-----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, MwrYmM01P+kSyMwdIa872a7uT+6k+Lp2PPJzhq1TV0t30snonkFBQ9uQ0pU7FwNO tIsZ6NRY72AJIlnGDd1xTw== 0000898430-99-001582.txt : 19990416 0000898430-99-001582.hdr.sgml : 19990416 ACCESSION NUMBER: 0000898430-99-001582 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWKER PACIFIC AEROSPACE CENTRAL INDEX KEY: 0001049625 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 953528840 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-29490 FILM NUMBER: 99595101 BUSINESS ADDRESS: STREET 1: 11240 SHERMAN WAY CITY: SUN VALLEY STATE: CA ZIP: 91352-4942 BUSINESS PHONE: 8187656201 MAIL ADDRESS: STREET 1: 11240 SHERMAN WAY CITY: SUN VALLEY STATE: CA ZIP: 913524942 10-K405 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ x ] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ TO _____________ COMMISSION FILE NUMBER: 0-29490 HAWKER PACIFIC AEROSPACE (Exact name of registrant as specified in its charter) CALIFORNIA 95-3528840 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11240 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352 (Address of principal executive offices) (Zip code) (818) 765-6201 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's common stock held by non- affiliates of the registrant as of March 31, 1999, was approximately $11,145,000. The number of shares of common stock outstanding on March 31, 1999, was 5,822,222 shares. DOCUMENTS INCORPORATED BY REFERENCE Part I and Part II incorporate information by reference to certain portions of registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998. Part III incorporates information by reference to the registrant's definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TABLE OF CONTENTS Page ---- PART I Item 1 BUSINESS............................................................ 3 Item 2. PROPERTIES.......................................................... 15 Item 3. LEGAL PROCEEDINGS................................................... 15 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................. 15 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER mATTERS.................................. 15 Item 6. SELECTED FINANCIAL DATA............................................. 16 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 18 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................... 24 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 24 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 24 PART III OMITTED - (INCORPORATED BY REFERENCE TO PROXY STATEMENT TO BE FILED NO LATER THAN APRIL 30, 1999)................. 24 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................................... 25 FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS....................................... 25 REPORT OF INDEPENDENT AUDITORS...................................... 28 CONSOLIDATED BALANCE SHEETS......................................... 29 CONSOLIDATED STATEMENTS OF OPERATIONS............................... 31 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY................................................ 32 CONSOLIDATED STATEMENT OF CASH FLOWS................................ 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 35
-2- PART I ITEM 1 - BUSINESS General Hawker Pacific Aerospace ("Hawker Pacific" or the "Company") repairs and overhauls aircraft and helicopter landing gear, hydromechanical components and wheels, brakes and braking system components for a diverse international customer base, including commercial airlines, air cargo operators, domestic government agencies, aircraft leasing companies, aircraft parts distributors and original equipment manufacturers ("OEMs"). The Company is a certified Federal Aviation Administration ("FAA") and Joint Airworthiness Authority ("JAA") approved repair station, and has also been granted Parts Manufacturer Approvals by the FAA. In addition, the Company distributes, manufactures and sells new and overhauled spare parts and components for both fixed wing aircraft and helicopters. The Company has long-term service contracts with many customers, including Federal Express Corporation ("Federal Express"), American Airlines, Inc. ("American Airlines"), the United States Coast Guard, and US Airways, Inc. ("US Airways"). On February 4, 1998, the Company completed its acquisition (the "BA Acquisition") of substantially all of the assets of the landing gear repair and overhaul operations (the "BA Assets") of British Airways plc ("British Airways"). The Company believes the BA Acquisition will provide it with a base in the United Kingdom from which to significantly expand its international repair and overhaul operations, and position itself to become a global leader in its market. The Company believes it is well situated to benefit from the following aviation industry trends that are driving increased demand for third-party repair, overhaul and spare parts inventory management services: (i) the increase in worldwide air traffic associated with the addition of new aircraft and more frequent use of existing aircraft; (ii) the outsourcing by aircraft operators of services previously handled internally; (iii) the break-up of monopolistic aircraft maintenance consortiums; and (iv) an increase in regulatory pressure and customer emphasis on the traceability of aircraft parts and overhaul processes. The Company traces its origins back to a hydraulics company formed in 1958. Hawker Pacific was first incorporated in 1980 in California as a distributor of aircraft parts and certain other consumer products, and began providing aircraft repair and overhaul services in 1987. In November 1996, BTR Dunlop, Inc. sold all of the outstanding capital stock of the Company to certain of the Company's current shareholders. See "Certain Relationships and Related Transactions". Unless the context otherwise requires, all references herein to the "Company" or "Hawker Pacific" shall also include Hawker Pacific Aerospace Limited, a wholly- owned United Kingdom subsidiary formed in November 1997. The Company's principal executive offices are located at 11240 Sherman Way, Sun Valley, California 91352, and its telephone number is (818) 765-6201. Recent Developments Initial Public Offering. On February 3, 1998, the Company completed an initial public offering (the "Offering") of 2,766,667 shares of the Company's common stock through several underwriters represented by EVEREN Securities, Inc. and The Seidler Companies Incorporated. Of the 2,766,667 shares of common stock sold in the Offering, 2,600,000 shares were sold by the Company and 166,667 shares were sold by a principal shareholder of the Company. The principal shareholder sold 415,000 additional shares of common stock pursuant to the exercise of an over-allotment option granted to the underwriters by the principal shareholder. The Registration Statement for the Offering (Registration No. 333-40295) was declared effective by the Securities and Exchange Commission (the "SEC") on January 29, 1998. The Company received net proceeds of approximately $18.1 million net of expenses of approximately $2.7 million. The Company used approximately $9.2 million of the net proceeds to fund a portion of the purchase price for the BA Assets and approximately $7.6 million to repay a portion of the revolving and term debt previously outstanding under the Company's credit facility. The Company used the remaining net proceeds for working capital and general corporate purposes. Acquisition of Certain Assets of British Airways. On February 4, 1998, the Company completed the acquisition of certain assets ("BA Assets") of the British Airways plc landing gear operation (the "BA Acquisition") for a purchase price of approximately $19.5 million (including acquisition related expenses) excluding a 747-400 landing gear rotable asset that was acquired during the second quarter of fiscal 1998 for approximately $2.9 million. The BA assets consisted of $1.9 -3- million of inventory, $4.0 million of machinery and equipment and $13.6 million of landing gear rotable assets. As part of the BA Acquisition, the Company and British Airways entered into a seven-year exclusive service agreement for the Company to provide landing gear and related repair and overhaul services to substantially all of the aircraft currently operated by British Airways. Market and Industry Overview The aviation aftermarket consists principally of the servicing and support of commercial passenger and cargo aircraft. The Company provides aftermarket landing gear repair and overhaul services and related spare parts to a variety of customers in the aviation industry. In March 1997, Dillon Read & Co., Inc. ("Dillon Read") estimated the global aviation aftermarket to be $47 billion annually and projected that it would grow to $60 billion by the year 2000. Increased Aviation Activity. Boeing's 1998 Current Market Outlook (the "Boeing Outlook") projects that global air travel will increase by 55% through the year 2007, with cargo traffic growth projected to increase by 69% through 2007. Average passenger seat miles flown are also expected to increase significantly over the next few years. Further, many new airlines are expected to commence operations in the United States and abroad, especially in China and other Asian nations where only a small percentage of the population has flown to date. In order to accommodate growing demand, aircraft operators will be required to increase the size of their aircraft fleets. The Boeing Outlook projects that the global fleet of aircraft will grow from 12,300 aircraft at the end of 1997 to 17,700 aircraft in 2007, and 26,200 aircraft in 2017. Increases in passenger travel, air cargo services and the number of aircraft in service increase the demand for repair and overhaul services. In addition, the Federal Aviation Administration (the "FAA") requires aircraft landing gear to be overhauled every seven to ten years. As a result, the growth in the number of aircraft over the past 15 years is expected to create increased demand for landing gear repair and overhaul services, which will most likely continue as the number of new aircraft in service grows. Further, because start-up airlines generally do not invest in the infrastructure necessary to service their aircraft, such airlines outsource all or most of their repair and overhaul services. Outsourcing of Repair and Overhaul Services. While the overall air transportation industry has grown significantly over the past decade, commercial airlines have not experienced consistent earnings growth over the same period. As a result, many aircraft operators have recognized outsourcing as an opportunity to reduce operating costs, working capital investment and turnaround time. In March 1997, Dillon Read estimated the outsourced military and government market to be $9 billion and the third party market to be $12 billion. Outsourcing allows aircraft operators to benefit from the expertise of service providers like Hawker Pacific who have developed specialized repair techniques and achieved economies of scale unavailable to individual operators. Additionally, outsourcing allows aircraft operators to limit their capital investment in infrastructure and personnel by eliminating the need for the equipment, sophisticated information systems technology and inventory required to repair and overhaul landing gear and hydromechanical components. Dillon Read also estimated in March 1997 that approximately 40%, 35% and 95%, respectively, of commercial, military and general aviation functions are currently outsourced. The increasing number of long-term service contracts during 1997 and 1998 from airlines outsourcing their repair and overhaul services exemplifies this growing trend. As aircraft operators continue to become more cost and value conscious, the Company expects the trend toward outsourcing to continue. Break-Up of Monopolistic Aircraft Maintenance Consortiums. Until recently, European aircraft operators attempted to realize cost savings by forming repair consortiums to provide maintenance, repair and overhaul services for their aircraft. Within these repair consortiums, each member was responsible for providing the consortium's other members with maintenance, repair and overhaul services for certain specified aircraft components. Over time, these members have begun subcontracting their maintenance, repair and overhaul services to independent service providers through a competitive bidding process. The Company believes that this trend will provide it with opportunities to expand its European customer base. Greater Emphasis on Traceability. As a result of concerns regarding unapproved aircraft spare parts, regulatory authorities have focused on the level of documentation which must be maintained on aircraft spare parts. Accordingly, aircraft operators increasingly demand that third party service providers provide complete traceability of all parts used in the repair and overhaul process. The sophistication required to track the parts histories of an inventory consisting of thousands of aircraft spare parts is considerable. For example, overhaul of a 747 aircraft shipset requires the handling and tracking of over 2,500 parts. This has required companies to invest heavily in information systems technology. The -4- Company has developed and maintains a proprietary management information system that enables it to comply with its customer's contract specifications and enables its customers to comply with governmental regulations concerning traceability of spare parts. The Company's proprietary system is well-regarded in the industry, and the Company considers it to be a competitive advantage. Company Operations Repair and Overhaul. The primary reasons for removing landing gear or hydromechanical components from an aircraft for servicing are: (i) the number of takeoffs and landings, or years since a landing gear's last overhaul, has reached the `time between overhaul' limit, or (ii) the landing gear or hydromechanical component has been damaged or is not performing optimally. The cost of servicing landing gear or hydromechanical components that have been removed varies depending upon the age and type of aircraft and the extent of repairs required. Each landing gear overhaul can involve numerous separate parts and work orders. For example, the Boeing 737 nose landing gear calls for over 290 parts and related work orders while the Boeing 747-200 nose gear calls for over 650 parts and related work orders. Generally, the Company performs these overhauls in approximately four to eight weeks. Hydromechanical component overhauls can involve 200 or more parts and over 25 separate work orders and are generally performed in approximately two to four weeks. In order to achieve this throughput, the Company must perform many parallel processes and integrate numerous components just before final assembly. Completing this complex overhaul work within the time constraints set by aircraft operators has led the Company to develop a highly managed systems-driven process, which is facilitated by its highly specialized management information system. See "Management Information Systems and Quality Assurance" below. The stages of the overhaul process include the following: Disassembly, Cleaning and Inspection. Upon receiving a landing gear shipset or a hydromechanical component, the Company's technicians disassemble the unit, a process which requires special tooling and expertise. Each part is completely cleaned to allow for comprehensive inspection, testing and evaluation of part size, structural integrity and material tolerances. The Company uses a detailed checklist and reporting procedure to create a work order which documents the state of each part inspected, and indicates the extent of repair or overhaul to be performed. Technicians tag all parts which need to be replaced or reworked and electronically prepare bills of material and requisitions to the Company's parts and production departments for inventory and scheduling purposes. An internal sales order is created concurrently with the work order for shipping, pricing, billing and delivery purposes. The Company utilizes its management information system throughout this process to reduce the amount of detailed inspection time required. The disassembly and inspection process enables the Company to obtain detailed information concerning which parts can be reused or repaired and which must be replaced, as well as the approximate amount of labor needed to complete the job. The Company's computer system identifies and tracks the parts and associated work orders from each landing gear or hydromechanical component throughout the overhaul process in order to maintain the integrity of the landing gear or hydromechanical component being serviced. Shop travelers provide a complete, detailed listing of all repair and overhaul work steps and processes. Once a landing gear is disassembled, the individual parts are washed, visually inspected for obvious damage and permanently identified using the internal work order number assigned to that delivery order. Major and minor parts are then processed for engineering evaluation and disposition of required repair work steps. Parts Rework, Replacement and Reassembly. The next phase of an overhaul involves reworking existing parts to specifications set by the Company's customers. This entails a combination of machining, plating, heat treatment, metal reshaping, surface finishing and restoration of organic finish. At this phase, each part is accompanied by the customized bar-coded traveler which facilitates the computerized prioritization and tracking of a part through the rework phase. Tight control is maintained over scheduling for each part, enabling the Company to remain within its required turnaround time. The Company performs the majority of the repair and overhaul procedures in its facilities using proprietary or specialized repair techniques. In addition, the Company utilizes in-house manufacturing capabilities to fabricate certain parts used in the overhaul process that are otherwise difficult to obtain. If a part cannot be reclaimed, the Company may install either a new part or a previously-reworked part from inventory. The Company maintains an inventory of serviceable parts that it has reworked for this purpose. Overhauling parts or using serviceable parts from inventory in lieu of new parts generally lowers customer costs and increases the Company's margins in comparison to an overhaul that consists of exclusively new spare parts. In addition, these manufacturing and service capabilities are integral to the Company's competitive position -5- because they enable the Company to maintain or increase the quality of work performed and reduce cost and turnaround time relative to its competitors. Inspection and Shipping. After completing the rework phase of the overhaul/repair process, each part is delivered to the assembly area where the end unit is assembled, tested and final inspection is completed. Once the end unit assembly has been accepted through final inspection it is moved to shipping, where it is packaged and prepared for dispatch. Pricing. The Company offers its customers different pricing arrangements for its repair and overhaul services. Pricing generally depends on the volume and complexity of the work performed, the kind and number of new or remanufactured spare parts used in the repair or overhaul, and the required turnaround time. For many of its customers, the Company exchanges a previously overhauled shipset from its inventory for an as-removed shipset from the customer's aircraft. The Company charges the customer a fixed overhaul fee, and upon completing the overhaul of the as-removed shipset, the Company charges the customer an additional fee for spare parts or extra services required to overhaul the landing gear to the customer's specifications. The Company typically bills a substantial portion of the repair and overhaul fee to the customer up-front upon receiving its as-removed shipset and generally receives payment for this portion of the overhaul fee before completing the overhaul. With certain of its customers for whom the Company regularly provides parts and services on entire fleets or large numbers of aircraft, the Company utilizes a flat fee fixed price arrangement which it typically sets forth in long-term service agreements. Pursuant to the Company's service agreements, the Company performs repair and overhaul services on a scheduled or as-needed basis. Pricing depends on the volume and type of aircraft landing gear or hydromechanical component to be serviced and the required turnaround time. Under its long-term service agreements, the Company is able to plan in advance for equipment and inventory requirements and can achieve efficiencies in labor hours and materials usage relative to the estimate on which the contract price was based. Parts Distribution General. Aircraft spare parts are classified within the industry as (i) factory new, (ii) new surplus, (iii) overhauled, (iv) serviceable, and (v) as- removed. A factory new or new surplus part is one that has never been installed or used. Factory new parts are purchased from manufacturers or their authorized distributors. New surplus parts are purchased from excess stock of airlines, repair facilities or other distributors. An overhauled part has been disassembled, inspected, repaired, reassembled and tested by a licensed repair facility. An aircraft spare part is classified serviceable if it is repaired by a licensed repair facility rather than completely disassembled as in an overhaul. A part may also be classified serviceable if it is removed by the operator from an aircraft or engine while operating under an approved maintenance program and is functional and meets any manufacturer or time and cycle restrictions applicable to the part. A factory new, new surplus, overhauled or serviceable part designation indicates that the part can be immediately utilized on an aircraft. A part in as-removed condition requires functional testing, repair or overhaul by a licensed facility prior to being returned to service in an aircraft. Parts Sales. The Company sells factory new, FAA-approved parts manufactured by approximately 80 OEMs, including Societe D'Application Des Machines Motrices ("SAMM"), Dunlop Equipment Division, Parker Hannifin Corporation ("Parker Hannifin") and Messier-Bugatti and overhauled aircraft spare parts to a diverse base of customers in the aviation industry. The Company believes that it provides customers with value added parts distribution services by offering immediate availability, broad product lines, technical assistance and additional services. Customers Commercial. The Company serves a broad base of domestic and international customers in the aviation industry. The Company's customers include British Airways, Federal Express, American Airlines, Air France, EVA Airways, US Airways, Continental Airlines and many other national and regional passenger and cargo airlines. Approximately 80% of the Company's landing gear business is derived from long-term contracts, generally of five to seven years in duration, representing one overhaul cycle for a customer's fleet. The Company believes that the long-term relationships it has developed with many of its customers provide the Company with a stable and ongoing base of business, as well as a source of new business opportunities. Government Contracts. 1998 and 1997 sales to the United States government and its agencies represented approximately 4.2% and 6.5%, respectively, of consolidated revenue. The Company's largest government customer has been the United States Coast Guard ("USCG"). The Company has an agreement with the USCG to provide repair and overhaul services and spare parts on an as-needed, fixed price basis for Dauphin II helicopters. The agreement is for a one- -6- year term which the USCG may renew for additional one-year terms through the year 2000. Because government sales are subject to competitive bidding and government funding, there can be no assurance that such sales will continue at previous levels. Although the Company's government contracts are subject to termination at the election of the government, in the event of such a termination the Company would be entitled to recover from the government all allowable costs incurred by the Company through the date of termination. Material Customers. Customers which have accounted for more than 10% of sales during the last three years are: (i) in 1998, British Airways (22.3%) and Federal Express (17.5%); (ii) in 1997, Federal Express (19.3%); and (iii) in 1996, Federal Express (18.4%) and the USCG (11.2%). Management Information System And Quality Assurance The Company utilizes its management information system to shorten turnaround times for customer orders, increase output, improve inventory management and reduce costs by eliminating duplication of work and reducing errors in ordering of parts. The system consists of an automated inspection and routing system, a material resources planning module, a bar-coded shop floor control module, an inventory control and parts tracing module, a tooling calibration module and a general accounting module. The system enables the Company to shorten lead times, increase output and improve inventory management by allowing the Company to manage and control the process of detailed parts inspection, materials requisitioning and work order scheduling and release. The system's database contains much of the information required to perform landing gear inspection activities, including illustrated parts catalogues, parts specifications and other technical data. This has largely eliminated the need to update parts catalogues manually and allows an inspector using a personal computer located at his workstation to (i) refer to computer based parts manuals and catalogues to identify needed parts, (ii) access inventory to check on the availability of needed parts, (iii) requisition needed parts from inventory, and (iv) create and record an audit trail for all inspected parts and processes. These features of the system have substantially reduced total detailed inspection time required in the overhaul process. Using the system, all materials utilized and labor performed in connection with a work order are recorded using bar code scanners located throughout the Company's facility. Work order travelers are generated upon commencement of a repair or overhaul and accompany the separate parts of each landing gear or hydromechanical component throughout the overhaul process. After each stage of the process is completed, the employee who performed the work uses the bar code system to record the date of completion, his or her employee identification number, critical dimensions and the quantity processed, accepted or rejected. For each repair or overhaul that it performs, the Company records: (i) all essential operations and tests conducted; (ii) inspection data on all components repaired, overhauled or exchanged for new components; and (iii) the sources of all materials issued during the course of the work. This function allows the Company to provide more accurate cost and timing estimates to customers, facilitates faster and more accurate preparation of customer invoices and forms the basis of the Company's comprehensive quality assurance program. In addition, shoploading and material requisition personnel receive more accurate planning data. Using the system, management can (i) plan for material requirements in advance so that required materials for a specific unit are on hand in time to facilitate on-time delivery, and (ii) optimize daily manpower and materials utilization based upon sales forecasts and actual orders. Equipment Maintenance and Tooling The Company performs all of the maintenance and repair on the equipment used in the repair and overhaul process. The Company's maintenance personnel perform various regularly scheduled maintenance procedures on the Company's equipment on a weekly, monthly and annual basis, and shift operators perform daily preventive maintenance. Precision measurement accessories installed on certain machines, which require periodic calibration, are maintained and serviced by approved vendors and closely monitored by the Company. The Company invests significant material and resources to design and construct tooling and fixtures to support its current product line and improve the efficiency of the repair and overhaul process. Manufacturer-designed tooling is typically limited to specialized tools to aid in the disassembly, assembly and testing of landing gear components, such as spanner wrenches and seal installation tools. From time to time, the Company's employees may develop modifications to existing tooling or ideas for new tooling and fixtures in order to accomplish a specific machining or testing operation or to -7- improve the performance of the overhaul process. Tooling and fixtures used in machining and plating operations are conceived, designed and fabricated in-house by the technical personnel involved in the Company's daily operations to improve the labor efficiency of a process and reduce the cost of performing a repetitive process. The Company believes that its ability to design and fabricate tooling used in its operations allows it to maximize efficiencies and enables its customers to realize cost savings and improved turnaround time. Suppliers And Procurement Practices The primary sources of parts and components for the Company's overhaul operations and parts distribution business are domestic and foreign airlines, OEMs and aircraft leasing companies. The supply of parts and components for the Company's aftermarket sales is affected by the availability of excess inventories that typically become available for purchase as a result of new aircraft purchases by commercial airlines. These new aircraft purchases reduce the airline's need for spares supporting the aircraft that have been replaced. Aftermarket supply is also affected by the availability of new parts from OEMs and the availability of older, surplus aircraft that can be purchased for the value of the major parts and components. Although the Company does not have fixed agreements with the majority of its suppliers, it has frequently been able to obtain price discounts from suppliers because of the volume and regularity of its purchases. The Company has ten-year agreements with Dunlop Limited, Aviation Division and Dunlop Equipment Division (collectively, "Dunlop") that enable it to purchase Dunlop parts at a discount from list price for resale and for use in the repair and overhaul of a variety of fixed wing aircraft and helicopters. Dunlop has been the largest single supplier of materials to the Company in 1997 and 1998. The Company also has agreements with Messier-Bugatti, SAMM and Eurocopter France that enable the Company to purchase new aircraft parts at discounts from list price. Although the Company does not have agreements with many of its suppliers, and competes with other parts distributors for production capacity, the Company believes that its sources of supply and its relationships with its suppliers are satisfactory. The Company has developed procurement practices to ensure that all supplies received conform to contract specifications. For cost, quality control and efficiency reasons, the Company generally purchases supplies only from vendors with whom the Company has an on-going relationship and/or whom the Company's customers have previously approved. The Company has qualified second sources or has identified alternate sources for all of its supplies. The Company chooses its vendors primarily on the quality of the parts supplied and the vendor's record for on-time performance. The Company regularly evaluates and audits the performance of its approved vendors. Repeated failure to comply with the Company's quality and delivery requirements may cause the Company to remove a vendor from its approved vendor list. Sales And Marketing The Company's sales and marketing strategy targets commercial and government customers with large fleets of aircraft that require regular repair and overhaul of landing gear parts and components. In recent years, the Company has significantly expanded its direct sales efforts, with the dual goals of increasing sales from the Company's existing customer base as well as attracting new customers. In particular, the Company focuses its sales efforts on encouraging its existing and prospective customers to enter into long-term agreements with the Company for the repair and overhaul of landing gear on all aircraft within a fleet, or alternatively, to engage the Company to perform repair and overhaul services on several aircraft at one time. In its sales and marketing efforts, the Company emphasizes its competitive strengths, including its superior quality of service, competitive pricing, rapid turnaround time and extensive industry experience. The Company markets and sells its products and services worldwide both directly through an in-house sales staff and indirectly through a network of independent sales representatives. Air Resources, Inc., an aviation sales representative agency ("Air Resources"), markets and sells the Company's products and services to a number of domestic airlines in return for a commission on sales made through Air Resources' efforts. The Company's domestic sales are conducted primarily by Air Resources, which focuses its efforts on major domestic commercial carriers, as well as the Company's in-house sales force. The Company conducts its international sales and marketing through a number of independent agencies based worldwide in such countries as France, Sweden, Mexico and India. Additionally, senior management plays an active role in marketing the Company's product lines. The Company's president and chief executive officer, Dave Lokken, oversees all sales -8- activities. Brian Carr, managing director of Sun Valley operations, supervises landing gear sales, and Michael Riley, vice president of the hydromechanical business unit, supervises hydromechanical component sales. The Company's sales staff works closely with engineering and customer support personnel to provide cost effective solutions to maintaining landing gear and hydromechanical systems, stressing the Company's repair and overhaul engineering expertise, turnaround times and component overhauling capabilities. In addition, the Company actively participates in many of the major aviation industry gatherings and air shows and hosts groups of aircraft operators at technical and other meetings. In certain instances, the Company bids on government contracts through its government contracts department, which coordinates with the Company's sales and marketing team. Growth Strategy Pursue Additional International Growth Opportunities. The Company believes that the international aviation aftermarket presents the greatest potential for substantial growth. With the large air transport repair and overhaul operations that it has established through the recent BA Acquisition, and the hydromechanical repair and overhaul services that it performs from its Netherlands facility, the Company believes it will be able to provide customers with a full range of repair and overhaul services in Europe. In addition, the Company believes that the break-up of aircraft maintenance consortiums will create opportunities for the Company to expand its European, Middle Eastern and Asian customer bases. With facilities located in the United Kingdom and California, the Company believes that it is geographically positioned to pursue additional growth opportunities in both the European and Asian aviation aftermarkets. Focus on Long-Term Service Agreements. Through increased sales and marketing efforts, the Company is actively seeking to enter into long-term service agreements with its existing and potential customers to provide its services for all of their respective aircraft. A recent example of the Company's success in this area includes the Company's five-year service agreement with EVA Airways, based in Taiwan, Republic of China. The Company had previously entered into a contract to provide overhaul services for all of EVA's B767 aircraft. Based on the Company's performance in servicing this fleet, EVA recently awarded the Company another contract for its entire fleet of B747-400's. The Company believes that long-term service agreements provide it with a more predictable and consistent flow of business. Approximately 80% of the Company's landing gear business, and approximately 64% of the Company's consolidated revenue, are currently derived from long-term service contracts. Expand Existing Operations. Hawker Pacific seeks to increase sales and operating income by marketing its landing gear repair and overhaul services to new and existing customers, and by expanding its hydromechanical component product lines. The Boeing Outlook projects that the global fleet of aircraft will grow from 12,300 aircraft at the end of 1997 to 17,700 aircraft in 2007, and 26,200 aircraft in 2017. The Company plans to expand its landing gear repair and overhaul operations to capitalize on this growth trend. Because the Company believes that improved profit margins in fixed wing operations are primarily a function of increased volume, it plans to expand its capacity to perform fixed wing landing gear repair and overhaul services. The Company also intends to expand its hydromechanical component service offerings. The Company recently began to offer repair and overhaul of constant speed drive-integrated drive generators. Accelerate Growth through Acquisition. At such times as its financial condition and resources permit, the Company will pursue strategically located companies with technology, equipment and inventory that complement or expand the Company's existing operations and that may enable it to expand into new geographic or product markets. In particular, the Company seeks to acquire companies that will enable it to expand its international operations or horizontally increase its product offerings within the aviation repair and maintenance industry. Competition Numerous companies compete with Hawker Pacific in the aviation services industry. The Company primarily competes with various repair and overhaul organizations, which include the service arms of OEMs, the maintenance departments or divisions of large air carriers (some of which also offer maintenance services to third parties) and independent organizations such as the Aerospace Division of B.F. Goodrich Company, the Landing Gear Division of AAR Corporation ("AAR"), Revima, a company organized and operating under the laws of France, and Dowty Aerospace Aviation Services. The Company's major competitors in its hydromechanical components business include AAR and OEMs such as Sunstrand, Aeroquip Vickers, Inc., Parker-Hannifin Corporation, Messier-Bugatti and Lucas. -9- Government Regulation The Company is highly regulated worldwide by the FAA, the JAA (a consortium of European regulatory authorities), and various other foreign regulatory authorities, including the Dutch Air Agency, which regulates the Company's Netherlands' operations, and the Civil Aviation Authority, which regulates the Company's United Kingdom operations. These regulatory authorities require all aircraft to be maintained under continuous condition monitoring programs and periodically to undergo thorough inspection. In addition, all parts must be certified by the FAA and equivalent regulatory agencies in foreign countries and conformed to regulatory standards before installation on an aircraft. The Company is a certified FAA and JAA approved repair station, and has been granted Parts Manufacturer Approvals by the FAA Manufacturing Inspectors District Office. In addition, the Company's operations are regularly audited and accredited by the Coordinating Agency for Supplier Evaluation, formed by commercial airlines to approve FAA approved repair stations and aviation parts suppliers. Environmental Matters and Proceedings The Company's operations are subject to extensive and frequently changing federal, state and local environmental laws and substantial related regulation by government agencies, including the United States Environmental Protection Agency (the "EPA"), the California Environmental Protection Agency, and the United States Occupational Safety and Health Administration. Among other matters, these regulatory authorities impose requirements that regulate the operation, handling, transportation and disposal of hazardous materials generated by the Company during the normal course of its operations, govern the health and safety of the Company's employees and require the Company to obtain and maintain permits in connection with its operations. See "Risk Factors-- Environmental Regulations". Environmental Proceedings. In October 1993, the United States of America and the State of California each filed lawsuits in the United States District Court for the Central District of California, against the Company and the owners (the "Owners") of one of the Company's facilities (the "Site"). The lawsuits (the "SFVB Actions") alleged that the groundwater in the San Fernando Valley Basin ("SFVB") had been contaminated with volatile organic compounds and other hazardous substances released from the Site, requiring costly investigation, evaluation and remediation efforts for which the Company and the Owners were liable. In February and June 1997, the Company entered into settlements with the United States of America and State of California pursuant to which the Company paid the EPA $382,500 and the State of California $40,950, respectively. The Company believes that it will not be liable to the United States government or the State of California for any future costs related to this matter, and the California Regional Water Quality Control Board recently notified the Company of its conclusion that soil contamination at the Site does not represent a significant threat to groundwater quality. BTR Dunlop, Inc., the former owner of the Company ("BTR"), has agreed to indemnify the Company against any future amounts for which the Company may be responsible in connection with the SFVB Actions. See "Certain Transactions--Acquisition of the Company from BTR." From August 1997 through December 1998, several lawsuits were filed by various individuals against Lockheed Martin Corporation and various other parties, including the Company, in the Los Angeles Superior Court pleading various causes of action in connection with certain alleged injuries caused by toxic and carcinogenic chemicals allegedly released by the defendants in the Burbank and Glendale areas of Los Angeles County, California. The individual plaintiffs seek unspecified compensatory and punitive damages. The Company does not believe that it caused the release of toxic and carcinogenic chemicals alleged in the complaints and believes that it is entitled to indemnification from BTR in the event it is held responsible for any damages in these lawsuits. The Company recently reached agreement to settle all liability associated with said lawsuits for a nominal payment. The settlement documents are in the process of being finalized. Employees and Employee Training As of March 31, 1999, the Company had 453 full-time employees, of whom 284 are employed at the Company's Sun Valley headquarters and repair facility, 156 are employed with the Company's United Kingdom subsidiary, and 13 are employed at the Company's repair facility in the Netherlands. In the United Kingdom, 83 former British Airways employees, representing 18% of the Company's work force, are covered by a collective bargaining agreement. Each of the Company's technical employees receives specific training in the individual repair and overhaul functions that he or she performs, in addition to comprehensive general training in total quality management procedures, statistical process control and material resource planning. The Company also regularly conducts in-house training programs, which the Company's management designs using standard industry practice manuals. In-house training is provided for the -10- Company's technical and engineering employees on a number of subjects, including materials handling, corrosion prevention and control, surface tension etch inspection and shot peening. Risk Factors SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS, THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION ENTITLED "RISK FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS ANNUAL REPORT, PERSONS WHO MAY OWN OR INTEND TO OWN SECURITIES OF THE COMPANY SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS. Aviation Industry Risks The Company derives all of its sales and operating income from the services and parts that it provides to its customers in the aviation industry. Therefore, the Company's business is directly affected by economic factors and other trends that affect its customers in the aviation industry, including a possible decrease in aviation activity, a decrease in outsourcing by aircraft operators or the failure of projected market growth to materialize or continue. When such economic and other factors adversely affect the aviation industry, they tend to reduce the overall demand for the Company's products and services, thereby decreasing the Company's sales and operating income. Fluctuations in Results of Operations The Company's operating results are affected by a number of factors, including the timing of orders for the repair and overhaul of landing gear and fulfillment of such contracts, the timing of expenditures to manufacture parts and purchase inventory in anticipation of future services and sales, parts shortages that delay work in progress, general economic conditions and other factors. Although the Company has secured several long-term agreements to service multiple aircraft, the Company receives sales under these agreements only when it actually performs a repair or overhaul. Because the average time between landing gear overhauls is seven years, the work orders that the Company receives and the number of repairs or overhauls that the Company performs in particular periods may vary significantly causing the Company's quarterly sales and results of operations to fluctuate substantially. The Company is unable to predict the timing of the actual receipt of such orders and, as a result, significant variations between forecasts and actual orders will often occur. In addition, the Company's need to make significant expenditures to support new aircraft in advance of generating revenues from repairing or overhauling such aircraft may cause the Company's quarterly operating results to fluctuate. Furthermore, the rescheduling of the shipment of any large order, or portion thereof, or any production difficulties or delays by the Company, could have a material adverse effect on the Company's quarterly operating results. Risks Relating to Acquisition Strategy; Establishment of United Kingdom Operations The Company may attempt to grow by acquiring service and parts providers whose operations or inventories complement or expand the Company's existing repair and overhaul businesses, or whose strategic locations enable the Company to expand into new geographic markets. The Company's ability to grow by acquisition depends upon, and may be limited by, the availability of suitable acquisition candidates and the Company's capital resources. See "Liquidity and Capital Resources" in Item 1. Acquisitions involve risks that could adversely affect the Company's operating results, including the assimilation of the operations and personnel of acquired companies, the amortization of acquired intangible assets and the loss of key employees of acquired companies. Although the Company investigates the operations and assets that it acquires, there may be liabilities that the Company fails or is unable to discover, and for which the Company as a successor owner or operator may be liable. In addition, costs and charges, including legal and accounting fees and reserves and write-downs relating to an acquisition, may be incurred by the Company or may be reported in connection with any such acquisition. The Company evaluates acquisition opportunities from time to time, but the Company has not entered into any commitments or binding agreements to date, except with respect to the BA Acquisition. There can be no assurance that the Company will be able to consummate acquisitions on satisfactory terms, or at all, or that it will be successful in integrating any such acquisitions, including the BA Acquisition, into its operations. The Company had no history or experience operating in the United Kingdom prior to the BA acquisition. The likelihood of the success of the Company's United Kingdom operations -11- must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with a new business. These include, without limitation, the need to establish operating, marketing and administrative capabilities, the need to implement the Company's management information system in its new location, the need to locate and move into a new facility, unanticipated marketing problems, new competitive pressures, and increased expenses. Risks Associated With Expansion Of International Operations The Company's growth strategy is based in large part on the Company's ability to expand its international operations, which will require significant management attention and financial resources. The Company currently has a subsidiary in the United Kingdom and a division in the Netherlands. There can be no assurance that the Company's efforts to expand operations internationally will be successful. In addition, international operations are subject to a number of risks, including longer accounts receivable collection periods and greater difficulty in accounts receivable collections, unexpected changes in regulatory requirements, foreign currency fluctuations, import and export restrictions and tariffs, difficulties and costs of staffing and managing foreign operations, potentially adverse tax consequences, political instability, the burdens of complying with multiple, potentially conflicting laws and the impact of business cycles and economic instability outside the United States. The Company's sales are principally denominated in United States dollars and British pounds, and to a lesser extent in Dutch guilders. The Company makes substantial inventory purchases in French francs from such suppliers as Messier- Bugatti, Societe D'Applications Des Machines Motrices and Eurocopter France. The Company's Netherlands facility's inventory purchases are primarily United States dollar denominated, while sales and operating expenses are partially denominated in Dutch guilders. To date, the Company's business has not been significantly affected by currency fluctuations or inflation. Fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive in particular countries, leading to a reduction in sales in that country. Substantial Competition Numerous companies compete with the Company in the aviation services industry. The Company expects that competition in its industry will increase substantially as a result of industry consolidations and alliances in response to the trend in the aviation industry toward outsourcing of repair and overhaul services. In addition, as the Company moves into new geographic or product markets it will encounter new competition. The Company believes that the primary competitive factors in its marketplace are quality, price, rapid turnaround time and industry experience. Certain of the Company's competitors have substantially greater financial, technical, marketing and other resources than the Company. These competitors may have the ability to adapt more quickly to changes in customer requirements, may have stronger customer relationships and greater name recognition and may devote greater resources to the development, promotion and sale of their products than the Company. There can be no assurance that competitive pressures will not materially and adversely affect the Company's business, financial condition or results of operations. See "Business--Competition." Government Regulation The Company's operations are regularly audited and accredited by the Coordinating Agency for Supplier Evaluation, formed by commercial airlines to approve FAA approved repair stations and aviation parts suppliers. If material authorizations or approvals are revoked or suspended, the Company's operations will be materially and adversely affected. As the Company attempts to commence operations in countries in which it has not previously operated, it will need to obtain new certifications and approvals. In addition, if new and more stringent regulations are adopted by foreign or domestic regulatory agencies, or oversight of the aviation industry is increased in the future, the Company's business may be adversely affected. Dependence On Key Suppliers The Company purchases landing gear spare parts and components for a variety of fixed wing aircraft and helicopters. The Company has separate 10-year agreements that each expire in October 2006 with: (i) Dunlop Limited, Aviation Division; (ii) Dunlop Limited, Precision Rubber; and (iii) Dunlop Equipment Division. Under two of these agreements, the Company purchases discounted parts for resale and repair from Dunlop. For the years ended December 31, 1998 and 1997, Dunlop accounted for approximately $4,513,000 and $4,301,000, respectively, of the spare parts and components that the Company purchased in such periods. Failure by any one of these divisions of Dunlop to renew its agreement on -12- similar terms when it expires could have a material adverse affect on the Company's business. The Company's single largest supplier during 1998 was Boeing, who provided the Company $13,000,000 of spares parts and components. In addition, the Company has agreements with Messier-Bugatti, SAMM and Eurocopter France that enable the Company to purchase new aircraft parts at discounts from list price. Many of the Company's supplier agreements, other than its agreements with Dunlop, are short-term and can be terminated by the supplier upon providing ninety days prior written notice. A decision by any of these suppliers to terminate their agreements would reduce the competitive advantage the Company derives therefrom. Customer Concentration British Airways, Federal Express and the USCG have been the only customers accounting for more than 10% of sales during the last three years. For additional detail please see "Business--Material Customers". Concentration of Credit Risk At December 31, 1998, 25.7% and 19.4% of the Company's total accounts receivable were associated with British Airways and Federal Express, respectively. At December 31, 1997, 18.9% and 6.1% of the Company's total accounts receivable were associated with Federal Express and British Airways, respectively. At December 31, 1996, 7.4% and 9.3% of the Company's total accounts receivable were associated with Federal Express and the USCG, respectively. Write-offs against accounts receivable have been one-twentieth of one percent in 1998, and two-tenths of one percent in 1997. The Company can not provide any assurance that such favorable bad debt experience will continue. Environmental Regulations The Company's operations are subject to extensive and frequently changing federal, state and local environmental laws and substantial related regulation by government agencies, including the EPA, the California Environmental Protection Agency and the United States Occupational Safety and Health Administration. Among other matters, these regulatory authorities impose requirements that regulate the operation, handling, transportation and disposal of hazardous materials generated by the Company during the normal course of its operations, govern the health and safety of the Company's employees and require the Company to obtain and maintain permits in connection with its operations. This extensive regulatory framework imposes significant compliance burdens and risks on the Company and, as a result, substantially affects its operational costs. In addition, the Company may become liable for the cost of removal or remediation of certain hazardous substances released on or in its facilities without regard to whether the Company knew of, or caused, the release of such substances. The Company believes that it currently is in material compliance with applicable laws and regulations and is not aware of any material environmental problem at any of its current or former facilities. There can be no assurance, however, that its prior activities did not create a material problem for which the Company could be responsible or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulation, or an increase in the amount of hazardous substances generated by the Company's operations) will not result in material environmental liability to the Company and materially and adversely affect the Company's financial condition and results of operations. The Company's plating operations, which use a number of hazardous materials and generate a significant volume of hazardous waste, increase the Company's regulatory compliance burden and compound the risk that the Company may encounter a material environmental problem in the future. Furthermore, compliance with laws and regulations in foreign countries in which the Company locates its operations may cause future increases in the Company's operating costs or otherwise adversely affect the Company's results of operations or financial condition. See also "Business-- Environmental Matters and Proceedings". Product Liability Risks The Company's business exposes it to possible claims for personal injury, death or property damage which may result from the failure or malfunction of landing gears, hydromechanical components or aircraft spare parts repaired or overhauled by the Company. Many factors beyond the Company's control could lead to liability claims, including the failure of the aircraft on which landing gear or hydromechanical components overhauled by the Company is installed, the reliability of the customer's operators of the aircraft and the maintenance of the aircraft by the customer. The Company currently has in force aviation products liability and premises insurance, which the Company believes provides coverage in amounts and on terms that are generally consistent with industry practice. The Company has not experienced any material product liability claims related to its products. There can be no assurance that the amount of product liability insurance that the Company carries at the time a product liability claim is be made will be sufficient to protect the Company. -13- Dependence On Key Personnel The continued success of the Company depends to a large degree upon the services of certain of its executive officers and upon the Company's ability to attract and retain qualified managerial and technical personnel experienced in the various operations of the Company's business. Loss of the services of such employees, particularly David Lokken, President and Chief Executive Officer; Philip Panzera, Vice President and Chief Financial Officer; Dennis Biety, Managing Director of Hawker Pacific Aerospace Ltd.; Brian Carr, Managing Director of Sun Valley Operations; or Michael Riley, Vice President- Hydromechanical Operations, could adversely affect the operations of the Company. The Company has entered into employment agreements expiring in 2001 with Messrs. Lokken and Panzera, and 2003 with Mr. Biety. Messrs. Carr and Riley have employment agreements with the Company which expire on October 31, 1999. Risk Associated with Facilities Reorganization The Company's UK subsidiary will relocate to a new facility in mid-1999. See "Item 2--Properties". This relocation has been planned for over one year, and the Company believes it has an effective strategy to move the facility with a minimum of disruption. The UK operation does, however, have a large amount of heavy machinery and equipment. Moving these items could present unforeseen problems. It is also difficult to predict to what extent the Company's principal operations will be affected by the move. Deliveries to key customers might be missed, with any delays causing additional fees to the subsidiary or potentially the loss of the customer. There is also the risk that machinery or equipment may be lost, damaged or stolen during the relocation. The Company has theft, casualty and business interruption insurance, but no assurance can be given that the proceeds from such insurance will be sufficient to reimburse the Company for any damages it may suffer. The Company is in the process of expanding its plating operations at its Sun Valley facility. This expansion is not expected to be completed until sometime in 2000. The plating shop of the UK operation is not scheduled to move to the new facility until sometime in early 2000. Any failure or delay in the expansion or relocation of these plating operations could impair the Company's ability to service its customers. Control By Existing Shareholders And Anti-Takeover Provisions As of March 26, 1999, the five shareholders (the "Unique Shareholders") of Unique Investment Corporation ("Unique") beneficially owned in the aggregate approximately 40.4% of the Company's outstanding common stock, and by virtue of such ownership, have effective control over all matters requiring a vote of shareholders, including the election of a majority of directors. See "Security Ownership of Certain Beneficial Owners and Management". On March 25, 1999, the Company declared a dividend distribution of one Preferred Share Purchase Right (the "Rights") on each outstanding share of its common stock, payable to shareholders of record as of that date. The Rights attached to the Company's common stock and will be traded separately and be exercisable only in the event that a person or group acquires or announces the intent to acquire 20% or more of the Company's common stock. Each Right will entitle the holder to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $15. The Rights are designed to insure that all shareholders receive fair and equal treatment in the event of any proposed takeover of the Company, and to guard against partial tender offers, squeeze-outs, open market accumulations and other abusive tactics to gain control of the Company without paying all shareholders a control premium. The Rights will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board of Directors prior to attempting a takeover. For additional information, please refer to Note 14-- Subsequent Events to the Consolidated Financial Statements. Stock Price Volatility In recent years, the stock market has experienced significant price and volume fluctuations. These fluctuations, which are often unrelated to the operating performances of specific companies, have had a substantial effect on the market price of stocks, particularly for many small capitalization companies. The Company's common stock is also thinly traded, which frequently causes relatively small trades to have a disproportionate effect on the Company's market price. -14- ITEM 2. PROPERTIES The Company's principal executive offices and production facilities are located in Sun Valley, California, near the Burbank Airport in Los Angeles. The Company occupies the premises, comprising approximately 193,000 square feet and nine buildings, pursuant to various long-term leases that expire on dates ranging between 2004 and 2010. Hawker Pacific Aerospace Ltd. operates the Company's second major repair facility. This operation is currently located in a British Airways building on Heathrow Airport in London. Pursuant to the BA acquisition agreement, the UK subsidiary must relocate from this 125,000 square foot facility during 1999. The Company intends to move the operation to a new 140,000 square foot facility in Hayes, about four miles from Heathrow. The relocation will take place from May 1999 to July 1999. The relocation will increase the subsidiary's capacity and capability, and is expected to significantly improve the Company's ability to serve current and future European customers, and compete effectively for new business. During 1998 the Company's Holland operation relocated to a 11,700 square foot facility near Schiphol Airport in Amsterdam. The lease for the facility expires in 2008. ITEM 3. LEGAL PROCEEDINGS From August 1997 through December 1998, several lawsuits were filed by various individuals against Lockheed Martin Corporation and various other parties, including the Company, in the Los Angeles Superior Court pleading various causes of action in connection with certain alleged injuries caused by toxic and carcinogenic chemicals allegedly released by the defendants in the Burbank and Glendale area of Los Angeles County, California. The individual plaintiffs seek unspecified compensatory and punitive damages. The Company does not believe that it caused the release of toxic and carcinogenic chemicals alleged in the complaints and believes that it is entitled to indemnification from BTR in the event the Company is held responsible for any damages in these lawsuits. The Company recently reached agreement to settle all liability associated with said lawsuits for a nominal payment. The settlement documents are in the process of being finalized. See also "Business--Environmental Matters and Proceedings". The Company is sued from time to time in the ordinary course of business. At the present time, there are no material legal proceedings against the Company, its subsidiary, or any officer, director, affiliate or five percent shareholder. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is quoted on the NASDAQ National Market under the symbol "HPAC". The following table sets forth the high and low sale prices as reported by NASDAQ from January 29, 1998, the date public trading of the Company's common stock commenced. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Sale Price --------------- Low High --- ---- 1998 From January 29, 1998 $8.00 $11.25 2nd Quarter 10.00 14.125 3rd Quarter 1.875 13.50 4th Quarter 2.5625 4.875 1999 1st Quarter 2.50 5.25
-15- As of March 31, 1999, the Company's common stock was held by 29 shareholders of record, and owned beneficially by an estimated 1,371 shareholders. The Company has not paid cash dividends on its common stock since its inception and has no plans to pay dividends on its common stock in the foreseeable future. The Company's current bank credit facility prohibits the payment of dividends. The Company intends to reinvest future earnings, if any, in the development and expansion of its business. Included in the totals of options granted and options cancelled were 144,207 options that were repriced from $8.00 to $3.56. These options included all 115,365 options granted to senior management in November 1997, and 28,842 options granted to senior management under the 1997 Plan. These newly issued options were repriced to be consistent with options granted to certain members of middle management in October 1998, and were issued pursuant to exemptions available under Section 3(9) of the Securities Act of 1933, as amended.. The strike price for these options was established at the $3.56 closing price of the Company's common stock on the date issued. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth for the periods and the dates indicated certain financial data which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included in this Annual Report. For the years ended December 31, 1994, 1995 and the ten months ended October 31, 1996, the Company was a wholly owned subsidiary of BTR Dunlop Holdings, Inc., and financial data related to those periods is presented under columns marked "Predecessor". Effective November 1, 1996, the Company was acquired by the Unique Shareholders and the Company's then current executive officers. All financial data subsequent to October 31, 1996, is presented below under columns marked "Successor". The balance sheet data as of December 31, 1995, 1996, 1997 and 1998, and the statement of operations data for the fiscal year ended December 31, 1995, the ten months ended October 31, 1996, the two months ended December 31, 1996, and the years ended December 31, 1997 and 1998, are derived from the financial statements of the Company which have been audited by Ernest & Young LLP, independent accountants. The balance sheet and statement of operations data as of December 31, 1994, are derived from unaudited financial statements. The pro forma statement of operations data for the year ended December 31, 1996, is derived from unaudited pro forma adjustments which were made to estimate the results of operations for fiscal year 1996 as if the purchase had occurred on January 1, 1996. For additional detail on these pro forma adjustments, please refer to the "Organization and Basis of Presentation" in Note 1 to the Consolidated Financial Statements. The unaudited financial statements have been prepared by the Company on a basis consistent with the Company's audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company's results of operations for the period.
Successor Predecessor --------------------------------------------------- ------------------------------------- Year Ended December 31, Two Months Ten Months Year ended ----------------------------------- Ended Ended December 31, (pro forma) December 31, ----------------------- (In thousands, except per share data) 1998 1997 1996 1996 1996 1995 1994 - ------------------------------------ ---- ---- ---- ---- ---- ---- ---- Revenue $65,151 $41,042 $39,004 $ 6,705 $32,299 $35,012 $31,743 Net income (loss) (2,198) 788 (1,523) 469 (1,606) 265 1,050 Net income (loss) per share (0.39) 0.25 (0.48) 0.15 -- -- -- Total assets 87,237 40,898 35,178 -- -- 35,455 25,865 Total long-term debt (excluding current portion) 2,500 17,700 19,150 -- -- 27,310 21,404
On February 4, 1998, the Company acquired the British Airways repair and overhaul operation in the United Kingdom. See "Organization and Basis of Presentation" in Note 1 to the Consolidated Financial Statements. -16- Income tax expenses for the two months ended December 31, 1996, and the year ended December 31, 1997, include provisions of $382,000 and $467,000, respectively, primarily due to changes in deferred tax assets. No tax was actually payable for such provisions. See Note 4 to the Consolidated Financial Statements. Restructuring charges of $1,196,000 are included during the ten months ended October 31, 1996, and the pro forma year ended December 31, 1996, related to costs incurred to shut down discontinued operations of Dunlop Miami. See Note 10 to the Consolidated Financial Statements. Included in selling, general and administrative expenses for the ten months ended October 31, 1996, and the pro forma year ended December 31, 1996, are expenditures related to an EPA Claim of approximately $947,000. For the years ended December 31, 1993 and 1994, selling, general and administrative expenses included $122,000 and $410,000, respectively, for expenditures related to the EPA Claim. No such costs were incurred during the two months ended December 31, 1996, or the year ended December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations". Fiscal 1995 includes a non-recurring charge to cost of revenues of $927,000 for disposal of inventory related to the Dunlop Merger which had operations in Chatsworth, CA and Miami, FL. Fiscal 1995 also includes a net gain of approximately $300,000 included in selling, general and administrative expenses, which represents an operating expense of $700,000 offset by an insurance reimbursement of $1,000,000 related to the EPA Claim for which the Company has been fully indemnified by BTR. The estimated total net cost of the EPA Claim recorded in fiscal 1995 was based on the information available at that time. See "Environmental Matters and Proceedings" in Note 1. Effective January 1, 1994, certain assets, liabilities and operations of Dunlop Aviation were merged into the Company. The merger was treated similarly to a pooling of interest for accounting purposes and accordingly, the financial data as of and for the year ended December 31, 1993 includes those assets, liabilities and operations as if the merger occurred on January 1, 1993. Included in selling, general and administrative expenses for the year ended December 31, 1994, are approximately $501,000 of merger related expenses. -17- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. WHEN USED IN THE FOLLOWING DISCUSSIONS, THE WORDS "BELIEVES", "ANTICIPATES", "INTENDS", "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "BUSINESS--RISK FACTORS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. Results Of Operations The following table sets forth certain statement of operations data for the periods indicated. Fiscal year 1996 represents an unaudited pro forma combination of the Successor and Predecessor
1998 1997 1996 ----- ----- ----- (Dollars in thousands) $ % $ % $ % Revenue $ 65,151 100.0% $41,042 100.0% $ 39,004 100.0% Cost of revenue 55,059 84.5% 31,430 76.6% 31,799 81.5% -------- ----- ------- ----- -------- ----- Gross margin 10,092 15.5% 9,612 23.4% 7,205 18.5% Selling general and administrative expense 9,764 15.0% 5,897 14.4% 6,161 15.8% Restructuring charges -- -- -- -- 1,196 3.1% -------- ----- ------- ----- -------- ----- Operating income (loss) 328 -0.5% 3,715 9.1% (152) 0.4% Interest expense (3,402) -5.2% (2,431) -5.9% (2,312) -5.9% Interest income 74 -- 3 -- 7 -- Other expense, net -- -- (32) -0.1% -- -- -------- ----- ------- ----- -------- ----- Income (loss) before income taxes and extraordinary item (3,000) -4.6% 1,255 3.1% (2,457) -6.3% Income tax provision (benefit) (1,402) -2.2% 467 1.1% (934) -2.4% -------- ----- ------- ----- -------- ----- Income (loss) before extraordinary item (1,598) -2.5% 788 2.0% (1,523) -3.9% Extraordinary loss (600) -0.9% -- -- -- -- -------- ----- ------- ----- -------- ----- Net income (loss) ($2,198) -3.4% $ 788 2.0% ($1,523) -3.9% ======== ===== ======= ===== ======== =====
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997 Revenue. Revenue for the year ended December 31, 1998, increased by $24,109,000, or 59%, from the year ended December 31, 1997. Revenue comparisons were favorably affected by the Company's acquisition of the British Airways landing gear repair and overhaul operation in February 1998. Without the effect of the British Airways acquisition, the Company's other operations recorded revenue growth of 25% as compared with 1997. Landing gear repair and overhaul revenue increased $7,753,000 (41%) to $26,680,000. The increase in landing gear repair and overhaul revenue was primarily attributable to increased business from Federal Express and American Airlines at the Company's Sun Valley facility, along with increased business from British Airways generated by the addition of the Company's United Kingdom ("UK") operation. -18- Fixed wing and helicopter repair and overhaul increased to $14,245,000 from $13,195,000 in 1997 or 8%. Wheels, brakes and braking system components repair and overhaul declined 5% to $5,135,000 from $5,393,000 in 1997. Cost of Revenue and Gross Margin. Cost of revenue as a percentage of sales in 1998 increased to 84.5%, as compared with 76.6% in 1997. Cost of revenue was higher proportionally during 1998 primarily because the Company's UK subsidiary was restructuring its operations, implementing new procedures and controls, and hiring and training personnel throughout 1998. The UK operation therefore required increased labor, material and overhead costs as compared with the Company's long-established Sun Valley facility. As the prior comparable period included only Sun Valley results, the gross margin percentage decreased accordingly during 1998. Also adversely affecting gross margin was a $750,000 writedown of certain slow-moving inventory. Selling, General and Administrative Expense. Selling, general and administrative expense for the year ended December 31, 1998, increased significantly from the prior comparable period as a direct result of the added facility in the United Kingdom. Additional expense was also incurred from the cancellation of a convertible debt offering, foreign currency adjustments, and an increase to a reserve for doubtful accounts. Although the dollar amount increased primarily because of the new facility and the significant charges above, selling, general and administrative expense as a percent of revenue increased only slightly for the year. Interest Expense. Interest expense increased by $971,000 during 1998 as a result of increased borrowings on the Company's senior credit facility. Income Taxes. During 1998 the Company recorded an income tax benefit of $1,402,000, as compared to income tax expense of $467,000 in 1997. A valuation allowance of $225,000 was recorded against the related deferred tax assets for state net operating loss carryforwards that expire in the near term. Extraordinary Item. In December 1998 the Company obtained a new senior credit facility which provided an additional $20,800,000 of availability. The Company incurred $954,000 of costs in deferred loan fees and prepayment charges to retire the Company's previous credit facility. These charges were recorded as an extraordinary item, and presented net of tax of $354,000. Net Loss. The net loss for fiscal year 1998 was $2,198,000, or $0.39, as compared with net income of $788,000, or $0.25, for fiscal year 1997. Quarter Ended December 31, 1998, Compared to Quarter Ended December 31, 1997 Revenue. Revenue for the fourth quarter of 1998 increased by 60% to $17,618,000 from $10,982,000 for the comparable period of 1997. Cost of Revenue and Gross Margin. Cost of revenue as a percentage of sales increased significantly during the fourth quarter of 1998 because of the addition of the new operation in the United Kingdom. The UK subsidiary was still establishing its operations, implementing new procedures and controls, and working to cope with massive personnel turnover issues. The UK operation therefore required increased labor, material and overhead costs, which management estimates exceeded $1 million in additional costs, as compared with the Company's long-established Sun Valley facility. As the prior comparable period included only Sun Valley results, the gross margin percentage decreased accordingly during the fourth quarter of 1998. Extraordinary, Unusual or Infrequently Occurring Items. Fourth quarter charges totaled $3,421,000, or $0.59. This amount includes an extraordinary expense of $954,000, and unusual or infrequently occurring charges of $2,467,000. The extraordinary expense of $954,000 consisted of costs related to retiring the Company's previous senior credit facility. Unusual or infrequently occurring charges included: (i) $241,000 for the cancellation of a convertible debt offering; (ii) $825,000 for restructuring expenses in the UK operation, including costs related to replacing management and restructuring operations; (iii) $750,000 to writedown slow-moving inventory; (iv) $326,000 of foreign exchange adjustments; (v) $225,000 to establish a valuation allowance against California net operating loss carryforwards which imminently expire; and (vi) $100,000 to increase the allowance for bad debt. -19- Net Loss. The Company posted a fourth quarter loss of $3,622,000, or $0.62, as compared with net income of $123,000, or $0.02 in the comparable period of 1997. Without the effect of the charges above, the Company would have recorded a net loss of $201,000, or $0.03. Year Ended December 31, 1997 Compared To Pro Forma Year Ended December 31, 1996 Revenue. Revenue for the year ended December 31, 1997, increased $2,038,000 or 5.2% to $41,042,000 from $39,004,000 for the year ended December 31, 1996. The increase was a result of a 20.2% increase in landing gear repair and overhaul services offset by reductions resulting from the Company's closure of the Dunlop Miami operations and rationalization of unprofitable product lines. Landing gear repair and overhaul revenues increased to $18,927,000 and accounted for 46.1% of total revenues for 1997, as compared to $15,745,000 or 40.4% of total revenues for 1996. The increase in landing gear repair and overhaul revenues was attributable to increases in business from Federal Express's MD10 freighter conversion program and new wide-body repair and overhaul business from British Airways and American Airlines. Fixed wing aircraft and helicopter repair and overhaul declined 0.9% to $13,195,000 or 32.1% of total revenues for 1997 from $13,310,000 or 34.1% of total revenues for 1996. This decline was attributable to a reduction in helicopter repair and overhaul business from the USCG, in part due to the modifications performed by the Company in 1996 and 1997 to extend the time between overhauls for the USCG fleet of Dauphin II helicopters. Wheels, brakes and braking system component repair and overhaul increased 9.8% to $5,393,000 or 13.1% of total revenues for 1997 from $4,913,000 or 12.6% of total revenues for 1996. For the year ended December 31, 1997, repair and overhaul services accounted for 92.5% of total revenues, as compared to 90.2% for 1996. Revenues from spare parts distribution and sales accounted for 7.5% of total revenues for 1997, as compared to 8.6% for 1996. This decline was a result of the Company's decision to close the Dunlop Miami operations and discontinue the low margin Dunlop aircraft tire distribution business, which contributed to improvements in operating profits. Gross Margin. Gross margin for the year ended December 31, 1997, increased 33.4% to $9,612,000 from $7,205,000 for 1996. Gross margin as a percent of revenue increased to 23.4% for the year ended December 31, 1997, compared to 18.5% for 1996. This increase was primarily due to: (i) improved throughput and economies of scale achieved from increased revenue in wide-body landing gear repair and overhaul services; (ii) development of the Company's higher margin fixed wing aircraft and helicopter hydromechanics products; and (iii) discontinuing the unprofitable Dunlop Miami operation, which adversely impacted gross profit in 1996 as a result of charges to cost of revenue for non- productive inventory. Gross profit for the year ended December 31, 1996, included a nonrecurring charge of $489,000 to dispose of certain obsolete and non-productive inventory related to closing Dunlop Miami and a charge of $574,000 primarily related to other non-productive inventory at the Company's Sun Valley operations, including inventory related to Dunlop Aviation. Excluding these charges, gross profit would have been $8,268,000 or 21.2% of revenues for the year ended December 31, 1996. Selling, General And Administrative Expense. Selling, general and administrative expense for the year ended December 31, 1997 decreased $264,000 or 4.3% to $5,897,000 from $6,161,000 for the year ended December 31, 1996. Selling, general and administrative expense decreased as a percent of revenues to 14.4% from 15.8% for the prior year. This decrease was due to $947,000 of costs related to the EPA Claim in 1996 that were not incurred in 1997. BTR indemnified the Company for costs incurred in connection with the EPA Claim. This decrease was offset by additional costs incurred in 1997 resulting from: (i) the Company's efforts to expand its international market presence through sales representatives located in Europe, the Middle East and China; (ii) management fees paid to Unique Investment Corporation; and (iii) expenses incurred in connection with developing the Company's relationship with British Airways. Excluding the $947,000 charge, selling, general and administrative expenses would have been $5,214,000 or 13.4% of revenue for the year ended December 31, 1996. Operating Income. Operating income for the year ended December 31, 1997, increased $3,867,000 to $3,715,000 or 9.1% of total revenues compared to an operating loss of $152,000 for 1996. Operating income for the year ended December 31, 1996, was negatively impacted by nonrecurring restructuring charges of $1,196,000 and charges to cost of -20- revenues of $1,063,000 related to the closure of the Dunlop Miami and $947,000 in costs related to the EPA claim. Excluding these charges, pro forma operating income for the year ended December 31, 1996, would have been $3,054,000 or 7.8% of revenues. Income Taxes. Income taxes for the year ended December 31, 1997, were $467,000 compared to an income tax benefit of $934,000 for the year ended December 31, 1996. The effective tax rate for the year ended December 31, 1997, was 37.2% compared to 38.0% for 1996. The effective tax rate for the periods differs from the federal statutory rate of 34.0% due to certain nondeductible expenses. At December 31, 1997, the Company had net operating loss carryforwards of $7,892,000. The utilization of these operating loss carryforwards is limited due to changes in the Company's ownership in November 1996. At December 31, 1997, the Company had a valuation reserve of $659,000 for the deferred tax assets. Net Income. As a result of the factors described above, net income for the year ended December 31, 1997, of $788,000 represents an increase of $2,311,000 from the net loss of $1,523,000 for the year ended December 31, 1996. Liquidity And Capital Resources Since the Company was acquired from BTR in November 1996, the Company's working capital and funds for capital expenditures have been provided by cash generated from operations, borrowings under the Company's working capital credit facilities and cash received from the sale of common stock. In November 1996, the Company entered into a loan agreement with Bank of America National Trust and Savings Association ("Bank of America") for a $10.0 million revolving line of credit, a $13.5 million term loan and a $3.0 million capital expenditures facility. On January 23, 1998, the Company and Bank of America entered into an Amended and Restated Business Loan Agreement (the "Amended Loan Agreement"), as a result of which the maximum amount of credit available to the Company was increased from $26.5 million to $45.5 million. The credit facilities of the Amended Loan Agreement became available upon the completion of the Company's initial public offering and consummation of the acquisition of the British Airways ("BA") repair operation. The Company used approximately $9.2 million of the proceeds available under the Amended Loan Agreement to fund a portion of the purchase price of the BA assets. The Amended Loan Agreement provided the Company with a $15.0 million revolving line of credit, a $24.5 million term loan, and a $6.0 million capital expenditure facility. Cash used by the Company for operating activities during 1998 amounted to $3.1 million. This amount resulted primarily from increases in accounts receivable and inventory related to the new UK subsidiary. The Company has scheduled capital expenditures in 1999 of approximately $8.7 million. Included in this amount are $3.9 million for rotable assets, and $4.8 million for other capital expenditures. Other capital expenditures consist primarily of $4.2 million for the relocation of the UK subsidiary. The $45.5 million Bank of America line was not adequate to fund these capital requirements. Accordingly, on December 22, 1998, the Company secured a $66.3 million senior credit facility from Heller Financial, Inc., and NMB-Heller Limited (collectively, "Heller"). Upon closing, $41.5 million of the proceeds were used to retire the Bank of America facility, and a $2.5 million principal payment was made on a $5 million subordinated debt agreement between the Company and Unique Investment Corporation ("Unique"), an entity controlled by several shareholders of the Company. The Loan and Security Agreement with Heller (the "Heller Agreement") provided a $55 million revolving line of credit, a Term Loan A in the amount of $4.3 million, and a Term Loan B in the amount of $7.0 million. The revolver and both term loans expire in five years, and carried interest at a base rate of 7.75%. In January 1999 the Company elected a LIBOR rate option, which changed the rate of interest on the line of credit, Term Loan A and Term Loan B to 7.0%, 7.25% and 7.5%, respectively. At March 26, 1999, the weighted average interest rate for all three loans was 7.1%. Availability on the $55 million revolving line of credit may be limited by borrowing base criteria related to levels of accounts receivable, inventory and exchange assets. At December 31, 1998, the Company's borrowing base was $50.4 million, of which $37.3 million had been advanced, leaving remaining availability of $13.1 million. On February 19, 1999, Heller established a $5 million reserve against the Company's line of credit as a result of the Company being in default on certain financial covenants. On March 26, 1999, certain exchange gears were temporarily -21- excluded from the borrowing base as they were located in ineligible foreign countries. At March 26, 1999, excluding the $4.0 million unavailable as a result of the foreign location of these exchange gears, the Company's borrowing base was $51.2 million, of which $43.0 million had been advanced, leaving remaining availability (after the $5 million reserve) of $3.2 million. The $5 million reserve removed important availability that the Company had planned on in meeting its capital budget for 1999. As a result of the large lump-sum payments required for the UK relocation from May through July 1999, and the decreased level of availability from the reserve, management anticipates that the Company will undergo a temporary period of cash tightness for the next few quarters. Management believes this condition will be temporary since cash flow from operations is anticipated to improve significantly commencing in the third quarter when the relocation is completed, and the UK subsidiary has substantially eliminated transition issues which have adversely affected its operating results. On March 10, 1999, the Company and Heller entered into a Forbearance Agreement with regard to certain violations of financial covenants in the Heller Agreement. In consideration therefor, the Company agreed to: (i) accept certain stricter financial controls; (ii) provide a consolidated business plan, and an operational improvements plan for the UK subsidiary; (iii) pay a $75,000 fee; and (iv) hire a third party consultant to evaluate improvement plans underway with respect to the UK subsidiary. The Forbearance Agreement was extended in a Second Forbearance Agreement with an effective date of April 13, 1999. In exchange for Heller's continued forbearance, the Company agreed to: (i) continue the tighter financial controls and retain a consultant as required in the Forbearance Agreement; (ii) accept a 1.5% interest rate increase on the revolving line; (iii) forego the ability to elect the LIBOR interest rate option; (iv) forego the benefit of future interest rate reductions if the Company's fixed charge coverage improves; and (v) provide supplemental financial statements for 1998 conforming to certain financial criteria. As additional consideration for the Second Forbearance Agreement, Unique (or a shareholder of Unique) has agreed to provide Heller by April 23, 1999, a $2.5 million guarantee and stand-by letter of credit securing the Company's obligations to Heller related to Term Loan B. Upon delivery of this guarantee and letter of credit, the $5.0 million reserve against the line of credit shall be released, and the Company will pay, to the extent available on the line of credit, up to $4.15 million to reduce the outstanding principal balance on Term Loan B to $2.5 million. At such time as the balance on Term Loan B is reduced to $2.5 million, all remaining principal payments shall be deferred until the expiration of Term Loan B on December 31, 2003. The Second Forbearance Agreement expires on April 30, 1999, and the Company is presently negotiating with Heller to restructure the facility. Management is confident that it will be able to successfully restructure the facility with Heller before the Second Forbearance Agreement expires. The Company intends to take whatever actions are necessary to insure that it has sufficient liquidity to meet its cash requirements. The Company is currently considering and implementing many options to improve liquidity, including eliminating or deferring selected capital expenditures, selling off lower-performing assets, and reducing internal costs. In addition, the Company is considering options to raise capital through external sources. The Company believes that funds generated from operations, supplemented by available borrowings under the Heller facility, and, if necessary, additional capital from external sources, will provide sufficient liquidity to meet the Company's cash requirements for the year ending December 31, 1999. Foreign Exchange The Company has operating units located in the United Kingdom and the Netherlands, and also conducts business in many other countries worldwide. Foreign currency exchange rates could cause the Company's products to become relatively more expensive in particular countries, leading to a reduction in revenues in that country. However, to date, the Company's business has not been significantly affected by currency fluctuations. The Company makes substantial inventory purchases in French francs from such suppliers as Messier-Dowty, SAMM and Eurocopter France. In the last few years, the United States dollar has strengthened against the French franc, creating a favorable exchange rate variance for the Company. Transactions related to the Company's Netherlands facility are primarily denominated in United States dollars for inventory purchases, while revenue and operating expenses are partially denominated in Dutch guilders. The Company anticipates as much as 35% of its 1999 consolidated revenue may be received by the Company's UK subsidiary in British pounds sterling. -22- The Company's payment of the purchase price for the BA Acquisition was denominated in pounds. To hedge against the fluctuation of pounds to dollars, the Company entered into a transaction which permitted it to purchase approximately $17 million of pounds at a rate of 1.6373 dollars per pound. The balance of the purchase price was not hedged, although the spot rate when the BA Acquisition was completed was similar to the forward hedge rate. The Company will continue to evaluate hedging options in the future. The Company's business will require it to continue engaging in foreign currency denominated sales, and to incur material amounts of expense in foreign currencies. These activities may generate gains and losses as a result of currency fluctuations. Quarterly Revenue Fluctuations The Company's operating results are affected by a number of factors, including the timing of orders for repair and overhaul work, the timing of expenditures to manufacture parts and purchase inventory in anticipation of future services and sales, parts shortages that delay work in progress, general economic conditions and other factors. As a result, the Company may experience significant fluctuations in operating results from quarter to quarter. See Risk Factors-- Fluctuations in Results of Operations in Item 1 for additional detail. Inflation Although the Company cannot accurately anticipate the effect of inflation on its operations, the Company does not believe that inflation has had, or is likely to have in the foreseeable future, a material effect on its results of operations or financial condition. Year 2000 Issue Description. The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculation or system failures. Assessment. The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing and implementation. To date, the Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000 issue. The completed assessment indicated that some of the Company's internal software would have to be rewritten or upgraded, and that the Company's telephone system at Sun Valley would have to be replaced. Based on a review of its product lines, the Company has determined that its products and services do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 issue presents a material exposure as it relates to the Company's products and services. The Company is currently in the process of gathering information and evaluating the Year 2000 compliance status of its significant suppliers and subcontractors. To date the Company is not aware of any problems with its suppliers or subcontractors that would affect the Company's operations. This assessment is scheduled to be completed by June 15, 1999. Remediation. The Company has completed approximately 40% of the software reprogramming and replacement required, and expects to complete the remaining remedial work required no later than June 15, 1999. Once software has been reprogrammed or replaced, the Company will begin testing and implementation. These phases run concurrently for different systems. Testing and implementation have been completed on the remediation work already accomplished. The Company has replaced its telephone system in Sun Valley with a Year 2000 compliant system. When a new telephone system is installed in the new UK facility in May 1999, all communication systems within the Company will be Year 2000 compliant. Costs. As of March 31, 1999, the total costs incurred to address the Company's year 2000 issues approximate $120,000. The Company estimates that another $75,000 of costs may be required to complete remediation efforts on the year 2000 issue. Given the nature of the Company's repair and overhaul operations, management does not believe such impact, if any, will be material. The Company does plan, however, to devote the necessary resources to becoming Year -23- 2000 compliant in a timely manner. The Company believes it has an effective program in place to resolve this issue prior to the end of the third quarter. Contingency Plan. The Company is currently developing a contingency plan to handle any unanticipated year 2000 problems. The Company's contingency plan is scheduled to be completed by July 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk refers to the potential effects of unfavorable changes in certain prices and rates on the Company's financial results and condition, primarily foreign currency exchange rates and interest rates on borrowings. The Company does not utilize derivative instruments in managing its exposure to such changes. Foreign Currency Risk. The Company has operations in the United Kingdom and the Netherlands. The currencies of these two countries have been relatively stable as compared with the U.S. dollar. The Company manages foreign currency risk, in part, by generally requiring that customers pay for the services of the Company's foreign operating units in the currency of the country where the operating unit is located. The Company also does not routinely exchange material sums of money between the operating units. The Company has not to date seen the need for currency hedging transactions in the ordinary course of business. For additional discussion on foreign currency exchange risk as it relates to the Company's operations, please refer to: (i) Item 7--Foreign Exchange; (ii) Item 1--Risks Associated with International Expansion; and (iii) Note 1 to the Consolidated Financial Statements--Foreign Currency Translation. Interest Rate Risk. The Company's senior credit facility is comprised of two notes payable and a revolving line of credit, each of which carries an interest rate which varies in accordance with a Base Rate equal to the higher of the Federal Reserve prime rate, or the Federal Funds Effective Rate. The Company is subject to potentially material fluctuations in its debt service as the Base Rate changes. The extent of this risk is not quantifiable or predictable. For additional information, please refer to Note 1 to the Consolidated Financial Statements--Fair Value of Financial Instruments. In February 1998, to reduce the impact of changes in interest rates on the Company's debt facility, the Company entered into an interest rate swap agreement. The swap agreement reduced interest rate exposure to a fixed amount. For additional information, please refer to Note 5 to the Consolidated Financial Statements--Successor Lines of Credit and Notes Payable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to Part IV, Item 14 of this Form 10-K for the information required by Item 8. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10-13. The information required by Items 10-13 of Part III is omitted and incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year. -24- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules INDEX TO FINANCIAL STATEMENTS AND SCHEDULES -------------------------------------------
Page ---- Report of Independent Auditors.......................................................................... 28 Consolidated Balance Sheets as of December 31, 1997 and 1998............................................ 29 Consolidated Statements of Operations for the ten months ended October 31, 1996, two months ended December 31, 1996, the year ended December 31, 1997, and the year ended December 31, 1998.............................................................. 31 Consolidated Statements of Changes in Shareholders' Equity for the ten months ended October 31, 1996, two months ended December 31, 1996, the year ended December 31, 1997, and the year ended December 31, 1998.............................................................. 32 Consolidated Statements of Cash Flows for the ten months ended October 31, 1996, two months ended December 31, 1996, the year ended December 31, 1997, and the year ended December 31, 1998.............................................................. 33 Notes to Consolidated Financial Statements.............................................................. 35 Note 1 - Summary of Significant Accounting Policies.................................................. 35 Note 2 - Inventories................................................................................. 39 Note 3 - Equipment and Leasehold Improvements........................................................ 40 Note 4 - Income Taxes................................................................................ 40 Note 5 - Successor Lines of Credit and Notes Payable................................................. 42 Note 6 - Commitments and Contingencies............................................................... 44 Note 7 - Related Party Transactions.................................................................. 45 Note 8 - Stock Option Plan........................................................................... 46 Note 9 - Employee Benefit Plans...................................................................... 48 Note 10 - Restructuring Charges...................................................................... 49 Note 11 - Shareholders' Equity....................................................................... 49 Note 12 - Non-monetary Exchange Transaction.......................................................... 50 Note 13 - Segment Information........................................................................ 50 Note 14 - Subsequent Events (unaudited).............................................................. 50 Schedule II. Valuation and qualifying accounts......................................................... 51
(b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the fourth quarter of fiscal 1998. -25- (c) Exhibits 2.1 Agreement relating to the Sale and Purchase of part of the Business of British Airways plc dated December 20, 1997 by and among the Company, Hawker Pacific Aerospace Limited and British Airways plc, and related Landing Gear Overhaul Services Agreement (1)+ 3.1 Amended and Restated Articles of Incorporation of the Company (1) 3.2 Amended and Restated Bylaws of the Company (1) 3.3 Certificate of Amendment to the Amended and Restated Articles of Incorporation of the Company (1) 4.1 Specimen Common Stock Certificate (1) 4.2 Form 8-A12G, Registration of Certain Classes of Securities (6) 10.1 1997 Stock Option Plan and forms of Stock Option Agreements (1) 10.1A Amendment No. 1 to 1997 Stock Option Plan (1) 10.2 Employment Agreement dated November 1, 1996 between the Company and David L. Lokken (1) 10.2A First Amendment to Employment Agreement for David L. Lokken (1) 10.3 Employment Agreement dated November 1, 1996 between the Company and Brian S. Aune (1) 10.3A First Amendment to Employment Agreement for Brian S. Aune (1) 10.4 Employment Agreement dated November 1, 1996 between the Company and Brian S. Carr (1) 10.4A First Amendment to Employment Agreement for Brian S. Carr (1) 10.5 Employment Agreement dated November 1, 1996 between the Company and Michael A. Riley (1) 10.5A First Amendment to Employment Agreement for Michael A. Riley (1) 10.6 Form of Indemnity Agreement for directors and executive officers of the Company (1) 10.7 Business Loan Agreement dated November 27, 1996 between the Company and Bank of America National Trust and Savings Association (1) 10.7A Amendment No. 1 to Business Loan Agreement between the Company and Bank of America National Trust and Savings Association (1) 10.8 Agreement of Purchase and Sale of Stock effective as of November 1, 1996 by and among BTR Dunlop, Inc., BTR, Inc., the Company and AqHawk, Inc (1) 10.9 Repair, Overhaul, Exchange, Warranty and Distribution Agreement dated November 1, 1996 between the Company and Dunlop Limited, Aviation Division (1)+ 10.10 Distribution Agreement dated November 1, 1996 between the Company and Dunlop Limited, Precision Rubber (1) 10.11 Repair, Overhaul, Exchange, Warranty and Distribution Agreement dated November 1, 1996 between the Company and Dunlop Equipment Division (1)+ 10.12 Repair Services Agreement dated September 9, 1997 between the Company and American Airlines, Inc (1)+ 10.13 Award/Contract dated September 20, 1995 issued by USCG Aircraft Repair and Supply Center to the Company (1)+ 10.14 Maintenance Services Agreement dated August 19, 1994 between the Company and Federal Express Corporation (1)+ 10.15 Lease Agreement dated March 31, 1997 by and between the Company and Industrial Centers Corp (1) 10.15A First Amendment to Lease Agreement dated March 31, 1997 by and between the Company and Industrial Centers Corp. (2) 10.16 Management Services Agreement dated November 14, 1997 between the Company and Unique Investment Corp. (1) 10.17 Mergers and Acquisitions Agreement dated September 2, 1997 between the Company and Unique Investment Corp. (1) 10.17A Form of First Amendment to Mergers and Acquisitions Agreement between the Company and Unique Investment Corp. (1) 10.17B First Amendment to Mergers and Acquisitions Agreement, dated as of January 23, 1998, by and between the Company and Unique Investment Corp. (3) 10.18 Subordinated Note for $6,500,000 in favor of Unique Investment Corp. (1) 10.19 Amended and Restated Subordinated Promissory Note dated February 3, 1998 in favor of Unique Investment Corp. (2) 10.20 Certified Translation of Rental Agreement between Mr. C. G. Kortenoever and Flight Accessory Services (1) 10.21 Lease Agreement dated July 28, 1994 by and between the Company and Industrial Bowling Corp. (1) 10.21A First Amendment to Lease Agreement dated July 28, 1994 by and between the Company and Industrial Bowling Corp. (2) 10.22 Lease Agreement dated July 28, 1994 by and between the Company and Industrial Bowling Corp. (1) 10.23 Lease Agreement dated July 28, 1994 by and between the Company and Industrial Bowling Corp. (1) 10.24 Lease Agreement dated July 28, 1994 by and between the Company and Industrial Bowling Corp. (1) 10.25 Lease Agreement dated June 24, 1997 by and between the Company and AllState Insurance Company (1) 10.25A First Amendment to Lease Agreement between the Company and AllState Insurance Company (2) -26- 10.26 Lease Agreement dated November 21, 1994 by and between the Company and Gordon N. Wagner and Peggy M. Wagner, and Joseph W. Basinger and Viola Marie Basinger (1) 10.27 Amended and Restated Business Loan Agreement dated January 23, 1998 between the Company and Bank of America National Trust and Savings Association (2) 10.28 Security Agreement dated January 23, 1998 by the Company in favor of Bank of America National Trust and Savings Association (2) 10.29 Pledge Agreement dated January 23, 1998 by the Company in favor of Bank of America National Trust and Savings Association (2) 10.30 Subordination Agreement dated January 23, 1998 by and among the Company, Hawker Pacific Aerospace Limited, Bank of America National Trust and Savings Association, Melanie L. Bastian and Unique Investment Corp. (2) 10.31 Underlease, dated February 4, 1998, by and among British Airways plc, Hawker Pacific Limited and the Company (3) + 10.32 Bailment and Services Agreement, dated as of September 1, 1997, by and between Federal Express Corporation and the Company (3) + 10.33 Tenancy Agreement relating to Bennebroekerweg, Rijsinboat (Netherlands), dated March 15, 1998, between Hawker Pacific Holland, a division of the Company, and Mateor II C.V. (4) 10.34 Statement of Terms and Conditions of Employment, dated May 12, 1998, by and between Hawker Pacific Aerospace, Ltd., and Richard Adey (4) 10.35 Statement of Terms and Conditions of Employment, dated October 1, 1998, by and between Hawker Pacific Aerospace and Philip Panzera (5) 10.36 Statement of Terms and Conditions of Employment, dated October 12, 1998, by and between Hawker Pacific Aerospace and Dennis Biety (5) 10.37 Loan and Security Agreement, dated December 22, 1998, between Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as borrowers, and Heller Financial, Inc., and NMB-Heller Limited 10.38 Lease relating to Unit 3 Dawley Park, Hayes, Middlesex, dated April 7,1998, between Sun Life Assurance plc and Hawker Pacific Aerospace Limited and Hawker Pacific Aerospace 10.39 Sublease related to Building 9, Sun Valley, dated January 14, 1998, between Hawker Pacific Aerospace and Abex Display Systems, Inc. 10.40 Forbearance Agreement between Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as borrowers, and Heller Financial, Inc., and NMB- Heller Limited, dated March 10, 1999 10.41 Second Forbearance Agreement between Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as borrowers, and Heller Financial, Inc., and NMB-Heller Limited, dated April 13, 1999 21.1 Subsidiaries of Registrant (filed herewith on page 53) 27.1 Financial Data Schedule _______________________________ + Portions of exhibits deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidentiality (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, as amended (Registration No. 333-40295), and incorporated herein by reference (2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (3) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference (4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference (5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference (6) Previously filed with the Securities and Exchange Commission on March 23, 1999, and incorporated herein by reference (d) Financial Statement Schedules Schedule II -- Valuation And Qualifying Accounts, has been included herein under Item 14(a) above. -27- Report of Independent Auditors The Board of Directors Hawker Pacific Aerospace We have audited the accompanying consolidated statements of operations and cash flows of Hawker Pacific Aerospace, a wholly-owned subsidiary of BTR Dunlop Holdings, Inc. (the "Predecessor") for the ten months ended October 31, 1996. We have also audited the accompanying consolidated balance sheets of Hawker Pacific Aerospace (the "Successor") as of December 31, 1997 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the two months ended December 31, 1996 and the years ended December 31, 1997 and 1998. These financial statements are the responsibility of the Predecessor's and Successor's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hawker Pacific Aerospace at December 31, 1997 and 1998, and the results of their operations and their cash flows, as the Predecessor and Successor companies, for the ten months ended October 31, 1996, the two months ended December 31, 1996, and the years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Woodland Hills, California February 13, 1999, except for paragraphs 5 through 9 of Note 5, for which the date is April 12, 1999 -28- CONSOLIDATED BALANCE SHEETS Assets
December 31, 1998 1997 ---------------------------------------------------------------------------------------- Current assets Cash $ 560,000 $ 160,000 Accounts receivable, less allowance for doubtful accounts of $301,000 and $147,000 at December 31, 1998 and 1997, respectively 12,303,000 7,351,000 Other receivables 114,000 80,000 Inventories 21,645,000 14,814,000 Prepaid expenses and other current assets 617,000 240,000 ------------ ------------ Total current assets 35,239,000 22,645,000 Equipment and leasehold improvements, net 9,298,000 5,083,000 Landing gear exchange, less accumulated amortization of $1,844,000 and $375,000 at December 31, 1998 and 1997, respectively 37,877,000 11,067,000 Goodwill, less accumulated amortization of $25,000 at December 31, 1997 -- 145,000 Deferred taxes 1,916,000 -- Deferred financing costs 798,000 262,000 Deferred offering costs -- 766,000 Other assets 2,109,000 930,000 ------------ ------------ Total assets $ 87,237,000 $ 40,898,000 =============================================================================================
See Accompanying Notes to Consolidated Financial Statements -29- CONSOLIDATED BALANCE SHEETS (continued) Liabilities and Shareholders' Equity
December 31, 1998 1997 ------------------------------------------------------------------------------------- Current liabilities Line of credit $37,185,000 $ 8,529,000 Accounts payable 12,171,000 6,946,000 Deferred revenue 1,023,000 848,000 Accrued payroll and employee benefits 1,433,000 812,000 Accrued expenses and other liabilities 1,242,000 316,000 Current portion of notes payable 11,280,000 1,450,000 ------------ ------------ Total current liabilities 64,334,000 18,901,000 Notes payable Bank note -- 11,200,000 Related party 2,500,000 6,500,000 ------------ ------------ 2,500,000 17,700,000 Commitments and contingencies Shareholders' equity Preferred stock: 5,000,000 and 400 shares authorized at December 31, 1998 and 1997, respectively; issued and outstanding: none and 400 shares at December 31, 1998 and 1997, respectively -- 2,000,000 Common stock: 20,000,000 shares authorized; issued and outstanding: 5,822,222 and 2,972,222 shares at December 31, 1998 and 1997, respectively 21,108,000 1,040,000 Retained earnings (deficit) (941,000) 1,257,000 Accumulated other comprehensive income 236,000 -- ------------ ------------ Total shareholders' equity 20,403,000 4,297,000 ------------ ------------ Total liabilities and shareholders' equity $ 87,237,000 $ 40,898,000 ==========================================================================================
See Accompanying Notes to Consolidated Financial Statements -30- CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Predecessor ---------------------------------------------- ------------- Year Year Two Months Ten Months Ended Ended Ended Ended December 31, December 31, December 31, October 31, 1998 1997 1996 1996 - ------------------------------------------------------------------------------------------------------- Revenue $ 65,151,000 $ 41,042,000 $ 6,705,000 $ 32,299,000 Cost of revenue 55,059,000 31,430,000 4,599,000 27,027,000 ------------ ------------ ----------- ------------ Gross profit 10,092,000 9,612,000 2,106,000 5,272,000 ------------ ------------ ----------- ------------ Operating expenses Selling expenses 3,621,000 3,191,000 525,000 2,248,000 General and administrative expense 6,143,000 2,706,000 534,000 2,796,000 Restructuring charges -- -- -- 1,196,000 ------------ ------------ ----------- ------------ Total operating expense 9,764,000 5,897,000 1,059,000 6,240,000 ------------ ------------ ----------- ------------ Income (loss) from operations 328,000 3,715,000 1,047,000 (968,000) Other (expense) income Interest expense (3,402,000) (2,431,000) (203,000) (1,609,000) Interest income 74,000 3,000 7,000 -- Other expense, net -- (32,000) -- -- ------------ ------------ ----------- ------------ Total other (expense) income (3,328,000) (2,460,000) (196,000) (1,609,000) ------------ ------------ ----------- ------------ Income (loss) before income tax provision (benefit) and extraordinary item (3,000,000) 1,255,000 851,000 (2,577,000) Income tax provision (benefit) (1,402,000) 467,000 382,000 (971,000) ------------ ------------ ----------- ------------ Income (loss) before extraordinary item (1,598,000) 788,000 469,000 (1,606,000) Extraordinary loss on early extinguishment of debt (net of tax benefit of $354,000) (600,000) -- -- -- ------------ ------------ ----------- ------------ Net income (loss) $ (2,198,000) $ 788,000 $ 469,000 $ (1,606,000) ====================================================================================================== Earnings (loss) per common share: basic and diluted $( 0.39) $0.25 $0.15 ============ =========== ========== Weighted average common and common equivalent shares outstanding 5,622,770 3,145,079 3,170,551 ============ =========== ==========
See Accompanying Notes to Consolidated Financial Statements -31- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Stock Common Stock Retained Other --------------- ------------ Earnings Comprehensive Shares Amount Shares Amount (Deficit) Income Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at November 1, 1996 -- $ -- -- $ -- $ -- $ -- $ -- Issuance of preferred stock 400 2,000,000 -- -- -- -- 2,000,000 Issuance of common stock to founders -- -- 2,640,955 -- -- -- -- Issuance of common stock to management -- -- 229,648 40,000 -- -- 40,000 Net income and comprehensive income for the period -- -- -- -- 469,000 -- 469,000 ------ ----------- --------- ----------- ----------- --------- ----------- Balance at December 31, 1996 400 2,000,000 2,870,603 40,000 469,000 -- 2,509,000 Issuance of common stock -- -- 101,619 1,000,000 -- -- 1,000,000 Net income and comprehensive income for the year -- -- -- -- 788,000 -- 788,000 ------ ----------- --------- ----------- ----------- --------- ---------- Balance at December 31, 1997 400 2,000,000 2,972,222 1,040,000 1,257,000 -- 4,297,000 Net loss for the year -- -- -- -- (2,198,000) -- (2,198,000) Foreign currency translation -- -- -- -- -- 236,000 236,000 ----------- Comprehensive loss -- -- -- -- -- -- (1,962,000) Conversion of preferred stock (400) (2,000,000) 250,000 2,000,000 -- -- -- Issuance of common stock -- -- 2,600,000 18,068,000 -- -- 18,068,000 ------ ----------- --------- ----------- ----------- --------- ----------- Balance at December 31, 1998 -- $ -- 5,822,222 $21,108,000 $ (941,000) $ 236,000 $20,403,000 ================================ ====== =========== ========= =========== =========== ========= ===========
See Accompanying Notes to Consolidated Financial Statements -32- CONSOLIDATED STATEMENT OF CASH FLOWS
Year Year Two Months Ten Months Ended Ended Ended Ended December 31, December 31, December 31, October 31, 1998 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) ($2,198,000) $ 788,000 $ 469,000 ($1,606,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary loss 954,000 -- -- -- Deferred income taxes (1,771,000) 466,000 382,000 (971,000) Depreciation 1,464,000 741,000 183,000 525,000 Amortization 1,743,000 463,000 17,000 294,000 Non cash restructuring charge -- -- -- 561,000 Stock compensation -- -- 40,000 -- (Gain) on the sale of machinery, equipment and landing gear -- (78,000) -- -- Changes in operating assets and liabilities: Accounts and other receivables (4,986,000) (1,036,000) (103,000) 1,771,000 Inventory (4,870,000) (185,000) (901,000) 1,156,000 Prepaid expenses and other current assets (377,000) 104,000 21,000 (72,000) Accounts payable 5,225,000 622,000 2,195,000 (2,681,000) Deferred revenue 175,000 (745,000) 115,000 532,000 Accrued liabilities 1,546,000 (818,000) (139,000) 261,000 ----------- ----------- ------------ ----------- Cash (used in) provided by operating Activities (3,095,000) 322,000 2,279,000 (230,000) - ------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of equipment, leasehold improvements and landing gear (7,427,000) (2,890,000) (155,000) (1,173,000) Proceeds from disposals of equipment, leasehold improvements and landing gear -- 250,000 -- -- Purchase of equipment and landing gear from British Airways (26,585,000) -- -- -- Purchase of inventory from British Airways (1,961,000) -- -- -- Other assets (1,162,000) (824,000) -- (26,000) Acquisition of Predecessor -- -- (28,398,000) -- ----------- ----------- ------------ ----------- Cash used in investing activities (37,135,000) (3,464,000) (28,553,000) (1,199,000) - -------------------------------------------------------------------------------------------------------------------
-33- CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year Year Two Months Ten Months Ended Ended Ended Ended December 31, December 31, December 31, October 31, 1998 1997 1996 1996 ------------- ------------- ------------- ----------- FINANCING ACTIVITIES Borrowing under bank note $ 38,766,000 $ -- $13,500,000 $ -- Principal payments on bank note (40,136,000) (850,000) -- -- Principal payments on related party note (4,000,000) -- -- -- Borrowing under related party note -- -- 6,500,000 -- Borrowings/payments on line of credit, net 28,656,000 3,200,000 (1,287,000) -- Proceeds from equity offering 20,800,000 -- -- -- Initial borrowing under line of credit -- -- 6,616,000 -- Borrowings/payments on Due to Parent and affiliates (net) -- -- -- 2,193,000 Deferred offering costs (1,966,000) (766,000) -- -- Deferred financing cost (1,490,000) (337,000) -- -- Issuance of preferred stock -- -- 2,000,000 -- Contributions to capital -- 1,000,000 -- 242,000 ------------ ---------- ----------- ----------- Cash provided by financing activities 40,630,000 2,247,000 27,329,000 2,435,000 - ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 400,000 (895,000) 1,055,000 1,006,000 Cash, beginning of period 160,000 1,055,000 -- 399,000 ------------ ---------- ----------- ----------- Cash, end of period $ 560,000 $ 160,000 $ 1,055,000 $1,405,000 ================================================================================================================= Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 3,291,000 $2,261,000 $ 193,000 $1,279,000 Income taxes $ 81,000 $ 3,000 $ -- $ 20,000 Non-cash investing and financing activities Acquisition of Predecessor: Fair market value of assets acquired $34,973,000 Fair market value of liabilities assumed (5,170,000) Less cash received (1,405,000) ----------- Net cash paid $28,398,000 ===========
See Accompanying Notes to Consolidated Financial Statements -34- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Hawker Pacific Aerospace, formerly known as Hawker Pacific, Inc. (the "Company") is a California corporation with headquarters in Sun Valley, California, and satellite facilities in the Netherlands and, through May 31, 1996, Miami, Florida. In addition, the Company has a wholly owned subsidiary known as Hawker Pacific Aerospace, Ltd. which operates an overhaul facility in the United Kingdom ("UK"). The Company repairs and overhauls aircraft and helicopter landing gear, hydromechanical components, and wheels, brakes and braking system components for a diverse international customer base, including commercial airlines, air cargo operators, domestic government agencies, aircraft leasing companies, aircraft parts distributors, and original equipment manufacturers. In addition, the Company distributes, manufactures and sells new and overhauled spare parts and components for both fixed wing and helicopters. Organization and Basis of Presentation The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. As a result of the significant amounts of cash and operating costs related to the start up of the Company's operations in the United Kingdom associated with the acquisition of the BA Assets (see discussion below) and certain other charges incurred in 1998, the Company incurred losses and negative cash flows from operating activities in 1998, has a working capital and an accumulated deficit at December 31, 1998, and is in violation of certain financial covenants with regard to its credit facility. Management's plans with respect to these conditions include carefully managing cash flow, increasing liquidity and availability on the credit line where possible, considering the viability of additional external financing, improving the operations in the United Kingdom, and obtaining an amendment to the Company's credit facility as discussed in Note 5. The Company operated as a subsidiary of BTR Dunlop Holdings, Inc., a Delaware Corporation, from December 21, 1994 to October 31, 1996. BTR Dunlop Holdings, Inc. was a subsidiary of BTR plc, a United Kingdom company (collectively, the "Parent"). Effective January 1, 1994, the Company merged its operations with certain operations of Dunlop Aviation, Inc., a subsidiary of the Parent. The merger was a combination of companies under common control and was accounted for similar to the pooling of interests method of accounting. Pursuant to an Agreement of Purchase and Sale of Stock, AqHawk, Inc. purchased all of the Company's outstanding stock from BTR plc effective as of November 1, 1996 (the "Acquisition"). AqHawk, Inc. was formed as a holding company for the sole purpose of acquiring the stock of the Company and was subsequently merged into the Company. The acquisition has been accounted for under the purchase accounting method. The aggregate purchase price was approximately $29,800,000, which includes the cost of the acquisition. The aggregate purchase price was allocated to the assets of the Company, based upon estimates of their respective fair market values. The excess of purchase price over the fair values of the net assets acquired was $1,019,000 and was recorded as goodwill. Goodwill has been subsequently reduced for the reduction of certain allowances on deferred taxes and amortization. The financial statements for the ten months ended October 31, 1996, are presented under the historical cost basis of the Company, as a wholly owned subsidiary of BTR Dunlop Holdings, Inc., the predecessor Company (the "Predecessor"). The financial statements as of December 31, 1997 and 1998, and for the two months ended December 31, 1996, and the years ended December 31, 1997 and 1998, are presented under the new basis of the successor company (the "Successor") established in the Acquisition. The following unaudited pro forma information combines the results of operations of the Successor and Predecessor as if the Acquisition had occurred on January 1, 1996, and includes certain pro forma adjustments to the historical operating results for amortization of goodwill, depreciation and amortization of fixed assets and interest expense. The pro forma information is presented for illustrative purposes only, and is not necessarily indicative of what the actual results of operations would have been during such period, nor is it intended to be representative of future operations. -35- Twelve Months Ended December 31, 1996 (Unaudited) ----------------------- Revenue $39,004,000 Net loss (1,523,000) Net loss per share (0.48) On February 3, 1998, the Company completed an initial public offering (the "Offering") of 2,766,667 shares of the Company's common stock. Of the 2,766,667 shares of common stock sold in the Offering, 2,600,000 shares were sold by the Company and 166,667 shares were sold by a principal shareholder of the Company. The principal shareholder sold 415,000 additional shares of common stock pursuant to the exercise of an over allotment option granted to the underwriters by the principal shareholder. The Company received net proceeds of approximately $18.1 million, net of expenses of approximately $2.7 million. The Company used approximately $9.2 million of the net proceeds to fund a portion of the purchase price for certain assets of British Airways as discussed below, and approximately $7.6 million to repay a portion of the revolving and term debt previously outstanding under the Company's credit facility. On February 4, 1998 (the "Acquisition Date"), the Company completed its acquisition of certain assets of British Airways ("BA Assets"). The BA Assets represent the assets of British Airways Engineering used to service landing gear primarily on British Airways' aircraft. The purchase price for the BA Assets was approximately $19.5 million, including acquisition related expenses, and excluding a 747-400 landing gear rotable asset that was acquired during the second quarter of 1998 for approximately $2.9 million. Transaction expenses of $1.1 million were capitalized as part of the rotable asset value. As part of the BA Acquisition, the Company and British Airways entered into a seven-year exclusive service agreement on February 4, 1998, for the Company to provide landing gear and related repair and overhaul services to substantially all of the aircraft currently operated by British Airways. As required by the BA purchase agreement, BA employees covered by a collective bargaining contract continue to be covered by the contract until three years after the date the Company completed the purchase. As of December 31, 1998, there were 83 employees in the Company's UK subsidiary that are covered by the BA collective bargaining agreement. Principles of Consolidation The consolidated financial statements include the accounts of Hawker Pacific Aerospace and its wholly owned subsidiary, Hawker Pacific Aerospace, Ltd. All significant intercompany transactions and balances have been eliminated. Landing Gear Exchange Landing gear and other rotable assets are accounted for as fixed assets at cost and are depreciated over their estimated useful lives to their respective salvage values. These assets include various airplane, wing, body and nose landing gear shipsets. Landing gear and other rotable assets are held for the purpose of exchanging the asset with a customer to allow the customer's aircraft to get back in service in the shortest possible time. Certain of the Company's contracts could not have been obtained without sufficient rotable inventory to meet the customer's requirements. As the landing gear is exchanged and the customer is billed for the cost of the repair, the landing gear or other parts are typically repaired and overhauled and maintained as property of the Company for future exchanges. The estimated useful lives range from 10 to 15 years depending on the age of the aircraft type, and the Company's estimate of how many years of overhaul demand remain. Amortization expense is recorded as a cost of revenue using the straight-line amortization method. Recognition of Revenue The Company generates revenue primarily from repair and overhaul services. In some cases repair and overhaul services include exchange fees for the exchange of the Company's landing gear or other parts needing repair or overhaul services. The Company also generates revenue from the sale and distribution of spare parts. Spare parts sales and exchange fee revenues are each individually less than 10% of total revenues. -36- Revenue for repair and overhaul services not involving an exchange transaction is recognized when the job is complete and shipped to the customer. Deferred revenue is principally comprised of customer prepayments and progress billings related to the overhaul and repair of landing gear and other services which are in process. Revenue from spare parts sales is recognized at the time of shipment. Landing gear exchange fees are recognized on shipment of the exchanged gear to the customer. Revenue for repair and overhaul service involving an exchange is recognized when the cost of repairing the part received from the customer is known and billable. Concentrations of Risk Major Customers. The Company performs credit evaluations and analysis of amounts due from its customers; however, the Company generally does not require collateral. Credit losses have been within management's expectations and an estimate of uncollectible accounts has been provided for in the financial statements. Three customers accounted for 22.3%, 17.5% and 9.9% of the Company's revenue for the year ended December 31, 1998, and represented 25.7%, 19.4% and 5.1%, respectively, of the accounts receivable balance at December 31, 1998. One customer accounted for 19.3% of the Company's revenue for the year ended December 31, 1997, and represented 18.9% of the accounts receivable balance at December 31, 1997. One customer accounted for 13.1% of the Company's revenue for the two month period ended December 31, 1996, and represented 7.4% of the accounts receivable balance at December 31, 1996. Revenues from two customers, who each accounted for more than 10% of total revenue, were 19.6% and 11.7%, respectively, of the Company's total revenue for the ten month period ended October 31, 1996. Major Vendors. Two vendors accounted for $17,510,000 of the Company's total purchases during the year ended December 31, 1998. Three vendors accounted for $9,283,000 of the Company's total purchases during the year ended December 31, 1997. Three vendors accounted for $1,901,000 of the Company's total purchases for the two month period ended December 31, 1996. Two vendors accounted for $7,030,000 of the Company's total purchases during the ten month period ended October 31, 1996. Inventories Inventories are stated at the lower of cost or market. Purchased parts and assemblies are valued based on their weighted average cost. Work-in-process inventory includes purchased parts, direct labor and factory overhead. Provisions for potentially obsolete or slow-moving inventory are made based on management's analysis of inventory levels, turnover and future revenue forecasts. -37- Equipment and Leasehold Improvements Equipment and leasehold improvements are recorded at cost. Depreciation expense is being provided using the straight-line method based on the following estimated useful lives.
Predecessor Successor ----------------- ----------------- Leasehold improvements Lesser of life of Lesser of life of lease or asset lease or asset Machinery and equipment 13.3 years 8 years Tooling 13.3 years 5 years Furniture and fixtures 7 years 5 years Vehicles 5 years 3 years Computer equipment 5 years 3 years
Expenditures for repairs are expensed as incurred, and additions and betterments are capitalized. Goodwill In connection with the purchase of the Company by AqHawk, Inc. as previously described, the Company recorded goodwill which represents the excess of the purchase price over the estimated fair value of the net assets acquired. The Company was amortizing goodwill using the straight-line method over a period of fifteen years. The Company assesses the recoverability of its goodwill whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows for the business may not be sufficient to support recorded goodwill. At December 31, 1997 and 1998, goodwill was reduced by $466,000 and $145,000, respectively, due to the realization of certain deferred tax assets and the corresponding reduction of the valuation allowance established in the allocation of the purchase price of the Acquisition. As a result of the reduction there is no remaining amount of goodwill at December 31, 1998. Foreign Currency Translation The Company considers the local currency of its foreign operations to be the functional currency. Accordingly, the Company translates the assets and liabilities of its foreign operations at the rate of exchange in effect at the period end. Revenues and expenses are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded as a separate component of other comprehensive income (loss) and are included in shareholders' equity. Transaction gains and losses other than on inter-company accounts deemed to be of a long-term nature are included in net income in the period they occur. Realized and unrealized foreign exchange gains (losses) recognized in earnings amounted to $33,000, ($3,000), $298,000 and $425,000 for the ten months ended October 31, 1996, the two months ended December 31, 1996, and the years ended December 31, 1997 and 1998, respectively. Earnings (Loss) per Share Earnings (loss) per common share are computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding give effect to the stock split and conversion of preferred stock discussed in Note 11 as if they had occurred on November 1, 1996. Basic earnings (loss) per common share is computed based upon the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if certain securities were exercised or converted into common stock. Basic earnings (loss) per share is the same as diluted earnings (loss) per share for all periods presented and includes 250,000 shares issued upon the conversion of the preferred stock discussed in Note 11, as if converted at the beginning of the period. The number of shares used in the calculation of basic and diluted earnings per share was 3,170,551, 3,145,079 and 5,622,770 for the two months ended December 31, 1996 and the years ended December 31, 1997 and 1998, respectively. Options to purchase 613,107 shares of common stock at exercise prices between $3.50 and $9.88 were outstanding during 1998 but were not included in the computation of diluted earnings per share because the exercise price was greater -38- than the average market price of the common shares and/or the Company incurred a loss for the period, therefore, the effect would be antidilutive. Fair Value of Financial Instruments The Company's financial instruments principally consist of accounts receivable, accounts payable, line of credit, note payable to a bank, and notes payable to a related party as defined by Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The carrying value of accounts receivable and accounts payable approximate their fair value because of the short-term nature of these instruments. The carrying value of the line of credit and note payable to a bank approximate their fair market value since these financial instruments carry a floating interest rate. The fair market value of the note payable to a related party approximates its carrying value based on current market rates for such debt. Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Significant estimates and assumptions include the accounts receivable allowance for doubtful accounts, a provision for potentially obsolete or slow-moving inventory, the warranty accrual, and the cost accruals for repair and overhaul services. Actual results may differ from those estimates. Stock-Based Compensation Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Pursuant to SFAS No. 123, a company may elect to continue expense recognition under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") or to recognize compensation expense for grants of stock options, and other equity instruments to employees based on the fair value methodology outlined in SFAS No. 123. SFAS No. 123 further specifies that companies electing to continue expense recognition under APB No. 25 are required to disclose pro forma net income and pro forma earning per share as if fair value based accounting prescribed by SFAS No. 123 has been applied. The Company has elected to continue expense recognition pursuant to APB No. 25. Comprehensive Income (Loss) As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income (loss) and its components. The components of other comprehensive income (loss) consist entirely of foreign currency translation adjustments related to the Company's operations in the United Kingdom. 2. INVENTORIES Inventories are comprised of the following:
December 31, -------------------------- 1998 1997 ----------- ------------ Purchased parts and assemblies $19,251,000 $11,961,000 Work-in-process 2,394,000 2,853,000 ----------- ----------- $21,645,000 $14,814,000 =========== ===========
-39- 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements, at cost, consist of the following:
December 31, ------------ 1998 1997 ----------- ----------- Leasehold improvements $ 1,770,000 $ 1,575,000 Machinery and equipment 7,631,000 3,394,000 Tooling 533,000 356,000 Furniture and fixtures 265,000 199,000 Vehicles 38,000 30,000 Computer equipment 1,518,000 384,000 ----------- ----------- 11,755,000 5,938,000 Less: accumulated depreciation 2,457,000 855,000 ----------- ----------- $ 9,298,000 $ 5,083,000 =========== ===========
4. INCOME TAXES The tax provision of the Predecessor has been computed as if the Predecessor filed a separate income tax return. Under a tax sharing arrangement with its Parent, the Predecessor's deferred tax assets were expected to be recoverable against the current or future earnings of the Predecessor or its Parent. For the two months ended December 31, 1996, and the years ended December 31, 1997 and 1998, the tax provision has been computed on a stand-alone basis. A full valuation allowance for the Successor's net deferred tax assets was provided at the Acquisition date as an adjustment to goodwill due to future uncertainty concerning the ultimate realization of the net deferred tax asset. -40- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, ------------------------- 1998 1997 ----------- ----------- Deferred tax assets Net operating loss carryforwards $4,308,000 $3,013,000 Inventory valuation accruals 709,000 439,000 Accounts receivable valuation accruals 121,000 64,000 Employee benefits and compensation 305,000 169,000 Product and service warranties -- 70,000 State tax credits 178,000 127,000 Other items, net -- 76,000 ---------- ---------- Total deferred tax assets 5,621,000 3,958,000 Less valuation allowance (225,000) (659,000) ---------- ---------- Net deferred tax asset 5,396,000 3,299,000 ========== ========== Deferred tax liabilities: Depreciation and amortization in fixed assets basis 3,302,000 3,234,000 Other items, net due to accelerated depreciation and tax deferred exchanges 178,000 65,000 ---------- ---------- Total deferred tax liabilities 3,480,000 3,299,000 ---------- ---------- Net deferred tax asset after allowance 1,916,000 $ -- ========== ==========
Significant components of the provision (benefit) for taxes based on income (loss) are as follows:
Successor Predecessor ------------ ------------ Year Year Two Months Ten Months Ended Ended Ended Ended December 31, December 31, December 31, October 31, 1998 1997 1996 1996 ------------- ------------ ------------ ------------ Current: Federal $ -- $ -- $ -- $ -- State 1,000 1,000 -- -- ---------- ---------- --------- ---------- 1,000 1,000 -- -- Deferred: Federal (1,114,000) 466,000 277,000 (746,000) State (289,000) -- 105,000 (225,000) ---------- ---------- --------- ---------- (1,403,000) 466,000 382,000 (971,000) ---------- ---------- --------- ---------- (Benefit) provision for taxes ($1,402,000) $467,000 $ 382,000 $ (971,000) =========== =========== ========== ===========
For the years ended December 31, 1997 and 1998, reductions were made in the valuation reserve of approximately $466,000 and $434,000, respectively, of which $466,000 for 1997 and $145,000 for 1998 were credited against goodwill. For the year ended December 31, 1997, deferred tax assets of $302,000 were determined not to be realizable and were charged directly against the valuation allowance. At December 31, 1998, there is no valuation allowance on the net deferred tax asset because management considers the use of the net deferred tax asset more likely than not. -41- A reconciliation of the statutory federal income tax rate to the effective tax rate, as a percentage of income before tax, is as follows:
Successor Predecessor -------------- ------------- Year Year Two Months Ten Months Ended Ended Ended Ended December 31, December 31, December 31, October 31, 1998 1997 1996 1996 -------------- ------------- ------------- ------------- Statutory federal income tax rate (34%) 34% 34% (34)% Nondeductible expenses 7 3 3 2 State income taxes, net of federal benefit (10) -- 8 (6) Decrease in valuation reserve (10) -- -- -- ---- ---- ---- ---- Effective tax rate (47)% 37% 45% (38%)
The Company has net operating loss carryforwards for federal tax purposes of $11,437,000 which expire in the years 2008 to 2018. The Company also has state net operating loss carryforwards of $4,745,000 which expire in the years 1999 to 2003. Utilization of approximately $7,600,000 of federal and $3,200,000 of state net operating loss carryforwards are subject to limitation as a result of ownership changes. Such limitations are not anticipated to have a material impact on the Company's ability to utilize such net operating loss carryforwards. 5. SUCCESSOR LINES OF CREDIT AND NOTES PAYABLE On December 22, 1998, the Company secured a $66.3 million senior credit facility from Heller Financial, Inc., and NMB-Heller Limited (collectively, "Heller"). The Loan and Security Agreement (the "Heller Agreement") provides a $55 million revolving line of credit, a Term Loan A in the amount of $4.3 million, and a Term Loan B in the amount of $7.0 million. The revolver and both term loans expire in five years. As a result of obtaining the Heller facility the Company incurred $954,000 of expenses related to early extinguishment of its loan agreement with Bank of America. This expense is presented in the Consolidated Statements of Operations for the year ended as of December 31, 1998, as an extraordinary item net of related tax benefit of $354,000. At December 31, 1998, all three instruments carried interest at a base rate of 7.75%. Shortly thereafter the Company elected a LIBOR rate option, which changed applicable interest on the line of credit, Term Loan A and Term Loan B to 7.0%, 7.25% and 7.5%, respectively. At March 26, 1999, the weighted average interest rate for all three loans was 7.1%. Availability for the $55 million revolving line of credit may be limited by borrowing base criteria related to levels of accounts receivable, inventory and exchange assets. At December 31, 1998, the Company's borrowing base was $50.3 million, of which $37.2 million had been advanced, leaving remaining availability of $13.1 million. On February 19, 1999, Heller established a $5 million reserve on the line of credit as a result of the Company being in default on certain financial covenants. On March 26, 1999, certain exchange gears were temporarily excluded from the borrowing base as they were located in ineligible foreign countries. At March 26, 1999, excluding the $4.0 million unavailable as a result of these foreign gears, the Company's borrowing base was $51.2 million, of which $43.0 million had been advanced, leaving remaining availability (after the $5 million reserve) of $3.2 million. On March 10, 1999, the Company entered into a Forbearance Agreement with Heller which waived certain violations of financial covenants in the Heller Agreement. In consideration therefor, the Company agreed to: (i) accept certain stricter financial controls; (ii) provide a consolidated business plan, and an operational improvements plan for the UK subsidiary; (iii) pay a $75,000 fee, and (iv) hire a third party consultant to evaluate improvement plans underway in the UK subsidiary. This agreement was subsequently extended in a Second Forbearance Agreement with an effective date of April 13, 1999. In exchange for Heller's continued agreement to forbear, the Company agreed to: (i) continue the tighter financial controls and retain a consultant as required in the Forbearance Letter; (ii) accept a 1.5% interest rate increase on the revolving line; (iii) forego the ability to elect the LIBOR interest rate option; (iv) forego the benefit of future interest rate -42- reductions if financial conditions improve; and (v) provide supplemental financial statements for 1998 conforming to certain financial criteria. Unique Investment Corporation ("Unique"), an entity controlled by shareholders of the Company, has a $5 million subordinated debt agreement with the Company. At the closing of the Heller Agreement, $2.5 million of principal related to this debt was repaid to Unique. As additional consideration for the Second Forbearance Agreement, Unique (or a shareholder of Unique) has agreed to provide Heller by April 23, 1999, a $2.5 million guarantee and stand-by letter of credit securing the Company's obligations to Heller related to Term Loan B. Upon delivery of this guarantee and letter of credit, the $5.0 million reserve against the line of credit shall be released, and the Company will pay, to the extent available on the line of credit, up to $4.15 million to reduce the outstanding principal balance on Term Loan B to $2.5 million. At such time as the balance on Term Loan B is reduced to $2.5 million, all remaining principal payments shall be deferred until the expiration of Term Loan B on December 31, 2003. The Second Forbearance Agreement expires on April 30, 1999. The Company and Heller are continuing to negotiate a longer term amendment to the credit facility. The Company's note payable balance consists of the following:
December 31, -------------------------- 1998 1997 ------------ ----------- Note payable to a financial institution, payable in 19 quarterly installments of $153,000, and a final payment of $1,375,000 plus interest at prime rate, secured by the fixed assets of the Company, maturing December 31, 2003. The interest rate in effect at December 31, 1998, was 7.75%. $ 4,280,000 $ -- Note payable to a financial institution, payable in quarterly installments of $350,000, plus interest at prime rate maturing December 31, 2003. The interest rate in effect at December 31, 1998. was 7.75%. 7,000,000 -- Note payable to a bank, payable in quarterly installments increasing from $212,500 in 1997 to $625,000 in 2002, plus interest at either the offshore rate plus 1.875% or the bank's reference rate, paid in full in 1998. -- 12,650,000 Note payable to related party, interest accrues monthly at the greater of prime plus 4% or 11.8% per annum, interest payments due monthly, subordinated to the line of credit and term loans, maturing on the earlier of the date such balance can be repaid per the loan agreement or June 30, 2005. 2,500,000 6,500,000 ----------- ----------- 13,780,000 19,150,000 Less current 11,280,000 1,450,000 ----------- ----------- $ 2,500,000 $17,700,000 =========== ===========
-43- Maturity of notes payable as of December 31, 1998, is summarized as follows: 1999 $11,280,000 2000 -- 2001 -- 2002 -- 2003 2,500,000 ----------- $13,780,000 ===========
In February, 1998, the Company entered into an interest rate swap agreement (the "Swap Agreement") to reduce the impact of changes in interest rates in its floating-rate long-term debt. The Swap Agreement has an initial notional amount of $14,700,000 reducing to $8,550,000 through the expiration date of March 28, 2002. The Company is required to pay interest on the notional amount at the rate of 6.39% and receives from the bank a percentage of the notional amount based on a floating interest rate. The Swap Agreement effectively reduces its interest rate exposure to a fixed rate of 6.39% of the notional amount. The floating interest rate in effect under the Swap Agreement is 5.625%. The Swap Agreement had a negative fair market value of $458,000 at December 31, 1998. The Swap Agreement is collateralized by a $1 million Treasury Bill, which is included in Other Assets at cost, which approximates the fair value. 6. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its facilities, certain office equipment and a vehicle under operating lease agreements, which expire through June 2023, and which contain certain escalation clauses based on various inflation indexes. Future minimum rental payments as of December 31, 1998, are summarized as follows:
1999 $ 3,835,000 2000 3,279,000 2001 3,271,000 2002 3,214,000 2003 3,212,000 2004 and thereafter 45,706,000 ----------- $61,517,000 ===========
In July 1997 the Company entered into a 13-year operating lease for additional office space and warehouse facilities. In addition, significant leasehold improvement costs were incurred during the year ended December 31, 1997. The Company incurred rent expense of approximately $586,000, $109,000, $795,000 and $2,898,000 for the ten months ended October 31, 1996, the two months ended December 31, 1996, the year ended December 31, 1997, and the year ended December 31, 1998, respectively. Employment Agreements The Company is obligated under certain management employment contracts through October 31, 2001. Future minimum salary expense related to these contracts are summarized as follows:
1999 $ 749,000 2000 525,000 2001 451,000 2002 160,000 2003 120,000 ---------- $2,005,000 ==========
Environmental Remediation During 1993, the Company and other parties became defendants in a United States Environmental Protection Agency and State of California lawsuit (the "Plaintiffs") alleging violations of certain environmental regulations related to the contamination of ground water in the San Fernando Valley Basin that resulted from the release of hazardous substances. -44- During 1996, the Company recorded additional reserves related to this matter for total reserves of $657,000 at October 31, 1996 and December 31, 1996. The Company has been indemnified by BTR plc for any claims related to this matter in excess of the amount recorded. The amount recorded at December 31, 1996, represented the Company's portion of a settlement that was reached with the Plaintiffs during 1997. Included in general and administrative expense for the ten months ended October 31, 1996, is $947,000 of legal fees and settlement cost associated with investigating, defending and settling the environmental remediation matter. There were no corresponding costs incurred in the two months ended December 31, 1996 or the years ended December 31, 1997 and 1998. Litigation The Company is involved in various lawsuits, claims and inquiries, which the Company believes are routine to the nature of the business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. 7. RELATED PARTY TRANSACTIONS The Predecessor Company generated revenue and purchased goods and services from its Parent and various subsidiaries of its Parent (collectively the "Affiliates"). Certain long-term purchase agreements with the Affiliates have continued under the Successor company. Total revenue for the ten months ended October 31, 1996, from the Affiliates was approximately $331,000. Total purchases for the ten months ended October 31, 1996, from the Affiliates was approximately $5,437,000. In the ordinary course of business, the Company pays sales commissions to a company which is also a shareholder of the Company. For the year ended December 31, 1997 and 1998, the Company paid $556,000 and $408,000, respectively of commissions and reimbursed expenses to this related party. As more fully described in Note 5, the Company is subject to a $5,000,000 note payable to Unique, an entity controlled by shareholders of the Company. In December 1998 the Company made a $2,500,000 principal payment on this note to Unique. This debt is included in long-term notes payable on the 1997 and 1998 balance sheets. Interest expense on this note payable for the years ended December 31, 1997 and 1998, amounted to $74,000 and $601,000, respectively. See also Note 14--Subsequent Events, Related Party Transactions. Management Fee The Company had an agreement (the "Old Management Agreement") with Unique to pay a management fee of $25,000 per month. Certain shareholders of the Company are related parties to Unique. The Company paid and included in general and administrative expense $50,000 to Unique during the period from November 1, 1996, through December 31, 1996, and $300,000 during the period from January 1, 1997, through December 31, 1997. In September 1997, the Company and Unique entered into a new management services agreement (the "New Management Services Agreement") pursuant to which, upon the consummation of the Offering, the Old Management Agreement was terminated, and Unique became entitled to receive $150,000 per year payable monthly commencing in January 1999 for certain management services rendered to the Company. No management fees were paid to Unique during 1998. The New Management Services Agreement will terminate upon the Company completing an underwritten public offering in which selling shareholders offer 25% or more of the common stock sold in such offering. In September 1997, the Company also entered into a mergers and acquisitions agreement with Unique pursuant to which Unique received $300,000 upon the closing of the BA Acquisition for services provided in connection with the acquisition. Such amount was recorded as part of the cost of the BA assets. -45- Due to Parent and Affiliates The Predecessor generally funded its operations through borrowings from the Parent through October 31, 1996. The Predecessor made payments against such borrowings based on cash availability although there were no contractual payment terms. During the ten months ended October 31, 1996, the weighted average interest rate was 4.9%. During the ten months ended October 31, 1996, the average borrowings outstanding on the Due to Parent and Affiliates account was approximately $32,978,000. The Company recognized interest expense on borrowings from its Parent and affiliates of $1,609,000. All borrowing amounts due to Parent and affiliates were settled in connection with the November 1, 1996, acquisition of the Company. Parent Company Allocation of Expenses The Predecessor received a charge from its Parent for certain insurance (i.e., workers' compensation, product liability, group medical, etc.) and employee benefit program expenses that were contracted and paid by the Parent and allocated to the various subsidiaries. Management believes these allocations approximate the amounts that would have been incurred had the Predecessor operated on a stand-alone basis. Included in general and administrative expense and cost of revenues is $1,504,000 for the ten months ended October 31, 1996, of costs charged to the Predecessor by the Parent for these programs. Warranty Reimbursement from Parent The Predecessor had an arrangement with the Parent whereby certain warranty costs incurred by the Predecessor for the failure of parts purchased from the Parent or its affiliates were reimbursed to the Predecessor. 8. STOCK OPTION PLAN In November 1997, the Board of Directors adopted the Company's 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan, provides for the grant of options to directors, officers, other employees and consultants of the Company to purchase up to an aggregate of 634,514 shares of common stock. The purpose of the 1997 Plan is to provide participants with incentives that will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company. The exercise price of any incentive stock options granted may not be less than 100% of the fair market value of the Company's common stock as of the date of grant (110% of the fair market value if the grant is to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the Company). Nonqualified options may be granted under the 1997 Plan at an exercise price of not less than 85% of the fair market value of the Common Stock on the date of grant. Options may not be exercised more than ten years after the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the Company). The number of options outstanding and the exercise price thereof are subject to adjustments in the case of certain transactions such as mergers, recapitalizations, stock splits or stock dividends. In November 1997, the Board of Directors of the Company granted six-year options to purchase 259,572 shares of common stock under the 1997 Plan. All of these options are exercisable at the initial public offering price per share (i.e., $8 per share). The options generally are subject to vesting and become exercisable at a rate of 5% per quarter from the date of grant, subject to the optionee's continuing employment with the Company. Certain options become fully vested and exercisable upon a change in control. In addition, in November 1997, the Board of Directors granted five-year management stock options to purchase an aggregate of 115,365 shares of common stock. All of these options are vested and are exercisable at the initial public offering price per share. The Company has adopted the disclosure-only requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Therefore, the following information is presented in accordance with the provisions of that Statement. -46- Had the Company elected to recognize compensation cost based on the fair value of options granted as prescribed by FAS 123, net income and earnings per share would have been reported as the pro forma amounts indicated below for the year ended December 31, 1998: Reported net loss ($2,198,000) Pro forma net loss (2,695,000) Reported diluted loss per share (0.39) Pro forma diluted loss per share (0.48) The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions: Risk free interest rate 5.2% Dividend yield 0% Expected stock price volatility 75.0% Expected option lives Incentive 5.0 years Non-qualified 5.0 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. The Company's employee stock options have characteristics significantly different from those of traded options such as vesting restrictions and extremely limited transferability. In addition, the assumptions used in option valuation models (see above) are highly uncertain, particularly the expected stock price volatility of the underlying stock. Because changes in these uncertain input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized over the option vesting periods. The pro forma effect on net income for 1998 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense for a full year as certain options were granted at different times during the year and it does not consider future grants. Pro forma information in future years will reflect the amortization of a larger number of stock options granted in several succeeding years. A summary of the Company's stock option plans and changes in outstanding options for the year ended December 31, 1998, is presented below:
Shares Weighted Under Average Option Exercise Price --------- -------------- Options granted in connection with IPO 374,937 $8.00 Options granted 406,892 4.48 Options cancelled (168,722) 8.00 Options exercised -- -- ------- Options outstanding at end of year 613,107 5.66 ------- Options exercisable at end of year 165,836 4.76 ------- Weighted average fair value of options granted during the year $2.61 =====
Included in the totals of options granted and options cancelled were 144,207 options that were repriced from $8.00 to $3.56. These options included all 115,365 options granted to senior management in November 1997, and 28,842 options granted to senior management under the 1997 Plan. These options were repriced to be consistent with options granted to certain members of middle management in October 1998. The strike price for these options was established at the $3.56 closing price of the Company's common stock on the date issued. -47-
The following table summarizes stock options outstanding information at December 31, 1998. Options Outstanding Options Exercisable - ------------------------------------------------------------------------------- --------------------------------- Weighted-Average Weighted Range of Remaining Weighted Average Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------- ----------- ---------------- -------------- ----------- -------------- $6.91-$7.90 43,261 9.8 $7.00 -- $0.00 $7.90-$8.89 235,937 8.7 $8.00 44,703 $8.00 $8.89-$9.88 14,861 9.2 $9.88 -- $0.00 $2.96-$3.95 319,048 7.6 $3.56 121,133 $3.56 ------- --- ----- ------- ----- 613,107 9.2 $5.66 165,836 $4.75 ======= =======
9. EMPLOYEE BENEFIT PLANS During the ten months ended October 31, 1996, the Company recorded a net periodic pension expense of $234,000 as part of the allocated charges from the Parent. Effective January 1, 1997, the Company adopted a defined benefit pension plan (the "1997 Plan") to provide retirement benefits to its employees. This non- contributory plan covers substantially all employees of the Company as of the effective date of the plan. Pursuant to plan provisions, normal monthly retirement benefits are equal to the participant's credited benefit service (up to a maximum of 35 years), times the sum of 0.75% of the participant's final average monthly compensation, plus 0.65% of such compensation in excess of the participant's covered average monthly wage. The plan also provides for early retirement and certain death and disability benefits. The Company's funding policy for the plan is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus any additional amounts which the Company may determine to be appropriate. The net pension cost for the Company-sponsored defined benefit pension plan for the years ended December 31, 1997 and 1998, includes the following components:
Pension Benefits ----------------- 1998 1997 ----------------- ------------ Change in benefit obligation Benefit obligation at beginning of year $1,040,000 $ -- Service cost 137,000 94,000 Interest cost 73,000 54,000 Actuarial losses 87,000 147,000 Prior service costs -- 745,000 Benefits paid (8,000) -- ---------- ----------- Benefit obligation at end of year 1,329,000 1,040,000 ---------- ----------- Change in plan assets Fair value of plan assets at beginning of year -- -- Actual return on plan assets 51,000 -- Company contributions 340,000 -- Benefits paid (8,000) -- ---------- ----------- Fair value of plan assets at end of year 383,000 -- ---------- ----------- Funded status of the plan (underfunded) (946,000) (1,040,000) Unrecognized net actuarial losses 149,000 113,000 Unamortized prior service cost 711,000 745,000 ---------- ----------- Prepaid (accrued) benefit cost $ (86,000) $ (182,000) ========== ===========
The Company made contributions of $340,000 to the Plan during 1998. No contributions were made to the Plan during 1997. -48- The assumptions used in the determination of the net pension cost for the defined benefit pension plan for the years ended December 31, 1997 and 1998, were as follows: Discount rate 7% Rate of increase in compensation levels 3% Expected long-term rate of return on assets 7% Effective January 1, 1997, the Company also adopted a defined contribution 401(k) retirement savings plan which covers substantially all employees of the Company. Plan participants are allowed to contribute up to 15% of their base annual compensation and are entitled to receive a company match equal to 50% of the participant's contribution up to a maximum of 6% of the participant's annual base compensation. Participant contributions to the plan are immediately fully vested while the Company matching contributions are subject to a five-year vesting period. All contributions to the plan are held in a separate trust account. During the years ended December 31, 1997, and December 31, 1998, the Company's matching contribution amounted to $137,000 and $168,000, respectively. This amount was expensed during the period and is included in the Statement of Operations. Employees associated with the BA Acquisition continued to participate in the BA pension plan in 1998. The Company incurred $436,000 of expense related to contributions to this plan. As of December 31, 1998, the Company had accrued $100,000 which will be contributed to the BA plan in 1999. As of January 1, 1999, the Company instituted its own pension plan for UK employees which covers the former BA employees. The Company has no further obligation to the BA Plan as of January 31, 1999. 10. RESTRUCTURING CHARGES The Predecessor closed its facility in Miami, Florida, in May 1996. This closure and the transfer of certain fixed assets and inventory to the Sun Valley, California, facility resulted in a nonrecurring restructuring charge of $1,196,000 in the Statement of Operations for the ten months ended October 31, 1996. The nonrecurring charge primarily includes costs incurred related to fixed and other asset write-offs of approximately $600,000, payroll and severance costs of approximately $190,000, moving and integration costs of approximately $243,000, with the remainder applied to facility and other charges. Additionally, the Company recorded Miami related inventory write-offs of approximately $489,000, which were charged to cost of sales during the ten months ended October 31, 1996. Revenue and operating loss of Miami, Florida, operations were approximately $2,049,000 and ($40,000), respectively for the ten months ended October 31, 1996. 11. SHAREHOLDERS' EQUITY AqHawk, Inc., was formed on November 1, 1996, with the issuance of 400 shares of Series A Preferred Stock to an individual for $2,000,000 and the issuance of 5,741,206 shares of common stock to the same individual, certain shareholders of Unique, and certain members of management of the Company. Effective November 1, 1996, AqHawk, Inc., merged with the Company through the issuance of 2,870,603 shares of common stock of the Company in exchange for the 5,741,206 shares of common stock of AqHawk, Inc., and the issuance of 400 shares of Series A Preferred Stock of the Company for 400 shares of Preferred Stock of AqHawk, Inc. A value of $40,000 was assigned to 229,648 shares of common stock issued to management, and such amount was expensed as compensation expense in the two months ended December 31, 1996. In 1997 the Company received $1,000,000 for the issuance of 101,619 shares of the Company's common stock. The capital infusion was made pursuant to an agreement under which the majority shareholder had agreed to provide to the Company up to $1,000,000 in return for common stock. The Series A Preferred Stock was converted into 250,000 shares of common stock in connection with the Company's initial public offering. As part of the Company's initial public offering, warrants to purchase 222,716 shares were issued to the underwriters. These warrants allow them to purchase a share of stock for each warrant at $8.00 per share. The Board of Directors has reserved 972,595 shares for these warrants, for options issued in 1997, and for options issued or available with respect to the 1997 Plan. -49- In connection with the initial public offering, the Company effected a 579.48618 for one stock split of the Company's common stock in November 1997 and a one for .9907406 reverse stock split in January 1998. All references in the accompanying financial statements to the number of shares of common stock, per common share amounts have been retroactively adjusted to reflect the stock splits. All of the Company's Series A Preferred Stock were converted into an aggregate of 250,000 shares of common stock. In addition, the Company's capital structure was changed to reflect 20,000,000 shares of common stock. The Board of Directors has authority to fix the rights, preferences, privileges and restrictions, including voting rights, of those shares without any future vote or action by the shareholders. 12. NON-MONETARY EXCHANGE TRANSACTION During the year ended December 31, 1997, the Company sold certain landing gear with a book value of $1,240,000 for a different landing gear valued at $1,800,000 and cash of $250,000. In connection with the exchange transaction the Company recognized profit of $78,000 during the year ended December 31, 1997, representing the pro rata portion of the gain associated with the cash received. The landing gear received in the exchange was recorded in the amount of $1,068,000. 13. SEGMENT INFORMATION On December 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their business segments and their enterprise-wide operations. The Company operates in one segment. The following table sets forth certain geographic information related to the Company's operations.
United States United Kingdom Consolidated ------------- -------------- ------------ As of December 31, 1998 - ----------------------- Total assets $46,202,000 $41,035,000 $87,237,000 Total long-lived assets (net of depreciation and amortization) 17,097,000 30,078,000 47,175,000 For the year ended December 31, 1998 - ------------------------------------ Revenue by location of operations 49,232,000 15,919,000 65,151,000 Loss before income tax benefit and extraordinary item (382,000) (2,618,000) (3,000,000)
The Company generated revenue from customers located outside of the United States of $4,493,000, $1,517,000, $11,856,000 and $26,660,000, of which $2,887,000, $1,191,000, $9,901,000 and $10,802,000 were revenues generated from the Company's United States location for the ten months ended October 31, 1996, the two months ended December 31, 1996, and the years ended December 31, 1997 and 1998, respectively. 14. SUBSEQUENT EVENTS (unaudited) UK Facility Lease. In April 1999 the Company entered into a 25-year operating lease for a new 140,000 square foot facility in Hayes, approximately four miles from Heathrow Airport. This facility replaces the current UK facility belonging to British Airways on Heathrow. The Company takes possession of the building in April 1999, and commences rent payments in October 1999. Annual rental payments under the operating lease are $1,992,000. Related Party Transactions. In April 1999, Unique (or a shareholder of Unique) has agreed to provide Heller a $2.5 million guarantee and stand-by letter of credit securing the Company's obligations to Heller related to Term Loan B. See also "Note 5--Successor Lines of Credit and Notes Payable". -50- Preferred Share Purchase Rights. On March 25, 1999, the Company declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of its common stock. The Rights will be attached to the Company's common stock and will trade separately and be exercisable only in the event that a person or group acquires or announces the intent to acquire 20% or more of the Company's common stock. Each Right will entitle shareholders to buy one one- hundredth of a share of a new series of junior participating preferred stock at an exercise price of $15. The Company is not aware of any current intent to acquire a sufficient number of shares of the Company's stock to trigger distribution of the Rights. If the Company is acquired in a merger or other business combination transaction after a person has acquired 20% or more of the Company's outstanding common stock, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price. In addition, if a person or group acquires 20% or more of Hawker Pacific Aerospace's outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's then-current exercise price, a number of its common shares having a market value of twice such price. Following an acquisition by a person or group of beneficial ownership of 20% or more of the Company's common stock and before an acquisition of 50% or more of the common stock, the Company's Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one one-hundredth of a share of the new series of junior participating preferred stock per Right. Before a person or group acquires beneficial ownership of 20% or more of the Company's common stock, the Rights are redeemable for $.0001 per Right at the option of the Board of Directors. The Rights are intended to enable the Company's shareholders to realize the long-term value of their investment in the Company. They will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board prior to attempting a takeover. The dividend distribution was made on March 25, 1999, payable to the shareholders of record on that date. The Rights will expire on March 25, 2009. The Rights distribution is not taxable to shareholders. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS Accounts Receivable Allowance for Doubtful Accounts
Balance at Charged to Charged to Balance at Beginning Costs and Other the End of Description of Period Expenses Accounts Deductions (a) Period - ----------- --------- -------- -------- -------------- ------ Predecessor Ten Months Ended October 31, 1996 $ 39,000 $345,000 $ -- ($188,000) $196,000 Successor Two Months Ended December 31, 1996 196,000 -- -- (129,000) 67,000 Year Ended December 31, 1997 67,000 167,000 -- (87,000) 147,000 Year Ended December 31, 1998 $147,000 $158,000 $28,000 ($32,000) $301,000 - ---------------------
(a) Represents amounts written-off against the allowance for doubtful accounts. -51- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. HAWKER PACIFIC AEROSPACE By /s/ Daniel J. Lubeck ------------------------ Daniel J. Lubeck Chairman Of The Board Date: April 14, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Daniel J. Lubeck Chairman of the Board April 14, 1999 - ------------------------------- and Secretary Daniel J. Lubeck /s/ David L. Lokken President, Chief Executive April 14, 1999 - ------------------------------- Officer and Director David L. Lokken (Principal Executive Officer) /s/ Philip M. Panzera Vice President and Chief April 14, 1999 - ------------------------------- Financial Officer (Principal Philip M. Panzera Financial and Accounting Officer) /s/ John G. Makoff Director April 14, 1999 - ------------------------------- John G. Makoff /s/ Scott W. Hartman Director April 14, 1999 - ------------------------------- Scott W. Hartman /s/ Joel F. McIntyre Director April 14, 1999 - ------------------------------- Joel F. McIntyre /s/ Daniel C. Toomey, Jr. Director April 14, 1999 - ------------------------------- Daniel C. Toomey, Jr. /s/Mellon C. Baird Director April 14, 1999 - ------------------------------- Mellon C. Baird -52- Exhibit 21.1 Subsidiaries of Registrant Registrant has one wholly-owned subsidiary, Hawker Pacific Aerospace Ltd., which is located and incorporated in the United Kingdom. -53- EX-10.37 2 LOAN AND SECURITY AGREEMENT DATED 12/22/1998 EXHIBIT 10.37 LOAN AND SECURITY AGREEMENT DATED AS OF DECEMBER 22, 1998 among HAWKER PACIFIC AEROSPACE, a California corporation and HAWKER PACIFIC AEROSPACE LIMITED, a corporation registered under the laws of England and Wales as Borrowers, HELLER FINANCIAL, INC., as Agent and as Lender, THE OTHER LENDERS PARTY HERETO FROM TIME TO TIME and NMB-HELLER LIMITED, as Funding Agent and as Collateral Agent TABLE OF CONTENTS SECTION 1. DEFINITIONS AND ACCOUNTING TERMS.................................1 1.1 Certain Defined Terms........................................................1 SECTION 2. LOANS AND COLLATERAL...................................................1 2.1 Loans........................................................................1 (A)(1) Term Loan A..........................................................1 (A)(2) Term Loan B..........................................................2 (B) Revolving Loan.......................................................2 (C) Eligible Collateral..................................................3 (D) Swingline Loan...............................................................6 .............................................................................6 (E) Borrowing Mechanics..................................................7 (F) Automatic Requests...................................................9 (G) Notes................................................................9 (H) Letters of Credit....................................................9 (I) Other Letter of Credit Provisions...................................10 (J) Availability of a Lender's Pro Rata Share...........................11 (K) Special Provisions Regarding Optional Currencies....................12 2.2 Interest....................................................................13 (A) Rate of Interest....................................................13 (B) Computation and Payment of Interest.................................14 (C) Interest Laws.......................................................14 (D) Conversion or Continuation..........................................14 2.3 Fees........................................................................15 (A) Unused Line Fee.....................................................15 (B) Letter of Credit Fees...............................................16 (C) Audit Fees..........................................................16 (D) Other Fees and Expenses.............................................16 (E) Agent's Fees........................................................16 2.4 Payments and Prepayments....................................................16 (A) Manner and Time of Payment..........................................16 (B) Mandatory Prepayments...............................................16 (C) Voluntary Prepayments and Repayments................................18 (D) Payments on Business Days...........................................18 2.5 Term of this Agreement......................................................18 2.6 Statements..................................................................18 2.7 Grant of Security Interest..................................................18 2.8 Capital Adequacy and Other Adjustments......................................20 2.9 Taxes.......................................................................21 (A) No Deductions.......................................................21 (B) Changes in Tax Laws.................................................21 (C) Foreign Lenders.....................................................22 2.10 Required Termination and Prepayment.........................................23 2.11 Optional Prepayment/Replacement of Lenders in Respect of Increased Costs...23 2.12 Compensation................................................................23
i 2.13 Booking of LIBOR Loans......................................................24 2.14 Assumptions Concerning Funding of LIBOR Loans...............................24 2.15 Appointment of Borrower Representative......................................24 SECTION 3. CONDITIONS TO LOANS...................................................24 SECTION 4. BORROWERS' REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS.........25 4.1 Organization, Powers, Capitalization........................................25 (A) Organization and Powers............................................25 (B) Capitalization.....................................................25 4.2 Authorization of Borrowing, No Conflict.....................................25 4.3 Financial Condition.........................................................25 4.4 Indebtedness and Liabilities................................................26 4.5 Account Warranties..........................................................26 4.6 Names and Locations.........................................................26 4.7 Title to Properties; Liens..................................................27 4.8 Litigation; Adverse Facts...................................................27 4.9 Payment of Taxes............................................................27 4.10 Performance of Agreements...................................................27 4.11 Employee Benefit Plans......................................................28 4.12 Intellectual Property.......................................................28 4.13 Broker's Fees...............................................................28 4.14 Environmental Compliance....................................................28 4.15 Solvency....................................................................28 4.16 Disclosure..................................................................29 4.17 Insurance...................................................................29 4.18 Compliance with Laws........................................................29 4.19 Bank Accounts...............................................................30 4.20 Employee Matters............................................................30 4.21 Governmental Regulation.....................................................30 4.22 Access to Accountants and Management........................................30 4.23 Inspection..................................................................30 4.24 Collateral Records..........................................................30 4.25 Account Covenants; Verification.............................................30 4.26 Collection of Accounts and Payments.........................................31 (A) U.S. Borrower......................................................31 (B) U.K. Borrower......................................................31 4.27 Inventory Warranties and Covenants..........................................32 SECTION 5. REPORTING AND OTHER AFFIRMATIVE COVENANTS.............................33 5.1 Financial Statements and Other Reports......................................33 5.2 Endorsement.................................................................33 5.3 Maintenance of Properties...................................................33 5.4 Compliance with Laws........................................................33 5.5 Further Assurances..........................................................33 5.6 Mortgages; Title Insurance; Surveys.........................................34 (A) Mortgaged Property.................................................34 (B) Title Insurance....................................................34
ii (C) Surveys............................................................34 5.7 Use of Proceeds and Margin Security.........................................34 5.8 Bailee......................................................................34 5.9 Year 2000...................................................................35 5.10 Maintenance of Certifications...............................................35 SECTION 6. FINANCIAL COVENANTS...................................................35 SECTION 7. NEGATIVE COVENANTS....................................................35 7.1 Indebtedness and Liabilities................................................35 7.2 Guaranties..................................................................36 7.3 Transfers, Liens and Related Matters........................................36 (A) Transfers..........................................................36 (B) Liens..............................................................36 (C) No Negative Pledges................................................36 (D) No Restrictions on Subsidiary Distributions to Borrowers...........36 7.4 Investments and Loans.......................................................37 7.5 Restricted Junior Payments..................................................37 7.6 Restriction on Fundamental Changes..........................................38 7.7 Transactions with Affiliates................................................38 7.8 Conduct of Business.........................................................38 7.9 Tax Consolidations..........................................................38 7.10 Subsidiaries................................................................38 7.11 Fiscal Year; Tax Designation................................................38 7.12 Press Release; Public Offering Materials....................................38 7.13 Bank Accounts...............................................................38 7.14 Exchange Inventory and Work in Process Purchases............................38 7.15 Changes Relating to Subordinated Debt.......................................39 SECTION 8. DEFAULT, RIGHTS AND REMEDIES..........................................39 8.1 Event of Default............................................................39 (A) Payment............................................................39 (B) Default in Other Agreements........................................39 (C) Breach of Certain Provisions.......................................39 (D) Breach of Warranty.................................................39 (E) Other Defaults Under Loan Documents................................39 (F) Involuntary Bankruptcy; Appointment of Receiver, etc...............39 (G) Voluntary Bankruptcy; Appointment of Receiver, etc.................40 (H) Liens..............................................................40 (I) Judgment and Attachments...........................................40 (J) Dissolution........................................................40 (K) Solvency...........................................................40 (L) Injunction.........................................................40 (M) Invalidity of Loan Documents.......................................41 (N) Failure of Security................................................41 (O) Damage, Strike, Casualty...........................................41 (P) Licenses and Permits...............................................41 (Q) Forfeiture.........................................................41 (R) Termination of Certain Contracts...................................41 (S) Change in Control or Management....................................41
iii 8.2 Suspension of Commitments...................................................42 8.3 Acceleration................................................................42 8.4 Remedies....................................................................42 8.5 Appointment of Attorney-in-Fact.............................................43 8.6 Limitation on Duty of Agent with Respect to Collateral......................44 8.7 Application of Proceeds.....................................................44 8.8 License of Intellectual Property............................................44 8.9 Waivers, Non-Exclusive Remedies.............................................45 SECTION 9. AGENT, FUNDING AGENT AND COLLATERAL AGENT.............................45 9.1 Agents......................................................................45 (A) Appointment........................................................45 (B) Nature of Duties...................................................46 (C) Rights, Exculpation, Etc...........................................46 (D) Reliance...........................................................47 (E) Indemnification....................................................47 (F) Heller and NMB-Heller Individually.................................48 (G) Successor Agents...................................................48 (H) Collateral Matters.................................................49 (I) Agency for Perfection..............................................50 (J) Exercise of Remedies...............................................50 9.2 Notice of Default...........................................................51 9.3 Action by Agents............................................................51 9.4 Amendments, Waivers and Consents............................................51 9.5 Assignments and Participations in Loans.....................................52 9.6 Set Off and Sharing of Payments.............................................53 9.7 Disbursement of Funds.......................................................54 9.8 Settlements, Payments and Information.......................................54 (A) Revolving Advances and Payments; Fee Payments......................54 (B) Return of Payments.................................................56 9.9 Dissemination of Information................................................56 9.10 Discretionary Advances......................................................56 SECTION 10. MISCELLANEOUS........................................................56 10.1 Expenses and Attorneys' Fees................................................56 10.2 Indemnity; Value Added Tax..................................................57 (A) Indemnity...........................................................57 (B) Value Added Tax....................................................58 10.3 Notices.....................................................................58 10.4 Survival of Representations and Warranties and Certain Agreements...........59 10.5 Indulgence Not Waiver.......................................................60 10.6 Marshaling; Payments Set Aside..............................................60 10.7 Entire Agreement............................................................60 10.8 Severability................................................................60 10.9 Lenders' Obligations Several; Independent Nature of Lenders' Rights.........60 10.10 Headings....................................................................61 10.11 APPLICABLE LAW..............................................................61 10.12 Successors and Assigns......................................................61 10.13 No Fiduciary Relationship; No Duty; Limitation of Liabilities...............61
iv 10.14 CONSENT TO JURISDICTION.....................................................61 10.15 WAIVER OF JURY TRIAL........................................................62 10.16 Construction................................................................62 10.17 Counterparts; Effectiveness.................................................62 10.18 Confidentiality.............................................................62 10.19 Judgment Currency...........................................................63 SECTION 11. DEFINITIONS AND ACCOUNTING TERMS.....................................63 11.1 Defined Terms...............................................................63 11.2 Accounting Terms............................................................82 11.3 Other Definitional Provisions...............................................83 11.4 Dollar Equivalents..........................................................83 11.5 Change of Currency..........................................................83
v LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT is dated as of December 22, 1998 and entered into among HAWKER PACIFIC AEROSPACE, a California corporation (the "U.S. ---- Borrower"), HAWKER PACIFIC AEROSPACE LIMITED, a company organized under the laws - -------- of England and Wales (registered number 3459428) (the "U.K. Borrower" and, ------------- collectively with the U.S. Borrower, the "Borrowers"), the financial --------- institution(s) listed on the signature pages hereof, and their respective successors and Eligible Assignees (each individually a "Lender" and collectively ------ "Lenders"), HELLER FINANCIAL, INC., a Delaware corporation (in its individual ------- capacity, "Heller"), for itself as a Lender and as Agent, and NMB-HELLER ------ LIMITED, an Affiliate of Heller domiciled in the United Kingdom, as Funding Agent and as Collateral Agent. WHEREAS, Borrowers desire that Lenders extend a credit facility to provide funds to refinance Borrowers' Existing Indebtedness (as herein defined), to repay in full Borrowers' existing Subordinated Debt, and to provide working capital financing and funds for other general corporate purposes of Borrowers; and WHEREAS, to secure Borrowers' respective obligations under the Loan Documents, Borrowers are (a) granting to Agent, for benefit of Agent and Lenders, a security interest in and lien upon substantially all of Borrowers' property located at any time in the United States of America, and (b) granting to Collateral Agent, for benefit of Agent and Lenders, a security interest in and lien upon substantially all of Borrowers' property located at any time in the United Kingdom, the Netherlands or any other jurisdiction other than the United States of America; and NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrowers, Agent, Funding Agent, Collateral Agent and Lenders agree as follows: SECTION 1. DEFINITIONS AND ACCOUNTING TERMS -------------------------------- 1.1 Certain Defined Terms. The capitalized terms and the accounting terms --------------------- used in this Agreement shall have the meanings set forth in Section 11 of this ---------- Agreement: SECTION 2. LOANS AND COLLATERAL -------------------- 2.1 Loans. ----- (A)(1) Term Loan A. Each Lender, severally, agrees to lend to ----------- Borrowers, jointly and severally, on the Closing Date, its Pro Rata Share of Term Loan A which is in the aggregate amount of $4,280,000. Term Loan A shall be funded in one drawing. Amounts borrowed under this subsection 2.1(A)(1) and -------------------- repaid may not be reborrowed. Borrowers shall make principal payments in the amount of the applicable Scheduled Installment of Term Loan A (or such lesser principal amount as shall then be outstanding) on the dates set forth below. 1 "Scheduled Installment" of Term Loan A means, for each date set forth --------------------- below, the amount set forth opposite such date.
Date Scheduled Installment ----- --------------------- March 31, 1999 and the last day of each June, $152,857 September and December thereafter through September 30, 2003 December 31, 2003 $1,375,714.30 or the then remaining principal balance of Term Loan A
(A)(2) Term Loan B. Each Lender, severally, agrees to lend to ----------- Borrowers, jointly and severally, on the Closing Date, its Pro Rata Share of Term Loan B which is in the aggregate amount of $7,000,000. Term Loan B shall be funded in one drawing. Amounts borrowed under this subsection 2.1(A)(2) and -------------------- repaid may not be reborrowed. Borrowers shall make principal payments in the amounts of the applicable Scheduled Installments of Term Loan B (or such lesser principal amount of Term Loan B as shall then be outstanding) on the dates set forth below. "Scheduled Installment" of Term Loan B means, for each date set forth --------------------- below, the amount set forth opposite such date.
Date Scheduled Installment ---- --------------------- March 31, 1999 and the last day of each June, $350,000 September and December thereafter through September 30, 2003 December 31, 2003 $350,000 or the then remaining principal balance of Term Loan B
(B) Revolving Loan. Each Lender, severally, agrees to lend to -------------- Borrowers from time to time its Pro Rata Share of each Revolving Advance. The aggregate amount of all Revolving Loan Commitments shall not exceed at any time $55,000,000. Amounts borrowed under this subsection 2.1(B) may be repaid and ----------------- reborrowed at any time prior to the earlier of (i) the termination of the Revolving Loan Commitment pursuant to subsection 8.3 or (ii) the Termination -------------- Date. Except as otherwise provided herein, no Lender shall have any obligation to make a Revolving Advance to the extent such Revolving Advance would cause the Revolving Loan (after giving effect to any immediate application of the proceeds thereof) to exceed the Maximum Revolving Loan Amount. (1) "Maximum Revolving Loan Amount" means, as of any date of ----------------------------- determination, the lesser of (a) the Revolving Loan Commitment(s) of all Lenders less the Letter of Credit Reserve or (b) the Borrowing Base less the Letter of - ---- ---- Credit Reserve. (2) "Borrowing Base" means, as of any date of determination, an -------------- amount equal to the sum of (a) 85% of the Collateral Value of Borrowers' Eligible Accounts less such reserves as Agent in its reasonable discretion may ---- elect to establish, plus (b) (ii) the Inventory Borrowing Base less such ---- ---- reserves as Agent in its reasonable discretion may elect to establish, 2 provided that in no event shall aggregate Advances at any one time outstanding - -------- against (i) the Exchange/WIP Borrowing Base exceed $40,000,000 or (ii) Eligible Repair Parts and Unserviceable Parts exceed $12,000,000; and provided further ---------------- that at no time shall more than 90% of the Borrowing Base be comprised of Eligible Accounts, Eligible Exchange Inventory and Work in Process and Eligible Repair Parts and Unserviceable Parts located in the United Kingdom. (3) "Inventory Borrowing Base" means, as of any date of ------------------------ determination, an amount equal to the sum of (a) the Exchange/WIP Borrowing Base, plus (b) 90% of the Orderly Liquidation Value of Borrowers' Eligible ---- Repair Parts and Unserviceable Parts. (4) "Exchange/WIP Borrowing Base" means, as of any date of ------------------------------ determination, an amount equal to the lesser of (a) the Applicable Percentage then in effect multiplied by the Orderly Liquidation Value of Borrower's ------------- Eligible Exchange Inventory and Work in Process, or (b) the Net Book Value of Borrowers' Eligible Exchange Inventory and Work in Process. (C) Eligible Collateral. ------------------- "Eligible Accounts" means, as at any date of determination, the ----------------- aggregate of all Accounts that Agent, in its reasonable credit judgment, deems to be eligible for borrowing purposes. Without limiting the generality of the foregoing, Agent may determine that the following Accounts are not Eligible Accounts: (1) Accounts which, at the date of issuance of the respective invoice therefor, were payable more than 60 days after the date of issuance; (2) Accounts which remain unpaid for more than 60 days after the due date specified in the original invoice or for more than 90 days after invoice date (or, in the case of Accounts with respect to which the account debtor is any of British Airways, American Airlines, United Airlines, Federal Express or any Subsidiary of the foregoing, only, 120 days after invoice date) if no due date was specified; (3) Accounts which are otherwise eligible with respect to which the account debtor is owed a credit by a Borrower, but only to the extent of such credit; (4) Accounts due from an account debtor whose principal place of business is located outside the United States of America, the United Kingdom, the Netherlands or the Canadian provinces of Ontario, Quebec, British Columbia, Manitoba or Saskatchewan, unless either (a) such Account is backed by a letter of credit, in form and substance acceptable to Agent and issued or confirmed by a bank that is acceptable to Agent in its sole discretion; provided that such -------- letter of credit has been delivered to Agent as additional Collateral, (b) such Account is covered by credit insurance satisfactory to Agent and with respect to which Agent, for the benefit of Agent and Lenders, has been named as loss payee, or (c) Agent has in its sole discretion otherwise agreed to consider Accounts due from such account debtor as Eligible Accounts, subject to satisfaction of the other criteria set forth herein; 3 (5) Accounts due from an account debtor which Agent has notified Borrowers does not have a satisfactory credit standing; (6) Accounts in excess of an aggregate face amount of $50,000 with respect to which the account debtor is the United States of America, any state or any municipality, or any department, agency or instrumentality thereof unless Borrower has, with respect to such Accounts, complied with the Federal Assignment of Claims Act of 1940 as amended (31 U.S.C. Section 3727 et seq.) or any applicable statute or municipal ordinance of similar purpose and effect; (7) Accounts with respect to which the account debtor is an Affiliate of a Borrower or a director, officer, Agent, stockholder or employee of a Borrower or any Affiliate of any Borrower; (8) Accounts due from an account debtor if more than 25% of the aggregate amount of Accounts of such account debtor have at the time remained unpaid for more than 60 days after due date or 90 days after the invoice date if no due date was specified; (9) Accounts with respect to which there is any unresolved dispute with the respective account debtor (but only to the extent of such dispute); (10) Accounts evidenced by an "instrument" or "chattel paper" (each as defined in the UCC) not in the possession of Agent or Collateral Agent, on behalf of Lenders; (11) Accounts with respect to which Agent or Collateral Agent, as applicable, on behalf of Lenders, does not have a valid, first priority and fully perfected security interest; (12) Accounts subject to any Lien except those in favor of Agent or Collateral Agent, as applicable, on behalf of Lenders; (13) Accounts with respect to which the account debtor is the subject of any federal, state or foreign bankruptcy, insolvency or other similar proceeding; (14) Accounts due from an account debtor to the extent that such Accounts exceed in the aggregate a Dollar Equivalent amount equal to the following percentage, as applicable, of the aggregate consolidated Dollar Equivalent amount of all Accounts at said date: 40%, in the case of Accounts due from British Airways; 30%, in the case of Accounts due from Federal Express and 20%, in all other cases; (15) Accounts with respect to which the account debtor's obligation to pay is conditional or subject to a repurchase obligation or right to return or with respect to which the goods or services giving rise to such Account have not been delivered (or performed, as applicable) and accepted by such account debtor, including progress billings, bill and hold sales, guarantied sales, sale or return transactions, sales on approval or consignment sales; (16) Accounts with respect to which the account debtor is located in any jurisdiction denying creditors access to its courts in the absence of a Notice of Business Activities 4 Report or other similar filing, unless the applicable Borrower has either qualified as a foreign corporation authorized to transact business in such jurisdiction or has filed a Notice of Business Activities Report or similar filing with the applicable Governmental Authority for the then current year; (17) Accounts with respect to which the account debtor is a creditor of any Borrower, provided, however, that any such Account shall only be -------- ------- ineligible as to that portion of such Account which is less than or equal to the amount owed by such Borrower to such Person. "Eligible Exchange Inventory and Work in Process" means, as at any ----------------------------------------------- date of determination, the aggregate Collateral Value of all Exchange Inventory and Work in Process owned by a Borrower (and for which title has unconditionally passed to such Borrower) less (a) a reserve in an amount equal to the aggregate ---- Fair Market Value of Borrowers' Exchange Inventory and Work in Process located as of such date in any Other Acceptable European Country, to the extent such aggregate Fair Market Value exceeds $1,000,000, and less (b) a reserve in an ---- amount equal to the aggregate Fair Market Value of Borrowers' Exchange Inventory and Work in Process located as of such date in any jurisdiction other than a Designated Country or an Other Acceptable European Country. Without limiting the generality of the foregoing, Agent may determine that the following is not Eligible Exchange Inventory and Work in Process: (a) finished goods which do not meet the specifications of the purchase order for such goods; (b) Exchange Inventory and Work in Process which Agent determines is unacceptable for borrowing purposes due to age, quality, type, category and/or quantity; (c) packaging, shipping materials or supplies consumed in any Borrower's business; (d) Exchange Inventory and Work in Process with respect to which Agent or Collateral Agent, as applicable, on behalf of Agent and Lenders, does not have a valid, first priority and fully perfected security interest; (e) Exchange Inventory and Work in Process with respect to which there exists any Lien in favor of any Person other than Agent or Collateral Agent, as applicable, on behalf of Agent and Lenders; and (f) Exchange Inventory and Work in Process produced in violation of the Fair Labor Standards Act and subject to the so- called "hot goods" provisions contained in Title 29 U.S.C. 215 (a)(i) or any replacement statute, or with respect to which any analogous circumstance arises under or pursuant to the laws of any other applicable Governmental Authority. For purposes of determining the Exchange/WIP Borrowing Base at any time, the following procedures shall apply: Borrower shall give Agent 5 Business Days prior written notice prior to shipping any Eligible Exchange Inventory and Work in Process to any jurisdiction other than a Designated Country, which notice shall identify such Eligible Exchange Inventory and Work in Process and shall state the date such Eligible Exchange Inventory and Work in Process is to be shipped, the jurisdiction and customer to which it is being shipped, the expected return date of such Eligible Exchange Inventory and Work in Process and the Fair Market Value thereof as provided by the most recent Periodic Inventory Appraisal. On the date such Eligible Exchange Inventory and Work in Process is so shipped, Agent shall establish the reserve required pursuant to clause (a) or clause (b) above, as applicable. On the date on which the applicable Borrower obtains possession of the Eligible Exchange Inventory and Work in Process to be delivered to the applicable Borrower by the applicable customer in exchange for such Eligible Exchange Inventory and Work in Process so shipped to such customer, the associated reserve established pursuant to clause (a) or clause (b) above, as applicable, shall be reversed by Agent. 5 "Designated Country" means any of the United States, the United ------------------ Kingdom (including Ireland and Scotland), The Netherlands, Canada, Australia and New Zealand. "Other Acceptable European Country" means any of Denmark, Sweden, --------------------------------- Belgium, France, Germany, Norway, Switzerland or Poland. "Eligible Repair Parts and Unserviceable Parts" means, as at any date --------------------------------------------- of determination, the aggregate Collateral Value of all Repair Parts and Unserviceable Parts owned by a Borrower (and for which title has unconditionally passed to such Borrower) and located in the United States of America or the Netherlands, in the case of U.S. Borrower, or the United Kingdom, in the case of U.K. Borrower, that Agent, in its reasonable credit judgment, deems to be eligible for borrowing purposes. Without limiting the generality of the foregoing, Agent may determine that the following is not Eligible Repair Parts and Unserviceable Parts: (a) Repair Parts or Unserviceable Parts consisting of work in process that is not readily marketable in its current form, except, in the case of Repair Parts, to the extent that Repair Parts have been issued to work orders, which are identified as such and are acceptable to Agent; (b) finished goods which do not meet the specifications of the purchase order for such goods; (c) Repair Parts and Unserviceable Parts which Agent determines are unacceptable for borrowing purposes due to age, quality, type category and/or quantity; (d) packaging, shipping materials or supplies consumed in any Borrower's business; (e) Repair Parts and Unserviceable Parts with respect to which Agent or Collateral Agent, as applicable, on behalf of Agent and Lenders, does not have a valid, first priority and fully perfected security interest; (f) Repair Parts and Unserviceable Parts with respect to which there exists any Lien in favor of any Person other than Agent or Collateral Agent, as applicable, on behalf of Agent and Lenders; (g) Repair Parts and Unserviceable Parts produced in violation of the Fair Labor Standards Act and subject to the so-called "hot goods" provisions contained in Title 29 U.S.C. 215 (a)(i) or any replacement statute, or with respect to which any analogous circumstance arises under or pursuant to the laws of any other applicable Governmental Authority; and (h) Repair Parts and Unserviceable Parts located at any location other than the applicable Borrower's principal location, unless a waiver of interest acceptable in form and substance is delivered to Agent or Collateral Agent. (D) Swingline Loan. Agent may convert any request by U.S. -------------- Borrower for a Revolving Advance into a request for an Advance under the Swingline Loan. The Swingline Loan shall be a Base Rate Loan and shall not exceed in the aggregate at any time outstanding the Maximum Swingline Loan Amount. In the event that on any Business Day, Swingline Lender desires that all or any portion of the Swingline Loan should be reduced in whole or in part, Swingline Lender shall promptly notify Agent to that effect and indicate the portion of the Swingline Loan to be reduced. Swingline Lender hereby agrees that it shall notify Agent to reduce the Swingline Loan to $1,000,000 or less at least once every month. Agent agrees to promptly transmit to Lenders the information contained in each notice received by Agent from Swingline Lender and shall concurrently notify Lenders of each Lender's Pro Rata Share of the obligation to make a Revolving Advance to repay the Swingline Loan (or portion thereof). Each of the Lenders hereby unconditionally and irrevocably agrees to fund to Agent for the benefit of Swingline Lender, in lawful money of the United States and in same day funds, not later than 1:00 p.m. Chicago time on the Business Day immediately following the Business Day of such Lender's receipt of such notice from Agent (provided that if any Lender shall receive such notice at or prior to -------- 11:00 a.m. Chicago time on a Business Day, such funding shall be made by such Lender on such 6 Business Day), such Lender's Pro Rata Share of a Revolving Advance (which Revolving Advance shall be a Base Rate Loan and shall be deemed to be requested by U.S. Borrower) in the principal amount of such portion of the Swingline Loan which is required to be paid to Swingline Lender under this subsection 2.1(D) ----------------- (regardless of whether the conditions precedent thereto set forth in Section 3 --------- and the Conditions Rider are then satisfied and whether or not U.S. Borrower ---------------- has provided a Notice of U.S. Borrowing under subsection 2.1(E)(2) and whether ---------- --------- or not any Default or Event of Default exists or all or any of the Loans have been accelerated, but subject to the other provisions of this subsection 2.1(D). ----------------- The proceeds of any such Revolving Advance shall be immediately paid over to Agent for the benefit of Swingline Lender for application to the Swingline Loan. In the event that an Event of Default shall occur and either (i) such Event of Default is of the type described in subsection 8.1(F) or (G) hereof or (ii) no ----------------- --- further Revolving Advances are being made under this Agreement, then so long as any such Event of Default is continuing, each of the Lenders (other than Swingline Lender) shall be deemed to have irrevocably, unconditionally and immediately purchased from Swingline Lender such Lender's Pro Rata Share of the Swingline Loan outstanding as of the date of the occurrence of such Event of Default. Each Lender shall effect such purchase by making available an amount equal to its participation on the date of such purchase in Dollars in immediately available funds to Agent's Account for the benefit of Swingline Lender. In the event any Lender fails to make available to Swingline Lender when due the amount of such Lender's participation in the Swingline Loan, Swingline Lender shall be entitled to recover such amount on demand from such Lender together with interest at the Federal Funds Effective Rate. Each such purchase by a Lender shall be made without recourse to Swingline Lender, without representation or warranty of any kind, and shall be effected and evidenced pursuant to documents reasonably acceptable to Swingline Lender. The obligations of Lenders under this subsection 2.1(D) shall be absolute, ----------------- irrevocable and unconditional, shall be made under all circumstances and shall not be affected, reduced or impaired for any reason whatsoever. (E) Borrowing Mechanics. (1) General. LIBOR Loans denominated in ------------------- ------- Dollars and made on any Funding Date shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess thereof, and LIBOR Loans denominated in any Optional Currency shall be in such minimum amounts and integral multiples thereof as Agent and Borrower Representative may agree at the time the applicable Notice of Borrowing is given, which shall be calculated so as to approximate, as nearly as practicable, the minimum amounts and multiples thereof applicable to LIBOR Loans denominated in Dollars. Any Loans made to U.S. Borrower shall be in Dollars, and any Loans made to U.K. Borrower shall be in the Available Currency specified by Borrower Representative in the applicable Notice of Borrowing, provided that during the initial 60 day period following -------- the Closing Date, the only Available Currency shall be Dollars. During the period commencing on the Closing Date through the Primary Syndication Completion Date, any requested LIBOR Loans shall be for an Interest Period of two (2) weeks. As used herein, the term "Primary Syndication Completion Date" means the ----------------------------------- date on which Agent has consummated the syndication of at least $41,280,000 of the Commitments to one or more other Lenders. (2) Advances. On any day when any Borrower desires an advance under this -------- subsection 2.1, Borrower Representative on behalf of the applicable Borrower - -------------- shall give Agent telephonic notice of the proposed borrowing by 1:00 p.m. Chicago time (a) on the Funding Date of a Base Rate Loan which is to be made through Agent to U.S. Borrower in Dollars, (b) one Business Day prior to the Funding Date of a Base Rate Loan which is to be made through Funding Agent to U.K. Borrower 7 in Dollars, Pounds or Euros, (c) two Business Days in advance of the Funding Date of a Base Rate Loan to U.K. Borrower which is to be made through Funding Agent in Guilders or Francs, (d) three Business Days in advance of the Funding Date of any Base Rate Loan which is to be made through Agent to U.K. Borrower in any Optional Currency; and (e) three Business Days in advance of the Funding Date of any LIBOR Loan in any Available Currency, which notice shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) whether such Loans shall consist of Base Rate Loans or LIBOR Loans (and, for LIBOR Loans, the Interest Period applicable thereto), (iii) the applicable Borrower to whom such Advance is to be made and the Available Currency or Currencies in which the requested Loan is to be made, (iv) in the case of a requested Advance to be denominated in an Optional Currency, the Dollar Equivalent amount thereof, and (v) Availability as of the time such Notice of Borrowing is delivered, which shall be determined based on the then current Borrowing Base Certificate after giving effect to all Loans made to Borrowers and all Lender Letters of Credit issued for the account of Borrowers since the date of such Borrowing Base Certificate. Any such telephonic notice shall be confirmed in writing on the same day by 2:00 p.m. Chicago time by delivery to Agent of a duly completed Notice of Borrowing. Borrower Representative shall request, within one-half hour prior to the issuance of a Notice of Borrowing requesting Advances in an Optional Currency, the advice of Agent as to the Dollar Equivalent of the amount of such Advance, and Borrower Representative shall specify such amount in such Notice of Borrowing, provided that such advice shall not be deemed to be a -------- prediction or guaranty of the Dollar Equivalent of such amount after the Notice of Borrowing is submitted and shall in no way limit the Borrowers' Obligations under this Agreement due to fluctuations in the applicable Optional Currency. Neither Funding Agent nor any Lender shall incur any liability to any Borrower for acting upon any telephonic notice Agent believes in good faith to have been given by a duly authorized officer or other Person authorized to borrow on behalf of any Borrower or for otherwise acting in good faith under this subsection 2.1(E). Agent shall not make (or direct Funding Agent to make) on - ----------------- behalf of Lenders, nor shall any Lender be required to make, any Advance pursuant to any telephonic notice unless Agent has also received the most recent Borrowing Base Certificate and all other documents required under Section 3 --------- hereof and the Reporting Rider hereto by 11:00 a.m. Chicago time on the --------------- applicable Funding Date. Each Advance to any Borrower under this subsection ---------- 2.1(E)(2) shall be deposited by wire transfer in immediately available funds - --------- in the applicable Available Currency or Currencies in such account or accounts as such Borrower may from time to time designate to Agent and Funding Agent in writing. Each such Advance may be made by Agent directly or, at the election of Agent (subject to the provisions of subsection 9.1(A)(2)), by Funding Agent on -------------------- behalf of Agent and Lenders. In the event Agent elects to cause Funding Agent to make a requested Advance on behalf of Agent and Lenders, Agent shall deliver to Funding Agent a written notice of such election, specifying the amount of the applicable Advance, the Available Currency in which such Advance is to be made and the Business Day in London on which such Advance is to be made. Funding Agent shall, as promptly as practicable following the commencement of business in London on the applicable Funding Date, make such Advances as may have been so requested by Agent in such written notice, and Funding Agent shall have no duty to ascertain whether Availability exists therefor or whether the conditions to funding shall have been met (all of which shall be determined by Agent). Agent may rescind any notice to Funding Agent directing Funding Agent to make an Advance at any time prior to the time Funding Agent shall have actually made such Advance. Except as permitted by subsection 9.10, without the prior --------------- written consent of Requisite Lenders, the aggregate outstanding principal amount of advances made to Borrowers by Funding Agent on behalf of Lenders under this subsection 2.1(E)(2) shall not as of any date of determination exceed -------------------- $500,000. Notwithstanding the foregoing or anything else contained in this 8 Agreement to the contrary, (a) from and after the date on which (i) an Event of Default shall have occurred and be continuing, and (ii) a Redirection Notice shall have been delivered, the only Available Currency shall be Dollars; and (b) in no event shall Loans denominated in more than one Optional Currency be outstanding at any time hereunder. (3) Special Provisions Regarding Communication Between Agent and Funding -------------------------------------------------------------------- Agent. Promptly upon the close of business, London time, on each Business Day, - ----- Funding Agent shall deliver or transmit to Agent a written or electronic report regarding all activity in Borrowers' account on such Business Day in the United Kingdom, including the amount of any payments credited to any of the Loans on such date and the amount of any Revolving Advances made to Borrowers on such Business Day by Funding Agent at the request of Agent. (F) Automatic Requests. The becoming due of any amount required to be ------------------ paid under this Agreement or any of the other Loan Documents as principal, accrued interest and fees shall be deemed irrevocably to be an automatic request by Borrowers for a Revolving Advance, which shall be a Base Rate Loan in Dollars or, in the event of any payment required to be made in an Optional Currency, in such Optional Currency, on the due date of, and in the amount required to pay (as set forth on Agent's books and records), such principal, accrued interest and fees. (G) Notes. Borrowers shall execute and deliver to each Lender with ----- appropriate insertions Notes to evidence such Lender's Commitments. In the event of an assignment under subsection 9.5, Borrowers shall, upon surrender of -------------- the assigning Lender's Notes, issue new Notes to reflect the interest held by the assigning Lender and its Eligible Assignee. (H) Letters of Credit. The Revolving Loan Commitments may, in addition ----------------- to Revolving Advances, be utilized, upon the request of U.S. Borrower, for (i) the issuance of letters of credit denominated in Dollars by Agent or, with Agent's consent, any Lender, for the account of U.S. Borrower or (ii) the issuance by Agent of risk participations to banks to induce such banks to issue Bank Letters of Credit denominated in Dollars for the account of U.S. Borrower (each of (i) and (ii) above a "Lender Letter of Credit"). Each Lender shall be ----------------------- deemed to have purchased a participation in each Lender Letter of Credit issued on behalf of any Borrower in an amount equal to its Pro Rata Share thereof. In no event shall any Lender Letter of Credit be issued to the extent that the issuance of such Lender Letter of Credit would cause the sum of the Letter of Credit Reserve (after giving effect to such issuance) plus the Revolving Loan to exceed the lesser of (x) the Borrowing Base or (y) the Revolving Loan Commitment. (1) Maximum Amount. The aggregate amount of Letter of Credit -------------- Liability with respect to all Lender Letters of Credit outstanding at any time shall not exceed $2,000,000. (2) Reimbursement. Borrowers, jointly and severally, shall be ------------- irrevocably and unconditionally obligated forthwith without presentment, demand, protest or other formalities of any kind, to reimburse Agent or the issuer, as applicable, for any amounts paid with respect to a Lender Letter of Credit including all fees, costs and expenses paid to any bank that issues a Bank Letter of Credit. Each Borrower hereby authorizes and directs Agent, at Agent's option, to debit Borrowers' account (by increasing the Revolving Loan) in the amount of any payment made with respect to any Lender Letter of Credit. In the event that Agent elects not to debit Borrowers' account 9 and Borrowers fail to reimburse Agent or the issuer, as applicable, in full on the date of any payment under a Lender Letter of Credit, Agent shall promptly notify each Lender of the unreimbursed amount of such payment together with accrued interest thereon and each Lender, on the next Business Day, shall deliver to Agent an amount equal to its respective participation in same day funds. The obligation of each Lender to deliver to Agent an amount equal to its respective participation pursuant to the foregoing sentence shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3. In the event any Lender fails to --------- make available to Agent the amount of such Lender's participation in such Lender Letter of Credit, Agent shall be entitled to recover such amount on demand from such Lender together with interest at the Base Rate. (3) Request for Letters of Credit. U.S. Borrower shall give Agent at ----------------------------- least three Business Days prior notice specifying the date a Lender Letter of Credit is to be issued, identifying the beneficiary and describing the nature of the transactions proposed to be supported thereby. The notice shall be accompanied by the form of the letter of credit being requested. Any letter of credit which U.S. Borrower requests must be in such form, be for such amount, contain such terms and support such transactions as are reasonably satisfactory to Agent. The expiration date of each Lender Letter of Credit shall be on a date which is at least 30 days prior to the Termination Date. (I) Other Letter of Credit Provisions. --------------------------------- (1) Obligations Absolute. The obligation of Borrowers, jointly and -------------------- severally, to reimburse Agent or any Lender for payments made under, and other amounts payable in connection with, any Lender Letter of Credit shall be unconditional and irrevocable and shall be paid under all circumstances strictly in accordance with the terms of this Agreement including, without limitation, the following circumstances: (a) any lack of validity or enforceability of any Lender Letter of Credit, or any other agreement; (b) the existence of any claim, set-off, defense or other right which any Borrower, any Affiliate of any Borrower, Agent or any Lender, on the one hand, may at any time have against any beneficiary or transferee of any Lender Letter of Credit (or any Persons for whom any such transferee may be acting), Agent, any Lender or any other Person, on the other hand, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between any Borrower or any of its Affiliates and the beneficiary of the Lender Letter of Credit); (c) any draft, demand, certificate or any other document presented under any Lender Letter of Credit is alleged to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or (d) payment under any Lender Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Lender Letter of Credit; provided that, in the case of any payment -------- by Agent or a Lender under any 10 Lender Letter of Credit, Agent or such Lender, as the case may be, has not acted with gross negligence or willful misconduct (as determined by a court of competent jurisdiction) in determining that the demand for payment under such Lender Letter of Credit complies on its face with any applicable requirements for a demand for payment under such Lender Letter of Credit. (2) Nature of Lender's Duties. As between Agent, any Lender that ------------------------- issues a Lender Letter of Credit (each, an "Issuing Lender") and all other -------------- Lenders, on the one hand, and Borrowers on the other hand, Borrowers assume all risks of the acts and omissions of, or misuse of any Lender Letter of Credit by the beneficiary thereof. In furtherance and not in limitation of the foregoing, neither Agent nor any Issuing Lender shall be responsible: (a) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document by any party in connection with the application for and issuance of any Lender Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Lender Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (c) for failure of the beneficiary of any Lender Letter of Credit to comply fully with conditions required in order to demand payment thereunder; provided that, in the case of any payment under any -------- such Lender Letter of Credit, Agent or the Issuing Lender, as applicable, has not acted with gross negligence or willful misconduct (as determined by a court of competent jurisdiction) in determining that the demand for payment under any such Lender Letter of Credit complies on its face with any applicable requirements for a demand for payment thereunder; (d) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (e) for errors in interpretation of technical terms; (f) for any loss or delay in the transmission or otherwise of any document required in order to make a payment under any such Lender Letter of Credit; (g) for the credit of the proceeds of any drawing under any such Lender Letter of Credit; and (h) for any consequences arising from causes beyond the control of Agent or any Issuing Lender, as the case may be. (3) Liability. In furtherance and extension of and not in limitation --------- of, the specific provisions herein above set forth, any action taken or omitted by Agent or any Lender under or in connection with any Lender Letter of Credit, if taken or omitted in good faith, shall not put Agent or any Lender under any resulting liability to Borrowers or any other Lender. (J) Availability of a Lender's Pro Rata Share. ----------------------------------------- (1) Unless Agent or Funding Agent, as applicable, receives written notice from a Lender on or prior to any Funding Date that such Lender will not make available to Agent or Funding Agent, as applicable, as and when required, such Lender's Pro Rata Share of any requested Loan or Advance, each of Agent and Funding Agent may assume that each Lender will make such amount available to it in immediately available funds in the applicable Available Currency on the Funding Date and each of Agent and Funding Agent may (but shall not be so required), in reliance upon such assumption, make available to the applicable Borrower on such Funding Date a corresponding amount. (2) A Defaulting Lender shall pay interest at the Federal Funds Effective Rate on the Defaulted Amount from the Business Day following the applicable Funding Date of such 11 Defaulted Amount until the date such Defaulted Amount is paid to Agent or Funding Agent, as applicable. A notice of Agent or Funding Agent submitted to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is not paid when due to Agent or Funding Agent, Agent or Funding Agent, as the case may be, at its option, may notify Borrowers of such failure to fund and, upon demand by Agent or Funding Agent, Borrowers shall pay the unpaid amount to Agent or Funding Agent, as applicable, for Agent's or Funding Agent's account, together with interest thereon for each day elapsed since the date of such borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loan made by the other Lenders on such Funding Date. The failure of any Lender to make available any portion of its Commitment on any Funding Date or to fund its participation in a Lender Letter of Credit or Swingline Loan shall not relieve any other Lender of any obligation hereunder to fund such Lender's Commitment on such Funding Date or to fund any such participation, but no Lender shall be responsible for the failure of any other Lender to honor its Commitment on any Funding Date or to fund any participation to be funded by any other Lender. (3) Neither Agent nor Funding Agent shall be obligated to transfer to a Defaulting Lender any payment made by Borrowers to Agent or Funding Agent or any amount otherwise received by Agent or Funding Agent for application to the Obligations nor shall a Defaulting Lender be entitled to the sharing of any interest, fees or payments hereunder. (4) For purposes of voting or consenting to matters with respect to (i) the Loan Documents or (ii) any other matter concerning the Loans, a Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitments and outstanding Loans and Advances shall be deemed to be zero. (K) Special Provisions Regarding Optional Currencies. Notwithstanding ------------------------------------------------ anything contained herein to the contrary, if any Lender shall, not later than 2:00 p.m. London time one Business Day before the Funding Date of any requested Revolving Advance which is to be made in an Optional Currency, notify Agent and Funding Agent that such Lender is not satisfied that deposits in the relevant Optional Currency will be freely available to it in the relevant amount and, if applicable, for the relevant Interest Period, the right of Borrower Representative to request or of U.K. Borrower to receive Revolving Advances in such Optional Currency from such Lender as part of the Notice of Borrowing delivered in respect of such requested Revolving Advance or any subsequent Notice of Borrowing shall be suspended until such Lender shall notify Agent and Funding Agent that the circumstances causing such suspension no longer exist, and, at the option of Borrower Representative, the Revolving Advance to be made by such Lender as part of such requested borrowing (and the Revolving Advance to be made by such Lender as part of any subsequent borrowing in respect of which such Optional Currency shall have been requested during such period of suspension) shall be denominated in any other Available Currency specified by Borrower Representative which is available (or in Pounds if no such currency is available) and having an Interest Period coextensive with the Interest Period in effect in respect of all other Revolving Advances made in such Optional Currency and comprising a part of such requested Revolving Advance (or having an Interest Period of one month, if no such other Revolving Advances exist). Agent and/or Funding Agent shall, upon becoming aware that the circumstances causing any such suspension no longer apply, promptly so notify Borrower Representative, provided -------- that the failure of Agent or Funding Agent to so notify Borrower Representative shall not impair the rights of 12 Lenders under this subsection 2.1(K) or expose Agent or Funding Agent to any ----------------- liability to any Borrower, any other Loan Party or any other Person. 2.2 Interest. -------- (A) Rate of Interest. The Loans and all other Obligations shall bear ---------------- interest from the date such Loans are made or such other Obligations become due to the date paid at a rate per annum equal to the applicable rates set forth below (collectively the "Interest Rate"): ------------- (1) The Revolving Loan and all other Obligations (other than the principal portion of the Term Loans) shall bear interest (a) if a Base Rate Loan, then at the sum of the applicable Base Rate plus the Base Rate Margin applicable to the ---- Revolving Loan; and (b) if a LIBOR Loan, then at the sum of the applicable LIBOR plus the LIBOR Margin applicable to the Revolving Loan; - ---- (2) Term Loan A shall bear interest (a) if a Base Rate Loan, then at the sum of the applicable Base Rate plus the Base Rate Margin applicable to Term Loan A; ---- and (b) if a LIBOR Loan, then at the sum of the applicable LIBOR plus the LIBOR ---- Margin applicable to Term Loan A; (3) Term Loan B shall bear interest (a) if a Base Rate Loan, then at the sum of the applicable Base Rate plus the Base Rate Margin applicable to Term Loan B; ---- and (b) if a LIBOR Loan, then at the sum of the applicable LIBOR plus the LIBOR ---- Margin applicable to Term Loan B; and (4) The Swingline Loan shall bear interest at the sum of the Base Rate applicable to Loans denominated in Dollars plus the Base Rate Margin applicable ---- to the Swingline Loan. Subject to the provisions of subsection 2.1(E)(1), Borrower Representative shall -------------------- designate to Agent whether a Loan shall be a Base Rate or LIBOR Rate Loan at the time a Notice of Borrowing is given pursuant to subsection 2.1(E)(2). Such -------------------- designation by Borrower Representative may be changed from time to time pursuant to subsection 2.2(D). If on any day a Loan or a portion of any Loan is ----------------- outstanding with respect to which notice has not been delivered to Agent in accordance with the terms of this Agreement specifying the basis for determining the rate of interest or if LIBOR has been specified and no LIBOR quote in the applicable Available Currency is available, then for that day that Loan or portion thereof shall bear interest determined by reference to the Base Rate applicable to Loans in such Available Currency. After the occurrence and during the continuance of an Event of Default (i) the Loans and all other Obligations shall, at the option of Requisite Lenders, bear interest at a rate per annum equal to 2% plus the applicable Interest Rate (the "Default Rate"), (ii) each LIBOR Loan shall automatically convert to a Base ------------ Rate Loan denominated in the same Available Currency as such LIBOR Loan at the end of any applicable Interest Period, and (iii) no Loans may be converted to LIBOR Loans. 13 (B) Computation and Payment of Interest. Interest on the Loans and all ----------------------------------- other Obligations shall be computed on the daily principal balance on the basis of a 360 day year (or a 365 day year, in the case of Loans denominated in Pounds) for the actual number of days elapsed. In computing interest on any Loan, the date of funding of the Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a LIBOR Loan, the date of conversion of such LIBOR Loan to such Base Rate Loan, shall be included; and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan, or with respect to a Base Rate Loan being converted to a LIBOR Loan, the date of conversion of such Base Rate Loan to such LIBOR Loan, shall be excluded; provided that if a Loan is -------- repaid on the same day on which it is made, one day's interest shall be paid on that Loan. Interest on Base Rate Loans and all other Obligations other than LIBOR Loans shall be payable to Agent for benefit of Lenders monthly in arrears on the first day of each month, on the date of any prepayment of Loans, and at maturity, whether by acceleration or otherwise. Interest on LIBOR Loans shall be payable to Agent for benefit of Lenders on the last day of the applicable Interest Period for such Loan, on the date of any prepayment of the Loans, and at maturity, whether by acceleration or otherwise. In addition, for each LIBOR Loan having an Interest Period longer than three months, interest accrued on such Loan shall also be payable on the last day of each three month interval during such Interest Period. Interest on any Loan or Advance shall accrue and shall be paid in the Available Currency in which such Loan or Advance was made. (C) Interest Laws. Notwithstanding any provision to the contrary ------------- contained in this Agreement or any other Loan Document, Borrowers shall not be required to pay, and neither Agent nor any Lender shall be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by applicable law ("Excess Interest"). If any Excess Interest is provided for or --------------- determined by a court of competent jurisdiction to have been provided for in this Agreement or in any other Loan Document, then in such event: (1) the provisions of this subsection shall govern and control; (2) neither Borrowers nor any other Loan Party shall be obligated to pay any Excess Interest; (3) any Excess Interest that Agent or any Lender may have received hereunder shall be, at Agent's option, (a) applied as a credit against the outstanding principal balance of the Obligations or accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; (4) the interest rate(s) provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Agreement and the other Loan ------------ Documents shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and (5) neither Borrowers nor any Loan Party shall have any action against Agent or any Lender for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on any Obligations is calculated at the Maximum Rate rather than the applicable rate under this Agreement, and thereafter such applicable rate becomes less than the Maximum Rate, the rate of interest payable on such Obligations shall remain at the Maximum Rate until each Lender shall have received the amount of interest which such Lender would have received during such period on such Obligations had the rate of interest not been limited to the Maximum Rate during such period. (D) Conversion or Continuation. Subject to the provisions of this -------------------------- subsection 2.2, Borrower Representative, on behalf of any Borrower, shall have - --------------- the option to (1) convert at any 14 time all or any part of outstanding Loans (other than Swingline Loans) equal to $1,000,000 and integral multiples of $500,000 in excess of that amount (or, in the case of Loans denominated in an Optional Currency, such other minimum amount and integral multiples thereof as Agent and Borrower Representative may agree, which shall be calculated so as to approximate, as nearly as practicable, the minimum amounts and multiples thereof applicable to LIBOR Loans denominated in Dollars) from Base Rate Loans to LIBOR Loans denominated in the same Available Currency as the Loans so converted, or (2) upon the expiration of any Interest Period applicable to a LIBOR Loan, to (a) continue all or any portion of such LIBOR Loan equal to $1,000,000 and integral multiples of $500,000 in excess of that amount (or, in the case of Loans denominated in an Optional Currency, such other minimum amount and integral multiples thereof as Agent and Borrower Representative may agree, which shall be calculated so as to approximate, as nearly as practicable, the minimum amounts and multiples thereof applicable to LIBOR Loans denominated in Dollars) as a LIBOR Loan denominated in the same Available Currency as the Loan so converted, or (b) convert all or any portion of such LIBOR Loan to a Base Rate Loan denominated in the same Available Currency as the Loan so converted. The succeeding Interest Period(s) of such continued or converted Loan commence on the last day of the Interest Period of the Loan to be continued or converted; provided that no outstanding Loan may be -------- continued as, or be converted into, a LIBOR Loan, when any Event of Default or Default has occurred and is continuing. Borrower Representative shall deliver a notice of conversion/continuation to Agent no later than 1:00 p.m. Chicago time at least 3 Business Days in advance of the proposed conversion/ continuation date (each, which shall be substantially in the form of Exhibit G, a "Notice of --------- --------- Conversion/Continuation"). A Notice of Conversion/Continuation shall certify: - ----------------------- (1) the proposed conversion/continuation date (which shall be a Business Day); (2) the amount of the Loan to be converted/continued and the Available Currency in which it was denominated; (3) the nature of the proposed conversion/continuation; (4) in the case of conversion to, or a continuation of, a LIBOR Loan, the requested Interest Period; and (5) that no Default or Event of Default has occurred and is continuing or would result from the proposed conversion/continuation. In lieu of delivering the Notice of Conversion/Continuation, Borrower Representative may give Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2(D); provided that ----------------- -------- such notice shall be promptly confirmed in writing by delivery by Borrower Representative of a Notice of Conversion/Continuation to Agent on or before the proposed conversion/continuation date. Neither Agent nor any Lender shall incur any liability to any Borrower in acting upon any telephonic notice referred to above that Agent believes in good faith to have been given by an officer or other person authorized to act on behalf of Borrowers or for otherwise acting in good faith under this subsection ---------- 2.2(D). - ------- 2.3 Fees. ---- (A) Unused Line Fee. Borrowers shall pay to Agent, for the benefit of --------------- Lenders, a fee in an amount equal to the Revolving Loan Commitment less the sum ---- of (i) the average daily balance of each of the Revolving Loan and the Swingline Loan, plus (ii) the average daily face amount of the Letter of Credit Reserve ---- during the preceding month, multiplied by .375% per ------------- 15 annum, such fee to be calculated on the basis of a 360 day year for the actual number of days elapsed and to be payable monthly in arrears in Dollars on the first day of each month following the Closing Date. (B) Letter of Credit Fees. Borrowers shall pay to Agent, for the --------------------- benefit of Lenders, a fee with respect to the Lender Letters of Credit in the amount of the average daily amount of Letter of Credit Liability outstanding during such month, multiplied by 1.50% per annum. Such fee will be calculated ------------- on the basis of a 360 day year for the actual number of days elapsed and will be payable monthly in arrears in Dollars on the first day of each month. Borrowers shall also reimburse Agent for any and all fees and expenses, if any, paid by Agent or any Lender to the issuer of any Bank Letter of Credit. (C) Audit Fees. Borrowers agree to pay to Agent for its own account an ---------- audit fee for each inspection equal to $750 per Agent auditor per day or any portion thereof, together with all out of pocket expenses (including all out of pocket fees, costs and expenses of any third party auditors retained by Agent.) (D) Other Fees and Expenses. Borrowers shall pay to each of Agent and ----------------------- Funding Agent, for their own respective accounts, all charges for returned items and all other bank charges incurred by Agent or Funding Agent, as well as each of Agent's and Funding Agent's standard wire transfer charges for each wire transfer made under this Agreement. (E) Agent's Fees. In addition to the foregoing, Borrowers shall pay to ------------ Agent those fees set forth in the fee letter dated as of the Closing Date between Borrowers and Agent, such fees to be paid in the amounts, at the times, and subject to the conditions set forth in such fee letter. 2.4 Payments and Prepayments. ------------------------ (A) Manner and Time of Payment. In its sole discretion, Agent may -------------------------- elect to honor the automatic requests by Borrowers for Revolving Advances for all principal, interest, fees and any other amounts due hereunder on their applicable due dates pursuant to subsection 2.1(F), and the proceeds of each ----------------- such Advance, if made, shall be applied as a direct payment of the relevant Obligation. If Agent elects to bill Borrowers for any amount due hereunder, such amount shall be immediately due and payable with interest thereon as provided herein. All payments made by Borrowers with respect to the Obligations shall be made without deduction, defense, setoff or counterclaim. All payments to Agent hereunder shall, unless otherwise directed by Agent, be made to Agent's Account or in accordance with subsection 4.26. Proceeds remitted to Agent's --------------- Account shall be credited to the Obligations on the Business Day following the day such proceeds were received; provided, however, proceeds remitted to Agent's -------- ------- Account by wire transfer shall be credited to the Obligations on the same Business Day such proceeds were received. For the purpose of calculating interest on the Obligations, funds shall be deemed received on the same Business Day in Chicago on which such proceeds were so received. (B) Mandatory Prepayments. --------------------- 16 (1) Overadvance. At any time that the sum of the Revolving Loan and ----------- the Swingline Loan exceeds the Maximum Revolving Loan Amount, Borrowers shall immediately repay the Revolving Loan and/or the Swingline Loan to the extent necessary to reduce the aggregate principal balance to an amount equal to or less than the Maximum Revolving Loan Amount. (2) Proceeds of Asset Dispositions. Immediately upon receipt by any ------------------------------ Borrower or any Subsidiary thereof of proceeds of any Asset Disposition (in one or a series of related transactions), which proceeds exceed $10,000 (it being understood that if the proceeds exceed $10,000, the entire amount and not just the portion above $10,000 shall be subject to this subsection 2.4(B)(2)), --------------------- Borrowers shall prepay the Obligations in an amount equal to such proceeds. In the case of an Asset Disposition involving any disposition of any of the assets included in the Fixed Asset Appraisal, such prepayments shall first be applied in payment of Scheduled Installments of Term Loan A, and shall then be applied in payment of Scheduled Installments of Term Loan B, each in inverse order of maturity and, at any time after the Term Loans shall have been repaid in full, such payments shall be applied to reduce the outstanding principal balance of the Revolving Loan (but not as a permanent reduction of the Revolving Loan Commitment). In the case of an Asset Disposition involving any disposition of any other assets, such prepayments shall first be applied in payment of Scheduled Installments of Term Loan B, and shall then be applied in payment of Scheduled Installments of Term Loan A, each in inverse order of maturity and, at any time after the Term Loans shall have been repaid in full, such payments shall be applied to reduce the outstanding principal balance of the Revolving Loan (but not as a permanent reduction of the Revolving Loan Commitment). If Borrowers reasonably expect the proceeds of any Asset Disposition to be reinvested within 180 days to repair or replace such assets with like assets, Borrowers shall deliver the proceeds to Agent (in the same Available Currency as received by the applicable Loan Party) to be applied to the Revolving Loan and Agent shall establish a reserve against available funds for borrowing purposes under the Revolving Loan for such amount, until such time as such proceeds have been reborrowed or applied to other Obligations as set forth herein. Borrowers may, so long as no Default or Event of Default shall have occurred and be continuing, reborrow such proceeds only for such repair or replacement. If Borrowers fail to reinvest such proceeds within 180 days, Borrowers hereby authorize Lenders to make a Revolving Advance to repay the Obligations in the manner set forth in this subsection 2.4(B)(2). -------------------- (3) Prepayments from Excess Cash Flow. Within 100 days after the end --------------------------------- of each Fiscal Year, commencing with Borrowers' 1999 Fiscal Year, Borrowers shall prepay the Obligations in Dollars in an amount equal to 25.0% of Excess Cash Flow for such prior Fiscal Year calculated on the basis of the audited financial statements for such Fiscal Year delivered to Agent and Lenders pursuant to the Reporting Rider. All such prepayments from Excess Cash Flow --------------- shall first be applied to the Scheduled Installments of Term Loan B in inverse order of maturity until Term Loan B shall have been repaid in full. Thereafter, within 100 days after the end of each Fiscal Year, Borrowers shall prepay the Obligations in Dollars in an amount equal to the lesser of (a) 25.0% of Excess Cash Flow for such prior Fiscal Year (calculated as set forth above) or (b) $245,000, which prepayments shall be applied to the Scheduled Installments of Term Loan A in inverse order of maturity until Term Loan A shall have been repaid in full. Concurrently with the making of any such payment, Borrowers shall deliver to Agent and Lenders a certificate of Borrower Representative's chief executive officer or chief financial officer 17 demonstrating its calculation of the amount required to be paid, such certificate to be substantially in the form of Exhibit H hereto. --------- (C) Voluntary Prepayments and Repayments. Except as provided in ------------------------------------ subsection 2.4(B) and except for repayments of the Revolving Loan from time to - ----------------- time in the ordinary course of business without any permanent reduction in the Revolving Loan Commitment, Borrowers' Obligations may only be prepaid or repaid in full and not in part. Borrowers may, at any time upon not less than three Business Days prior notice to Agent, prepay the Term Loans in full and terminate the Revolving Loan Commitment; provided, however, the Revolving Loan Commitment -------- ------- may not be terminated by Borrowers until all Loans are paid in full. Upon termination of the Revolving Loan Commitment, Borrowers shall cause Agent and each Lender to be released from all liability under any Lender Letters of Credit or, at Agent's option, Borrowers will deposit cash collateral (in Dollars) with Agent in an amount equal to 105% of the Letter of Credit Liability that will remain outstanding after such termination. (D) Payments on Business Days. Whenever any payment to be made ------------------------- hereunder shall be stated to be due on a day that is not a Business Day, the payment may be made on the next succeeding Business Day and such extension of time shall be included in the computation of the amount of interest or fees due hereunder. Except as expressly set forth herein to the contrary, all payments made by Borrowers in respect of principal or interest on the Loans shall be made in the same Available Currency as such Loan was made. 2.5 Term of this Agreement. This Agreement shall be effective until the ---------------------- earlier of (a) December 31, 2003 and (b) the acceleration of all Obligations pursuant to subsection 8.3 (such earlier date being referred to as the -------------- "Termination Date"). On the Termination Date, the Commitments shall terminate - ----------------- (unless earlier terminated pursuant to the terms hereunder) and all Obligations shall become immediately due and payable without notice or demand. Notwithstanding any termination, until all Obligations have been fully paid and satisfied, Agent and Collateral Agent, on behalf of Agent and Lenders, shall be entitled to retain security interests in and liens upon all Collateral, and even after payment of all Obligations hereunder, Borrowers' obligation to indemnify Agent, Funding Agent, Collateral Agent and each Lender in accordance with the terms hereof shall continue. 2.6 Statements. Agent shall render a monthly statement of account to ---------- Borrowers within 20 days after the end of each month. Such statement of account shall constitute an account stated unless Borrower Representative makes written objection thereto within 30 days from the date such statement is mailed to Borrower Representative. Each of Agent and Funding Agent shall record in its books and records, including computer records, the principal amount of the Loans owing to each Lender from time to time. Agent's and Funding Agent's books and records including computer records shall constitute presumptive evidence, absent manifest error, of the accuracy of the information contained therein. Failure by Agent or Funding Agent to make any such notation or record shall not affect the obligations of Borrowers to Lenders with respect to the Loans. 2.7 Grant of Security Interest. To secure the payment and performance of -------------------------- the Obligations, including all renewals, extensions, restructurings and refinancings of any or all of the Obligations, each Borrower hereby grants to Agent, on behalf of Lenders, a continuing security interest, lien and mortgage in and to all right, title and interest of such Borrower in all of such 18 Borrower's personal and real property, whether now owned or existing or hereafter acquired or arising and regardless of where located including, without limitation: (A) Accounts, and all guaranties and security therefor, and all goods and rights represented thereby or arising therefrom including the rights of stoppage in transit, replevin and reclamation; (B) Inventory; (C) general intangibles (as defined in the UCC) including all agreements, leases, licenses and contracts to which such Borrower is or may become a party; all obligations or indebtedness owing to such Borrower (other than Accounts) or other rights to receive payments of money from whatever source arising and all collateral security therefor; all tax refunds and tax refund claims; all choses in action and causes of action; and all trade secrets and other confidential information relating to the business of such Borrower, whether or not reduced in writing, with respect to the conduct by such Borrower of its business not generally known by the public; (D) documents (as defined in the UCC) or other receipts covering, evidencing or representing goods including all bills of lading, dock warrants, dock receipts, warehouse receipts and orders for the delivery of goods, and any other document which in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers; (E) all "instruments," "chattel paper" and "letters of credit" (each as defined in the UCC) in which such Borrower now has or hereafter acquires any rights including, without limitation, checks, drafts, notes, bonds, debentures and certificates of deposit; (F) Equipment; (G) investment property (as defined in the UCC) including, without limitation, all securities (certificated and uncertificated), security accounts, security entitlements, commodity contracts and commodity accounts, as such terms are defined in the UCC; (H) Intellectual Property; (I) all "fixtures" (as defined in the UCC) now owned or hereafter acquired by such Borrower including, without limitation, plant fixtures, trade fixtures and business fixtures, wherever located, and all additions and accessions thereto and replacements therefor; (J) Mortgaged Property; 19 (K) all deposit accounts of any Borrower maintained with any bank or financial institution; (L) all cash and other monies and property of any Borrower in the possession or under the control of Agent, Funding Agent, Collateral Agent, any Lender or any participant; (M) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the property described above or are otherwise necessary or helpful in the collection thereof or realization thereon; and (N) proceeds and products of all or any of the property described above, including, without limitation, the proceeds of any insurance policies covering any of the above described property. The obligations of each Borrower under this subsection 2.7 with respect to any -------------- property of such Borrower which is not located in the United States shall be discharged by its execution and delivery of the Foreign Security Documents to which it is a party. 2.8 Capital Adequacy and Other Adjustments. In the event Agent, Funding -------------------------------------- Agent or any Lender shall have determined that the adoption after the date hereof of any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by Agent, Funding Agent or such Lender or any corporation controlling Agent, Funding Agent or such Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from any central bank or governmental agency or body having jurisdiction (including without limitation any guideline or other requirement implementing the Basle Accord) does or shall have the effect of increasing the amount of capital, reserves or other funds required to be maintained by Agent, Funding Agent or such Lender or any corporation controlling Agent, Funding Agent or such Lender and thereby reducing the rate of return on Agent's, Funding Agent's or such Lender's or such corporation's capital as a consequence of its obligations hereunder, then Borrowers shall within 15 days after notice and demand from such Lender or Funding Agent (in each case with a copy to Agent) or Agent (together with the certificate referred to in the next sentence) pay to Agent, Funding Agent or such Lender additional amounts sufficient to compensate Agent, Funding Agent or such Lender for such reduction. A certificate as to the amount of such cost and showing the basis of the computation of such cost submitted by Agent, Funding Agent or any Lender to Borrowers shall, absent manifest error, be final, conclusive and binding for all purposes. "Basle Accord" means the statement of the Basle Committee on Banking ------------ Regulations and Supervisory Practices dated July 1988 and entitled "International Convergence of Capital Measurement and Capital Standards", as amended, modified, supplemented, restated or replaced. 20 2.9 Taxes. ----- (A) No Deductions. Any and all payments or reimbursements made hereunder ------------- shall be made free and clear of and without deduction for any and all taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto; excluding, however, the following: taxes imposed on the net income of any Lender, Agent or Funding Agent by the jurisdiction under the laws of which Agent, Funding Agent or such Lender is organized or doing business or any political subdivision thereof and taxes imposed on its net income by the jurisdiction of Agent's, Funding Agent's or such Lender's applicable lending office or any political subdivision thereof (all such taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto excluding such taxes imposed on net income, herein "Tax Liabilities"). If a --------------- Borrower shall be required by law to deduct any such Tax Liabilities from or in respect of any sum payable by such Borrower hereunder to Agent, Funding Agent or any Lender, then the sum payable hereunder shall be increased as may be necessary so that, after making all required deductions, Agent, Funding Agent or such Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made. (B) Changes in Tax Laws. In the event that, subsequent to the Closing Date, ------------------- (i) any changes in any existing law, regulation, treaty or directive or in the interpretation or application thereof, (ii) any new law, regulation, treaty or directive enacted or any interpretation or application thereof, or (iii) compliance by Agent, Funding Agent or any Lender with any request or directive (whether or not having the force of law) from any governmental authority, agency or instrumentality: (1) does or shall subject Agent, Funding Agent or any Lender to any tax of any kind whatsoever with respect to this Agreement, the other Loan Documents or any Loans made or Lender Letters of Credit issued hereunder, or change the basis of taxation of payments to Agent, Funding Agent or such Lender of principal, fees, interest or any other amount payable hereunder (except for net income taxes, or franchise taxes imposed in lieu of net income taxes, imposed generally by federal, state or local taxing authorities with respect to interest or commitment or other fees payable hereunder or changes in the rate of tax on the overall net income of Agent, Funding Agent or such Lender); or (2) does or shall impose on Agent, Funding Agent or any Lender any other condition or increased cost in connection with the transactions contemplated hereby or participations herein; and the result of any of the foregoing is to increase the cost to Agent, Funding Agent or such Lender of issuing any Lender Letter of Credit or making or continuing any Loan hereunder, as the case may be, or to reduce any amount receivable hereunder; then, in any such case, Borrowers shall promptly pay to Agent, Funding Agent or such Lender, as the case may be, upon its demand, any additional amounts necessary to compensate Agent, Funding Agent or such Lender, on an after-tax basis, for such additional cost or reduced amount receivable, as determined by Agent, Funding Agent or such Lender with respect to this Agreement or the other Loan Documents. If Agent, Funding Agent or any Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify Borrowers of the event by reason of which Agent, Funding Agent or such Lender has become so entitled (with Funding Agent or any 21 such Lender concurrently notifying Agent). A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Agent, Funding Agent or any Lender to Borrowers shall, absent manifest error, be final, conclusive and binding for all purposes. (C) Foreign Lenders. Each Lender organized under the laws of a jurisdiction --------------- outside the United States (a "Foreign Lender") as to which payments to be made -------------- under this Agreement are exempt from United States withholding tax or are subject to United States withholding tax at a reduced rate under an applicable statute or tax treaty shall provide to Borrowers and Agent (i) a properly completed and executed Internal Revenue Service Form 4224 or Form 1001 or other applicable form, certificate or document prescribed by the Internal Revenue Service of the United States certifying as to such Foreign Lender's entitlement to such exemption or reduced rate of withholding with respect to payments to be made to such Foreign Lender under this Agreement, (a "Certificate of -------------- Exemption"), or (ii) a letter from any such Foreign Lender stating that it is - --------- not entitled to any such exemption or reduced rate of withholding (a "Letter of --------- Non-Exemption"). Prior to becoming a Lender under this Agreement and within 15 - ------------- days after a reasonable written request of Borrowers or Agent from time to time thereafter, each Foreign Lender that becomes a Lender under this Agreement shall provide a Certificate of Exemption or a Letter of Non-Exemption to Borrowers and Agent. If a Foreign Lender is entitled to an exemption with respect to payments to be made to such Foreign Lender under this Agreement (or to a reduced rate of withholding) and does not provide a Certificate of Exemption to Borrowers and Agent within the time periods set forth in the preceding paragraph, Borrowers shall withhold taxes from payments to such Foreign Lender at the applicable statutory rates and Borrowers shall not be required to pay any additional amounts as a result of such withholding; provided, however, that all such -------- ------- withholding shall cease upon delivery by such Foreign Lender of a Certificate of Exemption to Borrowers and Agent. (D) Deduction from Payments Made by Agent, Funding Agent or Lenders. With --------------------------------------------------------------- prejudice to subsection 2.9(A), if Agent or Funding Agent is required to ----------------- withhold or deduct an amount in respect of any Tax Liabilities from or in respect of any payments made hereunder to any Lender, the relevant Borrower shall, upon demand of Agent, pay such additional amounts to Agent or Funding Agent, as the case may be, so that the relevant Lender receives an amount equal to the sum it would have received had no such deductions been made. (E) Tax on Receipts. If and to the extent that either: --------------- (i) an amount deducted or withheld from any payment or an additional amount payable for the account of any Lender by reason of a deduction or withholding pursuant to subsection 2.9(A); or ----------------- (ii) an amount in respect of increased costs payable pursuant to subsection 2.8 or 2.9(B) -------------- ------ is brought into account by a Lender as a receipt for the purposes of taxation and such amount proves inadequate, by reason of the absence of a credit, deduction or other relief which is (in any case) immediately and effectively received, fully and immediately to indemnify the relevant Lender on an after-tax basis against the cost, payment, deduction or withholding in 22 question, the relevant Borrower will on demand pay such further sum to Agent for the account of the relevant Lender as is necessary to remedy the inadequacy. 2.10 Required Termination and Prepayment. If on any date any Lender shall ----------------------------------- have reasonably determined (which determination shall be final and conclusive and binding upon all parties) that the making or continuation of its LIBOR Loans has become unlawful or impossible by compliance by such Lender in good faith with any law, governmental rule, regulation or order (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, and in any such event, that Lender shall promptly give notice (by telephone confirmed in writing) to Borrowers, Agent and Funding Agent of that determination. Subject to prior withdrawal of a Notice of Borrowing or a Notice of Conversion/Continuation or prepayment of LIBOR Loans as contemplated by subsection 2.12, the obligation of such Lender to make or maintain its LIBOR - --------------- Loans during any such period shall be terminated at the earlier of the termination of the Interest Period then in effect or when required by law and Borrowers shall, no later than the termination of the Interest Period in effect at the time any such determination pursuant to this subsection 2.10 is made, or --------------- earlier when required by law, repay or prepay LIBOR Loans together with all interest accrued thereon or convert LIBOR Loans to Base Rate Loans. 2.11 Optional Prepayment/Replacement of Lenders in Respect of Increased ------------------------------------------------------------------- Costs. Within 15 days after receipt by Borrowers of written notice and demand - ----- from any Lender (an "Affected Lender") for payment of additional costs as --------------- provided in subsection 2.8 or subsection 2.9, Borrowers may, at their option, -------------- -------------- notify Agent and such Affected Lender of their intention to do one of the following: (a) Borrowers may obtain, at Borrowers' expense, a replacement Lender ("Replacement Lender") for such Affected Lender, which Replacement Lender shall - -------------------- be reasonably satisfactory to Agent. In the event Borrowers obtain a Replacement Lender within 90 days following notice of their intention to do so, the Affected Lender shall sell and assign its Loans and Commitments to such Replacement Lender provided, that Borrowers have reimbursed such Affected Lender -------- for its increased costs for which it is entitled to reimbursement under this Agreement through the date of such sale and assignment; or (b) Borrowers may prepay in full all outstanding Obligations owed to such Affected Lender and terminate such Affected Lender's Commitments. Borrowers shall, within 90 days following notice of their intention to do so, prepay in full all outstanding Obligations owed to such Affected Lender, including such Affected Lender's increased costs for which it is entitled to reimbursement under this Agreement through the date of such prepayment and terminate such Affected Lender's Commitments. 2.12 Compensation. Borrowers shall compensate each Lender, upon written ------------ request by such Lender (which request shall set forth in reasonable detail the basis for requesting such amounts and which shall, absent manifest error, be conclusive and binding upon all parties hereto), for all reasonable losses, expenses and liabilities including, without limitation, any loss sustained by such Lender in connection with the re-employment of such funds: (i) if for any reason (other than a default by such Lender) a borrowing of any LIBOR Loan does not occur on a date specified therefor in a Notice of Borrowing, a Notice of Conversion/Continuation or a telephonic request for borrowing or conversion/continuation; (ii) if any prepayment of any of its 23 LIBOR Loans occurs on a date that is not the last day of an Interest Period applicable to that Loan; (iii) if any prepayment of any of its LIBOR Loans is not made on any date specified in a notice of prepayment given by Borrowers; or (iv) as a consequence of any other default by Borrowers to repay their LIBOR Loans when required by the terms of this Agreement; provided that during the -------- period while any such amounts have not been paid, Agent and Funding Agent shall reserve an equal amount from amounts otherwise available to be borrowed under the Revolving Loan. 2.13 Booking of LIBOR Loans. Each Lender may make, carry or transfer LIBOR ---------------------- Loans and/or any Loans denominated in any particular Available Currency at, to, or for the account of, any of its branch offices or the office of an affiliate of such Lender. 2.14 Assumptions Concerning Funding of LIBOR Loans. Calculation of all --------------------------------------------- amounts payable to Lenders under subsection 2.12 shall be made as though each --------------- Lender had actually funded its relevant LIBOR Loan through the purchase of a LIBOR deposit bearing interest at LIBOR in an amount equal to the amount of that LIBOR Loan and having maturity comparable to the relevant Interest Period and through the transfer of such LIBOR deposit from an offshore office to a domestic office in the United States of America; provided, however, that each Lender may -------- ------- fund each of its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under subsection 2.12. - --------------- 2.15 Appointment of Borrower Representative. U.K. Borrower hereby designates -------------------------------------- U.S. Borrower as its representative and agent on its behalf for the purposes of executing and delivering Borrowing Base Certificates, Notices of Borrowing, Notices of Conversion/Continuation, Compliance Certificates and other reports and certificates required to be delivered hereunder, giving and receiving all other notices and consents hereunder or under any of the other Loan Documents and taking all other actions (including in respect of compliance with covenants) on behalf of such Borrower under the Loan Documents. U.S. Borrower hereby accepts such appointment. Agent, Funding Agent, Collateral Agent or any Lender may regard any notice or other communication pursuant to any Loan Document from Borrower Representative as a notice or communication from all Borrowers, and may give any notice or communication required or permitted to be given to any Borrower or Borrowers hereunder to Borrower Representative on behalf of such Borrower or Borrowers. Each Borrower agrees that each notice, election, representation and warranty, covenant, agreement and undertaking made on its behalf by Borrower Representative shall be deemed for all purposes to have been made by such Borrower and shall be binding upon and enforceable against such Borrower to the same extent as if the same had been made directly by such Borrower. SECTION 3. CONDITIONS TO LOANS ------------------- The obligations of Agent, Funding Agent and each Lender to make Loans and the obligation of Agent or any Lender to issue Lender Letters of Credit on the Closing Date and on each Funding Date are subject to satisfaction of all of the terms and conditions set forth in this Agreement and in the Conditions Rider ---------------- attached hereto and the accuracy of all the representations and warranties of Borrowers and the other Loan Parties set forth herein and in the other Loan Documents. SECTION 4. BORROWERS' REPRESENTATIONS, WARRANTIES -------------------------------------- 24 AND CERTAIN COVENANTS --------------------- To induce Agent, Funding Agent, Collateral Agent and each Lender to enter into the Loan Documents, to make and to continue to make Loans and to issue and to continue to issue Lender Letters of Credit, Borrowers jointly and severally represent, warrant and covenant to Agent, Funding Agent, Collateral Agent and each Lender that, after giving effect to the consummation of the transactions contemplated hereunder, the following statements are and will be true, correct and complete and, unless specifically limited, shall remain so for so long as any of the Commitments hereunder shall be in effect and until payment in full of all Obligations: 4.1 Organization, Powers, Capitalization. ------------------------------------ (A) Organization and Powers. Each of the Loan Parties is a ----------------------- corporation duly organized, validly existing and, in the case of U.S. Borrower and each other Loan Party domiciled in the United States of America, in good standing under the laws of its jurisdiction of incorporation and qualified to do business in all jurisdictions where such qualification is required except where failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. Each of the Loan Parties has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted and to enter into each Loan Document. (B) Capitalization. The authorized capital stock of each of the Loan -------------- Parties and its respective Subsidiaries is as set forth on Schedule 4.1(B), --------------- which Schedule includes a description of all preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Loan Party of any shares of capital stock or other securities of any such entity. All issued and outstanding shares of capital stock of each of the Loan Parties are duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens other than those in favor of Agent or Collateral Agent, as applicable, for the benefit of Lenders, and such shares were issued in compliance with all applicable state, federal and foreign laws concerning the issuance of securities. Each Loan Party will promptly notify Agent of any change in its ownership or corporate structure. 4.2 Authorization of Borrowing, No Conflict. Each Borrower has the --------------------------------------- corporate power and authority to incur the Obligations and to grant security interests in the Collateral. On the Closing Date, the execution, delivery and performance of the Loan Documents by each Loan Party signatory thereto will have been duly authorized by all necessary corporate and shareholder action. The execution, delivery and performance by each Loan Party of each Loan Document to which it is a party and the consummation of the transactions contemplated by the Loan Documents by each Loan Party do not contravene any applicable law (including without limitation Section 151 of the Companies Act), the corporate charter or bylaws (or equivalent organizational documents) of any Loan Party or any agreement or order by which any Loan Party or any Loan Party's property is bound. The Loan Documents are the legally valid and binding obligations of the applicable Loan Parties respectively, each enforceable against the Loan Parties, as applicable, in accordance with their respective terms. 4.3 Financial Condition. All financial statements concerning Borrowers ------------------- and their respective Subsidiaries furnished by or on behalf of any Borrower or any such Subsidiary to 25 Agent, Funding Agent or any Lender pursuant to this Agreement have been prepared in accordance with GAAP consistently applied throughout the periods involved (except as disclosed therein) and present fairly the financial condition of the Persons covered thereby as at the dates thereof and the results of their operations for the periods then ended. The Projections delivered by Borrowers will be prepared in light of the past operations of the business of Borrowers and their respective Subsidiaries, and such Projections will represent the good faith estimate of Borrowers and their senior management concerning the most probable course of their business as of the date such Projections are delivered. 4.4 Indebtedness and Liabilities. As of the Closing Date, neither any ---------------------------- Borrower nor any Subsidiary thereof has (a) any Indebtedness except as reflected on the most recent financial statements delivered to Agent and Lenders; or (b) any Liabilities other than as reflected on the most recent financial statements delivered to Agent and Lenders or as incurred in the ordinary course of business following the date of such most recent financial statements delivered to Agent and Lenders. Borrowers shall promptly deliver copies of all notices given or received by any Borrower or any Subsidiary thereof with respect to noncompliance with any term or condition related to the Subordinated Debt or any other Indebtedness, and shall promptly notify Agent of any potential or actual Event of Default with respect to the Subordinated Debt or any other Indebtedness. 4.5 Account Warranties. Except as otherwise disclosed to Agent in writing, ------------------ Borrowers represent and warrant as to each Account that: at the time of its creation, the Account is a valid, bona fide account, representing an undisputed indebtedness incurred by the named account debtor for goods actually sold and delivered or for services completely rendered; there are no setoffs, offsets or counterclaims, genuine or otherwise, against the Account; the Account does not represent a sale to an Affiliate or a consignment, sale or return or a bill and hold transaction; no agreement exists permitting any deduction or discount (other than the discount stated on the invoice); the applicable Borrower is the lawful owner of the Account and has the right to assign the same to Agent or Collateral Agent, as applicable, for the benefit of Lenders; the Account is free of all security interests, liens and encumbrances other than those in favor of Agent or Collateral Agent, as applicable, on behalf of Lenders, and the Account is due and payable in accordance with its terms. 4.6 Names and Locations. Schedule 4.6 sets forth all names, trade names, ------------------- ------------ fictitious names and business names under which each Borrower currently conducts business or has at any time during the past five years conducted business and the name of any entity which any Borrower has acquired in whole or in part or from whom any Borrower has acquired a significant amount of assets within the past five years and sets forth the location of each Borrower's principal place of business, the location of each Borrower's books and records, the location of all other offices of each Borrower and all Collateral locations, and such locations are the applicable Borrower's sole locations for its business and the Collateral. Each Borrower and each of their respective Subsidiaries will give Agent at least 30 days advance written notice of: (a) any change of name or of any new trade name or fictitious business name, (b) any change of principal place of business, (c) any change in the location of such party's books and records or the Collateral, or (d) any new location for such Person's books and records or the Collateral. Agent shall have given its prior written consent to any such new principal place of business or other new location in the event that U.S. Borrower proposes to move its principal place of business or the location where 26 its books and records are kept to a location outside of the United States or proposes to establish any new Collateral location which is not in the United States or the Netherlands, or in the event U.K. Borrower proposes to move its principal place of business or the location where its books and records are kept, or proposes to establish any new Collateral location, to a location outside of England. 4.7 Title to Properties; Liens. Each Borrower and each of their -------------------------- respective Subsidiaries has good, sufficient and legal title to all of its respective material properties and assets, in each case, free and clear of all Liens except Permitted Encumbrances. 4.8 Litigation; Adverse Facts. There are no judgments outstanding against ------------------------- any Loan Party or affecting any property of any Loan Party nor is there any action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration now pending or, to the best knowledge of any Borrower after due inquiry, threatened against or affecting any Loan Party or any property of any Loan Party which could reasonably be expected to result in any Material Adverse Effect. Promptly upon any officer of any Borrower or any of their respective Subsidiaries obtaining knowledge of (a) the institution of any action, suit, proceeding, governmental investigation or arbitration against or affecting any Loan Party or any property of any Loan Party not previously disclosed by Borrowers to Agent or (b) any material development in any action, suit, proceeding, governmental investigation or arbitration at any time pending against or affecting any Loan Party or any property of any Loan Party which could reasonably be expected to have a Material Adverse Effect, Borrowers will promptly give notice thereof to Agent and provide such other information as may be reasonably available to them to enable Agent and its counsel to evaluate such matter. For the purpose of providing full disclosure to Agent and Lenders, Borrowers have set forth on Schedule 4.8 a list and brief description of pending ------------ litigation to which any Borrower is a party, provided that Borrowers represent -------- and warrant that no such litigation could reasonably be expected to result in any Material Adverse Effect. 4.9 Payment of Taxes. All necessary tax returns and reports of each Loan ---------------- Party required to be filed by any of them have been timely filed and are complete and accurate in all material respects. All taxes, assessments, fees and other governmental charges which are due and payable by any Loan Party have been paid when due; provided that no such tax need be paid if the applicable -------- Loan Party is contesting same in good faith by appropriate proceedings promptly instituted and diligently conducted and if such Loan Party has established appropriate reserves as shall be required in conformity with GAAP. As of the Closing Date, none of the tax returns of any Loan Party are under audit and Borrowers shall promptly notify Agent in the event that any Loan Party's tax returns become the subject of an audit. No tax liens have been filed against any Loan Party. No material claim is being asserted with respect to any taxes payable by any Loan Party. The charges, accruals and reserves on the books of each Loan Party in respect of any taxes or other governmental charges are in accordance with GAAP. U.S. Borrower's federal tax identification number is 95- 3528840. 4.10 Performance of Agreements. None of the Loan Parties and none of their ------------------------- respective Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material contractual obligation of any such Person, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default. 27 4.11 Employee Benefit Plans. Each Loan Party and each ERISA Affiliate is ---------------------- in compliance, and will continue to remain in compliance, in all material respects with all applicable provisions of ERISA, the IRC and all other applicable federal, state or foreign laws and the regulations and interpretations thereof with respect to all Employee Benefit Plans. No material liability has been incurred by any Loan Party or any ERISA Affiliate which remains unsatisfied for any funding obligation, taxes or penalties with respect to any Employee Benefit Plan. Neither any Borrower nor any of their respective Subsidiaries shall establish any new Employee Benefit Plan or amend any existing Employee Benefit Plan if the liability or increased liability resulting from such establishment or amendment is material. 4.12 Intellectual Property. Each Borrower and each of their respective --------------------- Subsidiaries owns, is licensed to use or otherwise has the right to use, all Intellectual Property used in or necessary for the conduct of its business as currently conducted, and all such Intellectual Property is identified on Schedule 4.12. - ------------- 4.13 Broker's Fees. No broker's or finder's fee or commission will be ------------- payable with respect to any of the transactions contemplated hereby. 4.14 Environmental Compliance. Each Loan Party is in compliance with all ------------------------ applicable Environmental Laws, except for where failure to be in compliance could not be expected to subject the Loan Parties to liabilities, costs or expenses in excess of $250,000 in the aggregate. There are no claims, liabilities, Liens, investigations, litigation, administrative proceedings, whether pending or threatened, or judgments or orders relating to any Hazardous Materials asserted or threatened against any Loan Party or relating to any real property currently or formerly owned, leased or operated by any Loan Party except for the matters disclosed on Schedule 4.8, none of which could reasonably ------------ be expected to result in a Material Adverse Effect. Notwithstanding anything contained herein to the contrary, in relation to any matter under Environmental Laws of the United Kingdom (a) U.K. Borrower shall not be obligated to notify Agent, Funding Agent, Collateral Agent or any Lender of the existence of any actual or potential Environmental Claim or environmental condition (except where such Environmental Claim or environmental condition is likely to have a Material Adverse Effect), and (b) neither Agent, Funding Agent, Collateral Agent nor any Lender shall be entitled to take any steps in relation to any such matter except where the failure to take such steps would be likely to have a Material Adverse Effect. 4.15 Solvency. From and after the date of this Agreement (a) U.S. Borrower: -------- (i) owns assets the fair salable value of which are greater than the total amount of its liabilities (including contingent liabilities); (ii) has capital that is not unreasonably small in relation to its business as presently conducted or any contemplated or undertaken transaction; and (iii) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due; and (b) U.K. Borrower (i) is not and will not be unable to pay its debts within the meaning of Section 123 of the Insolvency Act of 1986 (England and Wales); (ii) is not and will not become unable to pay its debts as they fall due; and (iii) has not and will not suspend or threaten to suspend making payments (whether of principal, interest, or otherwise) with respect to all or any class of its debts. 28 4.16 Disclosure. No representation or warranty of any Borrower, any of ---------- their respective Subsidiaries or any other Loan Party contained in this Agreement, the financial statements, the other Loan Documents, or any other document, certificate or written statement furnished to Agent, Funding Agent or any Lender by or on behalf of any such Person for use in connection with the Loan Documents contains any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. There is no material fact known to any Borrower that has had or could have a Material Adverse Effect and that has not been disclosed herein or in such other documents, certificates and statements furnished to Agent, Funding Agent or any Lender for use in connection with the transactions contemplated hereby. 4.17 Insurance. Each Borrower and each of their respective Subsidiaries --------- maintains adequate insurance policies for public liability, property damage, product liability, and business interruption with respect to its business and properties and the business and properties of its Subsidiaries against loss or damage of the kinds customarily carried or maintained by Persons of established reputation engaged in similar businesses and in amounts acceptable to Agent. Each Borrower shall cause Agent or Collateral Agent, as applicable, for itself and on behalf of Lenders, to be named as loss payee on all insurance policies relating to any Collateral and shall cause Agent, Collateral Agent and each Lender to be named as additional insured under all liability policies, in each case pursuant to appropriate endorsements in form and substance satisfactory to Agent and shall collaterally assign to Agent or Collateral Agent, as applicable, for itself and on behalf of Lenders, as security for the payment of the Obligations, all business interruption insurance of Borrowers. On or prior to the Closing Date Borrowers shall, at their expense, obtain a key man life insurance policy of at least $1,000,000 insuring the life of David L. Lokken, which policy shall be issued by an insurer acceptable to Agent and with respect to which Agent, for the benefit of Agent and Lenders, shall be named as sole loss payee. Borrowers represent and warrant that no notice of cancellation has been received with respect to any such policies and each Borrower and each of their respective Subsidiaries is in compliance with all conditions contained in any such policies. Borrowers shall apply any proceeds received from any policies of insurance relating to any Collateral to the Obligations as set forth in subsection 2.4(B). In the event any Borrower fails to provide Agent with ----------------- evidence of the insurance coverage required by this Agreement, Agent may, but is not required to, purchase insurance at Borrowers' expense to protect Agent's, Collateral Agent's and the Lenders' interests in the Collateral. This insurance may, but need not, protect Borrowers' interests. The coverage purchased by Agent may not pay any claim made by any Borrower or any claim that is made against any Borrower in connection with the Collateral. Borrowers may later cancel any insurance purchased by Agent, but only after providing Agent with evidence that Borrowers have obtained insurance as required by this Agreement. If Agent purchases insurance for the Collateral, Borrowers will be responsible for the costs of that insurance, including interest thereon and other charges imposed on Agent in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance, and such costs may be added to the Obligations. The costs of the insurance may be more than the cost of insurance Borrowers are able to obtain on their own. 4.18 Compliance with Laws. No Loan Party is in violation of any law, -------------------- ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority having jurisdiction over the conduct of its business or the ownership of its properties, including, without limitation, any Environmental Law, which violation would subject any Loan Party or any of their 29 respective officers to criminal liability or would have a Material Adverse Effect, and no such violation has been alleged. 4.19 Bank Accounts. Schedule 4.19 sets forth the account numbers and ------------- ------------- locations of all bank accounts of each Borrower and their respective Subsidiaries. No Borrower shall establish any new bank accounts, or amend or terminate any Blocked Account or lockbox agreement, without Agent's prior written consent. 4.20 Employee Matters. Except as set forth on Schedule 4.20, (a) no Loan ---------------- ------------- Party nor any of such Loan Party's employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the employees of any Loan Party and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of any Loan Party, and (c) there are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of Borrowers after due inquiry, threatened between any Loan Party and its respective employees, other than employee grievances arising in the ordinary course of business, which could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 4.20, no Loan Party is subject to an employment contract. ------------- 4.21 Governmental Regulation. None of the Loan Parties is subject to ----------------------- regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940 or to any statute or regulation of any Governmental Authority limiting its ability to incur indebtedness for borrowed. 4.22 Access to Accountants and Management. Each Borrower authorizes Agent ------------------------------------ or its designee (which may include Funding Agent) and Lenders to discuss the financial condition and financial statements of Borrowers and their respective Subsidiaries with Borrowers' Accountants upon reasonable notice to Borrowers of its intention to do so, and authorizes Borrowers' Accountants to respond to all of Agent's inquiries. Agent may and, with the consent of Agent, which will not be unreasonably denied, each Lender may, confer with each Borrower's management directly regarding Borrowers' business, operations and financial condition. 4.23 Inspection. Each Borrower shall permit Agent or its designee (which ---------- may include Funding Agent) and any authorized representatives designated by Agent to visit and inspect any of the properties of each Borrower or any of their respective Subsidiaries, including their financial and accounting records, and, in conjunction with such inspection, to make copies and take extracts therefrom, and to discuss their affairs, finances and business with their officers and Borrowers' Accountants, at such reasonable times during normal business hours and as often as may be reasonably requested. Each Lender may, with the consent of Agent which will not be unreasonably denied, accompany Agent on any such visit or inspection. 4.24 Collateral Records. Each Borrower shall keep full and accurate books ------------------ and records relating to the Collateral and shall mark such books and records to indicate Agent's (or Collateral Agent's, as applicable) security interests in the Collateral, for the benefit of Lenders. 4.25 Account Covenants; Verification. Each Borrower shall, at its own ------------------------------- expense: (a) cause all invoices evidencing Accounts and all copies thereof to bear a notice that such invoices 30 are payable to the applicable lockboxes established in accordance with subsection 4.26 and (b) use its best efforts to assure prompt payment of all - --------------- amounts due or to become due under the Accounts. No discounts, credits or allowances (other than in the ordinary course of business consistent with past practices) will be issued, granted or allowed by any Borrower to customers and no returns will be accepted without Agent's prior written consent; provided, -------- that until Agent notifies Borrowers to the contrary, Borrowers may presume consent. The applicable Borrower will promptly notify Agent in the event that a customer alleges any dispute or claim with respect to an Account or of any other circumstances known to such Borrower that may impair the validity or collectibility of an Account. Agent shall have the right, at any time or times hereafter, to verify the validity, amount or any other matter relating to an Account, by mail, telephone or in person. After the occurrence of a Default or an Event of Default, no Borrower shall, without the prior consent of Agent, adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any customer or obligor thereof, or allow any credit or discount thereon. 4.26 Collection of Accounts and Payments. (A) U.S. Borrower. U.S. ----------------------------------- ------------- Borrower shall establish lockboxes and blocked accounts (collectively, "U.S. ---- Blocked Accounts") in such Borrower's name with such banks ("U.S. Collecting - ---------------- --------------- Banks") as are acceptable to Agent (subject to irrevocable instructions - ----- acceptable to Agent as hereinafter set forth) to which all account debtors shall directly remit all payments on Accounts of U.S. Borrower and in which U.S. Borrower will immediately deposit all payments made for Inventory or other payments constituting proceeds of Collateral in the identical form in which such payment was made, whether by cash or check. The U.S. Collecting Banks shall acknowledge and agree, in a manner satisfactory to Agent, that all payments made to the U.S. Blocked Accounts are the sole and exclusive property of Agent, for the benefit of Agent and Lenders, and that the U.S. Collecting Banks have no right to setoff against the U.S. Blocked Accounts and that all such payments received will be promptly transferred to Agent's Account. U.S. Borrower hereby agrees that all payments made to such U.S. Blocked Accounts or otherwise received by Agent and whether on the Accounts of U.S. Borrower or as proceeds of other Collateral of U.S. Borrower or otherwise will be the sole and exclusive property of Agent, for the benefit of Agent and Lenders. U.S. Borrower shall irrevocably instruct each U.S. Collecting Bank to promptly transfer all payments or deposits to the U.S. Blocked Accounts into Agent's Account. If any Borrower, or any of their respective Affiliates, employees, agents or other Person acting for or in concert with such Borrower, shall receive any monies, checks, notes, drafts or any other payments relating to and/or proceeds of Accounts or other Collateral of U.S. Borrower, such Borrower or such Person shall hold such instrument or funds in trust for Agent for the benefit of Agent and Lenders, and, immediately upon receipt thereof, shall remit the same or cause the same to be remitted, in kind, to the U.S. Blocked Accounts or to Agent at its address set forth in subsection 10.3 below. --------------- (B) U.K. Borrower. U.K. Borrower shall establish lockboxes and blocked ------------- accounts (collectively, "U.K. Blocked Accounts") in such Borrower's name with --------------------- such banks ("U.K. Collecting Banks") as are acceptable to Agent (subject to --------------------- irrevocable instructions acceptable to Agent as hereinafter set forth) to which all account debtors shall directly remit all payments on Accounts and in which such Borrower will immediately deposit all payments made for Inventory or other payments constituting proceeds of Collateral in the identical form in which such payment was made, whether by cash or check. Each U.K. Collecting Bank shall acknowledge and agree, in a manner satisfactory to Agent, that from and after the date Collateral Agent (with the prior consent of Agent) delivers a notice (a "Redirection Notice") to such U.K. ------------------ 31 Collecting Bank, all payments made to the U.K. Blocked Accounts maintained at such U.K. Collecting Bank are the sole and exclusive property of Collateral Agent, for the benefit of Agent and Lenders, and that such U.K. Collecting Bank has no right to setoff against the U.K. Blocked Accounts maintained by it and that all such payments received will be promptly transferred to Agent's Account. Prior to the delivery of a Redirection Notice to a U.K. Collecting Bank, such U.K. Collecting Bank may follow any directions given to it by U.K. Borrower with respect to the disposition of such funds in the U.K. Blocked Accounts maintained at such U.K. Collecting Bank. U.K. Borrower hereby agrees that, from and after the delivery of a Redirection Notice, all payments made to such U.K. Blocked Accounts or otherwise received by Agent, Collateral Agent or Funding Agent and whether on the Accounts of U.K. Borrower or as proceeds of other Collateral of U.K. Borrower or otherwise will be the sole and exclusive property of Collateral Agent, for the benefit of Agent and Lenders. U.K. Borrower shall irrevocably instruct each U.K. Collecting Bank to promptly transfer all payments or deposits to the U.K. Blocked Accounts into Agent's Account from and after the delivery of a Redirection Notice. If any Borrower, or any of their respective Affiliates, employees, agents or other Person acting for or in concert with such Borrower, shall receive any monies, checks, notes, drafts or any other payments relating to and/or proceeds of Accounts of U.K. Borrower or other Collateral of U.K. Borrower, such Borrower or such Person shall hold such instrument or funds in trust for Collateral Agent for the benefit of Agent and Lenders, and, immediately upon receipt thereof, shall remit the same or cause the same to be remitted, in kind, to the U.K. Blocked Accounts or to Agent at its address set forth in subsection 10.3 below. --------------- 4.27 Inventory Warranties and Covenants. Borrowers hereby represent and ---------------------------------- warrant that no Inventory included in the Borrowing Base at any time shall be subject to any title retention arrangement or similar arrangement by any seller or vendor of such Inventory. 4.28 Shipments of Exchange Inventory and Work in Process. In the event any --------------------------------------------------- Borrower proposes to ship any Exchange Inventory and Work in Process to a customer location in the United States which customer location is not in any of the States of Alabama, Arizona, California, Florida, Georgia, Hawaii, Illinois, Indiana, Kansas, Kentucky, Minnesota, Missouri, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas or Washington, such Borrower shall give Agent at least 30 days prior written notice of such shipment and shall duly execute and deliver such additional UCC-1 financing statements as may be requested by Agent in order to more fully perfect Agent's Lien in the Exchange Inventory and Work in Process to be shipped to such additional location. Borrowers may amend any one or more of the Schedules referred in this Section ------- 4 (subject to prior notice to Agent, as applicable) and any representation, - - warranty, or covenant contained herein which refers to any such Schedule shall from and after the date of any such amendment refer to such Schedule as so amended; provided, however, that in no event shall the amendment of any such -------- ------- Schedule constitute a waiver by Agent and Lenders of any Default or Event of Default that exists notwithstanding the amendment of such Schedule. 32 SECTION 5. REPORTING AND OTHER AFFIRMATIVE COVENANTS ----------------------------------------- Each Borrower covenants and agrees that, so long as any of the Commitments hereunder shall be in effect and until payment in full of all Obligations, such Borrower shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 5. --------- 5.1 Financial Statements and Other Reports. Borrowers will deliver to -------------------------------------- Agent and each Lender (unless specified to be delivered solely to Agent) the financial statements and other reports contained in the Reporting Rider attached --------------- hereto. 5.2 Endorsement. Each Borrower hereby constitutes and appoints each of ----------- Agent, Funding Agent and Collateral Agent and all Persons designated by Agent (or by Funding Agent or Collateral Agent with the consent of Agent) for that purpose as such Borrower's true and lawful attorney-in-fact, with power to endorse such Borrower's name to any of the items of payment or proceeds described in subsection 4.26 above and all proceeds of Collateral that come into --------------- Agent's, Funding Agent's or Collateral Agent's possession or under Agent's, Funding Agent's or Collateral Agent's control. Both the appointment of each of Agent, Funding Agent and Collateral Agent as each Borrower's attorney and each of Agent's, Funding Agent's and Collateral Agent's rights and powers are coupled with an interest and are irrevocable until payment in full and complete performance of all of the Obligations. 5.3 Maintenance of Properties. Each Borrower will, and will cause each of ------------------------- its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition all material properties used in the business of such Borrower and each such Subsidiary and will, and will cause each of its Subsidiaries to, make or cause to be made all appropriate repairs, renewals and replacements thereof. 5.4 Compliance with Laws. Each Borrower will, and will cause each of its -------------------- Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority as now in effect and which may be imposed in the future in all jurisdictions in which such Borrower or any of its Subsidiaries is now doing business or may hereafter be doing business, other than those laws the noncompliance with which would not have a Material Adverse Effect. 5.5 Further Assurances. Each Borrower shall, and shall cause each of its ------------------ Subsidiaries to, from time to time, execute such guaranties, financing or continuation statements, documents, security agreements, reports and other documents or deliver to Agent (or to Funding Agent or Collateral Agent at the request of Agent) such instruments, certificates of title, mortgages, deeds of trust, or other documents as Agent at any time may reasonably request to evidence, perfect or otherwise implement the guaranties and security for repayment of the Obligations provided for in the Loan Documents. 33 5.6 Mortgages; Title Insurance; Surveys. ----------------------------------- (A) Mortgaged Property. Each Borrower shall as promptly as possible ------------------ (and in any event within 60 days after such designation) deliver to Agent or Collateral Agent, as applicable, a fully executed Mortgage, in form and substance satisfactory to Agent, on any Mortgaged Property designated by Agent. (B) Title Insurance. Within 30 days following delivery of any --------------- Mortgage with respect to any Mortgaged Property, the applicable Borrower shall deliver or cause to be delivered to Agent or Collateral Agent, as applicable, ALTA lender's title insurance policies (or, in the case of Mortgaged Property which is not located in the United States, such similar policies insuring title to real property as may be customary in the jurisdiction in which such Property is located and which are otherwise acceptable to Agent) issued by title insurers reasonably satisfactory to Agent (the "Mortgage Policies") in form and substance ----------------- and in amounts reasonably satisfactory to Agent assuring Agent that the Mortgages are valid and enforceable first priority mortgage liens (or the equivalent thereof) on the respective Mortgaged Property, free and clear of all defects and encumbrances except Permitted Encumbrances. The Mortgage Policies shall be in form and substance reasonably satisfactory to Agent and shall include an endorsement insuring against the effect of future advances under this Agreement, for mechanics' liens and for any other matter that Agent may reasonably request. In the case of each leasehold constituting Mortgaged Property, Agent or Collateral Agent, as applicable, shall have received such estoppel letters, consents and waivers from the landlords and non-disturbance agreements from any holders of mortgages or deeds of trust on such real estate as may have been requested by Agent, which letters shall be in form and substance satisfactory to Agent. (C) Surveys. Within 30 days following delivery of any Mortgage with ------- respect to any Mortgaged Property, the applicable Borrower shall deliver or cause to be delivered to Agent or Collateral Agent, as applicable current surveys, certified by a licensed surveyor, for all real property that is the subject of the Mortgage Policies including any Mortgaged Property for which a Mortgage Policy is issued. All such surveys shall be sufficient to allow the applicable title insurer to issue the Mortgage Policy to be delivered in respect of such Mortgaged Property pursuant to subsection 5.6(B). ----------------- 5.7 Use of Proceeds and Margin Security. Each Borrower shall use the ----------------------------------- proceeds of all Loans for proper business purposes (as described in the recitals to this Agreement) consistent with all applicable laws, statutes, rules and regulations. No portion of the proceeds of any Loan shall be used by any Borrower or any Subsidiary thereof for the purpose of purchasing or carrying margin stock within the meaning of Regulation U, or in any manner that might cause the borrowing or the application of such proceeds to violate Regulation T or Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act or the Companies Act. 5.8 Bailee. If any Collateral is at any time in the possession or control ------ of any warehouseman, bailee or any of any Borrower's agents or processors, the applicable Borrower shall, upon the request of Agent, notify such warehouseman, bailee, Agent or processor of the security interests in favor of Agent or Collateral Agent, as the case may be, for the benefit of 34 Lenders, created hereby and shall instruct such Person to hold all such Collateral for Agent's or Collateral Agent's account subject to Agent's or Collateral Agent's instructions. 5.9 Year 2000. Each Borrower has made an assessment of the microchip and --------- computer-based systems and the software used in its business and based upon such assessment believes that it will be Year 2000 Compliant by January 1, 2000. For purposes of this paragraph, "Year 2000 Compliant" means that all software, ------------------- embedded microchips and other processing capabilities utilized by, and material to the business operations or financial condition of, any Borrower are able to interpret, store, transmit, receive and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenarios in relation to dates in and after the Year 2000. From time to time, at the request of Agent, Borrowers shall provide to Agent such updated information as is requested regarding the status of their efforts to become Year 2000 Compliant. 5.10 Maintenance of Certifications. Each Borrower shall at all times ----------------------------- maintain, in full force and effect, all certifications, licenses, permits and any similar authorizations issued or otherwise granted by any Governmental Authority and necessary or desirable for the conduct of such Borrower's business, including without limitation any issued or granted by the Federal Aviation Authority of the United States or the Civil Aviation Authority of the United Kingdom. All such certifications, licenses, permits and similar authorizations issued to or otherwise held by either such Borrower as of the Closing Date are listed on Schedule 5.10. ------------- SECTION 6. FINANCIAL COVENANTS ------------------- Borrowers covenant and agree that so long as any of the Commitments remain in effect and until indefeasible payment in full of all Obligations and termination of all Lender Letters of Credit, Borrowers shall comply with and shall cause each of their respective Subsidiaries to comply with all covenants contained in the Financial Covenant Rider. ------------------------ SECTION 7. NEGATIVE COVENANTS ------------------- Borrowers covenant and agree that so long as any of the Commitments remain in effect and until indefeasible payment in full of all Obligations and termination of all Lender Letters of Credit, Borrowers shall not and shall not permit any of their respective Subsidiaries to: 7.1 Indebtedness and Liabilities. Directly or indirectly create, incur, ---------------------------- assume, guaranty, or otherwise become or remain directly or indirectly liable, on a fixed or contingent basis, with respect to any Indebtedness except: (a) the Obligations; (b) intercompany Indebtedness, not to exceed $30,000,000 outstanding at any time in the aggregate, among Borrowers and their Subsidiaries; provided that such Indebtedness (and any Lien securing such -------- Indebtedness) is subordinated in right of payment to the Obligations; (c) Indebtedness (excluding Capital Leases) not to exceed $2,000,000 in the aggregate at any time outstanding secured by purchase money Liens; (d) Indebtedness under Capital Leases not to exceed $2,000,000 outstanding at any time in the aggregate; and (e) Indebtedness existing on the Closing Date (after giving effect to the consummation of the transactions contemplated hereunder) and identified on Schedule 7.1. Borrowers will not, and will not permit any of ------------ their Subsidiaries to, incur any Liabilities except for Indebtedness permitted herein and trade payables and normal accruals in the ordinary course 35 of business not yet due and payable or with respect to which the applicable Borrower or the applicable Subsidiary is contesting in good faith the amount or validity thereof by appropriate proceedings and then only to the extent that such Borrower or such Subsidiary has established adequate reserves therefor under GAAP. 7.2 Guaranties. Except for endorsements of instruments or items of ---------- payment for collection in the ordinary course of business, guaranty, endorse, or otherwise in any way become or be responsible for any obligations of any other Person, whether directly or indirectly by agreement to purchase the indebtedness of any other Person or through the purchase of goods, supplies or services, or maintenance of working capital or other balance sheet covenants or conditions, or by way of stock purchase, capital contribution, advance or loan for the purpose of paying or discharging any indebtedness or obligation of such other Person or otherwise. 7.3 Transfers, Liens and Related Matters. ------------------------------------ (A) Transfers. Sell, assign (by operation of law or otherwise) or --------- otherwise dispose of, or grant any option with respect to, any of the Collateral or the assets of such Person, except that Borrowers and their Subsidiaries may (i) sell and exchange Inventory in the ordinary course of business; and (ii) make Asset Dispositions if all of the following conditions are met: (1) the market value of assets sold or otherwise disposed of in any single transaction or series of related transactions does not exceed $100,000 and the aggregate market value of assets sold or otherwise disposed of in any Fiscal Year does not exceed $300,000; (2) the consideration received is at least equal to the fair market value of such assets; (3) the sole consideration received is cash; (4) the net proceeds of such Asset Disposition are applied as required by subsection ---------- 2.4(B); (5) after giving effect to the sale or other disposition of the assets - ------ included within the Asset Disposition and the repayment of the Obligations with the proceeds thereof, Borrowers are in compliance on a pro forma basis with the covenants set forth in the Financial Covenant Rider recomputed for the most ------------------------ recently ended month for which information is available and are in compliance with all other terms and conditions contained in this Agreement; and (6) no Default or Event of Default shall then exist or result from such sale or other disposition. (B) Liens. Except for Permitted Encumbrances, directly or indirectly ----- create, incur, assume or permit to exist any Lien on or with respect to any of the Collateral or the assets of such Person or any proceeds, income or profits therefrom. (C) No Negative Pledges. Enter into or assume any agreement (other ------------------- than the Loan Documents) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired. (D) No Restrictions on Subsidiary Distributions to Borrowers. Except -------------------------------------------------------- as provided herein, directly or indirectly create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary of any Borrower to: (1) pay dividends or make any other distribution on any of such Subsidiary's capital stock or other equity interests owned by such Borrower or any Subsidiary of such Borrower; (2) pay any indebtedness owed to Borrowers or any other Subsidiary; (3) make loans or advances to Borrowers or any other Subsidiary; or (4) transfer any of its property or assets to any Borrower or any other Subsidiary. 36 7.4 Investments and Loans. Make or permit to exist investments in or --------------------- loans to any other Person, except: (a) U.K. Borrower may make investments in Cash Equivalents so long as no Redirection Notice has been given by Collateral Agent; and (b) Borrowers may make loans and advances to employees for moving, entertainment, travel and other similar expenses in the ordinary course of business in an aggregate outstanding amount not in excess of $250,000 at any time. 7.5 Restricted Junior Payments. Directly or indirectly declare, order, -------------------------- pay, make or set apart any sum for any Restricted Junior Payment, except that (a) Subsidiaries of any Borrower may make Restricted Junior Payments with respect to their common stock (or equivalent equity interests) to the extent necessary to permit such Borrower to pay the Obligations, to make Restricted Junior Payments permitted under clauses (b), (c), (d) and (e) below, and to permit such Borrower to pay expenses incurred in the ordinary course of business (b) U.S. Borrower may pay management fees to Unique in the amounts and on the respective dates required pursuant to the Unique Management Agreement, so long as (i) such payments do not exceed an aggregate of $150,000 per Fiscal Year, and (ii) at the time any such payment is made and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing; (c) U.S. Borrower may repay up to $2,500,000 in principal amount of the Subordinated Debt in full on the Closing Date, so long as after giving effect to such repayment and after giving effect to the consummation of all of the other transactions contemplated hereunder on the Closing Date and the payment by Borrowers of all costs, fees and expenses relating thereto, Borrowers shall have Availability (determined on a pro forma basis, with Borrowers having no accounts payables which are more than 60 days past due, and expenses and liabilities being paid in the ordinary course of business and without acceleration of sales) of at least $7,000,000; (d) following the Closing Date, U.S. Borrower may pay accrued and unpaid interest due and owing on an unaccelerated basis in respect to the Subordinated Debt, so long as at the time of any such payment and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing and such payment is otherwise permitted to be made pursuant to the Subordination Agreement; and (e) following the Closing Date, U.S. Borrower may make annual repayments of the principal balance of the Subordinated Debt from a portion of its Excess Cash Flow, if any, for the immediately preceding Fiscal Year, commencing with Borrowers' 1999 Fiscal Year (i.e., assuming there is Excess Cash Flow available therefor, the first such principal repayment permitted hereunder would be made during Fiscal Year 2000) so long as (i) the mandatory prepayment from Excess Cash Flow payable for the most recently ended Fiscal Year preceding the date of such payment pursuant to subsection 2.4(B)(3) -------------------- shall have been paid prior to the making of such principal payment; (ii) the amount of such principal payment does not exceed 25% of Excess Cash Flow for the most recently ended Fiscal Year; (iii) at the time of such principal payment and after giving effect thereto and to the mandatory prepayment of the Obligations payable pursuant to subsection 2.4(B)(3), Borrowers shall have Availability as -------------------- of such date, and shall have had average daily excess Availability during the immediately preceding 60 day period prior to such date (determined in each case on a pro forma basis as of such date or for such period, as the case may be, with Borrowers having no accounts payables which are more than 60 days past due, and expenses and liabilities being paid in the ordinary course of business and without acceleration of sales) of at least $3,000,000; and (iv) at the time of any such payment and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing and such payment is otherwise permitted to be made pursuant to the Subordination Agreement. 37 7.6 Restriction on Fundamental Changes. (a) Enter into any transaction of ---------------------------------- merger, consolidation, amalgamation or reconstruction; (b) liquidate, wind-up or dissolve itself or take any other action having substantially equivalent consequences (or suffer any liquidation or dissolution or similar event having substantially equivalent consequences); (c) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, or the capital stock or other equity interests of any of its Subsidiaries, whether now owned or hereafter acquired; or (d) acquire by purchase or otherwise all or any substantial part of the business or assets of, or stock or other beneficial ownership of, any Person. 7.7 Transactions with Affiliates. Directly or indirectly, enter into or ---------------------------- permit to exist any transaction (including the purchase, sale or exchange of property or the rendering of any service) with any Affiliate or with any officer, director or employee of any Loan Party, except for transactions in the ordinary course of the applicable Borrower's business and upon fair and reasonable terms which are fully disclosed to Agent and Lenders and which are no less favorable to such Borrower than it would obtain in a comparable arm's length transaction with an unaffiliated Person. 7.8 Conduct of Business. From and after the Closing Date, engage in any ------------------- business other than businesses of the type engaged in by such Loan Party on the Closing Date. 7.9 Tax Consolidations. File or consent to the filing of any consolidated ------------------ income tax return with any Person other than any other Borrower or any of their Subsidiaries. 7.10 Subsidiaries. Establish, create or acquire any new Subsidiaries. ------------ 7.11 Fiscal Year; Tax Designation. Change its Fiscal Year; or elect to be ---------------------------- designated as an entity other than a sub-chapter C corporation as defined in IRC. 7.12 Press Release; Public Offering Materials. Disclose the name of Agent, ---------------------------------------- Funding Agent, Collateral Agent or any Lender in any press release or in any prospectus, proxy statement or other materials filed with any governmental entity relating to a public offering of the capital stock of any Loan Party except as may be required by law or as approved in writing in advance by Agent, Funding Agent, Collateral Agent or such Lender, as the case may be. 7.13 Bank Accounts. Establish any new bank accounts, or attempt to amend ------------- or terminate any Blocked Account or lockbox agreement without Agent's prior written consent. 7.14 Exchange Inventory and Work in Process Purchases. Purchase any ------------------------------------------------ Exchange Inventory and Work in Process during the period commencing on the Closing Date through December 31, 1998; thereafter, Borrowers may purchase or otherwise acquire Exchange Inventory and Work in Process so long as (A) at the time of such purchase and after giving effect to the payment by the applicable Borrower of the purchase price for such Exchange Inventory and Work in Process, Borrowers have Availability of at least $2,500,000 (determined as set forth herein but after deducting therefrom the aggregate amount of any accounts payable of Borrowers which are more than 60 days past due, if any), and (B) the aggregate amount of Exchange Inventory and Work in Process purchased in any Fiscal Year does not exceed $9,000,000. 38 7.15 Changes Relating to Subordinated Debt. Change or amend the terms of ------------------------------------- the Subordinated Debt if the effect of such amendment is an attempt to: (a) increase the interest rate on such Indebtedness; (b) change the dates upon which payments of principal or interest are due on such Indebtedness; (c) change any event of default or add any covenant with respect to such Indebtedness; (d) change the payment provisions of such Indebtedness; (e) change the subordination provisions thereof; or (f) change or amend any other term if such change or amendment would materially increase the obligations of the obligor or confer additional material rights on the holder of such Indebtedness in a manner Lender. SECTION 8. DEFAULT, RIGHTS AND REMEDIES ---------------------------- 8.1 Event of Default. "Event of Default" shall mean the occurrence or ---------------- ---------------- existence of any one or more of the following: (A) Payment. Failure to make payment of any of the Obligations when ------- due; or (B) Default in Other Agreements. (1) Failure of any Loan Party to pay --------------------------- when due any principal or interest on any Indebtedness (other than the Obligations) or (2) breach or default by any Loan Party with respect to any Indebtedness (other than the Obligations); if such failure to pay, breach or default entitles the holder to cause such Indebtedness having an individual principal amount in excess of $100,000 or having an aggregate principal amount in excess of $250,000 to become or be declared due prior to its stated maturity; or (C) Breach of Certain Provisions. Failure of any Loan Party to ---------------------------- perform or comply with any term or condition contained in paragraphs (A) and (B) -------------- --- of the Reporting Rider and subsections 5.3, 5.5 or 5.6 or contained in Section --------------- --------------- --- --- ------- 4, Section 6, Section 7 or the Financial Covenants Rider; or - - --------- --------- ------------------------- (D) Breach of Warranty. Any representation, warranty, certification ------------------ or other statement made by any Loan Party in any Loan Document or in any statement or certificate at any time given by such Person in writing pursuant or in connection with any Loan Document is false in any material respect on the date made; or (E) Other Defaults Under Loan Documents. Any Borrower or any other ----------------------------------- Loan Party defaults in the performance of or compliance with any term contained in this Agreement or the other Loan Documents and such default is not remedied or waived within 10 days after receipt by Borrowers of notice from Agent, or Requisite Lenders, of such default (other than occurrences described in other provisions of this subsection 8.1 for which a different grace or cure period is -------------- specified or which constitute immediate Events of Default); or (F) Involuntary Bankruptcy; Appointment of Receiver, etc. (1) A court ---------------------------------------------------- enters a decree or order for relief with respect to any Loan Party in an involuntary case under any applicable federal, state or foreign bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed or other similar relief is not granted under any 39 applicable federal, state or foreign law; or (2) the continuance of any of the following events for 60 days unless dismissed, bonded or discharged: (a) an involuntary case is commenced against any Loan Party under any applicable federal, state or foreign bankruptcy, insolvency or other similar law now or hereafter in effect; or (b) a receiver, liquidator, sequestrator, trustee, custodian or other fiduciary having similar powers over any Loan Party or over all or a substantial part of any Loan Party's property, is appointed; or (3) a petition is presented, or a meeting is convened for the purpose of considering a resolution, or other steps are taken, for making an administration order against or for the winding up of any Loan Party or an administration order or a winding up order is made against any Loan Party (other than for the purposes of and followed by a reconstruction previously approved by Lenders, unless during or following such reconstruction any Loan Party becomes or is declared to be insolvent); or (G) Voluntary Bankruptcy; Appointment of Receiver, etc. (1) Any Loan -------------------------------------------------- Party commences a voluntary case under any applicable federal, state or foreign bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case or to the conversion of an involuntary case to a voluntary case under any such law or consents to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or (2) any Loan Party makes any assignment for the benefit of creditors; or (3) the board of directors of any Loan Party adopts any resolution or otherwise authorizes action to approve any of the actions referred to in this subsection 8.1(G); or ----------------- (H) Liens. Any lien, levy or assessment is filed or recorded with ----- respect to or otherwise imposed upon all or any part of the Collateral or the assets of any Loan Party by any Governmental Authority (other than Permitted Encumbrances) and such lien, levy or assessment is not stayed, vacated, paid or discharged within 10 days; or (I) Judgment and Attachments. Any money judgment, writ or warrant of ------------------------ attachment, or similar process involving (1) an amount in any individual case in excess of $250,000 or (2) an amount in the aggregate at any time in excess of $500,000 (in either case not adequately covered by insurance as to which the insurance company has acknowledged coverage) is entered or filed against any Loan Party or any assets of any Loan Party and remains undischarged, unvacated, unbonded or unstayed for a period of 30 days, but in any event not later than 5 days prior to the date of any proposed sale thereunder; or (J) Dissolution. Any order, judgment or decree is entered against any ----------- Loan Party decreeing the dissolution or split up of such Loan Party and such order remains undischarged or unstayed for a period in excess of 20 days, but in any event not later than 5 days prior to the date of any proposed dissolution or split up; or (K) Solvency. Any Borrower ceases to be solvent (as represented by -------- such Borrower in subsection 4.15) or admits in writing its present or --------------- prospective inability to pay its debts as they become due; or (L) Injunction. Any Loan Party is enjoined, restrained or in any way ---------- prevented by the order of any court or any administrative or regulatory agency from conducting all or any material part of its business and such order continues for 30 days or more; or 40 (M) Invalidity of Loan Documents. Any of the Loan Documents for any ---------------------------- reason, other than a partial or full release in accordance with the terms thereof, ceases to be in full force and effect or is declared to be null and void, or any Loan Party denies that it has any further liability under any Loan Documents to which it is party, or gives notice to such effect; or (N) Failure of Security. Agent or Collateral Agent, as applicable, on ------------------- behalf of Lenders, does not have or ceases to have a valid and perfected first priority security interest in the Collateral (subject to Permitted Encumbrances), in each case, for any reason other than the failure of Agent or Collateral Agent or any Lender to take any action within its control; or (O) Damage, Strike, Casualty. Any material damage to, or loss, theft ------------------------ or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than 15 consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of any Loan Party if any such event or circumstance could reasonably be expected to have a Material Adverse Effect; or (P) Licenses and Permits. The loss, suspension or revocation of, or -------------------- failure to renew, any license, permit now held or hereafter acquired by any Loan Party (including without limitation any of those set forth on Schedule 5.10), if ------------- such loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Effect; or (Q) Forfeiture. There is filed against any Loan Party any civil or ---------- criminal action, suit or proceeding under any federal, state or foreign racketeering or similar statute (including, without limitation, the Racketeer Influenced and Corrupt Organization Act of 1970), which action, suit or proceeding (1) is not dismissed within 120 days; and (2) could reasonably be expected to result in the confiscation or forfeiture of any material portion of the Collateral; (R) Termination of Certain Contracts. (1) Any Customer Contract with a -------------------------------- Material Customer is terminated in whole or in part (if after giving effect to such partial termination such customer would no longer constitute a Material Customer) prior to its stated expiration or termination date; or (2) any Customer Contract with a Material Customer expires in whole or in part (if after giving effect to such partial expiration such customer would no longer constitute a Material Customer) in accordance with its terms and is not renewed in writing by such Material Customer; or (3) within a ninety (90) day period, Customer Contracts with customers which collectively accounted for ten percent (10%) or more of Borrowers' consolidated gross revenues as of the last day of the most recently completed fiscal quarter for the trailing twelve month period then ended are terminated prior to their stated expiration or termination date or expire without written renewal by the applicable customers; or (4) any Borrower receives notice from any customer or customers of its or their intention to wholly or partially terminate, or not renew, the Customer Contract to which it or they are parties, if such termination(s) or expiration(s) without renewal, once effected, would constitute an event described in clauses (1) ----------- through (3) above; or --- (S) Change in Control or Management. Any of the following occurs: ------------------------------- (1) all or substantially all of the assets of any Borrower or any of its Subsidiaries are sold, leased or otherwise disposed of (in a single transaction or in a series of related transactions); (2) the 41 Persons listed on Schedule 8.1(S) hereto which owned equity interests in U.S. -------------- Borrower immediately prior to U.S. Borrower's initial public offering, or members of their immediate families or trusts for the benefit of members of their immediate families, fail to own, beneficially and of record, and control the power to vote, 35% of the equity securities of U.S. Borrower entitled to ordinary voting power during the two year period following the Closing Date, or 30% thereafter; (3) any person or entity or "affiliated group" (other than existing shareholders described on Schedule 8.1(S)) acquires more than 30% of --------------- the equity securities of U.S. Borrower entitled to ordinary voting power; (4) less than a majority of those persons constituting the board of directors of U.S. Borrower as of the Closing Date fail to remain as members of the board of directors of U.S. Borrower; (5) David Lokken, Brian Aune, Brian Carr or Michael Riley ceases to be actively involved on a full time basis in their current capacities as executive level employees of U.S. Borrower at any time and a replacement acceptable to Requisite Lenders is not appointed (or another plan for replacement which is acceptable to the Requisite Lenders is not in place) within 90 days; (6) Dennis Biety ceases to be actively involved on a full time basis in his current capacity as managing director of U.K. Borrower at any time during the one year period following the Closing Date and a replacement acceptable to Requisite Lenders is not appointed (or another plan for replacement which is acceptable to the Requisite Lenders is not in place) within 90 days; or (7) U.K. Borrower ceases to be a wholly owned subsidiary of U.S. Borrower. 8.2 Suspension of Commitments. Upon the occurrence of any Default or ------------------------- Event of Default, notwithstanding any grace period or right to cure, Agent may and may direct Funding Agent to, or, upon demand by Requisite Lenders, Agent and Funding Agent shall, without notice or demand, immediately cease making additional Loans and issuing additional Lender Letters of Credit and the Commitments shall be suspended; provided that, in the case of a Default, if the -------- subject condition or event is waived or cured within any applicable grace or cure period, the Commitments shall be reinstated. 8.3 Acceleration. Upon the occurrence of any Event of Default described ------------ in the foregoing subsections 8.1(F) or 8.1(G), all Obligations shall ---------------------------- automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Borrowers, and the Commitments shall thereupon terminate. Upon the occurrence and during the continuance of any other Event of Default, Agent may, and upon demand by Requisite Lenders, Agent shall, by written notice to Borrowers, (a) declare all or any portion of the Obligations to be, and the same shall forthwith become, immediately due and payable and the Commitments shall thereupon terminate and (b) demand that Borrowers immediately deposit with Agent an amount equal to 105% of the Letter of Credit Reserve to enable Agent or any Lender that has issued any Lender Letter of Credit to make payments under the Lender Letters of Credit when required and such amount shall become immediately due and payable. 8.4 Remedies. If any Event of Default shall have occurred and be -------- continuing, in addition to and not in limitation of any other rights or remedies available to Agent, Funding Agent, Collateral Agent and Lenders at law or in equity, each of Agent and, with the consent of Agent, Collateral Agent may, and upon the request of Requisite Lenders, each or either of Agent and Collateral Agent shall, exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) and 42 may also (a) require Borrowers to, and each Borrower hereby agrees that it will, at its expense and upon request of Agent or Collateral Agent, as the case may be, forthwith, assemble all or part of the Collateral as directed by Agent or Collateral Agent and make it available to Agent or Collateral Agent at a place to be designated by Agent or Collateral Agent which is reasonably convenient to both applicable parties; (b) withdraw all cash in the Blocked Accounts and apply such monies in payment of the Obligations in the manner provided in subsection ---------- 8.7; and (c) without notice or demand or legal process, enter upon any premises - --- of each or any Borrower and take possession of any or all of the Collateral. Each Borrower agrees that, to the extent notice of sale of the Collateral or any part thereof shall be required by law, at least 10 days notice to such Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. At any sale of the Collateral (whether public or private), if permitted by law, Agent, Collateral Agent (with the prior written consent of Agent) or any Lender may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral or any portion thereof for the account of Agent, Collateral Agent or such Lender. Neither Agent nor Collateral Agent shall be obligated to make any sale of Collateral regardless of notice of sale having been given. Borrowers shall remain jointly and severally liable for any deficiency. Agent or, with the consent of Agent, Collateral Agent, may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, each Borrower hereby specifically waives all rights of redemption, stay, appraisal or similar or substantially equivalent rights which it has or may have under any law now existing or hereafter enacted. Neither Agent nor Collateral Agent shall be required to proceed against any Collateral but may proceed against Borrowers or any Borrower directly, provided that in the case of -------- Collateral Agent, Agent shall have given its prior written consent. 8.5 Appointment of Attorney-in-Fact. Each Borrower hereby constitutes and ------------------------------- appoints each of Agent, Funding Agent and Collateral Agent as such Borrower's attorney-in-fact with full authority in the place and stead of such Borrower and in the name of such Borrower, Agent, Funding Agent, Collateral Agent or otherwise, from time to time in Agent's discretion or, with the consent of Agent, Funding Agent's or Collateral Agent's discretion, while an Event of Default is continuing to take any action and to execute any instrument that Agent, Funding Agent or Collateral Agent, as applicable, may deem necessary or advisable to accomplish the purposes of this Agreement, including: (a) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any customer or obligor thereunder or allow any credit or discount thereon; (c) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; (d) to file any claims or take any action or institute any proceedings that Agent or, with the prior consent of Agent, Funding Agent, Collateral Agent, may deem necessary or desirable for the collection of or to preserve the value of any of the Collateral or otherwise to enforce the rights of Agent, Funding Agent, Collateral Agent and Lenders with respect to any of the Collateral; and (e) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral. The appointment of each of Agent, Funding Agent and Collateral Agent, each Borrower's attorney, and each of Agent's, Funding 43 Agents's and Collateral Agent's rights and powers, are coupled with an interest and are irrevocable until indefeasible payment in full and complete performance of all of the Obligations. 8.6 Limitation on Duty of Agent with Respect to Collateral. Beyond the ------------------------------------------------------ safe custody thereof, none of Agent, Funding Agent, Collateral Agent or any Lender shall have any duty with respect to any Collateral in its possession or control (or in the possession or control of any Agent or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto. Agent, Funding Agent, Collateral Agent and each Lender shall each be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which Agent, Funding Agent, Collateral Agent or such Lender, as applicable, accords its own property. Neither Agent, Funding Agent, Collateral Agent nor any Lender shall be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee, broker or other Agent or bailee selected by any Borrower or selected by Agent, Funding Agent, Collateral Agent or any Lender in good faith. 8.7 Application of Proceeds. Upon the occurrence and during the ----------------------- continuance of an Event of Default, (a) each Borrower irrevocably waives the right to direct the application of any and all payments at any time or times thereafter received by Agent or Funding Agent from or on behalf of Borrowers, and each Borrower hereby irrevocably agrees that Agent shall have the continuing exclusive right to apply and to reapply any and all payments received at any time or times after the occurrence and during the continuance of an Event of Default against the Obligations in such manner as Agent may deem advisable notwithstanding any previous entry by Agent or Funding Agent upon any books and records and (b) the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied (it being understood that Agent shall have the right to convert, at a rate of exchange equal to the Spot Rate as of such conversion date and at the Borrowers' expense, any of such payments or proceeds of Collateral into any Available Currency or Available Currencies in which any such Obligations are denominated): first, to all fees, costs and ----- expenses incurred by or owing to Agent, Collateral Agent and Funding Agent with respect to this Agreement, the other Loan Documents or the Collateral; second, ------ to all fees, costs and expenses incurred by or owing to any Lender with respect to this Agreement, the other Loan Documents or the Collateral; third, to accrued ----- and unpaid interest on the Obligations; fourth, to the principal amounts of the ------ Obligations outstanding; and fifth, to any other indebtedness or obligations of ----- any Borrower owing to Agent, Funding Agent, Collateral Agent or any Lender. 8.8 License of Intellectual Property. Each Borrower hereby assigns, -------------------------------- transfers and conveys to each of Agent and Collateral Agent, for the benefit Lenders, effective upon the occurrence of any Event of Default hereunder, the non-exclusive right and license to use all Intellectual Property owned or used by such Borrower together with any goodwill associated therewith, all to the extent necessary to enable Agent or Collateral Agent, as the case may be, to realize on the Collateral and any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Agent, Collateral Agent and their respective successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge. 44 8.9 Waivers, Non-Exclusive Remedies. No failure on the part of Agent, ------------------------------- Funding Agent, Collateral Agent or any Lender to exercise, and no delay in exercising and no course of dealing with respect to, any right under this Agreement or the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise by Agent, Funding Agent, Collateral Agent or any Lender of any right under this Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right. The rights in this Agreement and the other Loan Documents are cumulative and shall in no way limit any other remedies provided by law. SECTION 9. AGENT, FUNDING AGENT AND COLLATERAL AGENT ----------------------------------------- 9.1 Agents. ------ (A) Appointment. (1) Appointment of Agent. Each Lender hereto and, ----------- -------------------- upon obtaining an interest in any Loan, any participant, transferee or other assignee of any Lender, irrevocably appoints, designates and authorizes Heller as Agent to take such actions or refrain from taking such action as its Agent on its behalf and to exercise such powers hereunder as are delegated to Agent by the terms hereof or of any other Loan Document, together with such powers as are reasonably incidental thereto. Neither Agent nor any of its directors, officers, employees or agents shall be liable for any action so taken. (2) Appointment of Funding Agent. Each Lender hereto and, upon obtaining ---------------------------- an interest in any Loan, any participant, transferee or other assignee of any Lender, irrevocably appoints, designates and authorizes NMB-Heller as Funding Agent to (a) at the request of Agent, make Revolving Advances to Borrowers on behalf of each Lender in accordance with the applicable provisions of Section 2, --------- and (b) take such actions or refrain from taking such action as its funding agent on its behalf and to exercise such powers hereunder as are delegated to Funding Agent by the terms hereof and of any other Loan Document, together with such powers as are reasonably incidental thereto. Neither Funding Agent nor any of its directors, officers, employees or agents shall be liable for any action so taken. Notwithstanding the foregoing or any other provision of the Loan Documents to the contrary, the parties hereto acknowledge and agree that until such time, if any, as Agent and Funding Agent shall have entered into agreements satisfactory to them (and to Borrower Representative to the extent the provisions of any such agreement affect Borrowers) setting forth the details of the funding and settlement procedures between or among Agent, Funding Agent and Lenders, and establishing the compensation and any other amounts payable to Funding Agent for its services in such capacity (i) neither Borrower Representative on behalf of Borrowers nor Agent shall be entitled to request that any Advances be made by Funding Agent on behalf of Lenders pursuant to subsection 2.1(E), and (ii) Funding Agent shall not be required to perform any - ----------------- of the duties or obligations imposed upon Funding Agent in its capacity as such hereunder or under any other Loan Document. (3) Appointment of Collateral Agent. Each Lender hereto and, upon ------------------------------- obtaining an interest in any Loan, any participant, transferee or other assignee of any Lender, irrevocably appoints, designates and authorizes NMB-Heller (together with any sub-agents appointed by NMB-Heller with the prior consent of Agent, in the event such sub-agents are required to take, hold, maintain, perfect or enforce Liens on Collateral located outside of the United States or the United Kingdom) as Collateral Agent to (a) take, hold, maintain, perfect and enforce Liens on the Collateral of any 45 Borrower at any time located in the United Kingdom, the Netherlands or any other jurisdiction other than the United States of America, and (b) take such actions or refrain from taking such action as its collateral agent on its behalf and to exercise such powers hereunder as are delegated to Collateral Agent by the terms hereof and of any other Loan Document, together with such powers as are reasonably incidental thereto. Neither Collateral Agent nor any of its directors, officers, employees or agents shall be liable for any action so taken. In the event Collateral Agent seeks to appoint any sub-agents as aforesaid, Collateral Agent shall obtain and deliver to Agent a written agreement of such sub-agent that it will agree to be bound by and will comply with all of the provisions of this Agreement and the other Loan Documents pertaining to Collateral Agent, with the same effect as if such sub-agent had originally been a "Collateral Agent" hereunder. (4) The provisions of this subsection 9.1 are solely for the benefit of -------------- Agent, Funding Agent, Collateral Agent and Lenders and neither any Borrower nor any other Loan Party shall have any rights as a third party beneficiary of any of the provisions hereof. Each of Agent, Funding Agent and Collateral Agent may perform any of its duties hereunder, or under the Loan Documents, by or through its agents or employees. (B) Nature of Duties. Neither Agent, Funding Agent nor Collateral ---------------- Agent shall have any duties, obligations or responsibilities except those expressly set forth in this Agreement or in the Loan Documents. The duties of Agent, Funding Agent and Collateral Agent shall be mechanical and administrative in nature. Neither Agent, Funding Agent nor Collateral Agent shall have by reason of this Agreement a fiduciary, trust or agency relationship with or in respect of any Lender, any Borrower or any other Loan Party. Each Lender shall make its own appraisal of the credit worthiness of Borrowers, and shall have independently taken whatever steps it considers necessary to evaluate the financial condition and affairs of Borrowers, and neither Agent, Funding Agent nor Collateral Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the Closing Date or at any time or times thereafter. If any of Agent, Funding Agent or Collateral Agent seeks the consent or approval of any Lenders to the taking or refraining from taking any action hereunder, then Agent (on behalf of Funding Agent or Collateral Agent, in any case in which such consent or approval is sought by Funding Agent or Collateral Agent) shall send notice thereof to each Lender, provided that Agent shall have given its prior approval to any request -------- by Funding Agent or Collateral Agent to seek the consent or approval of any Lenders. Agent shall promptly notify each Lender any time that the applicable percentage of Lenders have instructed Agent, Funding Agent or Collateral Agent to act or refrain from acting pursuant hereto. (C) Rights, Exculpation, Etc. Neither Agent, Funding Agent nor ------------------------ Collateral Agent, nor any of their respective officers, directors, employees or agents, shall be liable to any Lender for any action taken or omitted by them hereunder or under any of the Loan Documents, or in connection herewith or therewith, except that each of Agent, Funding Agent and Collateral Agent shall be obligated on the terms set forth herein for performance of their respective express obligations hereunder and under the other Loan Documents, and except that each of Agent, Funding Agent and Collateral Agent shall be liable with respect to its own gross negligence or willful misconduct. Neither Agent, Funding Agent nor Collateral Agent shall be liable for any apportionment or distribution of payments made by it in good faith and if any such apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any 46 Lender to whom payment was due but not made, shall be to recover from other Lenders any payment in excess of the amount to which they are determined to be entitled (and such other Lenders hereby agree to return to such Lender any such erroneous payments received by them). In performing its functions and duties hereunder, each of Agent, Funding Agent and Collateral Agent shall exercise the same care which it would in dealing with loans for its own account, but neither Agent, Funding Agent nor Collateral Agent shall be responsible to any Lender for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of this Agreement or any of the Loan Documents or the transactions contemplated thereby, or for the financial condition of any Loan Party. Neither Agent, Funding Agent nor Collateral Agent shall be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Loan Documents or the financial condition of any Loan Party, or the existence or possible existence of any Default or Event of Default. Agent may and, with the prior approval of Agent, each of Funding Agent and Collateral Agent may, at any time request instructions from Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Loan Documents Agent, Funding Agent or Collateral Agent, as applicable, is permitted or required to take or to grant, and each of Agent, Funding Agent and Collateral Agent, as applicable, shall be entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from the applicable percentage of the Lenders. Without limiting the foregoing, no Lender shall have any right of action whatsoever against any of Agent, Funding Agent or Collateral Agent as a result of Agent, Funding Agent or Collateral Agent acting or refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of the applicable percentage of the Lenders and notwithstanding the instructions of Lenders, none of Agent, Funding Agent or Collateral Agent shall have any obligation to take any action if it, in good faith, believes that such action exposes it to any liability. (D) Reliance. Neither Agent, Funding Agent nor Collateral Agent shall -------- be under any duty to examine, inquire into, or pass upon the validity, effectiveness or genuineness of this Agreement, any other Loan Document, or any instrument, document or communication furnished pursuant hereto or in connection herewith. Each of Agent, Funding Agent and Collateral Agent shall be entitled to rely upon and assume that any written notices, statements, certificates, orders or other documents or any telephone message or other communication (including any writing, telex, telecopy or telegram) are genuine, valid, effective and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder. Each of Agent, Funding Agent and Collateral Agent shall be entitled to rely upon the advice of legal counsel, independent accountants, and other experts selected by such Person in its sole discretion. (E) Indemnification. Each Lender, in proportion to its Pro Rata --------------- Share, severally, agrees to reimburse and indemnify each of Agent, Funding Agent and Collateral Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Agent, Funding Agent or Collateral Agent in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by Agent, Funding Agent or Collateral Agent under this Agreement or any of the Loan 47 Documents; provided, however, that no Lender shall be liable to Agent, Funding -------- ------- Agent or Collateral Agent, as the case may be, for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements resulting from Agent's, Funding Agent's or Collateral Agent's, as applicable, gross negligence or willful misconduct as determined by a court of competent jurisdiction. The obligations of Lenders under this subsection 9.1(E) shall ----------------- survive the payment in full of the Obligations and the termination of this Agreement. (F) Heller and NMB-Heller Individually. With respect to its ---------------------------------- Commitments, if any, and any Loans made by it, each of Heller and NMB-Heller shall have and may exercise the same rights and powers hereunder and are subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. The terms "Lenders" or "Requisite Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include Heller and NMB-Heller in their respective individual capacities as a Lender, if applicable. Each of Heller and NMB-Heller may lend money to, and generally engage in any or other business with, any Loan Party as if it were not acting as Agent or as Funding Agent and Collateral Agent, as the case may be, pursuant hereto. (G) Successor Agents. ---------------- (1) Resignation. Each of Agent, Funding Agent and Collateral ----------- Agent may resign from the performance of all their respective functions and duties hereunder at any time by giving at least 30 Business Days' prior written notice to Borrowers, Lenders and, in the case of a resignation by Funding Agent or Collateral Agent, to Agent; provided that in the case of Funding Agent and -------- Collateral Agent, any such resignation must apply to it in both such capacities. Any such resignation shall take effect upon the acceptance by a successor Agent or a successor Funding Agent and Collateral Agent, as applicable, of appointment as provided below. (2) Appointment of Successor. Upon any such notice of ------------------------ resignation pursuant to clause (G)(1) above, Requisite Lenders shall, upon ------------- receipt of Borrowers' prior consent which shall not unreasonably be withheld, appoint a successor Agent or a successor Funding Agent and Collateral Agent, as the case may be, provided that the prior consent of Agent shall be required to -------- the appointment of any successor Funding Agent or Collateral Agent and provided, -------- further that, unless Agent gives its prior consent otherwise, any successor - ------- Funding Agent and Collateral Agent must be the same Person. In the case of a resignation by Agent, if a successor Agent shall not have been so appointed within said 30 Business Day period, the retiring Agent, upon notice to Borrowers, shall then appoint a successor Agent who shall serve as Agent until such time as Requisite Lenders appoint a successor Agent as provided above. In the case of a resignation by Funding Agent and Collateral Agent, if a successor Funding Agent and Collateral Agent shall not have been so appointed within said 30 Business Day period, Agent, upon notice to Borrowers, shall then appoint a successor Funding Agent and Collateral Agent who shall serve as Funding Agent and Collateral Agent until such time as Requisite Lenders appoint a successor Funding Agent and Collateral Agent as provided above. (3) Successor Agents. Upon the acceptance of any appointment as Agent ---------------- or as Funding Agent and Collateral Agent under the Loan Documents by a successor Agent or a successor Funding Agent and Collateral Agent, such successor shall thereupon succeed to and 48 become vested with all the rights, powers, privileges and duties of the retiring Agent or the retiring Funding Agent and Collateral Agent, as the case may be, and the retiring Agent or retiring Funding Agent and Collateral Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent's or retiring Funding Agent's and Collateral Agent's resignation as such under the Loan Documents, the provisions of this Section 9 shall inure --------- to its benefit as to any actions taken or omitted to be taken by it while it was Agent or Funding Agent and Collateral Agent under the Loan Documents. (H) Collateral Matters. ------------------ (1) Release of Collateral. Lenders hereby irrevocably authorize --------------------- each of Agent and, with the prior written consent of Agent, Collateral Agent, at its option and in Agent's discretion, to release any Lien granted to or held by Agent or Collateral Agent upon any property covered by this Agreement or the other Loan Documents (i) upon termination of the Commitments and upon final and indefeasible payment in full in cash and satisfaction of all Obligations and termination of this Agreement; (ii) constituting property being sold or disposed of in accordance with this Agreement if the applicable Borrower certifies to each of Agent and Collateral Agent that the sale or disposition is made in compliance with the provisions of this Agreement (and each of Agent and Collateral Agent may rely in good faith conclusively on any such certificate, without further inquiry); or (iii) constituting property leased to any Borrower under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by such Borrower to be, renewed or extended. In addition during any Fiscal Year (x) Agent may and, upon the written direction of Agent, Collateral Agent may, release Collateral having a book value of not more than $250,000 and (y) Agent and/or Collateral Agent, with the consent of all Lenders, may release all or any portion of the Collateral. Without limiting any of the foregoing, each Lender agrees to confirm in writing, upon request by Borrowers, the authority to release any property covered by this Agreement or the Loan Documents conferred upon Agent and Collateral Agent under this subsection. (2) Execution of Releases. So long as no Event of Default is then --------------------- continuing, upon confirmation from the requisite percentage (as set forth in subsection 9.1(H)(1) above) of Lenders of Agent's or Collateral Agent's - -------------------- authority to release any Collateral, and upon at least 10 Business Days prior written request by Borrowers, Agent and/or Collateral Agent, as applicable, shall, and each is hereby irrevocably authorized by Lenders to, execute such documents as may be necessary to evidence the release of the Liens upon such Collateral; provided, however, that (i) neither Agent nor Collateral Agent shall -------- ------- be required to execute any such document on terms which, in Agent's or Collateral Agent's, as applicable, opinion, would expose Agent or Collateral Agent, as applicable, to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any Liens granted to Agent or Collateral Agent, as applicable, on behalf of Lenders upon (or obligations of any Loan Party, in respect of), all interests retained by any Loan Party, including, without limitation, the proceeds of any sale, all of which shall continue to constitute part of the property covered by this Agreement or the Loan Documents, and (iii) such release is not consistent with the terms of this Agreement. 49 (3) Absence of Duty. Neither Agent, Funding Agent nor Collateral --------------- Agent shall have any obligation whatsoever to any Lender or any other Person to assure that the property covered by this Agreement or the Loan Documents exists or is owned by any Borrower or is cared for, protected or insured or has been encumbered or that the Liens granted to Agent or Collateral Agent on behalf of Lenders herein or pursuant hereto have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent, Funding Agent or Collateral Agent in this Agreement or in any of the Loan Documents, it being understood and agreed that in respect of the property covered by this Agreement or the Loan Documents or any act, omission or event related thereto, each of Agent, Funding Agent and Collateral Agent may act in any manner it may deem appropriate, in its discretion (subject to the prior written approval of Agent, in the case of Funding Agent and Collateral Agent), given, in the case of Agent, Agent's own interest in property covered by this Agreement or the Loan Documents as one of the Lenders, and that neither Agent, Funding Agent nor Collateral Agent shall have any duty or liability whatsoever to any of the other Lenders. (I) Agency for Perfection. Each Lender hereby appoints each other --------------------- Lender as Agent for the purpose of perfecting Lenders' security interest in Collateral which, in accordance with Article 9 of the Uniform Commercial Code in --------- any applicable jurisdiction, can be perfected only by possession. Should any Lender (other than Agent or Collateral Agent) obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor, shall deliver such Collateral to Agent or in accordance with Agent's instructions. Agent may and, with the prior written consent of Agent, Collateral Agent may, file such proofs of claim or other similar or equivalent documents as may be necessary or advisable in order to have the claims of Agent, Funding Agent, Collateral Agent and the Lenders (including any claim for the reasonable compensation, expenses, disbursements and advances of Agent, Funding Agent, Collateral Agent and the Lenders, and their respective agents, financial advisors and counsel), allowed in any federal, state or foreign judicial proceedings relative to any Borrower and/or any Subsidiary of any Borrower, or any of their respective creditors or property, and shall be entitled and empowered to collect, receive and distribute any monies, securities or other property payable or deliverable on any such claims. Any custodian in any federal, state or foreign judicial proceedings relative to any Borrower and/or any Subsidiary of any Borrower is hereby authorized by each Lender to make payments to Agent (or, if requested in writing by Agent, to Collateral Agent) and, in the event that Agent shall consent to the making of such payments directly to the Lenders, to pay to each of Agent, Funding Agent and Collateral Agent any amount due to each such Person for the reasonable compensation, expenses, disbursements and advances of Agent, Funding Agent, Collateral Agent, and their respective agents, financial advisors and counsel, and any other amounts due Agent, Funding Agent or Collateral Agent. Nothing contained in this Agreement or the other Loan Documents shall be deemed to authorize Agent, Funding Agent or Collateral Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Loans, or the rights of any holder thereof, or to authorize Agent, Funding Agent or Collateral Agent to vote in respect of the claim of any Lender in any such proceeding, except as specifically permitted herein. (J) Exercise of Remedies. Each Lender agrees that it will not have -------------------- any right individually to enforce or seek to enforce this Agreement or any Loan Document or to realize 50 upon any collateral security for the Loans, it being understood and agreed that such rights and remedies may be exercised only by Agent or by Collateral Agent with the prior written consent of Agent. 9.2 Notice of Default. ----------------- In the event that Agent, Funding Agent, Collateral Agent or any Lender shall acquire actual knowledge, or shall have been notified of any Event of Default, then Agent, Funding Agent, Collateral Agent or such Lender, as the case may be, shall promptly notify Lenders and Agent, Funding Agent and Collateral Agent. 9.3 Action by Agents. ---------------- Each of Agent, Funding Agent and Collateral Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, and with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, this Agreement and the other Loan Documents, unless such Person shall have been instructed by Agent, in the case of Funding Agent and Collateral Agent, and/or by either Requisite Lenders or all of the Lenders, as applicable, required for an action hereunder or thereunder to exercise or refrain from exercising such rights or to make or refrain from taking such action; provided -------- that the exercise of discretion by Funding Agent and Collateral Agent shall require the prior consent of Agent. Neither Agent, Funding Agent nor Collateral Agent shall incur any liability under or in respect of this Agreement or any other Loan Document with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment or which may seem to it to be necessary or desirable in the circumstances, except for its gross negligence or willful misconduct. Neither Agent, Funding Agent nor Collateral Agent shall be liable to Lenders or to any Lender in acting or refraining from acting under this Agreement in accordance with the instructions of the Requisite Lenders, or all of the Lenders, as the case may be, and any action taken or failure to act pursuant to such instructions shall be binding on all Lenders. 9.4 Amendments, Waivers and Consents. -------------------------------- (A) Except as otherwise provided herein, no amendment, modification, termination or waiver of any provision of this Agreement or any other Loan Document, or consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by Borrowers and Requisite Lenders; provided however, no amendment, modification, ---------------- termination, waiver or consent shall be effective, unless in writing and signed by all Lenders, to do any of the following: (i) increase any of the Commitments; (ii) reduce the rate of interest on or fees payable with respect to any Loan or Lender Letter of Credit; (iii) extend the scheduled due date for all or any portion of principal of the Loans or any interest or fees due hereunder; (iv) amend or waive the definition of the term "Requisite Lenders"; (v) amend or waive this subsection 9.4; (vi) amend the definition of the term "Borrowing -------------- Base" or any of the associated defined terms used therein; (vii) amend the definition of the term "Available Currency" if the effect of such amendment is to include a new currency therein; (viii) amend or waive the definition of "Maximum Swingline Loan Amount" or the provisions of subsection 2.1(D) relating ---------- ----------------- to the terms of the Swingline Loan; or (ix) amend the provisions of subsection ---------- 51 9.10; provided, further, that no amendment, modification, termination, waiver or - ---- -------- ------- consent affecting the rights or duties of Agent, Funding Agent or Collateral Agent under this Agreement or any other Loan Document shall in any event be effective, unless in writing and signed by Agent, Funding Agent or Collateral Agent, as applicable, in addition to the Lenders required to take such action, and provided further, that no amendments, modification, termination, waiver or -------- ------- consent of or with respect to any provision relating to the Swingline Loan shall be effective unless in writing and signed by the Swingline Lender; (B) Each amendment, modification, termination, waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination, waiver or consent shall be required for Agent or Collateral Agent to take additional Collateral; (C) Each Lender grants Agent the right to purchase all, but not less than all, of such Lender's Commitment, in the event Agent requests the consent of a Lender and such consent is denied. In such circumstances, Agent may, at its option, require such Lender to assign its interest in the Loans to Agent or Agent's designee for a price equal to the then outstanding principal amount thereof plus accrued and unpaid interest and fees due such Lender, which ---- interest and fees will be paid when collected from Borrowers; Notwithstanding anything in this subsection 9.4, Agent and Borrowers, without -------------- the consent of either Requisite Lenders or all Lenders or of Funding Agent or Collateral Agent, may execute amendments to this Agreement and the Loan Documents, which consist solely of the making of typographical corrections. 9.5 Assignments and Participations in Loans. --------------------------------------- (A) Each Lender may assign its rights and delegate its obligations under this Agreement to an Eligible Assignee; provided that (a) such Lender -------- shall first obtain the written consent of Agent, which shall not be unreasonably withheld, (b) the amount of Commitments and Loans of the assigning Lender being assigned shall in no event be less than the lesser of (i) $5,000,000 or (ii) the entire amount of the Commitments and Loans of such assigning Lender and (c)(i) each such assignment shall be of a pro rata portion of all such assigning Lender's Loans and Commitments hereunder, and (ii) the parties to such assignment shall execute and deliver to Agent for acceptance and recording an Assignment and Assumption Agreement together with (x) a processing and recording fee of $3,500 payable to Agent and (y) each of the Notes originally delivered to the assigning Lender. Upon receipt of all of the foregoing, Agent shall notify Borrowers, Funding Agent and Collateral Agent of such assignment and Borrowers shall comply with their obligations under the last sentence of subsection ---------- 2.1(G). To the extent of an assignment authorized under this subsection 9.5, - ------ -------------- upon Agent's receipt and acceptance of the Assignment and Acceptance Agreement and Agent's receipt of the recording fee set forth above, the assignee shall be considered to be a "Lender" hereunder and each Borrower hereby acknowledges and agrees that any assignment will give rise to a direct obligation of Borrowers to the assignee. The assigning Lender shall be relieved of its obligations hereunder with respect to the assigned portion of its Commitment. 52 (B) Each Lender may sell participations in all or any part of any Loans made by it to another Person; provided that any such participation shall -------- be in a minimum amount of $5,000,000, and provided, further, that all amounts -------- ------- payable by Borrowers hereunder shall be determined as if that Lender had not sold such participation and the holder of any such participation shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly effecting (a) any reduction in the principal amount or an interest rate on any Loan in which such holder participates; (b) any extension of the Termination Date or the date fixed for any payment of interest payable with respect to any Loan in which such holder participates; and (c) any release of substantially all of the Collateral. Each Borrower hereby acknowledges and agrees that the participant under each participation shall for purposes of subsections 2.8, 2.9, 2.10, 9.6 and 10.2 be considered to be a "Lender". - ---------------------------------------- (C) Except as otherwise provided in subsection 9.5(A) no Lender shall, ----------------- as between Borrowers and that Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of participation in, all or any part of the Loans or other Obligations owed to such Lender. Each Lender may furnish any information concerning the Loan Parties in the possession of that Lender from time to time to Eligible Assignees and participants (including prospective assignees and participants) provided that the Persons obtaining such information agrees to maintain the - -------- confidentiality of such information to the extent required by subsection 10.18. ---------------- (D) Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement or the other Loan Documents in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. 9.6 Set Off and Sharing of Payments. In addition to any rights now or ------------------------------- hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Lender is hereby authorized by each Borrower at any time or from time to time, with reasonably prompt subsequent notice to Borrowers or to a directly affected Subsidiary (any prior or contemporaneous notice being hereby expressly waived) to set off and to appropriate and to apply any and all (a) balances held by such Lender at any of its offices for the account of any Borrower or any Subsidiary thereof (regardless of whether such balances are then due to such Borrower or such Subsidiary), and (b) other property at any time held or owing by such Lender to or for the credit or for the account of any Borrower or any Subsidiary thereof, against and on account of any of the Obligations which are not paid when due; provided that no Lender shall exercise any such right without -------- the prior written consent of Agent. Any Lender which has exercised its right to set off shall purchase for cash (and the other Lenders shall sell) participations in each such other Lender's Pro Rata Share of the Obligations as would be necessary to cause each Lender to share such amount so set off with each other Lender in accordance with their respective Pro Rata Shares. Each Borrower agrees, to the fullest extent permitted by law, that (a) any Lender may exercise its right to set off with respect to amounts in excess of its Pro Rata Share of the Obligations and may sell participations in such amount so set off to other Lenders, and (b) any Lender so purchasing a participation in the Loans made or other Obligations held by other Lenders may exercise all rights of set- off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans and other Obligations in the amount of such participation. 53 9.7 Disbursement of Funds. Each of Agent and, to the extent permitted by --------------------- subsection 2.(1)(E)(2), Funding Agent, may, on behalf of Lenders, disburse funds - ---------------------- to Borrowers for Loans requested. Each Lender shall reimburse each of Agent and Funding Agent on demand for all funds disbursed on its behalf by Agent or Funding Agent, as applicable, or if Agent so requests, each Lender will remit to Agent its Pro Rata Share of any Loan or Advance before Agent disburses same to any Borrower. If Agent elects to require that funds be made available prior to disbursement to any Borrower, Agent shall advise each Lender by telephone, telex or telecopy of the amount of such Lender's Pro Rata Share of such requested Loan no later than (a) two Business Days prior to the Funding Date applicable thereto for LIBOR Loans and (b) by 1:00 p.m. Chicago time on the Funding Date for Base Rate Loans, and each such Lender shall pay Agent such Lender's Pro Rata Share of such requested Loan, in same day funds, by wire transfer to Agent's account not later than 10:00 a.m. Chicago time on such Funding Date for LIBOR Loans and 3:00 p.m. Chicago time for Base Rate Loans. 9.8 Settlements, Payments and Information. ------------------------------------- (A) Revolving Advances and Payments; Fee Payments. --------------------------------------------- (1) Payments of principal in respect of the Term Loans will be settled on the Business Day received in accordance with the provisions of Section 2. The Revolving Loan may fluctuate from day to day through Agent's and - --------- Funding Agent's disbursement of funds to, and receipt of funds from, Borrowers. In order to minimize the frequency of transfers of funds between or among Agent, Funding Agent and each Lender, notwithstanding terms to the contrary set forth in Section 2 and subsection 9.7, Revolving Advances and repayments (except as --------- -------------- set forth in subsection 2.1(F)) may be settled according to the procedures ----------------- described in this subsection 9.8. Notwithstanding these procedures, each -------------- Lender's obligation to fund its Pro Rata Share of Advances made by Agent or Funding Agent to any Borrower will commence on the date such Advances are made by Agent or Funding Agent, as the case may be. Such payments will be made by such Lender without set-off, counterclaim or reduction of any kind. (2) Once each week for the Revolving Loan or more frequently (including daily), if Agent so elects (each such day being a "Settlement Date"), --------------- Agent will advise each Lender by 1:00 p.m. Chicago time by telephone, telex, or telecopy of the amount of each such Lender's Pro Rata Share of the Revolving Loan. Such advice will specify the aggregate amount of Revolving Advances made by each of Agent and Funding Agent since the immediately preceding Settlement Date and shall further specify the aggregate amount of Revolving Advances made in each Available Currency since the immediately preceding Settlement Date. In the event payments are necessary to adjust the amount of such Lender's share of the Revolving Loan to such Lender's Pro Rata Share of the Revolving Loan, the following settlement procedures shall apply: (a)(i) each Lender shall pay to Funding Agent an amount equal to the difference, if a positive number, between (i) such Lender's Pro Rata Share of all Revolving Advances made by Funding Agent on behalf of Agent and Lenders since the immediately preceding Settlement Date , and (ii) such Lender's Pro Rata Share of all principal payments, if any, in respect of the Revolving Loan for which good funds have been received by Funding Agent since the immediately preceding Settlement Date, which amount shall be paid by each Lender to Funding Agent in 54 the applicable Available Currencies in which such Revolving Advances were so made by Funding Agent; or (a)(ii) Funding Agent shall pay to each Lender an amount equal to the difference, if a positive number, between (i) such Lender's Pro Rata Share of all principal payments in respect of the Revolving Loan for which good funds have been received by Funding Agent or Collateral Agent since the immediately preceding Settlement Date, and (ii) such Lender's Pro Rata Share of all Revolving Advances made by Funding Agent on behalf of Agent and Lenders since the immediately preceding Settlement Date, which amount shall be paid by Funding Agent to each such Lender in the applicable Available Currencies in which such principal payments were so received by Funding Agent or Collateral Agent; and --- (b)(i) each Lender shall pay to Agent an amount equal to the difference, if a positive number, between (i) such Lender's Pro Rata Share of all Revolving Advances and payments under Lender Letters of Credit made by Agent since the immediately preceding Settlement Date, and (ii) such Lender's Pro Rata Share of all principal payments in respect of the Revolving Loan for which good funds have been received by Agent since the immediately preceding Settlement Date, which amount shall be paid by each Lender to Agent in the applicable Available Currencies in which such Advances or payments were so made by Agent; or (b)(ii) Agent shall pay to each Lender an amount equal to the difference, if a positive number, between (i) such Lender's Pro Rata Share of all principal payments in respect of the Revolving Loan for which good funds have been received by Agent since the immediately preceding Settlement Date, and (ii) such Lender's Pro Rata Share of all Revolving Advances and payments under Lender Letters of Credit made by Agent since the immediately preceding Settlement Date, which amount shall be paid by Agent to each such Lender in the applicable Available Currencies in which such principal payments were so received by Agent. The part(ies) from which any such payments are due will pay the other part(ies), in same day funds, by wire transfer to the other's account not later than (x) 3:00 p.m. Chicago time on the Business Day following the Settlement Date, in the case of payments between Agent and any Lender, and (y) 3:00 p.m. London time on the Business Day following the Settlement Date, in the case of payments between Funding Agent and any Lender. (3) On the first Business Day of each month ("Interest Settlement ------------------- Date"), Agent will advise each Lender by telephone, telefax or telecopy of the - ---- amount of interest and fees charged to and collected from Borrowers for the preceding month. Provided that such Lender has made all payments required to be made by it under this Agreement, Agent will pay to such Lender, by wire transfer to such Lender's account (as specified by such Lender on the signature page of this Agreement as amended by such Lender from time to time after the date hereof or in the applicable Assignment and Assumption Agreement) not later than 3:00 p.m. 55 Chicago time on the next Business Day following the Interest Settlement Date such Lender's share of such interest and such Lender's Pro Rata Share of such fees, which amounts shall be paid to each such Lender in the Available Currencies in which such interest and fees were charged to or collected from Borrowers by Agent. (B) Return of Payments. ------------------ (1) If Agent or Funding Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent or Funding Agent, as the case may be, from a Borrower and such related payment is not received by Agent or Funding Agent, then Agent or Funding Agent, as applicable, will be entitled to recover such amount from such Lender without set-off, counterclaim or deduction of any kind. (2) If Agent or Funding Agent determines at any time that any amount received by it under this Agreement must be returned to any Borrower or paid to any other Person pursuant to any federal, state or foreign solvency law (or similar or equivalent law) or otherwise, then, notwithstanding any other term or condition of this Agreement, neither Agent nor Funding Agent will be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to each of Agent and Funding Agent on demand any portion of such amount that Agent or Funding Agent, as applicable, has distributed to such Lender, together with interest at such rate, if any, as Agent or Funding Agent is required to pay to any Borrower or such other Person, without set-off, counterclaim or deduction of any kind. 9.9 Dissemination of Information. Agent will provide Lenders with any ---------------------------- information received by Agent from Borrowers which is required to be provided to a Lender hereunder; provided, however, that Agent shall not be liable to Lenders -------- ------- for any failure to do so, except to the extent that such failure is attributable to Agent's gross negligence or willful misconduct. 9.10 Discretionary Advances. Agent may, in its sole discretion, during ---------------------- the continuance of an Event of Default, make (and direct Funding Agent to make) Revolving Advances in an aggregate amount of not more than $250,000 in excess of the limitations set forth in the Borrowing Base for the purpose of preserving or protecting the Collateral or for incurring any costs associated with collection or enforcing rights or remedies against the Collateral, or incurred in any action to enforce this Agreement or any other Loan Document. SECTION 10. MISCELLANEOUS ------------- 10.1 Expenses and Attorneys' Fees. Whether or not the transactions ---------------------------- contemplated hereby shall be consummated, Borrowers jointly and severally agree to promptly pay all fees, costs and expenses incurred in connection with any matters contemplated by or arising out of this Agreement or the other Loan Documents including the following, and all such fees, costs and expenses shall be part of the Obligations, payable on demand and secured by the Collateral: (a) fees, costs and expenses incurred by Agent, Funding Agent or Collateral Agent (including attorneys' fees, allocated costs of internal counsel and fees of environmental consultants, accountants and other professionals retained by Agent or by Funding Agent or Collateral Agent with the prior approval of Agent) incurred in connection with the examination, review, due diligence investigation, documentation and closing of the financing arrangements evidenced by 56 the Loan Documents; (b) fees, costs and expenses incurred by Agent, Funding Agent or Collateral Agent (including attorneys' fees, allocated costs of internal counsel and fees of environmental consultants, accountants and other professionals retained by Agent or by Funding Agent or Collateral Agent with the prior approval of Agent) incurred in connection with the review, negotiation, preparation, documentation, execution, syndication, and administration of the Loan Documents, the Loans, and any amendments, waivers, consents, forbearances and other modifications relating thereto or any subordination or intercreditor agreements; (c) fees, costs and expenses incurred by Agent, Funding Agent, Collateral Agent or any Lender in creating, perfecting and maintaining perfection of Liens in favor of Agent or Collateral Agent, on behalf of Lenders; (d) fees, costs and expenses incurred by Agent or Funding Agent in connection with forwarding to any Borrower the proceeds of Loans including Agent's and Funding Agent's standard wire transfer fee and including any fees, costs, losses or expenses associated with currency translations, howsoever arising; (e) fees, costs, expenses and bank charges, including bank charges for returned checks, incurred by Agent, Funding Agent, Collateral Agent or any Lender in establishing, maintaining and handling lock box accounts, blocked accounts or other accounts for collection of the Collateral; (f) fees, costs, expenses (including attorneys' fees and allocated costs of internal counsel) of Agent, Funding Agent, Collateral Agent or any Lender and costs of settlement incurred in collecting upon or enforcing rights against the Collateral or incurred in any action to enforce this Agreement or the other Loan Documents or to collect any payments due from any Borrower or any other Loan Party under this Agreement or any other Loan Document or incurred in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement, whether in the nature of a "workout" or in connection with any insolvency or bankruptcy proceedings or otherwise. 10.2 Indemnity; Value Added Tax. -------------------------- (A) Indemnity. In addition to the payment of expenses pursuant to --------- subsection 10.1, whether or not the transactions contemplated hereby shall be - --------------- consummated, Borrowers jointly and severally agree to indemnify on an after tax basis, pay and hold Agent, Funding Agent, Collateral Agent and each Lender, and the officers, directors, employees, agents, consultants, auditors, persons engaged by any of Agent, Funding Agent, Collateral Agent or any Lender to evaluate or monitor the Collateral, affiliates and attorneys of any of Agent, Funding Agent, Collateral Agent, any Lender and such holders (collectively called the "Indemnitees") harmless from and against any and all liabilities, ----------- obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) that may be imposed on, incurred by, or asserted against that Indemnitee, in any manner relating to or arising out of this Agreement or the other Loan Documents, the consummation of the transactions contemplated by this Agreement, the statements contained in the commitment letters, if any, delivered by Agent, Funding Agent or any Lender, Agent's, Funding Agent's and each Lender's agreement to make the Loans hereunder, the use or intended use of the proceeds of any of the Loans or the exercise of any right or remedy hereunder or under the other Loan Documents (the "Indemnified Liabilities"); provided that no ----------------------- -------- Borrower shall have any obligation to an Indemnitee hereunder with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of that Indemnitee as determined by a court of competent jurisdiction. 57 (B) Value Added Tax. For the avoidance of doubt, the amounts stated --------------- in this Agreement to be payable by any Borrower are exclusive of United Kingdom value added tax ("VAT") and accordingly: --- (i) each Borrower shall pay on demand any VAT properly chargeable in respect of supplies to each Borrower contemplated by this Agreement (including any VAT chargeable by Agent, Funding Agent, Collateral Agent or any Lender in respect of its supplies to such Borrower under this Agreement); and (ii) in the case of goods or services supplied to or other costs, fees and expenses incurred by Agent, Funding Agent, Collateral Agent or any Lender in connection with this Agreement, and which are to be met by any Borrower or in respect of which a Borrower is to indemnify Agent, Funding Agent, Collateral Agent or any Lender, such Borrower (for the avoidance of doubt) shall pay to Agent (for itself or for the benefit of the relevant party) by way of additional remuneration such amount as shall represent any associated VAT (whether charged by the supplier or suffered by reason of the reverse charge provisions contained in section 8 of the Value Added Tax Act 1994 (England and Wales). 10.3 Notices. Unless otherwise specifically provided herein, all notices ------- shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier service or United States mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a Business Day before 4:00 p.m. Chicago time or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, two days after delivery to such courier properly addressed; or (d) if by U.S. Mail, four Business Days after depositing in the United States mail, with postage prepaid and properly addressed. If to U.S. Borrower: HAWKER PACIFIC AEROSPACE 11240 Sherman Way Sun Valley, California 91352 Attn: Brian S. Aune Telecopy No.: (818) 765-8073 With a copy to: TROY & GOULD PROFESSIONAL CORPORATION 1801 Century Park East, Suite 1600 Los Angeles, California 90067 Attn: Yvonne E. Chester, Esq. Telecopy No.: (310) 201-4746 If to U.K. Borrower: HAWKER PACIFIC AEROSPACE LIMITED Technical Block A (5362) P.O. Box 10, London Heathrow Airport Hounslow, Middlesex TW6 2JA United Kingdom Attn: Dennis Biety 58 Telecopy No.: 011-44-181-513-3596 With a copy to: PARIS, SMITH & RANDALL, SOLICITORS Number 1, London Road Southampton, Hampshire S015 2AE United Kingdom Attn: Andrew Heathcock Telecopy No.: 011-44-170-363-1835 If to Agent or to Heller: HELLER FINANCIAL, INC. 500 West Monroe Chicago, Illinois, 60661 Attn: Group Portfolio Officer Telecopy No.: (312) 441-7367 With a copy to: HELLER FINANCIAL, INC. 500 West Monroe Chicago, Illinois 60661 Attn: Legal Department Senior Counsel, Corporate Finance Telecopy No.: (312) 441-7367 If to Funding Agent or Collateral Agent: NMB-HELLER LIMITED Park House 22 Park Street Croydon CRG 1RD United Kingdom Attn: Robin Archibald Telecopy No.: 011-44-181-680-2084 With a copy to: Agent (as set forth above) If to any Lender: Its address indicated on the signature page hereto, in an Assignment and Assumption Agreement or in a notice to Agent, Funding Agent, Collateral Agent and Borrowers or to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this subsection 10.3. --------------- 10.4 Survival of Representations and Warranties and Certain Agreements. ----------------------------------------------------------------- All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrowers and Agent, Funding Agent, Collateral Agent and Lenders set forth in subsections 10.1, 10.2, 10.6, 10.11, 10.14, and 10.15 ------------------------------------------------------ (Borrowers' agreement to pay fees, agreement to indemnify Agent, Funding Agent, Collateral Agent and Lenders, the reinstatement of Obligations, agreement as to choice of law and jurisdiction and the waiver of a jury trial by the parties hereto) shall survive the payment of the Loans and the termination of this Agreement. 59 10.5 Indulgence Not Waiver. No failure or delay on the part of Agent, --------------------- Funding Agent, Collateral Agent, any Lender or any holder of any Note in the exercise of any power, right or privilege hereunder or under any Note shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. 10.6 Marshaling; Payments Set Aside. Neither Agent, Funding Agent, ------------------------------ Collateral Agent nor any Lender shall be under any obligation to marshal any assets (or take any similar or equivalent action under applicable law) in favor of any Loan Party or any other party or against or in payment of any or all of the Obligations. To the extent that any Loan Party makes a payment or payments to Agent, Funding Agent, Collateral Agent and/or any Lender, or Agent, Funding Agent, Collateral Agent and/or any Lender enforces its security interests or exercise its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any federal, state or foreign bankruptcy law, other federal, state or foreign law, common law or equitable cause, then to the extent of such recovery, the Obligations or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 10.7 Entire Agreement. This Agreement and the other Loan Documents embody ---------------- the entire agreement among the parties hereto and supersede all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof, and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. 10.8 Severability. The invalidity, illegality or unenforceability in any ------------ jurisdiction of any provision in or obligation under this Agreement or the other Loan Documents shall not affect or impair the validity, legality or enforceability of the remaining provisions or obligations under this Agreement, or the other Loan Documents. 10.9 Lenders' Obligations Several; Independent Nature of Lenders' Rights. ------------------------------------------------------------------- The obligation of each Lender hereunder is several and not joint and neither Agent, Funding Agent, Collateral Agent nor any Lender shall be responsible for the obligation or Commitment of any other Lender hereunder. In the event that any Lender at any time should fail to make a Loan as herein provided, the Lenders, or any of them, at their sole option, may make the Loan that was to have been made by the Lender so failing to make such Loan. Nothing contained in any Loan Document and no action taken by Agent, Funding Agent, Collateral Agent or any Lender pursuant hereto or thereto shall be deemed to constitute Lenders to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and, provided Agent or Collateral Agent fails or refuses to exercise any remedies against any Borrower after receiving the direction of the Requisite Lenders, each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 60 10.10 Headings. Section and subsection headings in this Agreement are -------- included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 10.11 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL -------------- BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 10.12 Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that no Borrower may assign its rights or -------- ------- obligations hereunder without the written consent of Lenders. 10.13 No Fiduciary Relationship; No Duty; Limitation of Liabilities. ------------------------------------------------------------- (A) No provision in this Agreement or in any of the other Loan Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty by Agent, Funding Agent, Collateral Agent or any Lender to any Borrower. (B) All attorneys, accountants, appraisers, and other professional Persons and consultants retained by Agent, Funding Agent, Collateral Agent or any Lender shall have the right to act exclusively in the interest of Agent, Funding Agent, Collateral Agent or such Lender and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to Borrowers or any of Borrowers' shareholders or any other Person. (C) Neither Agent, Funding Agent, Collateral Agent nor any Lender, nor any affiliate, officer, director, shareholder, employee, attorney or Agent of Agent, Funding Agent, Collateral Agent or any Lender shall have any liability with respect to, and each Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by any Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Each Borrower hereby waives, releases, and agrees not to sue Agent, Funding Agent, Collateral Agent or any Lender, or any of Agent's, Funding Agent's, Collateral Agent's or any Lender's affiliates, officers, directors, employees, attorneys or agents, for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the transactions contemplated hereby. 10.14 CONSENT TO JURISDICTION. EACH BORROWER HEREBY CONSENTS TO THE ----------------------- JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. EACH BORROWER HEREBY WAIVES 61 PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON SUCH BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE 10 DAYS AFTER THE SAME HAS BEEN POSTED. 10.15 WAIVER OF JURY TRIAL. EACH BORROWER, AGENT, FUNDING AGENT, -------------------- COLLATERAL AGENT AND EACH LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. EACH BORROWER, AGENT, FUNDING AGENT, COLLATERAL AGENT AND EACH LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH BORROWER, AGENT, FUNDING AGENT, COLLATERAL AGENT AND EACH LENDER WARRANT AND REPRESENT THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. 10.16 Construction. Each Borrower, Agent, Funding Agent, Collateral ------------ Agent and each Lender each acknowledge that it has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by Borrowers, Agent, Funding Agent, Collateral Agent and each Lender. 10.17 Counterparts; Effectiveness. This Agreement and any amendments, --------------------------- waivers, consents, or supplements may be executed via telecopier or facsimile transmission in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which counterparts together shall constitute one and the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto. 10.18 Confidentiality. Agent, Funding Agent, Collateral Agent and Lenders --------------- shall hold all nonpublic information obtained pursuant to the requirements hereof and identified as such by Borrowers in accordance with such Person's customary procedures for handling confidential information of this nature and in accordance with safe and sound business practices and in any event may make disclosure to such of its respective affiliates, officers, directors, employees, agents and representatives as need to know such information in connection with the Loans. Agent, Funding Agent, Collateral Agent and Lenders may also make disclosure reasonably required by a bona fide offeree or assignee (or participation), or as required or requested by any Governmental Authority or representative thereof, or pursuant to legal process, or to its accountants, lawyers and other advisors, and shall require any such offeree or assignee (or participant) to agree (and require any of its offerees, assignees or participants to agree) to comply with this subsection 10.18. In no event shall ---------------- Agent, Funding Agent, Collateral Agent or any Lender be obligated or required to return any materials furnished by any Borrower provided, -------- 62 however, each offeree shall be required to agree that if it does not become an - ------- assignee (or participant) it shall return all materials furnished to it by any Borrower in connection herewith. 10.19 Judgment Currency. (a) If for the purposes of obtaining judgment in ----------------- any court it is necessary to convert a sum due hereunder or under the other Loan Documents in any currency to another currency the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be the Spot Rate on the 2nd Business Day preceding that on which judgment is given. (b) The obligation of any Borrower in respect of any sum due in the original currency from it to Agent, Funding Agent, Collateral Agent or any Lender hereunder or under any other Loan Document shall, notwithstanding any judgment in any other currency, be discharged only to the extent that on the Business Day following receipt by Agent, Funding Agent, Collateral Agent or such Lender (as the case may be) of any sum adjudged to be so due in such other currency, Agent, Funding Agent, Collateral Agent or such Lender (as the case may be) may in accordance with normal banking procedures purchase the original currency with such other currency. If the amount of such original currency so purchased is less than the sum originally due to such Person in the original currency, each Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify Agent, Funding Agent, Collateral Agent or such Lender (as the case may be) against such loss, and if the amount of the original currency so purchased exceeds the sum originally due to Agent, Funding Agent, Collateral Agent or such Lender (as the case may be) in the original currency, such Person agrees to remit to such Borrower such excess. SECTION 11. DEFINITIONS AND ACCOUNTING TERMS -------------------------------- 11.1 Defined Terms. The following terms used in this Agreement shall have ------------- the following meanings: "Accounts" means all "accounts" (as defined in the UCC), accounts -------- receivable, contract rights and general intangibles relating thereto, notes, drafts and other forms of obligations owed to or owned by any Borrower arising or resulting from the sale of goods or the rendering of services, whether or not earned by performance. "Adjustment Date" means, with respect to any determination of the Base Rate --------------- Margin or the LIBOR Margin, February 1, May 1, August 1 and November 1 of each year. "Advance" shall mean an advance under the Revolving Loan or the Swingline ------- Loan. "Affiliate" means any Person (other than Agent, Funding Agent, Collateral --------- Agent or any Lender): (a) directly or indirectly controlling, controlled by, or under common control with, any Loan Party; (b) directly or indirectly owning or holding 5% or more of any equity interest in any Loan Party; (c) 5% or more of whose stock or other equity interest having ordinary voting power for the election of directors or the power to direct or cause the direction of management, is directly or indirectly owned or held by any Loan Party; or (d) which has a senior officer who is also a senior officer of a Loan Party. For purposes of this definition, "control" (including with ------- 63 correlative meanings, the terms "controlling", "controlled by" and "under common ----------- ------------- ------------ control with") means the possession directly or indirectly of the power to - ------------ direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or other equity interest, or by contract or otherwise. "Agent" means Heller in its capacity as Agent for the Lenders under the ----- Loan Documents and any successor in such capacity appointed pursuant to subsection 9.1(G). - ----------------- "Agent's Account" means ABA No. 0710-0001-3, Account No. 52-98695 at First --------------- National Bank of Chicago, One First National Plaza, Chicago, IL 60670, Reference: Heller Business Credit for the benefit of Hawker Pacific Aerospace. "Agreement" means this Loan and Security Agreement as it may be amended, --------- restated, supplemented or otherwise modified from time to time. "Applicable Percentage" means, with respect to Advances against Eligible --------------------- Exchange Inventory and Work in Process (a) during the period commencing on the Closing Date through and including the last day of the second Loan Year, 80%; (b) during the period commencing on the first day of the third Loan Year through and including the last day of the third Loan Year, 75%; (c) during the period commencing on the first day of the fourth Loan Year through and including the last day of the fourth Loan Year, 70%; and (d) at all times from and after the first day of the fifth Loan Year, 65%. "Appraiser" has the meaning assigned to that term in paragraph (I)(2) of --------- ---------------- the Reporting Rider. --------------- "Asset Disposition" means the disposition, whether by sale, lease, ----------------- transfer, loss, damage, destruction, condemnation or otherwise, of any or all of the assets of any Borrower or any of their respective Subsidiaries other than sales or exchanges of Inventory in the ordinary course of business. "Assignment and Assumption Agreement" shall mean an Assignment and ----------------------------------- Assumption Agreement substantially in the form of Exhibit A. --------- "Available Currency" means Dollars and each Optional Currency. ------------------ "Availability" means, as of any date of determination, the Maximum ------------ Revolving Loan Amount less the outstanding principal balance of the Revolving ---- Loan. "Bank Letter of Credit" means each letter of credit issued by a bank --------------------- acceptable to and approved by Agent for the account of U.S. Borrower and supported by a risk participation agreement issued by Agent. "Base Rate" means (a) with respect to Obligations denominated in Dollars, a --------- variable rate of interest per annum equal to the higher of (a) the rate of interest from time to time published by the Board of Governors of the Federal Reserve System as the "Bank Prime Loan" rate in Federal Reserve Statistical --------------- Release H.15(519) entitled "Selected Interest Rates" or any successor 64 publication of the Federal Reserve System reporting the Bank Prime Loan rate or its equivalent, or (b) the Federal Funds Effective Rate. In the event the Board of Governors of the Federal Reserve System ceases to publish a Bank Prime Loan rate or its equivalent, the term "Base Rate" shall mean a variable rate of interest per annum equal to the highest of the "prime rate", "reference rate", "base rate", or other similar rate announced from time to time by any of the three largest banks located in New York City, New York (with the understanding that any such rate may merely be a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer by any such bank); (b) with respect to Obligations denominated in an Optional Currency (other than Euros), the term "Base Rate" shall mean a variable rate of interest per annum equal to the highest of the "prime rate", "reference rate", "base rate", or other similar rate announced from time to time by any of the three largest banks located in the principal financial center of the applicable country in respect of such Optional Currency (e.g. London, England, with respect to Pounds; Paris, France, with respect to Francs, and Amsterdam, the Netherlands, with respect to Guilders; in each case with the understanding that any such rate may merely be a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer by any such bank; and (c) with respect to Obligations denominated in Euros, the term "Base Rate" shall mean such variable rate of interest per annum as may be agreed upon in writing by Agent, Borrowers and Lenders following the Euro Commencement Date. "Base Rate Loans" means Loans bearing interest at rates determined by --------------- reference to the applicable Base Rate. "Base Rate Margin" shall mean (a) as of the Closing Date through July 31, ---------------- 1999 (i) 0% per annum with respect to the Revolving Loan and all other Obligations (other than the Term Loans), (ii) 0% per annum, with respect to Term Loan A, (iii) 0% per annum, with respect to Term Loan B, and (iv) 0% per annum with respect to the Swingline Loan; and (b) thereafter, as of each Adjustment Date, commencing on August 1, 1999, the Base Rate Margin shall be adjusted, if necessary, to the applicable percent per annum set forth in the pricing table below opposite the Fixed Charge Coverage calculated for the applicable Calculation Period. If Borrower Representative shall fail to deliver a Compliance Certificate by the date required pursuant to paragraph (E) of the ------------- Reporting Rider effective as of the 10th Business Day following the date on - --------------- which such Compliance Certificate was due, each applicable Base Rate Margin shall be conclusively presumed to equal the highest applicable Base Rate Margin specified in the pricing table set forth below until the date of delivery of the Compliance Certificate. PRICING TABLE -------------
- ------------------------------------------------------------------------------ Fixed Charge Base Rate Margin Coverage - ------------------------------------------------------------------------------ Term Term Swingline Revolving Loan Loan A Loan B Loan - ------------------------------------------------------------------------------ Equal to or greater than 1.00:1.00 0% 0% 0% 0% - ------------------------------------------------------------------------------ Less than 1.00:1.00, but equal to or greater than .90:1.00 .25% .50% .75% .25% - ------------------------------------------------------------------------------
65 - ------------------------------------------------------------------------------ Fixed Charge Base Rate Margin Coverage - ------------------------------------------------------------------------------ Less than .90:1.00 .50% .75% 1.00% .50% - ------------------------------------------------------------------------------
"Blocked Accounts" means, collectively, the U.S. Blocked Accounts and the ---------------- U.K. Blocked Accounts. "Borrower Representative" means U.S. Borrower in its capacity as Borrower ----------------------- Representative pursuant to subsection 2.15. --------------- "Borrowers' Accountants" means the independent certified public accountants ---------------------- selected by Borrowers and their Subsidiaries and reasonably acceptable to Agent, which selection shall not be modified during the term of this Agreement without Agent's prior written consent. "Borrowing Base" has the meaning assigned to that term in subsection -------------- ---------- 2.1(B)(2). - --------- "Borrowing Base Certificate" means a certificate and schedule duly -------------------------- executed by an officer of Borrower Representative appropriately completed and in substantially the form of Exhibit B. --------- "British Airways Acquisition" means the acquisition by U.K. Borrower of the --------------------------- landing gear repair and overhaul business of British Airways Plc ("British Airways") pursuant to that certain Agreement relating to the Sale and Purchase of part of the Business of British Airways Plc dated as of December 20, 1997 among U.S. Borrower, U.K Borrower and British Airways Plc, which acquisition was consummated on January 23, 1998. "Business Day" means any day excluding Saturday, Sunday and any day which ------------ is a legal holiday under the laws of the States of Illinois, Pennsylvania or California (or, in relation to a payment or rate fixing in or other matter related to an Optional Currency, the principal financial center of the country of such Optional Currency) or is a day on which banking institutions located in any such state (or any such principal financial center) are closed, or for the purposes of LIBOR Loans, the making of Revolving Advances by Funding Agent or other matters relating to Funding Agent, a London Banking Day. "Calculation Period" means, with respect to any determination of the Base ------------------ Rate Margin or the LIBOR Margin, the trailing twelve month period ending on the last day of the most recently completed calendar quarter prior to the applicable Adjustment Date "Capital Expenditures" means all expenditures (including deposits but -------------------- excluding all expenditures for Exchange Inventory and Work in Process and excluding assets purchased pursuant to the British Airways Acquisition) for, or contracts for expenditures (excluding contracts for expenditures under or with respect to Capital Leases, but including cash down payments for assets acquired under Capital Leases) with respect to any fixed assets or improvements, or for replacements, substitutions or additions thereto, which have a useful life of more than one year, including the direct or indirect acquisition of such assets by way of increased product or service charges, offset items or otherwise. 66 "Capital Lease" means any lease of any property (whether real, personal or ------------- mixed) that, in conformity with GAAP, should be accounted for as a capital lease. "Cash Equivalents" means: (a) marketable direct obligations issued or ---------------- unconditionally guaranteed by the United States Government or the United Kingdom Government or issued by any agency of either such government and backed by the full faith and credit of the United States or the United Kingdom, as the case may be, in each case maturing within six months from the date of acquisition thereof; (b) commercial paper maturing no more than six months from the date issued and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation ("S&P") or at least P-1 from Moody's Investors Service, Inc. ("Moody's"); and (c) certificates of deposit or bankers' acceptances maturing within six months from the date of issuance thereof issued by, or overnight reverse repurchase agreements from (i) any commercial bank organized under the laws of the United States of America, or any state thereof or the District of Columbia, having combined capital and surplus of not less than $250,000,000 or (ii) any bank organized under the laws of the United Kingdom having a long term unsecured and unsubordinated debt rating of at least A-1 from S&P or at least P-1 from Moody's, and in any case not subject to setoff rights in favor of any such bank. "Closing Date" means December 22, 1998. ------------ "Closing Date Inventory Appraisal" means that certain Inventory appraisal -------------------------------- dated November 19, 1998 prepared by Sage-Popovich, Inc. "Collateral" means, collectively (a) all of the real or personal property ---------- or interests therein described in subsection 2.7, (b) any Mortgaged Property, -------------- and (c) any real or personal property or interest therein, in which a Lien in favor of Agent or Collateral Agent, for the benefit of Agent and Lenders, is granted or established pursuant to any Foreign Security Document. "Collateral Agent" means NMB-Heller (and any sub-agents thereof appointed ---------------- in accordance with the terms of this Agreement) in its capacity as collateral agent for the Lenders under the Loan Documents and any successor in such capacity appointed pursuant to subsection 9.1(G). ----------------- "Collateral Value" means (a) with respect to any Eligible Account, the ---------------- Dollar Equivalent of the unpaid face amount of such Eligible Account, and (b) with respect to any item of Eligible Exchange Inventory and Work in Process, Eligible Repair Parts and Unserviceable Parts, the Dollar Equivalent of the Orderly Liquidation Value of such Eligible Parts. "Commitment" or "Commitments" means the commitment or commitments of ---------- ----------- Lenders to make Loans as set forth in subsections 2.1(A) and/or 2.1(B) and to -------------------------------- provide Lender Letters of Credit as set forth in subsection 2.1(H). ----------------- "Companies Act" means the Companies Act 1985 as enacted and in effect from ------------- time to time in the United Kingdom. 67 "Compliance Certificate" means a certificate duly executed by the chief ---------------------- executive officer or chief financial officer of Borrower Representative appropriately completed and in substantially the form of Exhibit D. --------- "Customer Contract" with respect to any customer of any Borrower means the ----------------- contract between such Borrower and such customer providing for the provision of landing gear repair and overhaul services by such Borrower for such customer. In the event a Borrower is party to more than one such contract with a given customer, the term "Customer Contract" shall mean all of such contracts with ----------------- such customer, collectively. "Default" means a condition, act or event that, after notice or lapse of ------- time or both, would constitute an Event of Default if that condition, act or event were not cured or removed within any applicable grace or cure period. "Defaulted Amount" means, with respect to any Lender at any time, any ---------------- amount required to be paid by such Lender to Agent, Funding Agent, Collateral Agent or any other Lender hereunder or under any other Loan Document which has not been so paid. "Defaulting Lender" means, at any time, any Lender that owes a Defaulted ----------------- Amount. "Default Rate" has the meaning assigned to that term in subsection 2.2. ------------ -------------- "Dollar" or "$" means lawful currency of the United States of America. ------ - "Dollar Equivalent" means, as of any date of determination with respect ----------------- to any amount denominated in an Optional Currency, the equivalent of such amount in Dollars determined at the rate of exchange equal to the Spot Rate on such date of determination. "EBITDA" means, for any period, without duplication, the total of the ------ following for Borrowers and their Subsidiaries on a consolidated basis, each calculated for such period: (1) net income determined in accordance with GAAP (but determined without deduction of up to $750,000 in expenses incurred by Borrowers in connection with the contemplated move by U.K. Borrower from Heathrow to a new facility in Dawley Park); plus, to the extent included in the ---- calculation of net income, (2) the sum of (a) income and franchise taxes paid or accrued; (b) interest expense, net of interest income, paid or accrued; (c) amortization and depreciation; (d) other non-cash charges (including any occurring on an extraordinary or non recurring basis, but excluding accruals for cash expenses made in the ordinary course of business); and (e) extraordinary or non-recurring "cash" losses; less, to the extent included in the calculation of ---- net income, (3) the sum of (a) the income of any Person (other than wholly-owned Subsidiaries of a Borrower) in which a Borrower or a wholly owned Subsidiary of a Borrower has an ownership interest except to the extent such income is received by such Borrower or such wholly-owned Subsidiary in a cash distribution during such period; (b) gains from sales or other dispositions of assets (other than Inventory in the normal course of business); and (c) extraordinary or non- recurring gains. 68 "ECU" means the ECU, as defined in Council Regulation (EC) No. 3320/94, --- that is from time to time used as the unit of account of the European Communities; changes to the ECU may be made by the European Communities, in which event the ECU will change accordingly. "Eligible Assignee" shall mean (a) a commercial bank, commercial finance ----------------- company or savings bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000 (or $250,000,000 in the case of an assignment of a Revolving Loan Commitment); (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a ---- combined capital and surplus of at least $100,000,000 (or $250,000,000 in the case of an assignment of a Revolving Loan Commitment), provided that such bank -------- is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (c) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including but not limited to, insurance companies, mutual funds and lease financing companies, and (d) a Person that is primarily engaged in the business of lending that is (i) a Subsidiary or Affiliate of a Lender, (ii) a Subsidiary or Affiliate of a Person of which a Lender is a Subsidiary or Affiliate, or (iii) a Person of which a Lender is a Subsidiary or Affiliate; provided, --------- however, that no Affiliate of any Borrower shall be an Eligible Assignee. - ------- "Employee Benefit Plan" means any employee benefit plan within the meaning --------------------- of Section 3(3) of ERISA which (a) is maintained for employees of any Loan Party or any ERISA Affiliate or (b) has at any time within the preceding 6 years been maintained for the employees of any Loan Party or any current or former ERISA Affiliate. "EMU" means Economic and Monetary Union as contemplated in the Treaty on --- European Union. "EMU Legislation" means legislative measures of the European Council for --------------- the introduction of, changeover to or operation of the Euro. "Environmental Claims" means claims, liabilities, investigations, -------------------- litigation, administrative proceedings, judgments or orders relating to Hazardous Materials. "Environmental Laws" means any present or future federal, state, local or ------------------ foreign law, rule, regulation or order relating to pollution, waste, disposal or the protection of human health or safety, plant life or animal life, natural resources or the environment. "Equipment" means all "equipment" (as defined in the UCC), all furniture, --------- furnishings, fixtures, machinery, motor vehicles, trucks, trailers, vessels, aircraft and rolling stock and all parts thereof and all additions and accessions thereto and replacements therefor. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time, and any successor statute and all rules and regulations promulgated thereunder. 69 "ERISA Affiliate", as applied to any Loan Party, means any Person who is a --------------- member of a group which is under common control with any Loan Party, who together with any Loan Party is treated as a single employer within the meaning of Section 414(b) and (c) of the IRC. "Euro" means the single currency of Participating Member States of the ---- European Union. "Euro Commencement Date" means the date of the commencement of the third ---------------------- stage of EMU or on which circumstances arise which (in the opinion of Requisite Lenders) have substantially the same effect and result in substantially the same consequences as commencement of the third stage of EMU as contemplated by the Treaty on European Union. "Euro Unit" means the currency unit of the Euro. --------- "Excess Cash Flow" means, for any period, the greater of (A) zero (0); or ---------------- (B) without duplication, the total of the following for Borrowers and their Subsidiaries on a consolidated basis, each calculated for such period: (1) EBITDA; plus (2) tax refunds actually received; less (3) Capital Expenditures ---- ---- (to the extent actually made in cash and/or due to be made in cash within such period but in no event more than the amount permitted by paragraph (C) of the ------------- Financial Covenants Rider; less (4) income and franchise taxes paid or accrued - ------------------------- ---- excluding any provision for deferred taxes included in the determination of net income; less (5) decreases in deferred income taxes resulting from payments of ---- deferred taxes accrued in prior periods; less (6) cash interest paid or accrued ---- and less (7) scheduled amortization of Indebtedness (excluding mandatory ---- prepayments required under subsection 2.4 actually paid in cash and/or due to be -------------- paid in cash within such period but only, in the case of Indebtedness subordinated to the Obligations (if any), to the extent such payments were permitted under subsection 7.5). -------------- "Exchange Inventory and Work in Process" means repair parts allocated to -------------------------------------- jobs, and components or assembly of a landing gear, flap track or flap carriage for a fixed wing aircraft or helicopter, and shall include core sets received in exchange for overhauled units, core sets purchased, core sets in the process of being repaired and overhauled and completed and tagged serviceable landing gears, flap tracks or flap carriage, or any such items treated as fixed assets according to GAAP. "Existing Indebtedness" means all of the obligations of U.S. Borrower, as --------------------- borrower, and of U.K. Borrower, as guarantor, under and pursuant to that certain Amended and Restated Business Loan Agreement dated as of January 23, 1998 by and among U.S. Borrower and Bank of America National Trust and Savings Association and each of the other "Loan Documents" as therein defined, in each case as in effect as of the Closing Date. "Fair Market Value" means, with respect to any item of Exchange Inventory ----------------- and Work in Process as of any date of determination, the price that a buyer would be willing to pay to purchase such Exchange Inventory and Work in Process from a seller unaffiliated with such buyer on an arms length basis, with neither the buyer nor the seller under any compulsion to effect such transaction, as more specifically determined by the Appraiser as of any such date. "Federal Funds Effective Rate" means, for any day, the weighted average of ---------------------------- the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by 70 Federal funds brokers, as published on the immediately following Business Day by the Board of Governors of the Federal Reserve System as the Federal Funds Rate or Federal Reserve Statistical Release H.15(519) entitled "Selected Interest Rates" or any successor publication of the Federal Reserve System reporting the Federal Funds Effective Rate or its equivalent or, if such rate is not published for any Business Day, the average of the quotations for the day of the requested Loan received by Agent from three Federal funds brokers of recognized standing selected by Agent. "Fiscal Year" means each twelve month period ending on the last day of ----------- December in each year. "Fixed Asset Appraisal" means, collectively, those certain fixed asset --------------------- appraisals dated November 5, 1998 (in the case of U.S. Borrower's fixed assets) and November 13, 1997 (in the case of U.K. Borrower's fixed assets), each prepared by T/A Appraisal, Inc. "Fixed Charge Coverage" means, for any period, Operating Cash Flow divided --------------------- ------- by Fixed Charges. - -- "Fixed Charges" means, for any period, and each calculated for such period ------------- (without duplication) for Borrowers and their Subsidiaries on a consolidated basis, (a) Interest Expense of Borrowers and their Subsidiaries; plus (b)(i) ---- with respect to the period from December 31, 1998 through November 30, 1999, an amount equal to the higher of (x) $2,011,000 and (y) the current maturities of long term Indebtedness for such period as reported on Borrowers' consolidated and consolidating financial statements for such period prepared in accordance with GAAP; and (ii) at all times from and after December 1, 1999, scheduled payments of principal with respect to all Indebtedness of Borrowers and their Subsidiaries (excluding mandatory prepayments required under subsection 2.4 -------------- actually paid in cash and/or due to be paid in cash within such period); plus ---- (c) any provision for (to the extent it is greater than zero) income or franchise taxes included in the determination of net income, excluding any provision for deferred taxes; plus (d) payment of deferred taxes accrued in any ---- prior period; plus (e) Restricted Junior Payments made in cash to the extent ---- permitted under subsection 7.5, other than those made under subsections 7.5(b), -------------- ------------------ 7.5(c) or 7.5(e). - ------ ------ "Foreign Security Documents" means, collectively, that certain Deed of -------------------------- Charge executed and delivered on the Closing Date by U.K. Borrower in favor of Collateral Agent, each of the documents, instruments and agreements executed and delivered with respect thereto or in connection therewith, and any other deeds of charge, Mortgages, security agreements, pledge agreements or other documents, instruments or agreements at any time delivered by any Borrower in order to grant, maintain or perfect a Lien in favor of Collateral Agent, for the benefit of Agent and Lenders, in any Collateral of such Borrower located outside the United States of America. "Francs" means lawful currency of France. ------ "Funding Agent" means NMB-Heller in its capacity as funding Agent for the ------------- Lenders under the Loan Documents and any successor in such capacity appointed pursuant to subsection 9.1(G). ----------------- 71 "Funding Date" means the date of each funding of a Loan or issuance of a ------------ Lender Letter of Credit. "GAAP" means generally accepted accounting principles in the United States ---- of America as set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any federal, ---------------------- state, provincial, territorial, local or other political subdivision or instrumentality thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions (or any combination of such functions) of or pertaining to government. "Guilders" means lawful currency of the Kingdom of the Netherlands. -------- "Hazardous Material" means all or any of the following: (a) substances that ------------------ are defined or listed in, or otherwise classified pursuant to, any Environmental Laws or regulations as "hazardous substances", "hazardous materials", "hazardous wastes", "toxic substances" or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, or toxicity; (b) oil, petroleum or petroleum derived substances, natural gas, natural gas liquids or synthetic gas and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (c) any flammable substances or explosives or any radioactive materials; and (d) asbestos in any form or electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls. "Indebtedness", as applied to any Person, means without duplication: (a) ------------ all indebtedness for borrowed money; (b) obligations under leases which in accordance with GAAP constitute Capital Leases; (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (d) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six months from the date the obligation is incurred or is evidenced by a note or similar written instrument; (e) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non recourse to the credit of that Person; (f) obligations in respect of letters of credit; and (g) any advances under any factoring arrangement. "Intangible Assets" means all intangible assets (determined in conformity ----------------- with GAAP) including, without limitation, goodwill, Intellectual Property, licenses, organizational costs, deferred amounts, covenants not to compete, unearned income and restricted funds. "Intellectual Property" means all present and future designs, patents, --------------------- patent rights and applications therefor, trademarks and registrations or applications therefor, trade names, inventions, copyrights and all applications and registrations therefor, software or computer programs, license rights, trade secrets, methods, processes, know-how, drawings, specifications, descriptions, and all memoranda, notes and records with respect to any research and development, 72 whether now owned or hereafter acquired, all goodwill associated with any of the foregoing, and proceeds of all of the foregoing, including, without limitation, proceeds of insurance policies thereon. "Interest Coverage" means, for any period, Operating Cash Flow divided by ----------------- ---------- Interest Expense. "Interest Determination Date" for a LIBOR Loan will be the second London --------------------------- Banking Day preceding the beginning of the next Interest Period elected by Borrower Representative. "Interest Expense" means, without duplication, for any period, the ---------------- following, for Borrowers and their Subsidiaries on a consolidated basis, each calculated for such period: interest expenses deducted in the determination of net income (excluding (i) the amortization of fees and costs with respect to the transactions contemplated by this Agreement which have been capitalized as transaction costs in accordance with the provisions of subsection 11.2; and --------------- (ii) interest paid in kind). "Interest Period" means with respect to any LIBOR Loan (a) at any time --------------- prior to the Primary Syndication Completion Date, a two week period, and (b) at any time thereafter, either a one, two, three or six month period as elected by Borrower Representative to be applicable to such Loan in a Notice of Borrowing or in a Notice of Conversion/Continuation, provided that any such -------- election shall be subject to the following: (1) the initial Interest Period for any LIBOR Loan shall commence on the Funding Date of such Loan; (2) in the case of successive Interest Periods, each successive Interest Period shall commence on the day on which the immediately preceding Interest Period expires; (3) if an Interest Period expiration date is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that -------- if any Interest Period expiration date is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the immediately preceding Business Day; (4) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to part (5) below (and other than in the case of a two week Interest Period), end on the last Business Day of a calendar month; (5) no Interest Period shall extend beyond the Termination Date; (6) no Interest Period may extend beyond a scheduled principal payment date unless the sum of (a) the aggregate principal amount of Loans that are Base Rate Loans or that have Interest Periods expiring on or before such date and (b) Availability as of such date equals or exceeds the principal amount required to be paid on the Loans on such date; and 73 (7) there shall be no more than 4 Interest Periods relating to LIBOR Loans outstanding at any time. "Inventory" means all "inventory" (as defined in the UCC), including, --------- without limitation, finished goods, raw materials, work in process and other materials and supplies used or consumed in a Person's business, and goods which are returned or repossessed, and specifically includes all Exchange Inventory and Work in Process, Repair Parts and Unserviceable Parts. "IRC" means the Internal Revenue Code of 1986, as amended from time to --- time, and any successor statute and all rules and regulations promulgated thereunder. "Lender Letter of Credit" has the meaning assigned to that term in ----------------------- subsection 2.1(H). - ----------------- "Letter of Credit Liability" means, all reimbursement and other -------------------------- liabilities of Borrowers or any of their Subsidiaries with respect to each Lender Letter of Credit, whether contingent or otherwise, including: (a) the amount available to be drawn or which may become available to be drawn; (b) all amounts which have been paid or made available by Agent or any Lender issuing a Lender Letter of Credit or any bank issuing a Bank Letter of Credit to the extent not reimbursed; and (c) all unpaid interest, fees and expenses related thereto. "Letter of Credit Reserve" means, at any time, an amount equal to (a) the ------------------------ aggregate amount of Letter of Credit Liability with respect to all Lender Letters of Credit outstanding at such time plus, without duplication, (b) the ---- aggregate amount theretofore paid by Agent or any Lender under Lender Letters of Credit and not debited to Borrowers' Loan account pursuant to subsection ---------- 2.1(H)(2) or otherwise reimbursed by Borrowers. - --------- "Liabilities" shall have the meaning given that term in accordance with ----------- GAAP and shall include Indebtedness. "LIBOR" means, for each Interest Period, a rate equal to the rate for ----- deposits in the relevant Available Currency for the relevant Interest Period, commencing on the second London Banking Day immediately following that Interest Determination Date that appears on the Telerate Page 3750 (in the case of Dollars, or such other applicable Telerate Page, in the case of any Optional Currency) as of 11:00 a.m., London time, on that Interest Determination Date ("LIBOR Telerate"); provided that if no rate appears on the Telerate Page 3750 - ---------------- -------- (or other applicable Telerate Page), LIBOR in respect of that Interest Determination Date will be determined on the basis of the rates at which deposits in the relevant Available Currency for the relevant Interest Period are offered at approximately 11:00 a.m. London time, on that Interest Determination Date by four major banks in the London interbank market selected by Agent ("Reference Banks") to prime banks in the London interbank market commencing on - ----------------- the second London Banking Day immediately following that Interest Determination Date and in a principal amount equal to an amount of not less than $1,000,000 (or, in the case of any Optional Currency, such other minimum amount as may be agreed upon by Agent and Borrower Representative at the time the applicable Notice of Borrowing or Notice of Conversion/Continuation is delivered, which shall be calculated so as to approximate, as nearly as practicable, the minimum amount applicable to LIBOR Loans denominated in Dollars) that is representative for a single transaction in such market at such time. Agent will request the principal London office of each of the Reference Banks to provide a 74 quotation of its rate. If at least two such quotations are provided, LIBOR in respect of that Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, LIBOR in respect of that Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m. New York City time, on that Interest Determination Date by three major banks in the City of New York selected by Agent for loans in the relevant Available Currency to leading European banks for the relevant Interest Period commencing on the second London Banking Day immediately following that Interest Determination Date and in a principal amount equal to an amount of not less than $1,000,000 (or such other amount as may be agreed upon as aforesaid in the case of an Optional Currency) that is representative for a single transaction in such market at such time; provided, however, that if the banks -------- ------- selected as aforesaid by Agent are not quoting as mentioned in this sentence, LIBOR with respect to such Interest Determination Date will be the rate of LIBOR in effect on such date. "Telerate Page 3750" means the display designated as ------------------ page "3750" on the Telerate Services (or such other page as may replace the 3750 page on that service or such other service or services as may be nominated by the British Bankers' Association for the purpose of displaying London interbank offered rates for Dollar deposits), and "Telerate Page" in the context of an ------------- Optional Currency means the display, designated as a page, on the Telerate Services with respect to such Optional Currency (including any replacements therefor on that service or another service nominated by the British Bankers' Association for the purpose of displaying London interbank offered rates for deposits in the applicable Optional Currency). The rate determined pursuant to the foregoing shall be divided by a number ---------- equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day which is two (2) Business Days prior to the beginning of such Interest Period (including, without limitation, basic, supplemental, marginal, special emergency or other reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such ------------------------ Board) which are required to be maintained by a member bank of the Federal Reserve System (such rate to be adjusted to the nearest (1/16 of 1%) or, if there is not a nearest (1/16 of 1%), to the next higher (1/16 of 1%). In the case of any Obligations denominated in an Optional Currency, the rate determined pursuant to the foregoing shall be increased (and adjusted to the nearest 1/16 of 1% as set forth above) to reflect any reserve requirements or mandatory costs (including, without limitation, any cost attributable to such Obligations resulting from the imposition from time to time under or pursuant to the Bank of England Act 1998 and/or by the Bank of England and/or the Financial Services Authority (the "FSA") (or other United Kingdom Governmental Authorities) of a requirement to place non-interest bearing deposits or Special Deposits (whether interest bearing or not) with the Bank of England and/or pay fees to the FSA calculated by reference to liabilities used to fund such Obligations which may be required to be maintained, or which may be payable, by Lenders in respect of LIBOR Loans denominated in such Optional Currency in accordance with such Lender's customary practices. "LIBOR Loans" means at any time that portion of the Loans bearing interest ----------- at rates determined by reference to the applicable LIBOR. 75 "LIBOR Margin" shall mean (a) as of the Closing Date through July 31, 1999 ------------ (i) 2.00% per annum with respect to the Revolving Loan and all other Obligations (other than the Term Loans), (ii) 2.25% per annum, with respect to Term Loan A, and (iii) 2.50% per annum, with respect to Term Loan B; and (b) thereafter, as of each Adjustment Date, commencing on August 1, 1999, the LIBOR Margin shall be adjusted, if necessary, to the applicable percent per annum set forth in the pricing table below opposite the Fixed Charge Coverage calculated for the applicable Calculation Period. If Borrower Representative shall fail to deliver a Compliance Certificate by the date required pursuant to paragraph (E) ------------- of the Reporting Rider, effective as of the 10th Business Day following the date --------------- on which such Compliance Certificate was due, each applicable LIBOR Margin shall be conclusively presumed to equal the highest applicable LIBOR Margin specified in the pricing table set forth below until the date of delivery of the Compliance Certificate. PRICING TABLE -------------
- ------------------------------------------------------------------------------- Fixed Charge LIBOR Margin Coverage - ------------------------------------------------------------------------------- Revolving Term Loan A Term Loan B Loan - ------------------------------------------------------------------------------- Equal to or greater than 1.90:1.00 1.75% 2.00% 2.25% - ------------------------------------------------------------------------------- Less than 1.90:1.00, but equal to or greater than 1.00:1.00 2.00% 2.25% 2.50% - ------------------------------------------------------------------------------- Less than 1.00:1.00, but equal to or greater than .90:1.00 2.25% 2.50% 2.75% - ------------------------------------------------------------------------------- Less than .90:1.00 2.50% 2.75% 3.00% - -------------------------------------------------------------------------------
"Lien" means any lien, mortgage, pledge, security interest, charge or ---- encumbrance of any kind, whether voluntary or involuntary, (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Loan" or "Loans" means an advance or advances under the Term Loan ---- ----- Commitment or the Revolving Loan Commitment or the Swingline Loan. For purposes of determining the amount of any Loan (or any component thereof) which is denominated in an Optional Currency, such amount shall, as of any date of determination, equal the Dollar Equivalent of such amount as of such date. "Loan Documents" means this Agreement, each of the Foreign Security -------------- Documents and all other documents, instruments and agreements executed by or on behalf of any Borrower, any Borrower's Subsidiaries or any other Loan Party and delivered concurrently herewith or at any time hereafter to or for Agent, Funding Agent, Collateral Agent or any Lender in connection with the Loans, any Lender Letter of Credit, and any other transaction contemplated by this Agreement, all as amended, restated, supplemented or modified from time to time. "Loan Party" means each of each Borrower, each Borrower's Subsidiaries ---------- and any other Person (other than Agent, Funding Agent, Collateral Agent or any Lender or any U.S. Collecting Bank or U.K. Collecting Bank) which is or becomes a party to any Loan Document. 76 "Loan Year" means each period of 12 consecutive months commencing on the --------- Closing Date and on each anniversary thereof. "London Banking Day" means any day on which dealings in deposits in U.S. ------------------ dollars are transacted in the London Interbank market. "Material Adverse Effect" means a material adverse effect upon (a) the ----------------------- business, operations, prospects, properties, assets or condition (financial or otherwise) of any Loan Party on an individual basis or the Loan Parties taken as a whole or (b) the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party or of Agent, Funding Agent, Collateral Agent or any Lender to enforce or collect any of the Obligations. "Material Customer" means, as of any date of determination with respect ----------------- to any Borrower, a customer of such Borrower which accounted for ten percent (10%) or more of Borrowers' consolidated gross revenues as of the last day of the most recently completed fiscal quarter for the trailing twelve month period then ended. "Maximum Revolving Loan Amount" has the meaning assigned to that term in ----------------------------- subsection 2.1(B)(1). - -------------------- "Maximum Swingline Loan Amount" means at any time the lesser of (i) ----------------------------- $5,000,000, (ii) the Revolving Loan Commitments of all Lenders at such time or (iii) that amount which is the Borrowing Base at such time less the sum of (x) ---- the Revolving Loan at such time, and (y) the Letter of Credit Reserve at such time. "Mortgage" means each of the mortgages, deeds of trust, leasehold -------- mortgages, leasehold deeds of trust, collateral assignments of leases or other real estate security documents delivered by any Loan Party to Agent or Collateral Agent, as applicable, on behalf of Lenders, with respect to any Mortgaged Property, all in form and substance satisfactory to Agent. "Mortgaged Property" means all real property owned or leased by any ------------------ Borrower or any of their respective Subsidiaries in which after the Closing Date Agent requires a Mortgage to secure the Obligations. "National Currency Unit" means the unit of currency (other than a Euro ---------------------- unit) of a Participating Member State. "Net Book Value" means, as of any date of determination, the book value of -------------- Borrowers' Exchange Inventory and Work in Process (referred to as "landing gear exchange assets" on Borrowers' books and records) as reflected on Borrowers' books and records as of such date, less accumulated depreciation thereon (based ---- on the straight line method of depreciation), all as determined in accordance with GAAP. "Net Worth" means, as of any date, the sum of the capital stock and --------- additional paid-in capital plus retained earnings (or less accumulated deficit) ---- calculated in conformity with GAAP. "Notes" means the Revolving Notes, the Term Notes and the Swingline Note. ----- 77 "Notice of Borrowing" means a Notice duly executed by an authorized ------------------- representative of Borrower Representative appropriately completed and in the form of Exhibit C. --------- "Obligations" means all obligations, liabilities and indebtedness of every ----------- nature of each Loan Party from time to time owed to Agent, Funding Agent, Collateral Agent or any Lender under the Loan Documents (whether incurred before or after the Termination Date) including the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable including, without limitation, all interest, fees, cost and expenses accrued or incurred after the filing of any petition under any bankruptcy or insolvency law. For purposes of determining the amount of the Obligations (or any component thereof) in respect of any Obligations which are denominated in an Optional Currency, such amount shall, as of any date of determination, equal the Dollar Equivalent of such amount as of such date. "Operating Cash Flow" means, for any period, (a) EBITDA less (b) Unfinanced ------------------- ---- Capital Expenditures. "Optional Currency" means any of Pounds, Guilders or Francs or, from and ----------------- after the Euro Commencement Date, the Euro. "Orderly Liquidation Value" means, with respect to any Collateral, the ------------------------- proceeds (net of expenses incurred to inventory the Collateral and process it for sale and to complete work in process to a serviceable/overhauled unit) from a forced sale of such Collateral, held under a professionally managed and negotiated conditions, after an assumed business failure. The Orderly Liquidation Value of Borrowers' Inventory as of the Closing Date shall be as set forth in the Closing Date Inventory Appraisal, and shall thereafter be determined based on the then most recent Periodic Inventory Appraisal or Semi- Annual Inventory Appraisal delivered pursuant to paragraph (I)(2) of the ---------------- Reporting Rider. - --------------- "Participating Member State" means, at any time, each state participating -------------------------- in EMU at such time. "Periodic Inventory Appraisal" is defined in paragraph (I)(2) of the ---------------------------- ---------------- Reporting Rider. - --------------- "Permitted Encumbrances" means the following types of Liens: (a) Liens ---------------------- (other than Liens relating to Environmental Claims or ERISA) for taxes, assessments or other governmental charges not yet due and payable; (b) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens imposed by law, which are incurred in the ordinary course of business for sums not more than 30 days delinquent; (c) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of- money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (d) easements, rights-of-way, restrictions, and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of any Loan Party or any of its Subsidiaries; (e) Liens for purchase money 78 obligations, provided that (i) the purchase of the asset subject to any such -------- Lien is permitted under subsection 6.5, (ii) the Indebtedness secured by any -------------- such Lien is permitted under subsection 7.1, and (iii) such Lien encumbers only -------------- the asset so purchased; (f) Liens in favor of Agent or Collateral Agent, as the case may be, on behalf of Lenders, and (g) Liens set forth on Schedule 7.3(B). --------------- "Person" means and includes natural persons, corporations, limited ------ partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Pounds" means the lawful currency of the United Kingdom of Great Britain ------ and Northern Ireland.. "Pro Rata Share" means (a) with respect to matters relating to a particular -------------- Commitment of a Lender, the percentage obtained by dividing (i) such Commitment of that Lender by (ii) all such Commitments of all Lenders and (b) with respect to all other matters, the percentage obtained by dividing (i) the Total Loan Commitment of a Lender by (ii) the Total Loan Commitments of all Lenders, in either case as such percentage may be adjusted by assignments permitted pursuant to subsection 9.5; provided, however, if any Commitment is terminated pursuant -------------- -------- ------- to the terms hereof, then "Pro Rata Share" means the percentage obtained by dividing (x) the aggregate amount of such Lender's outstanding Loans related to such Commitment by (y) the aggregate amount of all outstanding Loans related to such Commitment. "Projections" means Borrowers' forecasted consolidated and, in the case of ----------- month-by-month projections for the forthcoming Fiscal Year delivered pursuant to paragraph (L) of the Reporting Rider, consolidating: (a) balance sheets; (b) - ------------- --------------- profit and loss statements; (c) cash flow statements; and (d) capitalization statements, all prepared on a division by division and Subsidiary by Subsidiary basis consistent with Borrowers' historical financial statements and based upon good faith estimates and assumptions by Borrowers believed to be reasonable at the time made, together with appropriate supporting details and a statement of underlying assumptions. "Redirection Notice" has the meaning assigned to that term in subsection ------------------ ---------- 4.26(B). - ------- "Repair Parts" means parts which are inventoried and used in the process of ------------ repair and overhaul and which are not allocated to jobs, and shall includes parts commonly referred to as "rotables" (e.g., parts for which repair or overhaul criteria is defined and which can be returned to service after such defined criteria is met but which do not constitute Exchange Inventory and Work in Process), and parts commonly referred to as "expendables" (e.g., parts which are not generally re-used, including gaskets, fasteners, packing and other parts for which there is no general process to return to service or re-certify for use). "Requisite Lenders" means Lenders (other than a Defaulting Lender), holding ----------------- or being responsible for 66.67% or more of the sum of (a) outstanding Loans, (b) outstanding Letter of Credit Liability and (c) unutilized Commitments of all Lenders which are not Defaulting Lenders. 79 "Restricted Junior Payment" means: (a) any dividend or other distribution, ------------------------- direct or indirect, on account of any shares of any class of stock of any Loan Party now or hereafter outstanding, except a dividend payable solely with shares of the class of stock on which such dividend is declared; (b) any payment or prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, retirement, defeasance, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any Subordinated Debt or any shares of any class of stock of any Loan Party now or hereafter outstanding, or the issuance of a notice of an intention to do any of the foregoing; (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of any Loan Party now or hereafter outstanding; and (d) any payment by any Loan Party of any management, consulting or similar fees to any Affiliate, whether pursuant to a management agreement or otherwise. "Revolving Advance" means each advance made by Lender(s) (or by Agent or ----------------- Funding Agent on behalf of Lenders) pursuant to subsection 2.1(B). ----------------- "Revolving Loan" means the outstanding balance of all Revolving Advances -------------- andd any amounts added to the principal balance of the Revolving Loan pursuant to this Agreement. "Revolving Loan Commitment" means (a) as to any Lender, the commitment of ------------------------- such Lender to make Revolving Advances pursuant to subsection 2.1(B), to ----------------- purchase participations in Lender Letters of Credit pursuant to subsection ---------- 2.1(H) and, without duplication, to purchase participations in the Swingline - ------ Loan pursuant to subsection 2.1(D) in the aggregate amount set forth on the ----------------- signature page of this Agreement opposite such Lender's signature or in the most recent Assignment and Assumption Agreement, if any, executed by such Lender and (b) as to all Lenders, the aggregate commitment of all Lenders to make Revolving Advances and to purchase participations in Lender Letters of Credit and Swingline Loans. "Revolving Note" means each promissory note of Borrowers in form and -------------- substance reasonably acceptable to Agent, issued to each Lender to evidence the Revolving Loan Commitment of such Lender. "Scheduled Installment" has the meaning assigned to that term in subsection --------------------- ---------- 2.1(A). - ------ "Semi-Annual Appraisal" is defined in paragraph (I)(2) of the Reporting --------------------- ---------------- --------- Rider. - ----- "Spot Rate" means, as of any date of determination with respect to the --------- conversion of an amount in one currency (the "Original Currency") to another ----------------- currency (the "Other Currency"), the rate of exchange quoted by a major bank -------------- acceptable to Agent located in any of New York, New York, Chicago, Illinois or London, England at 11:00 a.m. (New York, Chicago or London time, as applicable) on such date of determination to prime banks in such city for the spot purchase in the foreign exchange market of such city of such amount of the Original Currency with such Other Currency. "Subordinated Debt" means all Indebtedness owing by U.S. Borrower to ----------------- Unique. 80 "Subordination Agreement" means that certain Subordination Agreement dated ----------------------- as of the Closing Date among Borrowers, Agent, Unique and Melanie Bastian. "Subsidiary" means, with respect to any Person, any corporation, ---------- association or other business entity of which more than 50% of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other subsidiaries of that Person or a combination thereof. "Swingline Advance" means each advance made by Swingline Lender pursuant to ----------------- subsection 2.1(D). - ----------------- "Swingline Lender" means Heller, or if Heller shall resign as Swingline ---------------- Lender, another Lender selected by Agent and reasonably acceptable to U.S. Borrower. "Swingline Loan" means the outstanding balance of all Swingline Advances -------------- and any amounts added to the principal balance of the Swingline Loan pursuant to this Agreement. "Swingline Note" means the promissory note of U.S. Borrower in form and -------------- substance acceptable to Agent, issued to evidence the Swingline Loan. "Tangible Net Worth" of any Person means as of any date, an amount equal ------------------ to: (a) Net Worth of such Person; less (b) Intangible Assets of such Person; ---- less (c) prepaid expenses of such Person; less (d) all obligations owed to such - ---- ---- Person by any Affiliate of such Person or any of its Subsidiaries; and less (e) ---- all loans by such Person to its officers, stockholders, Subsidiaries or employees (determined in each case in conformity with GAAP). "Term Loans" mean the unpaid balance of the term loans made pursuant to ---------- subsection 2.1(A). - ----------------- "Term Loan A" means the advances made pursuant to subsection 2.1(A)(1). ----------- -------------------- "Term Loan B" means the advances made pursuant to subsection 2.1(A)(2). ----------- -------------------- "Term Loan A Commitment" means (a) as to any Lender, the commitment of such ---------------------- Lender to make its Pro Rata share of Term Loan A in the maximum aggregate amount set forth on the signature page of this Agreement opposite such Lender's signature or in the most recent Assignment and Assumption Agreements, if any, executed by such Lender and (b) as to all Lenders, the aggregate commitment of all Lenders to make Term Loan A. "Term Loan B Commitment" means (a) as to any Lender, the commitment of such ---------------------- Lender to make its Pro Rata share of Term Loan B in the maximum aggregate amount set forth on the signature page of this Agreement opposite such Lender's signature or in the most recent Assignment and Assumption Agreements, if any, executed by such Lender and (b) as to all Lenders, the aggregate commitment of all Lenders to make Term Loan B. 81 " Term Loan Commitments" means (a) as to any Lender, a collective reference --------------------- to such Lender's Term Loan A Commitment and Term Loan B Commitment, and (b) as to all Lenders, the aggregate Term Loan A Commitments and Term Loan B Commitments of all Lenders. "Term Note" or "Term Notes" means each promissory note of Borrowers in form --------- ---------- and substance acceptable to Agent, issued to each Lender to evidence the Term Loan Commitment of each such Lender. "Termination Date" means the date set forth in subsection 2.5. ---------------- -------------- "Total Loan Commitment" means as to any Lender the aggregate commitments of --------------------- such Lender with respect to its Revolving Loan Commitment and Term Loan Commitment. "Treaty on European Union" means the Treaty of Rome of 25 March 1957, as ------------------------ amended by the Single European Act 1986 and the Maastricht Treaty (which was signed at Maastricht on 7 February 1992 and came into force on 1 November 1993), as amended from time to time. "UCC" means the Uniform Commercial Code as in effect on the date hereof --- in the State of Illinois, as amended from time to time, and any successor statute. "Unfinanced Capital Expenditures" shall mean Capital Expenditures which are ------------------------------- not financed with the proceeds of Indebtedness. "Unique" means Unique Investment Corporation, a California corporation. ------ "Unique Management Agreement" means that certain Management Services --------------------------- Agreement dated November 14, 1997 between U.S. Borrower and Unique. "Unserviceable Parts" means as of any date of determination, Inventory ------------------- consisting of parts which are repairable in accordance with the then-prevailing customs and standards of Borrowers' industry or in accordance with the regulatory requirements of any applicable Government Authority but which in the exercise of reasonable business judgment Borrowers have elected not to repair at such time. 11.2 Accounting Terms. For purposes of this Agreement, all accounting ---------------- terms not otherwise defined herein shall have the meanings assigned to such terms in conformity with GAAP. Financial statements and other information furnished to Agent, Funding Agent, Collateral Agent or any Lender pursuant to subsection 5.1 and the Reporting Rider shall be prepared in accordance with GAAP - -------------- --------------- (as in effect at the time of such preparation) on a consistent basis. In the event any Accounting Changes (as defined below) shall occur and such changes affect financial covenants, standards or terms in this Agreement, then Borrowers and Lenders agree to enter into negotiations in order to amend such provisions of this Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating the financial condition of Borrowers shall be the same after such Accounting Changes as if such Accounting Changes had not been made, and until such time as such an amendment shall have been executed and delivered by Borrowers and Requisite Lenders, (A) all financial covenants, standards and terms in this Agreement shall be calculated and/or construed as if such Accounting Changes had not 82 been made, and (B) Borrowers shall prepare footnotes to each Compliance Certificate and the financial statements required to be delivered hereunder that show the differences between the financial statements delivered (which reflect such Accounting Changes) and the basis for calculating financial covenant compliance (without reflecting such Accounting Changes). "Accounting Changes" ------------------ means: (a) changes in accounting principles required by GAAP and implemented by any Borrower; (b) changes in accounting principles recommended by Borrowers' Accountants; and (c) changes in carrying value of any Borrower's or any of their Subsidiaries' assets, liabilities or equity accounts resulting from the application of purchase accounting principles (A.P.B. 16 and/or 17 and EITF 88- 16 and FASB 109) to the British Airways Acquisition. All such adjustments resulting from expenditures made subsequent to the Closing Date (including, but not limited to, capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made and deducted as part of the calculation of EBITDA in such period. 11.3 Other Definitional Provisions. References to "Sections", ----------------------------- -------- "subsections", "Riders", "Exhibits" and "Schedules" shall be to Sections, ----------- ------ -------- --------- subsections, Riders, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection ---------- 11.1 may, unless the context otherwise requires, be used in the singular or the - ---- plural depending on the reference. In this Agreement, words importing any gender include the other genders; the words "including," "includes" and --------- -------- "include" shall be deemed to be followed by the words "without limitation"; ------- ------------------ references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Loan Document; references to Persons include their respective permitted successors and assigns or, in the case of Persons which are Governmental Authorities, Persons succeeding to the relevant functions of such Governmental Authorities; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations and shall further include, in the case of any references herein or in any other Loan Document to statutes or regulations of any United States Governmental Authority, any similar or equivalent statutes or regulations of any other applicable Governmental Authority to the extent similar or equivalent statutes or regulation exist in the applicable jurisdiction. 11.4 Dollar Equivalents. The parties hereto acknowledge and agree ------------------ that various Liabilities of Borrower may be denominated in any of the Available Currencies, and hereby agree that, whenever in this Agreement or the other Loan Documents Borrowers' compliance with any covenant, representation or warranty or similar provision must be determined by reference to a minimum or maximum permitted Dollar amount of any Liabilities, such compliance shall, as of any date of determination, be determined on the basis of the Dollar Equivalent amount of the applicable Liabilities as of such date. 11.5 Change of Currency. (A) The provisions of this subsection 11.5 ------------------ --------------- shall come into effect on the Euro Commencement Date provided that, if and to ------------- the extent that any such provision relates to any jurisdiction (or the currency of such jurisdiction) which shall not be a Participating Member State on the Euro Commencement Date, such provision shall come into effect in relation to such jurisdiction (and the currency of such jurisdiction) on and from the date on which such jurisdiction becomes a Participating Member State. 83 (B) Redenomination and Alternate Currencies. Each obligation --------------------------------------- under the Loan Documents which has been denominated in a National Currency Unit shall be redenominated into the Euro unit in accordance with EMU legislation provided that, if and to the extent that any EMU Legislation -------- provides that an amount denominated either in the Euro or in the National Currency Unit of a given Participating Member State can be paid by the debtor either in the Euro unit or in that National Currency Unit, U.K. Borrower shall be entitled to pay or repay any such amount either in the Euro unit or in such National Currency Unit. (C) Advances. Any Advance denominated in Euros shall be made -------- in the Euro unit. (D) Basis of Accrual. If, in relation to the currency of any ---------------- Participating Member State, the basis of accrual of interest or any other amounts expressed in the Loan Documents in respect of that currency shall be inconsistent with any convention or practice in the London Interbank Market for the basis of accrual of interest or any other amounts in respect of the Euro, such expressed basis shall be replaced by such convention or practice. (E) Rounding and Other Consequential Changes. Without ---------------------------------------- prejudice and in addition to any method of conversion or rounding prescribed by any EMU Legislation and without prejudice to the respective liabilities for the obligations of Borrowers to Agent, Funding Agent, Collateral Agent and Lenders and the obligations of Agent, Funding Agent, Collateral Agent and Lenders to Borrowers under or pursuant to this Agreement: (a) each reference in the Loan Documents to an amount in a National Currency Unit to be paid to or by Agent, Funding Agent, Collateral Agent or any Lender shall be replaced by a reference to such reasonably comparable and convenient amount in the Euro unit as the Agent may from time to time specify; and (b) save as expressly provided in this subsection 11.5, each --------------- provision of this Agreement shall be subject to such changes of construction as Agent may from time to time specify to be necessary or appropriate to reflect the introduction of or changeover to the Euro in Participating Member States. (F) Euro Increased Costs. Each Borrower shall, from time to time on -------------------- demand of the Agent, pay to the Agent for the account of Agent or any Lender the amount of any cost or increased cost incurred by, or of any reduction in any amount payable to or in the effective return on its capital to, or of interest or other return forgone by, a Lender or any holding company of such Lender as a result of the introduction of, changeover to or operation of the Euro including, without limitation, compliance with any reserve requirement of the European Central Bank in any Participating Member State. 84 Witness the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. HAWKER PACIFIC AEROSPACE, as a Borrower and as Borrower Representative By: /s/ Brian Aune -------------------------------------- Title: VP & CFO ----------------------------------- FEIN: 05- 3528840 ------------------------------------ HAWKER PACIFIC AEROSPACE LIMITED, as a Borrower By: /s/ Brian Aune -------------------------------------- Title: Director ----------------------------------- Revolving Loan Commitment: HELLER FINANCIAL, INC., as Agent and $55,000,000 as a Lender Pro Rata Share: 100% By: /s/ Terry A. Rothe -------------------------------------- Title: SVP ----------------------------------- Term Loan A Commitment: $4,280,000 Pro Rata Share: 100% Term Loan B Commitment: $7,000,000 Pro Rata Share: 100% NMB-HELLER LIMITED, in its capacity as Funding Agent and Collateral Agent By: /s/ John Oslow -------------------------------------- Title: Director of Underwriting ----------------------------------- 85 EXHIBITS A Assignment and Assumption Agreement B Borrowing Base Certificate C Notice of Borrowing D Compliance Certificate E [Reserved] F Reconciliation Report G Notice of Conversion/Continuation H Excess Cash Flow Certificate A-1 SCHEDULES 3.1(A) List of Closing Documents 4.1(B) Capitalization of Loan Parties 4.6 Business and Trade Names (Present and Past Five Years); Location of Principal Place of Business, Books and Records and Collateral 4.8 Pending Litigation 4.12 Intellectual Property 4.19 Bank Accounts 4.20 Employee Matters 5.10 Certifications, Licenses and Permits 7.1 Indebtedness 7.3(b) Other Liens 8.1(S) Certain Shareholders 2 RIDERS A. Conditions Rider B. Reporting Rider C. Financial Covenants Rider A-3 CONDITIONS RIDER This Conditions Rider is attached to and made a part of that certain Loan and Security Agreement dated as of December 22, 1998 and entered into among Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as Borrowers, Agent, Funding Agent, Collateral Agent and Lenders. (A) Closing Deliveries. Agent shall have received, in form and ------------------ substance satisfactory to Agent, all documents, instruments and information identified on Schedule 3.1(A) and all other agreements, notes, certificates, --------------- orders, authorizations, financing statements, mortgages and other documents which Agent may at any time reasonably request. (B) Security Interests. Agent and Collateral Agent shall have ------------------ received satisfactory evidence that all security interests and liens granted to Agent or Collateral Agent for the benefit of Lenders pursuant to this Agreement or the other Loan Documents have been duly perfected and constitute first priority liens on the Collateral, subject only to Permitted Encumbrances. (C) Closing Date Availability. After giving effect to the ------------------------- consummation of the transactions contemplated hereunder on the Closing Date and the payment by Borrowers of all costs, fees and expenses relating thereto, Borrowers shall have Availability (determined on a pro forma basis, with Borrowers having no accounts payables which are more than 60 days past due, and expenses and liabilities being paid in the ordinary course of business and without acceleration of sales) of least $7,000,000. (D) Representations and Warranties. The representations and ------------------------------ warranties contained herein and in the Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except for any representation or warranty limited by its terms to a specific date and taking into account any amendments to the Schedules or Exhibits as a result of any disclosures made by Borrowers to Agent after the Closing Date and approved by Agent. (E) Fees. With respect to Loans or Lender Letters of Credit to be ---- made or issued on the Closing Date, Borrowers shall have paid all fees due to Agent, Funding Agent or any Lender and payable on the Closing Date. (F) No Default. No event shall have occurred and be continuing or ---------- would result from funding a Loan or issuing a Lender Letter of Credit requested by any Borrower that would constitute an Event of Default or a Default. (G) Performance of Agreements. Each Loan Party shall have performed ------------------------- in all material respects all agreements and satisfied all conditions which any Loan Document provides shall be performed by it on or before that Funding Date. A-4 (H) No Prohibition. No order, judgment or decree of any court, -------------- arbitrator or Governmental Authority shall purport to enjoin or restrain Agent, Funding Agent or any Lender from making any Loans or issuing any Lender Letters of Credit. (I) No Litigation. There shall not be pending or, to the knowledge of ------------- any Borrower, threatened, any action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration by, against or affecting any Loan Party or any of its Subsidiaries or any property of any Loan Party or any of its Subsidiaries that has not been disclosed to Agent by Borrowers in writing, and there shall have occurred no development in any such action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration that, in the opinion of Agent, would reasonably be expected to have a Material Adverse Effect. A-5 REPORTING RIDER This Reporting Rider is attached and made a part of that certain Loan and Security Agreement, dated as of December 22, 1998 and entered into among Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as Borrowers, Agent, Funding Agent, Collateral Agent and Lenders. (A) Monthly Financials. As soon as available and in any event within ------------------ 30 days after the end of each month, Borrower Representative will deliver (1) the consolidated and consolidating balance sheet of Borrowers and their Subsidiaries as at the end of such month and the related consolidated and consolidating statements of income, stockholders' equity and cash flow for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, and (2) a schedule of the outstanding Indebtedness for borrowed money of Borrowers and their Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan. (B) SEC Filings and Press Releases. Promptly upon their becoming ------------------------------ available, U.S. Borrower will deliver copies of (1) all financial statements, reports, notices and proxy statements sent or made available by U.S. Borrower or any of its Subsidiaries to its security holders, (2) all regular and periodic reports and all registration statements and prospectuses, if any, filed by U.S. Borrower or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (3) all press releases and other statements made available by Borrower or any of its Subsidiaries to the public concerning developments in the business of any such Person. (C) Year-End Financials. As soon as available and in any event within ------------------- 90 days after the end of each Fiscal Year, Borrower Representative will deliver: (1) the consolidated balance sheet of Borrowers and their Subsidiaries as at the end of such year and the related consolidated statements of income, stockholders' equity and cash flow for such Fiscal Year; (2) a schedule of the outstanding Indebtedness of Borrowers and their Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan; and (3) a report with respect to the financial statements from Borrowers' Accountants, which report shall be unqualified as to going concern and scope of audit of Borrowers and their Subsidiaries and shall state that (a) such consolidated financial statements present fairly the consolidated financial position of Borrowers and their Subsidiaries as at the dates indicated and the results of their operations and cash flow for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and (b) that the examination by Borrowers' Accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; and (4) copies of the consolidating financial statements of Borrowers and their Subsidiaries, including (a) consolidating balance sheets of Borrowers and their Subsidiaries as at the end of such Fiscal Year showing intercompany eliminations and (b) related consolidating statements of income of Borrowers and their Subsidiaries showing intercompany eliminations. A-6 (D) Accountants' Certification and Reports. Together with each -------------------------------------- delivery of consolidated financial statements of Borrowers and their Subsidiaries pursuant to paragraph (C) above, Borrower Representative will deliver or cause to be delivered a written statement by Borrowers' Accountants (1) stating that the examination has included a review of the terms of this Agreement as same relate to accounting matters and (2) stating whether, in connection with the examination, any condition or event that constitutes a Default or an Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof. Promptly upon receipt thereof, Borrower Representative will deliver copies of all significant reports submitted to any Borrower by Borrowers' Accountants in connection with each annual, interim or special audit of the financial statements of Borrowers made by Borrowers' Accountants, including the comment letter submitted by Borrowers' Accountants to management in connection with their annual audit. (E) Compliance Certificate. Together with the delivery of each set of ---------------------- financial statements referenced in paragraphs (A) and (C) above, Borrower Representative will deliver a Compliance Certificate, together with copies of the calculations and work-up employed to determine Borrowers' compliance or noncompliance with the financial covenants set forth in the Financial Covenants ------------------- Rider. - ----- (F) Borrowing Base Certificates, Registers and Journals. Within 15 --------------------------------------------------- Business Days after the last day of each month (or more frequently if requested by Agent at any time during which a Default or an Event of Default shall have occurred and be continuing), Borrower Representative shall deliver to Agent and to Funding Agent: (1) a Borrowing Base Certificate as of the last Business Day of the such month (or as of such other date as Agent may specify) updated to reflect (a) all sales and collections of Borrowers during such month (or such other period specified by Agent) and an assignment schedule of all Accounts created by Borrowers during such month (or such other period specified by Agent), (b) all Revolving Advances made by Agent, Funding Agent and Lenders during such month (or such other period specified by Agent), and (c) the aggregate Dollar Equivalent amount of Borrowers' Inventory then subject to any title retention arrangement or similar arrangement in favor of the seller or vendor of such Inventory (and, in connection therewith, Borrower Representative shall also deliver a separate certificate duly executed by its chief financial officer certifying that no Inventory subject to any such arrangement is included in the Borrowing Base); (2) a schedule setting forth projected shipments to customers of Exchange Inventory and Work in Process for the 12 month period commencing as of the first day of the then current month, which schedule shall identify the applicable Exchange Inventory and Work in Process to be shipped, the estimated shipping dates and customers and jurisdictions to which such Exchange Inventory and Work in Process are projected to be shipped; and (3) each or any of the following, if requested by Agent: (a) an invoice register or sales journal describing all sales of Borrowers during such month (or such other period specified by Agent), in form and substance satisfactory to Agent, and, if Agent so requests, copies of invoices evidencing such sales and proofs of delivery relating thereto; (b) a cash receipts journal; (c) a credit memo journal; and (d) an adjustment journal, setting forth all adjustments to each Borrower's accounts receivable. The certificate and information described in this paragraph (F) shall be delivered by Borrower Representative in a manner ------------- that is compatible with Agent's "Stars" computer software program. A-7 (G) Reconciliation Reports and Listings and Agings. (1) On the ---------------------------------------------- Closing Date and within 15 Business Days after the last day of each month and from time to time upon the request of Agent, Borrower Representative will deliver to Agent an aged trial balance of all then existing Accounts; and (2) as soon as available and in any event within 15 Business Days after the last day of each month, and from time to time upon the request of Agent, Borrower Representative will deliver to Agent: (a) a Reconciliation Report duly executed by the chief executive officer or chief financial officer of Borrower Representative and substantially in the form of Exhibit F as at the last day of --------- such period; (b) an aged trial balance of all then existing accounts payable; and (c) if requested by Agent, a detailed inventory listing and cover summary report. All such reports shall be in form and substance satisfactory to Agent. The information described in clauses (1) and (2(b)) of this paragraph (G) shall ----------- ------ ------------- be delivered by Borrower Representative in a manner that is compatible with Agent's "Stars" computer software program. (H) Management Report. Together with each delivery of financial ----------------- statements of Borrowers and their Subsidiaries pursuant to paragraphs (A) and (C) above, Borrower Representative will deliver a management report: (1) describing the operations and financial condition of Borrowers and their Subsidiaries for the month then ended and the portion of the current Fiscal Year then elapsed; (2) setting forth in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the most recent Projections for the current Fiscal Year delivered to Lenders pursuant to paragraph (L) below; and (3) discussing the reasons for any significant variations. The information above shall be presented in reasonable detail and shall be certified by the chief financial officer of Borrower Representative to the effect that such information fairly presents the results of operations and financial condition of Borrowers and their Subsidiaries as at the dates and for the periods indicated. (I) (1) Appraisals. Without limitation of the provisions of paragraph -------------- --------- (I)(2) below, from time to time, upon the request of Agent, Borrowers will - ------ obtain and deliver to Agent, at Borrowers' expense, appraisal reports in form and substance and from appraisers satisfactory to Agent, stating the then current fair market and Orderly Liquidation Values of all or any portion of the Collateral; provided, however, so long as no Default or Event of Default is -------- ------- continuing, Agent shall not request an appraisal as to any particular category of Collateral to be performed more than once every Loan Year at Borrowers' expense. (2) Inventory Appraisals. Within 20 days after the end of each month -------------------- following the Closing Date, commencing with the month ending December 31, 1998, Borrowers, at their expense, shall deliver to Agent desktop appraisals (meaning appraisals prepared without an on-site inspection by the appraiser; based on information provided to the appraiser by Borrowers) (each, a "Periodic Inventory ------------------ Appraisal") of the Exchange Inventory and Work in Process, Repair Parts and - --------- Unserviceable Parts of Borrowers. Such Periodic Inventory Appraisals shall be prepared by Sage Popovich, Inc. (so long as such appraiser is available and remains satisfactory to Agent or, if such is not the case, by another independent appraiser reasonably acceptable to Agent; Sage Popovich or such other appraiser shall be referred to herein as the "Appraiser"), shall be in --------- form and scope acceptable to Agent, and shall set forth the respective Orderly Liquidation Values and Fair Market Values of Borrowers' Exchange Inventory and Work in Process, Repair Parts and Unserviceable Parts as of the last day of the most recently ended month. In addition, within 45 days after June 30 and December 31 of each year following the Closing Date, commencing with A-8 June 30, 1999, Borrowers shall deliver to Agent full, on-site appraisals (each, a "Semi-Annual Appraisal") of the Exchange Inventory and Work in Process, Repair --------------------- Parts and Unserviceable Parts of Borrowers. Such Semi-Annual Appraisals shall be prepared by the Appraiser, shall be in form and scope acceptable to Agent, and shall set forth the respective Orderly Liquidation Values and Fair Market Values of Borrowers' Exchange Inventory and Work in Process, Repair Parts and Unserviceable Parts as of June 30 or December 31, as applicable, of the relevant year. (J) Government Notices. Borrowers will deliver to Agent promptly ------------------ after receipt copies of all notices, requests, subpoenas, inquiries or other writings received from any governmental agency concerning any Employee Benefit Plan, the violation or alleged violation of any Environmental Laws, the storage, use or disposal of any Hazardous Material, the violation or alleged violation of the Fair Labor Standards Act or any Borrower's payment or non-payment of any taxes including any tax audit. (K) Events of Default, etc. Promptly upon any officer of any Borrower ----------------------- obtaining knowledge of any of the following events or conditions, Borrower Representative shall deliver to Agent and each Lender a certificate of Borrower Representative's chief executive officer specifying the nature and period of existence of such condition or event and what action Borrowers have taken, are taking and propose to take with respect thereto: (1) any condition or event that constitutes an Event of Default or Default; (2) any notice of default that any Person has given to any Loan Party or any other action taken with respect to a claimed default; or (3) any Material Adverse Effect. (L) Projections. As soon as available and in any event no later than ----------- (i) January 31, 1999, in the case of Fiscal Year 1999, and (ii) 30 days prior to the end of each Fiscal Year of Borrowers thereafter, Borrower Representative will deliver Projections of Borrowers and their Subsidiaries for the forthcoming three Fiscal Years, year by year, and for the forthcoming Fiscal Year, month by month. (M) Other Information. With reasonable promptness, Borrowers will ----------------- deliver such other information and data as Agent, any Lender, Funding Agent or Collateral Agent may reasonably request from time to time. A-9 FINANCIAL COVENANTS RIDER This Financial Covenants Rider is attached and made a part of that certain Loan and Security Agreement, dated as of December 22, 1998 and entered into among Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as Borrowers, Agent, Funding Agent, Collateral Agent and Lenders. A. Tangible Net Worth. Borrowers shall at all Worth of at least the ------------------ amounts set forth below at times maintain Tangible Net the end of each month during the periods set forth below. As used below, the term "NPAT" means Borrowers' consolidated net profits after taxes (if greater than $0.00), as determined in accordance with GAAP. A-10
Period Amount ------ ------ Closing Date through December 30, 1999 $21,500,000 December 31, 1999 through December 30, 2000 $22,000,000 plus 50% ---- of NPAT for Fiscal Year 1999 December 31, 2000 through December 30, 2001 an amount equal to the sum of (a) the minimum tangible net worth required for the period from 12/31/99 through 12/30/00, determined as set forth above, plus (b) 50% of NPAT for Fiscal Year 2000 December 31, 2001 through December 30, 2002 an amount equal to the sum of (a) the minimum tangible net worth required for the period from 12/31/00 through 12/30/01, determined as set forth above, plus (b) 50% of NPAT for Fiscal Year 2001 December 31, 2002 through December 30, 2003 an amount equal to the sum of (a) the minimum tangible net worth required for the period from 12/31/01 through 12/30/02, determined as set forth above, plus (b) 50% of NPAT for Fiscal Year 2002
B. Minimum EBITDA. Borrowers shall at all times maintain EBITDA of at -------------- least (a) $7,000,000 as of December 31, 1998 for the Fiscal Year then ended; (b) $1,900,000 as of March 31, 1999 for the three months then ended; (c) $4,200,000 as of June 30, 1999 for the six months then ended; and (d) $6,200,000 as of September 30, 1999 for the nine months then ended. Thereafter, Borrowers shall maintain EBITDA as of the last day of each fiscal quarter during the periods set forth below for the rolling twelve month period then ended of not less than the amount set forth below for such period. A-11
Period Amount ------ ------ October 1, 1999 through September 30, 2000 $ 8,700,000 October 1, 2000 through September 30, 2001 $10,000,000 October 1, 2001 and thereafter $12,000,000
C. Capital Expenditure Limits. The aggregate amount of all Capital -------------------------- Expenditures, Capital Leases with respect to fixed assets of Borrowers and their Subsidiaries (which shall be considered to be expended in full on the date such Capital Lease is entered into) and other contracts with respect to fixed assets initially capitalized on any Borrower's or any Subsidiary's balance sheet prepared in accordance with GAAP (which shall be considered to be expended in full on the date such contract is entered into) (excluding, in each case, expenditures for trade-ins and replacement of assets to the extent funded with casualty insurance proceeds) will not exceed the amount set forth below for each period set forth below. Notwithstanding the provisions set forth below, in no event shall the aggregate amount of all Capital Expenditures (determined as set forth above) for Fiscal Years 1999 and 2000, collectively, exceed $8,500,000.
Period Amount ------ ------ Fiscal Year 1999 $5,000,000 Fiscal Year 2000 $5,000,000 Fiscal Year 2001 and each Fiscal Year thereafter $3,500,000
D. Fixed Charge Coverage. Borrowers shall not permit their Fixed Charge --------------------- Coverage for the rolling 12 month period ending on the last day of each month from and after the Closing Date to be less than 1.00:1.00. A-12 EX-10.38 3 LEASE RELATING TO UNIT 3 DAWLEY PARK EXHIBIT 10.38 DATED 1999 LEASE relating to Unit 3 Dawley Park Hayes Middlesex SUN LIFE ASSURANCE SOCIETY PLC (1) HAWKER PACIFIC AEROSPACE LIMITED and HAWKER PACIFIC AEROSPACE (2) Ref: 538/A11952.18/PP2:219526.10/kdc TABLE OF CONTENTS PARTIES 1 1 Definitions and Construction 1 2 Demise 6 3 Tenant's Covenants 7 3.1 Rents 7 3.2 Outgoings 7 3.3 Gas and electricity charges 8 3.4 Repair 8 3.5 Reinstatement after damage 9 3.6 Inside painting 9 3.7 Landlord's right of inspection 10 3.8 Compliance with notices to remedy 10 3.9 Window cleaning 11 3.10 Yielding up 11 3.11 Reimbursement of Landlord's expenses 11 3.12 Alterations and waste 11 3.13 Signs 13 3.14 Notices of a competent authority 13 3.15 Requirements of any Act or competent authority 14 3.16 Planning Acts 14 3.17 User permitted 16 3.18 User prohibited 16 3.19 General alienation restrictions 18 3.20 Assignment of whole 19 3.21 Underletting 20 3.22 Undertenant provisions 20 3.23 Direct covenants from undertenant 22 3.24 Landlord's approval of underlease 23 3.25 Obligations relating to underletting 23 3.26 Registration of dealings 24 3.27 Notice of damage 25 3.28 Defective Premises Act 1972 25 3.29 Glass insurance 25 3.30 Third Party Insurance 26 3.31 No other insurance 26 3.32 Indemnities 26 3.33 Boards 27 3.34 Landlord's costs 27 3.35 Interest 28 3.36 Value Added Tax 28 3.37 Regulations affecting Estate 28 3.38 Obstructions and encroachments 29 3.39 Car Parking 29 3.40 Surety 30 3.41 Covenants and provisions affecting Landlord's title 30 4 LANDLORD'S COVENANTS 31 4.1 Quiet enjoyment 31 4.2 Insurance 31 4.3 Reinstatement 32 4.4 Repair of Estate and provision of services 33 5 PROVISOS 33 5.1 Re-entry 33 5.2 Payment of rent not waiver 35
5.3 Suspension of rent 36 5.5 No warranty as to use 36 5.6 Exclusion of Landlord's liability 37 5.7 Service of notices 37 5.8 Modification of compensation 37 5.9 Distress 38 5.10 Removal of Goods 38 5.11 Disputes between Tenants 38 5.12 No Building Scheme 38 5.13 No other Easements 39 5.14 Value Added Tax 39 THE FIRST SCHEDULE................................................... 41 Part 1 41 The Estate 41 Part 2 41 The Premises 41 SECOND SCHEDULE...................................................... 42 Part 1 42 Rights granted 42 Part 2 43 Rights reserved 43 THIRD SCHEDULE....................................................... 46 Review of Principal Rent 46 FOURTH SCHEDULE...................................................... 53 Service Charge 53 FIFTH SCHEDULE....................................................... 59 Surety's Covenants Guarantee of Tenant's performance 59 SIXTH SCHEDULE....................................................... 62 Landlord's Fixtures 62 SEVENTH SCHEDULE..................................................... 63 Works to be Disregarded on Rent Review 63
DATE 1999 PARTIES (1) SUN LIFE ASSURANCE SOCIETY PLC (registered number 776273) whose registered office is at 107 Cheapside London EC2V 6DU ("the Landlord") (2) HAWKER PACIFIC AEROSPACE LIMITED (registered number 3459428) whose registered office is at 1 London Road Southampton SO15 2AE and HAWKER PACIFIC AEROSPACE of 11240 Sherman Way Sun Valley CA 91352-4942 USA ("the Tenant") 1 Definitions and Construction 1.1 In this Lease (unless the context otherwise requires or admits) the following words and phrases shall have the following meanings Word or Phrase Meaning Act any Act of Parliament now or hereafter during the Term to be passed Common Parts the roadways ramps service yard service roads car parks accessways forecourt loading areas landscaped areas entrances in the Estate from time to time intended for general use and any other parts of the Estate from time to time intended for general use consent of the Landlord prior consent in writing signed by the Landlord Estate the property described in Part 1 of the First Schedule
Group Company a company which is in the same group as the Tenant within the meaning of section 736 of the Companies Act 1985 Insured Risks loss or damage by fire storm tempest flood lightning explosion aircraft (other than hostile aircraft) articles dropped therefrom riot or civil commotion malicious damage impact bursting and overflowing of pipes and such other risks as the Landlord shall from time to time during the Term determine Lettable Areas those parts of the Estate leased or intended to be leased to occupational tenants whether or not actually let Landlord includes the estate owner for the time being of the reversion immediately expectant on the termination of the Term Landlord's fixtures the fixtures and fittings brief particulars of which are listed in the Sixth Schedule Landlord's Surveyor the duly qualified surveyor for the time being of the Landlord last year of the Term the year of the Term ending on the termination of the Term notice notice in writing
-2- Permitted Part such parts of the Premises (up to two) as is/are approved by the Landlord (such approval not to be unreasonably withheld or delayed) subject to the Premises never being divided into more than three parts Permitted Underlease an underlease of the Premises to be granted upon the date hereof by the Tenant to the said Hawker Pacific Aerospace Limited such underlease to be in the form of this Lease save only for amendment of the parties thereto Perpetuity Period the period of eighty (80) years from the date hereof Plan the plan annexed hereto Planning Acts the Act or Acts for the time being in force relating to town and country planning Premises the property described in Part 2 of the First Schedule together with all additions and improvements thereto and all fixtures and fittings therein or thereon other than tenant's or trade fixtures and fittings Prescribed Rate either the base rate of Barclays Bank PLC (or such other Bank being a member of the Committee of London and Scottish Clearing Bankers as the Landlord may from time to time nominate) or if no such base rate can be ascertained then the rate at the relevant time which such Bank (or alternative Bank as aforesaid) shall utilise for equivalent purposes
-3- Principal Rent the rent FIRST reserved in clause 2 Rent Commencement Date Rent Payment Dates the twenty fifth day of March the twenty fourth day of June the twenty ninth day of September and the twenty fifth day of December of each calendar year Rents the rents reserved in clause 2 Retained Parts the entirety of the Estate excluding the Lettable Areas Service Conduits and Appliances gas pipes water pipes drains ducts sewers cables electric mains wires supply lines conduits appliances air-conditioning apparatus and services Service Rent the rent THIRDLY reserved in clause 2 Service Road the roadway shown coloured brown on the Plan Tenant includes the successors in title of the Tenant and those deriving title under it Term the term hereby granted termination of the Term the determination of the Term whether by effluxion of time re-entry notice surrender (whether by operation of law or otherwise) or by any other means whatsoever underlease and include an agreement for underlease or sub-underlease sub-underlease
-4- underlet includes an agreement to underlet 1.2 In this Lease where the context requires 1.2.1 words importing the singular include the plural and vice versa 1.2.2 words importing the masculine include the feminine and neuter 1.2.3 where a party consists of more than one person covenants and obligations of that party shall take effect as joint and several covenants and obligations 1.3 References to any Act include references to any statutory modification or re-enactment thereof for the time being in force and any order instrument regulation or by-law made or issued thereunder 1.4 The clause headings shall not in any way affect the construction of this Lease 1.5 It shall be a breach of the covenants and conditions on the part of the Tenant herein contained to permit or suffer any act in breach of such covenants and conditions 2 Demise The Landlord demises the Premises to the Tenant TOGETHER WITH the rights granted in Part 1 of the Second Schedule RESERVING to the Landlord and all others authorised by the Landlord the rights set out in Part 2 of the Second Schedule TO HOLD for the term of Twenty five (25) years from (and including) 19 and expiring on (and including) determinable as herein provided SUBJECT TO all rights easements quasi-easements covenants and stipulations affecting the Premises including the matters contained in or referred to in the deeds and documents listed in the Fifth Schedule paying during the Term FIRST from the date hereof until the Rent Commencement Date the yearly rent of one peppercorn and from the Rent Commencement Date until (and including) day of 19 the yearly rent (and proportionately for any part of a year) of POUNDS ((Pounds) ) and thereafter the
-5- yearly rent payable under the Third Schedule such rent to be paid without any deduction or set off whether legal or equitable (except as required by any Act) by four equal quarterly payments in advance on the Rent Payment Dates the first payment for the period beginning on (and including) day of 19 and ending on (and including) day of 19 to be made on the day of 19 SECONDLY a yearly rent equal to 38 per centum per annum of the sum or sums (including the cost of periodic valuations for insurance purposes (but not more than once a year)) incurred or to be incurred by the Landlord in performance of the Landlord's covenant for insurance in clause 4.2 such yearly rent to be paid on demand THIRDLY the yearly rent ascertained in accordance with the provisions of the Fourth Schedule such rent to be paid in accordance with the Fourth Schedule and FOURTHLY by way of additional rent the interest payable pursuant to clause 3.35 -6- 3 Tenant's Covenants The Tenant covenants with the Landlord 3.1 Rents To pay the Rents at the times and in manner aforesaid if so required by banker's standing order without any deduction (except as aforesaid) by way of set off (whether legal or equitable or of any other description) or otherwise 3.2 Outgoings 3.2.1 To defray or in the absence of direct assessment on the Premises to pay to the Landlord a fair proportion (to be conclusively determined by the Landlord) of all existing and future rates taxes assessments charges and outgoings payable in respect of the Premises or any part thereof by any estate owner landlord tenant or occupier thereof (save only for any occasioned by the receipt of Rents or as a result of any disposition of or dealing with or the ownership of any estate or interest expectant in reversion on the termination of the Term other than a deemed disposal or dealing arising as a consequence of any act or default of the Tenant its undertenants licensees agents or servants) 3.2.2 To pay to the Landlord on demand the amount of any rates or surcharge payable by the Landlord after the termination of the Term through the Landlord's inability to claim void rate relief for the maximum period (commencing with the date of termination of the Term) which would have been allowed had the Premises been occupied up to the date of the termination of the Term 3.2.3 Not to agree any valuation of the Premises for rating purposes or agree any alteration in the rating list in respect thereof without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) -7- 3.2.4 Not to make any proposal to alter the rating list so far as the list relates to the Premises or lodge an appeal in respect thereof without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) 3.2.5 Without prejudice to clause 3.12 forthwith upon receipt to provide the Landlord with a copy of any notice of an alteration or proposed alteration in the rating list which will or may affect the Premises 3.3 Gas and electricity charges 3.3.1 To pay to the suppliers thereof all charges for gas electricity and water (including meter rents) consumed in the Premises during the Term 3.3.2 To comply with the requirements and regulations of the supply authority with regard to the electrical wiring installations and equipment in the Premises and not without the consent of the Landlord (such consent not to be unreasonably withheld or delayed) to carry out any electrical work whatsoever or make any alteration to or extension of the electrical installations in the Premises or the Estat e 3.4 Repair 3.4.1 To put and keep the Premises and every part thereof in good and substantial repair and condition throughout the Term and when necessary to rebuild the same (damage by the Insured Risks excepted subject to exclusions of the policy or policies effected by the Landlord and save to the extent that such policies shall have been vitiated or payment of the policy monies refused in consequence of some act or default on the part of or suffered by the Tenant its undertenant or their respective servants agents licensees or invitees) 3.4.2 To keep all parts of the Premises which are not built upon in a good and clean condition adequately surfaced and free from weeds and all landscaped areas properly cultivated and maintained -8- 3.4.3 To keep all plant machinery apparatus and equipment in the Premises properly maintained and in good working order and condition and when necessary renew or replace the same 3.5 Reinstatement after damage In the event that the Premises shall be destroyed or damaged by any of the Insured Risks and if the Term shall not have been determined under clause 5.4 if so required to join with the Landlord (at the parties' joint cost insofar as the costs are not recoverable from insurance) in making application for any planning or other permission necessary for rebuilding or reinstating the Premises 3.6 Inside painting 3.6.1 As often as reasonably required (having regard to the nature of the surfaces and the materials used in the construction of the Premises) (but no more often than once in every fifth year of the Term) and in the last three months of the last year of the Term in a proper and workmanlike manner to prepare and paint all inside surfaces of the Premises usually painted with two coats of good quality paint and to restore all other inside surfaces to their proper condition and appearance 3.6.2 In complying with this covenant in the last three months of the last year of the Term to use only materials approved by the Landlord (such approval not to be unreasonably withheld or delayed) -9- 3.7 Landlord's right of inspection Subject to the provisions of clause 5.17 hereof to permit the Landlord and any authorised person at all reasonable times and (save in the case of emergency) upon previous notice to enter upon the Premises for any of the following purposes 3.7.1 to view and examine the state and condition of the Premises and to take schedules or inventories of the Landlord's fixtures and fittings and 3.7.2 to exercise any of the rights excepted and reserved by this Lease and 3.7.3 to comply with the covenants on the part of the Landlord herein contained and 3.7.4 for any other reasonable purpose connected with the interest of the Landlord in the Premises including but not limited to the valuation or disposal of any interest of the Landlord 3.8 Compliance with notices to remedy 3.8.1 Forthwith to commence and thereafter diligently to proceed with any works to the Premises which are necessary to comply with any notice properly given by the Landlord requiring the Tenant to remedy any breach of the Tenant's covenants relating to the state and condition of the Premises found upon any inspection 3.8.2 If the Tenant shall not within a period of ninety (90) days or sooner if requisite comply with any such notice to permit the Landlord and any authorised person to enter the Premises to remedy any such breach 3.8.3 To pay to the Landlord on demand all the reasonable costs and expenses reasonably and properly incurred by the Landlord under the provisions of clause 3.8.2 which sums shall at the option of the Landlord be recoverable by action or as rent in arrears -10- 3.9 Window cleaning To clean the window glazing in the Premises as often as reasonably necessary and in any event at least once in every two months 3.10 Yielding up At the termination of the Term 3.10.1 to yield up the Premises (Tenant's or trade fixtures and fittings only excepted) in good and substantial repair and condition and fully in accordance with the foregoing Tenant's covenants and 3.10.2 to make good to the satisfaction of the Landlord any damage caused to the Premises by the removal of the Tenant's fixtures fittings furniture and effects or any signs or notices installed by the Tenant pursuant to the provisions hereafter contained and by the reinstatement of the Premises pursuant to any covenant with the Landlord 3.11 Reimbursement of Landlord's expenses To reimburse to the Landlord all expenditure reasonably incurred by the Landlord after the termination of the Term in repairing rebuilding renewing painting and decorating the Premises so as to put them into the condition required by the foregoing Tenant's covenants and to pay to the Landlord a sum equivalent to the loss of rent suffered by the Landlord during the period from such termination until all such works have been completed 3.12 Alterations and waste 3.12.1 Subject to the provisions of sub-clauses 3.12.2 and 3.12.3 not to erect or permit or suffer to be erected any other building structure pipe wire mast or post upon the Premises nor to make or permit or suffer to be made any alteration in or addition to the Premises nor to commit or permit or suffer any waste spoil or destruction in or upon the Premises nor to cut injure or remove or -11- suffer to be cut injured or removed any of the roofs walls (whether outside or inside) floors joists timbers wires pipes drains appurtenances or fixtures of the Estate or the Premises 3.12.2 Not to make any alterations of any nature to the Premises (whether structural or not) or any part thereof without the consent of the Landlord such consent not to be unreasonably withheld or delayed provided always that the Landlord shall be entitled (a) to require that the Works are carried out in a good and workmanlike manner and (b) as a condition of giving consent to stipulate that the Tenant enter into such covenants with the Landlord as the Landlord shall require with regard to the carrying out of the works including (without limitation) a covenant for reinstatement 3.12.3 In the event that the Tenant shall at any time carry out works to the Premises in breach of the provisions of this clause the Landlord will be entitled without notice to enter the Premises and remove such works or any part thereof and reinstate the Premises PROVIDED THAT the costs thereby incurred including interest calculated at the rate of Four per centum per annum above the Prescribed Rate on a day to day basis from the date of expenditure until the date of payment shall be recoverable by action or at the option of the Landlord as rent in arrears 3.12.4 Notwithstanding the above and subject to the provisions of clauses 3.17 and 3.19 the Tenant shall be entitled (without the consent of the Landlord) to install alter and remove demountable partitions which do not affect the structure PROVIDED THAT (a) the Tenant shall deposit with the Landlord plans showing the location of the partitions immediately after the installation alteration relocation of the same and (b) the Tenant shall at the termination of the Term remove such partitions and make good to the satisfaction of the Landlord all damage to the Premises thereby caused -12- 3.13 Signs 3.13.1 Not to affix any sign on the exterior of the Premises without the Landlord's prior written consent (such consent not to be unreasonably withheld or delayed) 3.13.2 Subject to clause 3.13.1 above and save as provided in paragraph 5 of Part 1 of the Second Schedule not to affix or display or permit or suffer to be affixed or displayed upon any part of the exterior of the Premises or the Estate or to or through any window thereof any placard poster notice advertisement name or sign whatsoever Any sign erected by the Tenant in breach of the provisions of this clause may be removed by the Landlord and the costs thereby incurred including interest calculated at the rate of Four per centum per annum above the Prescribed Rate in respect of the period from the date of expenditure until the date of payment shall be recoverable by action or at the option of the Landlord as rent in arrears 3.14 Notices of a competent authority Within fourteen days (or sooner if reasonably requisite having regard to the requirements of the same) of the receipt by the Tenant of any notice order requisition direction or plan given made or issued to or by a competent authority affecting the Premises or the occupation or user thereof to supply a copy thereof to the Landlord and to make or join in making (at the Landlord's cost) such objections or representations against or in respect thereof as the Landlord may reasonably require 3.15 Requirements of any Act or competent authority 3.15.1 To comply in every respect with the provisions of any Act or the requirements of any competent authority in respect of the Premises or any part thereof or in respect of the occupation or user thereof and to indemnify the Landlord against all claims demands expenses and liability in respect thereof and to pay all costs charges and expenses incurred by the Landlord in connection with any such provision or requirement -13- 3.15.2 In the event that at any time the Tenant shall not carry out such works as are necessary to comply with the provisions and requirements referred to in clause 3.15.1 then the Landlord may (but shall not be obliged to) enter the Premises and carry out such works itself and the reasonable costs thereby incurred including interest calculated at the rate of Four per centum per annum above the Prescribed Rate on a day to day basis from the date or expenditure until the date or repayment shall be recoverable by action or at the option of the Landlord as rent in arrears and 3.15.3 Not at any time to make application whether to the Court or otherwise for any apportionment of the costs or expenses incurred or to be incurred by the Tenant in compliance with the provisions and requirements referred to in clause 3.16 Planning Acts Without prejudice to the generality of the last preceding Sub-clause in relation to the Planning Acts 3.16.1 to comply with the provisions of the Planning Acts and of any planning permissions relating to or affecting the Premises and 3.16.2 not to make any application for planning permission in respect of the Premises without the consent of the Landlord such consent not to be unreasonably withheld or delayed and 3.16.3 at the expense of the Tenant to obtain and if appropriate to renew all planning permissions and any other consents and to serve all necessary notices required for the carrying out by the Tenant of any operations or the commencement of any work on the Premises which may constitute Development which the meaning of the Planning Acts and 3.16.4 not to implement any planning permission before it has been produced to the Landlord and acknowledged as satisfactory but such acknowledgement not to be unreasonably withheld or delayed PROVIDED THAT the Landlord may refuse to approve such planning permission on the grounds that any condition contained in it or anything omitted from it or the period referred to in -14- it would in the reasonable opinion of the Landlord be or be likely to be prejudicial to the Landlord's interest in the Premises or in any adjoining property and 3.16.5 unless the Landlord shall otherwise direct in writing to carry out and complete before the termination of the Term any works required to be carried out to the Premises as a condition of any planning permission granted during the Term and implemented by the Tenant whether or not the date by which the planning permission requires such works to be carried out is within the Term and 3.16.6 to produce to the Landlord on demand all plans documents and other evidence as the Landlord may reasonably require in order to satisfy itself that the provisions of this clause have been complied with and 3.16.7 in any case where a planning permission has been granted subject to conditions the Landlord shall be entitled (where it is reasonable to do so) to require the Tenant to provide security for the compliance with such covenants 3.17 User permitted Not to use or occupy the Premises other than for the purposes specified in Use Classes B1 (b) and (c) B2 and B8 of the Town and Country Planning (Use Classes) Order 198 7 3.18 User prohibited 3.18.1 Not to store or bring upon the Premises any materials or liquid of a specially combustible inflammable dangerous or offensive nature save for any such materials or liquids the nature of which have been previously disclosed to the Landlord (subject to the same being stored and used in accordance with any statutory provisions relating thereto) 3.18.2 Not to do any act or thing whereby any insurance effected on the Estate or Premises or any neighbouring property may be rendered void or voidable or unless the Tenant shall pay such -15- increased premium the rate of premium thereon may be increased and to comply with all requirements of the insurers as to fire precautions relating to the Premises 3.18.3 To keep the Premises supplied and equipped with such fire fighting equipment as may be required by statute or the insurers and not at any time to obstruct the means of access to or means of working of any such equipment 3.18.4 Not to do on the Premises or any part thereof any act or thing whatsoever which may be or tend to be a nuisance annoyance damage or disturbance to the Landlord or the owners or occupiers of any adjoining or neighbouring property PROVIDED ALWAYS that the carrying on by the Tenant (here meaning Hawker Pacific Aerospace Limited and Hawker Pacific Aerospace Incorporated only) of its business at the Premises in a usual and reasonable manner for a business of that type shall not in any event be deemed to be a breach of the provisions of this sub clause or any other provision contained or referred to in this Lease 3.18.5 Not to use the Premises or any part thereof for any illegal or immoral purpose 3.18.6 Not to bring into or upon the Estate and/or the Premises or do anything which might throw on the Estate and/or the Premises any load or weight in excess of that which the Estate and/or the Premises are designed or constructed to bear with due margin for safety nor to cause any undue vibration to the Premises or any part of the Estate by machinery or otherwise 3.18.7 Not to discharge into any of the Service Conduits and Appliances any oil or grease or other noxious or deleterious effluent or substance which may cause an obstruction or be or become a source of danger or which might injure the Service Conduits and Appliances or the drainage system of the Estate or which might overload the Service Conduits and Appliances or which is calculated or likely to pollute the water of any stream or river 3.18.8 Not to hold in the Premises any sale by public auction public exhibition or political meeting -16- 3.18.9 Not to obstruct the Common Parts or any means of escape nor to do anything which might be or become a source of danger to persons using the Common Parts or means of escape 3.18.10 Not to deposit in the Common Parts or on any land forming part of the Premises any rubbish refuse or trade empties of any kind other than in proper receptacles 3.18.11 Not to store stack or load out upon any land forming part of the Premises any materials equipment plants bins crates or any other item which is or might become in the reasonable opinion of the Landlord untidy unsightly unclean or in any way detrimental to the amenity of the Estate 3.18.12 Not to load or unload any goods amongst or dispatched from the Premises except within the curtilage of the Premises and in such a way that access to egress from other parts of the Estate is not obstructed 3.18.13 Not to post outside the Premises or in the Common Parts nor to expose from the windows of the Premises any articles goods or things of any kind 3.19 General alienation restrictions 3.19.1 Save for one or more underlettings of a Permitted Part or Permitted Parts not to assign charge or underlet part only of the Premises 3.19.2 Not to part with or share possession or occupation of the Premises or any part of them except that the Tenant may share occupation of the Premises or any part of them with a Group Company on condition that (a) no relationship of landlord and tenant is created (b) the Tenant gives the Landlord immediate notice in writing of the name of the Group Company its relationship to the Tenant the area occupied the date of occupation and the date of vacation and -17- (c) the Tenant procures (and covenants to this effect) that the Group Company shall vacate the Premises immediately upon the earlier of the Termination of the Term or the date on which the company ceases to be a Group Company 3.19.3 Not to charge the whole of the Premises without the consent of the Landlord not to be unreasonably withheld or delayed 3.20 Assignment of whole 3.20.1 Not to assign the whole of the Premises without the consent of the Landlord not to be unreasonably withheld or delayed but the Landlord and Tenant agree for the purposes of Section 19(1A) of the Landlord and Tenant Act 1927 that the Landlord may withhold its consent in any of the circumstances specified in clause 3.20.2 and may impose all or any of the conditions specified in clause 3.20.3 as a condition of its consent 3.20.2 The circumstances referred to in clause 3.20.1 are (a) if there are any outstanding arrears of rent (b) if the proposed assignee is not a person who in the Landlord's reasonable opinion is able to comply with the Tenant's obligations contained in this Lease (c) if the proposed assignee has the right to claim diplomatic immunity or exemption from the Tenant's covenants contained in this Lease 3.20.3 The conditions referred to in clause 3.20.1 are (a) that the Tenant and the Surety (if any) enter into a deed of guarantee (being an authorised guarantee agreement within Section 16 of the Landlord and Tenant (Covenants) Act 1995) with the Landlord on or before completion of the assignment in such form as the Landlord shall reasonably require -18- (b) that (if the Landlord reasonably so requires) the proposed assignee provides a guarantor or guarantors acceptable to the Landlord (acting reasonably) who shall covenant (jointly and severally if more than one) with the Landlord on the terms contained in the Sixth Schedule 3.20.4 The circumstances and conditions set out in clauses 3.20.2 and 3.20.3 shall not operate to limit the Landlord's right to withhold such consent on any other ground or grounds where it would be reasonable to do so or to impose any other reasonable conditions upon the grant of such consent 3.21 Underletting Not to underlet the whole or a Permitted Part or Parts of the Premises without the consent of the Landlord not to be unreasonably withheld or delayed and on condition that in every case 3.21.1 the rents reserved by such underlease shall not be less than the greater of the rents for the time being payable by the Tenant under this Lease or a due proportion of them (such proportion in the case of dispute to be conclusively determined by the Landlord's Surveyor) and the best rent reasonably obtainable in the open market for the premises to be underlet without taking a fine or premium and shall not be commuted or payable more than one quarter in advance and 3.21.2 an underlease of a Permitted Part (but not an underlease of the whole) incorporates an agreement authorised beforehand by an order of the Court excluding Sections 24 to 28 of the Landlord and Tenant Act 1954 in relation to such underlease 3.22 Undertenant provisions To incorporate (or procure the incorporation of) in every permitted (mediate or immediate) underlease 3.22.1 a covenant that the undertenant shall not underlet the whole or part of the underlet premises without the consent of both the Landlord and the Tenant (each such consent not to be -19- unreasonably withheld or delayed) and not save in the case of the Permitted Underlease (where such a restriction shall not be required) without incorporating in such underlease an absolute restriction against further underletting whether of the whole or part of the underlet premises 3.22.2 a covenant that the undertenant shall not assign or charge part only of the underlet premises 3.22.3 a covenant that the undertenant shall not assign the whole of the underlet premises without the consent of both the Landlord and the Tenant (each such consent not to be unreasonably withheld or delayed) and without the undertenant on or before completion of the assignment entering into an authorised guarantee agreement within Section 16 of the Landlord and Tenant (Covenants) Act 1995 with the Tenant in such form as the Landlord shall reasonably require 3.22.4 a covenant that the undertenant shall not charge the whole of the underlet premises without the consent of both the Landlord and the Tenant (each such consent not to be unreasonably withheld or delayed) 3.22.5 a covenant that the undertenant shall not part with or share possession or occupation of the underlet premises except by way of assignment sub- underletting (in the case only of the Permitted Underlease) or charge pursuant to the provisions contained in this clause 3.22 3.22.6 a covenant by the undertenant to observe and perform all the Tenant's covenants contained in this Lease (other than payment of the Rents) insofar as they relate to the underlet premises 3.22.7 a covenant by the undertenant (which the Tenant covenants to enforce) prohibiting the undertenant from causing or suffering any act or thing upon or in relation to the underlet premises inconsistent with or in breach of the provisions of this Lease 3.22.8 a condition for re-entry on the breach of any covenant by the undertenant 3.22.9 such provisions as are necessary to ensure that the rent reserved by the underlease is reviewed on the dates and upon the terms provided for review of rent in this Lease -20- 3.23 Direct covenants from undertenant Upon any permitted underlease to procure that the undertenant shall give a direct covenant under seal in favour of the Landlord 3.23.1 to observe and perform the covenants and conditions on the part of the Tenant contained in this Lease (save as to payment of Rents) insofar as they relate to the underlet premises and 3.23.2 that in the event that this Lease shall be forfeited or a liquidator or trustee in bankruptcy shall disclaim the Lease the undertenant shall if the Landlord so requires by notice in writing given to the undertenant within three (3) months after such event take a new lease of the premises demised by the underlease for the residue of the underlease term unexpired at the date of such event and at the rents then payable under the underlease and subject to the terms of the underlease in every respect and to execute and deliver to the Landlord a counterpart of such lease and pay to the Landlord on demand the costs incurred in its preparation and completion 3.23.3 and (if reasonably required) to procure that a guarantor or guarantors reasonably acceptable to the Landlord guarantee such covenants in such terms as the Landlord may from time to time reasonably require and covenant with the Landlord to enter into any new lease required pursuant to the covenant contained in clause 3.23.2 to guarantee the lessee's covenants contained in such lease in such terms as the Landlord may from time to time reasonably require 3.24 Landlord's approval of underlease Without prejudice to the other provisions relating to underletting contained in this Lease the Tenant shall obtain the approval of the Landlord's solicitors (such approval not to be unreasonably withheld or delayed) in relation to the form of underlease finally agreed with the proposed undertenant before granting it -21- 3.25 Obligations relating to underletting 3.25.1 To enforce all the covenants and obligations of the undertenant contained in any underlease and not expressly or by implication waive any breach of them 3.25.2 Not to give consent to or participate in any variation or addition to or accept any surrender of any permitted underlease 3.25.3 Duly and efficiently to operate and effect all reviews of rent pursuant to the terms of any permitted underlease but not to agree the amount of any reviewed rent without the consent of the Landlord (such consent not to be unreasonably withheld or delayed) If such review is referred to a third party for determination then the Tenant shall (a) include in its representations such third party representations as the Landlord may reasonably require (b) if at the date of such determination the rent payable under this Lease is being reviewed in accordance with the provisions of the Third Schedule and the determination has been referred to a third party then at the option of the Landlord use its reasonable endeavours to procure the agreement of the undertenant to such third party determining the revised rent under the underlease 3.25.4 Not to agree the amount of any interim rent payable under Section 24A of the Landlord and Tenant Act 1954 without the consent of the Landlord not to be unreasonably withheld or delayed 3.25.5 If the amount of interim rent or the terms of any underlease shall be determined by the Court under the provisions of Part II of the Landlord and Tenant Act 1954 then to make to the Court such representations with regard to the amount of such rent and the terms of such tenancy as the Landlord may reasonably require to the reasonable satisfaction of the Landlord and -22- 3.25.6 From time to time on demand during the Term the Tenant shall provide the Landlord with full particulars of all occupiers and derivative interests in the Premises (however remote) and disclose whether there are any grounds known to the Tenant on which an application under Section 24(1) or Section 26(1) of the Landlord and Tenant Act 1954 might reasonably be opposed by the Competent Landlord (as defined in the Sixth Schedule of that Act) 3.26 Registration of dealings 3.26.1 Within one month after any assignment underlease assent transfer assignment of underlease mortgage charge or other disposition or devolution of the Premises or any part of them whether mediate or immediate to give notice of it in duplicate to the Landlord's solicitors and provide a copy (certified as true) of the deed instrument or other document evidencing or effecting such disposition and pay to the Landlord's solicitors a reasonable fee (but not less than (Pounds)25) for its registration 3.26.2 The registration of any document in accordance with clause 3.26.1 shall be evidence of notification of such transaction to the Landlord but shall not require the Landlord to consider the terms of such transaction 3.27 Notice of damage In the event of the Premises being destroyed or materially damaged to give notice thereof immediately to the Landlord stating (if possible) the cause of such destruction or damage 3.28 Defective Premises Act 1972 Immediately upon becoming aware of the same to give notice to the Landlord of any defect in the Premises which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing under the Defective Premises Act 1972 and to display and maintain in the Premises all notices which the Landlord may from time to time reasonably require to be displayed in relation to such Act -23- 3.29 Glass insurance To insure and keep insured in the joint names of the Landlord and Tenant against loss or damage by accident all glass in the windows doors and partitions in the Premises to the full replacement value thereof in such insurance office of repute as may be approved by the Landlord and to produce evidence of the existence of the policy and the payment of the last premium receipt to the Landlord within seven days following demand and forthwith lay out all monies received from such insurance and such other monies as may be necessary in reinstating the glass with glass of the same quality -24- 3.30 Third Party Insurance To effect and maintain for such a sufficient amount and with reputable insurers insurance against liability to employees and third parties and contingencies arising under the Defective Premises Act 1972 and any other Act or at common law and to produce evidence of the existence of the policy and payment of the last premium to the Landlord within seven days following demand once a year 3.31 No other insurance Not to effect or maintain any insurance in respect of the Premises (except as to Tenant's fixtures and contents and except for the Tenant's usual and normal business insurances) 3.32 Indemnities 3.32.1 To indemnify the Landlord against all costs and expenses including professional fees properly incurred by the Landlord in connection with all and every loss and damage whatsoever incurred or sustained by the Landlord as a consequence of every breach of covenants by and conditions on the part of the Tenant set out (or implied) herein PROVIDED THAT such indemnity shall extend to and cover all reasonable costs and expenses incurred by the Landlord in connection with any steps which the Landlord may take to remedy any such breach and be without prejudice to any rights or remedies of the Landlord in respect of any such breach 3.32.2 To indemnify the Landlord against all actions claims liabilities costs and expenses alleged or demanded by the owners or occupiers of any adjoining or neighbouring property or other parties arising through the use or occupation of the Premises the existence of any article in or about the Premises or the execution or omission of any works upon the Premises except insofar as the same may be due solely to the Landlord's own act or default or the act or default of the Landlord's employees or agents -25- 3.33 Boards To permit the Landlord during the last six months of the Term to affix and retain without interference upon any suitable and conspicuous part of the Estate or the Premises (but not so as materially to affect the access of light and air to the Premises or the Tenant's use and enjoyment of the Premises) a notice for re-letting the same or at any time during the Term for selling or other dealing with the Landlord's interest in the Premises 3.34 Landlord's costs To pay to the Landlord on demand all reasonable costs charges and expenses (including legal and surveyor's fees and costs) properly incurred of and incidental to 3.34.1 every application made by the Tenant for the consent of the Landlord whether the same be granted or lawfully refused or proffered subject to any lawful qualification or condition or whether the application be withdrawn including and without prejudice to the foregoing any costs incurred by the Landlord in compliance with the requirements of the Landlord and Tenant Act 1988 3.34.2 the preparation and service of a notice under Section 146 of the Law of Property Act 1925 and of any proceedings under Sections 146 or 147 of the Act notwithstanding that any right of re-entry has been waived or the Tenant obtains relief or forfeiture is avoided otherwise than by relief granted by the Court 3.34.3 any schedule relating to wants of repair to the Premises whether served during or within six months after the termination of the Term and 3.34.4 the recovery of any arrears of the Rents or other moneys payable under this Lease or the remedying of any breach of covenant by the Tenant -26- 3.35 Interest If any sum payable by the Tenant to the Landlord under this Lease shall not be paid on the due date or shall not be accepted by the Landlord for a reasonable period so as not to waive any existing breach or alleged breach of covenant to pay to the Landlord interest thereon at the rate of two per centum per annum above the Prescribed Rate calculated on a day to day basis from the date of the same becoming due down to the date of payment and the aggregate amount for the time being so payable shall at the option of the Landlord be recoverable by action or as rent in arrears 3.36 Value Added Tax Whenever any sum is payable by the Tenant on which value added tax or any other tax is payable (whether or not such tax is imposed at the election of or with the consent of the Landlord) then (subject to the Landlord providing a VAT invoice addressed to the Tenant) to pay to the Landlord in addition to such sum the amount of the value added or other tax thereon at the rate applicable to that payment and such sums shall at the option of the Landlord be recoverable by action or as rent in arrears 3.37 Regulations affecting Estate To comply in all respects with the regulations for the time being made by the Landlord for the maintenance of the amenity and good order of the Estate provided that such regulations do not conflict with the terms of this Lease or derogate from the rights granted to the Tenant by this Lease -27- 3.38 Obstructions and encroachments Not to obstruct or permit or suffer to be obstructed any of the windows lights or ventilators belonging to the Premises nor to permit or suffer any new window light ventilator passage drainage or other encroachment or easement to be made into against or over the Premises or any part thereof AND in case any encroachment or easement whatsoever shall be attempted to be made or acquired by any person whomsoever to give notice thereof to the Landlord immediately the same shall come to the knowledge of the Tenant and at the cost of the Landlord do all such things as may be reasonable and proper for preventing any new encroachment or easement being made or acquired 3.39 Car Parking 3.39.1 Not to do or permit or suffer to be done anything in or about the parking spaces which from time to time form part of the Premises ("the Parking Spaces") or the service road or accessways leading thereto which would or could constitute a nuisance annoyance obstruction disturbance or cause damage or inconvenience to the Landlord or the Tenants or occupiers of the Estate 3.39.2 To comply and ensure that the Tenant's visitors comply with such reasonable regulations as the Landlord may make for the regulation of the traffic to and from the Premises 3.39.3 Not to do or permit any person to wash any motor car carry out works of repair or maintenance to a motor car or pour petrol or other fuel into the tank of such a car whilst parked in the Parking Spaces PROVIDED THAT the Landlord shall not incur any liability or responsibility to the Tenant or any other person firm or corporation (a) for any loss of or damage to or from any motor car using the Parking Spaces nor for any damage or injury suffered by any driver or passenger in such motor car or by the Tenant or any visitor of the Tenant and -28- (b) if any person other than the Tenant shall use or occupy the Parking Spaces without the consent of the Landlord 3.40 Surety In the event that any person firm or body corporate which has or shall have guaranteed the Tenant's obligations contained in this Lease shall die or an event shall occur in relation to such person firm or body corporate of the type referred to in clauses 5.1.3 5.1.4 5.1.5 or 5.1.6 then to give immediate notice thereof to the Landlord and if so required by the Landlord at the expense of the Tenant within 30 working days thereafter to procure that some other guarantor or guarantors reasonably acceptable to the Landlord execute a guarantee in respect of the Tenant's obligations contained in this Lease in the form referred in the Sixth Schedule 3.41 Covenants and provisions affecting Landlord's title By way of indemnity to observe and perform the covenants and conditions contained or referred to in Entry 1 of the Charges Register of Title Number NGL 346507 and insofar as they relate to any act carried out by the Tenant the covenants and conditions contained or referred to in clause 3 of the Transfer dated 31 March 1992 referred to in Entry No 4 of the Charges Register of Title Number NGL 346507 so far as the same affect the Premises and to keep the Landlord fully and effectually indemnified from and against all actions costs proceedings claims and demands arising from any breach or non-observance or non-performance thereof -29- 4 LANDLORD'S COVENANTS The Landlord covenants with the Tenant as follows 4.1 Quiet enjoyment That the Tenant paying the Rents and performing and observing the covenants and stipulations on the part of the Tenant herein shall peaceably hold and enjoy the Premises during the Term without any interruption by the Landlord or any person rightfully claiming under or in trust for the Landlord 4.2 Insurance To insure the Estate (other than plate glass) and keep the same insured subject to such exclusions excesses and limitation as may be imposed by the insurers and which are notified to the Tenant against 4.2.1 loss or damage by the Insured Risks in such amount as is from time to time sufficient to cover the full amount of the costs of completely rebuilding or reinstating the Estate including reasonable provision for escalation of such costs between the date of destruction or damage and the date of rebuilding or reinstating the Estate professional fees and expenses in such amount as the Landlord shall from time to time deem appropriate and the cost of site clearance including demolition and debris removal and value added tax on all such sums including any value added tax arising on a deemed self supply pursuant to paragraphs 5 and 6 of Schedule 6A to the Value Added Tax Act 1983 as amended by the Finance Act 1989 or otherwise and 4.2.2 loss of rent and Service Rent of the Estate at the rate for the time being payable or prospectively payable taking into account any review of the rent for Three (3) years 4.2.3 (to the extent to which the same is not covered by sub-clause 4.2.1) breakdown and where applicable explosion of the boilers lifts and other plant in the Estate and -30- 4.2.4 property owner's liability and such other insurances as the Landlord may from time to time reasonably deem necessary to effect AND to effect such insurance with an insurance company or underwriters of repute and through such agency as the Landlord from time to time deems fit and proper and to produce to the Tenant upon written request (but not more than once in every year) particulars of the policy or policies of such insurance and evidence of payment of the premium therefore 4.3 Reinstatement 4.3.1 If the Estate or any part shall be destroyed or damaged by any of the Insured Risks so as to render the Premises unfit for use and occupation (a) subject to the Landlord obtaining any planning or other permission necessary for rebuilding or reinstating the Premises (which the Landlord shall use reasonable endeavours to obtain as soon as reasonably practicable) and subject to the necessary labour and materials being and remaining available to rebuild or reinstate the Premises substantially as the same were prior to such destruction or damage (but not so as to provide accommodation identical in layout if it would not be reasonably practical so to do) and (b) in the event that the Landlord is prevented from rebuilding or reinstating the Premises or in the event that such rebuilding and reinstatement shall not be commenced within two (2) years and completed within 3 years after the date of such destruction or damage either party may by notice to the other determine this Lease but without prejudice to any claim by either party against the other in respect of any antecedent breach of covenant PROVIDED THAT upon any such determination the Landlord will be entitled to all the insurance monies and the Tenant shall have no claim with regard thereto -31- 4.3.2 The Landlord's obligations under this clause shall cease if and to the extent that the insurance shall be vitiated or the policy monies withheld as a consequence of any act or default of the Tenant or its servants agents licensees and invitees 4.4 Repair of Estate and provision of services Unless prevented by strikes lockouts electrical breakdown or interruption works of repair or replacement or other causes beyond the Landlord's control to comply with the obligations in paragraph 2 of the Fourth Schedule so far as consistent with the principles of good estate management 5 PROVISOS Provided as follows 5.1 Re-entry If 5.1.1 the Rents or any part thereof shall be in arrears for 21 days next after becoming payable (whether formally demanded or not) or 5.1.2 there shall be any breach non-performance or non-observance of any of the Tenant's covenants or 5.1.3 the Tenant shall enter into any arrangement or composition for the benefit of the Tenant's creditors or convene a meeting of the Tenant's creditors (or a nominee calls such a meeting on its behalf) or shall suffer any distress or execution to be levied on the Tenant's goods on the Premises or 5.1.4 the Tenant or a surety for the Tenant (a) is the subject of an interim order under Part VIII of the Insolvency Act 1986 or makes application to the Court for such an order or -32- (b) makes a voluntary arrangement under that Part or (c) has a bankruptcy order made against him or a bankruptcy petition presented against him or 5.1.5 a receiver receiver and manager or administrative receiver is appointed of all or any of the assets of the Tenant or any surety of the Tenant or 5.1.6 the Tenant or a surety for the Tenant (being a company) (a) makes a voluntary arrangement or submits to its creditors or any of them a proposal under Part I of the Insolvency Act 1986 or (b) makes an application to the Court under section 425 of the Companies Act 1985 or resolves to make such an application or (c) has a petition for an administration order under Part II of the Insolvency Act 1986 presented against it or is the subject of such an order or is subject to a resolution passed by its directors or shareholders for the presentation of a petition for such an order or (d) has a petition for winding up presented against it or is the subject of a resolution for voluntary winding up otherwise than for the purpose of an amalgamation or reconstruction of a solvent company which has been approved by the Landlord (such approval not to be unreasonably withheld or delayed) or in the event that a meeting of creditors is called to consider a resolution for winding up or (e) has an interim order or winding up order made against it or (f) ceases to exist it shall be lawful for the Landlord at any time thereafter to re-enter the Premises or any part thereof in the name of the whole and thereupon the Term shall absolutely determine but without -33- prejudice to any rights of action of the Landlord or the Tenant in respect of any antecedent breach by the other of any of the covenants herein 5.1.7 it is hereby agreed and declared that in the event that the Tenant comprises more than one person firm or body then the Landlord will be entitled to re-enter the Premises and the Term shall thereupon absolutely determine upon the happening of any of the events referred to in clauses 5.1.3 5.1.4 5.1.5 and 5.1.6 hereof in relation to any one of them 5.2 Payment of rent not waiver No demand for or receipt or acceptance of any part of the Rents or any payment on account thereof or any other act or deed by or on behalf of the Landlord shall operate as a waiver by the Landlord of any right which the Landlord may have to forfeit this Lease by reason of any breach of covenant by the Tenant and the Tenant shall not in any proceedings for forfeiture be entitled to rely on any such demand receipt acceptance act or deed as aforesaid as a defence PROVIDED THAT with regard to the demand receipt and acceptance of the Rents this proviso shall have effect in relation only to a demand receipt or acceptance made during such period as may in all the circumstances be reasonable for enabling the Landlord to conduct any negotiations with the Tenant for remedying the breach such period commencing when the Landlord becomes aware of such breach 5.3 Suspension of rent If the Premises shall at any time during the Term be so damaged or destroyed by any of the Insured Risks as to be unfit for occupation and use then (unless the insurance money shall be wholly or partly irrecoverable by reason solely or in part of any act or default of the Tenant or its servants agents or licensees) the Principal Rent or a fair proportion thereof according to the nature and extent of the damage sustained shall be suspended until the date when the Premises shall again be rendered fit for occupation and use or until the date Three (3) years from the date of such damage or destruction whichever date shall be the earlier and any dispute with reference to this -34- proviso shall be referred to a single arbitrator to be appointed in default of agreement upon the application of either party by or on behalf of the President or other competent official of the Royal Institution of Chartered Surveyors 5.4 Jurisdiction This Lease is subject to and governed by the laws of England & Wales 5.5 No warranty as to use 5.5.1 Nothing herein shall be deemed to constitute any warranty by the Landlord that the Premises or any part thereof are under the Planning Acts authorised for use for any specific purpose and the Tenant hereby acknowledges and admits that the Landlord has not given or made at any time any representation or warranty that such use is or will be or will remain a permitted use under the Planning Acts 5.5.2 Notwithstanding that the permitted use is not an authorised use under the Planning Acts the Tenant will remain fully liable to the Landlord in respect of any covenants or obligations on its part contained in this Lease for the residue of the Term 5.6 Exclusion of Landlord's liability 5.6.1 Subject to the provisions of the Unfair Contract Terms Act 1977 the Landlord shall not be responsible to the Tenant (save as and to the extent hereinbefore expressly provided) or its employees or visitors for any injury death damage destruction or financial or consequential loss whether to person property or goods sustained on or by reason of the condition of the Estate or of the Premises and 5.6.2 The Landlord will not be liable to the Tenant in respect of any failure by the Landlord to perform or provide the services referred to in the Fourth Schedule unless and until the Tenant has notified -35- the Landlord of such failure and the Landlord has failed within a reasonable time to remedy the same 5.7 Service of notices Section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery Service Act 1962 shall apply to the service of any notice required to be served under this Lease 5.8 Modification of compensation Subject to Section 38(2) of the Landlord and Tenant Act 1954 neither the Tenant nor any assignee or undertenant of the Term or of the Premises or any part of the Premises shall be entitled on quitting the Premises or any part to any compensation under Section 37 of the Act -36- 5.9 Distress In the event of any rent or other monies due under this Lease being in arrears for 14 days whether demanded or not the Landlord shall be entitled to enter into the Premises or any part thereof and to distrain and to apply the proceeds thereof in or towards the payment of the said rents or other monies 5.10 Removal of Goods If the Tenant shall leave any property on the Premises after the termination of the Term and shall not have removed the same within twenty working days of notice from the Landlord requiring such removal then the Landlord may on behalf of the Tenant (and the Landlord is hereby appointed by the Tenant to act in that behalf) sell such property and hold the proceeds of sale after deducting the costs of removal storage and sale incurred by it to the order of the Tenant provided always that the Tenant will indemnify the Landlord against all costs and claims proceedings and expenses arising out of or in connection with any such sale 5.11 Disputes between Tenants Any dispute between the Tenant and any other tenant of the Estate shall be referred to and settled by the Landlord's Surveyor whose opinion shall be binding save as to matters of law 5.12 No Building Scheme Nothing contained in this Lease shall give the Tenant a right to enforce or prevent the release or modification of any covenant or condition entered into by any other tenant of the Estate -37- 5.13 No other Easements Nothing herein contained shall impliedly grant or confer on the Tenant any rights save as expressly herein set out 5.14 Value Added Tax Any rent or other sum payable by the Tenant hereunder is exclusive of value added tax or other tax that is or may be payable thereon 5.15 It is hereby agreed that this Lease is a new tenancy for the purposes of Section 1 of the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act") 5.16 The Landlord may let transfer or otherwise dispose of any land or premises now or formerly or within 21 years from the date of this Lease comprised in the Estate and any buildings now or hereafter erected thereon on such terms and for such purposes as the Landlord may desire or approve 5.17 Where any rights of entry are reserved to the Landlord (and any persons authorised by the Landlord) hereunder such rights of entry shall only be exercised strictly subject to the following conditions (a) where the purpose for which the right of entry is to be exercised cannot reasonably be undertaken without access to the Premises (b) only after the giving of at least 48 hours written notice to the Tenant (save in case of emergency when no notice shall be required) (c) in such a way as to cause the minimum damage and inconvenience possible to the Tenant and the Tenant's business -38- (d) subject to the person exercising such rights forthwith making good to the reasonable satisfaction of the Tenant any damage or inconvenience caused to the Tenant and/or the Premises and/or the business carried on thereat and/or the stock and fixtures and fittings therein or thereon (e) such rights of entry only being exercised during normal business hours (save in case of emergency) (f) subject to such reasonable provisions and stipulations as the Tenant may lay down having due regard to Health and Safety issues and the nature of the Business carried on at and from the Premises EXECUTED AS A DEED by the parties -39- THE FIRST SCHEDULE Part 1 The Estate ALL THOSE the land and premises at Dawley Park Dawley Road Hayes Middlesex registered at H M Land Registry under Title Number NGL346507 together with the buildings from time to time erected or standing thereon known as land and premises at Dawley Park Dawley Road Hayes Middlesex all of which are shown edged green on the Plan Part 2 The Premises ALL THOSE land and buildings constructed at Dawley Park Dawley Road Hayes Middlesex all which said premises are for the purposes of identification only shown and edged red on the Plan hereto together also with the appurtenances thereof and all items in the nature of Landlord's fixtures and fittings from time to time in on or about or annexed to the Premises and all Service Media which are situate within and which exclusively serve the Premises -40- SECOND SCHEDULE Part 1 Rights granted In common with the Landlord and all other persons similarly entitled 1 The rights contained or referred to in registered title number NGL546507 so far as the same relate to the Premises are still subsisting and are capable of taking effect 2 Subject to the Tenant paying the Service Charge 2.1 the right at all times whether by day or night with or without vehicles of any description to pass and repass along the Service Road leading to and from the public highway from and to the Premises for all purposes connected with the use and enjoyment of the Premises 2.2 The right of way on foot at all times and for all purposes over any footpaths pavements or other pedestrian areas situate upon or within the Estate from and to the Premises for all purposes connected with the use and enjoyment of the Premises 2.3 full and free right and liberty for the Tenant (jointly and in common with the Landlord any occupiers of adjoining or neighbouring premises and their respective successors in title) to use the Service Conduits and Appliances serving the Premises now or to be laid during the term of this Lease under over and in the Estate and any adjoining or neighbouring property 3 The right of support shelter and protection for the Premises from the remainder of the Estate and all other parts of any building erected or to be erected thereon of which the Premises may form part as are at present enjoyed or intended to be enjoyed by the Premises 4 Such rights of access to and entry upon any adjoining or neighbouring part of the Estate as are necessary for the repair and maintenance of the Premises and/or for the proper performance and observance of the restrictions stipulations and conditions herein contained or the exercise of the -41- Tenant's rights hereunder the Tenant giving to the occupiers of such adjoining parts at least 48 hours' notice of exercise of such rights (except in case of emergency) and in the exercise of such rights the Tenant shall cause as little damage and interference to the fabric of the Estate as is reasonably practicable and shall make good forthwith all damage to the fabric of any property occasioned by the exercise of such rights to the reasonable satisfaction of the Landlord or the Surveyor 5 The right to display a sign showing the name and description of the Tenant's business upon any communal signboard provided upon the Estate together with the right to erect such other reasonable directional signs situate within the Common Parts of the Estate in order to direct visitors to the Premises Part 2 Rights reserved The following rights are excepted and reserved out of the Premises for the benefit of the Landlord and all the other tenants and occupiers of the Estate and persons authorised by the Landlord 1 Subject as provided in clause 5.17 the right at reasonable times on reasonable prior notice (except in case of emergency) to enter upon the Premises as often as may be necessary for all the purposes for which the Tenant covenants in this Lease to permit entry and for all purposes in connection with the compliance with any statutory requirements subject to the person or persons exercising such rights causing as little damage and interference to the fabric of the Estate as is reasonably practicable and making good as soon as practicable any damage caused to the Premises 2 The right for the Landlord to rebuild or alter any of the buildings upon the Estate now or hereafter adjoining or near to the Premises and to build upon or use any land upon the Estate now or hereafter belonging to the Landlord and adjoining or near to the Premises at any time or times and for any purposes whatsoever notwithstanding any temporary interference or damage caused thereby with or to the Premises (the Landlord causing as little damage and interference to the -42- Premises as reasonably practicable making good as soon as reasonably practicable any damage so caused to the reasonable satisfaction of the Tenant) or any interference to the enjoyment of light or air to or in respect of the Premises (and the said enjoyment of light and air whether to the existing or to any future windows or apertures of any structures of any description for the time being on the Premises is hereby agreed to be enjoyed under the express consent of the Landlord who may interfere with such enjoyment in manner aforesaid without any formal revocation of such consent) 3 Subject to clause 5.17 hereof the right with or without workmen and others as often as may be necessary and at all reasonable times upon reasonable prior written notice (except in case of emergency) to enter in and upon the Premises for the purpose of cleansing redecorating repairing altering removing renewing or rebuilding any other premises in the Estate or repairing or restoring any premises affording support shelter or protection to any other part of the Estate the person or persons exercising such rights causing as little damage as reasonably possible to the Premises and making good as soon as reasonably practicable any damage so caused to the reasonable satisfaction of the Tenant 4 The right of support shelter and protection for the remainder of the Estate from the Premises as are at present enjoyed or intended to be enjoyed by the remainder of the Estate 5 Subject to 5.17 hereof the right to the free passage and running of water soil gas electricity telephone and other services through the Service Conduits and Appliances which may now or hereafter during the Term be in on under over or through the Premises and serve the Estate with liberty to make connections with the Service Conduits and Appliances or any of them together further with the right with or without workmen and others as often as may be necessary and at all reasonable times upon reasonable prior written notice (except in case of emergency) to enter in and upon the Premises for the purpose of cleansing repairing altering or renewing the Service Conduits and Appliances and upon those parts of the Premises from time to time unbuilt upon for -43- the purposes of laying removing or constructing the Service Conduits and Appliances the person or persons exercising such rights causing as little damage as possible and making good as soon as reasonably practicable any damage occasioned thereby to the Premises -44- THIRD SCHEDULE Review of Principal Rent 1 In this Schedule (unless the context otherwise required admits) the following words and phrases shall have the following meanings Word or Phrase Meaning Review Date the day of in the years and any other date that becomes a Review Date pursuant to Paragraph 6 of this Schedul Market Rent the rent at which the Premises might reasonably be expected to be let with vacant possession by a willing lessor to a willing lessee without any premium or other consideration in the open market at the relevant Review Date for a term of the same duration as the residue of the Term or a term of Fifteen years whichever shall be the greater with vacant possession and for the use or uses permitted under this Lease and otherwise upon the terms of this Lease (other than the amount of rent hereby reserved but including the provisions for rent review) on the following assumptions (a) that all the Tenant's covenants in this Lease have been complied with and (b) that the Premises are fit and fitted out for immediate occupation and use and -45- (c) that in case the Premises have been destroyed or damaged or have become inaccessible they have been completely rebuilt reinstated or rendered accessible and (d) that the Premises are in a good state of repair and decorative condition and (e) that the Premises may lawfully be used for the uses permitted under this Lease and BUT DISREGARDING (a) any goodwill attached to the Premises by reason of the carrying on thereat by the Tenant or any undertenant of any business and (b) any effect on rent of any improvement to the Premises made (otherwise than pursuant to any obligation (other than an obligation to comply with statutes and the like) to the Landlord of the Tenant or any undertenant to carry out such work) by the Tenant or any undertenant during the Term at the sole expense of the Tenant or any undertenant and with the consent of the Landlord where the same is required pursuant to the terms of this Lease and in accordance with all necessary statutory and by-law consents and -46- (c) the effect on rent of any works to or alterations of the Premises which reduce their rental value and (d) the effect on rent of any rent free period or other concession or inducement which would or might be given to an incoming tenant on the grant of a lease of the Premises at the relevant Review Date to the intent that no discount shall be made in ascertaining the Market Rent to reflect such rent free period or other concession or inducement and that the Market Rent shall be that which would be payable after the expiry of every such rent free period and after receipt of such concession or inducement and (e) any restraint or restriction on the right to recover or increase rent imposed by any Act (f) the effect on rent of the works to the Premises listed in the Seventh Schedule hereto President the President for the time being of the Royal Institution of Chartered Surveyors or his duly appointed deputy or any person authorised by the President to make appointments on his behalf Surveyor a surveyor agreed upon by the Landlord and the Tenant or in default of agreement appointed by the President -47- agree or agreed agree or agreed in writing between the Landlord and the Tenant 2 From each Review Date the Principal Rent shall be such as may at any time be agreed between the Landlord and the Tenant as the Principal Rent payable from that Review Date or (in default of such agreement) whichever is the greater of 2.1 the Market Rent and 2.2 the Principal Rent contractually payable immediately before that Review Date 3 If by a date two months before the Review Date the rent payable from that Review Date has not been agreed the Landlord and the Tenant may agree upon a person to act as the Surveyor who shall determine the Market Rent but in default of such agreement then the Landlord or the Tenant may at any time whether before or after the Review Date make application to the President to appoint a surveyor to determine the Market Rent and such application shall request that the surveyor to be appointed shall if practicable be a specialist in the letting of industrial/warehouse premises in the area in which the Premises are situate 4 The Surveyor shall act as an arbitrator and the provisions of the Arbitration Acts for the time being in force shall apply 4.2 If the Surveyor refuses to act or is incapable of acting or dies or fails to give notice of his determination within the period stipulated above the Landlord or the Tenant may apply to the President for the further appointment of a surveyor which procedure may be repeated as many times as necessary 4.3 Any Surveyor appointed under this clause shall be required to produce a statement of reasons when making his determination -48- 5 If by a Review Date the Principal Rent payable from that Review Date has not been ascertained pursuant to this Schedule the Tenant shall continue to pay the Principal Rent at the rate previously payable and on the quarter day next after such ascertainment the Tenant shall pay to the Landlord the difference for the period ending on that quarter day between the Principal Rent paid and the Principal Rent so ascertained together with interest on such difference for such period at the Prescribed Rate prevailing upon the day upon which the shortfall is paid on each instalment of the Principal Rent due on or after the relevant Review Date on the difference between what would have been paid on each rent day had the revised rent been determined and the amount actually paid on account the interest being payable for the period from that date upon which each part of the instalment was due up to the date of payment of the shortfall 6 If at any Review Date there is by virtue of any Act a restriction upon the Landlord's right to review the Principal Rent or if at any time there is by virtue of any Act a restriction upon the right of the Landlord to recover the Principal Rent otherwise payable then upon the ending removal or modification of such restriction the Landlord may at any time thereafter give to the Tenant not less than one month's notice requiring an additional rent review upon a subsequent quarter day specified therein which quarter day shall for the purposes of this Schedule be a Review Date 7 A memorandum of the Principal Rent ascertained from time to time in accordance with this Schedule shall be signed by and on behalf of the Tenant and the Landlord respectively and exchanged between them 8 Time shall not be of the essence in agreeing or determining the reviewed rent or appointing an arbitrator or expert -49- FOURTH SCHEDULE Service Charge In this Schedule (and where appropriate the other schedules hereto unless the context otherwise requires) the following words and expressions shall have the meanings set out below "the Landlord's Costs" the reasonable costs and expenses from time to time properly incurred by the Landlord in providing the services herein mentioned "the Service Charge" the proportion of the Landlord's Costs attributable to the Premises and payable by the Tenant in accordance with the provisions of this Schedule being 38% until the date all land on the Estate has been developed by the construction of buildings for occupation by commercial tenants (as evidenced by the issue of certificates of practical completion for all of the buildings on the Estate copies of which shall be delivered to the Tenant) when it will be such proportion of the Landlord's Costs as is reasonably and properly determined by the Landlord to be equal to the proportion that the gross internal floor area of the Building on the Premises bears to the gross internal floor area of all the buildings on the Estate "the Amenity Areas" such landscaped areas as from time to time may be provided by the Landlord within the Common Parts of the Estate "the Common Parts" all parts of the Estate from time to time made available or provided by the Landlord for general use by the tenants or -50- occupiers of the Estate in common including without prejudice to the generality of the foregoing the Amenity Areas the Service Road and all other vehicular and pedestrian ways and areas external or fire escape routes service and other areas the Service Conduits and Appliances and all building or parts thereof reserved by the Landlord for the housing of plant machinery and equipment or otherwise in connection with or required for the provision of Landlord's services but excluding any of the aforesaid which are available for letting or specifically let or included in a demise to a particular tenant or tenants 2 The Landlord's Costs are those reasonable costs and expenses properly incurred for 2.1 repairing maintaining cleansing draining repainting and where necessary replacing and renewing the Common Parts 2.2 the maintenance of boundary fences or walls to the Estate 2.3 the provision of such control of traffic on the Service Road as the Landlord may from time to time reasonably consider necessary or desirable 2.4 repairing and maintaining or where necessary replacing any apparatus or equipment fixtures fittings decorations in or about the Common Parts or which are necessary for the provision of the services comprised herein 2.5 maintaining repairing cleansing emptying draining extending and amending the Service Media serving the Estate other than those for whose maintenance individual tenants are responsible 2.6 paying all rates taxes charges assessments and outgoings whatsoever (whether parliamentary parochial local or of any other description) assessed charged or imposed upon or payable in -51- respect of the Common Parts or any part thereof and the Service Media serving the same except insofar as the same are the responsibility of the Tenant or any other tenant 2.7 all reasonable costs charges and expenses of abating a nuisance and of executing all such works as may be necessary for complying with any notice served by a local authority in connection with the Common Parts or any part thereof or the Service Media serving the same insofar as the same is not the liability of or attributable to the fault of any individual tenant of any part thereof or the Landlord 2.8 looking after and providing for those areas (if any) of the Common Parts as may be grassed or planted or may be suitable for grassing or planting 2.9 paying any special costs which may be made or imposed by the local or other competent authority on the Common Parts or the Service Media serving the same and relate to or arise from the administration thereof and/or the provision of the service herein mentioned 2.10 providing maintaining renewing and insuring such equipment as may from time to time be reasonably necessary or desirable for the carrying out of the acts and things mentioned in this Schedule and any other services which the Landlord may in accordance with the principles of good estate management from time to time consider reasonably necessary and providing such accommodation as may in the Landlord's reasonable opinion seem necessary to house vehicles and equipment employed in providing services in accordance herewith to the Estate or the Service Conduits and Appliances serving the same 2.11 the proper and reasonable costs charges remuneration of the Landlord or any agent or agents employed by the Landlord to manage and administer the Estate or the Service Conduits and Appliances serving the same and also any other proper and reasonable expenses incurred by the Landlord in the administration or protection of the Estate or the amenities thereof or the Service Conduits and Appliances serving the same -52- 2.12 the reasonable costs charges and expenses of preparing and supplying to tenants copies of regulations made by the Landlord governing the use of the Estate or any part thereof 2.13 the provision maintenance and renewal of a board for the display of the names and locations of the tenants on the Estate and of any structure or any other board advertising the same 2.14 keeping proper records of all costs charges and expenses incurred by the Landlord in carrying out its obligations hereunder and if necessary employing a qualified accountant to audit the same 2.15 the insurance of any risks in relation to the Common Parts and all parts of the Estate for the time being unbuilt upon (but not any parts thereof which are or are intended to be available for sale or let) or which the Landlord has not yet developed) in respect of any public liability property owners and third party liability of the Landlord and risks arising by virtue of the employment of any person working on or engaged in the administration or maintenance of the Estate 2.16 the cost of electricity gas water and other services required for providing any of the Landlord's services 2.17 any irrecoverable Value Added Tax or other similar taxes levied or charged and paid in respect of the above mentioned heads of expenditure or otherwise in connection with provision of the services as aforesaid Provided that the Landlord shall be at liberty at any time to review the heads of expenditure or charge included in the Service Charge and to add thereto any items of expenditure not previously included therein which are in accordance with the principles of good estate management and reasonable in all the circumstances and from and after the relevant date of such review such additional items of expenditure charge allowance provision or value shall be included in the calculation of the service charge 3 Audited accounts for the Landlord's costs reasonably and properly incurred in connection with the provision of the services and amenities and in complying with the obligations in clause 6 of this -53- Lease for the period ending on the 31st day of December 1999 and for each subsequent year ending on the 31st day of December during the Term shall be prepared and a copy of each set of such Accounts shall be supplied by the Landlord to the Tenant within three months of the expiration of the period to which it relates together with a copy of the certificate from the Surveyor that such Account is correct and such certificate shall (apart from any manifest error) be final and binding on both parties and the Landlord shall also supply to the Tenant on request such evidence that any item of the Landlord's costs has been or will be incurred as the Tenant may reasonably require 4 The Surveyor shall determine and certify the Service Charge and such certificate shall apart from any manifest error be final and binding on both parties 5 The Tenant shall pay to the Landlord the amount of the Service Charge in the following manner 5.1 on the usual quarter days in each year during the said Term the Tenant shall pay to the Landlord in advance one quarter of the amount reasonably and properly estimated by the Landlord or the Surveyor to be the Service Charge for the current period of twelve months Provided always that the first payment thereunder shall be made on the signing hereof and shall be a proper proportion of the amount estimated by the Landlord or the Surveyor to be the Service Charge for the period between the date of this Lease and the day before the quarter day immediately after the date of this Lease 5.2 within twenty-one days after service by the Landlord on the Tenant of the copy of any account and certificates as referred to aforesaid the Tenant shall pay to the Landlord or be entitled to receive from the Landlord the balance by which the Service Charge exceeds or falls short of the total sum payable by the Tenant to the Landlord pursuant to the provisions of this clause for the year to which such account relates -54- FIFTH SCHEDULE Surety's Covenants Guarantee of Tenant's performance 1 The Surety hereby covenants with the Landlord as a primary obligation that 1.1 the Tenant will pay the Rents on the days and in manner aforesaid and will duly perform and observe all the Tenant's covenants herein and that in case of default the Surety will pay and make good to the Landlord on demand all loss damages costs and expenses thereby arising or incurred by the Landlord 1.2 the Surety will enter into any further lease granted by the Landlord to the Tenant whether pursuant to the Landlord and Tenant Act 1954 or otherwise to guarantee the obligations of the Tenant under such lease such guarantee to be on terms identical (mutatis mutandis) to the terms of this guarantee or on such other terms as may be reasonably required by the Landlord 1.3 in the event that a liquidator or trustee in bankruptcy shall disclaim or surrender the Lease or the Lease shall be forfeited the Surety shall if the Landlord so requires by notice given to the Surety within three (3) months after such event take from the Landlord a new lease of the Premises for the residue of the Term unexpired at the date of such event and at the Rents then payable and subject to the terms of this Lease in every respect and to execute and deliver to the Landlord a counterpart thereof and to pay to the Landlord the reasonable costs thereof 1.4 in the event that the Landlord shall not require the Surety to take up a lease in accordance with the provisions of paragraph 1.2 then the Surety shall pay to the Landlord a capital sum equal to three months' Rents that would have otherwise have been payable under this Lease 2 PROVIDED THAT AND IT IS HEREBY AGREED THAT 2.1 The Surety shall not be released or discharged in any way from its obligations under this Lease by -55- 2.1.1 any neglect or forbearance of the Landlord in endeavouring to obtain payment of the Rents when the same become payable or to enforce performance or observance of the Tenant's covenants herein and any time which may be given by the Landlord to the Tenant or 2.1.2 any variation of the terms of this Lease (save as provided by the 1995 Act) or 2.1.3 the transfer of the Landlord's reversionary interest immediately expectant on the termination of the Term or 2.1.4 any refusal by the Landlord to accept rent tendered by or on behalf of the Tenant at a time when the Landlord was entitled to re-enter the Premises or 2.1.5 any legal limitation and/or incapacity of Tenant and/or any change in the constitution or powers of the Tenant the Surety or the Landlord or 2.1.6 any liquidation administration or bankruptcy of the Tenant or the Surety or 2.1.7 any other act omission matter or thing whatsoever whereby but for this provision the Surety would be released 2.2 The Surety shall not be entitled to participate in or be subrogated to any security held by the Landlord in respect of the Tenant's obligations or otherwise to stand in the place of the Landlord in respect of any such security 2.3 The Surety hereby waives any right to require the Landlord to pursue against the Tenant any rights which may be available to the Landlord before proceeding against the Surety 2.4 The benefit of this guarantee shall enure for the successors in title of the Landlord without the requirement of any express assignment -56- SIXTH SCHEDULE Landlord's Fixtures 1 Sanitary fittings in main office and warehouse area (including but not limited to toilets wash hand basins showers vanity counters sanitary ironmongery soap dishes dispensers hat and coat hooks and toilet roll holders) 2 Supports for signage -57- SEVENTH SCHEDULE Works to be Disregarded on Rent Review 1 Item cancelled 2 Revised partition layout to entrance lobby 3 Item cancelled 4 Revised partitions to blending/prunus and paint 5 Steam cleaning pit 6 Machine pit to shot peen area 7 Machine pit to prunus area 8 Item cancelled 9 Drainage point for canteen 10 Item cancelled 11 Revised openings to internal partitions specifically the introduction of steel 12 Revised floor boxes to offices 13 Revised transformers and switchgear 14 Revised machine base details 15 Revised ducts to machine shop 16 Omit schedule of main services penetrations required for Hawker Pacific equipment 17 Revert to original location of loading bay door to stores between Grid Lines N and O 18 Item cancelled 19 Not current - HPA to resolve issue with Environment Agency 20 Revised edge detail for plating pit 21 Alterations to M&E at first floor offices to suit internal partitions, rejected 22 Increase size of cable ladder to facilitate machine shop cabling 23 Provide un-metered hose reel water supply 24 Item cancelled 25 Supply and install two pairs of double doors in lieu of two single doors to main works access corridor (under office plant room, grids 12-13/P-R) 26 Floor sealer and hardener to the steam clean pit and adjacent area of the floor slab, as indicated on sketch ref LB2723/SK11 (an epoxy coating will be applied to this area as part of the fit out works) -58- THE COMMON SEAL of ) SUN LIFE ASSURANCE SOCIETY PLC ) was hereto affixed in the presence of ) Authorised Signatory Signatory THE COMMON SEAL of ) HAWKER PACIFIC AEROSPACE LIMITED ) was hereto affixed in the presence of ) Director /s/ David L Lokken Secretary/Director /s/ Dennis Biety EXECUTED as a Deed by ) HAWKER PACIFIC AEROSPACE ) acting by DAVID L LOKKEN ) /s/ DAVID L LOKKEN -59- EX-10.39 4 SUBLEASE RELATED TO BUILDING 9, SUN VALLEY EXHIBIT 10.39 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD SUBLEASE (Short-form to be used with post 1995 AIR leases) 1. Parties. This Sublease, dated, for reference purposes only, January 14 ,1999, is made by and between Hawker Pacific Aerospace, a California Corporation ("Sublessor") and Abex Display Systems, Inc., a California Corporation ("Sublessee"). 2. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby subleases from Sublessor for the term, at the rental, and upon all of the conditions set forth herein, that certain real property, including all improvements therein, and commonly known by the street address of 7103 Fair Avenue, North Hollywood, CA 91605 located in the County of Los Angeles , State of California and generally described as (describe briefly the nature of the property) An approximately 17,010 square foot building ("Premises"). 3. Term. 3.1 Term. The term of this Sublease shall be for Twenty-four (24) months commencing on January 1, 1999 and ending on December 31, 2000 unless sooner terminated pursuant to any provision hereof. 3.2 Delay in Commencement. Sublessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises by the commencement date. If, despite said efforts, Sublessor is unable to deliver possession as agreed, the rights and obligations of Sublessor and Sublessee shall be as set forth in Paragraph 3.3 of the Master Lease (as modified by Paragraph 7.3 of this Sublease). 4. Rent. 4.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent for the Premises equal monthly payments of $8, 845. 00 in advance, on the First day of each month of the term hereof. Sublessee shall pay Sublessor upon the execution hereof 8,845.00 as Base Rent for January 1999. Base Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. 4.2 Rent Defined. All monetary obligations of Sublessee to Sublessor under the terms of this Sublease (except for the Security Deposit) are deemed to be rent ("Rent"). Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 5. Security Deposit. Sublessee shall deposit with Sublessor upon execution hereof $8, 845. 00 as security for Sublessee's faithful performance of Sublessee's obligations hereunder. The rights and obligations of Sublessor and Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of the Master Lease (as modified by Paragraph 7.3 of this Sublease). 6. Use. 6.1 Agreed Use. The Premises shall be used and occupied only for Storage and warehouse of display materials only.and for no other purpose. 6.2 Compliance. Sublessor warrants that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances ("Applicable Requirements") in effect on the commencement date. Said warranty does not apply to the use to which Sublessee will put the Premises or to any alterations or utility installations made or to be made by Sublessee. NOTE: Sublessee is responsible for determining whether or not the zoning is appropriate for its intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, or in the event that the Applicable Requirements are hereafter changed, the rights and obligations of Sublessor and Sublessee shall be as provided in Paragraph 2.3 of the Master Lease (as modified by Paragraph 7.3 of this Sublease). 6.3 Acceptance of Premises and Lessee. Sublessee acknowledges that: (a) it has been advised by Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Sublessee's intended use, (b) Sublessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Sublessor, Sublessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Sublease. In addition, Sublessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Sublessee's ability to honor the Sublease or suitability to occupy the Premises, and (b) it is Sublessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 7. Master Lease 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter the "Master Lease", a copy of which is attached hereto marked Exhibit 1, wherein ASP Burbank, LLC is the lessor, hereinafter the "Master Lessor" 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the Master Lease except for those provisions of the Master Lease which are directly contradicted by this Sublease in which event the terms of this Sublease document shall control over the Master Lease. Therefore, for the purposes of this Sublease, wherever In the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessor herein and wherever in the Master Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein. 7.4 During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this Sublease, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the Master Lease except for the following paragraphs which are excluded therefrom: 7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The obligations that Sublessee has not assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessor's Remaining Obligations". 7.6 Sublessee shall hold Sublessor free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys' fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublessee free and harmless from all liability, Judgments, costs, damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. Page 1 of 3 REVISED 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that no default exists on the part of any Party to the Master Lease. 8. Assignment of Sublease and Default. 8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's interest in this Sublease, subject however to the provisions of Paragraph 8.2 hereof. 8.2 Master Lessor, by executing this document, agrees that until a Default shall occur in the performance of Sublessor's Obligations under the Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing under this Sublease. However, if Sublessor shall Default in the performance of its obligations to Master Lessor then Master. Lessor may, at its option, receive and collect, directly from Sublessee, all Rent owing and to be awed under this Sublease. Master Lessor shall not, by reason of this assignment of the Sublease nor by reason of the collection of the Rent from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform and comply with Sublessor's Remaining Obligations. 8.3 Sublessor hereby Irrevocably authorizes and directs Sublessee upon receipt of any written notice from the Master Lessor stating that a Default exists in the performance of Sublessor's obligations under the Master Lease, to pay to Master Lessor the Rent due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any such statement and request from Master Lessor, and that Sublessee shall pay such Rent to Master Lessor without any obligation or right to inquire as to whether such Default exists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such Rent so paid by Sublessee. 8.4 No changes or modifications shall be made to this Sublease without the consent of Master Lessor. 9. Consent of Master Lessor. 9.1 In the event that the Master Lease requires that Sublessor obtain the consent of Master Lessor to any subletting by Sublessor then, this Sublease shall not be effective unless, within ten days of the date hereof, Master Lessor signs this Sublease thereby giving its consent to this Subletting. 9.2 In the event that the obligations of the Sublessor under the Master Lease have been guaranteed by third parties then neither this Sublease, nor the Master Lessor's consent, shall be effective unless, within 10 days of the date hereof, said guarantors sign this Sublease thereby giving their consent to this Sublease. 9.3 In the event that Master Lessor does give such consent then: (a) Such consent shall not release Sublessor of its obligations or alter the primary liability of Sublessor to pay the Rent and perform and comply with all of the obligations of Sublessor to be performed under the Master Lease. (b) The acceptance of Rent by Master Lessor from Sublessee or anyone else liable under the Master Lease shall not be deemed a waiver by Master Lessor of any provisions of the Master Lease. (c) The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. (d) In the event of any Default of Sublessor under the Master Lease, Master Lessor may proceed directly against Sublessor, any guarantors or anyone else liable under the Master Lease or this Sublease without first exhausting Master Lessor's remedies against any other person or entity liable thereon to Master Lessor. (e) Master Lessor may consent to subsequent sublettings and assignments of the Master Lease or this Sublease or any amendments or modifications thereto without notifying Sublessor or any one else liable under the Master Lease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event that Sublessor shall Default in its obligations under the Master Lease, then Master Lessor, at its option and without being obligated to do so, may require Sublessee to attorn to Master Lessor in which event Master Lessor shall undertake the obligations of Sublessor under this Sublease from the time of the exercise of said option to termination of this Sublease but Master Lessor shall not be liable for any prepaid Rent nor any Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any other Defaults of the Sublessor under the Sublease. 9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at the end of this document shall constitute their consent to the terms of this Sublease. 9.5 Master Lessor acknowledges that, to the best of Master Lessor's knowledge, no Default presently exists under the Master Lease of obligations to be performed by Sublessor and that the Master Lease is in full force and effect. 9.6 In the event that Sublessor Defaults under its obligations to be performed under the Master Lease by Sublessor, Master Lessor agrees to deliver to Sublessee a copy of any such notice of default. Sublessee shall have the right to cure any Default of Sublessor described in any notice of default within ten days after service of such notice of default on Sublessee. If such Default is cured by Sublessee then Sublessee shall have the right of reimbursement and offset from and against Sublessor. 10. Brokers Fee. 10.1 Upon execution hereof by all parties, Sublessor shall pay to The Seeley Company a licensed real estate broker, ("Broker"), a fee as set forth in a separate agreement between Sublessor and Broker, or in the event there is no such separate agreement, the sum of $2, 122.00 for brokerage services rendered by Broker to Sublessor in this transaction. Page 2 of 3 REVISED ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE. WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED. Executed at: Sun Valley, CA Hawker Pacific Aerospace -------------------------- ----------------------------------- on: January ,1999 By /s/ David Lokken ---------------------------------- -------------------------------- David Lokken, C.E.O. Address: 11240 Sherman Way, Sun Valley, CA By ---------------------------------- -------------------------------- "Sublessor" (Corporate Seal) (818) 765-6201 Executed at: North Hollywood, CA Abex Display Systems, Inc. -------------------------- ----------------------------------- on: January 28, 1999 By /s/ Robble Blumenfeld ---------------------------------- -------------------------------- Robble Blumenfeld, President Address: 7101 Fair Avenue, North Hollywood, CA By ---------------------------------- -------------------------------- "Sublessee" (Corporate Seal) (818) 765-5126 Executed at: Glendale, CA ASP Burbank, LLC -------------------------- ----------------------------------- on: January , 1999 By /s/ Scott R. Fitzgerald ---------------------------------- -------------------------------- Address: 801 N. Brand Blvd., #195, "Master Lessor" (Corporate Seal) Glendale, CA By Scott R. Fitzgerald Vice President NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower St., Suite 600, Los Angeles, CA 90017. (213) 6874777. Page 3 of 3 REVISED CORPORATE RESOLUTION The undersigned Director of HAWKER PACIFIC, INC., A California Corporation, hereby certifies that the following is a true and correct copy of a resolution duly and legally adopted by the Board of Directors of said Corporation on July 14, 1997, and that said resolution is unmodified and has not been revoked and is presently in full force and effect: RESOLVED 1) That this Corporation shall enter into a Lease with ALLSTATE INSURANCE COMPANY for the Premises described as 7103 FAIR AVENUE, NORTH HOLLYWOOD, CA 91605 for the rent and upon the terms and conditions of that certain Lease dated June 24, 1997, which has been presented to and reviewed by the Board of Directors. 2) That DAVID LOKKEN the Chief Executive Officer of said Corporation is hereby authorized to execute and deliver such Lease on behalf of the Corporation. Dated: July 14, 1997 (SEAL) /s/ Brian Aune ------------------------------------ Brian Aune Director and Chief Financial Officer CORPRES [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET (Do not use this form for Multi-Tenant Property) 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, June 24 , 1997 is made by and between ALLSTATE INSURANCE COMPANY, An Illinois Insurance Corporation ("Lessor") HAWKER PACIFIC. INC.. A California Corporation. ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 7103 Fair Avenue, North Hollywood, CA 91605 located in the County of Los Angeles, State of California and generally described as (describe briefly the nature of the property) approximately 17,010 sq. ft. building in a 358,392 sq. ft. industrial park (See Exhibit "A"). ("Premises"). (See Paragraph 2 for further provisions.) 1.3 Term: seven (7) years and -0- months ("Original Term") commencing October 1, 1997 ("Commencement Date") and ending September 30, 2004 ("Expiration Date"). (See Paragraph 3 for further provisions) 1.4 . Early Possession: N/A ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 Base Rent: $ 8,845.00 per month ("Base Rent"), payable on the 1st day of each month commencing October 1, 1997 (See Paragraph 4 for further provisions.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $ 8,845.00 as Base Rent for the period October 1-31, 1997 1.7 Security Deposit: $8,845.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: manufacturing/overhaul of aircraft components and all legal activities related thereto only. (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): DELPHI BUSINESS PROPERTIES represents [X] Lessor exclusively ("Lessor's Broker"); both Lessor and Lessee, and THE SEELEY COMPANY represents [X] Lessee exclusively ("Lessee's Broker"); both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (See Paragraph 37 for further provisions.) 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 60 and Exhibits A all of which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms. covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such noncompliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period, Any such early possession shall not affect nor advance the Expiration Date of the Original Term. INITIALS ---- PAGE 1 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, it no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. It possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement: Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which Is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month Involved. Payment of Base Rent and other charges shall be made to Lessor at Its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified In the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which Is comparable thereto, and for no other purpose; Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or Intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially Injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3)."Reportable Use" shall mean (I) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportage Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in Its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, If any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of Investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire Insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (Including but not limited to matters pertaining to (i) Industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time,: in the case of an emergency, and otherwise at reasonable time"., for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance. or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee Is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance; Repairs; Utility installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall,at Lessee's sole co expense and at all times, keep the Premises and every part thereof In good order, condition and repair, structural and non-structural (whether or not such portion of the Premises - requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs INITIAL ---- Page 2 as a result of Lessee's use, any prior use, the elements-or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired 'pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all Investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 Lessor's Obligations. Except for the warranties and agreements of Lessor contained in Paragraphs 2;2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it Is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the Improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined In Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor; whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with ail conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee, shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action U Lessor shall decide it is to its best interest to do so. 7.4 Ownership;- Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect In writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations, and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice, Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional Insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried By Lessor. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above. In addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss Page 3 or damage to the Pemises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof If, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall Insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision In lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such Insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined In Paragraph 9.1(c). (b) Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. It Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at Its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policy holders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current Issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to In this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the Insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8, The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises. Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in-the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall Include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to Judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee In such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for Injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, Invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage-Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not In force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by. Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earth e hall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. Page 4 9.3 Partial Damage-Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect. but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for Its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage-Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, it any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, If any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph S and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (I) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, In which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of 'such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the.receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or,assurance thereof within the times specified above, this Lease shall terminate as of the date, specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 Termination-Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without Interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 Definition of "Real Property Taxes." As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, tee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 Joint Assessment If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. Page 5 10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges Jointly metered with other premises. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), Increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, it disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, In the event of such Breach and market value adjustment, (I) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent Lessee agrees to provide Lessor with such other or additional Information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what Is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided In this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "Default" Is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specific herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. Page 6 (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default Is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) 'day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S)101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) It the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's-failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Pemises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such' event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, Inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which Initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charge Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14.Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent 25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Broker's Fee. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers Jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $ ) for brokerage services rendered by said Brokers to Lessor in this transaction. 15.4 Any buyer or transferee of Lessor's interest in this Lease, whether such transfer Is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a third party beneficiary of the provisions of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. Tenancy Statement. 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest In the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear Interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. 23. Notices. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified In this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party s address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or it no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of( Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State In which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee Is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall .execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorney's Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action. or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, Judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or addition's to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, Including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options 39.1 Definition. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) In the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period Immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to Institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, Insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, it more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the Joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Northbrook, Ill Executed at Sun Valley, CA -------------------------- ----------------------------------- on on 7-14-97 ---------------------------------- -------------------------------- by LESSOR: by LESSEE: ALLSTATE INSURANCE COMPANY HAWKER PACIFIC, INC. ---------------------------------- -------------------------------- By /s/ Barbara S. Brown By /s/ David Lokken ---------------------------------- -------------------------------- Name Printed: Barbara S. Brown Name Printed: David Lokken ---------------------------------- -------------------------------- Title: Authorized Signatories Title: C.E.0. ---------------------------------- -------------------------------- By By ---------------------------------- -------------------------------- Name Printed: Name Printed: ---------------------------------- -------------------------------- Title: c/o CB COMMERCIAL REAL ETATE Title: ---------------------------------- -------------------------------- Address: 533 S. Fremont Avenue Address: 11310 Sherman Way ---------------------------------- -------------------------------- Los Angeles, CA 90071 Sun Valley, CA 91352 ---------------------------------- -------------------------------- Tel. No. (818) 502-8037 Tel. No. (818) 765-6201 Fax No. (818) 240-0294 Fax No. (818) 265-8073 ---------------------------------- -------------------------------- NET PAGE 10 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213) 687-6777. Fax No. (213) 687-8616. ADDENDUM TO LEASE AGREEMENT THIS ADDENDUM TO LEASE AGREEMENT is dated June 24, 1997, by and between ALLSTATE INSURANCE COMPANY, AN ILLINOIS INSURGENCE CORPORATION, ("Lessor"), and HAWKER PACIFIC, INC., A CALIFORNIA CORPORATION, ("Lessee") for the Premises commonly known as 7103 Fair Avenue, North Hollywood, CA 91605. This Addendum is attached to, and made a part of, the above referenced Standard Industrial/Commercial Single-Tenant Lease-Net (together with this Addendum, the "Lease"). The provisions of this Addendum shall govern and supersede any, and all, contrary or inconsistent provisions of the preprinted portion of the Lease. 49. INSURANCE: Lessor agrees that during the Lease Term it will insure the Building (excluding any property which Lessee is obligated in insure) for its full replacement cost against loss due to fire and other casualties included in standard "extended coverage insurance. In addition, Lessor will maintain public liability and loss of rental income insurance. Lessee shall, at its own expense, procure and maintain during the Lease Term, commercial general liability insurance with respect to the Leased Premises and Lessee's activities in the Leased Premises and in the Building, providing bodily injury, broad form property with a maximum $10,000.00 deductible, or such other amount approved by Lessor in writing, as follows: a. $1,000,000., with respect to bodily injury or death to any one person; b. $1,000,000., with respect to bodily injury or death arising out of any one occurrence; c. $1,000,000., with respect to property damage or other loss arising out of any one occurrence; d. Fire and extended casualty insurance covering Lessee's trade fixtures, merchandise and other personal property in an amount not less than 100% of their actual replacement cost, and; e. Worker's Compensation insurance in at least the statutory amounts. Nothing in this Paragraph shall prevent Lessee from obtaining insurance of the kind and in the amount provided for under this Paragraph under a blanket insurance policy covering other properties as well as the Leased Premises, provided, however, that any such policy of blanket insurance (i) shall provide that the amount of insurance or the coverage required hereunder shall not be prejudiced by any other losses under such blanket policy, and (ii) such amounts so specified shall be sufficient to prevent any one of the assured from becoming a co-insurer within the terms of the applicable policy, and (iii) shall, as to the Leased Premises, otherwise comply as to endorsements and coverage with the Provisions of the Paragraph. Lessee's insurance shall be with a Best's Insurance Reports A+ rated company (or A rated, if Class XIII or larger). Lessor and Lessor's mortgagee, if any, shall be named as "Additional Insurers" under Lessee's insurance, and such Lessee's insurance shall be primary and non-contributing with Lessor's insurance. Lessee's insurance policies shall contain endorsements requiring 30 day's notice to Lessor and Lessor's mortgagee, if any, prior to any cancellation, lapse, or non-renewal or and reduction in amount of coverage. Lessee shall deliver to Lessor, as a condition precedent to its taking occupancy of the Leased Premises, a certificate (or certificates) evidencing such insurance. 1 of 4 50. WAIVER OF CERTAIN CLAIMS: Lessee, to the extent permitted by law, waives all claims it may have against Lessor, and against Lessor's agents and employees, for any damages sustained by Lessee or by any occupant of the Leased Premises, or by any other person, resulting from any cause arising at any time, except for those claims arising from Lessor's gross negligence or willful misconduct. Lessee agrees to hold Lessor harmless and indemnified against claims and liability for injuries to all persons and for damages to or loss of property occurring in or about the Leased Premises or the Building, due to Lessee's breach of this Lease or any act of negligence or default under the Lease by Lessee, its contractors, agents, employees, licensees and invitees, except for those claims arising from Lessor's gross negligence or willful misconduct. 51. LIMITATION OF LESSOR'S LIABILITY: The obligations of Lessor under this Lease do not constitute personal obligations of the individual partners, shareholders, directors, officers, employees or agents of Lessor, and Lessee shall look solely to Lessor's interest in the building and Land (and the proceeds thereof) and to no other assets of Lessor for satisfaction of any liability in respect of this Lease. Lessee will not seek recourse against the individual partners, shareholders, directors, officers, employees or -agents of Lessor, or any of their personal assets for such satisfaction. Notwithstanding any other provisions contained herein, Lessor shall not be liable to Lessee, its contractors, agents, or employees for any consequential damages or damages for loss of profits. 52. RENTAL ADJUSTMENTS: See Addendum attached hereto and made a part hereof by reference. 53. MAINTENANCE AND REPAIRS: Notwithstanding anything contained in Paragraph 7.1 or 7.2 herein to the contrary, Lessor agrees that at all times during the Term of this Lease, it will maintain the structural portions of the Premises, including without limitation the foundation, floor/slab, roof structure and exterior roof covering, columns, and beams (collectively, "Building Structure") in good condition and repair, at Lessor's sole cost and expense. In the event the damage or needed repair is a result of Lessee's actions, use of the Premises and/or failure to properly maintain, the repair shall be at the sole cost and expense of Lessee. 54. CONDITION OF PREMISES: Premises shall be delivered to Lessee in their "As Is" condition, subject to, and without in any way limiting, the warranties contained within the Lease (including without limitation Paragraph 2.2 and 2.3 of this Lease), except that prior to occupancy being tendered to Lessee, Lessor at its sole cost and expense shall perform the following work upon the Premises: A. Paint the exterior front (east side) of the Premises and the interior office and bathroom areas; B. Install new carpeting in the existing offices (Lessor's Standard). 55. LESSEE'S IMPROVEMENTS: Lessee shall have the right to perform the following improvements upon the Premises at its sole cost and expense: A. Install a fire sprinkler system; B. Install a "paint room"' C. Install two-ton overhead cranes (subject to a structural engineer report); D Install metal halide lighting throughout the warehouse area; All said work shall be performed subject to any, and all, applicable governmental rules and regulations and permit processes. Lessor shall reserve the right to request that Lessee remove said improvements at the expiration of the Lease Term, as extended, and restore the building to its original condition 2 of 4 All such improvements not permanently affixed to the Premises shall remain the property of Lessee, and may be removed at the expiration of the Lease Term, as extended, and Lessee shall repair any damage to the Premises caused by such removal. 56. IMPOUND FOR NET CHARGES: Lessee shall pay to Lessor, on the first day of every month of the Lease Term, as extended, as additional rental, the sum of $1,445.85 as its estimated cost for Real Property Tax, Premise Insurance and Common Area Expense applicable to the Premises, subject to an annual recap of the actual expense. Lessor may increase or decrease this estimated payment during the Lease Term based upon the actual amounts. Common Area Expense shall be defined as either the direct costs associated with Lessee's Premises (i.e., landscaping maintenance) and/or Lessee's pro-rata share of the general cost of maintaining all of Lessor's property at the Burbank Airport Business Park, such as maintenance staff and supplies. Lessee and Lessor acknowledge that the Premises are equal to 9.6% of the total square footage in the Park (358,392). 57. RENTAL ABATEMENT: The Base Monthly Rental specified in Paragraph 1.5 herein during the second (2nd), third (3rd), fourth (4th) and fifth (5th) months of the initial Lease Term only shall be Abated ("Free") by fifty (50%) percent. The portion of the Base Monthly Rental not paid pursuant to this Paragraph, together with any postponed rent or other rental concessions under this Lease is collectively referred to as "Abated Rent". The Abated Rent set forth in this Paragraph shall be subject to all of the provisions set forth in Paragraph 13.3 of the Lease. 58. SURFACE WATER ABATEMENT: During the term of this Lease, Lessor, at its sole cost and expense, shall be responsible to make necessary repairs to the Premises to prevent "surface water" from entering the Premises. Provided that Lessor is using its reasonable best efforts to correct any such condition, Lessor shall have no responsibility for any damage caused as a result of surface water entering the Premises. 59. HAZARDOUS MATERIALS: Lessee shall not store, use and/or dispose of any Hazardous Substances on, or within, the Premises without the explicit prior written consent of Lessor. Lessee hereby discloses to Lessor that the following materials shall be stored within, and used upon, the Premises, in compliance with all applicable laws, and Lessor hereby grants its consent to the use of these materials provided they are stored, used and disposed of in compliance with all applicable laws and governmental rules and regulations: A. Oil and water mixtures; B. Solvents; C. Paint shop related wastes; D. Used "blast media"; E. Assorted abrasives. Should Lessee desire to store any different materials within the Premises, it shall first notify Lessor in writing and receive Lessor's written permission before bringing said new materials onto the Premises. 60. EXISTING RAMP: Lessor and Lessee acknowledge that a prior Tenant of the Premises constructed a "ramp" to the building directly to the west of the Premises. Lessor will not be held responsible for, or warrant that it meets all applicable building codes and permit requirements. Lessee may use same during the Lease Term, but shall be responsible for any modifications to same to meet any, and all, applicable building codes. 3 of 4 This Addendum to Lease is executed as of the date first written above. LESSOR: ALLSTATE INSURANCE COMPANY By: /s/ Barbara S. Brown ----------------------------------- Barbara S. Brown Its: Authorized Signatories LESSEE: HAWKER PACIFIC, INC. By: /s/ David Lokken ----------------------------------- David Lokken Its: Chief Executive Officer 4 of 4 [LOGO] RENT ADJUSTMENT(S) ADDENDUM TO STANDARD LEASE Dated June 24, 1997 -------------------------------------------- By and Between (Lessor) ALLSTATE INSURANCE COMPANY -------------------------- (Lessee) HAWKER PACIFIC, INC. -------------------------- Property Address: 7103 Fair Avenue, North Hollywood, CA ------------------------------------- Paragraph 52 -- A. RENT ADJUSTMENTS: The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] 1. Cost of Living Adjustment(s) (COL) (a) On (Fill in COL Adjustment Date(s): April 1, 1999; October 1, 2000; ------------------------------ April 1, 2002 and October 1, 2003 the monthly rent payable under paragraph 1.5 - --------------------------------- ("Base Rent") of the attached Lease shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): CPI W (Urban Wage Earners and Clerical Workers) or [X] CPI U (All Urban Consumers), for (Fill In Urban Area): Los Angeles, Anaheim, Riverside , All Items (1982-1984 ------------------------------- = 100), herein referred to as "C.P.I." (b) The monthly rent payable in accordance with paragraph Al(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph AI(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar --------------------------- month which is two (2) months prior to (select one): [X] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [_] (Fill in Other "Base Month"): ______________________________. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. [_] II. Market Rental Value Adjustment(s) (MRV) (a) On (Fill in MRV Adjustment Date(s): N/A _____________________________ ________________________________________________________________________________ the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted to the "Market Rental Value" of the property as follows: 1) Four months prior to the Market Rental Value (MRV) Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an agreed upon new MRV for the specified term. If agreement cannot be reached, then: i) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the parties, or ii) Both Lessor and Lessee shall each immediately select and pay the appraiser or broker of their choice to establish a MRV within the next 30 days. If, for any reason, either one of the appraisals is not completed within-the next 30 days, as stipulated, then the appraisal that is completed at that time shall automatically become the new MRV. If both appraisals are completed and the two appraisers/brokers cannot agree on a reasonable average MRV then they shall immediately select a third mutually acceptable appraiser/broker to establish a third MRV within the next 30 days. The average of the two appraisals closest in value shall then become the new MRV. The costs of the third appraisal will be split equally between the parties. ** The sum so calculated shall constitute the new monthly rent hereunder, but in no event shall any new monthly rent be less than four and one-half (4 1/2%) percent greater than, nor more than nine (9%) percent higher than the rent payable for the month immediately preceding the date for the rent adjustment. As an example, at the first adjustment on April 1, 1999, the minimum new monthly rent shall be $9,243.03, and the maximum new monthly rent shall be $9,641.05. Initials: BB Initials: DL ----------- ----------- RENT ADJUSTMENT(S) Pages 1 of 2 2) In any events the new MRV shall not be less than the rent payable for the month immediately preceding the date for rent adjustment. b) Upon the establishment of each New Market Rental Value as described in paragraph All: 1) the monthly rental sum so calculated for each term as specified in paragraph All(a) will become the new "Base Rent" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph Al(a) above and 2) the first month of each Market Rental Value term as specified in paragraph All(a) shall become the new "Base Month" for the purpose of calculating any further Cost of Living Adjustments as specified In paragraph Al(b). III. Fixed Rental Adjustment(s) (FRA) The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s)): The New Base Rental shall be: N/A $ ------------------------------------ ---------------------------- $ ------------------------------------ ---------------------------- $ ------------------------------------ ---------------------------- $ ------------------------------------ ---------------------------- B. NOTICE:. Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustment(s) shall be made as specified in paragraph 23 of the attached Lease. C. BROKER'S FEE: Initials: BB Initials: DL --------------- ------------ RENT ADJUSTMENT(S) Page 2 of 2 NOTICE: These forms are often modified to meet changing requirements of law and Industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-8616. BURBANK AIRPORT BUSINESS PARK Plot Plan EXHIBIT "A" EX-10.40 5 FORBEARANCE AGREEMENT DATED 3/10/1999 EXHIBIT 10.40 Heller Financial, Inc. 500 West Monroe Street Chicago, Illinois 60661 312 441 7000 Heller Financial March 10, 1999 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited 11240 Sherman Way Technical Block A (5362) Sun Valley, California 91352 P.O. Box 10, London Heathrow Airport Attention: Philip Panzera Hounslow, Middlesex TW6 2JA United Kingdom Attention: Dennis Biety Re: Forbearance Letter Gentlemen: This letter is delivered pursuant to that certain Loan and Security Agreement dated as of December 22, 1998 (as from time to time amended, restated, supplemented or otherwise modified, the "Loan Agreement") by and among Hawker Pacific Aerospace ("U.S. Borrower"), Hawker Pacific Aerospace Limited ("U.K. Borrower" and, collectively with U.S. Borrower, the "Borrowers"), Heller Financial, Inc., as Agent and as a Lender (the "Agent"), NMB-Heller Limited, as Funding Agent and Collateral Agent, and the other Lenders from time to time party thereto. All capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Loan Agreement. Pursuant to paragraph (A) of the Financial Covenants Rider to the Loan Agreement, the minimum Tangible Net Worth required to be maintained as of December 31, 1998 was $21,500,000. Pursuant to paragraph (B) of the Financial Covenants Rider to the Loan Agreement, the minimum EBITDA required for the Fiscal Year ended as of December 31, 1998 was $7,000,000. Pursuant to paragraph (D) of the Financial Covenants Rider, the minimum Fixed Charge Coverage permitted for the twelve month period ended as of December 31, 1998 was 1.00:1.00. Based upon your monthly financial statements for the month ended December 31, 1998 and for the Fiscal Year ended as of such date and the Compliance Certificate for such period delivered in connection therewith, actual Tangible Net Worth as of December 31, 1998 was $20,601,394, actual EBITDA for the Fiscal Year ended as of December 31, 1998 was $4,808,129 and actual Fixed Charge Coverage for the twelve months ended as of December 31, 1998 was .45:1:00. In addition, pursuant to paragraph (L) of the Reporting Rider, Borrowers were required to deliver, no later than January 31, 1999, Projections for Fiscal Year 1999, prepared on a month-by-month basis, which Projections have not delivered as of the date hereof; this letter hereby serves as notice to you of such Default. Pursuant to subsection 8.1(C) of the Loan Hawker Pacific Aerospace Hawker Pacific Aerospace Limited March 10, 1999 Page 2 of 5 Agreement, such breaches of the covenants set forth in paragraphs (A), (B) and (D) of the Financial Covenants Rider constitute immediate Events of Default under the Loan Agreement and, pursuant to subsection 8.1(E) of the Loan Agreement, the breach of the covenant set forth in paragraph (L) of the Reporting Rider will constitute an Event of Default if not remedied within ten days after the date of this letter. Such Events of Default and such Default shall be collectively referred to herein as the "Existing Events of Default". Borrowers hereby recognize and acknowledge that the Existing Events of Default have occurred and are continuing. Borrowers hereby further recognize and acknowledge that, absent the effectiveness of this letter agreement, Agent, Funding Agent, Collateral Agent and Lenders have the right, in accordance with the provisions of the Loan Agreement and the other Loan Documents, to (i) immediately cease making additional Loans and issuing Lender Letters of Credit and to cause their obligation to lend their respective Pro Rata Shares of the Commitments to be suspended; (ii) declare all or any portion of the Loans and all or some of the other Obligations to be immediately due and payable together with accrued interest thereon, and to terminate the obligations of Agent, Funding Agent, Collateral Agent and Lenders to make Loans and issue Lender Letters of Credit; (iii) demand that Borrowers immediately deposit with Agent an amount equal to 105% of the aggregate outstanding Letter of Credit Reserve to enable Agent or any Lender to make payments under the Lender Letters of Credit when required; and (iv) exercise such other rights and remedies available to Agent, Funding Agent, Collateral Agent and Lenders under the Loan Documents or at law or in equity, including without limitation the right to immediately enforce their Liens on the Collateral. As a result of the Existing Events of Default, you are hereby formally notified that, pursuant to and in furtherance of the verbal notice given to you by Agent on February 19, 1999, Agent has, as of such date, established a reserve against the Borrowing Base of $5,000,000, which reserve shall remain in effect at all times from and after February 19, 1999 until such time, if any, as Agent shall give Borrowers written notice to the contrary. You are hereby advised that from and after the date of this letter, and continuing for so long as the Existing Events of Default are continuing, Agent, Funding Agent, Collateral Agent and Lenders hereby agree to forbear from exercising the rights and remedies afforded Agent and Lenders under the Loan Agreement and the other Loan Documents as a result of the Existing Events of Default (other than the establishment of a reserve against the Borrowing Base as set forth above, which reserve may be maintained or modified at any time by Agent in its sole discretion notwithstanding the terms of this letter), but only for the period commencing on the Effective Date of this letter through the earlier of (a) the date on which a Forbearance Default shall have occurred and be continuing, and (b) March 30, 1999 (the "Forbearance Period"), and only subject to the terms and conditions set forth in paragraphs (1) through (6) below (collectively, the "Forbearance Conditions"): (1) Notwithstanding anything contained in the Loan Documents to the contrary (including without limitation that certain Post Closing Matters and Waiver Agreement dated as of the Closing Date), Borrowers shall (a) as promptly as practicable following the date hereof, establish or cause to be established the U.S. Blocked Accounts Hawker Pacific Aerospace Hawker Pacific Aerospace Limited March 10, 1999 Page 3 of 5 as required pursuant to subsection 4.26(A) of the Loan Agreement, and (b) use their best efforts to, as promptly as practicable following the date hereof, establish or cause to be established the U.K. Blocked Accounts as required pursuant to subsection 4.26(B) of the Loan Agreement; (2) Notwithstanding anything contained in the Loan Documents to the contrary (including without limitation the provisions of paragraph (F) of the Reporting Rider to the Loan Agreement), from and after the Effective Date and at all times thereafter until Agent shall give Borrower Representative written notice to the contrary, Borrower Representative shall deliver to Agent and Funding Agent Borrowing Base Certificates on the second Business Day of each week (as appropriate for weekly use), setting forth the calculation of the Borrowing Base as of the last Business Day of the immediately preceding week, and otherwise in the form and containing the information required pursuant to paragraph (F) of the Reporting Rider; (3) As promptly as practicable and in any event no later than March 30, 1999, Borrowers shall retain the services of a third party turnaround consultant acceptable to Agent to evaluate and assist, if necessary, in the turnaround efforts for the U.K. Borrower (including without limitation those efforts described in the turnaround implementation plan required to be delivered pursuant to paragraph (4) below); (4) On or prior to the Effective Date (notwithstanding the ten day grace period which might otherwise be available under subsection 8.1(E) of the Loan Agreement), Borrowers shall deliver to Agent Projections for Borrowers' Fiscal Year 1999, prepared on a month-by-month basis, which Projections shall not forecast any material decline in Borrowers' financial condition or financial performance for such Fiscal Year from that set forth in the quarter-by-quarter Projections for such Fiscal Year delivered as of the Closing Date, other than any such decline resulting from the downward adjustment in Borrowers' EBITDA of $3,546,000 effected as of December 31, 1998. In addition, on or prior to the Effective Date, Borrowers shall deliver to Agent a turnaround implementation plan with respect to the U.K. Borrower, which plan shall be satisfactory to Agent in form, scope and substance; and (5) On the Effective Date, and in consideration of the execution and delivery of this letter by Agent, Borrowers shall pay to Agent a forbearance fee of $75,000, and thereafter, without limitation of the provisions of subsection 10.1 of the Loan Agreement, Borrowers shall pay or reimburse Agent and Funding Agent for all fees, costs and expenses incurred by them in connection with this letter, the Existing Events of Default, any Forbearance Default and/or any third party consultants, accountants or other professionals retained by Agent or Funding Agent in connection with the analysis or implementation of any turnaround plans regarding the U.K. Borrower or the Borrowers collectively. 3 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited March 10, 1999 Page 4 of 5 By execution of this letter agreement, Borrowers hereby represent and warrant that as of the date hereof, no Forbearance Default has occurred and is continuing. For purposes of this letter: (i) the term "Forbearance Default" means the occurrence and continuance of any Default or Event of Default under the Loan Agreement or any of the other Loan Documents other than the Existing Events of Default, or the failure by Borrowers or either of them as of any date of determination to satisfy any of the Forbearance Conditions required to be satisfied as of such date; and (ii) the term "Effective Date" shall mean the date on which a counterpart of this letter, duly executed by each Borrower, is delivered to Agent, together with payment of the forbearance fee required pursuant to paragraph (5) of the Forbearance Conditions, which date shall occur no later than March 6, 1999 (and the foregoing agreement to forbear shall be of no force or effect if the Effective Date does not occur on or prior to March 6. 1999). The foregoing agreement to forbear shall be limited precisely as written and, except as expressly set forth in this letter, shall not be deemed to (i) be a waiver of the Existing Events of Default or of Agent's, Funding Agent's, Collateral Agent's or Lenders' right to exercise or enforce any of their rights and remedies under the Loan Agreement or the other Loan Documents, as more fully described above; (ii) be a waiver or modification of any other term or condition of the Loan Agreement or of any of the other Loan Documents; or (iii) prejudice any right or rights which Agent, Funding Agent, Collateral Agent or Lenders may now have or may have in the future under or in connection with the Loan Agreement or any of the other Loan Documents. You are hereby further advised that, during the Forbearance Period, the Agent may, in its sole discretion, consider working with Borrowers on a potential restructuring of the credit facilities provided under the Loan Agreement and the other Loan Documents, provided that you hereby acknowledge and agree that (a) neither Agent, Funding Agent, Collateral Agent or any Lender is obligated or in any way committed to enter into any such restructuring, (b) none of Agent, Funding Agent, Collateral Agent or any Lender has sought or obtained the approval of their respective internal credit authorities as to any such restructuring or any potential terms and conditions thereof, (c) this letter shall not be deemed or construed as obligating any of Agent, Funding Agent, Collateral Agent or any Lender to seek or obtain any such approval, and (d) the terms and conditions of any such restructuring, if one should occur, are not known at this time. However, you are hereby advised that in the event any such restructuring were to be consummated, one condition precedent thereto would be that, prior to or contemporaneously with any such restructuring, the portion of the Subordinated Debt of U.S. Borrower repaid to Unique on the Closing Date (which repayment was in the amount of $2,500,000) would be required to be reinvested by Unique in Subordinated Debt or other junior capital of U.S. Borrower, in such form and on such terms and conditions as may be acceptable to Agent at such time. You are hereby further advised that, except for the agreement of Agent, Funding Agent, Collateral Agent and Lenders to forbear from exercising their rights and remedies during the Forbearance 4 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited March 10, 1999 Page 5 of 5 Period as set forth above, Agent, Funding Agent, Collateral Agent and Lenders expressly reserve the right to exercise any or all of their rights and remedies under the Loan Agreement and the other Loan Documents or otherwise now or at any time hereafter. None of the statements set forth in this letter, any prior oral or written statements by Agent, Funding Agent, Collateral Agent or any Lender to Borrowers, the making of further advances or other extensions of credit to Borrowers, or the failure of Agent, Funding Agent, Collateral Agent or any Lender to exercise any of its rights and remedies against Borrowers now or at any time in the future, shall be deemed a waiver of the Existing Events of Default described herein, a waiver of any such rights and remedies or a waiver or modification of any of the terms of the Loan Agreement or any of the other Loan Documents, all of which remain in full force and effect. Very truly yours, HELLER FINANCIAL, INC., as Agent By: /s/ Anthony Vizgirda ----------------------------- Title: Vice President ACKNOWLEDGED AND AGREED TO this 11 day of March, 1999 by HAWKER PACIFIC AEROSPACE By: /s/ David L. Lokken ------------------------------- Title: Chief Executive Officer ACKNOWLEDGED AND AGREED TO this 11 day of March, 1999 by HAWKER PACIFIC AEROSPACE LIMITED By: /s/ David L. Lokken ------------------------------ Title: Director cc: Yvonne E. Chester, Esq. Troy & Gould Professional Corporation 1801 Century Park East, Suite 1600 Los Angeles, California 90067 and Andrew Heathcock, Esq. Paris, Smith & Randall, Solicitors Number 1, London Road Southhampton, Hampshire S015 2AE United Kingdom 5 EX-10.41 6 SECOND FOREBEARANCE AGREEMENT DATED 4/13/1999 EXHIBIT 10.41 April 13, 1999 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited 11240 Sherman Way Technical Block A (5362) Sun Valley, California 91352 P.O. Box 10, London Heathrow Airport Attention: Philip M. Panzera Hounslow, Middlesex TW6 2JA United Kingdom Attention: Dennis Biety Re: Second Forbearance Letter GENtLEMEN: This letter is delivered pursuant to that certain Loan and Security Agreement dated as of December 22, 1998 (as from time to time amended, restated, supplemented or otherwise modified, the "Loan Agreement") by and among Hawker Pacific Aerospace ("U.S. Borrower"), Hawker Pacific Aerospace Limited ("U.K. Borrower" and, collectively with U.S. Borrower, the "Borrowers"), Heller Financial, Inc.,. as Agent and as a Lender (the "Agent"), NMB-Heller Limited, as Funding Agent and Collateral Agent, and the other Lenders from time to time party thereto. All capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Loan Agreement. Pursuant to paragraph (A) of the Financial Covenants Rider to the Loan Agreement, the minimum Tangible Net Worth required to be maintained as of December 31, 1998 was $21,500,000. Pursuant to paragraph (B) of the Financial Covenants Rider to the Loan Agreement, the minimum EBITDA required for the Fiscal Year ended as of December 31, 1998 was $7,000,000. Pursuant to paragraph (D) of the Financial Covenants Rider, the minimum Fixed Charge Coverage permitted for the twelve month period ended as of December 31, 1998 was 1.00:1.00. Based upon your monthly financial statements for the month ended December 31, 1998 and for the Fiscal Year ended as of such date and the Compliance Certificate for such period delivered in connection therewith, actual Tangible Net Worth as of December 31, 1998 was $20,601,394 actual EBITDA for the Fiscal Year ended as of December 31, 1998 was $4,808,129 and actual Fixed Charge Coverage for the twelve months ended as of December 31, 1998 was 45:1:00. Pursuant to subsection 8.l(C) of the Loan Agreement, such breaches of the covenants set forth in paragraph (A), (B) and (D) of the Financial Covenants Rider constitute immediate Events of Default under the Leon Agreement; such Events of Default shall be collectively referred to herein as the "Existing Events of Default". Hawker Pacific Aerospace Hawker Pacific Aerospace Limited April 13, 1999 Page 2 of 7 Borrowers hereby recognize and acknowledge that (a) in connection with the Existing Events of Default, Agent and Borrowers entered into those certain letter agreements dated as of March 4, 1999 and March 10, 1999 (collectively, the "Prior Forbearance Letter"), that the "Forbearance Period" as defined in the Prior Forbearance Letter (the "Prior Forbearers Period") expired as of March 30, 1999, and that the agreement to forbear set forth in the Prior Forbearance Period is thus of no further force and effect, and (b) the Existing Events of Default continue to exist as of the date hereof Based on the foregoing, Borrowers hereby further recognize and acknowledge that, absent the effectiveness of this letter agreement, Agent, Funding Agent, Collateral Agent and Lenders have the right, in accordance with the provisions of the Loan Agreement and the other Loan DOCUMENTS , to (i) immediately cease making additional Loans and issuing Lender Letters of Credit and to cause their obligation to lend their respective Pro Rata Shares of the Commitments to be suspended; (ii) declare all or any portion of the Loans end all or some of the other Obligations to be immediately due and payable together with accrued interest thereon, and to terminate the obligations of Agent, Funding Agent, Collateral Agent and Lenders to make Loans and issue Lender Letters of Credit; (iii) demand that Borrowers immediately deposit with Agent an amount equal to 105% of the aggregate outstanding Letter of Credit Reserve to enable Agent or any Lender to make payments under the Lender Letters of Credit when required and (iv) exercise such other rights and remedies available to Agent, Funding Agent, Collateral Agent and Lenders under the Loan Documents or at law or in equity, including without limitation the right to immediately enforce their Liens on the Collateral. As set forth in the Prior Forbearance Latter, as a result of the Existing Events of Default, you were formally noted that, as of February 19, 1999, Agent has established a reserve against the Borrowing Base of $5,000,000. You are hereby notified that such reserve continues to remain in effect as of the date hereof and shall remain in effect until such time as Agent receives duly executed copies of the Guaranty and Letter of Credit described (and defined) in paragraph (6) below. You are hereby advised that from and after the date of this letter, and continuing for so long as the Existing Events of Default are continuing, Agent, Funding Agent, Collateral Agent and Lenders hereby agree to further forbear from exercising the rights and remedies afforded Agent and Lenders under the Loan Agreement and the other Loan Documents as a result of the Existing Events of Default (other than (x) the establishment of the reserve against the Borrowing Base as set forth above, which reserve may, subject to the provisions of paragraph (6) below, be maintained or modified at any time by Agent in its sole discretion notwithstanding the terms of this letter, and (y) the elimination of the LIROR option as described below), but only for the period commencing on the Effective Date of this letter through the earlier of (a) the date on which a Forbearance Default shall have occurred and be continuing, and (b) April 30, 1999 (the "Second Forbearance Period"), and only subject to the terms and conditions set forth in paragraphs(l) through (6) below (collectively, the "Second Forbearance Conditions"): (l) Notwithstanding anything contained in the Loan Documents to the contrary (including without limitation that certain Post Closing Matters and Waiver Agreement dated as of the Closing Date), Borrowers shall (a) as promptly as practicable following the date hereof, establish or cause to be established the U.S. Blocked Accounts as required pursuant to subsection 4.26(A) of the Loan Agreement, to the extent not previously established pursuant to the Prior Forbearance Letter, and (b) continue to use their best efforts to, as promptly as practicable following the date hereof, establish or cause to be established the 2 Hawker Pacific Hawker Pacific Aerospace Limited April 13, 1999 Page 3 of 7 U.K. Blocked Accounts as required pursuant to subsection 4.26(B) of the Loan Agreement, to the extent not previously established pursuant to the Prior Forbearance Letter; (2) Notwithstanding anything contained in the Loan Documents to the contrary (including without limitation the provisions of paragraph (F) of the Reporting Rider to the Loan Agreement),until Agent shall give Borrower Representative written notice to the contrary, Borrower Representative shall continue to deliver to Agent and Funding Agent Borrowing Base Certificates on the second Business Day of each week, setting forth the calculation of the Borrowing Base as of the last Business Day of the immediately preceding week, and otherwise in the form and containing the information required pursuant to paragraph (F) of the Reporting Rider; (3) As promptly as practicable and in any event no later than April 16, 1999, Borrowers shall retain the services of a third party turnaround consultant acceptable to Agent to assist in the turnaround efforts for the U.K. Borrower (including without limitation those efforts described in the turnaround implementation plan delivered pursuant to the Prior Forbearance Letter); (4) On or prior to April 15, 1999, Borrowers shall deliver to Agent restated annual financial statements for Borrowers' Fiscal Year 1998 conforming to the requirements of paragraph (C) of the Reporting Rider to the Loan Agreement; Borrowers' EBITDA set forth in such restated annual Financial statements shall not be less than $3,500,000; (5) From and after April 1, 1909 and at all times thereafter until Agent shall give Borrowers written notice to the contrary, and notwithstanding anything contained in the Loan Documents to the contrary including without limitation the definition of the term "Base Rate Margin") (a) Borrowers shall no longer be entitled to elect the LIBOR option with respect to any Loans, and each outstanding LIBOR Loan shall automatically convert to a Base Rate Loan denominated in the same Available Currency as such LIBOR Loan as of the equation of the Interest Period applicable thereto, and (b) the Base Rate Margin shall equal one and one-half of one percent (1.50%), which margin shall not be subject to adjustment as of any Adjustment Date. The parties hereto acknowledge and agree that this paragraph (5) effectively eliminates the pricing matrix currently embodied in the terms "LIBOR Margin" and "Base Rate Margin" in the Loan Agreement in the course of considering potential restructurings of the Credit facilities as discussed in the last paragraph of this letter, Agent and Lenders may consider providing an alternative pricing matrix, but as more fully stated in such last paragraph of this letter, there are no assurances that any such alternative will be offered or approved by Agent and Lenders; and (6) No later than April 23, 1999; (a) Unique or Melanic Bastian, as the case may be (either such person, the "Term B Guarantor") will execute and deliver to Agent (i) a Guaranty of up to $2,500,000 of the Obligations in respect of Term Loan B (the 3 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited April 13, 1909 Page 4 of 7 "Guaranty"), Which Guaranty must be in form and substance satisfactory to agent, and (ii)a stand-by letter of credit securing the obligations of the Term B Guarantor under the Guaranty, which letter of credit (the "Letter of Credit")must be in a face amount of $2,500,000, must name Agent, for the benefit of Agent and Lenders, as sole beneficiaries, and must be issued by a bank satisfactory to Agent. Sole recourse under the GuaRANty will be limited to drawing under the Letter of Credit. Further, the Letter of Credit will(i) provide that drawings thereunder may be made upon Agent's demand at anytime during the period commencing on the issuance date thereof through December 31, 2003, so long as at the time any such demand is made, a 'material Event of Default' (as such term will be mutually agreed upon in the GuaRANty) has occurred and is then continuing, and (ii) otherwise be acceptable in form and substance to Agent. Proceeds of drawings under the Letter of Credit will be applied in repayment of Term Loan B. U.S. Borrower and the Term B Guarantor will execute and deliver such agreements as may be necessary to provide that, upon any drawing by Agent under the Letter of Credit (x) the amount drawn will constitute additional Subordinated Debt of U.S. Borrower owed to the Term B Guarantor, subject in all respect to the terms and conditions set forth in the existing Subordination Agreement (which agreement will be amends to so provide), and (y) the Term B Guarantor shall be entitled to receive from U.S. Borrower and U.S. Borrower shall issue to the Term B Guarantor, such warrants or similar equity rights as may be agreed upon by the Term B Guarantor and U.S. Borrower, provided that any such agreements and any warrants or similar equity rights to be issued thereunder must be acceptable to Agent. Notwithstanding anything contained to the contrary in the Loan Agreement, in consideration of the issuance of such Guaranty and the delivery of such Letter of Credit, U.S. Borrower will be permitted to pay to the Term B Guarantor a fee, in an annual amount not exceeding 3% of the face amount of such Letter of Credit, which foe may be paid annually in advance in cash on the date such Guaranty and Letter of Credit is executed and delivered to Agent and on each anniversary of such date thereunder so long as such Guaranty and Letter of Credit remain outstanding. (b) Upon delivery of the Guaranty and Letter of Credit as required above (i) the $5,000,000 reserve against the Borrowing Base shall be released, (ii) U.S. Borrower shall request, and Lenders shall make, a Revolving Advance in Dollars in an amount equal to the lesser of (x) $4,150,000 (e.g., the then outstanding principal balance of Term Loan B less the $2,500,000 portion thereof secured by the Letter of Credit), and (y) Availability as of such date, and (iii) U.S. Borrower shall direct Agent to apply the proceeds of such Revolving Advance as a permanent prepayment of the principal 4 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited April 13, 1999 Page 5 of 7 balance of Term Loan B, which prepayment will be made without premium or penalty. (c) Notwithstanding anything contained in the Loan Agreement to the contrary, no further Scheduled Installments shall be require to be paid in respect of Term Loan B from and after the earlier of (i) the date the Revolving Advance referred to in paragraph 6(b) is made and applied to Term Loan B, if Availability as of such date is sufficient to permit U.S. Borrower to repay $4,150,000 of Term Loan B on such date, and (ii) such subsequent date on which the outstanding principal balance of Term Loan B has been reduced to $2,500,000 (and until such date, Borrowers shall continue to make payments of Scheduled Installments of Term Loan B on the dates required pursuant to the Loan Agreement, each such Scheduled Installment to be in an amount equal to the lesser of (x) the amount of the Scheduled Installment due on the relevant payment date pursuant to the Loan Agreement, or (y) the amount required to reduce the outstanding principal balance of Term Loan B to $2,500,000. By execution of this letter agreement, Borrower hereby represent and warrant that as of the date hereof, no Forbearance Default has occurred and is continuing. For purposes of this letter: (i) the term "Forbearance Default" means the occurrence and continuance of any Default or Event of Default under the Loan Agreement or any of the other Loan Documents other than the Existing Events of Default, or the failure by Borrowers or either of them as of any date of determination to satisfy any of the Second Forbearance Conditions required to be satisfied as of such date; and (ii) the term "Effective Date" Shall mean the date on which a counterpart of this letter, duly executed by each Borrower, is delivered to Agent, which date shall occur no later than April 13, 1999 (and the foregoing agreement to forbear shall be of no force or effect if the Effective Date does not occur on or prior to April 13, 1999). The foregoing agreement to forbear shall be limited precisely as written and shall not be deemed to (i) be a waiver of the Existing Events of Default or of Agent's, Funding Agent's, Collateral Agent's or Lenders' right to exercise or enforce any of their rights and remedies under the Loan Agreement or the other Loan Documents, as more fully described above; (ii) be a waiver or modification of any other term or condition of the Loan Agreement or of any of the other Loan Documents; or(iii) prejudice any right or rights which Agent, Funding Agent, Collateral Agent or Lenders may now have or may have in the future under or in connection with the Loan Agreement or any of the other Loan Documents. You are hereby further advised that, except for the agreement of Agent, Funding Agent, Collateral Agent and Lender to forbear from exercising their rights and remedies during the Second Forbearance Period as set forth above, Agent, Funding Agent, Collateral Agent and Lenders expressly reserve the right to exercise any or all of their rights and remedies under the Loan Agreement and the other 5 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited April 13, 1999 Page 6 of 7 Loan Documents or otherwise now or at any time hereafter. None of the statements set forth in this letter, any prior oral or written statements by Agent, Funding Agent, Collateral Agent or at any Lender to Borrowers (including without limitation the Prior Forbearance Letter), the making of further advances or other extensions of credit to Borrowers, or the failure of Agent, Funding Agent, Collateral Agent or any Lender to exercise any of its rights and remedies against Borrowers now or at any time in the future, shall be deemed a waiver of the Existing Events of Default described herein, a waiver of any such right and remedies or a waiver or modification of any of the terms of the Loan Agreement or any of the other Loan Documents, all of which remain in full force and effect. You are hereby further advised that, during the Second Forbearance, the Agent may, in its sole discretion, consider working with Borrowers on a potential restructuring of the facilities provided under the Loan Agreement and the other Loan Document, provided that you hereby acknowledge and agree that (a) neither Agent, Funding Agent, Collateral Agent or any Lender is obligated or in any way committed to enter into any such restructuring, (b) none of Agent, Funding Agent, Collateral Agent or any Lender has Sought or obtained the approval of their respective internal credit authorities as to any such restructuring or any potential terms and conditions thereof, (c) this letter shall not be deemed or construed as obligating any of Agent, Funding Agent, Collateral Agent or any Lender to seek or obtain any such approval, and (d) the terms and conditions of any such restructuring, if one should occur, are not known at this time. Very truly yours, HELLER FINANCIAL, INC., as Agent By: Title: Vice President (signatures continue on next page) 6 Hawker Pacific Aerospace Hawker Pacific Aerospace Limited April 13, 1999 Page 7 of 7 ACKNOWLEDGED AND AGREED TO this 13th day of April, 1999 by HAWKER PACIFIC AEROSPACE By: Title: ACKNOWLEDGE AND AGREED TO this 13th day of April, 1999 by HAWKER PACIFIC AEROSPACE LIMITED By: Title: cc: Yvonne E. Chester, Esq. Troy & Gould Professional Corporation 1801 Century Park East, Suite 1600 Los Angeles, California 90067 and Andrew Heathcock, Esq. Paris, Smith & Randall, Solicitors Number 1, London Road Southhampton, Hampshire S015 2AE United Kingdom 7 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS OF HAWKER PACIFIC AEROSPACE FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 560,000 0 12,604,000 301,000 21,645,000 35,239,000 51,475,000 4,301,000 87,237,000 64,334,000 0 0 0 21,108,000 (941,000) 87,237,000 65,151,000 65,151,000 55,059,000 55,059,000 0 301,000 0 (3,000,000) (1,402,000) (1,598,000) 0 (600,000) 0 (2,198,000) (.39) (.39)
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