engine Related Agreements; and (iii) any guarantee of the Engine Related Agreements and any rights of the Issuer in respect of any subleases or assignments permitted under the Engine Related Agreements; (j) All insurance proceeds of the Collateral (other than proceeds of liability insurance), all proceeds of the voluntary or involuntary disposition of the Collateral or such proceeds; (k) Any and all payments made or due to the Issuer in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority and any other cash or non-cash receipts from the sale, exchange, collection or other disposition of the Collateral; (l) To the extent not otherwise included, all income and Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing. All of the property described in this Granting Clause is herein collectively called the "Collateral" and as such is security for the Aggregate Outstanding Obligations. ARTICLE I DEFINITIONS 2 Section 101. DEFINED TERMS. Capitalized terms used in this Indenture shall have the following meanings and the definitions of such terms shall be equally applicable to both the singular and plural forms of such terms: ACCOUNT DEBTOR: Any "account debtor," as such term is defined in Section 9-105(1)(a) of the UCC. ACCOUNTS: Any "account," as such term is defined in Section 9-106 of the UCC, arising out of or in any way related to an Eligible Engine and, in any event, shall include, without limitation, all accounts receivable, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments) now owned or hereafter received or acquired by or belonging or owing to Issuer (including, without limitation, under any trade name, style or division thereof) whether arising out of goods sold or services rendered by Issuer or from any other transaction, whether or not the same involves the sale of goods or services by Issuer (including, without limitation, any such obligation which may be characterized as an account or contract right under the UCC) and all of Issuer's rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, and all of Issuer's rights to any goods represented by any of the foregoing (including, without limitation, unpaid seller's rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), and all monies due or to become due to Issuer under all purchase orders and contracts for the sale of goods or the performance of services or both by Issuer (whether or not yet earned by performance on the part of Issuer or in connection with any other transaction), now in existence or hereafter occurring, including, without limitation, the right to receive the proceeds of said purchase orders and contracts, and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. ADMINISTRATION AGREEMENT: The Administration Agreement, dated as of September 1, 1997, among the Issuer, the Servicer, the Administrative Agent and the Indenture Trustee, as such agreement shall be modified or supplemented from time to time in accordance with its terms. ADMINISTRATIVE AGENT: First Union Capital Markets Corp. and its permitted successors and assigns. AFFILIATE: With respect to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. AGGREGATE NET BOOK VALUE: As of any date of determination, an amount equal to the sum of the Net Book Values of all Eligible Engines. 3 AGGREGATE OUTSTANDING OBLIGATIONS: As of any date of determination, an amount equal to the sum of the Outstanding Obligations for all Series of Notes then Outstanding. APPLICABLE PERCENTAGE: This term is defined in Schedule 1 hereto ("Schedule 1"). APPRAISAL: An appraisal by one or more widely recognized independent appraisers selected by the Servicer and acceptable to the Administrative Agent. APPRAISED VALUE: With respect to an Engine, an amount determined by Appraisal equal to the value which would be obtained in an arm's-length transaction between an informed and willing purchaser (other than a purchaser currently in possession) under no compulsion to purchase and an informed and willing seller, under no compulsion to sell. In determining such value in the case of an Engine, it will be assumed that (i) no value will be given to lease payments made under any related Lease Agreement, (ii) that such Engine appraisal shall be based upon the condition and overhaul status in which the Engine is required to be returned, provided, however, that maintenance and repair provisions shall be considered when evaluating return conditions. ASSET BASE: With respect to any Series, as of any Payment Date, an amount equal to (1) the sum of (a) the product of (i) the Applicable Percentage and (ii) the sum of (x) the Aggregate Net Book Value as of the end of the immediately preceding Collection Period of all Eligible Engines pledged to such Series and (y) an amount calculated as of the end of the immediately preceding Collection Period by applying the Depreciation Policy to Capital Improvements made to the Eligible Engines pledged to such Series, and (b) the amount on deposit in the related Restricted Cash Account for such Series on such Payment Date, after giving effect to all deposits to and withdrawals from such Restricted Cash Account on such Payment Date, minus (2) the sum of (a) any Maintenance Reserve Payments and Security Deposits relating to such Eligible Engines pledged to such Series that are not then on deposit in the related Engine Reserve Account and the related Security Deposit Account, respectively, and (b) the Excess Concentration Amount (as defined in a Supplement for a Series). ASSET BASE CERTIFICATE: A certificate with appropriate insertions setting forth the components of the Asset Base as of the last day of the month for which such certificate is submitted, which certificate shall be substantially in the form of Exhibit D to the related Supplement and shall be certified by an Authorized Signatory. AUTHORIZED SIGNATORY: Any Person designated by written notice delivered to the Indenture Trustee and any Series Enhancer as authorized to execute documents and instruments on behalf of a Person. AVAILABLE AMOUNTS: This term is defined in Section 401 hereof. BANKRUPTCY CODE: The Bankruptcy Reform Act of 1978, as amended. 4 BENEFIT PLAN: This term is defined in Section 205(e) hereof. BUSINESS DAY: Any day other than a Saturday, a Sunday or a day on which banking institutions in New York City, Sausalito, California, Charlotte, North Carolina, or the city in which the Corporate Trust Office of Indenture Trustee is located, are authorized or are obligated by law, executive order or governmental decree to be closed. CAPITAL IMPROVEMENTS: Any capital improvements made to Eligible Engines in accordance with Section 3.01(f) of the Servicing Agreement. CASUALTY LOSS: (i) Any of the following events with respect to an Eligible Engine which is not subject to a Lease Agreement: (a) the actual total loss or compromised total loss of such Eligible Engine, (b) Issuer's knowledge that such Eligible Engine has become lost, stolen or destroyed, (c) 60 days following Issuer's determination that such Eligible Engine is damaged beyond repair or permanently rendered unfit for use for any reason whatsoever or (d) the seizure, condemnation or confiscation of such Eligible Engine for a period exceeding thirty (30) days and (ii) if such Eligible Engine is subject to a Lease Agreement, such Eligible Engine shall have been deemed under its Lease Agreement to have suffered a casualty loss as to the entire Eligible Engine. CASUALTY PROCEEDS: Any payment to, or on behalf of, the Issuer in connection with a Casualty Loss. CHANGE OF CONTROL: means (i) (a) any "person" or group (as defined in Rules 13d-3 and 13-5 under the Securities Act), is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Act) of a larger number of shares of common stock of the Seller than the number of shares of common stock of the Seller of which CHARLES F. WILLIS, IV and members of his family (including children, brothers and sisters) is the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Securities Act) and (b) at any time during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Seller (together with any new directors whose elections by the shareholders of the Seller was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Seller then in office; or (ii) any "person" or group (as defined in Rules 13d-3 and 13-5 under the Securities Act) other than Charles F. Willis IV, and members of his family (including children, brothers and sisters) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13-5 under the Securities Act) of 50% or more of the shares of common stock of the Seller. CHATTEL PAPER: Any lease (including any Lease or any Lease Agreement) or other "chattel paper," as such term is defined in Section 9-105(1)(b) of the UCC, arising out of or in any way related to the Eligible Engines and now owned or hereafter acquired by Issuer. 5 CLASS: With respect to any Series, all Notes having the same rights to payment under the related Supplement. CLOSING DATE: This term shall have the meaning set forth in the related Supplement for a Series. CODE: The Internal Revenue Code of 1986, as amended, or any successor statute thereto. COLLATERAL: This term shall have the meaning set forth in the Granting Clause of this Indenture. COLLECTION PERIOD: With respect to the first Payment Date, the period commencing on the Closing Date and ending on the last day of the next succeeding calendar month and thereafter for any subsequent Payment Date the period from the first day of the calendar month immediately preceding the month in which such Payment Date occurs through the last day of such calendar month. COLLECTIONS: With respect to any Collection Period, all payments actually received by the Issuer with respect to the Eligible Engines or the other items of Collateral, including, without limitation, all Engine Revenues, Casualty Proceeds, Sales Proceeds and Warranty Purchase Amounts. Collections for any Collection Period shall include any of the foregoing amounts which are received in any Collection Period but which are deposited in the Trust Account in the next month within the time required by Section 303(a) hereof. CONTRACTS: All contracts, undertakings, franchise agreements or other agreements (other than rights evidenced by Chattel Paper, Documents or Instruments), arising out of or in any way related to an Eligible Engine or to the related Series of Notes, in or under which Issuer may now or hereafter have any right, title or interest, including, without limitation, the Servicing Agreement, the Contribution and Sale Agreement, any Interest Rate Hedge Agreements and any related agreements, security interests or UCC or other financing statements and, with respect to an Account, any agreement relating to the terms of payment or the terms of performance thereof. CONTRIBUTED ASSETS: This term shall have the meaning set forth in the Contribution and Sale Agreement. CONTRIBUTION AND SALE AGREEMENT: The Contribution and Sale Agreement, dated as of September 1,1997, between the Seller and the Issuer, and all amendments and supplements thereto. CONTROL PARTY: With respect to a Series, Noteholders of such Series representing more than fifty percent (50%) of the then unpaid principal balance of all Notes Outstanding within such Series, unless otherwise specified in the Supplement related to such Series. 6 CORPORATE TRUST OFFICE: The principal office of the Indenture Trustee at which at any particular time its corporate trust business shall be administered, which office shall initially be located at 101 Barclay Street, 12th Floor East, Asset Backed Finance Unit, New York, New York 10286. CORPORATE TRUST OFFICER: Any Treasurer, Assistant Treasurer, Assistant Trust Officer, Trust Officer, Assistant Vice President, Vice President or Senior Vice President of the Indenture Trustee or any other officer who customarily performs functions similar to those performed by the Persons who at the time shall be such officers to whom any corporate trust matter is referred because of their knowledge of and familiarity with the particular subject. DEFAULT INTEREST: The interest specified in the related Supplement payable by the Issuer resulting from the occurrence of an Event of Default. DEFICIENCY AMOUNT: This term is defined in Section 401 hereof. DEFICIENT SERIES: This term is defined in Section 401 hereof. DEPRECIATION EXPENSE: As of any date of determination shall mean the depreciation expense of the Eligible Engines for the immediately preceding four (4) fiscal quarters through the most recently completed fiscal quarter, which depreciation expense shall be calculated in accordance with the Depreciation Policy. DEPRECIATION PERCENTAGE: This term is defined in Schedule 1. DEPRECIATION POLICY: As of the date hereof, (i) with respect to the Eligible Engines, straight line monthly depreciation over a period of fifteen years commencing from the date of acquisition of an Engine until the date on which the value attributable to an Engine is equal to the Depreciation Percentage of its Net Purchase Price and (ii) with respect to Capital Improvements made to the Eligible Engines, straight line monthly depreciation over a period of fifteen years less the number of months transpired from the date of acquisition of the related Eligible Engine, commencing from the date on which such Capital Improvement is made to the related Eligible Engine until the date on which the value attributable to such Capital Improvement is equal to the Depreciation Percentage of the value of such Capital Improvement (such value, as determined in accordance with GAAP on the date on which such Capital Improvement is made). As of any date other than the date hereof, the Issuer may modify the Depreciation Policy with the prior written consent of the Administrative Agent. DETERMINATION DATE: The fourth Business Day prior to any Payment Date. DISPOSITION PROCEEDS: Any payment to the Issuer in connection with any sale, lease or disposition of an Eligible Engine. 7 DOCUMENTS: Any "documents," as such term is defined in Section 9-105(1)(f) of the UCC, arising out of or in any way related to an Eligible Engine and now owned or hereafter acquired by the Issuer. EARLY AMORTIZATION EVENT: The occurrence of any of the events or conditions set forth in Article XII hereof. EBIT: For any period, earnings (loss) before Net Interest Expense, taxes, gains and losses from the sale of plant, property and equipment and foreign exchange transactions. EBIT RATIO: For the Issuer, the ratio of (a) EBIT to (b) Net Interest Expense, in each case for the most recently concluded four (4) fiscal quarters (except for the first three fiscal quarters of the Issuer following the Effective Date of the first Series, EBIT and Net Interest Expense through the end of any quarter under consideration will, for purposes of this calculation, be calculated on an annualized basis by multiplying actual EBIT or Net Interest Expense for the fiscal quarters which have been completed since the Effective Date of the first Series by a fraction, the numerator of which is four (4) and the denominator of which is the number of full fiscal quarters then completed). EFFECTIVE DATE: This term shall have the meaning set forth in the related Supplement for a Series. ELIGIBLE ACCOUNT: Either (a) a segregated account with an Eligible Institution or (b) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States or any of the states thereof, including the District of Columbia (or any domestic branch of a foreign bank), and acting as a trustee for funds deposited in such account, so long as the senior securities of such depository institution shall have a credit rating from each Rating Agency in one of its generic credit rating categories no lower than "A3" or "A-", as the case may be, or (c) any account held with the Indenture Trustee. ELIGIBLE ENGINE: This term shall have the meaning set forth in the related Supplement for a Series. ELIGIBLE INSTITUTION: Any one or more of the following institutions: (i) the corporate trust department of the Indenture Trustee, or (ii) a depositary institution organized under the laws of the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), (a) which has both (x) a long-term unsecured senior debt rating of not less than "A" by Standard & Poor's Ratings Group and "A-2" by Moody's Investors Service, Inc., and (y) a short-term unsecured senior debt rating rated in the highest rating category by each Rating Agency and (b) whose deposits are insured by the Federal Deposit Insurance Corporation. ELIGIBLE INVESTMENTS: One or more of the following: 8 (i) direct obligations of, and obligations fully guaranteed as to the timely payment of principal and interest by, the United States or obligations of any agency or instrumentality thereof when such obligations are backed by the full faith and credit of the United States; (ii) certificates of deposit and bankers' acceptances (which shall each have an original maturity of not more than 365 days) of any United States depository institution or trust company incorporated under the laws of the United States or any State and subject to supervision and examination by federal and/or State authorities, provided that the long-term unsecured senior debt obligations of such depository institution or trust company at the date of acquisition thereof have been rated "A-"/"A3" or better by the Rating Agencies, or the short-term unsecured senior debt obligations of such depository institution or trust company are rated by each Rating Agency in its highest rating category; (iii) commercial paper (having original maturities of not more than 270 days) of any corporation incorporated under the laws of the United States or any State thereof which on the date of acquisition has been rated by each Rating Agency in the highest short-term unsecured commercial paper rating category; (iv) any money market fund that has been rated by each Rating Agency in its highest rating category (including any designations of "plus" or "minus") or that invests solely in Eligible Investments; (v) eurodollar deposits (which shall each have an original maturity of not more than 365 days) of any depository institution or trust company, provided that the long-term unsecured senior debt obligations of such depository institution or trust company at the date of acquisition thereof have been rated "A-"/"A3" or better by the Rating Agencies, or the short-term unsecured senior debt obligations of such depository institution or trust company are rated by each Rating Agency in its highest rating category; and (vi) other obligations or securities that are acceptable to the related Series Enhancers and each Rating Agency as an Eligible Investment hereunder and will not result in a reduction or withdrawal in the then current rating of the Notes as evidenced by a letter to such effect from each Rating Agency and the related Series Enhancers. ELIGIBLE LEASE: This term shall have the meaning set forth in the related Supplement for a Series. ENGINE: Any aircraft engine manufactured by one of the manufacturers and constituting one of the engine types set forth in Exhibit C hereto. ENGINE RELATED AGREEMENT: Any agreement relating to an Eligible Engine or agreements relating to the use or management of an Eligible Engine whether in existence on 9 any Series Issuance Date or thereafter acquired, including, but not limited to, all Leases, the Servicing Agreement, the Contribution and Sale Agreement and the Chattel Paper. ENGINE REPRESENTATIONS AND WARRANTIES: This term shall have the meaning set forth in the Contribution and Sale Agreement. ENGINE RESERVE ACCOUNT: Any deposit, trust, escrow or similar account maintained for the benefit of the Noteholder of any Series or Class and any related Series Enhancer in accordance with the provisions of Section 308 hereof. ENGINE REVENUES: For any Collection Period, all amounts paid to and received by the Issuer which are attributable to an Eligible Engine, including but not limited to (i) any Scheduled Payment and other amounts payable by a Lessee pursuant to the related Lease Agreements; (ii) amounts received from the manufacturers or sellers of an Eligible Engine for breach of sale warranties relating thereto or in settlement of any claims, losses, disputes or proceedings relating to such Eligible Engine; (iii) amounts received from any other Person in settlement of any claims, losses, disputes or proceedings relating to an Eligible Engine, including insurance proceeds relating thereto; and (iv) any insurance premiums relating to an Eligible Engine which have been refunded by the insurer. Notwithstanding the foregoing, Engine Revenues do not include Sales Proceeds, Casualty Proceeds, Maintenance Reserve Payments or Security Deposits (unless, and to the extent that, such Security Deposit is applied toward payment of any Lessee payment obligation under the related Lease Agreement). ENHANCEMENT AGREEMENT: Any agreement, instrument or document governing the terms of any Series Enhancement or pursuant to which any Series Enhancement is issued or outstanding. ERISA: The Employee Retirement Income Security Act of 1974, as amended. ERISA AFFILIATE: With respect to any Person, any other Person meeting the requirements of Section 414(b), (c), (m) or (o) of the Code. EVENT OF DEFAULT: With respect to any Series, the occurrence of any of the events or conditions set forth in Section 801 of the Indenture. EXCESS CASH AVAILABLE FOR DISTRIBUTION: With respect to any Series on any Payment Date, the amount of funds remaining in the related Series Account following distribution on such Payment Date of all payments which, pursuant to the terms of the related Supplement, have a payment priority greater than the distribution of funds to the Issuer. FAA: The Federal Aviation Authority or any successor organization thereto. 10 FINAL PAYMENT DATE: With respect to any Series, the date on which the principal balance of the Outstanding Notes of such Series are payable in full. The Final Payment Date for a Series shall be set forth in the related Supplement. FIRST UNION: First Union Capital Markets Corp., and its permitted successors and assigns. GENERAL INTANGIBLES: Any "general intangibles," as such term is defined in Section 9-106 of the UCC, arising out of or in any way related to an Eligible Engine and now owned or hereafter acquired by Issuer and, in any event, shall include, without limitation, all right, title and interest which Issuer may now or hereafter have in or under any Contract, interests in partnerships, joint ventures and other business associations, licenses, permits, software, data bases, data, materials and records, claims in or under insurance policies, including unearned premiums, uncertificated securities, deposit accounts, rights to receive tax refunds and other payments and rights of indemnification. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES OR GAAP: With respect to any Person, those generally accepted accounting principles and practices which are recognized as such by (i) the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof consistently applied as to the party in question or (ii) such other equivalent entit(ies) have authority for promulgatory accounting principles and practices applicable to such Person. GOVERNMENTAL AUTHORITY: This term shall mean (a) any federal, state, county, municipal or foreign government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, (c) any court or administrative tribunal or (d) with respect to any Person, any arbitration tribunal or other non-governmental authority to whose jurisdiction that Person has consented. GUARANTY FEE: A fee or premium payable to a Series Enhancer or to another Person specified in the related Supplement or Enhancement Agreement for guaranteeing all or a portion of the Notes of a Series (or a Class thereof). HEDGE ARRANGEMENT: Shall have the meaning with respect to a Series as more particularly set forth in the related Series Supplement. HOLDER: See NOTEHOLDER. INDEBTEDNESS: With respect to any Person means, without duplication, (a) any obligation of such Person for borrowed money, including, without limitation, (i) any obligation incurred through the issuance and sale of bonds, debentures, notes or other similar debt instruments, and (ii) any obligation for borrowed money which is non-recourse to the 11 credit of such Person but which is secured by any asset of such Person, (b) any obligation of such Person on account of deposits or advances, (c) any obligation of such Person for the deferred purchase price of any property or services, except accounts payable arising in the ordinary course of such Person's business, (d) any obligation of such Person as lessee under a capital lease, (e) any Indebtedness of another secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person and (f) any obligation in respect of interest rate or foreign exchange hedging agreements. INDENTURE: This Indenture, dated as of September 1, 1997, between the Issuer and the Indenture Trustee and all amendments hereof and supplements hereto, including, with respect to any Series or Class, the related Supplement. INDENTURE TRUSTEE: The Person performing the duties of the Indenture Trustee under this Indenture. INDENTURE TRUSTEE'S FEES: The amounts payable as fees to the Indenture Trustee pursuant to the first sentence of Section 905 of this Indenture. INDEPENDENT ACCOUNTANTS: KPMG Peat Marwick or other independent certified public accountants of internationally recognized standing selected by Issuer and acceptable to the Administrative Agent and each Series Enhancer. INSOLVENCY LAW: The Bankruptcy Code or similar law in any applicable jurisdiction. INSOLVENCY PROCEEDING: Any Proceeding under any applicable Insolvency Law. INSTRUMENTS: Any "instrument," as such term is defined in Section 9-105(1)(i) of the UCC arising out of or in any way related to an Eligible Engine and now owned or hereafter acquired by Issuer, including, without limitation, all notes, certificated securities, and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. INTEREST ARREARAGES: With respect to any Series on any Payment Date, any amounts that are payable as interest on the Outstanding Notes of such Series which are not paid from amounts then on deposit in the related Series Account. INTEREST RATE HEDGE AGREEMENT: Any Interest Rate Swap Agreement, Cap Agreement or other similar agreement entered into by the Issuer with an Interest Rate Hedge Provider. INTEREST RATE HEDGE PROVIDER: Any counterparty to an Interest Rate Hedge Agreement entered into by the Issuer or the Indenture Trustee that has a long-term rating of at least A- from Standard & Poor's Ratings Services and A2 from Moody's Investors Service, Inc. and a short-term rating of at least A1 from Standard & Poor's Ratings Services and P1 from Moody's Investors Service, Inc. 12 INVENTORY: Any "inventory," as such term is defined in Section 9-109(4) of the UCC, wherever located, arising out of or in any way related to an Eligible Engine and now or hereafter owned or acquired (whether as lessee or otherwise) by Issuer and, in any event, shall include, without limitation, all inventory, merchandise, goods and other personal property which are held by or on behalf of Issuer for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in Issuer's business, or the processing, packaging, promotion, delivery or shipping of the same, and all furnished goods whether or not such inventory is listed on any schedules, assignments or reports furnished to Indenture Trustee from time to time and whether or not the same is in transit or in the constructive, actual or exclusive occupancy or possession of Issuer or is held by Issuer or by others for Issuer's account, including, without limitation, all goods covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers and all inventory which may be located on premises of Issuer or of any carriers, forwarding agents, warehousemen, vendors, selling agents or other persons. INVESTMENT: When used in connection with any Person, any investment by or of that Person, whether by means of purchase or other acquisition of securities of any other Person or by means of loan, advance, capital contribution, guaranty or other debt or equity participation or interest, or otherwise, in any other Person, including any partnership and joint venture interests of such Person in any other Person. The amount of any Investment shall be the original principal or capital amount thereof less all returns of principal or equity thereon (and without adjustment by reason of the financial condition of such other Person) and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property. ISSUER: WLFC Funding Corporation, a corporation organized and existing under the laws of the State of Delaware. LEASE: Each and every item of chattel paper, installment sales agreement, equipment lease or rental agreement (including progress payment authorizations) to which an Eligible Engine is subject. The term "Lease" includes (a) all payments to be made thereunder, (b) all rights of Issuer therein, and (c) any and all amendments, renewals, extensions or guaranties thereof. LEASE AGREEMENT: This term shall have the meaning set forth in the related Supplement for a Series. LESSEE: The obligor under a Lease Agreement (including any guarantor of the obligations of the user of an Engine). LIEN: Any security interest, lien, charge, pledge, equity or encumbrance of any kind. 13 MAINTENANCE RESERVE PAYMENTS: With respect to any Lease Agreement, any amounts paid by the Lessee to Lessor pursuant to the terms of such Lease Agreement to cover the maintenance, repair or similar payments and expenses for the related Engine. MATERIAL ADVERSE CHANGE: Any set of circumstances or events which (a) has or would reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of any Related Document or the security for any of the related Notes, (b) is or would reasonably be expected to be material and adverse to the condition (financial or otherwise) or business operations of Issuer, Guarantor or Servicer, individually or taken together as a whole, (c) materially impairs or would reasonably be expected to materially impair the ability of Issuer, Guarantor or Servicer to perform its obligations under the Related Documents, or (d) materially impairs or would reasonably be expected to materially impair the ability of Indenture Trustee or any Series Enhancer to enforce any of its or their legal rights or remedies pursuant to the Related Documents. MINIMUM SERVICING FEE PERCENTAGE: This term is defined in Schedule 1. NET BOOK VALUE: With respect to an Engine, the amount calculated by applying the Depreciation Policy to the Net Purchase Price for such Engine. NET PURCHASE PRICE: With respect to an Engine as of any date of determination, an amount equal to the lesser of (i) the Appraised Value of such Engine on the Transfer Date and (ii) the purchase price paid by Seller as reflected on the invoice or purchase agreement delivered to Seller by its vendor, provided however, clause (ii) shall not be applicable to those Engines owned by the Seller or one of its Affiliates on the Closing Date. NET INTEREST EXPENSE: For any period, the net finance costs as shown for such period on the statement of operations of the Issuer. NOTES: Any one of the Notes or other securities executed by the Issuer and authenticated by or on behalf of the Indenture Trustee, substantially in the form attached to the related Supplement. NOTEHOLDER: The person in whose name a Note is registered in the Note Register, except that, solely for the purposes of giving any consent, waiver, request or demand, the interest evidenced by any Note registered in the name of the Seller or the Issuer or any Affiliate of any of them known to be such an Affiliate by the Indenture Trustee shall not be taken into account in determining whether the requisite percentage of the aggregate principal balance of the Outstanding Notes necessary to effect any such consent, waiver, request or demand is represented unless the Issuer owns 100% of the Notes. NOTE PURCHASE AGREEMENT: Any underwriting agreement or other agreement for the Notes of any Series or Class. 14 NOTE REGISTER: The register maintained by the Indenture Trustee pursuant to Section 205 of this Indenture. OFFICER'S CERTIFICATE: A certificate signed by a duly authorized officer of the Person who is required to sign such certificate. ONE YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE: As of any date of determination a fraction (expressed as a percentage) the numerator of which shall be the sum of the Net Book Values of all Eligible Engines subject to Lease Agreements having a remaining lease term that will expire in the immediately succeeding twelve (12) months and the denominator of which shall be the Aggregate Net Book Value. OPINION OF COUNSEL: A written opinion of counsel, who, unless otherwise specified, may be counsel employed by the Issuer, the Seller or the Servicer, in each case reasonably acceptable to the Person or Persons to whom such Opinion of Counsel is to be delivered. The counsel rendering such opinion may rely (i) as to factual matters on a certificate of a Person whose duties relate to the matters being certified, and (ii) insofar as the opinion relates to local law matters, upon opinions of local counsel. OUTSTANDING: When used with reference to the Notes and as of any particular date, any Note theretofore and thereupon being authenticated and delivered except: (i) any Note cancelled by the Indenture Trustee or proven to the satisfaction of the Indenture Trustee to have been duly cancelled by the Issuer at or before said date; (ii) any Note, or portion thereof, called for payment or redemption for which monies equal to the principal amount or redemption price thereof, as the case may be, with interest to the date of maturity or redemption, shall have theretofore been deposited with the Indenture Trustee (whether upon or prior to maturity or the redemption date of such Note); (iii) any Note in lieu of or in substitution for which another Note shall subsequently have been authenticated and delivered; and (iv) any Note held by the Issuer, the Seller or any Affiliate of either the Issuer or the Seller. Notwithstanding the foregoing, any Note on which any portion of principal or interest has been paid by a Series Enhancer pursuant to an Enhancement Agreement, shall be Outstanding until the Series Enhancer has been reimbursed in full therefor in accordance with the related Series Enhancement Agreement. 15 OUTSTANDING OBLIGATIONS: As of any date of determination for any Series of Notes issued under this Indenture or any Supplement thereto, all accrued interest payable on, and the then outstanding principal balance of, such Series of Notes and all other amounts owing to Noteholders of such Series or to any Person under the Indenture or any Supplement hereto, including without limitation any amounts owed to any related Series Enhancer. OVERDUE RATE: The rate of interest specified in the related Supplement applicable to a Note then earning Default Interest. PAYMENT DATE: With respect to any Series, this term shall have the meaning set forth in the related Supplement. PERMITTED ENCUMBRANCE: With respect to the Collateral, any of the following: (i) Liens for taxes not yet due or which are being contested in good faith by appropriate Proceedings and for the payment of which adequate reserves are provided by the Servicer; (ii) carriers', warehousemen's, mechanics, or other like Liens arising in the ordinary course of business and relating to amounts not yet due or which shall not have been overdue for a period of more than sixty (60) days or which are being contested in good faith by appropriate proceedings and for the payment of which adequate reserves are provided by the Servicer; (iii) Lease Agreements entered into in the ordinary course of business providing for the leasing of Eligible Engines; (iv) Liens created by this Indenture and (v) any encumbrance permitted under the Lease Agreement which is commercially acceptable for comparable transactions; PROVIDED HOWEVER, that Proceedings described in (i) and (ii) above could not reasonably subject any Series Enhancer, the Indenture Trustee or the Noteholders to any civil or criminal penalty or liability or involve any risk of material loss, sale or forfeiture of any of the Collateral. PERSON: An individual, a partnership, a limited liability company, a corporation, a joint venture, an unincorporated association, a joint-stock company, a trust, or other entity or a Governmental Authority. PLAN: An "employee benefit plan," as such term is defined in ERISA, established or maintained by Issuer or any ERISA Affiliate or as to which Issuer or any ERISA Affiliate contributes or is a member or otherwise may have any liability. PREPAYMENT: Any mandatory or optional prepayment of principal of any Class of Notes including without limitation any prepayment pursuant to Section 702 of this Indenture. PRINCIPAL ARREARAGES: With respect to any Series on any Payment Date, any amounts that are payable as principal on the Outstanding Notes of such Series which are not paid from amounts then on deposit in the related Series Account. PRINCIPAL TERMS: With respect to any Series, (i) the name or designation of such Series; (ii) the initial principal amount of the Notes to be issued for such Series (or method for calculating such amount); (iii) the interest rate to be paid with respect to each Class of Notes 16 for such Series (or method for the determination thereof); (iv) the Payment Date and the date or dates from which interest shall accrue and principal shall be paid; (v) the designation of any Series Accounts and the terms governing the operation of any such Series Accounts; (vi) the terms of any form of Series Enhancement with respect thereto; (vii) the Final Payment Date for the Series; (viii) the number of Classes of Notes of the Series and, if the Series consists of more than one Class, the rights and priorities of each such Class; (ix) the priority of the Series with respect to any other Series; (x) the Control Party with respect to such Series; (xi) the Eligible Engines that will serve as collateral security for the Notes and other obligations of such Series; and (xii) any other terms of such Series. PROCEEDING: Any suit in equity, action at law, or other judicial or administrative proceeding. PROCEEDS: "Proceeds," as such term is defined in Section 9-306(1) of the UCC and, in any event, shall include, without limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other proceeds payable to Issuer from time to time in respect of the Collateral, (b) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Issuer from time to time with respect to any of the Collateral, (c) any and all payments (in any form whatsoever) made or due and payable to Issuer from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral above by any Governmental Authority (or any Person acting under color of Governmental Authority), and (d) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. RATED INSTITUTIONAL NOTEHOLDER: An institutional Noteholder whose long term unsecured debt obligations are then rated BBB- or better by Standard & Poor's Rating Services and Baa-3 or better by Moody's Investors Service, Inc. RATING AGENCY OR RATING AGENCIES: With respect to any outstanding Series or Class, shall mean each statistical rating agency selected by the Issuer (with the approval of any Series Enhancer for such Series) to rate such Series or Class and that has an outstanding rating with respect to such Series or Class. RATING AGENCY CONDITION: With respect to any action shall mean that each Rating Agency shall have notified the Issuer, the Servicer, the Administrative Agent, any related Series Enhancer and the Indenture Trustee in writing that such action will not result in a reduction or withdrawal of any rating at issuance of any Outstanding Notes with respect to which it is a Rating Agency, including any underlying rating issued to a Series Enhancer of such Notes as if such Notes were issued without the benefit of any credit enhancement provided by such Series Enhancer. RECORD DATE: With respect to any Payment Date, the last Business Day of the month preceding the month in which the related Payment Date occurs, except as otherwise provided with respect to a Series in the related Supplement. 17 RELATED DOCUMENTS: With respect to any Series, the Contribution and Sale Agreement, this Indenture, the related Supplement, the Notes of such Series, the Servicing Agreement, the Guaranty, the related Series Enhancement Agreement, the related Note Purchase Agreements and each other document or instrument executed in connection with the issuance to any Series. REPORTABLE EVENT: This term shall have the meaning given to such term in ERISA. REQUISITE GLOBAL MAJORITY: As of any date of determination, the determination of whether a Requisite Global Majority exists with respect to a particular course of action shall be determined in accordance with Section 503 of this Indenture. RESTRICTED CASH ACCOUNT: This term shall have the meaning set forth in Section 307 of this Indenture. RULE 144A: Rule 144A under the Securities Act, as such Rule may be amended from time to time. SALE: This term shall have the meaning set forth in Section 816 of this Indenture. SALES PROCEEDS: The gross proceeds of the sale or other disposition of an Eligible Engine or Casualty Proceeds, if any, received by, or on behalf of, the Issuer in respect of an Eligible Engine, less commissions, administrative fees, handling charges or other amounts paid or to be paid to third parties in connection with the sale or other disposition as determined in the sole discretion of the Servicer. SCHEDULED PAYMENT: With respect to any Lease Agreement, the monthly, quarterly or other periodic rent payment scheduled to be paid by the Lessee pursuant to the terms of such Lease Agreement. SECURITIES ACCOUNTS: The Restricted Cash Account and Series Accounts. SECURITIES ACT: The Securities Act of 1933, as amended from time to time. SECURITY DEPOSIT: Any deposit collected from, or on behalf of, a Lessee as a security deposit at the time of origination of the Lease Agreement. SECURITY DEPOSIT ACCOUNT: Any deposit, trust, escrow or similar account maintained for the benefit of the Noteholders of any Series or Class and any related Series Enhancer in accordance with Section 309 hereof. SECURITIES INTERMEDIARY: The Bank of New York, a New York banking corporation, as securities intermediary (as such terms is defined under UCC Section 8-102(a)(14)) with respect to the Securities Accounts. 18 SELLER: Willis Lease Finance Corporation, a corporation organized and existing under the laws of the State of California. SERIES: Any series of Notes established pursuant to a Supplement. SERIES ACCOUNT: Any deposit, trust, escrow or similar account maintained for the benefit of the Noteholders of any Series or Class and any related Series Enhancer as specified in the related Supplement. SERIES COLLATERAL: This term shall have the meaning set forth in the related Supplement for a Series. SERIES ENHANCEMENT AGREEMENT: Any Enhancement Agreement for any Series. SERIES ENHANCEMENT: The rights and benefits provided to the Noteholders of any Series or Class pursuant to any letter of credit, surety bond, financial guaranty insurance policy, insurance agreement, cash collateral or reserve account, spread account, guaranteed rate agreement, maturity liquidity facility, tax protection agreement, interest rate swap agreement, interest rate cap agreement or other similar arrangement. The subordination of any Class to another Class shall not be deemed to be a Series Enhancement. SERIES ENHANCER: The Person then providing any Series Enhancement, other than the Noteholders of any Class which is subordinated to another Class. SERIES FINAL PAYMENT DATE: With respect to any Series, the final payment date specified in the related Supplement. SERIES ISSUANCE DATE: With respect to any Series, the date on which the Notes of such Series are to be originally issued in accordance with Section 1006 of this Indenture and the related Supplement. SERIES MAJORITY: Unless otherwise defined in a Supplement for a Series, shall mean an amount equal to more than 50% of the outstanding obligations of the Notes of such Series. SERVICING AGREEMENT: The Servicing Agreement, dated as of September 1, 1997, entered into by and between the Servicer and the Issuer, as such agreement shall be amended, supplemented or modified from time to time in accordance with its terms. SERVICING FEE: For any Collection Period, the amount calculated as set forth in the related Supplement. SERVICING FEE ARREARAGE: For any Payment Date, an amount equal to any unpaid Servicing Fee from all prior Collection Periods. 19 SERVICING OFFICER: Any representative of the Servicer involved in, or responsible for, the management of the day-to-day operations of the Issuer and the administration and servicing of the Eligible Engines and the other Collateral whose name appears on a list of managing officers furnished to Issuer, each Series Enhancer and the Indenture Trustee by the Servicer, as such list may from time to time be amended. SERVICER: The Person performing the duties of the Servicer under the Servicing Agreement; initially, Willis Lease Finance Corporation, a corporation organized under the laws of the State of California. SERVICER DEFAULT: The occurrence of any of the events or conditions set forth in Section 7.01 of the Servicing Agreement. SERVICER REPORT: A written informational statement in the form attached as Exhibit A to the Servicing Agreement to be provided by the Servicer in accordance with the Servicing Agreement and furnished to the Indenture Trustee, the Administrative Agent and each Series Enhancer. SERVICER TERMINATION NOTICE: A written notice to be provided to the Servicer pursuant to Section 405(b) of this Indenture with a copy to each Series Enhancer. STATE: Any state of the United States of America and, in addition, the District of Columbia. SUBSIDIARY: A subsidiary of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than fifty percent (50.0%) of the voting stock or other equity interests (in the case of Persons other than corporations) is owned or controlled directly or indirectly by such Person, or one or more of the Subsidiaries of such Person, or a combination thereof. SUPPLEMENT: Any supplement to the Indenture executed in accordance with Article X of this Indenture. TRANSFER DATE: The date on which an Engine is contributed or sold by the Seller to the Issuer pursuant to the terms of the Contribution and Sale Agreement. TRUST ACCOUNT: The account or accounts established by the Issuer for the benefit of the Indenture Trustee pursuant to Section 303 hereof. TWO YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE: As of any date of determination a fraction (expressed as a percentage) the numerator of which shall be the sum of the Net Book Values of all Eligible Engines subject to Lease Agreements having a remaining lease term that 20 will expire in the immediately succeeding twenty-four (24) months and the denominator of which shall be the Aggregate Net Book Value. UCC: The Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; PROVIDED, HOWEVER, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Indenture Trustee's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection of priority and for purposes of definitions related to such provisions. WARRANTY PURCHASE AMOUNT: This term shall have the meaning set forth in the Contribution and Sale Agreement. WEIGHTED AVERAGE LEASE RATE FACTOR: As of any date of determination shall mean a fraction (expressed as a percentage) the numerator of which shall be equal to the sum of the Scheduled Payments due in the current month under all Lease Agreements then in effect with respect to the Eligible Engines and the denominator of which shall be equal to the Aggregate Net Book Value as of such date of determination. WIDE BODY AIRCRAFT: Shall mean aircraft commonly known as Boeing 747 or 777, McDonnell Douglas DC-10, MD-11 or Airbus A300, A310, A330, A340. Section 102. OTHER DEFINITIONAL PROVISIONS. (a) With respect to any Series, all terms used herein and not otherwise defined herein shall have meanings ascribed to them in the related Supplement. (b) All terms defined in this Indenture shall have the defined meanings when used in any agreement, certificate or other document made or delivered pursuant hereto, including any Supplement, unless otherwise defined therein. (c) As used in this Indenture and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Indenture or in any such certificate or other document, and accounting terms partly defined in this Indenture or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under GAAP consistently applied. To the extent that the definitions of accounting terms in this Indenture or in any such certificate or other document are inconsistent with the meanings of such terms under GAAP or regulatory accounting principles, the definitions contained in this Indenture or in any such certificate or other document shall control. (d) With respect to any Collection Period, the "related Record Date," the "related Determination Date," and the "related Payment Date," shall mean the Record Date 21 occurring on the last Business Day of such Collection Period and the Determination Date and Payment Date next following the end of such Collection Period. (e) With respect to any Series of Notes, the "related Supplement" shall mean the Supplement pursuant to which such Series of Notes is issued and the "related Series Enhancer" shall mean the Series Enhancer for such Series of Notes. (f) References to the Servicer's financial statements shall mean the consolidated financial statements of the Servicer and its consolidated subsidiaries. (g) With respect to any ratio analysis required to be performed as of the most recently completed fiscal quarter, the most recently completed fiscal quarter shall mean the fiscal quarter for which financial statements were required hereunder to have been delivered. (h) With respect to the calculations of the ratios set forth in this Indenture, the components of such calculations are to be determined in accordance with GAAP, consistently applied, with respect to the Issuer or the Servicer, as the case may be. (i) References to (a) the ability of the Administrative Agent to waive any requirement of the Indenture, any related document or any obligation imposed on the Issuer, the Seller or the Servicer, or (b) any provision of the Indenture or any related document that requires the consent or approval of the Administrative Agent shall be deemed to mean that in determining whether to grant such waiver, consent or approval, the Administrative Agent, shall be obligated to act in a timely manner. Section 103. COMPUTATION OF TIME PERIODS. Unless otherwise stated in this Indenture or any Supplement issued pursuant to the terms hereof, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." Section 104. DUTIES OF ADMINISTRATIVE AGENT. All of the duties and responsibilities of the Administrative Agent set forth in this Indenture and any Supplement issued pursuant hereto are subject in all respects to the terms and conditions of the Administration Agreement. Each of the Issuer, the Indenture Trustee and, by acceptance of its Notes, each Noteholder hereby acknowledge the terms of the Administration Agreement and agree to cooperate with the Administrative Agent in its execution of its duties and responsibilities. Each Noteholder, by acceptance of its Notes, (i) authorizes and instructs the Indenture Trustee to enter into the Administration Agreement on its behalf; (ii) acknowledges and approves the appointment of the Administrative Agent and (iii) agrees that the Indenture Trustee should have no liability for the acts or omissions of the Administrative Agent. 22 ARTICLE II THE NOTES Section 201. AUTHORIZATION OF NOTES. (a) The number of Series or Classes of Notes which may be created by this Indenture is not limited; PROVIDED, HOWEVER, that the Outstanding Obligations of each Series (in each case calculated after giving effect to the issuance of each such Series) shall not exceed an amount equal to the Asset Base for such Series. The aggregate principal amount of Notes of each Series which may be issued, authenticated and delivered under this Indenture is not limited except as shall be set forth in any Supplement and as restricted by the provisions of this Indenture. (b) The Notes issuable under this Indenture shall be issued in such Series, and such Class or Classes within a Series, as may from time to time be created by Supplement pursuant to this Indenture. Each Series shall be created by a different Supplement and shall be designated to differentiate the Notes of such Series from the Notes of any other Series. (c) Upon satisfaction of and compliance with the requirements and conditions to closing set forth in the related Supplement, Notes of the Series to be executed and delivered on a particular Series Issuance Date pursuant to such related Supplement, may be executed by the Issuer and delivered to the Indenture Trustee for authentication following the execution and delivery of the related Supplement creating such Series or from time to time thereafter, and the Indenture Trustee shall authenticate and deliver Notes upon an Issuer request set forth in an Officer's Certificate of the Issuer signed by one of its Authorized Signatories, without further action on the part of the Issuer. Section 202. FORM OF NOTES. Notes of any Series or Class may be issued, authenticated and delivered in fully registered form and shall be substantially in the form of the exhibits attached to the related Supplement. Notes of each Series shall be dated the date of their authentication and shall bear interest at such rate, be payable as to principal, premium, if any, and interest on such date or dates, and shall contain such other terms and provisions as shall be established in the related Supplement. Except as otherwise provided in any Supplement, the Notes shall be issued in minimum denominations of $1,000,000 and in integral multiples of $100,000 in excess thereof; provided that one Note of each Class may be issued in a nonstandard denomination. Section 203. EXECUTION; RECOURSE OBLIGATION. The Notes shall be executed on behalf of the Issuer by an Authorized Signatory of the Issuer. In case any Authorized Signatory of the Issuer whose signature shall appear on the Notes shall cease to be an Authorized Signatory of the Issuer before the authentication and delivery of such Notes, such signature or facsimile signature shall nevertheless be valid and sufficient for all purposes. 23 All Notes and the interest thereon shall be full recourse obligations of the Issuer and shall be secured by all of Issuer's right, title and interest in the Collateral. The Notes shall never constitute obligations of the Indenture Trustee, the Seller (except to the extent that Seller guarantees the Notes of a Series) or of any shareholder or any Affiliate of the Seller (other than the Issuer) or any officers, directors, employees or agents of any thereof, and no recourse may be had under or upon any obligation, covenant or agreement of this Indenture, any Supplement or of any Notes, or for any claim based thereon or otherwise in respect thereof, against any incorporator or against any past, present, or future owner, partner of an owner or any officer, employee or director thereof or of any successor entity, or any other Person, either directly or through the Issuer, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly agreed that this Indenture and the obligations issued hereunder are solely obligations of the Issuer, and that no such personal liability whatever shall attach to, or is or shall be incurred by, any other Person under or by reason of this Indenture, any Supplement or any Notes or implied therefrom, or for any claim based thereon or in respect thereof, all such liability and any and all such claims being hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Notes. Except as provided in any Supplement, no Person other than the Issuer shall be liable for any obligation of the Issuer under this Indenture or any Note or any losses incurred by any Noteholder. Section 204. CERTIFICATE OF AUTHENTICATION. No Notes shall be secured hereby or entitled to the benefit hereof or shall be or become valid or obligatory for any purpose unless there shall be endorsed thereon a certificate of authentication by the Indenture Trustee, substantially in the form set forth in the form of Note attached to the related Supplement. Such certificate on any Note issued by the Issuer shall be conclusive evidence and the only competent evidence that it has been duly authenticated and delivered hereunder. At the written direction of the Issuer, the Indenture Trustee shall authenticate and deliver the Notes. It shall not be necessary that the same Authorized Signatory of the Indenture Trustee execute the certificate of authentication on each of the Notes. Section 205. REGISTRATION; REGISTRATION OF TRANSFER AND EXCHANGE OF NOTES. (a) The Indenture Trustee shall keep at its Corporate Trust Office books for the registration and transfer of the Notes (the "Note Register"). The Issuer hereby appoints the Indenture Trustee as its registrar and transfer agent to keep such books and make such registrations and transfers as are hereinafter set forth in this Section 205 and also authorizes and directs the Indenture Trustee to provide a copy of such registration record to the Administrative Agent, the Issuer and the Seller upon request. The names and addresses of the Holders of all Notes and all transfers of, and the names and addresses of the transferee of, all Notes will be registered in such Note Register. The Person in whose name any Note is registered shall be deemed and treated as the owner and Holder thereof for all purposes of this Indenture, and the Indenture Trustee, the related Series Enhancer and the Issuer shall not be affected by any notice or knowledge to the contrary. If a Person other than the Indenture Trustee is appointed by the Issuer to maintain the Note Register, the Issuer will give the Indenture Trustee and the 24 Administrative Agent prompt written notice of such appointment and of the location, and any change in the location, of the successor note registrar, and the Indenture Trustee, the Issuer, the Servicer and the related Series Enhancer shall have the right to inspect the Note Register at all reasonable times and to obtain copies thereof, and the Indenture Trustee shall have the right to rely upon a certificate executed on behalf of the note registrar by an officer thereof as to the names and addresses of the Noteholders and the principal amounts and number of such Notes. (b) Payments of principal, premium, if any, and interest on any Note shall be payable on each Payment Date only to the registered Holder thereof on the Record Date immediately preceding such Payment Date. The principal of, premium, if any, and interest on each Note shall be payable at the Corporate Trust Office of the Indenture Trustee in immediately available funds in such coin or currency of the United States of America as at the time for payment shall be legal tender for the payment of public and private debts. Except as set forth in any Supplement, all interest payable on the Notes shall be computed on the basis of a 360 day year consisting of twelve months of 30 days each. Notwithstanding the foregoing or any provision in any Note to the contrary, if so requested by the registered Holder of any Note by written notice to the Indenture Trustee received by the Indenture Trustee at least 5 Business Days prior to the Payment Date, all amounts payable to such registered Holder may be paid either (i) by crediting the amount to be distributed to such registered Holder to an account maintained by such registered Holder with the Indenture Trustee or by transferring such amount by wire to such other bank in the United States, including a Federal Reserve Bank, as shall have been specified in such notice, for credit to the account of such registered Holder maintained at such bank, or (ii) by mailing a check to such address as such Holder shall have specified in such notice, in either case without any presentment or surrender of such Note to the Indenture Trustee at the Corporate Trust Office of the Indenture Trustee. (c) Except as otherwise set forth in a Supplement, any Note is transferable only upon the surrender to the Indenture Trustee of such Note together with (i) an assignment (executed by the existing Holder or its duly authorized attorney) in form reasonably satisfactory to the Indenture Trustee and (ii) the documents required pursuant to Sections 205(e) and (f) hereof. Upon satisfaction of the requirements set forth in the preceding sentence, each Holder of a Note shall have the right, upon surrender of such Note to the Indenture Trustee, to require a new Note or Notes of the same Series and Class to be issued to it or to a prospective Holder, in a minimum denomination of the lesser of (x) $1,000,000 (or such other amount as shall be set forth in the related Supplement) or (y) the entire principal balance of the Note being surrendered, in substitution of the Note being surrendered. (d) Any service charge made or expense incurred by the Indenture Trustee for any such registration, discharge from registration or exchange referred to in this Section 205 shall be paid by the Noteholder. The Indenture Trustee or the Issuer may require payment by the Holder of a sum sufficient to cover any tax expense or other governmental charge payable in connection therewith. 25 (e) Each prospective initial Noteholder acquiring a Note, each prospective owner acquiring a Note and each prospective owner (or transferee thereof) of a beneficial interest in Notes acquiring such beneficial interest shall represent and warrant in writing to the Indenture Trustee, the Issuer, the Servicer and any successor Servicer that one of the following statements is true and correct: (i) the purchaser is not an "employee benefit plan" within the meaning of Section 3(3) of ERISA or a "plan" within the meaning of Section 4975(e)(1) of the Code ("Benefit Plan") and it is not directly or indirectly acquiring the Notes on behalf of, as investment manager of, as named fiduciary of, as trustee of, or with assets of, a Benefit Plan, (ii) the acquisition will qualify for a statutory or administrative prohibited transaction exemption under ERISA and the Code and will not give rise to a non-exempt transaction described in Section 406 of ERISA or Section 4975(c) of the Code, (iii) the source of funds (the "Source") to be used by the Purchaser to pay the purchase price of the Notes is a guaranteed benefit policy within the meaning of Section 401(b)(2)(B) of ERISA, or (iv) the Source to be used by the purchaser to pay the purchase price of the Notes is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995), and there is no "employee benefit plan" or "plan" (within the meaning of Section 3(3) of ERISA or Section 4975(e)(1) of the Code as applicable, and treating as a single plan, all plans maintained by the same employer (or an affiliate within the meaning of Section V(a)(1) of PTE 95-60) or employee organization) with respect to which the amount of the reserves and liabilities for the general account contracts held by or on behalf of such plan, as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the "NAIC Annual Statement"), exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with the purchaser's state of domicile. (f) No transfer of any Note shall be made unless such transfer is made in a transaction which does not require registration under the Securities Act and pursuant to an effective registration or qualification under any State securities or "Blue Sky" laws, or in a transaction which does not require such registration or qualification. If such a transfer is to be made in reliance upon an exemption from the Securities Act other than Rule 144A under the Securities Act, the prospective owner shall furnish to the Indenture Trustee a certificate substantially in the form of Exhibit E hereto. If such transfer is to be made in reliance upon Rule 144A under the Securities Act, the prospective owner shall furnish to the Indenture Trustee a certificate, substantially in the form of Exhibit D hereto. The Issuer (or Servicer as agent for the Issuer) shall promptly furnish to any Holder, or any prospective owners designated by a Holder, the information required to be delivered to any Holder and prospective owner in connection with a resale of the Notes to permit compliance with Rule 144A in connection with such resale. No Note may be subdivided (including any assignment or transfer of a participation or beneficial interest therein) for resale or other transfer into a unit smaller than a unit the initial offering price of which would have been $1,000,000 (or such other amount as shall be set forth in the related Supplement.) 26 Section 206. MUTILATED, DESTROYED, LOST AND STOLEN NOTES. (a) If (i) any mutilated Note is surrendered to the Indenture Trustee, or the Indenture Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, and (ii) there is delivered to the Indenture Trustee such security or indemnity as it and the Issuer may require to hold the Issuer, the Servicer and the Indenture Trustee harmless (the unsecured indemnity of a Rated Institutional Noteholder being deemed satisfactory for such purpose unless the Indenture Trustee provides written notice to the contrary), then the Issuer shall execute and the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a replacement Note of the same Series and Class and maturity and of like terms as the mutilated, destroyed, lost or stolen Note; PROVIDED, HOWEVER, that if any such destroyed, lost or stolen Note, but not a mutilated Note, shall have become, or within seven days shall be, due and payable, or shall have been called for redemption, the Issuer may pay such destroyed, lost or stolen Note when so due or payable instead of issuing a replacement Note. (b) If, after the delivery of such replacement Note, or payment of a destroyed, lost or stolen Note pursuant to the proviso to the preceding sentence, a bona fide purchaser of the original Note in lieu of which such replacement Note was issued presents for payment such original Note, the Issuer and the Indenture Trustee shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Issuer or the Indenture Trustee in connection therewith. (c) The Indenture Trustee and Issuer may, for each new Note authenticated and delivered under the provisions of this Section 206, require the advance payment by the Noteholder of the expenses, including counsel fees, service charges and any tax or governmental charge which may be incurred by the Indenture Trustee or Issuer. Any Note issued under the provisions of this Section 206 in lieu of any Note alleged to be destroyed, mutilated, lost or stolen, shall be equally and proportionately entitled to the benefits of this Indenture with all other Notes of the same Series and Class. The provisions of this Section 206 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. Section 207. DELIVERY, RETENTION AND CANCELLATION OF NOTES. Each Noteholder is required, and hereby agrees, to return to the Indenture Trustee, within 30 days after the Final Payment Date, any Note on which the final payment due thereon has been made. Any such Note as to which the Indenture Trustee has made or holds the final payment thereon shall be deemed cancelled and shall no longer be Outstanding or outstanding for any purpose of this Indenture, whether or not such Note is ever returned to the Indenture Trustee unless any unreimbursed payment on such Note has been made by a Series Enhancer. Matured Notes delivered upon final payment to the Indenture Trustee and any Notes transferred or exchanged for other Notes shall be cancelled and disposed of by the Indenture Trustee in accordance with its policy of disposal and the Indenture Trustee shall promptly deliver to the Issuer such cancelled Notes upon request; PROVIDED, HOWEVER, that the Indenture Trustee shall not be required to destroy cancelled Notes. If the Indenture Trustee, for its own account, shall 27 acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes. If the Issuer shall acquire any of the Notes, such acquisition shall operate as a redemption or satisfaction of the indebtedness represented by such Notes. Notes which have been cancelled by the Indenture Trustee shall be deemed paid and discharged for all purposes under this Indenture. 28 ARTICLE III PAYMENT OF NOTES; STATEMENTS TO NOTEHOLDERS Section 301. PRINCIPAL AND INTEREST. Distributions of principal and interest on any Series or Class of Notes shall be made to Noteholders of each Series and Class as set forth in this Indenture and the related Supplement. The maximum Overdue Rate for any Note under any Series shall be 2.00% plus the interest rate for such Note prior to the default. If interest or principal amounts are paid by a Series Enhancer, then the Overdue Rate shall be applicable to any Class of Notes only if the related Series Enhancer has failed to make payment of such amounts in accordance with the terms of any applicable Series Enhancement Agreement. Section 302. DIRECTION TO LESSEES. On or prior to each Transfer Date, the Issuer shall (or shall cause the Servicer to) mail a notice to each Lessee under the Lease Agreements contributed to the Issuer pursuant to the Contribution and Sale Agreement on such Transfer Date informing such Lessee that all payments including, without limitation, all Scheduled Payments, Maintenance Reserve Payments and Security Deposits, with respect to the related Lease Agreement should be submitted directly to the Trust Account; PROVIDED, HOWEVER, that such notice shall provide that any indemnification payments and liability insurance payments shall not be deposited in the Trust Account but shall be paid directly to the person entitled to such indemnification or insurance payment. Section 303. TRUST ACCOUNT. (a) On or prior to the Effective Date of the first Series, the Issuer shall establish and maintain the Trust Account into which all Collections (other than amounts received from manufacturers or sellers of an Eligible Engine for breach of sale warranties or in settlement of any claims, losses, disputes or proceedings related thereto for which a corresponding amount has previously been paid by the Issuer, Seller or Servicer to the Trust Account), Prepayments after an Early Amortization Event, Prepayments designated by the Issuer to be deposited in the Trust Account prior to the occurrence of an Early Amortization Event, Warranty Purchase Amounts and other payments required by this Indenture shall be deposited. Such Trust Account shall be established and maintained with the Corporate Trust Office of the Indenture Trustee in trust for the Indenture Trustee, on behalf of the Noteholders and any Series Enhancer, until the Aggregate Outstanding Obligations are paid in full. The Trust Account shall be an Eligible Account and shall be pledged to the Indenture Trustee pursuant to the terms of this Indenture. Promptly upon receipt thereof (but in no event later than two Business Days after receipt), the Servicer shall deposit into the Trust Account those amounts that have been remitted directly to the Servicer that the Servicer ascertains to be Engine Revenues, Sales Proceeds or Casualty Proceeds in respect of any of the Eligible Engines; PROVIDED, HOWEVER, that indemnification payments and liability insurance payments received by the Issuer or the Servicer shall not be deposited in the Trust Account but shall be paid directly to the Person entitled to such indemnification or insurance payment. The Issuer shall not establish any additional Trust Accounts without prior written notice to the Indenture Trustee. 29 (b) By not later than each Determination Date, the Servicer, pursuant to the Servicing Agreement, shall instruct in writing the Indenture Trustee to allocate all Collections and Prepayments for the related Collection Period then on deposit in the Trust Account to each Series Account (PROVIDED, HOWEVER, that the Servicer shall instruct in writing the Indenture Trustee to allocate any Maintenance Reserve Payments and Security Deposits directly to each Engine Reserve Account and Security Deposit Account, respectively, for each Series) by specifically identifying such Collections and Prepayments (and such Maintenance Reserve Payments and Security Deposits) to a particular Eligible Engine and then instructing in writing the Indenture Trustee to allocate all of such amounts to the Series Account, the Engine Reserve Account and the Security Deposit Account for the Series to which such Eligible Engine is pledged. In addition, the Servicer shall instruct in writing the Indenture Trustee to allocate any earnings on Eligible Investments in the Trust Account to the Series Account for each Series then Outstanding in the same proportion as the ratio of the Outstanding Obligations of such Series to the Aggregate Outstanding Obligations. (c) If any Series has more than one Class of Notes then Outstanding, then the portion of the investment earnings in the Trust Account allocable to such Series pursuant to Section 303(b) shall be calculated without giving effect to the payment priorities of the Classes of such Series. Once such Collections and investment earnings have been allocated to each Series, then that portion of the Collections allocable to such Series shall be paid to each Class of Noteholders of such Series in accordance with the priority of payments set forth in the related Supplement. Section 304. INVESTMENT OF MONIES HELD IN THE TRUST ACCOUNT, THE RESTRICTED CASH ACCOUNT, ENGINE RESERVE ACCOUNT, THE SECURITY DEPOSIT ACCOUNT AND SERIES ACCOUNTS. The Indenture Trustee shall invest any cash deposited in the Trust Account, the Engine Reserve Account, the Security Account, the Restricted Cash Account for each Series and each Series Account in such Eligible Investments as the Servicer shall direct in writing or by telephone, confirmed in writing. Each Eligible Investment (including reinvestment of the income and proceeds of Eligible Investments) shall be held to its maturity and shall mature or shall be payable on demand not later than the Business Day immediately preceding the next succeeding Payment Date. If the Indenture Trustee has not received written instructions from the Servicer by 2:30 p.m. (New York time) on the day such funds are received as to the investment of funds then on deposit in any of the aforementioned accounts, the Issuer hereby instructs the Indenture Trustee to invest such funds in overnight investments of the type described in clause (ii) of the definition of Eligible Investments. Any funds in the Trust Account, the Engine Reserve Account, the Security Deposit Account, each Restricted Cash Account and each Series Account not so invested must be fully insured by the Federal Deposit Insurance Corporation. Eligible Investments shall be made in the name of the Indenture Trustee for the benefit of the Noteholders and any Series Enhancer. Any earnings on Eligible Investments in the Trust Account, the Engine Reserve Account, the Security Deposit Account, each Restricted Cash Account and each Series Account shall be retained in each such account and be distributed in accordance with the terms of this Indenture or any related Supplement. 30 The Indenture Trustee shall not be liable or responsible for losses on any investments made by it pursuant to this Section 303. Section 305. REPORTS TO NOTEHOLDERS. The Indenture Trustee shall promptly upon request furnish to each Noteholder and each Series Enhancer a copy of all reports, financial statements and notices received by the Indenture Trustee pursuant to the Contribution and Sale Agreement or the Servicing Agreement. Section 306. RECORDS. The Indenture Trustee shall cause to be kept and maintained adequate records pertaining to the Trust Account, each Restricted Cash Account, each Engine Reserve Account, each Security Deposit Account and each Series Account and all receipts and disbursements therefrom. The Indenture Trustee shall deliver at least monthly an accounting thereof in the form of a trust statement to the Issuer, the Seller and the Servicer and each Series Enhancer. Section 307. RESTRICTED CASH ACCOUNT. The Issuer shall establish and maintain an account with the Corporate Trust Office of the Indenture Trustee with subaccounts for each Series, as provided in the related Supplement for a Series, which shall be designated the restricted cash account (the "Restricted Cash Account") for each such Series and which shall be pledged to the Indenture Trustee pursuant to this Indenture and the related Supplement. Any and all moneys remitted by the Issuer, or Servicer on its behalf, to the Restricted Cash Account from the Trust Account, together with any Eligible Investments in which such moneys are or will be invested or reinvested, shall be held in the Restricted Cash Account subaccount for each such Series. Section 308. ENGINE RESERVE ACCOUNT. (a) The Issuer shall establish and maintain an account with the Corporate Trust Office of the Indenture Trustee with subaccounts for each Series, as provided in the related Supplement for a Series, which shall be designated the engine account (the "Engine Reserve Account") for each such Series and which shall be pledged to the Indenture Trustee pursuant to this Indenture and the related Supplement. The Maintenance Reserve Payments remitted by the Issuer, the Servicer on its behalf or by the Lessee, as provided in the related Supplement for a Series, to the Engine Reserve Account from the Trust Account, together with any Eligible Investments in which such moneys are or will be invested or reinvested, shall be held in the Engine Reserve Account subaccount for each such Series. (b) The Issuer shall maintain (or shall cause the Servicer to maintain) records that will identify amounts on deposit in the Engine Reserve Account subaccount to a specific Eligible Engine. The Servicer shall be entitled to withdraw funds from the Engine Reserve Account for the payment of maintenance expenses with respect to the related Eligible Engine, at the times and subject to the further conditions set forth in the Servicing Agreement; provided, however, that so long as a Servicer Default is then in effect, the Servicer shall not be entitled to make such withdrawal except upon presentation of supporting documentation reasonably determined by the Administrative Agent to comply with the terms of the applicable 31 Lease Agreement (which shall evidence its determination by written instrument delivered to the Indenture Trustee). Section 309. SECURITY DEPOSIT ACCOUNT. (a) The Issuer shall establish and maintain an account with the Corporate Trust Office of the Indenture Trustee with subaccounts for each Series, as provided in the related Supplement for a Series, which shall be designated the security deposit account (the "Security Deposit Account") for each such Series and which shall be pledged to the Indenture Trustee pursuant to this Indenture and the related Supplement. The Security Deposits remitted by the Issuer, the Servicer on its behalf or by the Lessees, as provided in the related Supplement for a Series, to the Security Deposit Account from the Trust Account, together with any Eligible Investments in which such moneys are or will be invested or reinvested, shall be held in the Security Deposit Account subaccount for each such Series. (b) The Issuer shall maintain (or shall cause the Servicer to maintain) records that will identify amounts on deposit in the Security Deposit Account subaccount to a specific Eligible Engine. The Servicer shall be entitled to withdraw funds from the Security Deposit Account in accordance with the terms of the applicable Lease Agreement with respect to the related Eligible Engine, subject to the further conditions set forth in the Servicing Agreement; provided, however, that so long as a Servicer Default is then in effect, the Servicer shall not be entitled to make such withdrawal except upon presentation of supporting documentation reasonably determined by the Administrative Agent to comply with the terms of the applicable Lease Agreement (which shall evidence its determination by written instrument delivered to the Indenture Trustee). Section 310. SECURITIES ACCOUNTS. (a) Notwithstanding any other provision of this Indenture or any Supplement, with respect to each of the Securities Accounts, the Securities Intermediary hereby agrees that it will comply with entitlement orders (as such term is defined under UCC Section 8-102(a)(8)) originated by the Indenture Trustee without further consent by the Issuer. (b) Each of the Issuer, the Securities Intermediary and the Indenture Trustee intends that the provisions of Section 310(a) will give the Indenture Trustee "control" over the Securities Accounts (as the term "control" is defined under UCC Section 8-106(d)), without prejudice to any other provision of the UCC that also would be deemed to give the Indenture Trustee such control. 32 ARTICLE IV COLLATERAL Section 401. COLLATERAL. (a) The Notes and the obligations of the Issuer hereunder shall be an obligation of the Issuer as provided in Section 203 hereof. The Indenture Trustee, for the benefit of the Noteholders of all Series, and the Noteholders of a particular Series and the Series Enhancer (if any) of such Series, all in accordance with the Supplement for such Series, shall also have the benefit of, and the Notes of such Series shall be secured by and be payable from, the Issuer's right, title and interest in that portion of the Collateral allocated or identified to such Series in accordance with the terms of this Indenture and the Supplement pursuant to which such Notes were issued. (b) Notwithstanding anything contained in this Indenture to the contrary, the Issuer expressly agrees that it shall remain liable under each of its Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder and that it shall perform all of its duties and obligations thereunder, all in accordance with and pursuant to the terms and provisions of each such Contract. (c) Pursuant to the Servicing Agreement the Issuer shall cause the Servicer to collect the Accounts in accordance with the Servicer's normal business practice; PROVIDED, HOWEVER, that the Indenture Trustee, with the consent of, or at the direction of, the Requisite Global Majority, may, without notice, limit or terminate such authority upon (i) the occurrence of an Event of Default described in Section 801(ii) hereof, or (ii) any Sale of the Collateral pursuant to Section 816 hereof or (iii) the occurrence of a Servicer Default. Any Proceeds subsequently received in payment of any such Account or in payment for any of the Eligible Engines or on account of any of its Contracts shall be promptly deposited by the Issuer in precisely the form received (with all necessary endorsements) in the Trust Account as hereinafter provided, and until so turned over shall be deemed to be held in trust by the Issuer for and as Indenture Trustee's property. Such Proceeds, when deposited, shall continue to be collateral security for all of the obligations secured by this Indenture and shall not constitute payment thereof until applied as hereinafter provided. Upon (i) the occurrence of an Event of Default described in Section 801(ii), or (ii) any Sale of the Series Collateral pursuant to Section 816 hereof or (iii) the occurrence of a Servicer Default, the Issuer shall at the request of Indenture Trustee, with the consent of or at the direction of the Requisite Global Majority, to the extent practicable, deliver to the Indenture Trustee (or such other Person as the Indenture Trustee may direct) all original Lease Agreements and any other documents evidencing, and relating to, the sale, lease and delivery of the Eligible Engines and the Issuer shall, to the extent practicable, deliver all original and other documents evidencing and relating to, the performance of any labor, maintenance, remarketing or other service which gave rise to such Accounts, including, without limitation, all original orders, invoices and shipping receipts. 33 (d) In order to secure the Outstanding Obligations under each Supplement to this Indenture, the Issuer hereby pledges, assigns, grants, transfers and conveys to the Indenture Trustee, on behalf of the Noteholders of all Series, a lien on and first priority security interest in all Excess Cash Available for Distribution pursuant to Section 302 of each Supplement (or such other or additional sections or clauses as may be provided in any particular Supplement). On each Payment Date under each Supplement for a Series, after payment of all other amounts then payable to the Indenture Trustee, any Noteholder or any other Person entitled thereto (except the Issuer), all Excess Cash Available for Distribution shall be paid to the Indenture Trustee for payment to the Noteholders under all other Series (each, a "Deficient Series") of the amount (the "Deficiency Amount") by which the amounts on deposit in the related Series Account are insufficient for the payment in full of all Outstanding Obligations then due and payable. Such Excess Cash Available for Distribution shall be paid to the Indenture Trustee(s) for each such Deficient Series in the proportion that the Outstanding Obligations for each such Deficient Series bears to the aggregate amount of Outstanding Obligations for all such Deficient Series. Only after all Deficiency Amounts existing on such Payment Date have been paid in full shall any such Excess Cash Available for Distribution be paid to the Issuer. Section 402. PRO RATA INTEREST. (a) Each Supplement pursuant to which a Series of Notes is issued shall identify the Eligible Engines and other Series Collateral that will be pledged as collateral security for the Notes and other Obligations for such Series. All Notes of a particular Series shall be equally and ratably entitled to the benefits of this Indenture without preference, priority or distinction, except as provided in the related Supplement. All Notes of a particular Class within a Series are and are to be, to the extent (including any exceptions) provided in this Indenture and the related Supplement, equally and ratably secured by this Indenture without preference, priority or distinction on account of the actual time or times of the authentication or delivery of the Notes so that all Notes of a particular Series and Class at any time Outstanding shall have the same right, Lien and preference under this Indenture and shall all be equally and ratably secured hereby with like effect as if they had all been executed, authenticated and delivered simultaneously on the date hereof. (b) With respect to each Series of Notes, the execution and delivery of the related Supplement shall be upon the express condition that if the conditions specified in Section 701 of this Indenture are met with respect to such Series of Notes, the security interest and all other estate and rights granted by this Indenture with respect to such Series of Notes shall cease and become null and void and all of the property, rights, and interest granted as security for the Notes of such Series shall revert to and revest in the Issuer without any other act or formality whatsoever. Section 403. INDENTURE TRUSTEE'S APPOINTMENT AS ATTORNEY-IN-FACT. (a) The Issuer hereby irrevocably constitutes and appoints Indenture Trustee, and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Issuer and in the name of the Issuer or in its own name, from time to time at Indenture Trustee's discretion, for the purpose 34 of carrying out the terms of this Indenture, to take any and all appropriate action and to execute and deliver any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Indenture; PROVIDED, HOWEVER, that the Indenture Trustee has no obligation or duty to determine whether to perfect, file, record or maintain any perfected, filed or recorded document or instrument in connection with the grant or security interest in the Collateral hereunder. (b) Except upon the occurrence of an Event of Default, the Indenture Trustee shall not exercise the power of attorney or any rights granted to the Indenture Trustee pursuant to this Section 403. The Issuer hereby ratifies, to the extent permitted by law, all that said attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this Section 403 is a power coupled with an interest and shall be irrevocable until all Series of Notes are paid and performed in full. (c) The powers conferred on the Indenture Trustee hereunder are solely to protect Indenture Trustee's interests in the Collateral and shall not impose any duty upon it to exercise any such powers except as set forth herein. The Indenture Trustee shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees, agents or representatives shall be responsible to the Issuer for any act or failure to act, except for its own negligence or willful misconduct. (d) The Issuer also authorizes the Indenture Trustee, at any time and from time to time upon the occurrence of any Event of Default (subject to the quiet enjoyment rights of any lessee of any Collateral), to (i) communicate in its own name, or to direct any other Person, including the Servicer or a replacement Servicer, to communicate with any party to any Contract with regard to the assignment of the right, title and interest of the Issuer in and under the Contracts hereunder and other matters relating thereto and (ii) execute, in connection with the sale of Collateral provided for in Article VIII hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (e) If the Issuer fails to perform or comply with any of its agreements contained herein and the Indenture Trustee, with the consent of or at the direction of the Requisite Global Majority, shall perform or comply, or otherwise cause performance or compliance, with such agreement, the reasonable expenses, including attorneys' fees, of Indenture Trustee incurred in connection with such performance or compliance together with interest thereon at the rate specified in the related Supplement, shall be payable by the Issuer to the Indenture Trustee on demand and shall constitute obligations secured hereby. Section 404. RELEASE OF SECURITY INTEREST. The Indenture Trustee, at the written direction of the Servicer (which shall be the Administrative Agent if an Early Amortization Event shall have occurred), shall release from the security interest created pursuant to the terms of this Indenture, any Eligible Engine, the related Lease Agreement and any other Related Assets sold or transferred pursuant to Section 606(a) hereof. In effectuating 35 such release, the Indenture Trustee shall be entitled to rely on a certificate of the Servicer (PROVIDED, HOWEVER, that after the occurrence of an Early Amortization Event, the Administrative Agent in its sole discretion shall be entitled to deliver such certification) identifying each Eligible Engine, the related Lease Agreement or other items to be released from the Lien of this Indenture in accordance with the provisions of this Section 404 accompanied by an Asset Base Certificate and stating that such release is in compliance with Sections 404 and 606(a) hereof. The Indenture Trustee will, promptly upon receipt of such certificate from the Servicer or the Administrative Agent and at the Issuer's expense, execute and deliver to the Issuer, the Seller or the Servicer, as appropriate, and each Series Enhancer, a non-recourse certificate of release substantially in the form of Exhibit F hereto and such additional documents and instruments as that Person may reasonably request (including UCC termination statements and appropriate filings with the FAA or other Governmental Authority) to evidence the termination and release from the Lien of this Indenture of such Eligible Engine, the related Lease Agreement and the other related items of Collateral. Section 405. ADMINISTRATION OF COLLATERAL. (a) The Indenture Trustee hereby acknowledges the appointment by the Issuer of the Servicer to service and administer the Collateral in accordance with the provisions of the Servicing Agreement and agrees to provide the Servicer with such documentation, and to take all such actions, as the Servicer may reasonably request in accordance with the provisions of the Servicing Agreement or as the Issuer may request. (b) The Indenture Trustee shall promptly as practicable notify the Noteholders, each Series Enhancer and the Administrative Agent of any Servicer Default of which it has prior actual knowledge, and at the direction of the Requisite Global Majority, shall deliver to the Servicer a Servicer Termination Notice terminating the Servicer of its responsibilities in accordance with the terms of the Servicing Agreement. If the Administrative Agent is unable to locate and qualify a replacement Servicer within sixty (60) days after the date of delivery of the Servicer Termination Notice, then the Indenture Trustee may appoint, or petition a court of competent jurisdiction to appoint, a company acceptable to the Requisite Global Majority, and whose regular business includes equipment leasing, as the successor to the Servicer of all or any part of the responsibilities, duties or liabilities of the Servicer under the Servicing Agreement, for such portion of the Servicing Fee as the Requisite Global Majority shall determine in its sole discretion. The Servicer shall continue to fulfill its duties and responsibilities as Servicer until such time as its replacement is appointed and has assumed such responsibilities. The replaced Servicer shall not be entitled to receive any compensation for any period after the effective date of such replacement, but shall be entitled to receive compensation for services rendered through the effective date of such replacement except to the extent that it is unable to fulfill such duties pending the appointment of a replacement Servicer. If the Servicer is unable to fulfill such duties pending the appointment of a replacement Servicer, the Administrative Agent may (but shall not be required to) take such actions which it is reasonably capable of performing and that have been directed by as the 36 Requisite Global Majority; PROVIDED, HOWEVER, that as a condition precedent to taking any such action, the Requisite Global Majority shall provide the Administrative Agent with (i) indemnification, reasonably satisfactory to the Administrative Agent, with respect to such actions and (ii) reimbursement of any out-of-pocket costs incurred by the Administrative Agent in taking such actions which have been approved by the Requisite Global Majority. In connection with the appointment of a replacement Servicer, the Indenture Trustee or Administrative Agent may, with the written consent of the Requisite Global Majority, make such arrangements for the compensation of such replacement out of Collections as the Indenture Trustee, the Administrative Agent and such replacement Servicer shall agree; PROVIDED, HOWEVER, that no such revised compensation shall be in excess of the Servicing Fees permitted the Servicer under the Servicing Agreement and the arrangement for reimbursement of expenses shall be no more favorable than that set forth in the Servicing Agreement unless (i) the Indenture Trustee (with the prior written consent of the Requisite Global Majority) shall approve such higher amounts or (ii) the outgoing Servicer shall agree to pay, out of its own funds, the replacement Servicer any such excess compensation and reimbursement; PROVIDED, FURTHER, that in no event shall either the Indenture Trustee or the Administrative Agent be liable to any replacement Servicer for the Servicing Fees or any additional amounts (including expenses and indemnifications) payable to such replacement Servicer, either pursuant to the Servicing Agreement or otherwise. The Indenture Trustee and such successor shall take such action, consistent with the Servicing Agreement, as shall be necessary to effectuate any such succession. (c) The Indenture Trustee may, and shall if directed by the Requisite Global Majority, at any time, upon the occurrence of any Servicer Default, after first notifying the Issuer of its intention to do so, notify Account Debtors of the Issuer, parties to the Contracts of the Issuer, obligors in respect of Instruments of the Issuer and obligors in respect of Chattel Paper of the Issuer that the Accounts and the right, title and interest of the Issuer in and under such Contracts, Instruments, and Chattel Paper (to the extent related to the Eligible Engines) have been assigned to Indenture Trustee and that payments shall be made directly to Indenture Trustee; provided that a replacement Servicer appointed pursuant to this Section 405 shall unless otherwise directed by the Requisite Global Majority exercise all of the foregoing rights, and that pending appointment of such replacement Servicer, the then current Servicer shall unless otherwise directed by the Requisite Global Majority be permitted to exercise such rights until the replacement Servicer assumes the responsibility of the Servicer. Upon the request of the Requisite Global Majority, the Issuer or Servicer shall so notify such Account Debtors, parties to such Contracts, obligors in respect of such Instruments and obligors in respect of such Chattel Paper. Upon the occurrence of a Servicer Default, the Indenture Trustee shall at the direction of the Requisite Global Majority communicate with such Account Debtors, parties to such Contracts, obligors in respect of such Instruments and obligors in respect of such Chattel Paper to verify with such parties, to the Indenture Trustee's satisfaction, the existence, amount and terms of any such Accounts, Contracts, Instruments or Chattel Paper. (d) Upon the breach of any Engine Representations and Warranties giving rise to repurchase or substitution obligations of the Seller pursuant to Section 2.02 of the 37 Contribution and Sale Agreement, the Issuer shall cause the Seller to fully satisfy such repurchase or substitution obligations and cause to be deposited in the Trust Account in accordance with the provisions of Section 2.02 of the Contribution and Sale Agreement, the Warranty Purchase Amounts received from, or on behalf of, the Seller with respect to such repurchase obligation. Upon obtaining actual knowledge or the receipt of notice by the Indenture Trustee that any repurchase or substitution obligations of the Seller under Section 2.02 of the Contribution and Sale Agreement have arisen, the Indenture Trustee shall notify the Series Enhancer, if any, for the Series to which the Engines to be repurchased or substituted are pledged, each Rating Agency and all Noteholders of the Series to which such Engines are pledged of such event and shall enforce such repurchase or substitution obligations at the direction of the Control Party for the affected Series. Section 406. QUIET ENJOYMENT. The security interest hereby granted to Indenture Trustee by the Issuer is subject to the rights of any lessee under the related Lease Agreement so long as such lessee is not in default under the Lease Agreement therefor and the Servicer under the Servicing Agreement (or the Indenture Trustee, as provided in Section 405(c)) continues to receive all amounts payable under the related Contract. Section 407. ACKNOWLEDGMENT. The Indenture Trustee agrees to execute any and all acknowledgments that the Issuer or the Seller may require with respect to the Lessee's right to continued quiet enjoyment of the related Engine. 38 ARTICLE V RIGHTS OF NOTEHOLDERS; ALLOCATION AND APPLICATION OF COLLECTIONS; REQUISITE GLOBAL MAJORITY Section 501. RIGHTS OF NOTEHOLDERS. The Noteholders of each Series shall have the right to receive, to the extent necessary to make the required payments with respect to the Notes of such Series at the times and in the amounts specified in the related Supplement, (i) the portion of Collections allocable to Noteholders of such Series pursuant to this Indenture and the related Supplement, (ii) funds on deposit in the Trust Account and any related Restricted Cash Account, and (iii) funds on deposit in any Series Account for such Series or Class, or payable with respect to any Series Enhancement for such Series or Class. Each Noteholder, by acceptance of its Notes, (a) acknowledges and agrees that (except as expressly provided herein and in a Supplement entered into in accordance with Section 1006(b) hereof) the Noteholders of a Series or Class shall not have any interest in any Series Collateral, Series Account or Series Enhancement for the benefit of any other Series or Class and (b) ratifies and confirms the terms of this Indenture and the Related Documents executed in connection with such Series. Section 502. COLLECTIONS AND ALLOCATIONS. With respect to each Collection Period, Collections on deposit in the Trust Account will be allocated to each Series then Outstanding in accordance with Article III of this Indenture and the Supplements. Section 503. DETERMINATION OF REQUISITE GLOBAL MAJORITY. A Requisite Global Majority shall exist with respect to any action proposed to be taken pursuant to the terms of this Indenture or any Supplement if (a) the Control Party or Control Parties representing more than fifty percent (50%) of the Outstanding Obligations of all Series then Outstanding shall approve or direct such proposed action (in making such a determination, each Control Party shall be deemed to have voted the entire Outstanding Obligations of the related Series either in favor of or in opposition to such action, as the case may be) and (b) each Series Enhancer shall approve or direct such proposed action. 39 ARTICLE VI COVENANTS As of the Effective Date of the first Series and for so long as any obligation of the Issuer under this Indenture, any Supplement or any Series of Notes remains unpaid, the Issuer shall observe each of the following covenants: Section 601. PAYMENT OF PRINCIPAL AND INTEREST; PAYMENT OF TAXES. (a) The Issuer will duly and punctually pay the principal of and interest on the Notes in accordance with the terms of the Notes, this Indenture and the related Supplement. (b) The Issuer will take all actions as are necessary to insure that all taxes and governmental claims, if any, in respect of the Issuer's activities and assets are promptly paid. Section 602. MAINTENANCE OF OFFICE. The chief executive office of the Issuer is located at 180 Harbor Drive, Suite 207, Sausalito, CA 94965. The Issuer shall not establish a new location for its chief executive office unless (i) it shall have given to the Indenture Trustee, each Rating Agency, the Administrative Agent and each Series Enhancer not less than thirty (30) days' prior written notice of its intention so to do, clearly describing such new location and providing such other information in connection therewith as the Indenture Trustee or any Series Enhancer may reasonably request, and (ii) with respect to such new location, it shall have taken at its own cost all action necessary so that such change of location does not impair the security interest of the Indenture Trustee in the Collateral, or the perfection of the sale or contribution to the Issuer of any Eligible Engine, the related Lease Agreements or any other Related Asset, and shall have delivered to the Indenture Trustee and each Series Enhancer copies of all filings required in connection therewith together with an Opinion of Counsel, satisfactory to the Indenture Trustee and the Series Enhancers, to the effect that such change of location does not impair such security interest and perfection. Section 603. CORPORATE EXISTENCE. The Issuer will keep in full effect its existence, rights and franchises as a corporation under the laws of the State of Delaware, and will obtain and preserve its qualification as a foreign corporation in each jurisdiction in which such qualification is necessary to protect the validity and enforceability of this Indenture, any Supplements issued hereunder and the Notes. Section 604. PROTECTION OF COLLATERAL. The Issuer will from time to time execute and deliver all amendments hereto and all such financing statements, continuation statements, instruments of further assurance and other instruments, and will, upon the reasonable request of the Servicer, the Indenture Trustee or any Series Enhancer, take such other reasonable action necessary or advisable to: 40 (a) grant more effectively the security interest in all or any portion of the Collateral; (b) maintain or preserve the Lien of this Indenture (and the priority thereof) or carry out more effectively the purposes hereof including executing and filing such documents as may be required under any international convention for the perfection of interests in Engines that may be adopted subsequent to the date of this Indenture; (c) perfect, publish notice of, or protect the validity of the security interest in the Collateral created pursuant to this Indenture; (d) enforce any of the items of the Collateral; (e) preserve and defend its right, title and interest to the Collateral and the rights of the Indenture Trustee in such Collateral against the claims of all Persons (other than the Noteholders or any Person claiming through the Noteholders); (f) pay any and all taxes levied or assessed upon all or any part of the Collateral unless contested in good faith and such contest will not pose any risk of forfeiture; or (g) pay any and all fees, taxes and other charges payable in connection with the registration of this Indenture, any Supplement or any required financing statements with any applicable Governmental Authority. Section 605. PERFORMANCE OF OBLIGATIONS. Except as otherwise permitted by this Indenture, the Servicing Agreement or the Contribution and Sale Agreement, the Issuer will not take, or fail to take, any action, and will use its best efforts not to permit any action to be taken by others, which would release any Person from any of such Person's covenants or obligations under any agreement or instrument included in the Collateral, or which would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any such agreement or instrument. Section 606. NEGATIVE COVENANTS. The Issuer will not, without the consent of the Control Party with respect to a Series: (a) sell, transfer, exchange or otherwise dispose of any of the related Series Collateral, except (i) in connection with a sale pursuant to Section 816 hereof, or (ii) sales in the normal course of business so long as an Early Amortization Event or Event of Default does not then exist or would not exist immediately after such sale (with the giving of notice and/or the lapse of time). The Sales Proceeds of any such sale or other disposition shall not, unless an Early Amortization Event shall have occurred and be continuing, be less than the Net Book Value of the subject Eligible Engines; 41 (b) claim any credit on, make any deduction from the principal, premium, if any, or interest payable in respect of the Notes of a Series (other than amounts properly withheld from such payments under any applicable law) or assert any claim against any present or former Noteholder of such Series by reason of the payment of any taxes levied or assessed upon any of the related Series Collateral; (c) (i) permit the validity or effectiveness of this Indenture to be impaired, or (ii) permit the Lien of this Indenture with respect to the Series Collateral to be subordinated, terminated or discharged, except as permitted in accordance with Section 404 or Article VII hereof, or (iii) permit any Person to be released from any covenants or obligations with respect to such Series Collateral, except as may be expressly permitted by the Servicing Agreement; (d) permit any Lien (except any Permitted Encumbrance) to be created on or extend to or otherwise arise upon or burden the Series Collateral or any part thereof or any interest therein or the proceeds thereof other than the Lien created pursuant to this Indenture; and (e) permit the Lien of this Indenture not to constitute a valid first priority perfected security interest in the Series Collateral. Section 607. NON-CONSOLIDATION OF ISSUER. The Issuer represents, warrants and covenants to take the following actions to maintain its existence separate and apart from any other Person: (i) maintain books of account in accordance with generally accepted accounting principles and maintain its accounts, books and records separate from any other person or entity; provided, that the Issuer's assets and liabilities may be included in a consolidated financial statement issued by an affiliate of the Issuer; provided, however, that any such consolidated financial statement will make clear the Issuer's assets are not available to satisfy the obligations of such affiliate; (ii) not commingle its funds or assets with those of any other entity; (iii) hold its assets in its own name; (iv) conduct its business solely in its own name; (v) pay its own liabilities out of its own funds and assets; (vi) observe all corporate formalities; (vii) maintain an arms-length relationship with its affiliates; (viii) not assume or guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligation of any other entity, and will not permit any other person to assume or guarantee or become obligated for its debts or hold out its credit as being available to satisfy its obligations, except with respect to the Seller's obligations under the Guaranty; (ix) not acquire obligations or securities of its stockholders; (x) allocate fairly and reasonably overhead or other expenses that are properly shared with any other person or entity, including without limitation, shared office space, and use separate stationery, invoices and checks; (xi) identify and hold itself out as a separate and distinct entity under its own name and not as a division or part of any other person or entity; (xii) correct any known misunderstanding regarding its separate identity, (xiii) not make loans to any person or entity; (xiv) not identify its stockholders, or any affiliates of any of them, as a division or part of itself; (xv) not enter into, or be a party to, any transaction with its stockholders or their affiliates, except in the ordinary course of its business and on terms which are intrinsically fair and are no less favorable to it than would 42 be obtained in a comparable arms-length transaction with an unrelated third party; and (xvi) pay the salaries of its own employees, if any, from its own funds. Section 608. NO BANKRUPTCY PETITION. The Issuer shall not (1) commence any Insolvency Proceeding seeking to have an order for relief entered with respect to it, or seeking reorganization, arrangement, adjustment, wind-up, liquidation, dissolution, composition or other relief with respect to it or its debts, (2) seek appointment of a receiver, trustee, custodian or other similar official for it or any part of its assets, (3) make a general assignment for the benefit of creditors, or (4) take any action in furtherance of, or consenting or acquiescing in, any of the foregoing. Section 609. LIENS. The Issuer shall not contract for, create, incur, assume or suffer to exist any Lien upon any of its property or assets, including, without limitation, any Capital Improvements, whether now owned or hereafter acquired, except for the Lien created pursuant to the terms of this Indenture. Section 610. OTHER DEBT. The Issuer shall not contract for, create, incur, assume or suffer to exist any Indebtedness other than any Notes issued pursuant to this Indenture or any Supplement issued hereunder and other than under any Interest Rate Hedge Agreement, except trade payables and expense accruals incurred in the ordinary course and which are incidental to the purposes permitted pursuant to the Issuer's charter documents. Section 611. GUARANTEES, LOANS, ADVANCES AND OTHER LIABILITIES. The Issuer will not make any loan, advance or credit to, or guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance on any obligation or capability of so doing, or otherwise), endorse (except for the endorsement of checks for collection or deposit) or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person. Section 612. CONSOLIDATION, MERGER AND SALE OF ASSETS. (a) The Issuer shall not consolidate with or merge with or into any other Person or convey or transfer to any Person all or substantially all of its assets without the prior written consent of each Control Party for each Series. (b) The obligations of the Issuer hereunder shall not be assignable nor shall any Person succeed to the obligations of the Issuer hereunder except in each case in accordance with the provisions of this Indenture. Section 613. OTHER AGREEMENTS. The Issuer will not enter into or become a party to any agreements or instruments other than this Indenture, the Supplements, the Contribution and Sale Agreement, the Note Purchase Agreements, or any other agreement(s) or amendments contemplated by this Indenture, any Supplement or the Contribution and Sale 43 Agreement, including, without limitation, any agreement(s) for disposition of the Contributed Assets permitted by Sections 612, 804 or 816 hereof and any agreement(s) for the sale or re-lease of a Engine made in accordance with the provisions of the Contribution and Sale Agreement. In addition, the Issuer will not amend, modify or waive any provision of the Contribution and Sale Agreement or give any approval or consent or permission provided for therein without the prior written consent of the requisite Persons set forth therein. Section 614. CHARTER DOCUMENTS. The Issuer will not amend or modify its certificate of incorporation or by-laws without the prior written consent of the Control Party of each Series and otherwise in accordance with the provisions of such certificate of incorporation and by-laws. Section 615. CAPITAL EXPENDITURES. The Issuer will not make any expenditure (by long-term or operating lease or otherwise) for capital assets (both realty and personalty), except for (i) acquisition of additional Eligible Engines from the Seller pursuant to the Contribution and Sale Agreement, (ii) any Capital Improvements and (iii) ordinary course expenditures for office equipment and similar or other related items. Section 616. PERMITTED ACTIVITIES. The Issuer will not engage in any activity or enter into any transaction except as permitted under its charter documents as in effect on the date on which this Indenture is executed. Section 617. INVESTMENT COMPANY ACT. The Issuer will conduct its operation in a manner which will not subject it to registration as an "investment company" under the Investment Company Act of 1940, as amended. Section 618. PAYMENTS OF COLLATERAL. If the Issuer shall receive from any Person any payments with respect to the Collateral (to the extent such Collateral has not been released from the Lien of this Indenture in accordance with Section 404 hereof), the Issuer shall receive such payment in trust for the Indenture Trustee, as secured party hereunder, and subject to the Indenture Trustee's security interest and shall immediately deposit such payment in the Trust Account. Section 619. NOTICES. The Issuer shall notify the Indenture Trustee, the Administrative Agent, each Rating Agency and each Series Enhancer in writing of any of the following immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the Person(s) affected with respect thereto: (a) Event of Default. The occurrence of an Event of Default or any event or condition which, with the giving of notice or the passage of time or both, would constitute an Event of Default; 44 (b) Litigation. The institution of any litigation, arbitration proceeding or Proceeding before any Governmental Authority which might have or result in a Material Adverse Change; (c) Material Adverse Change. The occurrence of a Material Adverse Change; (d) Other Events. The occurrence of an Early Amortization Event or such other events that may, with the giving of notice or the passage of time or both, constitute an Early Amortization Event. Section 620. BOOKS AND RECORDS. The Issuer shall maintain complete and accurate books and records in which full and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. Section 621. TAXES. The Issuer shall pay when due, all of its taxes, unless and only to the extent that Issuer is contesting such taxes in good faith and by appropriate proceedings and Issuer has set aside on its books such reserves or other appropriate provisions therefor as may be required by GAAP. Section 622. SUBSIDIARIES. The Issuer shall not create any Subsidiaries. Section 623. INVESTMENTS. The Issuer shall not make or permit to exist any Investment in any Person except for Investments in Eligible Investments made in accordance with the terms of this Indenture. Section 624. USE OF PROCEEDS. The Issuer shall use the proceeds of the Notes only for the purchase of Eligible Engines and the other Related Assets and for the payment of related expenses. In addition, Issuer shall not permit any proceeds of the Notes to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying any margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, and shall furnish to each Holder, upon its request, a statement in conformity with the requirements of Regulation U. Section 625. ASSET BASE CERTIFICATE. With respect to each Series, the Issuer shall prepare (or cause to be prepared) an Asset Base Certificate (if applicable) and deliver (if applicable) such Asset Base Certificate to the Indenture Trustee, each Series Enhancer, each Rating Agency and the Administrative Agent by not later than (i) each Payment Date and (ii) each date on which any Loan (as defined in a Supplement for a Series), if any, is made. Section 626. FINANCIAL STATEMENTS. The Issuer shall prepare and deliver to the Indenture Trustee, each Series Enhancer, each Rating Agency and the Administrative Agent, or shall cause the Servicer to prepare and deliver pursuant to the Servicing Agreement, 45 promptly upon their becoming available, copies of Forms 8-K, 10-K and 10-Q filed with the Securities and Exchange Commission relating to the Issuer or the Servicer; provided, however, that in no event will the Forms 10-K be provided later than 120 days following the end of the period covered, and in no event will the Forms 10-Q be provided later than 60 days following the end of the period covered. All financial statements shall be prepared in accordance with GAAP. Section 627. SERVICING REPORT. The Issuer shall cause the Servicer to prepare and deliver to the Indenture Trustee, each Series Enhancer (if applicable), each Rating Agency (if applicable) and the Administrative Agent within 10 days of the end of each month, commencing the month immediately following the first delivery of Collateral, a Servicing Report (as defined in the Servicing Agreement). Section 628. CASH RECEIPTS REPORT. The Issuer shall (or cause the Servicer to) prepare and deliver to the Indenture Trustee, each Series Enhancer (if applicable), each Rating Agency (if applicable) and the Administrative Agent by not later than the 15th day of each month, a report detailing all cash receipts deposited into the Trust Account during the preceding month, which report shall also detail the source of such cash deposits and the Series Account to which such cash receipt was allocated. Section 629. RESERVED. 46 ARTICLE VII DISCHARGE OF INDENTURE; PREPAYMENTS Section 701. FULL DISCHARGE. With respect to each Series of Notes, upon payment in full of the Outstanding Obligations of such Series, the Indenture Trustee shall, at the request and at the expense of the Issuer, execute and deliver to the Issuer such deeds or other instruments as shall be requisite to evidence the satisfaction and discharge of this Indenture and the security hereby created with respect to such Series, and to release the Issuer from its covenants contained in this Indenture and the related Supplement with respect to such Series in connection with the satisfaction and discharge of the Indenture, the Indenture Trustee shall be entitled to receive an Opinion of Counsel stating that such satisfaction and discharge is authorized and permitted. All Eligible Engines supporting a Series for which the Outstanding Obligations of such Series have been paid in full shall be released from the lien of this Indenture in accordance with Section 404 hereof. Section 702. PREPAYMENT OF NOTES. (a) MANDATORY PREPAYMENTS. At any time that the Outstanding Obligations of a Series exceed the Asset Base for such Series as evidenced by the related Asset Base Certificate received by the Indenture Trustee on any Determination Date, the Issuer shall on each Payment Date, either (i) acquire, free from all Liens except Permitted Encumbrances, additional Eligible Engines for such Series in an amount which shall increase the Asset Base for such Series to the required level, or (ii) prepay the outstanding principal amount, together with accrued interest thereon, of such Series of Notes in an aggregate amount equal to such excess, which prepayment shall be applied in accordance with the provisions of the related Supplement. So long as no Early Amortization Event is continuing, any mandatory Prepayment of one or more Series of Notes pursuant to this Section 702(a) may be accomplished by a deposit of funds directly into the related Series Account(s). (b) OPTIONAL PREPAYMENTS. The Issuer may, from time to time, on any Payment Date and upon at least four (4) Business Days' prior written notice to the Indenture Trustee, each Series Enhancer and the affected Noteholders, make an optional prepayment of principal of the Notes of any Series in whole or in part without premium or penalty except as may be set forth in any Supplement; PROVIDED, HOWEVER, that any partial prepayment of principal shall be in a minimum aggregate amount of One Million Dollars ($1,000,000). The Issuer shall promptly confirm any telephonic notice of prepayment in writing. Any optional Prepayment of principal made by the Issuer pursuant to this Section 702(b) shall also include accrued interest to the date of the prepayment on the amount being prepaid. So long as no Early Amortization Event is continuing, any optional prepayment of a Series of Notes pursuant to this Section 702(b) may be accomplished by a deposit of funds directly into the related Series Account. (c) After an Early Amortization Event, Prepayments will be deposited into the Trust Account and will be allocated to each Series based on Outstanding Obligations at the time of the Early Amortization Event. 47 Section 703. UNCLAIMED FUNDS. In the event that any amount due to any Noteholder remains unclaimed, the Issuer shall, at its expense, cause to be published once, in the eastern edition of THE WALL STREET JOURNAL, notice that such money remains unclaimed. Any such unclaimed amounts shall not be invested by the Indenture Trustee (notwithstanding the provisions of Section 303 hereof) and no additional interest shall accrue on the related Note subsequent to the date on which such funds were available for distribution to such Noteholder. Any such unclaimed amounts shall be held by the Trustee in trust until the latest of (i) two years after the date of the publication described in the second preceding sentence, (ii) the date all other registered Noteholders of such Series shall have received full payment of all principal, interest, premium, if any, and other sums payable to them on such Notes or the Indenture Trustee shall hold (and shall have notified the registered Noteholders that it holds) in trust for that purpose an amount sufficient to make full payment thereof when due and (iii) the date the Issuer shall have fully performed and observed all its covenants and obligations contained in this Indenture and the related Supplement with respect to such Series of Notes. Thereafter any such unclaimed amounts shall be paid to the Issuer by the Indenture Trustee on demand; and thereupon the Indenture Trustee shall be released from all further liability with respect to such monies, and thereafter the registered Noteholders in respect of which such monies were so paid to the Issuer shall have no rights in respect thereof except to obtain payment of such monies from the Issuer. 48 ARTICLE VIII DEFAULT PROVISIONS AND REMEDIES Section 801. EVENT OF DEFAULT. "Event of Default", wherever used herein with respect to any Series of Notes, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority): (i) (A) default in (x) the payment of principal of the Notes of any Series on the Final Payment Date of such Series, or (y) if the related Supplement so specifies, the payment of the principal balance of the Notes on a Payment Date prior to the Final Payment Date for a period of ten calendar days without having been cured, or (z) the payment when due of any amount payable by the Issuer under any Series Enhancement; or (B) default in the payment of Guaranty Fees, if applicable, Indenture Trustee's Fees, or payment of interest or premium on the Notes of any Series for more than three (3) Business Days after the same shall have become due and payable in accordance with the terms of such Notes, this Indenture and the related Supplement; PROVIDED, HOWEVER, that the three (3) Business Day grace period set forth above shall be applicable only to the first three payment defaults pursuant to this clause (B); (ii) default in any material respect in the performance, or breach in any material respect, of any covenant of the Issuer in this Indenture (other than a covenant or agreement a breach of which or default in the performance of which breach is elsewhere in this Section specifically dealt with), the related Supplement or if any representation or warranty of the Issuer made in this Indenture, the related Supplement, or any other Related Documents or in any certificate or other writing delivered pursuant hereto or thereto or in connection herewith with respect to or affecting the Notes of such Series shall prove to be inaccurate in any material respect as of the time when the same shall have been made, and, except for breaches of any covenants set forth in Section 406 of any related Supplement for a Series, if such breach or default or inaccuracy is curable, continuance of such default or breach or inaccuracy for a period of 60 days after the earlier to occur of (i) actual knowledge of such default, breach or inaccuracy by the Issuer or (ii) the date on which there has been given to the Issuer by the Indenture Trustee, or to the Issuer and the Indenture Trustee by the Series Enhancer or any Noteholder of such Series, a written notice specifying such default or breach or inaccuracy and requiring it to be remedied; (iii) the entry of a decree or order for relief by a court having jurisdiction in respect of the Issuer or the Seller in any involuntary case under any applicable Insolvency Law, or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, or sequestrator (or other similar official) for the Issuer or the Seller, as the case may be, or for any substantial part of their respective properties, or ordering 49 the winding up or liquidation of their respective affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (iv) the commencement by the Issuer or the Seller of a voluntary case under any applicable Insolvency Law, or other similar law now or hereafter in effect, or the consent by the Issuer or the Seller, as the case may be, to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Issuer or the Seller, as the case may be, or any substantial part of their respective properties, or the making by the Issuer or the Seller, as the case may be of any general assignment for the benefit of creditors, or the failure by the Issuer or the Seller, as the case may be generally to pay its debts as they become due, or the taking of corporate action by the Issuer in furtherance of any such action; (v) any of the Related Documents for such Series ceases to be in full force and effect except to the extent that they are terminated in accordance with their terms after all payments have been made thereunder; (vi) the occurrence of a reportable event (within the meaning of Section 4043 of ERISA) with respect to any Plan, or the occurrence of any event or condition with respect to a Plan which actually results in the imposition of a Lien on the Collateral. The occurrence of an Event of Default with respect to one Series of Notes (that has not been waived by the related Control Party) shall constitute an Event of Default with respect to all other Series of Notes then Outstanding unless the related Supplement with respect to each such other Series of Notes shall specifically provide to the contrary. Section 802. ACCELERATION OF STATED MATURITY; RESCISSION AND ANNULMENT. (a) If an Event of Default under Section 801 occurs and is continuing, then and in every such case the Control Party for a Series may declare the Outstanding Obligations for such Series to be due and payable immediately, by a notice in writing to the Issuer and to the Indenture Trustee given by such Control Party, and upon any such declaration such Outstanding Obligations for such Series shall become immediately due and payable. (b) At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Indenture Trustee as hereinafter in this Article provided, such Control Party, by written notice to the Issuer and the Indenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Issuer has paid or deposited with the Indenture Trustee a sum sufficient to pay: (A) all of the installments of interest, premium and principal on all Notes which were overdue prior to the date of such acceleration; 50 (B) to the extent that payment of such interest is lawful, interest at the applicable Overdue Rate on the amounts set forth in clause (A) above; (C) all sums paid or advanced by the Indenture Trustee hereunder or the Servicer and the reasonable compensation, out-of-pocket expenses, disbursements and advances of the Indenture Trustee, its agents and counsel incurred in connection with the enforcement of this Indenture; (D) all amounts due to any Series Enhancer (if applicable); and (ii) all Events of Default, other than the nonpayment of the principal of or interest on Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 813 hereof. No such rescission with respect to any Event of Default shall affect any subsequent Event of Default or impair any right consequent thereon. Section 803. COLLECTION OF INDEBTEDNESS. The Issuer covenants that, if an Event of Default occurs and is continuing and a declaration of acceleration has been made under Section 802 with respect to a Series and not rescinded, the Issuer will, upon demand of the Indenture Trustee, pay to the Indenture Trustee, for the benefit of the Noteholders of such Series then Outstanding and any Series Enhancers of such Series, an amount equal to the sum of (i) the Outstanding Obligations of such Series including the costs and out-of-pocket expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, its agents and counsel incurred in connection with the enforcement of this Indenture and (ii) to the extent that the payment of such interest is lawful, interest on the amount set forth in clause (i) at the applicable Overdue Rate. Section 804. REMEDIES. If an Event of Default shall occur and be continuing, the Indenture Trustee, by such officer or agent as it may appoint, shall notify the applicable Rating Agencies, if any, of such Event of Default and shall, if instructed by the Control Party of a Series: (i) institute any Proceedings, in its own name and as trustee of an express trust, for the collection of all amounts then due and payable on the Notes of such Series or under this Indenture or the related Supplement with respect thereto, whether by declaration or otherwise, enforce any judgment obtained, and collect from the related Series Collateral and any other assets of the Issuer any monies adjudged due; 51 (ii) subject to the quiet enjoyment rights of any Lessee under a Lease Agreement, sell, hold or lease the related Series Collateral or any portion thereof or rights or interest therein, at one or more public or private transactions conducted in any manner permitted by law; (iii) institute any Proceedings from time to time for the complete or partial foreclosure of the Lien created by this Indenture and the related Supplement with respect to the related Series Collateral; (iv) institute such other appropriate Proceedings to protect and enforce any other rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy; (v) exercise any remedies of a secured party under the Uniform Commercial Code or any applicable law and take any other appropriate action to protect and enforce the rights and remedies of the Indenture Trustee or the Noteholders of a Series hereunder; and (v) appoint a receiver or a manager over the Issuer or its assets. Section 805. INDENTURE TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES. (a) In all Proceedings brought by the Indenture Trustee (and also any Proceedings involving the interpretation of any provision of this Indenture to which the Indenture Trustee shall be a party), the Indenture Trustee shall be held to represent all of the Noteholders of the affected Series, and it shall not be necessary to make any affected Noteholder a party to any such Proceedings. (b) All rights of action and claims under this Indenture, the related Supplement or such Notes may be prosecuted and enforced by the Indenture Trustee without the possession of any of the Notes or the production thereof in any Proceeding relating thereto, and any such Proceeding instituted by the Indenture Trustee shall be brought in its own name as trustee of an express trust, and any recovery whether by judgment, settlement or otherwise shall, after provision for the payment of the reasonable compensation, expenses, and disbursements incurred and advances made, by the Indenture Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes of the affected Series, subject to the subordination of payments among Classes of a particular Series as set forth in the related Supplement. Section 806. ALLOCATION OF MONEY COLLECTED. If the Notes of a Series have been declared due and payable following an Event of Default and such declaration and its 52 consequences have not been rescinded or annulled, any money collected by the Indenture Trustee pursuant to this Article or otherwise and any other monies that may be held or thereafter received by the Indenture Trustee as security for the Notes of such Series shall be applied, to the extent permitted by law, in the following order, at the date or dates fixed by the Indenture Trustee: FIRST: To the payment of all amounts due the Indenture Trustee under Section 905 hereof; and SECOND: To the payment of all management fees or other servicing fees as more particularly provided in each Supplement and in accordance with the terms of the related Servicing Agreement; PROVIDED, HOWEVER, that in no event shall the Servicing Fee then payable pursuant to each Supplement be less than the Minimum Servicing Fee Percentage of Engine Revenues of the Engines pledged pursuant to such Supplement. THIRD: Any remaining amounts shall be distributed in accordance with Section 302 (II) of each Supplement (or such other or additional related sections or clauses as may be provided in any particular Supplement) hereof but without duplication of any amounts specified in Section 302(II) of a Supplement that is also set forth in Section 806 (First) or (Second) above. Section 807. LIMITATION ON SUITS. Except to the extent provided in Section 808 hereof, no Noteholder of a Series shall have the right to institute any Proceeding, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Holder has previously given written notice to the Indenture Trustee of a continuing Event of Default; (ii) the Control Party of such Series shall have made written request to the Indenture Trustee to institute Proceedings in respect of such Event of Default in its own name as Indenture Trustee hereunder; (iii) such Holder or Holders have offered to the Indenture Trustee reasonable security or indemnity against the costs, expenses and liabilities to be incurred in compliance with such request (the unsecured indemnity of a Rated Institutional Noteholder being deemed satisfactory for such purpose); (iv) the Indenture Trustee has, for 30 days after its receipt of such notice, request and offer of security or indemnity, failed to institute any such Proceeding; and 53 (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 30 day period by the Control Party of such Series; it being understood and intended that no one or more Noteholders shall have any right in any manner whatsoever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Noteholder, or to obtain or to seek to obtain priority or preference over any other Noteholder (except to the extent provided in the related Supplement) or to enforce any right under this Indenture, except in the manner herein provided and for the benefit of all Noteholders of a Series. Section 808. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND INTEREST. Notwithstanding any other provision of this Indenture, each Noteholder shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on such Note as such principal and interest becomes due and payable and to institute any Proceeding for the enforcement of such payment, and such rights shall not be impaired without the consent of such Holder. Section 809. RESTORATION OF RIGHTS AND REMEDIES. If the Indenture Trustee, any Series Enhancer or any Holder has instituted any Proceeding to enforce any right or remedy under this Indenture or the related Supplement and such Proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Indenture Trustee, any Series Enhancer or to such Holder, then and in every such case, subject to any determination in such Proceeding, the Issuer, the Indenture Trustee, such Series Enhancer (if applicable) and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Indenture Trustee, such Series Enhancer (if applicable) and the Holders shall continue as though no such Proceeding had been instituted. Section 810. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy conferred upon or reserved to the Indenture Trustee, any Series Enhancer (if applicable) or to the Holders pursuant to this Indenture or any Supplement is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 811. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Indenture Trustee, of any Series Enhancer or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Indenture Trustee or to the Holders may be 54 exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee or by the Holders, as the case may be. Section 812. CONTROL BY THE CONTROL PARTY OF THE AFFECTED SERIES. Upon the occurrence of an Event of Default with respect to a Series, the Control Party of the affected Series shall have the right to direct the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee or exercising any trust or power conferred on the Indenture Trustee, provided that (i) such direction shall not be in conflict with any rule of law or with this Indenture, including, without limitation, Section 804 hereof, (ii) such Control Party has offered to the Indenture Trustee reasonable security or indemnity against costs, expenses and liabilities which it might incur in connection therewith as provided in Section 902(iii) hereof, (iii) the Indenture Trustee may take any other action deemed proper by the Indenture Trustee which is not inconsistent with such direction. Section 813. WAIVER OF PAST DEFAULTS. (a) The Control Party of a Series may, on behalf of all Noteholders of such Series, waive any past Event of Default with respect to such Series and its consequences, except an Event of Default with respect to such Series. (i) in the payment of (x) the principal balance of any Note on the Final Payment Date or (y) any required interest payment on any Note of any Series on any Payment Date, or (ii) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of all the Noteholders of all Series pursuant to Section 1002 of this Indenture. (b) Upon any such waiver, such Event of Default shall cease to exist and shall be deemed to have been cured and not to have occurred for every purpose of this Indenture; PROVIDED, HOWEVER, that no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon. Section 814. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Note by acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Indenture Trustee for any action taken, suffered or omitted by it as Indenture Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; PROVIDED, HOWEVER, that the provisions of this Section shall not apply (i) to any suit instituted by the Indenture Trustee or any Holder or group of Holders, holding in the aggregate more than 10% of the aggregate principal balance of the Notes of all Series then Outstanding, or (ii) to any suit instituted by any Holder for the enforcement of (x) the payment of interest or principal on 55 any Notes on any Payment Date or (y) the payment of the principal of any Note on or after the Final Payment Date of such Note. Section 815. WAIVER OF STAY OR EXTENSION LAWS. The Issuer covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Indenture Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 816. SALE OF COLLATERAL. (a) The power to effect any sale (a "Sale") of any portion of the Series Collateral pursuant to Section 804 hereof shall not be exhausted by any one or more Sales as to any portion of the Series Collateral remaining unsold, but shall continue unimpaired until the entire Series Collateral shall have been sold or the Outstanding Obligations of the related Series shall have been paid in full. The Indenture Trustee at the direction of the Control Party of the related Series may from time to time postpone any Sale by public announcement made at the time and place of such Sale. (b) Upon any Sale, whether made under the power of sale hereby given or under judgment, order or decree in any Proceeding for the foreclosure or involving the enforcement of this Indenture: (i) the Indenture Trustee, at the direction of the Control Party of the related Series, may bid for and purchase the property being sold, and upon compliance with the terms of such Sale may hold, retain and possess and dispose of such property in accordance with the terms of this Indenture; and (ii) the receipt of the Indenture Trustee or of any officer thereof making such Sale shall be a sufficient discharge to the purchaser or purchasers at such Sale for its or their purchase money, and such purchaser or purchasers, and its or their assigns or personal representatives, shall not, after paying such purchase money and receiving such receipt of the Indenture Trustee or of such officer therefor, be obliged to see to the application of such purchase money or be in any way answerable for any loss, misappropriation or non-application thereof. (c) The Indenture Trustee shall execute and deliver an appropriate instrument of conveyance transferring its interest in any portion of the Collateral in connection with a Sale thereof. In addition, the Indenture Trustee is hereby irrevocably appointed the agent and attorney-in-fact of the Issuer to transfer and convey its interest (subject to lessee's rights of quiet enjoyment) in any portion of the Collateral in connection with a Sale thereof, and to take all action necessary to effect such Sale. No purchaser or transferee at such a Sale shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any monies. Section 817. ACTION ON NOTES. The Indenture Trustee's right to seek and recover judgment on the Notes or under this Indenture or any Supplement shall not be affected 56 by the seeking, obtaining or application of any other relief under or with respect to this Indenture or any Supplement. Neither the Lien of this Indenture nor any rights or remedies of the Indenture Trustee, any Series Enhancer or the Noteholders shall be impaired by the recovery of any judgment by the Indenture Trustee against the Issuer or by the levy of any execution under such judgment upon any portion of the Collateral or upon any of the assets of the Issuer. 57 ARTICLE IX CONCERNING THE INDENTURE TRUSTEE Section 901. DUTIES OF INDENTURE TRUSTEE. The Indenture Trustee, prior to the occurrence of an Event of Default with respect to any Series or after the curing of any Event of Default with respect to any Series which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and the related Supplement. If an Event of Default with respect to any Series has occurred and is continuing, the Indenture Trustee, at the direction of the Control Party of the related Series, shall exercise such of the rights and powers vested in it by this Indenture and the related Supplement, and use the same degree of care and skill in its exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. The Indenture Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments furnished to the Indenture Trustee which are specifically required to be furnished pursuant to any provisions of this Indenture and any applicable Supplement, shall determine whether they are in the form required by this Indenture and any applicable Supplement; PROVIDED, HOWEVER, that the Indenture Trustee shall not be responsible for the accuracy or content of any such resolution, certificate, statement, opinion, report, document, order or other instrument furnished pursuant to this Indenture and any applicable Supplement. No provision of this Indenture or any Supplement shall be construed to relieve the Indenture Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct; PROVIDED, HOWEVER, that: (i) Prior to the occurrence of an Event of Default and after the curing of any Event of Default which may have occurred, the duties and obligations of the Indenture Trustee shall be determined solely by the express provisions of this Indenture and any Supplements issued pursuant to the terms hereof. The Indenture Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and any Supplements issued pursuant to the terms hereof, and no implied covenants or obligations shall be read into this Indenture against the Indenture Trustee and, in the absence of bad faith on the part of the Indenture Trustee, the Indenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any Opinion of Counsel, certificates, statements, reports, documents, orders, opinions, appraisals, bonds or other documents or instruments believed by it to be genuine and to have been signed or presented by the proper party or parties and conforming to the requirements of this Indenture and any Supplements issued pursuant to the terms hereof; (ii) The Indenture Trustee shall not be liable for an error of judgment made in good faith by a Corporate Trust Officer or Corporate Trust Officers of the Indenture 58 Trustee, unless it shall be proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; and (iii) The Indenture Trustee shall not be personally liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the Control Party of a Series relating to the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee, or exercising any trust or power conferred upon the Indenture Trustee, under this Indenture. No provisions of this Indenture shall require the Indenture Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate security or indemnity against such risk or liability is not reasonably assured to it (the unsecured indemnity of (A) a Rated Institutional Noteholder being deemed satisfactory for such purpose unless the Indenture Trustee provides written notice to the contrary, or (B) any Series Enhancer, if applicable (so long as its claims paying ability is rated "AAA" or "Aaa", as applicable) being deemed satisfactory for such purpose). Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Indenture Trustee shall be subject to the provisions of this Section 901. Section 902. CERTAIN MATTERS AFFECTING THE INDENTURE TRUSTEE. Except as otherwise provided in Section 901 hereof: (i) The Indenture Trustee may consult with counsel of its selection and any advice of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance in reliance thereof; (ii) The Indenture Trustee shall be under no obligation to institute, conduct or defend any litigation or proceeding hereunder or in relation hereto at the request, order or direction of the Control Party of a Series, pursuant to the provisions of this Indenture, unless the such Control Party shall have offered to the Indenture Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby (the unsecured indemnity of (A) a Rated Institutional Noteholder being deemed satisfactory for such purpose, unless the Indenture Trustee provides written notice to the contrary or (B) any Series Enhancer if applicable (so long as its claims paying ability is rated "AAA" or "Aaa", as applicable) being deemed satisfactory for such purpose); 59 (iii) The Indenture Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (iv) The Indenture Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by the Control Party of a Series; PROVIDED, HOWEVER, that the Indenture Trustee may require reasonable security or indemnity against any cost, expense or liability likely to be incurred in making such investigation as a condition to so proceeding (the unsecured indemnity of (A) a Rated Institutional Noteholder being deemed satisfactory for such purposes unless the Indenture Trustee provides written notice to the contrary) or (B) any Series Enhancer (so long as its claims paying ability is rated "AAA" or "Aaa," as applicable,) being deemed satisfactory for such purpose). The reasonable expense of any such examination shall be paid, on a pro rata basis, by the Noteholders of the applicable Series requesting such examination or, if paid by the Indenture Trustee, shall be reimbursed by such Noteholders upon demand; (v) The Indenture Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, provided that the Indenture Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder; and (vi) The Indenture Trustee shall not be charged with knowledge of any Default or Event of Default unless either a Trust Officer of the Indenture Trustee shall have actual knowledge or written notice of such shall have been given to a Trust Officer of the Indenture Trustee. The provisions of this Section 902 shall be applicable to the Indenture Trustee in its capacity as Indenture Trustee under this Indenture. Section 903. INDENTURE TRUSTEE NOT LIABLE. (a) The recitals contained herein (other than the representations and warranties contained in Section 911 hereof), in any Supplement and in the Notes (other than the certificate of authentication on the Notes) shall be taken as the statements of the Issuer, and the Indenture Trustee assumes no responsibility for their correctness. The Indenture Trustee makes no representations as to the validity or sufficiency of this Indenture, any Supplement, the Notes, the Collateral or of any related document. The Indenture Trustee shall not be accountable for the use or application by the Issuer of any of the Notes or of the proceeds thereof, or for the use or application of any funds paid to the Issuer or the Servicer in respect of the Collateral. The Indenture Trustee will be deemed to have appointed First Union Capital Markets Corp. to act as Administrative Agent under the terms of the Administration Agreement without negligence or willful misconduct. 60 (b) The Indenture Trustee shall have no responsibility or liability for or with respect to the existence or validity of any Engine, the perfection of any security interest (whether as of the date hereof or at any future time), the maintenance of or the taking of any action to maintain such perfection, the validity of the assignment of any portion of the Collateral to the Indenture Trustee or of any intervening assignment, the compliance by the Seller or the Servicer with any covenant or the breach by the Seller or the Servicer of any warranty or representation made hereunder, in any Supplement or in any related document or the accuracy of such warranty or representation, any investment of monies in the Trust Account, the Restricted Cash Account or any Series Account or any loss resulting therefrom (provided that such investments are made in accordance with the provisions of Section 303 hereof), the acts or omissions of the Seller or the Servicer taken in the name of the Indenture Trustee, or the acts or omissions of the Administrative Agent. (c) Except as expressly provided herein or in any Supplement, the Indenture Trustee shall not have any obligation or liability under any Contract by reason of or arising out of this Indenture or the granting of a security interest in such Contract hereunder or the receipt by the Indenture Trustee of any payment relating to any Contract pursuant hereto, nor shall the Indenture Trustee be required or obligated in any manner to perform or fulfill any of the obligations of the Issuer, the Seller or the Servicer under or pursuant to any Contract, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it, or the sufficiency of any performance by any party, under any Contract. Section 904. INDENTURE TRUSTEE MAY OWN NOTES. The Indenture Trustee in its individual or any other capacity may become the owner or pledgee of Notes with the same rights it would have if it were not Indenture Trustee; provided that such transaction shall not result in the disqualification of the Indenture Trustee for purposes of Rule 3a-7 under the Investment Company Act of 1940. Section 905. INDENTURE TRUSTEE'S FEES AND EXPENSES. The fees of the Indenture Trustee shall be paid by the Issuer in accordance with Section 302 of a related Supplement for a Series. The Issuer shall indemnify the Indenture Trustee and each of its officers, directors and employees for, and hold them harmless against, any loss, liability, damage claim or expense incurred without negligence or willful misconduct on their part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself both individually and in its representative capacity against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder (including, but not limited to, loss, liability, damage, claim or expense incurred by reason of the appointment of First Union Capital Markets Corp. to act as Administrative Agent). The obligations of the Issuer under this Section 905 to compensate the Indenture Trustee, to pay or reimburse the Indenture Trustee for expenses, disbursements and advances and to indemnify and hold harmless, the Indenture Trustee shall constitute Outstanding 61 Obligations hereunder and shall survive the resignation or removal of the Indenture Trustee and the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 801(iii) or Section 801(iv), the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy law. Section 906. ELIGIBILITY REQUIREMENTS FOR INDENTURE TRUSTEE. The Indenture Trustee hereunder shall at all times be a national banking association or a corporation, organized and doing business under the laws of the United States of America or any State, and authorized under such laws to exercise corporate trust powers. In addition, the Indenture Trustee or its parent corporation shall at all times (i) have a combined capital and surplus of at least $250,000,000, (ii) be subject to supervision or examination by Federal or state authority and (iii) have a long-term unsecured senior debt rating of "A-2" or better by Moody's Investors Service, Inc. or a long-term unsecured senior debt rating of "A" by Standard & Poor's Rating Services and short-term unsecured senior debt rating of "P-1" or better by Moody's Investors Service, Inc. or a short-term unsecured senior debt rating of "A-2" by Standard & Poor's Rating Services. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of such supervising or examining authority, then, for the purposes of this Section 906, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Indenture Trustee shall cease to be eligible in accordance with the provisions of this Section, the Indenture Trustee shall resign immediately in the manner and with the effect specified in Section 907 hereof. In lieu of the foregoing eligibility requirements for the Indenture Trustee, The Bank of New York shall be an eligible Indenture Trustee. Section 907. RESIGNATION AND REMOVAL OF INDENTURE TRUSTEE. The Indenture Trustee may at any time resign and be discharged from the trusts hereby created by giving written notice thereof to the Issuer, the Servicer, each Series Enhancer if applicable and the Noteholders. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Indenture Trustee each Series Enhancer if applicable, and one copy to the successor Indenture Trustee. If no successor Indenture Trustee shall have been so appointed and have accepted appointment within 30 days after the giving of such notice of resignation, the Requisite Global Majority may appoint a successor trustee or, if it does not do so within 30 days thereafter, the resigning Indenture Trustee, with the consent of each Series Enhancer, may petition any court of competent jurisdiction for the appointment of a successor trustee, which successor trustee shall meet the eligibility standards set forth in Section 906. If at any time the Indenture Trustee shall cease to be eligible in accordance with the provisions of Section 906 hereof and shall fail to resign after written request therefor by the Issuer, any Series Enhancer if applicable or the Servicer, or if at any time the Indenture Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a 62 receiver of the Indenture Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Indenture Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Issuer shall remove the Indenture Trustee and appoint a successor Indenture Trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the Indenture Trustee so removed and one copy to the successor Indenture Trustee. Any resignation or removal of the Indenture Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor trustee as provided in Section 908 hereof. Section 908. SUCCESSOR INDENTURE TRUSTEE. Any successor Indenture Trustee appointed as provided in Section 907 hereof shall execute, acknowledge and deliver to the Issuer and to its predecessor Indenture Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Indenture Trustee shall become effective and such successor Indenture Trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Indenture Trustee herein. The predecessor Indenture Trustee shall deliver to the successor Indenture Trustee all documents relating to the Collateral, if any, delivered to it, together with any amount remaining in the Trust Account, Restricted Cash Account and any other Series Accounts. In addition, the predecessor Indenture Trustee and, upon request of the successor Indenture Trustee, the Issuer shall execute and deliver such instruments and do such other things as may reasonably be required for more fully and certainly vesting and confirming in the successor Indenture Trustee all such rights, powers, duties and obligations. No successor Indenture Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Indenture Trustee shall be eligible under the provisions of Section 906 hereof and shall be acceptable to the Requisite Global Majority. Upon acceptance of appointment by a successor Indenture Trustee as provided in this Section, the Issuer shall mail notice of the succession of such Indenture Trustee hereunder to all Noteholders at their addresses as shown in the registration books maintained by the Indenture Trustee. If the Issuer fails to mail such notice within 10 days after acceptance of appointment by the successor Indenture Trustee, the successor Indenture Trustee shall cause such notice to be mailed at the expense of the Issuer. Section 909. MERGER OR CONSOLIDATION OF INDENTURE TRUSTEE. Any corporation into which the Indenture Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Indenture Trustee shall be a party, or any corporation succeeding to the business of the Indenture Trustee, shall be the successor of the Indenture Trustee hereunder, provided such corporation shall be eligible under the provisions of Section 906 hereof, without the execution 63 or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 910. SEPARATE INDENTURE TRUSTEES, CO-INDENTURE TRUSTEES AND CUSTODIANS. If the Indenture Trustee is not capable of acting outside the United States, it shall have the power from time to time to appoint one or more Persons or corporations to act either as co-trustees jointly with the Indenture Trustee, or as separate trustees, or as custodians, for the purpose of holding title to, foreclosing or otherwise taking action with respect to any of the Collateral, when such separate trustee or co-trustee is necessary or advisable under any applicable laws or for the purpose of otherwise conforming to any legal requirement, restriction or condition in any applicable jurisdiction. The separate trustees, co-trustees, or custodians so appointed shall be trustees, co-trustees, or custodians for the benefit of all Noteholders and shall have such powers, rights and remedies as shall be specified in the instrument of appointment; PROVIDED, HOWEVER, that no such appointment shall, or shall be deemed to, constitute the appointee an agent of the Indenture Trustee. The Issuer shall join in any such appointment, but such joining shall not be necessary for the effectiveness of such appointment. Every separate trustee, co-trustee and custodian shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all powers, duties, obligations and rights conferred upon the Indenture Trustee in respect of the receipt, custody and payment of moneys shall be exercised solely by the Indenture Trustee; (ii) all other rights, powers, duties and obligations conferred or imposed upon the Indenture Trustee shall be conferred or imposed upon and exercised or performed by the Indenture Trustee and such separate trustee, co-trustee, or custodian jointly, except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed the Indenture Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Collateral or any portion thereof in any such jurisdiction) shall be exercised and performed by such separate trustee, co-trustee or custodian; (iii) no trustee or custodian hereunder shall be personally liable by reason of any act or omission of any other trustee or custodian hereunder; and (iv) the Issuer or the Indenture Trustee may at any time accept the resignation of or remove any separate trustee, co-trustee or custodian so appointed by it or them if such resignation or removal does not violate the other terms of this Indenture. 64 Any notice, request or other writing given to the Indenture Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee, co-trustee, or custodian shall refer to this Indenture and the conditions of this Article. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Indenture Trustee or separately, as may be provided therein, subject to all the provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection to, the Indenture Trustee. Every such instrument shall be furnished to the Indenture Trustee and each Series Enhancer. Any separate trustee, co-trustees, or custodian may, at any time, constitute the Indenture Trustee, its agent or attorney-in-fact, with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Indenture on its behalf and in its name. If any separate trustee, co-trustee, or custodian shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Indenture Trustee, to the extent permitted by law, without the appointment of a new or successor trustee or custodian. No separate trustee, co-trustee or custodian hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 906 hereof and no notice to Noteholders of the appointment thereof shall be required under Section 908 hereof. The Indenture Trustee agrees to instruct the co-trustees, if any, to the extent necessary to fulfill the Indenture Trustee's obligations hereunder. Section 911. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Indenture Trustee hereby represents, warrants and covenants as of the Effective Date of each Series that: (a) ORGANIZATION AND GOOD STANDING. The Indenture Trustee is a New York banking corporation duly organized, validly existing and in good standing under the laws of the State of New York, and has the power to own its assets and to transact the business in which it is presently engaged; (b) AUTHORIZATION. The Indenture Trustee has the power, authority and legal right to execute, deliver and perform this Indenture and each Supplement and to authenticate the Notes, and the execution, delivery and performance of this Indenture and each Supplement and the authentication of the Notes has been duly authorized by the Indenture Trustee by all necessary corporate action; (c) BINDING OBLIGATIONS. This Indenture and each Supplement, assuming due authorization, execution and delivery by the Issuer, constitutes the legal, valid and binding obligations of the Indenture Trustee, enforceable against the Indenture Trustee in accordance with its terms, except that (i) such enforcement may be subject to bankruptcy, insolvency, 65 reorganization, moratorium or other similar laws (whether statutory, regulatory or decisional) now or hereafter in effect relating to creditors' rights generally and the rights of trust companies in particular and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought, whether in a proceeding at law or in equity; (d) NO VIOLATION. The performance by the Indenture Trustee of its obligations under this Indenture and each Supplement will not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice, lapse of time or both) a default under, the charter documents or bylaws of the Indenture Trustee; (e) NO PROCEEDINGS. There are no proceedings or investigations to which the Indenture Trustee is a party pending, or, to the knowledge of the Indenture Trustee, threatened, before any court, regulatory body, administrative agency or other tribunal or Governmental Authority (A) asserting the invalidity of this Indenture or the Notes, (B) seeking to prevent the issuance of the Notes or the consummation of any of the transactions contemplated by this Indenture or (C) seeking any determination or ruling that would materially and adversely affect the performance by the Indenture Trustee of its obligations under, or the validity or enforceability of, this Indenture or the Notes; and (f) APPROVALS. Neither the execution or delivery by the Indenture Trustee of this Indenture nor the consummation of the transactions by the Indenture Trustee contemplated hereby requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any Governmental Authority under any existing federal or State of New York law governing the banking or trust powers of the Indenture Trustee. (g) SECURITIES ACCOUNTS. (i) The Indenture Trustee is a bank which regularly accepts in the ordinary course of its business securities of the same type as the applicable Collateral as a custodial service for its customers and maintains in the State of New York deposit accounts and securities accounts for its customers; (ii) The Indenture Trustee will at all times be acting solely in the capacity of a Securities Intermediary with respect to items of Collateral identified on its books and records; (iii) The Indenture Trustee will maintain its offices and books and records with respect to its securities accounts in the State of New York; (iv) The Indenture Trustee will at all times maintain an account with and be a member of The Federal Reserve Bank; and (v) The Indenture Trustee will act in accordance with, and fulfill its obligations under the terms of this Indenture and any Supplement hereto, on its part to be performed or observed, including, without limitation, crediting each Financial Asset (as defined in Section 8-102(a)(9) of the New York UCC) and any other property it receives in accordance thereunder to the appropriate Securities Account. Section 912. INDENTURE TRUSTEE OFFICES. The Indenture Trustee shall maintain in the State of New York an office or offices or agency or agencies where Notes may be 66 surrendered for registration of transfer or exchange, which office shall initially be located at 101 Barclay Street, New York, New York 10286, and shall promptly notify the Issuer, the Servicer and the Noteholders of any change of such location. Section 913. NOTICE OF EVENT OF DEFAULT. If the Indenture Trustee shall have actual knowledge of an Event of Default with respect to any Series, the Indenture Trustee shall give prompt written notice thereof to the Noteholders and any Series Enhancer of such Series. For all purposes of this Indenture, in the absence of actual knowledge by a Corporate Trust Officer of the Indenture Trustee, the Indenture Trustee shall not be deemed to have actual knowledge of any Event of Default unless notified in writing thereof by the Issuer, the Seller, the Servicer, any Series Enhancer or any Noteholder, and such notice references the applicable Series of Notes generally, the Issuer, this Indenture or the applicable Supplement. 67 ARTICLE X SUPPLEMENTAL INDENTURES Section 1001. SUPPLEMENTAL INDENTURES NOT CREATING A NEW SERIES WITHOUT CONSENT OF HOLDERS. (a) Without the consent of any Holder and based on an Opinion of Counsel to the effect that such Supplement is for one of the purposes set forth in clauses (i) through (vii) below, the Issuer and the Indenture Trustee, at any time and from time to time, may, with the consent of the Series Enhancers if applicable, enter into one or more Supplements in form satisfactory to the Indenture Trustee, for any of the following purposes: (i) to add to the covenants of the Issuer in this Indenture for the benefit of the Holders of one or more Series then Outstanding or of one or more Series Enhancers if applicable, or to surrender any right or power conferred upon the Issuer in this Indenture; (ii) to cure any ambiguity, to correct or supplement any provision in this Indenture which may be inconsistent with any other provision in this Indenture, or to make any other provisions with respect to matters or questions arising under this Indenture; (iii) to correct or amplify the description of any property at any time subject to the Lien of this Indenture, or better to assure, convey and confirm unto the Indenture Trustee any property subject or required to be subjected to the Lien of this Indenture, or to subject additional property to the Lien of this Indenture; (iv) to add to the conditions, limitations and restrictions on the authorized amount, terms and purposes of issue, authentication and delivery of the Notes, as herein set forth, or additional conditions, limitations and restrictions thereafter to be observed by the Issuer; (v) to convey, transfer, assign, mortgage or pledge any additional property to or with the Indenture Trustee; (vi) to evidence the succession of the Indenture Trustee pursuant to Article IX; or (vii) to add any additional Events of Default. Prior to the execution of any Supplement issued pursuant to this Section 1001, the Issuer shall provide written notice to each Rating Agency setting forth in general terms the substance of any such Supplement. 68 (b) Promptly after the execution by the Issuer and the Indenture Trustee of any Supplement pursuant to this Section, the Indenture Trustee shall mail to all Noteholders of any affected Class then Outstanding, each Rating Agency if applicable of an affected Series and each affected Series Enhancer if applicable a notice setting forth in general terms the substance of such Supplement, together with a copy of the text of such Supplement. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplement. Section 1002. SUPPLEMENTAL INDENTURES NOT CREATING A NEW SERIES WITH CONSENT OF HOLDERS. (a) With the prior written consent of the Control Party of each affected Series, the Issuer and the Indenture Trustee may enter into a Supplement hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; PROVIDED, HOWEVER, that no such Supplement shall, without the consent of the Holder of each Outstanding Note affected thereby: (i) reduce the principal amount of any Note or the rate of interest thereon, change the priority of any payments required pursuant to this Indenture or any Supplement, or the date on which, or the place of payment where, or the coin or currency in which, any Note or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Final Payment Date thereof; (ii) reduce the percentage of Outstanding Notes required for (a) the consent of any Supplement to this Indenture, (b) the consent required for any waiver of compliance with certain provisions of this Indenture or certain Events of Default hereunder and their consequences as provided for in this Indenture or (c) the consent required to waive any payment default on the Notes; (iii) modify any of the provisions of this Section except to increase any percentage provided herein, or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby; (iv) modify or alter the definition of the terms "Outstanding," "Requisite Global Majority", "Control Party", or "Asset Base" or "Depreciation Policy"; (v) impair or adversely affect the Collateral except as otherwise permitted herein; (vi) modify or alter Section 702(a) of this Indenture; 69 (vii) permit the creation of any Lien ranking prior to or on a parity with the Lien of this Indenture with respect to any part of the Collateral or terminate the Lien of this Indenture on any property at any time subject hereto or deprive the Holder of any Note of the security afforded by the Lien of this Indenture; or (viii) modify any of the provisions of this Indenture in such a manner as to affect the amount or timing of any payments of interest or principal due on any Note. Prior to the execution of any Supplement issued pursuant to this Section 1002, the Issuer shall provide a written notice to each Rating Agency (if applicable) setting forth in general terms the substance of any such Supplement. (b) Promptly after the execution by the Issuer and the Indenture Trustee of any Supplement pursuant to this Section, the Issuer shall mail to all Noteholders of any affected Class, each Rating Agency of an Affected Class (if applicable) and the Series Enhancer (if applicable), a notice setting forth in general terms the substance of such Supplement, together with a copy of the text of such Supplement. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplement. Section 1003. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, a Supplement permitted by this Article or the modification thereby of the trusts created by this Indenture, the Indenture Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such Supplement is authorized or permitted by this Indenture. The Indenture Trustee may, but shall not be obligated to, enter into any such Supplement which affects the Indenture Trustee's own rights, duties or immunities under this Indenture or otherwise. Section 1004. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any Supplement under this Article, this Indenture shall be modified in accordance therewith, and such Supplement shall form a part of this Indenture for all purposes, and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 1005. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES. Notes authenticated and delivered after the execution of any Supplement pursuant to this Article may, and shall if required by the Issuer, bear a notation in form approved by the Indenture Trustee as to any matter provided for in such Supplement. If the Issuer shall so determine, new Notes so modified as to conform, in the opinion of the Indenture Trustee, may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for Outstanding Notes. 70 Section 1006. ISSUANCE OF SERIES OF NOTES. (a) The Issuer may from time to time direct the Indenture Trustee to execute and authenticate one or more Series of Notes (each, a "Series"). (b) On or before the Series Issuance Date relating to any Series, the parties hereto will execute and deliver a Supplement which will specify the Principal Terms of such Series. No Series of Notes shall be subordinated, in right of payment or otherwise, to any other Series without the prior written consent of each Noteholder of such Series. The terms of such Supplement may modify or amend the terms of this Indenture solely as applied to such Series, and, with the consent of the Control Party for any other Series, may amend this Indenture as applicable to such other Series, in accordance with Section 1002 hereof. The obligation of the Indenture Trustee to authenticate, execute and deliver the Notes of such Series and to execute and deliver the related Supplement is subject to the satisfaction of the following conditions: (i) on or before the tenth Business Day immediately preceding the Series Issuance Date (unless the parties to be notified agree to a shorter notice period), the Issuer shall have given the Indenture Trustee, the Servicer, each Rating Agency for such Series and any Series Enhancer entitled thereto pursuant to the relevant Supplement notice of the Series and the Series Issuance Date; (ii) the Issuer shall have delivered to the Indenture Trustee the related Supplement, in form satisfactory to the Indenture Trustee, executed by each party hereto other than the Indenture Trustee; (iii) the Issuer shall have delivered to the Indenture Trustee any related Enhancement Agreement executed by each of the parties thereto and the Series Enhancer under such Enhancement Agreement shall have acknowledged in writing the terms of the Administration Agreement; (iv) if such Series would modify the terms of any other Series previously issued and then Outstanding, then (i) the Control Party of each affected Series shall have given its prior written consent, (ii) the terms and conditions of Section 1002 shall have been complied with and (iii) the Rating Agency Condition shall have been satisfied with respect to the other affected Series; (v) the Issuer shall have delivered to the Indenture Trustee, each Rating Agency (if applicable), each Series Enhancer (if applicable) and, if required, any Noteholder, any Opinions of Counsel required by the related Supplement, including without limitation with respect to true sale, enforceability, non-consolidation and security interest perfection issues; and (vi) such other conditions as shall be specified in the related Supplement. 71 Upon satisfaction of the above conditions, the Indenture Trustee shall execute the Supplement and authenticate, execute and deliver the Notes of such Series. 72 ARTICLE XI HOLDERS LISTS Section 1101. ISSUER TO FURNISH INDENTURE TRUSTEE NAMES AND ADDRESSES OF HOLDERS. Unless otherwise provided in the related Supplement, Issuer will furnish or cause to be furnished to the Indenture Trustee and each Series Enhancer (as applicable) (but only with respect to any Series for which such Series Enhancer (as applicable) has provided enhancement (i) not more than 10 days after receipt of a request from the Indenture Trustee, a list, in such form as the Indenture Trustee may reasonably require, of the names and addresses and tax identification numbers of the Holders of Notes as of such Date, and (ii) at such other times as the Indenture Trustee may request in writing, within 30 days after the receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; PROVIDED, HOWEVER, that so long as the Indenture Trustee maintains the Note Register, no such lists shall be required to include the names and addresses received by the Indenture Trustee in such capacity. Section 1102. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. The Indenture Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Indenture Trustee as provided in Section 1101 and the names and addresses of Holders received by the Indenture Trustee in its capacity as note registrar. The Indenture Trustee may destroy any list furnished to it as provided in Section 1101 upon receipt of a new list so furnished. 73 ARTICLE XII EARLY AMORTIZATION EVENT Section 1201. EARLY AMORTIZATION EVENT. With respect to any Series, as of any date of determination, the existence of any one of the following events or conditions: (1) The Outstanding Obligations of such Series on any Payment Date (after giving effect to all payments of principal to be paid on such Payment Date) exceeds the Asset Base of such Series for a period of 10 consecutive Business Days without having been cured; or (2) The occurrence of an additional Early Amortization Event as specified in the related Supplement for any Series. The occurrence of an Early Amortization Event with respect to one Series of Notes (that has not been waived by the related Control Party) shall constitute an Early Amortization Event with respect to all other Series of Notes then Outstanding unless waived by the Control Party for such other Series or unless the related Supplement with respect to each such other Series of Notes shall specifically provide to the contrary. If an Early Amortization Event with respect to any Series exists on any Payment Date, then such Early Amortization Event shall be deemed to continue until the Business Day on which the related Control Party waives in writing such Early Amortization Event. Section 1202. OTHER SERIES. If an Early Amortization Event with respect to any Series exists on any Payment Date, any Excess Cash Available for Distribution shall be paid, pro rata in accordance with the Outstanding Obligations of all other Series, on such Payment Date for application to all Outstanding Obligations until paid in full. 74 ARTICLE XIII MISCELLANEOUS PROVISIONS Section 1301. COMPLIANCE CERTIFICATES AND OPINIONS. (a) Upon any application or request by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture or any Supplement, the Issuer shall furnish to the Indenture Trustee a certificate stating that all conditions precedent, if any, provided for in this Indenture and any relevant Supplement relating to the proposed action have been complied with and, if deemed reasonably necessary by the Indenture Trustee or if required pursuant to the terms of this Indenture, an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. (b) Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 1302. FORM OF DOCUMENTS DELIVERED TO INDENTURE TRUSTEE. (a) In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. 75 (b) Any certificate or opinion may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. (c) Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 1303. ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture or any Supplement to be given or taken by Holders may be (i) embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing, (ii) evidenced by the written consent or direction of Holders of the specified percentage of the principal amount of the Notes, or (iii) evidenced by a combination of such instrument or instruments; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments and record are delivered to the Indenture Trustee and, where it is hereby expressly required, to the Issuer. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgements of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Indenture Trustee deems sufficient. (c) The ownership of Notes shall be proved by the Note Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Note. Section 1304. INSPECTION. (a) Upon reasonable request, the Issuer agrees that it shall make available to any representative of the Indenture Trustee, any Series Enhancer (if applicable) or the Administrative Agent and their duly authorized representatives, attorneys or 76 accountants, for inspection and copying its books of account, records and reports relating to the Eligible Engines, the related Lease Agreements and the other items of Collateral, all in the format which the Servicer uses for its own operations. Such inspections shall be conducted during normal business hours and shall not unreasonably disrupt the Servicer's business. Any expense incident to the reasonable exercise by the Indenture Trustee, the Administrative Agent, each Series Enhancer (if applicable) or any Noteholder of any right under this Section shall be borne by the Person exercising such right unless an Event of Default shall have occurred and then be continuing in which case such expenses shall be borne by the Issuer. (b) The Issuer also agrees (i) to make available on a reasonable basis upon reasonable request to the Indenture Trustee, Administrative Agent, any Series Enhancer (if applicable) or any prospective owner a Servicing Officer for the purpose of answering reasonable questions respecting recent developments affecting the Issuer and (ii) to instruct the Servicer to allow the Indenture Trustee, Administrative Agent, any Series Enhancer (if applicable) or any prospective owner to inspect the Servicer's facilities upon reasonable request during normal business hours. Section 1305. LIMITATION OF RIGHTS. Except as expressly set forth in this Indenture, this Indenture shall be binding upon the Issuer, the Noteholders and their respective successors and permitted assigns and shall not inure to the benefit of any Person other than the parties hereto, the Noteholders and the Servicer as provided herein. Notwithstanding the previous sentence, the parties hereto, the Seller and the Servicer acknowledge that any Series Enhancer (if applicable) for a Series of Notes is an express third party beneficiary hereof entitled to enforce its rights hereunder as if actually a party hereto. Section 1306. SEVERABILITY. If any provision of this Indenture is held to be in conflict with any applicable statute or rule of law or is otherwise held to be unenforceable for any reason whatsoever, such circumstances shall not have the effect of rendering the provision in question inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions herein contained invalid, inoperative, or unenforceable to any extent whatsoever. The invalidity of any one or more phrases, sentences, clauses or Sections of this Indenture contained, shall not affect the remaining portions of this Indenture, or any part thereof. Section 1307. NOTICES. All demands, notices and communications hereunder shall be in writing, personally delivered, or by facsimile (with subsequent telephone confirmation of receipt thereof), or sent by internationally recognized overnight courier service, (a) in the case of the Indenture Trustee, at the following address: 101 Barclay Street, 12th Floor East, Asset Backed Finance Unit, New York, New York 10286, (b) in the case of the Servicer, at the following address: 180 Harbor Drive, Suite 207, Sausalito, California 94965, (c) in the case of the Issuer, at the following address: 180 Harbor Drive, Sausalito, California 94965, with a copy to the Servicer at the address set forth in clause (b), (d) in the 77 case of each Rating Agency (if applicable), its address set forth in the related Supplement, in the case of any Series Enhancer (if applicable), at its address set forth in the related Supplement, or at other such address as shall be designated by such party in a written notice to the other parties. Any notice required or permitted to be given to a Noteholder shall be given by certified first class mail, postage prepaid (return receipt requested), or by courier, or by facsimile, with subsequent telephone confirmation of receipt thereof, in each case at the address of such Holder as shown in the Note Register or to the telephone and fax number furnished by such Noteholder. Notice shall be effective and deemed received (a) two days after being delivered to the courier service, if sent by courier, (b) upon receipt of confirmation of transmission, if sent by telecopy, or (c) when delivered, if delivered by hand. Any rights to notices conveyed to a Rating Agency (if applicable) pursuant to the terms of this Indenture with respect to any Series or Class shall terminate immediately if such Rating Agency (if applicable) no longer has a rating outstanding with respect to such Series or Class. Section 1308. CONSENT TO JURISDICTION. Any legal suit, action or proceeding against the Issuer arising out of or relating to this indenture, or any transaction contemplated hereby, may be instituted in any federal or state court in The City of New York, State of New York and the Issuer hereby waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, and, solely for the purposes of enforcing this Indenture, the Issuer hereby irrevocably submits to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding. The Issuer hereby irrevocably appoints and designates CT Corporation Systems having an address at 1633 Broadway, New York, New York 10019, its true and lawful attorney-in-fact and duly authorized agent for the limited purpose of accepting servicing of legal process and the Issuer agrees that service of process upon such party shall constitute personal service of such process on such Person. The Issuer shall maintain the designation and appointment of such authorized agent until all amounts payable under this Indenture shall have been paid in full. If such agent shall cease to so act, each of the Agent and the Seller shall immediately designate and appoint another such agent satisfactory to the Indenture Trustee and shall promptly deliver to the Indenture Trustee evidence in writing of such other agent's acceptance of such appointment. Section 1309. CAPTIONS. The captions or headings in this Indenture are for convenience only and in no way define, limit or describe the scope or intent of any provisions or sections of this Indenture. Section 1310. GOVERNING LAW. This Indenture shall be governed by and interpreted in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of law. Section 1311. NO PETITION. The Indenture Trustee, on its own behalf, hereby covenants and agrees, and each Noteholder by its acquisition of a Note shall be deemed to covenant and agree, that it will not institute against the Issuer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any federal or 78 state bankruptcy or similar law, at any time other than on a date which is at least one year and one day after the last date on which any Note of any Series was Outstanding. Section 1312. GENERAL INTERPRETIVE PRINCIPLES. For purposes of this Indenture except as otherwise expressly provided or unless the context otherwise requires: (a) references herein to "Articles", "Sections", "Subsections", "paragraphs", and other subdivisions without reference to a document are to designated Articles, Sections, Subsections, paragraphs and other subdivisions of this Indenture; (b) a reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to paragraphs and other subdivisions; (c) the words "herein", "hereof", "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular provision; and (d) the term "include" or "including" shall mean without limitation by reason of enumeration. Section 1313. EFFECTIVE DATE OF TRANSACTION. Notwithstanding that this Indenture is dated as of September 1, 1997, the various transfers, conveyances and transactions set forth in this Indenture, including, without limitation, the security interests granted pursuant to Section 401 hereof, shall not be effective until the date on which this Indenture is actually executed by the parties hereto. Section 1314. COUNTERPARTS. This Indenture may be executed simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. 79 IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused this Indenture to be duly executed and delivered by their respective officers thereunto duly authorized, all as of the day and year first above written. WLFC FUNDING CORPORATION By: /s/ James D. McBride Name: JAMES D. McBRIDE Title: CHIEF FINANCIAL OFFICER THE BANK OF NEW YORK, as indenture trustee By: /s/ Cheryl L. Laser Name: CHERYL L. LASER Title: ASSISTANT VICE PRESIDENT THE BANK OF NEW YORK, as securities intermediary By: /s/ Cheryl L. Laser Name: CHERYL L. LASER Title: ASSISTANT VICE PRESIDENT SCHEDULE 1 "Applicable Percentage" means ___________ percent (__%).* "Depreciation Percentage" means ___________ percent (__%).* "Minimum Servicing Fee Percentage" means __________ percent (__%).* - -------------------- * The redacted material on this Schedule has been omitted pursuant to a request for confidential treatment and the material has been filed separately. EX-10.17 4 EXHIBIT 10.17 - -------------------------------------------------------------------------------- WLFC FUNDING CORPORATION Issuer and THE BANK OF NEW YORK Indenture Trustee ------------------------------ SERIES 1997-1 SUPPLEMENT Dated as of September 1, 1997 to INDENTURE Dated as of September 1, 1997 ------------------------------ SERIES 1997-1 NOTES - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ARTICLE I Definitions; Calculation Guidelines. . . . . . . . . . .5 Section 101. Definitions. . . . . . . . . . . . . . . . . . . . . . .5 Section 102. Calculation Guidelines . . . . . . . . . . . . . . . . 15 ARTICLE II Creation of the Series 1997-1 Notes. . . . . . . . . . 16 Section 201. Designation; General Terms and Conditions. . . . . . . 16 Section 202. Interest Payments on the Series 1997-1 Notes; Selection and Determination of Interest Rates. . . . . 17 (a) Interest on Series 1997-1 Notes. . . . . . . . . . . . 17 (b) Default Interest . . . . . . . . . . . . . . . . . . . 17 (c) Determination of LIBOR . . . . . . . . . . . . . . . . 17 (d) Determination of Prime Period. . . . . . . . . . . . . 18 Section 203. Principal Payments on the Series 1997-1 Notes. . . . . 18 (b) Prepayment Premium . . . . . . . . . . . . . . . . . . 18 Section 204. Amounts and Terms of Series 1997-1 Noteholder Commitments. . . . . . . . . . . . . . . . . . . . . . 18 Section 205. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 206. Increased Costs. . . . . . . . . . . . . . . . . . . . 21 Section 207. Capital Requirements . . . . . . . . . . . . . . . . . 21 ARTICLE III Series 1997-1 Series Account and Allocation and Application of Amounts Therein . . . . . . . . . . . . 22 Section 301. Series 1997-1 Series Account . . . . . . . . . . . . . 22 Section 302. Distributions. . . . . . . . . . . . . . . . . . . . . 23 Section 303. Allocation of Excess Cash Available for Distribution . 26 Section 304. Series 1997-1 Restricted Cash Account. . . . . . . . . 26 Section 305. Series 1997-1 Engine Reserve Account . . . . . . . . . 26 Section 306. Series 1997-1 Security Deposit Account . . . . . . . . 27 Section 307. Securities Accounts. . . . . . . . . . . . . . . . . . 27 ARTICLE IV Additional Covenants . . . . . . . . . . . . . . . . . 28 Section 401. Additional Series. . . . . . . . . . . . . . . . . . . 28 Section 402. Control Party. . . . . . . . . . . . . . . . . . . . . 28 Section 403. Inspections. . . . . . . . . . . . . . . . . . . . . . 28 Section 404. Reserved.. . . . . . . . . . . . . . . . . . . . . . . 28 Section 405. Interest Rate Hedge Agreements . . . . . . . . . . . . 28 Section 406. Insurance. . . . . . . . . . . . . . . . . . . . . . . 29 Section 407. Lessee Acknowledgment. . . . . . . . . . . . . . . . . 29 Section 408. Opinions of Foreign Local Counsel. . . . . . . . . . . 29 ARTICLE V Conditions of Effectiveness and Future Lending . . . . 30 Section 501. Effectiveness of Supplement. . . . . . . . . . . . . . 30 (a) Series 1997-1 Notes . . . . . . . . . . . . . . . . . . . . 30 (b) Certificate(s) of Secretary or Assistant Secretary. . . . . 30 (c) Security Documents. . . . . . . . . . . . . . . . . . . . . 30 (d) Opinions of Counsel.. . . . . . . . . . . . . . . . . . . . 30 (e) Series 1997-1 Transaction Documents.. . . . . . . . . . . . 31 (f) Good Standing Certificates. . . . . . . . . . . . . . . . . 31 (g) Establishment of Accounts . . . . . . . . . . . . . . . . . 31 (h) Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 502. Advances on Class A Notes. . . . . . . . . . . . . . . 31 (f) Security Documents. . . . . . . . . . . . . . . . . . . . . 32 (g) Certificate as to Eligible Engines. . . . . . . . . . . . . 32 ARTICLE VI Representations and Warranties. . . . . . . . . . . . . . . 34 Section 601. Existence. . . . . . . . . . . . . . . . . . . . . . . 35 Section 602. Authorization. . . . . . . . . . . . . . . . . . . . . 35 Section 603. No Conflict; Legal Compliance. . . . . . . . . . . . . 35 Section 604. Validity and Binding Effect. . . . . . . . . . . . . . 35 Section 605. Financial Statements . . . . . . . . . . . . . . . . . 35 Section 606. Executive Offices. . . . . . . . . . . . . . . . . . . 36 Section 607. No Agreements or Contracts . . . . . . . . . . . . . . 36 Section 608. Consents and Approvals . . . . . . . . . . . . . . . . 36 Section 609. Margin Regulations . . . . . . . . . . . . . . . . . . 36 Section 610. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 611. Other Regulations. . . . . . . . . . . . . . . . . . . 37 Section 612. Solvency and Separateness. . . . . . . . . . . . . . . 37 Section 613. Survival of Representations and Warranties . . . . . . 38 Section 614. No Event of Default or Early Amortization Event. . . . 39 Section 615. Litigation and Contingent Liabilities. . . . . . . . . 39 Section 616. Title; Liens . . . . . . . . . . . . . . . . . . . . . 39 Section 617. Subsidiaries . . . . . . . . . . . . . . . . . . . . . 39 Section 618. No Partnership . . . . . . . . . . . . . . . . . . . . 39 Section 619. Pension and Welfare Plans. . . . . . . . . . . . . . . 39 Section 620. Ownership of Issuer. . . . . . . . . . . . . . . . . . 40 Section 621. Security Interest. . . . . . . . . . . . . . . . . . . 40 Section 622. Eligible Lease Agreements; Eligible Engines. . . . . . 40 ARTICLE VII EARLY AMORTIZATION EVENT . . . . . . . . . . . . . . . 40 Section 701. Early Amortization Event . . . . . . . . . . . . . . . 40 ARTICLE VIII Miscellaneous Provisions . . . . . . . . . . . . . . . 41 Section 801. Ratification of Indenture. . . . . . . . . . . . . . . 41 Section 802. Counterparts . . . . . . . . . . . . . . . . . . . . . 41 Section 803. Governing Law. . . . . . . . . . . . . . . . . . . . . 41
EXHIBITS EXHIBIT A Form of Class A Note EXHIBIT B Manufacturer, Engine Type, Concentration Guidelines EXHIBIT C Lessee Acknowledgment EXHIBIT D Asset Base Certificate SCHEDULES SCHEDULE 1 Certain Terms SCHEDULE 2 Initial List of Engines and Lease Agreements SERIES 1997-1 SUPPLEMENT, dated as of September 1, 1997 (the "Supplement"), between WLFC Funding Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Issuer"), and The Bank of New York, a New York banking corporation, as Indenture Trustee (the "Indenture Trustee"). Pursuant to the Indenture, dated as of September 1, 1997 (as amended and supplemented, the "Indenture"), between the Issuer and the Indenture Trustee, the Issuer may from time to time direct the Indenture Trustee to authenticate one or more new Series of Notes. The Principal Terms of any new Series are to be set forth in a Supplement to the Indenture. Pursuant to this Supplement, the Issuer and the Indenture Trustee shall create a new Series of Notes and specify the Principal Terms thereof. ARTICLE I DEFINITIONS; CALCULATION GUIDELINES Section 101. DEFINITIONS. (a) Capitalized terms used in this Supplement but not defined herein shall have the meaning assigned to such terms in the Indenture. Whenever used in this Supplement, the following words and phrases shall have the following meanings, and the definitions of such terms are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. "ADJUSTED LIBOR" means, for each LIBOR Period in respect of LIBOR Loans, an interest rate per annum (rounded upward to the nearest 1/16th of one percent (0.0625%)) determined pursuant to the following formula: Adjusted LIBOR = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage "ADMINISTRATIVE AGENT FEE" means the fee payable by the Issuer to the Administrative Agent pursuant to Section 204(e) hereof. "APPLICABLE MARGIN" has the meaning set forth in Schedule 1. "APPLICABLE PERCENTAGE" has the meaning set forth in Schedule 1. "CLASS A NOTE" means any one of the Class A Notes of Series 1997-1 issued pursuant to the terms of this Supplement, substantially in the form of Exhibit A to this Supplement. "CLASS A NOTE COMMITMENT" has the meaning set forth in Schedule 1. "CLASS A NOTE INTEREST ARREARAGE" means, for any Payment Date, an amount equal to the excess, if any, of (a) the Class A Note Interest Payment for such Payment Date and any outstanding Class A Note Interest Arrearage from the immediately preceding Payment Date plus interest on any outstanding Class A Note Interest Arrearage, to the extent permitted by law, at the Overdue Rate over (b) the amount of Class A Note Interest Payment and Class A Note Interest Arrearage actually distributed to the Class A Noteholders on such Payment Date. "CLASS A NOTE INTEREST PAYMENT" means the amount of interest payable to the Class A Noteholders pursuant to the provisions of Section 202(a) hereof. "CLASS A NOTE PRINCIPAL PAYMENT" means, for any Payment Date, one of the amounts set forth in (A) or (B): (A) If no Early Amortization Event has occurred or is continuing on such Payment Date, an amount equal to the excess, if any, of (1) the sum of (A) the product of (i) ninety percent (90%) and (ii) all Engine Revenues actually received by, or on behalf of, the Issuer during the related Collection Period with respect to the Series 1997-1 Eligible Engines and (B) the product of (x) a fraction, expressed as a percentage, the numerator of which shall equal the Class A Note Principal Balance (prior to giving effect to any payments of principal on such Payment Date) and the denominator of which shall equal the sum of the Net Book Values of all Series 1997-1 Eligible Engines (calculated as of the last day of the immediately preceding month); PROVIDED, HOWEVER, that if the Class A Note Principal Balance is less than $15,000,000, then such percentage shall be 90% and (y) the greater of (i) the sum of the Net Book Values of all Series 1997-1 Eligible Engines sold during the related Collection Period (which Net Book Values will be determined as of the last day of the month immediately preceding such sale), and (ii) the aggregate Sales Proceeds of all Series 1997-1 Eligible Engines sold during the related Collection Period, over (2) the amount paid pursuant to clauses (A) through (H) inclusive, of Section 302(I) hereof; or 6 (B) If an Early Amortization Event is continuing, all remaining amounts on deposit in the Series 1997-1 Series Account after payment of the amounts set forth in clauses (A) through (G), inclusive, of Section 302(II) of this Supplement, until the Class A Note Principal Balance is reduced to zero. "CLASS A NOTE PRINCIPAL BALANCE" means an amount equal to the excess of (x) the sum of (A) the outstanding principal balance of the Class A Notes on the Closing Date plus (B) the principal balance of all Loans made subsequent to the Closing Date, over (y) all amounts paid to the Class A Noteholders representing the sum of the following, to the extent actually received by the Class A Noteholders: (i) Class A Note Principal Payments, (ii) Prepayments paid to the Class A Noteholders, and (iii) repayments of the Class A Note Principal Balance made pursuant to Section 204(c) hereof. "CLASS A NOTE PURCHASE AGREEMENT" means the Class A Note Purchase Agreement, dated as of September 1, 1997, among the Issuer, the Servicer and FUNB, as the initial Class A Noteholder. "CLASS A NOTEHOLDER(s)" means, at any time of determination for the Series 1997-1 Notes, any person in whose name a Class A Note is registered in the Note Register. "CLOSING" means the time at which each of the conditions precedent set forth in Section 502 of this Supplement (with respect to the initial Loan made hereunder by the Class A Noteholder) shall have been duly fulfilled or satisfied. "CLOSING DATE" means the date on which Closing occurs. "COMMITMENT FEE" means the fee payable by the Issuer to the Class A Noteholders pursuant to Section 204(d) hereof. "CONTROL PARTY" shall be determined in accordance with Section 402 of this Supplement. "CONVERSION DATE" means the Payment Date occurring on the first annual anniversary of the initial Payment Date; PROVIDED, HOWEVER, that such Conversion Date may be extended annually by the Issuer for a one year period if approved by all of the Holders of the Class A Notes. "DEFAULT INTEREST" is defined in Section 202(b) of this Supplement. "DOLLARS" and the sign "$" means lawful money of the United States of America. "EFFECTIVE DATE" means the date on which each of the conditions precedent set forth in Section 501 of this Supplement shall have been duly fulfilled or satisfied. 7 "ELIGIBLE ENGINE" means any Engine which, individually or when considered with all Eligible Engines then owned by Issuer, as applicable, shall comply with each of the following requirements, unless any of such requirements is waived in writing by the Administrative Agent: (i) ELIGIBLE LEASE. Each Engine is subject to an Eligible Lease on the related Transfer Date; and (ii) ENGINE REPRESENTATIONS AND WARRANTIES. Each Engine complies with the Engine Representations and Warranties on the related Transfer Date; and (iii) CASUALTY LOSS. No Casualty Loss shall have been suffered by the related Engine; and (iv) DEPRECIATION POLICY. The depreciation method utilized in calculating the Net Book Value of such Engine as of such Transfer Date is the Depreciation Policy. "ELIGIBLE LEASE" means each Lease Agreement that encumbers an Engine on any Transfer Date or that encumbers an Eligible Engine on any date thereafter that complies with all of the following requirements unless any of such requirements is waived in writing by the Administrative Agent: (i) DELINQUENCIES. No Scheduled Payment on such Lease Agreement is delinquent for more than 30 days as of the related Transfer Date; (ii) VALID CONTRACT. Each Lease Agreement is a legal, valid and binding full recourse payment obligation of the related Lessee, is enforceable in accordance with its terms (except as may be limited by applicable insolvency, bankruptcy, moratorium, reorganization, or other similar laws affecting enforceability of creditors' rights generally and the availability of equitable remedies) and is in full force and effect and such Lease Agreement has not been satisfied, subordinated or rescinded; (iii) HELL-OR-HIGH WATER OBLIGATION. The Lessee's obligations under each Lease Agreement are non-cancelable and unconditional and not subject to any right of set-off, counterclaim, reduction or recoupment; (iv) NET LEASE. Each Lease Agreement contains provisions requiring the related Lessee to pay all sales, use, excise, rental, property or similar taxes imposed on or with respect to the Engine and to assume all risk of loss or malfunction of the related Engine; each Lease Agreement requires the Lessee to maintain the Engine in good and workable order and as are necessary to maintain the Engine's serviceability standards pursuant to FAA requirements or requirements of other appropriate Governmental Authorities; 8 (v) LEGAL CAPACITY. The Lessee had the legal capacity to execute such Lease Agreement and the Seller had the legal capacity to execute such Lease Agreement or the related acquisition documentation, as the case may be; (vi) U.S. DOLLARS. All payments under each Lease Agreement are required to be made in United States dollars; (vii) NO CONSENT. No Lease Agreement requires the prior written consent of a Lessee or contains another restriction relating to the transfer or assignment of such Lease Agreement by Seller or the Issuer (except such consent as have been obtained or restrictions satisfied on or prior to the related Transfer Date); (viii) SCHEDULED PAYMENTS. Each Lease Agreement provides for the payment of Scheduled Payments on a basis no less frequently than quarterly; (ix) PREPAYMENT. As of the Transfer Date, no Scheduled Payment under any Lease Agreement has been prepaid; (x) CUSTOMARY PRACTICES. The Lease Agreement was originated or acquired by the Seller in the ordinary course of its business; (xi) BANKRUPT LESSEE. On the Transfer Date, the related Engine is not subject to a Lease Agreement with a Lessee that is subject to an Insolvency Proceeding; (xii) INSURANCE. The Lease Agreement requires the Lessee to provide liability insurance, all risk ground and flight hull and engine coverage for damage/loss of engine, war risk, and where requested by the Administrative Agent, governmental confiscation and expropriation insurance coverage with acceptable deductibles, all of which shall name the Indenture Trustee as additional insured and first loss payee; and (xiii) GEOGRAPHIC OPERATING RESTRICTIONS. In the related Lease Agreement the Lessee agrees not to operate the aircraft and not to be based in any jurisdiction excluded from the insurance coverage referred to in item (xii) above. "ENGINE TYPE EXCESS CONCENTRATION AMOUNT" means at any date of determination, the dollar amount, if any, by which the sum of the Net Book Values of all Eligible Engines (relating to Loans hereunder) of the same engine type exceeds the applicable concentration limits set forth in Section 502(o) hereof. "EURODOLLAR RESERVE PERCENTAGE" means the maximum reserve percentage (expressed as a decimal, rounded upward to the nearest 1/100th of one percent (0.01%)) in effect from time to time determined (whether or not applicable to any Class A Noteholder) under regulations issued by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency liabilities having a term comparable to such LIBOR Loan. 9 "EXCESS CONCENTRATION AMOUNT" means, at any date of determination, an amount equal to the highest of the Engine Type Excess Concentration Amount, the Single Lessee Excess Concentration Amount, the Three Lessee Excess Concentration Amount, the Geographic Region Excess Concentration Amount and the Wide Body Aircraft Excess Concentration Amount. "EXISTING AND POSSIBLE LOANS" means Loans outstanding hereunder and Loans proposed to be made on any Transfer Date. "FEDERAL RESERVE BOARD" means the Board of Governors of the Federal Reserve System or any successor thereto. "FINAL PAYMENT DATE" means, with respect to Series 1997-1 Notes, the date which is the seventh annual anniversary of the Conversion Date, or if such date is not a Business Day, the Business Day immediately succeeding such date. "FUNB" means First Union National Bank of North Carolina. "GEOGRAPHIC REGION EXCESS CONCENTRATION AMOUNT" means at any date of determination, the dollar amount, if any, by which the sum of the Net Book Values of all Eligible Engines (relating to Loans hereunder) subject to a Lease Agreement with Lessees having corporate headquarters located in the geographic areas set forth in Section 502(r) hereof exceeds the applicable concentration limits set forth in Section 502(r) hereof. "GUARANTOR" means Willis Lease Finance Corporation and its successors and permitted assigns. "GUARANTY" means that certain Guaranty, dated as of September 1, 1997 made by the Guarantor in favor of First Union National Bank of North Carolina, together with its successors and assigns. "INCREASED COSTS" means any fee, expense or increased cost charged to a Class A Noteholder on account of the adoption of any applicable law, rule or regulation (including any applicable law, rule, or regulation regarding capital adequacy) or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority as provided by Sections 206 and 207 of this Supplement. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 205(a) hereof. "INDENTURE COMPLIANCE CERTIFICATE" means the certificate of the Issuer given pursuant to Section 502(c) hereof. "INTEREST DIFFERENTIAL" means, with respect to any prepayment of a LIBOR Loan on a day other than a Payment Date, the difference between (a) the Adjusted LIBOR for 10 the LIBOR Loan as of the date of the Prepayment and (b) the Adjusted LIBOR on, or as near as practicable to, the date of the Prepayment commencing on such date and ending on the last day of the applicable LIBOR Period. The determination of the Interest Differential by a Series 1997-1 Noteholder shall be conclusive in the absence of manifest error. "INTEREST PERIOD" means any LIBOR Period or any Prime Period, as the case may be. "LEASE AGREEMENT" means any lease agreement entered into from time to time by the Issuer, either directly or pursuant to an assignment, pursuant to which the Issuer leases one or more Eligible Engines, as identified on Schedule 2 hereto, and any substitutions and replacements therefor made in accordance with the Series 1997-1 Transaction Documents. "LIBOR" means an interest rate per annum equal to the London Inter-Bank Offered Rate (determined in accordance with Section 202(c) of this Supplement, rounded upward to the nearest 1/16th of one percent (0.0625%). "LIBOR DETERMINATION DATE" means the third Business Day prior to the day on which the Class A Noteholders make or continue a LIBOR Loan. "LIBOR LOAN" means any loan by, or on behalf of, the Class A Noteholders which utilizes Adjusted LIBOR as a measurement of interest payable thereon. "LIBOR PERIOD" means the thirty (30) day, sixty (60) day, ninety (90) day or one hundred eighty (180) day period selected in accordance with Section 202(c) hereof. "LOAN" means an extension of credit made by the Class A Noteholders pursuant to Section 204 hereof and may mean a Prime Loan or a LIBOR Loan depending on the context. "MAJORITY OF HOLDERS" means, with respect to the Series 1997-1 Notes, Class A Noteholders representing more than fifty percent (50%) of the unpaid principal balance of the Class A Notes then Outstanding. "ON-LEASE PERCENTAGE" means, a fraction, expressed as a percentage, the numerator of which is equal to the Net Book Value of all Eligible Engines (relating to Loans hereunder) subject to a Lease Agreement and the denominator of which is equal to the sum of the Net Book Values of all Eligible Engines (relating to Loans hereunder). "OTHER TAXES" shall have the meaning set forth in Section 205(b) of this Supplement. "OVERDUE RATE" means, with respect to any Notes, an interest rate per annum equal to the sum of (i) the interest rate per annum that would have otherwise been in effect with respect to such Loan plus (ii) two percent (2%). 11 "PAYMENT DATE" means, with respect to the Series 1997-1 Notes, the fifteenth day of each month, or, if such day is not a Business Day, the immediately following Business Day; PROVIDED, HOWEVER, that the initial Payment Date shall be the fifteenth day of the second month immediately succeeding the Closing Date, or if such day is not a Business Day, the immediately following Business Day. "PREPAYMENT" means any mandatory or optional prepayment of principal of Notes including, without limitation, any Prepayment pursuant to Section 702 of the Indenture. "PRIME LOAN" means any Loan which utilizes the Prime Rate as a measurement of interest payable thereon. "PRIME PERIOD" means a period of less than one month and ending on a Payment Date as such period is selected in accordance with Section 202(d) hereof. "PRIME RATE" means the "prime rate" of interest per annum in effect from time to time as such rate is publicly announced by FUNB; PROVIDED, HOWEVER, that for purposes of calculating the Class A Note Interest Payment, for the period commencing on each Determination Date and ending on (but excluding) the next succeeding Payment Date, the Prime Rate shall equal the rate in effect on such Determination Date. "REFERENCE BANKS" means leading banks in the New York market designated by the Administrative Agent in accordance with Section 202(c) of this Supplement. "SECURITIES ACCOUNTS" means the Series 1997-1 Series Account and the Series 1997-1 Restricted Cash Account. "SECURITIES INTERMEDIARY" means The Bank of New York, a New York banking corporation, as securities intermediary (as such term is defined under UCC Section 8-102(a)(14)) with respect to the Securities Accounts. "SERIES COLLATERAL" shall have the meaning set forth in Section 201 hereof. "SERIES 1997-1" shall mean the Series of Notes the terms of which are specified in this Supplement. "SERIES 1997-1 ELIGIBLE ENGINES" shall mean the Eligible Engines identified on Schedule 2 hereto, and any substitutions and replacements therefor made in accordance with the Series 1997-1 Transaction Documents. "SERIES 1997-1 ENGINE RESERVE ACCOUNT" means the subaccount established by the Issuer with the Indenture Trustee into which Maintenance Reserve Payments are deposited pursuant to Section 308 of the Indenture and Section 305 hereof. 12 "SERIES 1997-1 NOTEHOLDER" shall mean the Person in whose name a Series 1997-1 Note is registered in the Note Register. "SERIES 1997-1 NOTES" means the Class A Notes, and shall include any and all replacements, extensions, substitutions or renewals of such notes. "SERIES 1997-1 RESTRICTED CASH ACCOUNT" means the subaccount (designated as such) of the account established pursuant to Section 307 of the Indenture. "SERIES 1997-1 RESTRICTED CASH AMOUNT" means the amount required to be deposited or maintained in the Series 1997-1 Restricted Cash Account, which on the date on which the initial Loan is made and on any Payment Date thereafter shall be equal to the product of (x) two percent (2%) and (y) the Class A Note Principal Balance on such date on which the initial Loan is made or on such Payment Date, as the case may be (after giving effect to all Loans made on such date on which the initial Loan is made or on such Payment Date and all Class A Note Principal Payments actually paid on such date on which the initial Loan is made or on such Payment Date). "SERIES 1997-1 SECURITY DEPOSIT ACCOUNT" means the subaccount established by the Issuer with the Indenture Trustee into which Security Deposits are deposited pursuant to Section 309 of the Indenture and Section 306 hereof. "SERIES 1997-1 SERIES ACCOUNT" means the account established by the Issuer with the Indenture Trustee into which funds are deposited from the Trust Account pursuant to Section 303 of the Indenture. "SERIES 1997-1 TRANSACTION DOCUMENTS" means any and all of the Indenture, this Supplement, the Series 1997-1 Notes, the Servicing Agreement, the Contribution and Sale Agreement, the Class A Note Purchase Agreement, the Administration Agreement and any and all other agreements, documents and instruments executed and delivered by or on behalf or in support of Issuer with respect to the issuance and sale of the Series 1997-1 Notes, as any of the foregoing may from time to time be amended, modified, supplemented or renewed. "SERVICER ADVANCE" means all extraordinary out of pocket payments payable pursuant to Section 3.04 of the Servicing Agreement and made by the Servicer which have been authorized by the Administrative Agent. "SERVICER REPORT" means, with respect to Series 1997-1, the monthly report prepared by the Servicer in the form set forth in Exhibit A to the Servicing Agreement. "SERVICING FEE" has the meaning set forth in Schedule 1. "SINGLE LESSEE EXCESS CONCENTRATION AMOUNT" means at any date of determination, the dollar amount, if any, by which the aggregate of the sum of the Net Book Values of all Eligible Engines (relating to Loans hereunder) that are subject to a Lease 13 Agreement with any single Lessee (including Affiliates thereof) exceeds the applicable concentration limits set forth in Section 502(p) hereof. "SINGLE LESSEE PERCENTAGE" has the meaning set forth in Schedule 1. "STRUCTURING FEE LETTER AGREEMENT" means that certain letter agreement, dated as of December 19, 1997 between the Administrative Agent and the Issuer. "TARGET EBIT RATIO" has the meaning set forth in Schedule 1. "TARGET ONE YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE" has the meaning set forth in Schedule 1. "TARGET TWO YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE" has the meaning set forth in Schedule 1. "TAXES" shall have the meaning set forth in Section 205(a) of this Supplement. "THREE LESSEE EXCESS CONCENTRATION AMOUNT" means at any date of determination, the dollar amount, if any, by which the sum of the Net Book Values of all Eligible Engines (relating to Loans hereunder) that are subject to a Lease Agreement with the three (3) largest Lessees with respect to aggregate Net Book Values (including Affiliates thereof) exceeds the applicable concentration limits set forth in Section 502(q) hereof. "THREE LESSEE PERCENTAGE" has the meaning set forth in Schedule 1. "WEIGHTED AVERAGE LEASE RATE PERCENTAGE" has the meaning set forth in Schedule 1. "WIDE BODY AIRCRAFT EXCESS CONCENTRATION AMOUNT" means, at any date of determination, the dollar amount, if any, by which the sum of the Net Book Values of all Eligible Engines (relating to Loans hereunder) designed to power Wide Body Aircraft exceeds the applicable concentration limits set forth in Section 502(s) hereof. "WIDE BODY AIRCRAFT PERCENTAGE" has the meaning set forth in Schedule 1. (b) Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Indenture. Section 102. CALCULATION GUIDELINES. For purposes of calculating the Class A Note Interest Payment, the following calculation guidelines shall apply: (1) The interest calculation for any LIBOR Loan shall be calculated based on the actual number of days elapsed in a year consisting of 360 days; 14 (2) The interest calculation for any Prime Loan shall be based on the actual number of days elapsed in a year consisting of 365 days or 366 days, as appropriate; and (3) The Class A Note Principal Balance shall at all times be equal to the sum of all Loans then outstanding. 15 ARTICLE II CREATION OF THE SERIES 1997-1 NOTES Section 201. DESIGNATION; GENERAL TERMS AND CONDITIONS. (a) There is hereby created a Series of Notes to be issued in one Class pursuant to the Indenture and this Supplement to be known respectively as the "WLFC Funding Corporation Secured Notes, Series 1997-1, Class A". The Series 1997-1 Notes shall not be rated by any Rating Agency as of the Effective Date. (b) The Payment Date with respect to the Series 1997-1 Notes shall be the fifteenth day of each month, or, if such day is not a Business Day, the immediately following Business Day; PROVIDED, HOWEVER, that the initial Payment Date shall be the fifteenth day of the second month immediately succeeding the Closing Date, or if such day is not a Business Day, the immediately following Business Day. (c) The Class A Notes shall be issued in definitive form substantially in the form of Exhibit A hereto. (d) Payments of principal and interest on the Series 1997-1 Notes shall be payable solely from funds on deposit in the Series 1997-1 Series Account or otherwise at the times and in the amounts set forth in Article III of this Supplement. (e) In furtherance of, and in addition to the property identified in, the Granting Clause set forth in the Indenture, as it relates to this Supplement, the Issuer hereby grants to the Indenture Trustee, for the benefit of the Series 1997-1 Noteholders, a security interest in all of Issuer's right, title and interest in and to (i) each of the Series 1997-1 Eligible Engines, (ii) the Lease Agreements that encumber the Series 1997-1 Eligible Engines on the Closing Date or on any date thereafter, (iii) the Series 1997-1 Series Account, the Series 1997-1 Engine Reserve Account, the Series 1997-1 Security Deposit Account and the Series 1997-1 Restricted Cash Account and all amounts and Eligible Investments from time to time on deposit therein and (iv) all income, payments and proceeds of the foregoing (all such property identified in this Section 201(e), collectively, the "Series Collateral"). Such Series Collateral (except as set forth in Section 401(d) of the Indenture with respect to Excess Cash Available for Distribution) shall not be available to pay any other Aggregate Outstanding Obligations until all Outstanding Obligations under this Supplement have been paid in full. (f) In the event that any term or provision contained herein shall conflict with or be inconsistent with any term or provision contained in the Indenture, the terms and provisions of this Supplement shall govern. (g) The Series 1997-1 Notes created hereunder are not securities under federal or state securities laws, but evidence the Issuer's obligation in accordance with the terms hereof, to repay an extension of credit constituting the Loans made to the Issuer by the Series 1997-1 Noteholders. 16 Section 202. INTEREST PAYMENTS ON THE SERIES 1997-1 NOTES; SELECTION AND DETERMINATION OF INTEREST RATES. (a) INTEREST ON SERIES 1997-1 NOTES. Each Loan shall bear interest on the outstanding principal amount thereof from the date when made, continued or converted until paid in full at a rate per annum equal to the Prime Rate or the Adjusted LIBOR, as the case may be, PLUS the Applicable Margin. Any notice not specifying the type of Loan shall be deemed a request for a Prime Loan. (b) DEFAULT INTEREST. Upon the occurrence of an Event of Default with respect to the Series 1997-1 Notes, the Issuer shall, pursuant to Section 302 hereof, from time to time pay interest ("Default Interest") in accordance with the terms of the Indenture, at a rate per annum equal to the Overdue Rate, for the period during which such amounts shall remain unpaid. (c) DETERMINATION OF LIBOR. (i) On or prior to each LIBOR Determination Date, the Issuer shall provide written notice to the Administrative Agent indicating whether the LIBOR Period shall be a thirty (30) day, sixty (60) day, ninety (90) day, or one hundred eighty (180) day period, and on each LIBOR Determination Date the Administrative Agent shall determine LIBOR based on (i) such thirty (30) day, sixty (60) day, ninety (90) day, or one hundred eighty (180) day period, as the case may be and (ii) the offered LIBOR quotations, appearing on Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination Date. If such rate does not appear on Telerate Page 3750, the rate for that day will be determined on the basis of the rates at which deposits in U.S. dollars are offered by the Reference Banks at approximately 10:00 a.m., North Carolina time, on the LIBOR Determination Date to prime banks in the London interbank market for such period commencing on that day. The Administrative Agent will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If at least two such quotations are provided from the Reference Banks, the rate for that day will be the arithmetic mean of the quotations provided by the Reference Banks. (ii) If necessary, on each LIBOR Determination Date, the Administrative Agent shall designate the banks that shall act as the Reference Banks for the succeeding LIBOR Period. The Administrative Agent may conclusively rely and shall be protected in relying upon the offered quotations (whether electronic, written or oral) of the selected Reference Banks. (iii) The establishment of LIBOR, and the subsequent calculation of the interest rate for each LIBOR Loan by the Administrative Agent in the absence of manifest error, shall be final and binding. (d) DETERMINATION OF PRIME PERIOD. The Issuer shall be entitled to select each Prime Period (subject to the limitations set forth in such definition). 17 (e) MAXIMUM NUMBER OF INTEREST PERIODS. There shall be no more than five different Interest Periods outstanding at any one time. Section 203. PRINCIPAL PAYMENTS ON THE SERIES 1997-1 NOTES. (a) SCHEDULED AMORTIZATION OF SERIES 1997-1 NOTES. Principal of the Series 1997-1 Notes shall be payable on each Payment Date in the amount of the Class A Note Principal Payment from amounts on deposit in the Series 1997-1 Series Account (and on the Final Payment Date, from amounts on deposit in the Series 1997-1 Restricted Cash Account) in accordance with Section 302 of this Supplement. The unpaid principal amount of the Series 1997-1 Notes shall be due and payable in full on the Final Payment Date, together with all unpaid interest, fees, expenses, costs and other amounts payable by the Issuer pursuant to the terms of the Indenture and this Supplement. (b) PREPAYMENT PREMIUM. In the event that Issuer prepays or is required to prepay any LIBOR Loan by acceleration or otherwise, Issuer agrees to reimburse each Series 1997-1 Noteholder for its expenses and loss of anticipated profits due to such prepayment. Issuer hereby agrees that such expenses and loss of anticipated profits shall consist of the sum of the following amounts for each month in which such LIBOR Loan would have been outstanding, calculated as follows for each such month: (i) principal amount of such LIBOR Loan TIMES (number of days between the date of prepayment and the last day in the applicable LIBOR Period DIVIDED by 360), TIMES the applicable Interest Differential; plus (ii) all actual out-of-pocket expenses (other than those taken into account in the calculation of the Interest Differential) incurred by the Series 1997-1 Noteholders (EXCLUDING allocations of any expense internal to the Series 1997-1 Noteholders) and reasonably attributable to such prepayment; PROVIDED that no prepayment fee shall be payable (and no credit or rebate shall be required) if the product of the foregoing formula is not a positive number. Section 204. AMOUNTS AND TERMS OF SERIES 1997-1 NOTEHOLDER COMMITMENTS. (a) Subject to the terms and conditions of this Supplement and the Class A Note Purchase Agreement, the Class A Note Commitment shall be available to the Issuer on and after the Closing Date until the Conversion Date. (b) Prior to the Conversion Date, the Class A Note shall be a revolving note with a maximum principal amount equal to the Class A Note Commitment then in effect; provided, however, that at no time shall the Class A Note Principal Balance exceed the Asset Base for this Series 1997-1. The Administrative Agent shall maintain a record of all Loans and repayments made on the Class A Note and absent manifest error such records shall be conclusive. On any date requested by the Issuer, after the Issuer shall have satisfied all 18 applicable conditions precedent set forth in Article V hereof, each Series 1997-1 Class A Noteholder shall, at the Issuer's request for a Prime Loan or a LIBOR Loan as specified in a notice given to the Administrative Agent in accordance with the terms of the Class A Note Purchase Agreement, make payment thereof (in proportion to its respective commitment) in an amount equal to (i) the Applicable Percentage of the Net Purchase Price for the Eligible Engines pledged as collateral for such Loan and, with respect to any Capital Improvements, (ii) the Applicable Percentage of the value of Capital Improvements made to the Eligible Engines pledged as collateral for such Loan, as determined in accordance with GAAP, and in accordance with the written direction of the Issuer by wire transfer in immediately available funds not later than 1:00 p.m. North Carolina time; provided, that each request for an advance of principal of the Class A Note shall, subject to the Class A Note Commitment then in effect, be in a minimum aggregate amount of One Million Dollars ($1,000,000); and provided further that one advance may be in an amount less than One Million Dollars ($1,000,000). The Issuer shall pay interest on the Class A Notes at the rates and in the manner set forth in Section 202 hereof. The unpaid principal amount of the Class A Notes and all unpaid interest accrued thereon, together with any unpaid Commitment Fee and all other fees, expenses, costs and other sums chargeable to the Issuer incurred in connection therewith, shall be due and payable on the Final Payment Date. Each request for a Loan shall constitute a reaffirmation by the Issuer that (1) no Event of Default or Early Amortization Event has occurred and is continuing and (2) the representations and warranties contained in the Series 1997-1 Transaction Documents are true, correct and complete in all material respects to the same extent as though made on and as of the date of the request, except to the extent such representations and warranties specifically relate to an earlier date, in which event they shall be true, correct and complete in all material respects as of such earlier date. (c) The Issuer may, on any Payment Date or on the maturity date of any LIBOR Loan, repay all or any portion of the Class A Note Principal Balance after the Issuer specifies in a notice given to the Administrative Agent in accordance with the terms of this Supplement, by making a wire transfer to the Series 1997-1 Class A Noteholders, pro rata, in accordance with the outstanding principal amount thereof; PROVIDED, HOWEVER, that the Issuer may not make such repayment from funds in the Series 1997-1 Restricted Cash Account unless the Issuer is repaying all of the Class A Note Principal Balance. (d) Prior to the Conversion Date, the Issuer shall pay on each quarterly Payment Date a Commitment Fee to Class A Noteholders as set forth in Schedule 1. (e) The Issuer shall pay on each quarterly Payment Date, beginning with the third Payment Date, an Administrative Agent Fee to the Administrative Agent as set forth in Schedule 1. (f) If upon the maturity of any LIBOR Loan, such LIBOR Loan has not been repaid in full and the Issuer has failed to select a new LIBOR Loan, the Issuer shall be 19 deemed to have renewed such LIBOR Loan as of such maturity date and the LIBOR Period for such LIBOR Loan shall be thirty (30) days. (g) Each Loan shall be either a Prime Loan or a LIBOR Loan as shall be selected by the Issuer, except as otherwise provided herein. During any period that any Event of Default shall occur and be continuing, the Issuer shall no longer have the option of electing LIBOR Loans, and all Loans made during such period shall be Prime Loans only; provided that any outstanding LIBOR Loans shall remain LIBOR Loans. Section 205. TAXES. (a) In addition to payments of principal and interest on the Series 1997-1 Notes when due, the Issuer shall pay, but only in accordance with the priorities for distributions set forth in Section 302 of this Supplement, any and all present or future taxes, fees, duties, levies, imposts, or charges, or any other similar deduction or withholding, whatsoever imposed by any Governmental Authority, and all liabilities with respect thereto, excluding, in the case of each Series 1997-1 Noteholder and any Person to whom a Series 1997-1 Noteholder has sold an interest in the Series 1997-1 Note owned by such Series 1997-1 Noteholder (such Series 1997-1 Noteholder and any such Person being an "Indemnified Party"), such taxes as are imposed on or measured by each Indemnified Party's income by the jurisdiction under the laws of which such Indemnified Party, as the case may be, is organized or maintains an office or otherwise conducts business or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). (b) In addition, the Issuer shall pay, subject to the priorities set forth in Section 302, any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Supplement or any other documents related to the issuance of the Series 1997-1 Notes (hereinafter referred to as "Other Taxes"). (c) If any Taxes or Other Taxes are directly asserted or imposed against any Indemnified Party, the Issuer shall indemnify and hold harmless such Indemnified Party, subject to the priorities for distribution set forth in Section 302, for the full amount of the Taxes or Other Taxes (including any Taxes or Other Taxes asserted or imposed by any jurisdiction on amounts payable under this Section 205) paid by the Indemnified Party and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted or imposed. If the Issuer fails to pay any Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Indemnified Party the required receipts or other required documentary evidence, the Issuer shall indemnify the Indemnified Party for any incremental Taxes or Other Taxes, interest or penalties that may become payable by the Indemnified Party as a result of any such failure. Payment under this indemnification shall be made in accordance with the priorities for distributions set forth in Section 302 of this 20 Supplement after the Indemnified Party makes written demand therefor. Indemnified Party shall give prompt notice to Issuer of any assertion of Taxes or Other Taxes so that Issuer may, at its option, contest such assertion. (d) Within thirty (30) days after the date of any payment by the Issuer of Taxes or Other Taxes, the Issuer shall furnish to each of the Series 1997-1 Noteholders the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Series 1997-1 Noteholders. (e) Tax and Other Taxes shall not constitute a claim against the Issuer or the Collateral in the event such amounts are not paid in accordance with Section 302 of this Supplement. Section 206. INCREASED COSTS. If any Indemnified Party shall determine that, due to either (a) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of LIBOR) in or in the interpretation of any law or requirement of law or (b) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Indemnified Party of agreeing to maintain its investment in any Note at a rate of interest based upon LIBOR, then the Issuer shall be liable for, and shall from time to time, pay to such Indemnified Party such additional amounts as are sufficient to compensate such Indemnified Party for such Increased Costs; PROVIDED, HOWEVER, that such Indemnified Party shall (i) use reasonable efforts in good faith to mitigate any such Increased Costs and (ii) provide to Issuer in writing the basis for such Increased Costs. Payment under this indemnification shall be made in accordance with the priorities for distributions set forth in Section 302 of this Supplement after the Indemnified Party makes written demand therefor. Increased Costs shall not constitute a claim against the Issuer or the Collateral in the event that such amounts are not paid in accordance with Section 302 of this Supplement. Section 207. CAPITAL REQUIREMENTS. If any Indemnified Party shall determine that any change after the date of this Supplement in any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards," or the adoption after the date hereof of any other law or requirement of law regarding capital adequacy, or any change after the date of this Supplement in any of the foregoing or in the enforcement or interpretation or administration of any of the foregoing by any Governmental Authority charged with the enforcement or interpretation or administration thereof, or compliance by any Indemnified Party (or any business office of the Indemnified Party) or the Indemnified Party's holding company with any request or directive regarding capital adequacy of any such Governmental Authority, has or would have the effect of reducing the rate of return on the Indemnified Party's capital or on the capital of the Indemnified Party's holding company, if any, as a consequence of maintaining its commitment to purchase Notes or maintain its investment in a Note at a rate of interest based upon LIBOR 21 or the Prime Rate, as the case may be, under this Supplement to a level below that which the Indemnified Party or the Indemnified Party's holding company could have achieved but for such adoption, change or compliance (taking into consideration the Indemnified Party's policies and the policies of the Indemnified Party's holding company with respect to capital adequacy) by an amount reasonably deemed by the Indemnified Party to be material, THEN, upon written demand by the Indemnified Party, the Issuer shall be liable for such additional amount or amounts as will compensate the Indemnified Party or the Indemnified Party's holding company for any such reduction suffered. Payment under this indemnification shall be made in accordance with the priorities for distributions set forth in Section 302 of this Supplement after the Indemnified Party makes written demand therefor. Indemnification amounts shall not constitute a claim against the Issuer or the Collateral in the event such amounts are not paid in accordance with Section 302 of this Supplement. Without affecting its rights under this Section 207 or any other provision of this Supplement or the Indenture, the Indemnified Party agrees that if there is an increase in any cost to or reduction in any amount receivable by the Indemnified Party with respect to which the Issuer would be obligated to compensate the Indemnified Party pursuant to this Section 207, the Indemnified Party shall use reasonable efforts to select an alternative business office which would not result in any such increase in any cost to or reduction in any amount receivable by the Indemnified Party; PROVIDED, HOWEVER, that the Indemnified Party shall not be obligated to select an alternative business office if the Indemnified Party determines that (i) as a result of such selection the Indemnified Party would be in violation of any applicable law, or would incur material, additional costs or expenses, or (ii) such selection would be unavailable for regulatory reasons. ARTICLE III SERIES 1997-1 SERIES ACCOUNT AND ALLOCATION AND APPLICATION OF AMOUNTS THEREIN Section 301. SERIES 1997-1 SERIES ACCOUNT. The Issuer shall establish on the Effective Date and maintain, so long as any Series 1997-1 Note is Outstanding, an Eligible Account with the Indenture Trustee which shall be designated as the Series 1997-1 Series Account, which account is hereby pledged to the Indenture Trustee for the benefit of the Series 1997-1 Noteholders pursuant to the Indenture and this Supplement. All deposits of funds by or for the benefit of the Series 1997-1 Noteholders from the Trust Account and the Series 1997-1 Restricted Cash Account shall be accumulated in, and withdrawn from, the Series 1997-1 Series Account in accordance with the provisions of the Indenture and this Supplement. Section 302. DISTRIBUTIONS FROM SERIES 1997-1 SERIES ACCOUNT ON EACH PAYMENT DATE. On each Payment Date, the Indenture Trustee shall, in accordance with the Servicer Report, distribute funds then on deposit in the Series 1997-1 Series Account to the following Persons and in the following order of priority: (I) If an Early Amortization Event shall not then be continuing: 22 (A) To the Indenture Trustee by wire transfer of immediately available funds, all Indenture Trustee's Fees then due and payable for Series 1997-1 to the extent not paid by the Servicer; (B) (i) If the Indenture Trustee has received the Servicer Report for the related Collection Period, to the Servicer by wire transfer of immediately available funds, an amount equal to the sum of any (x) Servicer Fee Arrearage and (y) Servicer Fee then due and payable and (ii) to the Servicer by wire transfer of immediately available funds, an amount equal to the Servicer Advance then due and payable; (C) To the Administrative Agent, any fees and expenses then payable to the Administrative Agent approved by the Requisite Global Majority pursuant to Section 405(b) of the Indenture; (D) To an Interest Rate Hedge Provider, any payments owing under an Interest Rate Hedge Agreement other than termination payments; (E) To each Holder of a Class A Note on the immediately preceding Determination Date, an amount equal to its PRO RATA portion of FIRST, any Class A Note Interest Arrearage, and SECOND, the Class A Note Interest Payment for such Payment Date; (F) To the Series 1997-1 Restricted Cash Account, an amount sufficient so that the total amount on deposit therein is equal to the Series 1997-1 Restricted Cash Amount for such Payment Date; (G) To the Administrative Agent an amount equal to the sum of (x) the Administrative Agent Fee then due and payable and (y) any unpaid Administrative Agent Fee from all prior Payment Dates; (H) To each Holder of a Class A Note on the immediately preceding Determination Date, an amount equal to its PRO RATA portion of prepayments deposited in the Series 1997-1 Series Account for the related Collection Period; (I) To each Holder of a Class A Note on the immediately preceding Determination Date, an amount equal to its PRO RATA portion of the Class A Note Principal Payment; (J) Prior to the Conversion Date, to each Holder of a Class A Note, an amount equal to its PRO RATA portion of the sum of (x) the Commitment Fee then due and payable and (y) any unpaid Commitment Fees from all prior Payment Dates; (K) To each Holder of a Class A Note on the immediately preceding Determination Date, PRO RATA, any Default Interest then due and payable; 23 (L) To each Holder of a Class A Note on the immediately preceding Determination Date, PRO RATA, an amount equal to Taxes, Other Taxes, Increased Costs and amounts due pursuant to Sections 205, 206 and 207 hereof, if any, then due and payable with respect to such Class A Note and any other costs, expenses, taxes and indemnities payable by the Issuer pursuant to the Class A Note Purchase Agreement; (M) To an Interest Rate Hedge Provider any termination payments owing under any Interest Rate Hedge Agreement; (N) To the Indenture Trustee for distribution pursuant to Section 401(d) of the Indenture, as Excess Cash Available for Distribution, to the extent that any Deficient Series is Outstanding on such Payment Date; (O) To the Issuer by wire transfer of immediately available funds, any remaining amount on deposit in the Series 1997-1 Series Account on such Payment Date. Notwithstanding the foregoing, the amounts set forth in clause (O) shall be payable only at such times as no Deficient Series then exists. (II) If an Early Amortization Event shall then be continuing: (A) To the Indenture Trustee by wire transfer of immediately available funds, all Indenture Trustee's Fees then due and payable for Series 1997-1 to the extent not paid by the Servicer; (B) (i) If the Indenture Trustee has received the Servicer Report for the related Collection Period, to the Servicer by wire transfer of immediately available funds, an amount equal to the sum of any (x) Servicer Fee Arrearage and (y) Servicer Fee then due and payable and (ii) to the Servicer by wire transfer of immediately available funds, an amount equal to the Servicer Advance then due and payable; (C) To the Administrative Agent, any fees and expenses then payable to the Administrative Agent approved by the Requisite Global Majority pursuant to Section 405(b) of the Indenture; (D) To an Interest Rate Hedge Provider, any payments owing under an Interest Rate Hedge Agreement other than termination payments; (E) To each Holder of a Class A Note on the immediately preceding Determination Date, an amount equal to its PRO RATA portion of FIRST, any Class A Note Interest Arrearage and SECOND, the Class A Note Interest Payment for such Payment Date; (F) To the Administrative Agent, an amount equal to the sum of (x) the Administrative Agent Fee then due and payable and (y) any unpaid Administrative Agent Fee from all prior Payment Dates; 24 (G) To each Holder of a Class A Note on the immediately preceding Determination Date, an amount equal to its PRO RATA portion of prepayments deposited in the Series 1997-1 Series Account for the related Collection Period; (H) To each Holder of a Class A Note on the immediately preceding Determination Date, an amount equal to its PRO RATA portion of the Class A Note Principal Payment; (I) To each Holder of a Class A Note on the immediately preceding Determination Date, PRO RATA, any Default Interest then due and payable; (J) To each Holder of a Class A Note on the immediately preceding Determination Date, PRO RATA, an amount equal to Taxes, Other Taxes, Increased Costs and amounts due pursuant to Sections 205, 206 and 207 hereof, if any, then due and payable with respect to such Class A Note and any other costs, expenses, taxes and indemnities payable by the Issuer pursuant to the Class A Note Purchase Agreement; (K) To an Interest Rate Hedge Provider any termination payments owing under any Interest Rate Hedge Agreement; (L) To the Indenture Trustee for distribution pursuant to Section 401(d) of the Indenture, as Excess Cash Available for Distribution, to the extent that any Deficient Series is Outstanding on such Payment Date; (M) To the Issuer by wire transfer of immediately available funds, any remaining amount on deposit in the Series 1997-1 Series Account on such Payment Date. Any amounts payable to a Class A Noteholder shall be made by wire transfer of immediately available funds to the account that such Noteholder has designated to the Indenture Trustee in writing on or prior to the Business Day immediately preceding the Payment Date. Section 303. ALLOCATION OF EXCESS CASH AVAILABLE FOR DISTRIBUTION. On each Payment Date, the Indenture Trustee shall distribute any Excess Cash Available for Distribution deposited into the Series 1997-1 Series Account in accordance with Section 401 of the Indenture in payment of the amounts and in the order of priority set forth in Section 302(I) or (II), as the case may be. Section 304. SERIES 1997-1 RESTRICTED CASH ACCOUNT. (a) The Issuer shall establish on the Effective Date and maintain so long as any Series 1997-1 Note is Outstanding an Eligible Account with the Indenture Trustee which shall be designated as the Series 1997-1 Restricted Cash Account, which account is hereby pledged to the Indenture Trustee pursuant to the Indenture and this Supplement. On the date on which the initial Loan is made, the Issuer will deposit the Series 1997-1 Restricted Cash Amount in the Series 1997-1 Restricted Cash 25 Account from the proceeds of issuance of the Series 1997-1 Notes and thereafter amounts shall be deposited in the Series 1997-1 Restricted Cash Account in accordance with Section 302 of this Supplement. Any and all moneys remitted by the Indenture Trustee to the Series 1997-1 Restricted Cash Account shall be invested in Eligible Investments in accordance with the Indenture and shall be distributed in accordance with this Section 304. (b) No later than 10:00 a.m. North Carolina time on the Business Day prior to each Payment Date, the Indenture Trustee shall, in accordance with the written instructions from the Administrative Agent, make a draw on the Series 1997-1 Restricted Cash Account in an amount equal to the extent by which amounts on deposit in the Series 1997-1 Series Account will be insufficient to pay those amounts payable pursuant to Section 302(I)(E) or Section 302(II)(E), as the case may be, on such Payment Date (after giving effect to any distributions to be made on such Payment Date prior to the payment of such amounts) and the amount of any such draw shall be deposited in the Series 1997-1 Series Account. (c) On each Payment Date, the Indenture Trustee shall, in accordance with the Servicer Report or pursuant to written instructions from the Administrative Agent, deposit in the Series 1997-1 Series Account the excess, if any, of (A) amounts then on deposit in the Restricted Cash Account (after giving effect to any withdrawals therefrom on such Payment Date) over (B) the Series 1997-1 Restricted Cash Amount. On the Final Payment Date, any remaining funds in the Series 1997-1 Restricted Cash Account shall be deposited in the Series 1997-1 Series Account and distributed in accordance with Section 302 of this Supplement. Section 305. SERIES 1997-1 ENGINE RESERVE ACCOUNT. (a) The Issuer shall establish on the Effective Date and maintain an Eligible Account with the Indenture Trustee which shall be designated as the Series 1997-1 Engine Reserve Account, which account is hereby pledged to the Indenture Trustee pursuant to the Indenture and this Supplement. The Issuer, or Servicer on its behalf, shall cause the Lessees to remit the Maintenance Reserve Payments to the Trust Account, and the Servicer, pursuant to the Servicing Agreement, shall, by not later than each Determination Date, specifically identify those Maintenance Reserve Payments to a particular Eligible Engine and instruct the Indenture Trustee to allocate all Maintenance Reserve Payments on deposit in the Trust Account which relate to any Engine pledged as collateral for the Series 1997-1 Notes, to the Series 1997-1 Engine Reserve Account. (b) The Issuer shall maintain (or shall cause the Servicer to maintain) records that will identify amounts on deposit in the Series 1997-1 Engine Reserve Account to a specific Eligible Engine. The Servicer shall be entitled to withdraw funds from the Series 1997-1 Engine Reserve Account for the payment of maintenance expenses with respect to the related Eligible Engine, at the times and subject to the further conditions set forth in the Servicing Agreement; provided, however, that so long as a Servicer Default is then in effect, the Servicer shall not be entitled to make such withdrawal except upon presentation of supporting documentation reasonably determined by the Administrative Agent to comply with 26 the terms of the applicable Lease Agreement (which shall evidence its determination by written instrument delivered to the Indenture Trustee). Section 306. SERIES 1997-1 SECURITY DEPOSIT ACCOUNT (a) The Issuer shall establish on the Effective Date and maintain an Eligible Account with the Indenture Trustee which shall be designated as the Series 1997-1 Security Deposit Account, which account is hereby pledged to the Indenture Trustee pursuant to the Indenture and this Supplement. The Issuer, or Servicer on its behalf, shall cause the Lessees to remit the Security Deposits to the Trust Account, and the Servicer, pursuant to the Servicing Agreement, shall, by not later than each Determination Date, specifically identify those Security Deposits to a particular Eligible Engine and instruct the Indenture Trustee to allocate all Security Deposits on deposit in the Trust Account which relate to any Engine pledged as collateral for the Series 1997-1 Notes, to the Series 1997-1 Security Deposit Account. (b) The Issuer shall maintain (or shall cause the Servicer to maintain) records that will identify amounts on deposit in the Series 1997-1 Security Deposit Account to a specific Eligible Engine. The Servicer shall be entitled to withdraw funds from the Series 1997-1 Security Deposit Account for the refund to the Lessee of the Security Deposit with respect to the related Eligible Engine, at the times and subject to the further conditions set forth in the Servicing Agreement; provided, however, that so long as a Servicer Default is then in effect, the Servicer shall not be entitled to make such withdrawal except upon presentation of supporting documentation reasonably determined by the Administrative Agent to comply with the terms of the applicable Lease Agreement (which shall evidence its determination by written instrument delivered to the Indenture Trustee). Section 307. SECURITIES ACCOUNTS. (a) Notwithstanding any other provision of this Supplement or the Indenture, with respect to each of the Securities Accounts, the Securities Intermediary hereby agrees that it will comply with entitlement orders (as such term is defined under the UCC originated by the Indenture Trustee without further consent by the Issuer. (b) Each of the Issuer, the Securities Intermediary and the Indenture Trustee intends that the provisions of Section 307(a) will give the Indenture Trustee "control" over the Securities Accounts (as the term "control" is defined under the UCC, without prejudice to any other provision of the UCC that also would be deemed to give the Indenture Trustee such control. ARTICLE IV ADDITIONAL COVENANTS 27 In addition to the covenants set forth in Article VI of the Indenture, the Issuer hereby makes the following additional covenants for the benefit of the Series 1997-1 Noteholders: Section 401. ADDITIONAL SERIES. The Issuer shall not issue any additional Series of Notes on or after the Effective Date without (a) the prior written consent of the Administrative Agent, (b) confirmation in writing that the Outstanding Obligations of each Series of Notes (calculated after giving effect to such proposed issues) shall not exceed the Asset Base for such Series of Notes as evidenced by the related Asset Base Certificate most recently received by the Indenture Trustee (but not earlier than the preceding Payment Date) and (c) confirmation in writing that no Early Amortization Event or Event of Default has occurred and is then continuing; and as a result of the issuance of such new Series no Early Amortization Event or Event of Default will exist. Section 402. CONTROL PARTY. For purposes of determining a Requisite Global Majority pursuant to Section 503 of the Indenture, the Control Party of Series 1997-1 shall mean the Majority of Holders of the Outstanding Class A Notes. Section 403. INSPECTIONS. The Issuer agrees that any Person designated in writing by the Administrative Agent may consult with the proper officials of the Issuer (including, without limitation, officials of any Affiliate of the Issuer in charge of servicing the Lease Agreements) at such times during normal business hours and as often as the Administrative Agent may reasonably request regarding the information required to be furnished pursuant to the Servicing Agreement or regarding the performance of its respective covenants and agreements contained in any of this Agreement or any of the Related Documents to which it is a party; Section 404. RESERVED. Section 405. INTEREST RATE HEDGE AGREEMENTS. (a) The Issuer shall enter into Interest Rate Hedge Agreements in order to protect the Issuer, to the extent commercially practicable, from fluctuations in interest rates which would increase the interest payments of the Issuer on Notes issued under this Supplement; provided that all Interest Rate Hedge Agreements shall be in the amount specified in Schedule 1 and in form and substance acceptable to the Administrative Agent and be with an Interest Rate Hedge Provider acceptable to the Administrative Agent PROVIDED, HOWEVER, that following any Servicer Default the Administrative Agent shall have the right, in its sole discretion but after consultation with the initial Servicer if the initial Servicer is still an operating entity, to direct the Indenture Trustee to enter into Interest Rate Hedge Agreements on the Issuer's or the Indenture Trustee's behalf. On or prior to the effective date of each such Interest Rate Hedge Agreement which is not solely a cap agreement, the Interest Rate Hedge Providers thereunder shall agree, for the period of one year after all Indebtedness under this Supplement shall have been paid in full, not to commence any case, proceeding or other action under any existing or future Insolvency Law seeking to have an order for relief entered with respect to the Issuer. In addition, long 28 term senior unsecured indebtedness of the related Interest Rate Hedge Provider shall be rated not less than A by S&P and A2 by Moody's. (b) Each Interest Rate Hedge Agreement shall provide that all payments made pursuant thereto shall be paid directly to the Series 1997-1 Series Account or shall be assigned to the Issuer with directions from the Issuer to deposit such payments in the Series 1997-1 Series Account, and all payments received from an Interest Rate Hedge Provider shall be deposited by the Issuer or the Indenture Trustee directly into the Series 1997-1 Series Account. Section 406. INSURANCE. The Issuer shall deliver to the Administrative Agent and the Indenture Trustee, within 90 days of the Closing Date or the Transfer Date related to the transfer of any additional Transferred Assets, as the case may be, certificates evidencing the Issuer's insurance coverage (in addition to any insurance coverage required under the Servicing Agreement), which shall be satisfactory to the Administrative Agent, and shall name the Indenture Trustee on behalf of the Series 1997-1 Noteholders as additional loss payee, in the case of casualty insurance, and as additional insured in the case of liability insurance. Section 407. LESSEE ACKNOWLEDGMENT. Within 90 days of the Closing Date or the Transfer Date related to each Lease Agreement that is the subject of a Loan, as the case may be, the Lessee under each Lease Agreement that is the subject of a Loan made on such date shall have executed and delivered to the Administrative Agent a written certificate, substantially in the form attached hereto as Exhibit C, in which the Lessee confirms (i) its remaining obligations under such Lease Agreement, (ii) that no event of default (as defined in the Lease Agreements), or condition or event which with the giving of notice or the passage of time or both would constitute an event of default, exists under any related Lease Agreement and (iii) that it will name the Indenture Trustee as additional loss payee, in the case of casualty insurance, and as additional insured in the case of liability insurance. Section 408. OPINIONS OF FOREIGN LOCAL COUNSEL. Within 120 days of the Closing Date or the Transfer Date related to each Eligible Engine and related Lease Agreement, as the case may be, the Issuer shall cause the delivery to the Series 1997-1 Noteholders of Opinions of Counsel, other than counsel employed by the Issuer, the Seller or the Servicer for purposes other than solely with respect to the issuance of such opinions, in form and substance satisfactory to the Series 1997-1 Noteholders, as to the perfection and priority (to the extent applicable in such jurisdiction) of the Indenture Trustee's security interest in each Eligible Engine and related Lease Agreement, which are subject to the applicable laws of any jurisdiction other than the United States. ARTICLE V CONDITIONS OF EFFECTIVENESS AND FUTURE LENDING Section 501. EFFECTIVENESS OF SUPPLEMENT. The effectiveness of this Supplement is subject to the condition precedent that the Indenture Trustee shall have received all of the following, each duly executed and dated as of the Effective Date, in form and 29 substance satisfactory to all of the initial Series 1997-1 Noteholders and each (except for the Series 1997-1 Notes, of which only the originals shall be signed) in sufficient number of signed counterparts to provide one for each Series 1997-1 Noteholder: (a) SERIES 1997-1 NOTES. Separate Series 1997-1 Notes executed by the Issuer, and duly authenticated by the Indenture Trustee, in favor of each Series 1997-1 Noteholder in the stated principal amount of such Series 1997-1 Notes that such Series 1997-1 Noteholder has agreed to purchase. (b) CERTIFICATE(S) OF SECRETARY OR ASSISTANT SECRETARY. Separate certificates executed by the corporate secretary or assistant secretary of each of Seller (as Seller and Servicer), the Servicer, the Guarantor and the Issuer, dated the Effective Date, certifying (i) that the respective company has the authority to execute and deliver, and perform its respective obligations under each of the Series 1997-1 Transaction Documents to which it is a party, and (ii) that attached are true, correct and complete copies of the Certificate of Incorporation, by-laws, board resolutions and incumbency certificates in form and substance satisfactory to all of the initial Series 1997-1 Noteholders, as to such matters as they shall require. (c) SECURITY DOCUMENTS. The Indenture and this Supplement, in form and substance satisfactory to all of the initial Series 1997-1 Noteholders, shall have been executed and delivered by Issuer, and all other parties thereto, together with other documents reasonably requested by Series 1997-1 Noteholders. (d) OPINIONS OF COUNSEL. Opinions of Counsel to the Issuer, the Seller, the Guarantor, the Servicer and the Indenture Trustee, in form and in substance satisfactory to the initial Series 1997-1 Noteholder as to such matters as it shall require. (e) SERIES 1997-1 TRANSACTION DOCUMENTS. Each of the Servicing Agreement, the Contribution and Sale Agreement, the Structuring Fee Letter Agreement, the Administration Agreement, the Indenture and the Class A Note Purchase Agreement shall have been duly executed and delivered. (f) GOOD STANDING CERTIFICATES. Good Standing Certificates in the state(s) of formation and location for each of the Seller (as Seller and Servicer), the Guarantor and the Issuer. (g) ESTABLISHMENT OF ACCOUNTS. Each of the Trust Account, the Series 1997-1 Series Account, the Restricted Cash Account, the Series 1997-1 Restricted Cash Account, the Engine Reserve Account, the Series 1997-1 Engine Reserve Account, the Security Deposit Account and the Series 1997-1 Security Deposit Account shall have been established with the Indenture Trustee as evidenced by a certificate of an authorized officer of the Indenture Trustee. (h) GUARANTY. The Guarantor shall have duly executed and delivered the Guaranty. 30 (i) STRUCTURING FEE. The Issuer shall have paid (i) to the Administrative Agent those fees then due and payable as set forth in the Structuring Fee Letter Agreement and (ii) to Thacher Proffitt & Wood, its fees and expenses as counsel for the Administrative Agent and the Class A Noteholder. Purchase of the Series 1997-1 Notes by the Series 1997-1 Noteholders shall be conclusive evidence, upon which the Indenture Trustee may rely that the Series 1997-1 Noteholders have determined that the conditions precedent to the effectiveness of the Series 1997-1 Supplement set forth in (a) through (i) above, have been complied with to their satisfaction. Section 502. ADVANCES ON CLASS A NOTES. The obligation of a Class A Noteholder to make any Loans pursuant to its Class A Note Commitment under this Supplement and the Class A Note Purchase Agreement is subject to the following further conditions precedent; provided, however, that the Administrative Agent may waive in writing those conditions precedent set forth in subdivisions (o), (r), (s), (v) and (w) of this Section 502: (a) DEFAULT. Before and after giving effect to such advance, no Event of Default shall have occurred and be continuing. (b) EARLY AMORTIZATION EVENT. Before and after giving effect to such advance, no Early Amortization Event shall have occurred and be continuing unless each of the Requisite Global Majority and Holders representing one hundred percent (100%) of the Class A Note Principal Balance have approved such advance. (c) CERTIFICATION. Issuer shall have delivered to the Series 1997-1 Class A Noteholders a compliance certificate, signed by an officer of Issuer, as to the matters set out in Article V and in Article VI of this Supplement. (d) ASSET BASE CERTIFICATE. Issuer shall have delivered to the Class A Noteholders a duly completed and executed Asset Base Certificate, as of a date not earlier than thirty (30) days prior to the date of such proposed advance of principal of the Class A Note, which states that the Class A Note Principal Balance (after giving effect to such proposed advance of principal of the Class A Note) will not exceed the Asset Base for Series 1997-1 and complies with the requirements therefor set forth in the Indenture and this Supplement. (e) CONVERSION DATE. The Conversion Date shall not have occurred. (f) SECURITY DOCUMENTS. All UCC financing statements, documents of similar import in other jurisdictions, and other documents reasonably requested by Series 1997-1 Noteholders shall have been delivered to the Administrative Agent. 31 (g) CERTIFICATE AS TO ELIGIBLE ENGINES. A certificate from the Servicer certifying that it is managing all of the Contributed Engines in accordance with the Servicing Agreement. (h) OPINIONS OF COUNSEL. Opinions of Counsel to the Issuer, other than counsel employed by the Issuer, the Seller or the Servicer, as to perfection and priority of the Indenture Trustee's security interest in the Collateral, in form and substance satisfactory to the Series 1997-1 Noteholder as to such matters as it shall require. (i) PERFECTED SECURITY INTEREST. The Administrative Agent shall have received evidence to its satisfaction that the Indenture Trustee has (or upon funding, will have) a first priority security in each Eligible Engine, and related Lease Agreements that will be the subject of such Loan; provided, however, that if the applicable laws of any jurisdiction in which an Eligible Engine is required to be registered does not provide for a means to obtain such first priority security, then the Issuer shall provide additional assurances satisfactory to the Class A Noteholders. Such evidence shall, if requested by the Administrative Agent, include any Opinion of Counsel, other than counsel employed by the Issuer, the Seller or the Servicer, as to the perfection of such security interest including, without limitation, a written opinion from outside counsel for the Issuer, regarding FAA matters. (j) APPRAISAL. The Administrative Agent shall have received an Appraisal in form, scope and for a value satisfactory to the Administrative Agent with respect to each Eligible Engine that will be the subject of such Loan. (k) CHATTEL PAPER. Any original counterpart of each Lease Agreement (other than the one held by the Lessee or filed with any relevant Governmental Authority) that will be the subject of a Loan that constitutes "chattel paper" for purposes of the UCC as in effect in the jurisdiction whose law governs the Lease Agreement has been delivered to the Indenture Trustee. (l) REMITTANCE TO TRUST ACCOUNT. The Lessee under each Lease Agreement that will be the subject of a Loan shall have been directed to remit to the Trust Account all Scheduled Payments and other amounts owing pursuant to such Lease Agreement. (m) LESSEE ACKNOWLEDGMENT. The Lessee under each Lease Agreement that will be the subject of a Loan shall have received a written certificate, in substantially the form attached hereto as Exhibit C, in which the Lessee will confirm (i) its remaining obligations under such Lease Agreement, (ii) no event of default (as defined in the Lease Agreements), or condition or event which with the giving of notice or the passage of time or both would constitute an event of default, exist under any such Lease Agreement and (iii) that it will name the Indenture Trustee as additional loss payee, in the case of casualty insurance, and as additional insured in the case of liability insurance. (n) ADMINISTRATIVE AGENT APPROVAL. The Administrative Agent shall have approved each Lease Agreement which is proposed as collateral for a Loan hereunder (the 32 Administrative Agent shall communicate, within five Business Days of receipt of all information from the Issuer reasonably requested by the Administrative Agent, its approval or disapproval of each Lease Agreement which is proposed as collateral for a Loan hereunder). (o) MAXIMUM CONCENTRATION BY ENGINE TYPES. Each Engine shall have been manufactured by one of the manufacturers set forth under the column titled "Manufacturer" on Exhibit B hereto and shall be one of the engine types set forth opposite the name of such manufacturer under the column titled "Engine Type" on Exhibit B hereto. After giving effect to the transfer of Engines on any Transfer Date, the sum of the Net Book Values of all Eligible Engines (relating to Existing and Possible Loans) of the same engine type shall not exceed an amount equal to the product of (i) the percentage set forth opposite such engine type in the column entitled "Maximum Concentration" on Exhibit B hereto and (ii) the Aggregate Net Book Value (relating to Existing and Possible Loans) on such Transfer Date. (p) MAXIMUM CONCENTRATION FOR SINGLE LESSEE. After giving effect to the transfer of Engines and the related Lease Agreements on any Transfer Date, the sum of the Net Book Values of all Eligible Engines (relating to Existing and Possible Loans) that are or would be subject to a Lease Agreement with a single Lessee (including Affiliates thereof) shall not exceed an amount equal to the product of (i) the Single Lessee Percentage and (ii) the Aggregate Net Book Value (relating to Existing and Possible Loans). (q) MAXIMUM CONCENTRATION FOR ANY THREE LESSEES. After giving effect to the transfer of Engines and the related Lease Agreements on any Transfer Date, the sum of the Net Book Values of all Eligible Engines (relating to Existing and Possible Loans) that are or would be subject to a Lease Agreement with the three (3) largest Lessees with respect to aggregate Net Book Values (including Affiliates thereof) shall not exceed an amount equal to the product of (i) the Three Lessee Percentage and (ii) the Aggregate Net Book Value (relating to Existing and Possible Loans). (r) MAXIMUM CONCENTRATION BY GEOGRAPHIC REGION. After giving effect to the transfer of Engines and the related Lease Agreements on any Transfer Date, the sum of the Net Book Values of all Engines (relating to Existing and Possible Loans) that are or would be subject to a Lease Agreement with Lessees having corporate headquarters located in the geographic areas set forth below shall not exceed an amount equal to the product of (i) the percentage set forth opposite such geographic region under the column entitled "Maximum Geographic Percentage" in the Geographic Concentration Table in Schedule 1 and (ii) the Aggregate Net Book Value (relating to Existing and Possible Loans). (s) CONCENTRATION OF ENGINES FOR WIDE BODY AIRCRAFT. After giving effect to the transfer of Engines on any Transfer Date, the sum of the Net Book Values of all Eligible Engines (relating to Existing and Possible Loans) designed to power Wide Body Aircraft shall not exceed an amount equal to the product of (i) the Wide Body Aircraft Percentage and (ii) Aggregate Net Book Value (relating to Existing and Possible Loans). 33 (t) ON-LEASE PERCENTAGE. After giving effect to the transfer of Engines on any Transfer Date, the On-Lease Percentage of all Eligible Engines (relating to Existing and Possible Loans) as of such Transfer Date shall not be less than the Applicable Percentage. (u) WEIGHTED AVERAGE LEASE RATE FACTOR. After giving effect to the transfer of Engines on any Transfer Date, the Weighted Average Lease Rate Factor for all Eligible Engines (relating to Existing and Possible Loans) shall not be less than the Weighted Average Lease Rate Percentage. (v) ONE YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE. After giving effect to the transfer of Engines on any Transfer Date, the One Year Lease Expiry Concentration Percentage for Eligible Engines (relating to Existing and Possible Loans) on such Transfer Date shall not exceed the Target One Year Lease Expiry Concentration Percentage. (w) TWO YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE. After giving effect to the transfer of Engines on any Transfer Date, the Two Year Lease Expiry Concentration Percentage for Eligible Engines (relating to Existing and Possible Loans) on such Transfer Date shall not exceed the Target Two Year Lease Expiry Concentration Percentage. ARTICLE VI REPRESENTATIONS AND WARRANTIES To induce the Series 1997-1 Noteholders to purchase the Series 1997-1 Notes hereunder, the Issuer hereby represents and warrants to the Series 1997-1 Noteholders as of the Effective Date, the Closing Date and each date on which a Loan is made (to the extent applicable to the Issuer generally and to the assets added to the Collateral on such date on which a Loan is made, unless otherwise specified) that: Section 601. EXISTENCE. Issuer is a corporation duly organized, validly existing and in compliance under the laws of the State of Delaware. Issuer is in good standing and is duly qualified to do business in each jurisdiction where the failure to do so would have a material adverse effect upon the Issuer. Section 602. AUTHORIZATION. Issuer has the power and is duly authorized to execute and deliver this Supplement and the other Series 1997-1 Transaction Documents to which it is a party; Issuer is and will continue to be duly authorized to borrow monies hereunder; and Issuer is and will continue to be authorized to perform its obligations under this Supplement and under the other Series 1997-1 Transaction Documents. The execution, delivery and performance by Issuer of this Supplement and the other Series 1997-1 Transaction Documents to which it is a party and the borrowings hereunder do not and will not require any consent or approval of any Governmental Authority, stockholder or any other Person which has not already been obtained. Section 603. NO CONFLICT; LEGAL COMPLIANCE. The execution, delivery and performance of this Supplement and each of the other Series 1997-1 Transaction Documents 34 and the execution, delivery and payment of the Series 1997-1 Notes will not: (a) contravene any provision of Issuer's charter documents or bylaws or other organizational documents; (b) contravene, conflict with or violate any applicable law or regulation, or any order, writ, judgment, injunction, decree, determination or award of any Governmental Authority; or (c) materially violate or result in the breach of, or constitute a default under any indenture or other loan or credit agreement, or other agreement or instrument to which Issuer is a party or by which Issuer, or its property and assets may be bound or affected. Issuer is not in material violation or breach of or default under any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any contract, agreement, lease, license, indenture or other instrument to which it is a party. Section 604. VALIDITY AND BINDING EFFECT. This Supplement is, and each Series 1997-1 Transaction Document to which Issuer is a party, when duly executed and delivered, will be, legal, valid and binding obligations of Issuer, enforceable against Issuer in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. Section 605. FINANCIAL STATEMENTS. Since March 31, 1997, there has been no Material Adverse Change in the financial condition of the Seller or the Servicer. Section 606. EXECUTIVE OFFICES. The current location of Issuer's chief executive office and principal place of business is located at 180 Harbor Drive, Suite 207, Sausalito, California 94965, and has been located at such address since its formation. The Issuer does not have trade names or doing business names. Section 607. NO AGREEMENTS OR CONTRACTS. The Issuer has not transacted any business on or prior to the Effective Date. The Issuer is not now and has not been a party to any contract or agreement (whether written or oral), other than the Series 1997-1 Transaction Documents and contracts or agreements incidental thereto. Section 608. CONSENTS AND APPROVALS. No approval, authorization or consent of any trustee or holder of any Indebtedness or obligation of Issuer or of any other Person under any material agreement, contract, lease or license or similar document or instrument to which Issuer is a party or by which Issuer is bound, is required to be obtained by Issuer in order to make or consummate the transactions contemplated under the Series 1997-1 Transaction Documents. All consents and approvals of, filings and registrations with, and other actions in respect of, all Governmental Authorities required to be obtained by Issuer in order to make or consummate the transactions contemplated under the Series 1997-1 Transaction Documents have been, or prior to the time when required will have been, obtained, given, filed or taken and are or will be in full force and effect. Section 609. MARGIN REGULATIONS. Issuer does not own any "margin security", as that term is defined in Regulations G and U of the Federal Reserve Board, and the proceeds of the Series 1997-1 Notes issued under this Supplement will be used only for the purposes 35 contemplated hereunder. None of such proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the loans under this Supplement to be considered a "purpose credit" within the meaning of Regulations G, T, U and X. Issuer will not take or permit any agent acting on its behalf to take any action which might cause this Supplement or any document or instrument delivered pursuant hereto to violate any regulation of the Federal Reserve Board. Section 610. TAXES. All federal, state, local and foreign tax returns, reports and statements required to be filed by Issuer have been filed with the appropriate Governmental Authorities, and all Taxes, Other Taxes and other impositions shown thereon to be due and payable by Issuer have been paid prior to the date on which any fine, penalty, interest or late charge may be added thereto for nonpayment thereof, or any such fine, penalty, interest, late charge or loss has been paid, or Issuer is contesting its liability therefor in good faith and has fully reserved all such amounts according to GAAP in the financial statements provided to the Noteholders pursuant to Section 626 of the Indenture. Issuer has paid when due and payable all material charges upon the books of Issuer and no Government Authority has asserted any Lien against Issuer with respect to unpaid Taxes or Other Taxes. Proper and accurate amounts have been withheld by Issuer and its Subsidiaries from its employees for all periods in full and complete compliance with the tax, social security and unemployment withholding provisions of applicable federal, state, local and foreign law and such withholdings have been timely paid to the respective Governmental Authorities. Section 611. OTHER REGULATIONS. Issuer is not: (a) a "public utility company" or a "holding company," or an "affiliate" or a "Subsidiary company" of a "holding company," or an "affiliate" of such a "Subsidiary company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, or (b) an "investment company," or an "affiliated person" of, or a "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. The issuance of the Notes hereunder and the application of the proceeds and repayment thereof by Issuer and the performance of the transactions contemplated by this Supplement and the other Series 1997-1 Transaction Documents will not violate any provision of the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended, or any rule, regulation or order issued by the SEC thereunder. Section 612. SOLVENCY AND SEPARATENESS. The Issuer represents, warrants and covenants to take the following actions to maintain its existence separate and apart from any other Person: (i) maintain books of account in accordance with generally accepted accounting principles and maintain its accounts, books and records separate from any other person or entity: 36 (ii) not commingle its funds or assets with those of any other entity; (iii) hold its assets in its own name; (iv) conduct its business solely in its own name; (v) pay its own liabilities out of its own funds and assets; (vi) observe all corporate formalities; (vii) maintain an arms-length relationship with its affiliates; (viii) not assume or guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligation of any other entity, and will not permit any other person to assume or guarantee or become obligated for its debts or hold out its credit as being available to satisfy the Issuer's obligations, except with respect to obligations in connection with the Guaranty; (ix) not acquire obligations or securities of its stockholders; (x) allocate fairly and reasonably overhead or other expenses that are properly shared with any other person or entity, including without limitation, shared office space, and use separate stationery, invoices and checks; (xi) identify and hold itself out as a separate and distinct entity under its own name and not as a division or part of any other person or entity; (xii) correct any known misunderstanding regarding its separate identity; (xiii) not make loans to any person or entity; (xiv) not identify its stockholders, or any affiliates of any of them, as a division or part of itself; (xv) not enter into, or be a party to, any transaction with its stockholders or their affiliates, except in the ordinary course of its business and on terms which are intrinsically fair and are no less favorable to it than would be obtained in a comparable arms-length transaction with an unrelated third party; (xvi) pay the salaries of its own employees, if any, from its own funds; (xvii) maintain capital that is adequate for the business and undertakings of the Issuer; (xviii) have one director who shall not have been, at the time of his or her appointment or at any time in the preceding five (5) years; (a) a direct or indirect legal or beneficial stockholder of the Issuer or any of its affiliates; (b) a creditor, supplier, 37 employee, officer, director, manager or contractor of the Issuer or any of its affiliates; (c) a person who controls the Issuer or any of its affiliates; or (d) a member of the immediate family of a person defined in (a), (b) or (c) immediately above; (xix) is not insolvent under the Insolvency Law and will not be rendered insolvent by the transactions contemplated by the Series 1997-1 Transaction Documents and after giving effect to such transactions, the Issuer will not be left with an unreasonably small amount of capital with which to engage in its business nor will the Issuer have intended to incur, or believed that it has incurred, debts beyond its ability to pay such debts as they mature. The Issuer does not contemplate the commencement of insolvency, bankruptcy, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, trustee or similar person in respect of the Issuer or any of its assets. Section 613. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. So long as any of the Notes shall be Outstanding and until payment and performance in full of the Outstanding Obligations, the representations and warranties contained herein shall have a continuing effect as having been true when made. Section 614. NO EVENT OF DEFAULT OR EARLY AMORTIZATION EVENT. No Event of Default or Early Amortization Event has occurred and is continuing. Section 615. LITIGATION AND CONTINGENT LIABILITIES. No claims, litigation, arbitration proceedings or governmental proceedings by any Governmental Authority are pending or threatened against or are affecting Issuer or any of its Subsidiaries the results of which might interfere with the consummation of any of the transactions contemplated by this Supplement or any document issued or delivered in connection herewith. Section 616. TITLE; LIENS. The Issuer has good, legal and marketable title to its assets including the Collateral, and none of such assets is subject to any Lien, except for the Lien created pursuant to the Indenture. The Issuer has not assigned, conveyed, pledged or otherwise transferred to any other Person any of its right, title or interest in the Collateral. Section 617. SUBSIDIARIES. At all times on or prior to the Effective Date, the Issuer has had no subsidiaries. Section 618. NO PARTNERSHIP. Issuer is not a partner or joint venturer in any partnership or joint venture. Section 619. PENSION AND WELFARE PLANS. No accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA) or reportable event (within the meaning of section 4043 of ERISA), has occurred with respect to any Plan. The present value of all benefit liabilities under all Plans subject to Title IV of ERISA, as defined in Section 4001(a)(16) of ERISA, exceeds the fair market value of all assets of Plans subject to Title IV of ERISA (determined as of the most 38 recent valuation date for such Plan on the basis of assumptions prescribed by the Pension Benefit Guaranty Corporation for the purpose of Section 4044 of ERISA), by no more than $1.9 million. Neither Issuer nor any ERISA Affiliate is subject to any present or potential withdrawal liability pursuant to Title IV of ERISA and no multiemployer plan (within the meaning of section 4001(a)(3) of ERISA) to which the Issuer or any ERISA Affiliate has an obligation to contribute or any liability, is or is likely to be disqualified for tax purposes, in reorganization within the meaning of Section 4241 of ERISA or Section 418 of the Code) or is insolvent (as defined in Section 4245 of ERISA). No liability (other than liability to make periodic contributions to fund benefits) with respect to any Plan of Issuer, or Plan subject to Title IV of ERISA of any ERISA Affiliate, has been, or is expected to be, incurred by Issuer or an ERISA Affiliate, either directly or indirectly. All Plans of Issuer are in material compliance with ERISA and the Code. No lien under Section 412 of the Code or 302(f) of ERISA or requirement to provide security under the Code or ERISA has been or is reasonably expected by Issuer to be imposed on its assets. The Issuer does not have any obligation under any collective bargaining agreement. As of the Effective Date, the Issuer is not an employee benefit plan within the meaning of ERISA or a "plan" within the meaning of section 4975 of the Code and assets of the Issuer do not constitute "plan assets" within the meaning of section 2510.3-101 of the regulations of the Department of Labor. Section 620. OWNERSHIP OF ISSUER. On the Effective Date, all of the issued and outstanding common shares of the Issuer are owned by Willis Lease Finance Corporation. Section 621. SECURITY INTEREST. The security interest in the Collateral created pursuant to the Indenture and this Supplement has been validly created, and no other action is required to be taken by any person in order for the full benefit of the security interest created thereby to vest in the Indenture Trustee in order to insure the first priority perfected security interest of the Indenture Trustee (for the benefit of the Series 1997-1 Noteholders) in the Collateral. Each Lease Agreement is "chattel paper" (under the UCC, if the UCC is in effect in the jurisdiction whose law governs the Lease Agreement). All executed counterparts of each Lease Agreement (other than the one held by the related Lessee or filed with any relevant Governmental Authority) that constitutes "chattel paper" are in the possession of the Indenture Trustee. Section 622. ELIGIBLE LEASE AGREEMENTS; ELIGIBLE ENGINES. Each of the Lease Agreements is an Eligible Lease and each Engine is an Eligible Engine. ARTICLE VII EARLY AMORTIZATION EVENT Section 701. EARLY AMORTIZATION EVENT. With respect to the Series 1997-1 Notes, as of any date of determination, the existence of any one of the following events or conditions shall constitute an Early Amortization Event: 39 (1) An "event of default" under any Related Document (including an Event of Default) shall have occurred and then be continuing; (2) A Servicer Default shall have occurred and then be continuing; (3) The amount of any scheduled payment of interest or principal then due and owing on the Series 1997-1 Notes is not paid in full; (4) The EBIT Ratio of Issuer shall be less than the Target EBIT Ratio; (5) The occurrence of any other Early Amortization Event as specified in the Indenture. ARTICLE VIII MISCELLANEOUS PROVISIONS Section 801. RATIFICATION OF INDENTURE. As supplemented by this Supplement, the Indenture is in all respects ratified and confirmed and the Indenture as so supplemented by this Supplement shall be read, taken and construed as one and the same instrument. Section 802. COUNTERPARTS. This Supplement may be executed in two or more counterparts, and by different parties on separate counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. Section 803. GOVERNING LAW. THIS SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICTS OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. 40 IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused this Supplement to be duly executed and delivered by their respective officers thereunto duly authorized, all as of the day and year first above written. WLFC FUNDING CORPORATION By: /s/ James D. McBride Name: JAMES D. MCBRIDE Title: CHIEF FINANCIAL OFFICER THE BANK OF NEW YORK, as indenture trustee By: /s/ Cheryl L. Laser Name: CHERYL L. LASER Title: ASSISTANT VICE PRESIDENT THE BANK OF NEW YORK, as securities intermediary By: /s/ Cheryl L. Laser Name: CHERYL L. LASER Title: ASSISTANT VICE PRESIDENT 41 SCHEDULE 1 SECTION 1: DEFINITIONS "APPLICABLE MARGIN" means: (i) with respect to each LIBOR Loan, 2.25%; PROVIDED, HOWEVER, that if the Class A Note Principal Balance at any time exceeds $70,000,000, then the Applicable Margin with respect to such LIBOR Loan during such time shall be 2.0%; or (ii) with respect to a Prime Loan, 0.50%; PROVIDED, HOWEVER, that if the Class A Note Principal Balance at any time exceeds $70,000,000, then the Applicable Margin with respect to such Prime Loan during such time shall be 0.25%. "APPLICABLE PERCENTAGE" means __________ percent (___%).* "CLASS A NOTE COMMITMENT" means an amount not to exceed $80,000,000, subject to the terms and conditions set forth herein; PROVIDED, HOWEVER, that at no time shall the Class A Note Principal Balance exceed the Asset Base for this Series 1997-1. "SERVICING FEE" means for any Payment Date an amount equal to the product of (x) ____ percent (___%) and (y) the aggregate amount of Engine Revenues with respect to the Series 1997-1 Eligible Engines during the immediately preceding Collection Period.* "SINGLE LESSEE PERCENTAGE" means _______ percent (___%).* "TARGET EBIT RATIO" means 1.20:1.0. "TARGET ONE YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE" means _____ percent (___%).* "TARGET TWO YEAR LEASE EXPIRY CONCENTRATION PERCENTAGE" means _____ percent (___%).* "THREE LESSEE PERCENTAGE" means _____ percent (___%).* "WEIGHTED AVERAGE LEASE RATE PERCENTAGE" means one percent (1.0%). - ---------------------------- * The redacted material on this Schedule has been omitted pursuant to a request for confidential treatment and the material has been filed separately. "WIDE BODY AIRCRAFT PERCENTAGE" means _____ percent (__%).* SECTION 2: CERTAIN ADDITIONAL TERMS COMMITMENT FEE. Prior to the Conversion Date, the Issuer shall pay on each quarterly Payment Date, beginning with the third Payment Date, a Commitment Fee to Class A Noteholders, PRO RATA in an amount equal to the product of (x) either (i) for the period commencing on the Closing Date and ending on the Payment Date occurring in June 1998, ___% or (ii) thereafter, ___%, (y) one fourth, and (z) the excess, if any of (i) $80,000,000 over (ii) the then unpaid Class A Note Principal Balance. Such Commitment Fee shall be payable on each quarterly Payment Date solely from amounts then on deposit in the Series 1997-1 Series Account in accordance with Section 302 of the Supplement.* ADMINISTRATIVE AGENT FEE. The Issuer shall pay on each quarterly Payment Date, beginning with the third Payment Date, an Administrative Agent Fee to the Administrative Agent in an amount equal to the product of (x) ___%, (y) one fourth, and (z) the Class A Note Principal Balance. Such Administrative Agent Fee shall be payable on each quarterly Payment Date from amounts then on deposit in the Series 1997-1 Series Account in accordance with Section 302 of the Supplement.* INTEREST RATE HEDGE AGREEMENTS. The Issuer at all times shall have Interest Rate Hedge Agreements in effect, each of which has an aggregate notional amount of not less than 50% of the Outstanding Obligations of the Series 1997-1 Notes. - ---------------------------- * The redacted material on this Schedule has been omitted pursuant to a request for confidential treatment and the material has been filed separately. SECTION 3: GEOGRAPHIC CONCENTRATION TABLE *
Geographic Region Maximum Geographic ----------------- ------------------ Percentage ---------- --------------------------------------------- Africa __% --------------------------------------------- Asia (including China) __% --------------------------------------------- China __% --------------------------------------------- Australia and New Zealand __% --------------------------------------------- Western Europe __% --------------------------------------------- Middle East __% --------------------------------------------- North America __% --------------------------------------------- Latin America __% ---------------------------------------------
- ---------------------------- * The redacted material on this Schedule has been omitted pursuant to a request for confidential treatment and the material has been filed separately. EX-10.18 5 EXHIBIT 10.18 WLFC FUNDING CORPORATION Series 1997-1 Class A Note CLASS A NOTE PURCHASE AGREEMENT Dated as of: September 1, 1997 First Union National Bank of North Carolina One First Union Center Charlotte, North Carolina 28288 Dear Sirs: WLFC Funding Corporation, a Delaware corporation (the "Issuer"), proposes, subject to the terms and conditions stated herein, to issue to you (the "Purchaser") the WLFC Funding Corporation Secured Note, Series 1997-1, Class A (the "Class A Note") in the maximum principal amount of $80,000,000. The Class A Note will be issued pursuant to the Series 1997-1 Supplement, dated as of September 1, 1997, to the Indenture, dated as of September 1, 1997, each between the Issuer and The Bank of New York, as trustee. The actual outstanding principal balance of the Class A Note will be increased and decreased from time to time in accordance with the terms of the Series 1997-1 Supplement. Forms of the Indenture, the Series 1997-1 Supplement, the Contribution and Sale Agreement, the Administration Agreement and the Class A Note have been delivered to you and the Issuer understands that each of the foregoing are in form and substance acceptable to you. Each such document and each document attached to any of the foregoing is in substantially the form in which it will be executed, with such changes as may be approved by you. Section 1. DEFINITIONS. All capitalized terms not otherwise defined in this Section or elsewhere in this Class A Note Purchase Agreement shall have the respective meanings set forth in the Series 1997-1 Supplement or, if not defined therein, the Indenture. Section 2. COMMITMENT TO MAKE LOANS. (a) Subject to the terms and conditions, and in reliance upon the representations and warranties set forth herein and in the other Related Documents, the Purchaser agrees to make Loans to the Issuer on the terms and subject to the conditions set forth in the Series 1997-1 Supplement. (b) The Issuer shall give written notice to the Administrative Agent (on its own behalf and on behalf of each Class A Noteholder) of a request for either a Prime Loan or a LIBOR Loan no later than 1:00 p.m. (Charlotte, North Carolina time) two (2) Business Days prior to the date on which such Loan is requested to be made by the Class A Noteholder. 1 Each such written notice shall be in the form of Exhibit A hereto, shall be irrevocable and shall specify (i) the date on which the requested Loan is to be made; (ii) whether the requested Loan shall be a LIBOR Loan or a Prime Loan; (iii) the full amount of the requested Loan; and (iv) the LIBOR Period or Prime Period, as the case may be. Section 3. DELIVERY OF CLASS A NOTE. (a) Delivery of the Class A Note shall be made at the offices of Thacher Proffitt & Wood, Two World Trade Center, New York, New York 10048, at 11:00 A.M., New York time, on December 19, 1997 or such later Business Day as may be agreed upon in writing by the Issuer and you (the "Effective Date"). (b) The Class A Note to be delivered to you hereunder shall be issued to you in fully registered form only and shall be registered in the name of First Union National Bank of North Carolina. Such Class A Note shall be dated December 19, 1997, authenticated by the Indenture Trustee, registered in your name and issued in the maximum principal amount of $80,000,000. You hereby authorize Thacher Proffitt & Wood, special counsel to the Purchaser, to receive on your behalf the Class A Note to be delivered to you on the Closing Date, to deliver a receipt therefor and to transmit such Class A Note to you. Section 4. REPRESENTATIONS AND WARRANTIES OF THE ISSUER. (a) The Issuer represents (as of the Effective Date and as of each date on which a Loan is made by a Class A Noteholder pursuant to the Series 1997-1 Supplement, unless otherwise indicated) and warrants to, and agrees with, the Purchaser that: (i) The Issuer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with its chief executive office located at 180 Harbor Drive, Suite 207, Sausalito, California 94965, and has the power to own its assets and to engage in the activities in which it is presently engaged and is duly qualified and in good standing under the laws of each jurisdiction where its ownership of property or the conduct of its activities requires such qualification, if the failure to so qualify would have a material adverse effect on the financial condition of the Issuer or on the enforceability of the Class A Note or the ability of the Issuer to perform its obligations under this Agreement and the other Related Documents to which it is a party. One hundred percent of the beneficial ownership of the Issuer is owned by Willis Lease Finance Corporation ("WLFC"). The Issuer has no subsidiaries; (ii) The Issuer has the power, authority and legal right to execute, deliver and perform its obligations under this Agreement and the other Related Documents to which it is a party (collectively, the "Issuer Documents"); the execution, delivery, and performance of the Issuer Documents by the Issuer have been duly authorized by the Issuer by all necessary action, the Issuer Documents, other than the Class A Note, have been duly executed and delivered by the Issuer, and the Class A Note, when issued in accordance with the terms hereof and of the Indenture and the Series 1997-1 Supplement, will have been duly executed and delivered; -2- (iii) Each of the Issuer Documents (other than the Class A Note), assuming due authorization, execution and delivery by the other parties thereto, constitutes, and the Class A Note, when issued and authenticated in accordance with the terms of the Indenture and the Series 1997-1 Supplement, will constitute, a legal, valid and binding obligation of the Issuer, enforceable against the Issuer in accordance with its terms, except that such enforcement may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or other similar laws (whether statutory, regulatory or decisional) now or hereafter in effect relating to creditors' rights generally and (B) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (iv) The consummation of the transactions contemplated by the Issuer Documents and the fulfillment of the terms therein will not conflict with or result in any breach of any of the terms and provisions of or constitute (with or without notice, lapse of time or both) a default under the certificate of incorporation or by-laws of the Issuer, or any indenture, agreement, mortgage, deed of trust, commitment letter or funding arrangement with any lending institution or investment bank or other instrument to which the Issuer is a party or by which it is bound, or result in the creation or imposition of any lien, claim or encumbrance upon any of its properties pursuant to the terms of such indenture, agreement, mortgage, deed of trust, commitment letter or funding arrangement with any lending institution or investment bank or other such instrument, other than as created pursuant to the Indenture and the Series 1997-1 Supplement, or violate any law or, any order, rule or regulation applicable to the Issuer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Issuer or any of its properties and there are no legal or governmental proceedings pending or, to the best knowledge of the Issuer, threatened or contemplated that would result in a material modification or revocation thereof; (v) There are no litigation, proceedings or investigations to which the Issuer, or any Affiliate of the Issuer, is a party pending, or, to the knowledge of Issuer, threatened, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality (A) asserting the invalidity of the Class A Note or the other Issuer Documents, (B) seeking to prevent the issuance of the Class A Note or the consummation of any of the transactions contemplated by the other Issuer Documents, or (C) seeking any determination or ruling that would materially and adversely affect the performance by the Issuer of its obligations under, or the validity or enforceability of, the Class A Note or the other Issuer Documents; (vi) All approvals, authorizations, consents, orders or other actions of any person, corporation or other organization, or of any court, governmental agency or body or official, required in connection with the execution and delivery of the Issuer Documents by the Issuer and with the valid and proper authorization, issuance and sale of the Class A Note pursuant to this Agreement, have been or will be taken or obtained on or prior to the Effective Date; -3- (vii) No written materials delivered to the Purchaser by or on behalf of the Issuer in connection with the sale of the Class A Note contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact peculiar to the Issuer or any Affiliate of the Issuer or, to the knowledge of the Issuer, any Lease Agreement, Lessee or Engine which the Issuer has not disclosed to you in writing which materially adversely affects or, so far as the Issuer can now reasonably foresee, will materially adversely affect the ability of the Issuer to perform the transactions contemplated hereby and by the other Related Documents; (viii) The List of Engines to be created as of the Closing Date and each supplement thereto will be available to you by the Issuer and will be complete as of the date thereof and will include an accurate (in all material respects) description of the Engines; (ix) The representations and warranties made by the Issuer in the Issuer Documents are true and correct in all material respects and the Purchaser shall be entitled to rely on such representations and warranties; (x) Any taxes, fees and other governmental charges payable by the Issuer in connection with the execution and delivery of the Issuer Documents, the pledge of the Collateral to the Indenture Trustee, and the execution, delivery and sale of the Class A Note, have been paid; (xi) To the extent the Securities Exchange Act of 1934, as amended (the "Exchange Act"), may be deemed to apply to the Class A Note and the Loans, none of the transactions contemplated in the Issuer Documents (including, without limitation thereof, the use of the proceeds from the sale of the Class A Note) will violate or result in a violation of Section 7 of the Exchange Act, or any regulations issued pursuant thereto; (xii) Concurrently with the execution and delivery of this Agreement, the Issuer is executing no other Note Purchase Agreement with respect to the Class A Note; (xiii) The Issuer is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (xiv) For so long as the Series 1997-1 Class A Notes are the only Notes outstanding under the Indenture, each of the Indenture and the Series 1997-1 Supplement need not be qualified as an "indenture" pursuant to the terms of the Trust Indenture Act of 1939, as amended; (xv) The Issuer has not taken and will not take, directly or indirectly, any action prohibited by Rules 101 and 102 under Regulation M of the Securities and Exchange Commission in connection with the offering of the Class A Note; -4- (xvi) To the extent that the Securities Act may be deemed to apply to the Class A Note and the Loans, neither the Issuer nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")) of the Issuer has directly, or through any agent, including, without limitation, First Union, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Class A Note in a manner that would render the issuance and sale of the Class A Note a violation of the Securities Act or require the registration of the Class A Note under the Securities Act or (ii) engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offering of the Class A Note. (xvii) To the extent that the Securities Act may be deemed to apply to the Class A Note and the Loans, assuming compliance by you with your agreements set forth in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Class A Note in the manner contemplated by this Agreement to register the Class A Note under the Securities Act; (xviii) No event has occurred and is continuing that constitutes, or with the passage of time or the giving of notice or both would constitute, an Early Amortization Event under, and as defined in, the Indenture. The Issuer is not in violation of any agreement, charter instrument, by-law or other instrument to which they are a party or by which they are or may be bound; (xix) The aggregate amount of Scheduled Payments payable by the Lessees under the Lease Agreements during each Collection Period is sufficient to pay the Monthly Servicing Fee, and the principal and interest on the Class A Note, as such payments become due and payable, in accordance with the Indenture and the Series 1997-1 Supplement; (xx) The Issuer agrees that it will not directly or indirectly, sell or offer to sell the Class A Note or similar security in a manner that would render the issuance and sale of the Class A Note pursuant to this Agreement a violation of Section 5 of the Securities Act. Section 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF WLFC. WLFC hereby represents (as of the Effective Date and as of each date on which a Loan is made by a Class A Noteholder pursuant to the Series 1997-1 Supplement, unless otherwise indicated) and warrants to, and agrees with, the Purchaser that: (i) The representations and warranties made by WLFC in this Note Purchase Agreement, the Guaranty, the Contribution and Sale Agreement, the Servicing Agreement and any other Related Document to which it is a party (collectively, the "WLFC Documents") are true and correct in all material respects and the Purchaser shall be entitled to rely on such representations and warranties; -5- (ii) No written materials delivered to the Purchaser by or on behalf of WLFC in connection with the sale of the Class A Note contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact peculiar to WLFC or any Affiliate of WLFC or, to the knowledge of WLFC, any Lease Agreement, Lessee or Engine which WLFC had not disclosed to you in writing which materially affects adversely or, so far as WLFC can now reasonably foresee, will materially affect adversely the ability of WLFC to perform the transactions contemplated hereby and by the Indenture, the Series 1997-1 Supplement, the Servicing Agreement and the Class A Note; (iii) Any taxes, fees and other governmental charges payable by WLFC on or prior to the Effective Date in connection with the execution and delivery of the WLFC Documents, have been, or will be, paid on or prior to the Effective Date; (iv) To the extent that the Exchange Act may be deemed to apply to the Class A Note and the Loans, none of the transactions contemplated herein (including, without limitation thereof, the use of the proceeds from the sale of the Class A Note) will violate or result in a violation of Section 7 of the Exchange Act or any regulations issued pursuant thereto including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. WLFC will not use any distribution from the Issuer of proceeds received by the Issuer from the sale of the Class A Note to purchase or carry, directly or indirectly, margin stock; (v) No event has occurred and is continuing that constitutes, or with the passage of time or the giving of notice or both would constitute an Early Amortization Event under, and as defined in, the Servicing Agreement or the Indenture and the Series 1997-1 Supplement, respectively. WLFC is not in violation in any material respect of any term of any agreement, charter instrument, by-law or other instrument to which it is a party or by which it is or may be bound; (vi) The aggregate amount of Scheduled Payments payable by the Lessees under the Lease Agreements during each Collection Period is sufficient to cover the Monthly Servicing Fee, and pay the principal and interest on the Class A Note, as such payments become due and payable, in accordance with the Indenture and the Series 1997-1 Supplement; and (vii) To the extent that the Securities Act may be deemed to apply to the Class A Note and the Loans, neither WLFC nor any affiliate (as defined in Rule 501(b) of Regulation D) of WLFC has directly, or through any agent, including, without limitation, First Union, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Class A Note in a manner that would render the issuance and sale of the Class A Note a violation of the Securities Act or require the registration of the Class A Note under the Securities Act or (ii) engaged in any form of -6- general solicitation or general advertising (within the meaning of Regulation D) in connection with the offering of the Class A Note. It is not necessary in connection with the offer, sale and delivery of the Class A Note to register the Class A Note under the Securities Act. Section 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE PURCHASER. The Purchaser hereby represents (as of the Effective Date) and warrants to, and agrees with, the Issuer and WLFC that: (a) The Purchaser understands and acknowledges that the Class A Note is not a security under federal or state securities laws but evidences the obligations of the Issuer in accordance with the terms of the Supplement and the Indenture to repay the Loans extended pursuant to the Indenture and the Series 1997-1 Supplement, and further understands that the Class A Note purchased by it has not been registered under the Securities Act or the securities laws of any State and, if the Class A Note is not then registered under applicable federal and State securities law (which registration the Issuer is not obligated to effect), it will not offer to sell, transfer or otherwise dispose of the Class A Note except in a transaction which is exempt from such registration; (b) The Purchaser is not acquiring its Class A Note with a view to or for sale or transfer in connection with any distribution of the Class A Note under the Securities Act, but subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control; (c) The Purchaser will not dispose of the Class A Note purchased by it in violation of any applicable federal or state securities laws; (d) The Purchaser is an "accredited investor" as defined in Regulation D under the Securities Act; (e) The Purchaser (i) is not an "employee benefit plan" within the meaning of Section 3(3) of ERISA or a "plan" within the meaning of Section 4975(e)(1) of the Code ("Benefit Plan") and it is not directly or indirectly acquiring the Class A Note on behalf of, as investment manager of, as named fiduciary of, as trustee of, or with assets of a Benefit Plan, (ii) the acquisition will qualify for a statutory or administrative prohibited transaction exemption under ERISA and the Code and will not give rise to a non-exempt transaction described in Section 406 of ERISA or Section 4975(e)(1) of the Code, (iii) the source of funds (a "Source") to be used by the purchaser to pay the purchase price of the Class A Note is a guaranteed benefit policy within the meaning of Section 401(b)(2) of ERISA, or (iv) the source of funds to be used by the purchaser to pay the purchase price of the Class A Note is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no "employee benefit plan" (within the meaning of Section 3(3) of ERISA or Section 4975(e)(1) of the Code and treating as a single plan, all plans maintained by the same employer (or an affiliate within the meaning of Section V(a)(1) of PTE 95-60) or employee organization) with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf -7- of such plan, exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with the purchaser's state of domicile; (f) Neither the Purchaser nor any Person acting on its behalf has offered to sell the Class A Note by any form of general solicitation or general advertising. The Class A Note Purchaser has not offered the Class A Note in any manner that would render the issuance and sale of the Class A Note a violation of the Securities Act or any state securities laws, or require registration pursuant thereto, not has it authorized nor will it authorize any Person to act in such manner; (g) Purchaser has conducted an independent investigation of the risks involved in making the Loan and holding the Note and understands those risks. Purchaser has been provided with all information concerning the Note, the Issuer and the Servicer that it has requested and has had an opportunity to discuss the terms of the Note and the Issuer and the Servicer with representatives of the Issuer and the Servicer; and (h) By purchasing the Class A Note, the Purchaser has authorized and instructed the Indenture Trustee to enter into the Administration Agreement on behalf of the Purchaser and the Purchaser hereby acknowledges that the Indenture Trustee shall have no liability for the acts or omissions of the Administrative Agent. Section 7. CONDITIONS OF THE PURCHASER'S OBLIGATION. (I) CONDITIONS TO INITIAL LOAN. The Purchaser's obligation to make the initial Loan shall be subject to the accuracy in all material respects of the representations and warranties of the Issuer and WLFC in each of the Series 1997-1 Transaction Documents, to the performance in all material respects by WLFC and the Issuer of their respective obligations thereunder, to the satisfaction of all of the conditions precedent set forth in Sections 501 and 502 of the Series 1997-1 Supplement and to the following additional conditions: (a) All of the respective representations and warranties of the Issuer under the Issuer Documents and of WLFC under the WLFC Documents shall be true and correct in all material respects as of the date made, and no event shall have occurred which, with notice or the passage of time, would constitute an Event of Default under the Indenture or an Early Amortization Event under the Indenture; each of such Issuer Documents and WLFC Documents shall have been duly authorized, executed and delivered and shall be in full force and effect; (b) All conditions to closing required to be fulfilled pursuant to Article V of the Contribution and Sale Agreement shall have been fulfilled or waived, and the Indenture Trustee shall have received originals (constructively or actually) or copies of all documents required to be so delivered; (c) Each of Gibson, Dunn & Crutcher LLP, counsel for WLFC, and in-house counsel of WLFC shall have delivered to you its respective written opinion, dated the Effective Date, which opinions shall state that they may be relied upon by subsequent Class A Noteholders, in -8- form and substance satisfactory to you, to the effect set forth in paragraphs (ii) (with respect to the enforceability opinion) and (v) of Exhibit B hereto with respect to the opinion of Gibson, Dunn & Crutcher LLP, and paragraphs (i), (ii) (with respect to matters other than enforceability), (iii) and (iv) of Exhibit B hereto with respect to the opinion of in-house counsel; (d) Gibson, Dunn & Crutcher LLP, counsel to the Issuer, shall have furnished to you its written opinion, dated the Effective Date, which opinion shall state that it may be relied upon by subsequent Class A Noteholders, in form and substance satisfactory to you, to the effect set forth in Exhibit C hereto; (e) Gibson, Dunn & Crutcher LLP, counsel for WLFC and the Issuer, shall have delivered to you its written opinion, dated the Closing Date, which opinion shall state that it may be relied upon by subsequent Class A Noteholders, in form and substance satisfactory to you, to the effect set forth in Exhibit E hereto; (f) Emmet, Marvin & Marvin, counsel to the Indenture Trustee, shall have furnished to you and to the Issuer its written opinion, dated the Effective Date, which opinion shall state that it may be relied upon by subsequent Class A Noteholders, in form and substance satisfactory to you, in the form of Exhibit D hereto; (g) The Issuer shall have furnished to you on the Closing Date a certificate, dated the Closing Date, signed by an authorized officer, to the effect that: (i) The representations and warranties made by the Issuer in the Issuer Documents are true and correct in all material respects on the Closing Date; (ii) The Issuer has complied with all of the agreements and satisfied all the conditions on its part to be performed or satisfied on or prior to the Closing Date pursuant to the terms of the Issuer Documents; and (iii) The written information supplied by the Issuer to the Purchaser (other than projections and other estimates) did not contain any untrue statement of a material fact, and any estimates or projections so supplied to the Purchaser were based on assumptions which the Issuer believed to be reasonable (except as otherwise disclosed therein). (h) WLFC shall have furnished to you on the Closing Date a certificate, dated the Closing Date, signed by an authorized officer, to the effect that: (i) The representations and warranties made by WLFC in the WLFC Documents are true and correct in all material respects on the Closing Date; (ii) WLFC has complied with all of the agreements and satisfied all the conditions on its part to be performed or satisfied on or prior to the Closing Date pursuant to the terms of the WLFC Documents; and -9- (iii) The written factual information supplied by WLFC to the Purchaser (other than projections and other estimates) did not contain any untrue statement of a material fact in light of the circumstances under which they were made, and any estimates or projections so supplied to the Purchaser were based on assumptions which WLFC believed to be reasonable (except as otherwise disclosed therein); (i) Any taxes, fees and other governmental charges which are due and payable prior to the Effective Date and the Closing Date by WLFC or the Issuer in connection with the execution, delivery and performance of the Issuer Documents and WLFC Documents shall have been paid at or prior to the Effective Date or the Closing Date, as the case may be; (j) As of the related Transfer Date, the Issuer has good title to, and is the sole owner of, the Collateral, free and clear from any Lien except for the rights of the Lessees under the Lease Agreements and the Lien of the Indenture Trustee and shall not have assigned to any Person other than the Indenture Trustee any of its right, title or interest in the Lease Agreements, the Engines or any other Transferred Assets; (k) The Indenture Trustee or its agent shall have received, to be held in trust pursuant to the Indenture and the Series 1997-1 Supplement, the Transferred Assets including the Lease Agreements and all documents, instruments and other assets required by the Indenture and the Series 1997-1 Supplement to be delivered to the Indenture Trustee with respect thereto as of the Closing Date and as of each related Transfer Date, as applicable; (l) No fact or condition shall exist under applicable law or applicable regulations thereunder or interpretations thereof by any regulatory authority which in the Purchaser's reasonable opinion would make it illegal for the Issuer to issue and sell the Class A Note or for the Issuer or any of the other parties thereto to perform their respective obligations under any Related Document; (m) The Asset Base as of the Closing Date shall be not less than the Outstanding Obligations; (n) The Issuer, WLFC, the Purchaser and the Indenture Trustee shall each have received a fully executed counterpart original and any required conformed copies of all Related Documents delivered at or prior to the Closing Date; (o) All corporate, trust and other proceedings in connection with the sale of the Class A Note and the transactions contemplated hereby and all documents and certificates incident thereto shall be satisfactory in form and substance to the Purchaser and its counsel, and the Purchaser shall have received such other documents and certificates incident to such transaction as the Purchaser or such counsel shall reasonably request; (p) WLFC shall have furnished to the Purchaser (a) a consolidated statement of income of WLFC for the fiscal quarter ended December 31, 1996 and a consolidated -10- balance sheet of WLFC dated as of September 30, 1997, each of which shall be in form and substance satisfactory to the Purchaser, and (b) from the independent accounting firm which regularly audits WLFC's financial statements, a consolidated statement of income of WLFC for the fiscal year ended December 31, 1996 and a consolidated balance sheet of WLFC dated as of December 31, 1996, each of which shall be in form and substance satisfactory to the Purchaser and be certified by such accounting firm to fairly present the financial condition of WLFC, to have been prepared in accordance with Generally Accepted Accounting Principles applied on a basis consistent with that of the preceding fiscal year and to have been based upon an audit by such accounting firm made in accordance with generally accepted auditing standards; (q) The Purchaser shall have received the following, in each case in form and substance satisfactory to it and its special counsel: (i) a copy of resolutions of the Board of Directors of the Issuer, certified by the Secretary or an Assistant Secretary of the Issuer as of the Effective Date, duly authorizing the issuance, sale and delivery of the Class A Note by the Issuer and the execution, delivery and performance by the Issuer of the Issuer Documents and any other Related Documents to which it is a party and any other documents executed by or on behalf of the Issuer in connection with the transactions contemplated hereby; and an incumbency certificate of the Issuer as to the person or persons executing and delivering each such document; (ii) a copy of resolutions of the Board of Directors of WLFC, certified by the Secretary or an Assistant Secretary of WLFC as of the Effective Date, duly authorizing the execution, delivery and performance by WLFC of the WLFC Documents and any other Related Documents to which it is a party and any other documents executed by or on behalf of WLFC in connection with the transactions contemplated hereby; and an incumbency certificate of WLFC as to the person or persons executing and delivering each such document; and (iii) such other documents and evidence with respect to WLFC, the Issuer and the Indenture Trustee as the Purchaser may reasonably request in order to establish the corporate existence and good standing of each thereof, the proper taking of all appropriate corporate proceedings in connection with the transactions contemplated hereby and the compliance with the conditions set forth herein; and (r) The Purchaser shall receive on or before the Closing Date and each Transfer Date, as the case may be, evidence that UCC-1 financing statements and FAA recordations set forth in Section 2.03 of the Contribution and Sale Agreement have been filed in the appropriate filing offices, reflecting the interest of the Issuer and the Indenture Trustee in the Collateral; (s) Reserved; -11- (t) No action or proceeding shall have been instituted nor shall any governmental action be threatened before any court or government agency nor shall any order, judgment or decree have been issued or proposed to be issued by any court or governmental agency to set aside, restrain, enjoin or prevent the performance of the Contribution and Sale Agreement, the Indenture, the other Related Documents or any of the other agreements or the transactions contemplated hereby; (u) Reserved; (v) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained by or from any Federal, State or other governmental authority or agency, or by or from any trustee or holder of any indebtedness or obligation of WLFC or the Issuer, or that are necessary or, in the opinion of the Purchaser's special counsel, advisable in connection with the transactions contemplated herein shall have been delivered to the Purchaser. (II) CONDITIONS TO EACH SUBSEQUENT LOAN. In addition to those conditions precedent set forth in Section 7(I) hereof, the Purchaser's obligation to make a Loan on each date subsequent to the date on which the initial Loan is made shall be subject to the satisfaction of each of the following conditions: (a) REPRESENTATIONS, WARRANTIES AND COVENANTS. Before and after giving effect to such Loan, the representations, warranties and covenants in Sections 4 and 5, or in any other Related Document given by the Issuer, WLFC or any officer thereof, shall be true and correct in all material respects as though made on such date on which the Loan is made. (b) NOTICE. The Purchaser shall have received timely notice of such Loan and such other documents required pursuant to the terms of this Agreement and the Indenture and the Series 1997-1 Supplement with respect to such Loan. Each request for a Loan shall be deemed to be a certification to the Purchaser that the conditions set forth in this Section 7(II) have been satisfied. Section 8. INTENTION OF THE PARTIES. The Indenture, the Series 1997-1 Supplement and the Class A Note have been structured with the intention that the Class A Note will qualify under applicable tax law as indebtedness, and the Purchaser by acceptance of its Class A Note (and any Person which is a beneficial owner of any interest in a Class A Note, by virtue of such person's acquisition of a beneficial interest therein) agrees to treat the Class A Note for purposes of federal, state and local income or franchise taxes and any other tax imposed on or measured by income, as indebtedness. Section 9. EXPENSES. Whether or not the transactions contemplated hereby and by the Series 1997-1 Transaction Documents shall be consummated, the Issuer and WLFC agree, jointly and severally, to pay promptly all reasonable out-of-pocket expenses incurred by you in connection with such transactions prior to the Effective Date, prior to the Closing Date, prior to each date on which a Loan is made by a Class A Noteholder pursuant to the Series 1997-1 Supplement, and in connection with any amendment initiated, directly or indirectly, by -12- the Issuer and WLFC (whether or not such amendment becomes effective) or waiver of any such document, including, without limitation, (i) the cost and expenses of preparing and reproducing the Series 1997-1 Transaction Documents, (ii) the cost of arranging for delivery or performance of conditions precedent, (iii) the fees and disbursements of Thacher Proffitt & Wood and (iv) all costs and expenses incurred in connection with the transfer and delivery of the Collateral and the issuance of the Class A Note to you, including custodial fees, Indenture Trustee's fees, fees for financing statement filings and continuations, and the Issuer's, WLFC's, and the Indenture Trustee's attorney's and accountant's fees. The Issuer and WLFC further agree that they will pay or cause to be paid, promptly upon demand, any reasonable expense incurred by the Purchaser in connection with the making of any amendment to, the enforcement (after the occurrence of an Event of Default or an Early Amortization Event under the Indenture or the Series 1997-1 Supplement) of the Purchaser's rights with respect to, or the giving of any release, consent or waiver in respect of, this Class A Note Purchase Agreement and any document executed pursuant hereto or thereto, including the reasonable fees and disbursements of one counsel to represent the Purchaser in connection therewith, in each case that are related to or arise out of a request of, or an action taken by, or that are otherwise required by, a Person other than the Purchaser. The Issuer and WLFC further agree that they will pay, or reimburse the Purchaser for, promptly upon demand, all reasonable costs and expenses (including reasonable legal fees and disbursements of one counsel for all the Class A Noteholders) incident to or in connection with any proceeding or governmental investigation against or with respect to the Issuer, WLFC or any subsidiary or affiliate of any of them and which result solely because of the ownership by the Purchaser of the Class A Note. The obligations of the Issuer and WLFC under the immediately preceding sentence shall survive the termination of the Indenture. Section 10. SURVIVAL. The parties hereto agree that the representations, warranties and covenants made by each of them in this Class A Note Purchase Agreement, and in any document, certificate or other instrument delivered pursuant hereto or thereto shall be deemed to be relied upon by the other, notwithstanding any investigation heretofore or hereafter made by or on behalf of such other party. All representations, warranties and covenants made by any party to this Class A Note Purchase Agreement, or in any such document, certificate or other instrument shall survive the delivery of and payment for the Class A Note. Section 11. NOTICES. (a) All demands, notices and communications hereunder shall be in writing, sent by courier service, by facsimile (with subsequent telephone confirmation of receipt thereof) or hand delivery to the following addresses (or to such other address as the parties may have designated in writing to the other parties): (a) in the case of the Purchaser, at the address stated on the signature page of this Agreement, (b) in the case of the Issuer, at the following address: 180 Harbor Drive, Suite 207, Sausalito, California 94965 (with a copy to WLFC), (c) in the case of WLFC, at the following address: 180 Harbor Drive, Suite 200, Sausalito, California 94965; or with respect to any other Persons, at the respective address set forth in the Series 1997-1 Supplement. Notice shall be effective and deemed received (a) two days after being delivered to the courier service, if sent by courier, (b) upon receipt of confirmation of transmission, if sent by telecopy, or (c) when delivered, if delivered by hand. -13- (b) The Purchaser hereby agrees to promptly provide the Indenture Trustee, the Issuer and the Administrative Agent, with a copy of a confirmation for each LIBOR Period setting forth LIBOR for such LIBOR Period and the outstanding principal balance of the Loan for such LIBOR Period. Section 12. SEVERABILITY OF PROVISIONS. Any part, provision, representation, warranty or covenant of this Class A Note Purchase Agreement which is prohibited or which is held to be void or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any part, provision, representation, warranty or covenant of this Class A Note Purchase Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereto waive any provision of law which prohibits or renders void or unenforceable any provision hereof. Section 13. COUNTERPARTS. This Class A Note Purchase Agreement may be executed simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. Section 14. GOVERNING LAW. This Class A Note Purchase Agreement shall be construed and enforced in accordance with the internal laws of the State of New York, without giving effect to the principles of conflicts of law, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of New York. Section 15. CONSENT TO JURISDICTION. Any legal suit, action or proceeding against any of the Issuer, WLFC or the Purchaser arising out of or relating to this Agreement, or any transaction contemplated hereby, may be instituted in any federal or state court in New York County, State of New York, and each of the Issuer, WLFC and the Purchaser hereby waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, and, solely for the purposes of enforcing this Agreement, each of the Issuer, WLFC and the Purchaser hereby irrevocably submits to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding. Each of the Issuer and WLFC hereby irrevocably appoints and designates CT Corporation Systems, having an address at 1633 Broadway, New York, New York 10019, its true and lawful attorney-in-fact and duly authorized agent for the limited purpose of accepting service of legal process and the Issuer and WLFC each agree that service of process upon such party shall constitute personal service of such process on such Person. Each of the Issuer and WLFC shall maintain the designation and appointment of such authorized agent until all amounts payable under this Agreement shall have been paid in full. If such agent shall cease to so act, each of the Issuer and WLFC shall immediately designate and appoint another such agent satisfactory to the other parties hereto and shall promptly deliver to the other parties hereto evidence in writing of such other agent's acceptance of such appointment. -14- Section 16. SUCCESSORS AND ASSIGNS. This Class A Note Purchase Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. The provisions of this Class A Note Purchase Agreement are intended to be for the benefit of all Holders, from time to time, of the Class A Note purchased by you, and shall be enforceable by any Class A Noteholder, whether or not an express assignment of rights under this Class A Note Purchase Agreement has been made by you or your successor or assign. Notwithstanding the foregoing, you shall at all times be the Holder of record of not less than fifty percent (50%) of the unpaid principal balance of the Class A Notes then outstanding. Section 17. WAIVER; PRIOR AGREEMENTS. No term or provision of this Class A Note Purchase Agreement may be waived or modified unless such waiver or modification is in writing and signed by the party against whom such waiver or modification is sought to be enforced. This Class A Note Purchase Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Section 18. FURTHER AGREEMENTS. The Purchaser, the Issuer and WLFC agree to execute and deliver to the other such additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Class A Note Purchase Agreement. Section 19. GENERAL INTERPRETIVE PRINCIPLES. For purposes of this Class A Note Purchase Agreement except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Class A Note Purchase Agreement have the meanings assigned to them in this Class A Note Purchase Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (b) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with Generally Accepted Accounting Principles as in effect on the date hereof; (c) references herein to "Articles", "Sections", "Subsections", "paragraphs", and other subdivisions without reference to a document are to designated Articles, Sections, Subsections, paragraphs and other subdivisions of this Class A Note Purchase Agreement; (d) a reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to paragraphs and other subdivisions; (e) the words "herein", "hereof", "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and -15- (f) the term "include" or "including" shall mean without limitation by reason of enumeration. -16- IN WITNESS WHEREOF, the Purchaser, WLFC and the Issuer have caused their names to be signed hereto by their respective authorized representatives as of the date first above written. Very truly yours, WILLIS LEASE FINANCE CORPORATION By: /s/ Charles F. Willis Name: CHARLES F. WILLIS Title: PRESIDENT WLFC FUNDING CORPORATION By: /s/ James D. McBride Name: JAMES D. MCBRIDE Title: CHIEF FINANCIAL OFFICER FIRST UNION NATIONAL BANK OF NORTH CAROLINA By:/s/ Russell D. Morrison Name: RUSSELL D. MORRISON Title: VICE PRESIDENT Address: One First Union Center Charlotte, North Carolina 28288 Attention: Milton Anderson EX-10.19 6 EXHIBIT 10.19 - -------------------------------------------------------------------------------- ADMINISTRATION AGREEMENT among WLFC FUNDING CORPORATION, as Issuer, WILLIS LEASE FINANCE CORPORATION, as Servicer FIRST UNION CAPITAL MARKETS CORP., as Administrative Agent and THE BANK OF NEW YORK, as Indenture Trustee Dated as of September 1, 1997 - -------------------------------------------------------------------------------- This ADMINISTRATION AGREEMENT, dated as of September 1, 1997 (the "Agreement"), among WLFC FUNDING CORPORATION, a Delaware corporation (the "Issuer"), WILLIS LEASE FINANCE CORPORATION, a California corporation (the "Servicer"), FIRST UNION CAPITAL MARKETS CORP., a North Carolina corporation (the "Administrative Agent") and THE BANK OF NEW YORK, a New York banking corporation, as Indenture Trustee (the "Indenture Trustee"). W I T N E S S E T H : WHEREAS, the Issuer is issuing its Series 1997-1 Notes (the "Series 1997-1 Notes") pursuant to the Series 1997-1 Supplement, dated as of September 1, 1997 (the "Series 1997-1 Supplement") to the Indenture, dated as of September 1, 1997 (the "Indenture"), each between the Issuer and The Bank of New York, as trustee (the "Indenture Trustee"); WHEREAS, pursuant to the Indenture and the other Related Documents, the Administrative Agent is required to perform certain duties referred to therein; and WHEREAS, the Administrative Agent has the capacity to provide the services required thereby and is willing to perform such services on the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: SECTION 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in the Series 1997-1 Supplement or, if not defined therein, as defined in the Indenture. SECTION 2. APPOINTMENT AND AUTHORITY OF ADMINISTRATIVE AGENT. Subject to the terms and conditions set forth herein, the Indenture Trustee, on behalf of the Noteholders, hereby appoints the Administrative Agent to perform all of the activities set forth in Section 3 hereof. By executing this Agreement, the Administrative Agent hereby accepts such appointment. SECTION 3. DUTIES OF THE ADMINISTRATIVE AGENT. Subject to the limitations set forth in this Agreement, the duties of the Administrative Agent shall be limited to the following: (a) COORDINATION OF THE ISSUANCE OF ADDITIONAL SERIES. At the request of the Issuer, the Administrative Agent shall coordinate the issuance of additional Series pursuant to Section 1006 of the Indenture. (b) FACILITATION OF TRANSFER TO REPLACEMENT SERVICER. Upon receipt of a copy of a notice that a Servicer Termination Notice has been issued pursuant to 1 Section 405(b) of the Indenture, the Administrative Agent shall use reasonable efforts to locate a qualified replacement Servicer to fulfill the duties of the then current Servicer in accordance with, and subject to the terms and conditions set forth in, Section 405(b) of the Indenture. The Administrative Agent agrees to perform the duties set forth in Section 405(b) of the Indenture. (c) DETERMINATION OF LIBOR. The Administrative Agent shall determine LIBOR pursuant to the terms and conditions of Section 202(c) of the Series 1997-1 Supplement. The Class A Noteholder has agreed, pursuant to Section 11(b) of the Note Purchase Agreement, to provide the Administrative Agent, among others, with a copy of confirmation for each LIBOR Period setting forth LIBOR for such LIBOR Period and the outstanding principal balance of the Loan for such LIBOR Period. (d) The Administrative Agent shall take all action required of it under the Indenture or the Series 1997-1 Supplement, including the determination of whether to grant any waivers, consents or approvals described therein, and the implementation thereof. All such obligations of the Administrative Agent set forth therein are incorporated herein by reference and failure to take any such action shall constitute a breach of this Agreement. SECTION 4. STANDARD OF CARE; CONFORMITY WITH APPLICABLE LAW; LIABILITY OF ADMINISTRATIVE AGENT. (a) The Administrative Agent will perform its duties hereunder in accordance with the same standard of care exercised by the Administrative Agent in the conduct of similar affairs for its own account. (b) The Administrative Agent will not, in performing its obligations hereunder, take any action that would be in violation of any law, rule or regulation that may be applicable to the Administrative Agent, its property or the services to be performed hereunder. (c) The Administrative Agent shall not (a) be liable for any action taken or omitted to be taken by it under or in connection with this Agreement (except for its own gross negligence or willful misconduct), or (b) be responsible in any manner for any recital, statement, representation or warranty made by the Issuer, Indenture Trustee or Servicer, or any officer thereof, contained in this Agreement or in any other Related Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or in any other Related Document, or for the value of any Collateral or the validity, effectiveness, genuineness, enforceability or sufficiency of any Related Document, or for any failure of the Issuer or Servicer or any other party to any Related Document to perform its obligations thereunder except to the extent set forth therein. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or other document reasonably believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. 2 SECTION 5. RECORDS. The Administrative Agent shall maintain appropriate books of account and records relating to services performed hereunder, which books of account and records shall upon prior written notice to the Administrative Agent be accessible for inspection at the offices of the Administrative Agent by the Issuer, the Servicer and the Indenture Trustee, and the agents of any of them, at such inspecting party's expense during the Administrative Agent's normal business hours. SECTION 6. INDEMNIFICATION. (a) The Administrative Agent hereby agrees to indemnify and hold harmless the Indenture Trustee, each Noteholder and their respective directors, officers and shareholders (each an "INDEMNIFIED PARTY") from and against any and all damages, losses, liabilities, costs and expenses incurred by an Indemnified Party resulting from the gross negligence or willful misconduct of the Administrative Agent in performing (or failing to perform) its obligations under this Agreement. An Indemnified Party shall immediately notify the Administrative Agent of any damages, losses, liabilities, costs or expenses which an Indemnified Party has determined has given or would give rise to a right of indemnification hereunder and the Administrative Agent shall have the exclusive right to compromise or defend any such liability or claim at its own expense, which decision shall be binding and conclusive upon an Indemnified Party. Failure to give such notice shall not relieve the Administrative Agent of its obligations hereunder; PROVIDED, HOWEVER, that the Administrative Agent shall not be liable or otherwise be held responsible for any damages, losses, liabilities, costs or expenses resulting from the failure to give such notice. The Administrative Agent hereby agrees to indemnify and hold harmless the Issuer from and against any and all damages, losses, liabilities, costs and expenses incurred by the Issuer resulting from the gross negligence or willful misconduct of the Administrative Agent in performing its obligations under Section 3(c) hereof. (b) The Issuer and the Servicer shall jointly and severally indemnify upon demand the Administrative Agent from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind whatsoever which may at any time (including at any time following the repayment of any Outstanding Obligations and the termination or resignation of the related Administrative Agent) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by any such Person under or in connection with any of the foregoing; PROVIDED, HOWEVER, that neither the Issuer nor the Servicer shall be liable for the payment to the Administrative Agent of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Administrative Agent's negligence or willful misconduct. SECTION 7. COMPENSATION. As compensation for the performance of the Administrative Agent's obligations under this Agreement, the Servicer agrees to pay quarterly 3 in arrears, beginning with the third Payment Date, to the Administrative Agent a fee at the rate of ____% * per annum of the sum of the Aggregate Outstanding Obligations of all Series then Outstanding on the related quarterly Payment Date; notwithstanding payment of such fee by the Servicer, each of the parties hereto acknowledge that the Administrative Agent is the agent of the Noteholders. If the Servicer fails to pay such fee, the Issuer shall pay such unpaid amounts from amounts on deposit in the Series 1997-1 Series Account in accordance with the provisions of Section 302 of the Series 1997-1 Supplement. In addition, the Administrative Agent shall also be entitled to be reimbursed in accordance with Section 302 of the Series 1997-1 Supplement for its expenses incurred in taking any actions required pursuant to Section 405(b) of the Indenture. SECTION 8. INDEPENDENCE OF THE ADMINISTRATIVE AGENT. For all purposes of this Agreement, the Administrative Agent shall be an agent of the Noteholders and shall not be subject to the supervision of the Issuer, Servicer or Indenture Trustee with respect to the manner in which it accomplishes the performance of its obligations hereunder; PROVIDED, HOWEVER, that the Administrative Agent shall act in accordance with directions from the Requisite Global Majority when required by the Indenture or the Related Documents. SECTION 9. NO JOINT VENTURE. Nothing contained in this Agreement (i) shall constitute the Administrative Agent, the Issuer, the Servicer and the Indenture Trustee as members of any partnership, joint venture, association, syndicate, unincorporated business or other separate entity, (ii) shall be construed to impose any liability as such on any of them or (iii) shall be deemed to confer on any of them any express, implied or apparent authority to incur any obligation or liability on behalf of the others. SECTION 10. OTHER ACTIVITIES OF THE ADMINISTRATIVE AGENT. Nothing herein shall prevent the Administrative Agent or its Affiliates from engaging in other businesses or, in its sole discretion, from acting in a similar capacity as an administrator for any other Person even though such Person may engage in business activities similar to those of the Issuer and/or the Servicer. SECTION 11. TERM OF AGREEMENT; RESIGNATION AND REMOVAL OF ADMINISTRATIVE AGENT. (a) This Agreement shall continue in force until all of the Outstanding Obligations under the Indenture are paid in full, upon which event this Agreement shall automatically terminate. (b) The Administrative Agent may resign its duties hereunder by providing each of the Issuer, the Servicer and the Indenture Trustee with at least 60 days' prior written notice. - -------------------- * This redacted material has been omitted pursuant to a request for confidential treatment and the material has been filed separately. 4 (c) The Indenture Trustee, acting at the written direction of the Requisite Global Majority, or of the Issuer, may remove the Administrative Agent immediately upon written notice of termination to the Administrative Agent (with a copy to each of the Issuer and the Servicer) if any of the following events shall occur: (i) the Administrative Agent shall default in any material respect the performance of any of its duties under this Agreement which failure continues unremedied for a period of fifteen (15) days after the receipt by the Administrative Agent of written notice thereof specifying with reasonable detail the default; (ii) a court having jurisdiction in the premises shall enter a decree or order for relief, and such decree or order shall not have been vacated within 60 days, in respect of the Administrative Agent in any involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for the Administrative Agent or any substantial part of its property or order the winding-up or liquidation of its affairs; or (iii) the Administrative Agent shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Administrative Agent or any substantial part of its property, shall consent to the taking of possession by any such official of any substantial part of its property, shall make any general assignment for the benefit of creditors or shall fail generally to pay its debts as they become due. (d) No resignation or removal of the Administrative Agent pursuant to this Section 11 shall be effective until (i) a successor Administrative Agent shall have been appointed by the Requisite Global Majority (which successor shall also be reasonably acceptable to the Issuer) and (ii) such successor Administrative Agent shall have agreed in writing to be bound by the terms of this Agreement in the same manner as the Administrative Agent is bound hereunder or as otherwise approved by the Requisite Global Majority. A copy of any such appointment and the agreement executed by such successor Administrative Agent shall be promptly sent to each of the Issuer, the Servicer and the Indenture Trustee. SECTION 12. ACTION UPON TERMINATION, RESIGNATION OR REMOVAL. Promptly upon the effective date of termination of this Agreement pursuant to Section 11(a) of this Agreement or the resignation or removal of the Administrative Agent pursuant to Section 11(b) or (c) of this Agreement, respectively, the Administrative Agent shall be entitled to be paid all fees and reimbursable expenses accruing to it to the date of such termination, resignation or removal. In the event of the resignation or removal of the Administrative Agent pursuant to Section 11(b) or (c) of this Agreement, respectively, the Administrative Agent shall cooperate with the Indenture Trustee and take all reasonable steps requested to assist the Requisite Global 5 Majority and the Indenture Trustee in making an orderly transfer of the duties of the Administrative Agent. SECTION 13. NOTICES. Any notice, report or other communication given hereunder shall be in writing and addressed as follows: (a) If to the Issuer, to: WLFC Funding Corporation 180 Harbor Drive, Suite 207 Sausalito, California 94965 Fax: 415/331-0607 with a copy to: the Servicer and Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 Attention: Brian Kilb, Esq. Telephone: 213/229-7236 Fax: 213/229-7520 (b) If to the Administrative Agent, to: First Union Capital Markets Corp. One First Union Center 301 South College Street Charlotte, North Carolina 28288 Attn: Milton Anderson (c) If to the Indenture Trustee, to: The Bank of New York 101 Barclay Street 12th Floor, East Asset Backed Finance Unit New York, New York 10286 (d) If to the Servicer, to: Willis Lease Finance Corporation 180 Harbor Drive, Suite 200 Sausalito, California 94965 Attention: General Counsel Fax: 415/331-0607 6 with a copy to: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 Attention: Brian Kilb, Esq. Telephone: 213/229-7236 Fax: 213/229-7520 (e) If to any Noteholder, at the address set forth in the Note Register. or to such other address as any party shall have provided to the other parties in writing. Any notice required to be in writing hereunder shall be deemed given if such notice is mailed by certified mail, postage prepaid, or hand-delivered (or, in the case of the Issuer or the Servicer, by internationally recognized courier service) to the address of such party as provided above. SECTION 14. Amendments. This Agreement may be amended from time to time by the parties hereto, provided that any amendment must be accompanied by the written consent of the Requisite Global Majority. Prior to the execution of any amendment to this Agreement, the Issuer will provide notice of any such amendment to each Rating Agency, if any. SECTION 15. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by the Administrative Agent except to an Affiliate unless (i) such assignment is previously consented to in writing by the Indenture Trustee (acting at the direction of the Control Party of each Series), (ii) such assignee is reasonably acceptable to the Issuer, and (iii) each Rating Agency, if any, shall have received prior notice of each such assignment. SECTION 16. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. SECTION 17. CONSENT TO JURISDICTION. Any legal suit, action or proceeding against any of the parties hereto arising out of or relating to this Agreement, or any transaction contemplated hereby, may be instituted in any federal or state court in New York County, State of New York, and each of the parties hereto hereby waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, and, solely for the purposes of enforcing this Agreement, each of the Issuer and the Servicer hereby irrevocably submits to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding. Each of the Issuer and the Servicer hereby irrevocably appoints and designates CT Corporation Systems, 1633 Broadway, New York, New York 10019, its true and lawful attorney-in-fact and duly authorized agent for the limited purpose of accepting 7 service of legal process and the Issuer agrees that service of process upon such party shall constitute personal service of such process on such Person. Each of the Issuer and the Servicer shall maintain the designation and appointment of such authorized agent until all amounts payable under this Agreement shall have been paid in full. If such agent shall cease to so act, each of the Issuer and the Servicer shall immediately designate and appoint another such agent satisfactory to the Administrative Agent and shall promptly deliver to the Administrative Agent evidence in writing of such other agent's acceptance of such appointment. SECTION 18. HEADINGS. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. SECTION 19. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed shall together constitute but one and the same agreement. SECTION 20. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable under any applicable law, rule or regulation or that would result in the imposition of any fine or adverse regulatory or other consequence in any jurisdiction shall be ineffective to the extent thereof without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 21. AGREEMENT NOT TO FILE PETITION IN BANKRUPTCY. The Administrative Agent hereby agrees that it shall not institute against, or join any other person in instituting against, the Issuer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any insolvency, bankruptcy or similar law of any jurisdiction, for one year and a day after the last date on which any Note of any Series was Outstanding. SECTION 22. BINDING EFFECT; THIRD-PARTY BENEFICIARIES. This Agreement will inure to the benefit of and be binding upon the parties hereto. SECTION 23. MERGER AND INTEGRATION. Except as specifically stated otherwise herein, this Agreement sets forth the entire understanding of the parties relating to the subject matter hereof, and all prior understandings, written or oral, are superseded by this Agreement. This Agreement may not be modified, amended, waived or supplemented except as provided herein. 8 IN WITNESS WHEREOF, the parties have caused this Administration Agreement to be duly executed and delivered as of the day and year first above written. WLFC FUNDING CORPORATION By: /s/ James D. McBride Name: JAMES D. McBRIDE Title: CHIEF FINANCIAL OFFICER FIRST UNION CAPITAL MARKETS CORP. By: /s/ Russell D. Morrison Name: RUSSELL D. MORRISON Title: VICE PRESIDENT WILLIS LEASE FINANCE CORPORATION By: /s/ Charles F. Willis Name: CHARLES F. WILLIS Title: PRESIDENT THE BANK OF NEW YORK, not in its individual capacity but solely as Indenture Trustee By: /s/ Cheryl L. Laser Name: CHERYL L. LASER Title: ASSISTANT VICE PRESIDENT EX-11.1 7 EXHIBIT 11.1 COMPUTATION OF EARNINGS WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE YEARS ENDED DECEMBER 31,
1997 1996 1995 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME BEFORE EXTRAORDINARY ITEM Primary Earnings: Income to common shares before extraordinary item................................ $ 5,330 $ 2,804 $ 3,216 Shares: Weighted average number of common shares outstanding............................. 5,497 3,756 3,111 --------- --------- --------- Primary earnings per common share before extraordinary item.......................... $ 0.97 $ 0.75 $ 1.03 Assuming Full Dilution Earnings: Income before extraordinary item................................................. $ 5,330 $ 2,804 $ 3,216 Shares: Weighted average number of common shares outstanding and common stock equivalents.................................................................... 5,673 3,796 3,111 --------- --------- --------- Earnings per common share assuming full dilution..................................... $ 0.94 $ 0.74 $ 1.03 NET INCOME Primary Earnings: Net income to common shares:..................................................... $ 7,338 $ 2,804 $ 3,216 Shares: Weighted average number of common shares outstanding............................. 5,497 3,756 3,111 --------- --------- --------- Primary earnings per common share.................................................... $ 1.33 $ 0.75 $ 1.03 Assuming Full Dilution Earnings: Net income....................................................................... $ 7,338 $ 2,804 $ 3,216 Shares:............................................................................ Weighted average number of common shares......................................... 5,497 3,756 3,111 Potentially dilutive common shares............................................... 176 32 -- --------- --------- --------- Total Shares................................................................... 5,673 3,788 3,111 Earnings per common share assuming full dilution..................................... $ 1.29 $ 0.74 $ 1.03
51 EX-21.1 8 EXHIBIT 21.1 SUBSIDIARIES OF WILLIS LEASE FINANCE CORPORATION Willis Aeronautical Services, Inc. Terandon Leasing Corporation T-2 Inc. T-4 Inc. T-5 Inc. T-7 Inc. T-8 Inc. T-10 Inc. T-11 Inc. T-12 Inc. All the above are California Corporations WLFC Engine Pooling Company, A California Corporation WLFC Funding Corporation, A Delaware Corporation EX-27.1 9 EXHIBIT 27-1
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 31,556,759 0 5,352,284 0 10,334,113 0 139,076,499 15,542,792 198,430,056 0 0 0 0 40,117,223 14,484,234 198,430,056 26,857,942 51,206,744 20,146,669 33,060,262 9,331,972 0 0 8,814,510 3,484,768 0 0 2,007,929 0 7,337,671 1.33 1.29
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