-----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, R+5ov7RTZ9MKLGvTzxFrXQuVpvi9WfPgtVBTFGH8rgJMFg36ZgGP6zCNa6fjXwuK wWCtVc0TE5OafZc7qWQT8A== 0001047469-99-031882.txt : 19990816 0001047469-99-031882.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031882 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIS LEASE FINANCE CORP CENTRAL INDEX KEY: 0001018164 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 680070656 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28774 FILM NUMBER: 99688555 BUSINESS ADDRESS: STREET 1: 180 HARBOR DR STREET 2: STE 200 CITY: SAUSALITO STATE: CA ZIP: 94965 BUSINESS PHONE: 4153315281 MAIL ADDRESS: STREET 1: 180 HARBOR DR STREET 2: SUITE 200 CITY: SAUSALITO STATE: CA ZIP: 94965 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-28774 ---------------------- WILLIS LEASE FINANCE CORPORATION (Exact name of registrant as specified in its charter) Delaware 68-0070656 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2320 Marinship Way, Suite 300, Sausalito, CA 94965 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 331-5281 ---------------------- 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING AT JULY 31, 1999 ------------------- ---------------------------- Common Stock, $0.01 Par Value 7,393,145 1 WILLIS LEASE FINANCE CORPORATION INDEX
PART I FINANCIAL INFORMATION PAGE NO. Item 1. Consolidated Financial Statements Consolidated Balance Sheets As of June 30, 1999 and December 31, 1998 3 Consolidated Statements of Income Three and six months ended June 30, 1999 and 1998 4 Consolidated Statements of Shareholders' Equity Year ended December 31, 1998 and six months ended June 30, 1999 5 Consolidated Statements of Cash Flows Six months ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 2A. Quantitative and Qualitative Disclosures About Market Risk 18 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 21
2 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) (AUDITED) JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ ASSETS Cash and cash equivalents $ 15,557 $ 10,305 Restricted cash 16,327 13,738 Equipment held for operating lease, less accumulated depreciation of $15,645 at June 30, 1999 and $15,455 at December 31, 1998 316,427 274,618 Net investment in direct finance lease 8,977 9,249 Property, equipment and furnishings, less accumulated depreciation of $544 at June 30, 1999 and $509 at December 31, 1998 782 2,480 Spare parts inventory 35,340 35,858 Lease related receivables 3,523 2,492 Trade receivables, net 5,164 5,310 Notes receivable 3,122 - Investment in unconsolidated affiliate 5,643 - Other receivables 30 757 Other assets 5,743 5,198 -------- -------- Total assets $416,635 $360,005 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 6,973 $ 9,620 Salaries and commissions payable 862 977 Deferred income taxes 14,912 11,684 Deferred gain 497 157 Notes payable and accrued interest 287,479 245,581 Capital lease obligation 2,572 2,652 Residual share payable 3,041 2,618 Maintenance reserves 18,811 13,273 Security deposits 5,309 4,561 Unearned lease revenue 4,378 3,040 -------- -------- Total liabilities 344,834 294,163 -------- -------- Shareholders' equity: Preferred stock ($0.01 par value, 5,000,000 shares authorized; none outstanding) - - Common stock, ($0.01 par value, 20,000,000 shares authorized; 7,393,145 and 7,360,813 shares issued and outstanding as of June 30, 1999 and December 31,1998, respectively) 74 74 Paid-in capital in excess of par 42,419 42,033 Retained earnings 29,308 23,735 -------- -------- Total shareholders' equity 71,801 65,842 -------- -------- Total liabilities and shareholders' equity $416,635 $360,005 -------- -------- -------- --------
See accompanying notes to the consolidated financial statements 3 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data) (Unaudited)
Three months ended Six months ended June 30, June 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------- ------------ ------------ REVENUE Lease revenue $11,078 $7,129 $21,647 $13,565 Gain on sale of leased equipment 3,849 2,431 7,260 5,539 Spare part sales 6,217 6,583 15,189 9,599 Sale of equipment acquired for resale 4,000 4,094 9,775 4,094 Interest and other income 357 434 577 619 ------------ ------------- ------------ ------------ Total revenue $25,501 $20,671 $54,448 $33,416 ------------ ------------- ------------ ------------ EXPENSES Interest expense 5,113 3,600 10,006 6,202 Depreciation expense 2,868 1,728 5,983 3,145 Residual share 212 168 423 400 Cost of spare part sales 4,629 4,831 11,259 6,886 Cost of equipment acquired for resale 3,570 3,573 8,354 3,573 General and administrative 4,421 3,184 9,089 6,368 ------------ ------------- ------------ ------------ Total expenses 20,813 17,084 45,114 26,574 ------------ ------------- ------------ ------------ Income from operations $4,688 $3,587 $9,334 $6,842 Income/(loss) from unconsolidated affiliate (40) - (40) - ------------ ------------- ------------ ------------ Income before income taxes and extraordinary item 4,648 3,587 9,294 6,842 Income taxes (1,861) (1,438) (3,721) (2,743) ------------ ------------- ------------ ------------ Income before extraordinary item 2,787 2,149 5,573 4,099 Extraordinary item less applicable income taxes - - - (200) ------------ ------------- ------------ ------------ Net income $2,787 $2,149 $5,573 $3,899 ============ ============= ============ ============ Basic earnings per common share: Income before extraordinary item $0.38 $0.30 $0.76 $0.57 Extraordinary item - - - (0.04) ------------ ------------- ------------ ------------ Net income $0.38 $0.30 $0.76 $0.53 ============ ============= ============ ============ Diluted earnings per common share: Income before extraordinary item $0.37 $0.29 $0.75 $0.55 Extraordinary item - - - (0.03) ------------ ------------- ------------ ------------ Net income $0.37 $0.29 $0.75 $0.52 ============ ============= ============ ============ Average common shares outstanding 7,374 7,263 7,368 7,228 Diluted average common shares outstanding 7,453 7,488 7,455 7,466
See accompanying notes to the consolidated financial statements 4 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Year Ended December 31, 1998 and Six Months Ended June 30, 1999 (In thousands, except share data)
Issued and outstanding Paid-in Total shares of Common Capital in Retained shareholders' common stock Stock Excess of par earnings equity ------------ ----- ------------- -------- ------ Balance at December 31, 1997 7,178 $40,117 $ - $14,484 $54,601 Shares issued 183 587 737 - 1,324 Tax benefit from disqualified dispositions of qualified shares - - 666 - 666 Conversion to par value stock - (40,630) 40,630 - - Net income - - - 9,251 9,251 ---------------- ------------- ------------ ------------ ------------- Balances at December 31, 1998 (audited) 7,361 74 42,033 23,735 65,842 Shares issued 32 - 278 - 278 Tax benefit from disqualified dispositions of qualified shares - - 108 - 108 Net income - - - 5,573 5,573 ---------------- ------------- ------------ ------------ ------------- Balances at June 30, 1999 (unaudited) 7,393 $74 $42,419 $29,308 $71,801 ================ ============= ============ ============ =============
5 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------------------- 1999 1998 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $5,573 $3,898 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of equipment held for lease 5,724 3,063 Depreciation of property, equipment and furnishings 259 83 Gain on sale of property, equipment and furnishings (1) (2) Gain on sale of leased equipment (7,260) (5,539) Increase in residual share payable 423 123 Loss from unconsolidated affiliate 40 - Changes in assets and liabilities: Restricted Cash (2,589) (2,731) Spare parts inventory (335) (15,727) Receivables (493) 139 Other assets (2,929) (614) Accounts payable and accrued expenses (1,895) (215) Salaries and commission payable (15) (357) Deferred income taxes 3,336 1,787 Deferred gain 340 (13) Accrued interest (178) 20 Maintenance reserves 5,538 1,178 Security deposits 748 1,354 Unearned lease revenue 1,338 712 ---------------- ---------------- Net cash provided (used in) by operating activities 7,624 (12,841) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment held for lease (net of selling expenses) 33,908 16,487 Proceeds from sale of property, equipment and furnishings 1 16 Purchase of equipment held for operating lease (77,303) (101,397) Deposits made in connection with inventory purchases - (3,410) Purchase of property, equipment and furnishings (1,454) (871) Investment in unconsolidated affiliate (70) - Principal payments received on direct finance lease 272 285 ---------------- ---------------- Net cash used in investing activities (44,646) (88,890) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable 81,513 109,984 Proceeds from issuance of common stock 278 586 Principal payments on notes payable (39,437) (18,679) Principal payments on capital lease obligation (80) (73) ---------------- ---------------- Net cash provided by financing activities 42,274 91,818 (Decrease) increase in cash and cash equivalents 5,252 (9,913) Cash and cash equivalents at beginning of period 10,305 13,095 ---------------- ---------------- Cash and cash equivalents at end of period 15,557 $3,182 ================ ================ Supplemental information: Net cash paid for: Interest $10,185 $6,182 ---------------- ---------------- Income Taxes $654 $2,657 ---------------- ---------------- Non-cash investing activities: Transfer of assets to unconsolidated affiliate (net) $5,613 $ - ---------------- ---------------- Non-cash financing activities: Short term loan related to sale of equipment held for operating lease $1,500 $ - ---------------- ---------------- Installment loan related to sale of equipment held for operating lease $1,622 $ - ---------------- ----------------
See accompanying notes to the consolidated financial statements 6 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements of Willis Lease Finance Corporation and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 1999 unaudited, and December 31, 1998 audited, and the unaudited results of its operations for the three and six month periods ended June 30, 1999 and 1998 and its cash flows for the six month periods ended June 30, 1999 and 1998. The results of operations and cash flows for the periods ended June 30, 1999 are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 1999. 2. MANAGEMENT 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3. SHAREHOLDERS' EQUITY Authorized capital shares of the Company include 5,000,000 shares of preferred stock and 20,000,000 shares of common stock with a par value of $0.01 per share. As of June 30, 1999 and December 31, 1998, 7,393,145 and 7,360,813 shares, respectively, of common stock were issued and outstanding. No preferred stock was issued or outstanding as of June 30, 1999 or December 31, 1998. The rights and preferences of any preferred stock will be established by the Company's Board of Directors upon issuance. The Company has a 1996 Employee Stock Purchase Plan (the "Purchase Plan") under which 75,000 shares of common stock have been reserved for issuance. This plan became effective in September 1996. Eligible employees may designate not more than 10% of their base salary to be deducted each pay period for the purchase of common stock under the Purchase Plan, and participants may purchase not more than 500 shares of common stock on any one purchase date, subject to additional Internal Revenue Code limitations. Each January 31 and July 31, shares of common stock are purchased with the employees' payroll deductions over the immediately preceding six months at a price per share of 85% of the lesser of the market price of the common stock on the purchase date or the market price on the date of entry into an offering period. During the six month period ended June 30, 1999, the Company issued 4,382 shares of Common Stock as a result of employee stock purchases under the Purchase Plan. 7 WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Under the 1996 Stock Option/Stock Issuance Plan, as amended and restated April 6, 1999, 1,025,000 shares of the Company's shares have been set aside to provide eligible persons with the opportunity to acquire a proprietary interest in the Company. The plan includes a Discretionary Option Grant Program, a Stock Issuance Program, a Salary Investment Option Grant Program for certain officers and employees, a Director Fee Option Grant Program and an Automatic Option Grant Program for eligible nonemployee Board Members. During the six month period ended June 30, 1999, 30,000 options were exercised. In connection with the exercise of a portion of these options, the Company recognized a tax benefit of approximately $108,000. In conjunction with its initial public offering, the Company sold five-year purchase warrants for $0.01 per warrant covering an aggregate of 100,000 shares of common stock exercisable at a price equal to 130% of the initial public offering price. The warrants became exercisable in December 1997. The warrants' exercise price and the number of shares of Common Stock are subject to adjustment to protect the warrant holders against dilution in certain events. In February 1998, a holder of 50,000 of the warrants exercised the warrants under the net issuance rights of the warrants. Based on the closing price on such date, the exercise resulted in the issuance of 25,238 shares to the holder of the warrants. 4. FINANCING In May 1999, the Company increased its $80 million debt warehouse facility to $125 million. The facility is available to a wholly-owned special purpose finance subsidiary of the Company, WLFC Funding Corporation, for the financing of jet aircraft engines transferred by the company to such finance subsidiary. The facility has an eight-year initial term with a revolving period to February 2000 followed by a seven-year amortization period. At June 30, 1999, the interest rate was a commercial paper based rate plus 1.6%. The facility is renewable annually. In March 1998, the Company repaid a loan that had residual sharing provisions. The repayment resulted in an extraordinary expense of $0.2 million, net of tax. 5. COMMITMENTS The Company has three leases for its office and warehouse space. The annual lease rental commitments are $309,481, $56,000, and $80,829 and the leases expire on May 31, 2003, December 31, 1999 and July 31, 2000, respectively. The Company has committed to purchase during 1999, additional used aircraft and new and used engines for its operations. Certain deposits were made in connection with these commitments. The Company's current, remaining commitment to such purchases is not more than $11.7 million. 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE On May 28, 1999, the Company entered into an agreement with Chromalloy Gas Turbine Corporation, a subsidiary of Sequa Corporation, to operate a joint venture to perform maintenance, repair and overhaul of commercial jet engines. Under the terms of the joint venture agreement, the Company and Chromalloy formed a new company, Pacific Gas Turbine Center, LLC ("PGTC LLC"). The Company contributed the operations and assets of its wholly owned subsidiary Pacific Gas Turbine Center, Incorporated ("PGTC Inc.") (with a book value of $5.7 million) and Chromalloy contributed working capital to the joint venture. Both the Company and Chromalloy have a 50% interest in the joint venture. The equity method of accounting is used for the Company's 50% ownership in PGTC LLC. Under the equity method, the original contribution was recorded at cost and is adjusted periodically to recognize the Company's share of the earnings or losses of PGTC LLC after the date of formation. The contribution is shown in the Company's Consolidated Balance 8 Sheet as a single amount and earnings or losses are shown in the Consolidated Statement of Income as a single amount. All intercompany profits or losses are eliminated. 7. OPERATING SEGMENTS The Company operates in two business segments: (i) Leasing and Related Operations which involves acquiring and leasing, primarily pursuant to operating leases, commercial aircraft, aircraft spare engines and other aircraft equipment and the selective purchase and resale of commercial aircraft engines and other aircraft equipment and (ii) Spare Parts Sales which involves the purchase and resale of after-market engine and airframe parts, whole engines, engine modules and rotable aircraft components and leasing of engines destined for disassembly and sale of parts. In 1998, the Company formed PGTC Inc. to engage in engine disassembly and maintenance, repair and overhaul services. At the end of May 1999, the Company's investment in and the operations of PGTC Inc. were contributed to a joint venture, PGTC LLC (see note 6 above). During the five months ended May 31, 1999, while PGTC Inc. was a wholly-owned subsidiary of the Company, the majority of PGTC Inc.'s revenue was derived from services provided to WASI. Revenue from third parties during this period was not material. Accordingly, for the five months ended May 31, 1999, the operations of PGTC Inc. are included in the Spare Parts Sales segment. Subsequent to the formation of PGTC LLC, because the results of PGTC LLC were immaterial, PGTC LLC is not included in the operating segment analysis for the three and six months ended June 30, 1999. PGTC Inc. was not in operation during the three and six months ended June 30, 1998. The Company evaluates the performance of each of the segments based on profit or loss after general and administrative expenses and inter-company allocation of interest expense. While the Company believes there are synergies between the two business segments, the segments are managed separately because each requires different business strategies. The following tables present a summary of the operating segments (in thousands):
For the three months ended June 30, 1999 For the three months ended June 30, 1998 -------------------------------------------- -------------------------------------------- Leasing Spare Leasing Spare and Related Parts and Related Parts Operations Sales Total Operations Sales Total ----------------------------------------- -------------------------------------------- Revenue: Lease revenue $10,560 $518 $11,078 $7,129 $ - $7,129 Gain on sale of leased equipment 3,849 - 3,849 2,431 - 2,431 Spare parts sales - 6,217 6,217 - 6,583 6,583 Sale of equipment acquired for resale 4,000 - 4,000 4,094 - 4,094 Interest and Other Income 243 114 357 409 25 434 ----------------------------------------- -------------------------------------------- Total revenue 18,652 6,849 25,501 14,063 6,608 20,671 ----------------------------------------- -------------------------------------------- Expenses: Interest expense 4,341 772 5,113 3,227 373 3,600 Depreciation expense 2,585 283 2,868 1,711 17 1,728 Residual share 212 - 212 168 - 168 Cost of spare parts - 4,629 4,629 - 4,831 4,831 Cost of equipment acquired for resale 3,570 - 3,570 3,573 - 3,573 General and administrative 2,880 1,541 4,421 2,186 998 3,184 ----------------------------------------- --------------------------------------------- Total expenses 13,588 7,225 20,813 10,865 6,219 17,084 ----------------------------------------- --------------------------------------------- Income from operations $5,064 ($376)(1) $4,688 $3,198 $389 $3,587 ========================================= ============================================= Total assets as of June 30, 1999 and 1998 $356,995 $53,997 $410,992 $291,960 $6,775 $298,735 ========================================= ============================================= - ------------------------------------------------------------------------------------
(1) The Company estimates that income from operations would have been $0.1 million if the effect of PGTC Inc.'s operations, after intercompany eliminations, were eliminated from the results of the Spare Parts Sales segment. 9
For the six months ended June 30, 1999 For the six months ended June 30, 1998 ------------------------------------------ ---------------------------------------------- Leasing Spare Leasing Spare and Related Parts and Related Parts Operations Sales Total Operations Sales Total ------------------------------------------ ---------------------------------------------- Revenue: Lease revenue $20,625 $1,022 $21,647 $13,565 $ - $13,565 Gain on sale of leased equipment 7,260 - 7,260 5,539 - 5,539 Spare parts sales - 15,189 15,189 - 9,599 9,599 Sale of equipment acquired for resale 9,775 - 9,775 4,094 - 4,094 Interest and other income 462 115 577 586 33 619 ------------------------------------------ ------------------------------------------------ Total revenue 38,122 16,326 54,448 23,784 9,632 33,416 ------------------------------------------ ------------------------------------------------ Expenses: Interest expense 8,557 1,449 10,006 5,711 491 6,202 Depreciation expense 5,421 562 5,983 3,113 32 3,145 Residual share 423 - 423 400 - 400 Cost of spare parts - 11,259 11,259 - 6,886 6,886 Cost of equipment acquired for resale 8,354 - 8,354 3,573 - 3,573 General and administrative 5,437 3,652 9,089 4,565 1,803 6,368 ----------------------------------------- ------------------------------------------------ Total expenses 28,192 16,922 45,114 17,362 9,212 26,574 ----------------------------------------- ------------------------------------------------ Income from operations $9,930 ($596)(2) $9,334 $6,422 $420 $6,842 ========================================= ================================================ Total assets as of June 30, 1999 and 1998 $356,995 $53,997 $410,992 $291,960 $6,775 $298,735 ========================================= ================================================ - -------------------------------------------------------------------------------------
(2) The Company estimates that income from operations would have been $0.5 million if the effect of PGTC Inc.'s operations, after intercompany eliminations, were eliminated from the results of the Spare Parts Sales segment. 8. SUBSEQUENT EVENT In July, 1999, the Company entered into an agreement to participate in a joint venture - Sichuan Snecma Aero-engine Maintenance Co. Ltd. Sichuan Snecma will focus on providing maintenance services for CFM56 series engines. Other participants in the joint venture are China Southwest Airlines, Snecma Services and Beijing Kailan Aviation Technology Development and Services Corporation. Under the terms of the agreement, the Company expects to contribute not more than $3 million to the joint venture over the next three years. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's core business is acquiring and leasing, primarily pursuant to operating leases, commercial aircraft spare engines, aircraft and other aircraft equipment. The Company, through WASI, also specializes in the purchase and resale of aftermarket airframe and engine parts, engines, modules and rotable components. In addition, the Company engages in the selective purchase and resale of commercial aircraft engines. In July 1998, the Company formed Pacific Gas Turbine Center, Incorporated ("PGTC Inc."). In May 1999, the Company contributed the operations and assets of PGTC Inc. to a newly formed joint venture, Pacific Gas Turbine Center, LLC ("PGTC LLC"). PGTC Inc. and its successor, PGTC LLC provide engine disassembly and maintenance, repair and overhaul services to the Company and third parties from the its San Diego location. Revenue consists primarily of lease revenue, income from the sale of spare parts and components and income from the sale of engines and equipment. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998: Revenue is summarized as follows:
Three Months Ended June 30, ---------------------------------------------------- 1999 1998 ---- ---- Amount % Amount % ---------------------------------------------------- (dollars in thousands) Lease revenue................................................. $11,078 43% $7,129 34% Gain on sale of leased equipment.............................. 3,849 15 2,431 12 Spare parts sales............................................. 6,217 24 6,583 32 Sale of equipment acquired for resale......................... 4,000 16 4,094 20 Interest and other income..................................... 357 2 434 2 ---------------------------------------------------- Total......................................................... $25,501 100% $20,671 100% ====================================================
LEASING RELATED ACTIVITIES. Lease related revenue for the quarter ended June 30, 1999, increased 55% to $11.1 million from $7.1 million for the comparable period in 1998. This increase reflects lease related revenues from additional engines and aircraft. The aggregate of net book value of leased equipment and net investment in direct finance lease at June 30, 1999 and 1998 was $325.4 million and $235.5 million, respectively, an increase of 38%. During the quarter ended June 30, 1999, 24 engines and two aircraft were added to the Company's lease portfolio at a total cost of $57.0 million. Six engines and three spare parts packages from the lease portfolio were sold or transferred to inventory for sale. The engines sold from the lease portfolio had a total net book value of $16.2 million and were sold for a gain of $3.8 million. During the quarter ended June 30, 1998, the Company sold three engines from the lease portfolio. The engines had a net book value of $7.6 million and were sold for a gain of $2.4 million. During the quarter ended June 30, 1999, the Company sold one engine acquired for resale for $4.0 million which resulted in a gain of $430,000. During the comparable 1998 period, the Company sold one engine for $4.1 million which resulted in a gain of $0.5 million. 11 SPARE PARTS SALES. Revenues from spare parts sales decreased 6% to $6.2 million as compared to $6.6 million in the quarter ended June 30, 1998. The gross margin decreased to 26% from 27% in the corresponding period in 1998. This decrease was due to changes in the mix of parts sold during the periods. INTEREST AND OTHER INCOME. Interest and other income for each of the quarters ended June 30, 1999 and 1998, were $0.4 million. Interest is earned on cash and deposits held. INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all activities increased 42% to $5.1 million for the quarter ended June 30, 1999, from the comparable period in 1998, due to an increase in average debt outstanding. This increase in debt was primarily related to debt associated with the increase in lease portfolio assets and to a lesser extent an increase in spare parts inventories. Residual sharing expense related to debt increased 26% to $212,000 for the quarter ended June 30, 1999 from $168,000 for the comparable period in 1998. Residual sharing arrangements apply to three of the Company's engines as of June 30, 1999 and are a function of the difference between the debt associated with the residual sharing arrangement and estimated residual proceeds. Because a greater portion of the principal of such debt is amortized as debt ages, residual sharing expense increases. The Company accrues for its residual sharing obligations using net book value as an estimate for residual proceeds. DEPRECIATION EXPENSE. Depreciation expense increased 66% to $2.9 million for the quarter ended June 30, 1999, from the comparable period in 1998, due primarily to the increase in lease portfolio assets. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 39% to $4.4 million for the quarter ended June 30, 1999, from the comparable period in 1998. This change reflects increased expenses, in all business segments associated with staff additions, increased rent due to the expansion of the facilities, as well as an increase in professional fees. Two months of expenses related to PGTC Inc. are included in the quarter ended June 30, 1999. INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for the quarter ended June 30, 1999, increased to $1.9 million from $1.4 million for the comparable period in 1998. This increase reflects an increase in the Company's pre-tax earnings. The effective tax rate for the quarters ended June 30, 1999 and 1998 were 40%. INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company entered into a joint venture to perform maintenance, repair and overhaul of commercial jet aircraft engines. The Company accounts for its 50% interest in the joint venture using the equity method. During the three months ended June 30, 1999, net losses from the joint venture, after inter-company eliminations, were $40,000. The Company had no such activity during the comparable 1998 period. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998: Revenue is summarized as follows:
Six Months Ended June 30, ------------------------------------------------- 1999 1998 ---- ---- Amount % Amount % ------------ ------------- ------------ --------- (dollars in thousands) Lease revenue........................................................... $21,647 40% $13,565 41% Gain on sale of leased equipment........................................ 7,260 13 5,539 16 Spare parts sales....................................................... 15,189 28 9,599 29 Sale of equipment acquired for resale................................... 9,775 18 4,094 12 Interest and other income............................................... 577 1 619 2 ------------ ------------- ------------ --------- Total................................................................... $54,448 100% $33,416 100% ============ ============= ============ =========
LEASING RELATED ACTIVITIES. Lease related revenue for the six months ended June 30, 1999, increased 59% to $21.6 million from $13.6 million for the comparable period in 1998. This increase reflects lease related revenues from 12 additional engines and aircraft. The aggregate of net book value of leased equipment and net investment in direct finance lease at June 30, 1999 and 1998 was $325.4 million and $235.5 million, respectively, an increase of 38%. During the six months ended June 30, 1999, 30 engines were added to the Company's lease portfolio at a total cost of $77.1 million. Fourteen engines and three spare parts packages from the lease portfolio were sold or transferred to inventory for sale. The engines sold from the lease portfolio had a total net book value of $27.4 million and were sold for a gain of $7.2 million. During the six months ended June 30, 1998, four engines and one spare parts package were sold or transferred to inventory for sale from the lease portfolio. The engines had a net book value of $10.9 million and were sold for a gain of $5.5 million. During the six months ended June 30, 1999, the Company sold three engines acquired for resale for $9.8 million which resulted in a gain of $1.4 million. SPARE PARTS SALES. Revenues from spare parts sales increased 58% to $15.2 million as compared to $9.6 million in the six months ended June 30, 1998. The gross margin decreased to 26% from 28% in the corresponding period in 1998. This decrease was due to changes in the mix of parts being sold during the periods. INTEREST AND OTHER INCOME. Interest and other income for each of the six months ended June 30, 1999 and 1998, were $0.6 million. Interest is earned on cash and deposits held. INTEREST EXPENSE AND RESIDUAL SHARING. Interest expense related to all activities increased 61% to $10.0 million for the six months ended June 30, 1999, from the comparable period in 1998, due to an increase in average debt outstanding during the period. This increase in debt was primarily related to debt associated with the increase in lease portfolio assets and to a lesser extent an increase in spare parts inventories. Residual sharing expense increased 6% to $423,000 for the six months ended June 30, 1999 from $400,000 for the comparable period in 1998. Residual sharing arrangements apply to three of the Company's engines as of June 30, 1999 and are a function of the difference between the debt associated with the residual sharing arrangement and estimated residual proceeds. Because a greater portion of the principal of such debt is amortized as debt ages, residual sharing expense increases. The Company accrues for its residual sharing obligations using net book value as an estimate for residual proceeds. DEPRECIATION EXPENSE. Depreciation expense increased 90% to $6.0 million for the six months ended June 30, 1999, from the comparable period in 1998, due primarily to the increase in lease portfolio assets. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 43% to $9.1 million for the six months ended June 30, 1999, from the comparable period in 1998. This change reflects increased expenses, in all business segments, associated with staff additions, increased rent due to the expansion of the facilities, as well as an increase in professional fees. Five months of expenses related to PGTC Inc. are included in the quarter ended June 30, 1999. INCOME TAXES. Income taxes, exclusive of tax on extraordinary items, for the six months ended June 30, 1999, increased to $3.7 million from $2.7 million for the comparable period in 1998. This increase reflects an increase in the Company's pre-tax earnings. The effective tax rate for the six months ended June 30, 1999 and 1998 were 40%. INCOME/(LOSS) FROM UNCONSOLIDATED AFFILIATE. In May 1999, the Company entered into a joint venture to perform maintenance, repair and overhaul of commercial jet aircraft engines. The Company accounts for its 50% interest in the joint venture using the equity method. During the six months ended June 30, 1999, net losses from the joint venture, after inter-company eliminations, were $40,000. The Company had no such activity during the comparable 1998 period. EXTRAORDINARY ITEM. In March 1998, the Company repaid a loan that had residual sharing provisions and an interest rate of 10%. The repayment resulted in an extraordinary expense of $0.2 million, net of tax. The Company had no such transactions during the comparable 1999 period. 13 ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS No. 137, "Accounting for Derivatives, Instruments, and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133," issued in June 1999, defers the effective date of SFAS No. 133. SFAS No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. As of June 30, 1999, the Company is reviewing the effect SFAS No. 133 will have on the Company's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its growth through borrowings secured by its equipment lease portfolio. Cash of approximately $81.5 million and $110.0 million, in the six month periods ended June 30, 1999 and 1998, respectively, was derived from this activity. In these same time periods $39.4 million and $18.7 million, respectively, was used to pay down related debt. Cash flow from operating activities generated approximately $7.6 million in the six month period ended June 30, 1999 and cash flows from operating activities used $12.8 million in the six month period ended June 30, 1998. The deficit cash flow from operations for the six month period ended June 30, 1998 was primarily attributable to the acquisition of used aircraft for WASI's inventory. The Company's primary use of funds is for the purchase of equipment for lease. Approximately $77.3 million and $101.4 million of funds were used for this purpose in the six month periods ended June 30, 1999 and 1998, respectively. At June 30, 1999, the Company had a $150.0 million revolving credit facility to finance the acquisition of aircraft engines, aircraft and spare parts for sale or lease as well as for general working capital purposes. As of June 30, 1999, $0.1 million was available under this facility, subject to the Company providing sufficient collateral. The facility has a two-year revolving period followed by a four-year term-out period. The facility is renewable annually. In May 1999, the Company increased its $80 million debt warehouse facility to $125 million. The facility is available to a wholly-owned special purpose finance subsidiary of the Company, WLFC Funding Corporation, for the financing of jet aircraft engines transferred by the Company to such finance subsidiary. The facility is renewable annually. This transaction's structure facilitates public or private securitized note issuances by the special purpose finance subsidiary. The subsidiary is consolidated for financial statement presentation purposes. The facility has an eight-year initial term with a revolving period to February 2000 followed by a seven-year amortization period. At June 30, 1999, the interest rate was a commercial paper based rate plus 1.6%. The Company has guaranteed the obligations under the facility on a limited basis, up to an amount equal to the greater of: (i) the lesser of $5 million and 20% of the outstanding obligations or (ii) 10% of the outstanding obligations. Assuming compliance with the facility's terms, including sufficiency of collateral, as of June 30, 1999, $38.7 million was available under this facility. Approximately $6.5 million of the Company's debt is repayable during 1999. Such repayments consist of scheduled installments due under term loans. The Company believes that its current equity base, internally generated funds and existing and contemplated debt facilities are sufficient to fund the Company's anticipated operations into the third quarter of 1999, at which time additional capital will be required to fund projected growth. The Company is currently discussing additions to its debt and equity capital bases with its commercial and investment banks. If the Company is not able to access additional debt and equity capital, its ability to continue to grow its asset base consistent with historical trends will be impaired. As of June 30, 1999, the Company had eight engines, two aircraft and one spare parts package which had not been financed. Subsequent to June 30, 1999, the Company's revolving credit lenders agreed that six engines and the two aircraft could be used as collateral for borrowing purposes. The Company may seek financing for unfinanced equipment, 14 although no assurance can be given that such financing will be available on favorable terms, if at all. Certain of the Company's engines have been financed under floating rate facilities. Accordingly, the Company is subject to interest rate risk, since the underlying lease revenue is fixed. See "Management Of Interest Rate Exposure" below. The Company has committed to purchase, during 1999, additional used aircraft and used and new engines for its operations. Certain deposits were made, in 1998, in connection with a portion of these commitments. As of June 30, 1999, the Company's current commitment to such purchases is not more than $11.7 million, which includes $1.4 million of deposits in other assets. MANAGEMENT OF INTEREST RATE EXPOSURE At June 30, 1999, $237.8 million of the Company's borrowings were on a variable rate basis at various interest rates tied to either LIBOR or the prime rate. The Company's equipment leases are generally structured at fixed rental rates for specified terms. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue the Company realizes under its leases and the interest rate that the Company pays under its borrowings. In September 1996, the Company purchased an amortizing interest rate cap in order to limit its exposure to increases in interest rates on a portion of its variable rate borrowings. Pursuant to this cap, the counter party will make payments to the Company, based on the notional amount of the cap, if the three month LIBOR rate is in excess of 7.66%. As of June 30, 1999, the notional principal amount of the cap was $33.3 million, which will decline to $26.0 million at the end of its term. The cost of the cap is being amortized as an expense over its remaining term. To further mitigate exposure to interest rate changes, the Company has entered into interest rate swap agreements which have notional outstanding amounts of $30.0 million, a weighted average remaining term of 26 months and a weighted average fixed rate of 5.48%. Under its borrowing agreement, WLFC Funding Corporation is required to hedge a certain portion of its $125 million warehouse facility against changes in interest rates. WLFC Funding Corporation has entered into interest rate swap agreements in order to meet such hedging requirements and to manage the variable interest rate risk related to its debt. As of June 30, 1999, such swap agreements had notional outstanding amounts totaling $50 million, a weighted average remaining term of 45 months and a weighted average fixed rate of 5.90%. The Company will be exposed to risk in the event of non-performance of the interest rate hedge counter parties. The Company anticipates that it will hedge additional amounts of its floating rate debt during the next several months. FACTORS THAT MAY AFFECT FUTURE RESULTS Except for historical information contained herein, the discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed below as well as those discussed elsewhere herein and in the Company's report on Form 10-K for the year ended December 31, 1998. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they appear in this report or in other written or oral statements by the Company. The businesses in which the Company is engaged are capital intensive businesses. Accordingly, the Company's ability to successfully execute its business strategy and to sustain its operations is dependent, in large part, on the availability of debt and equity capital. There can be no assurance that the necessary amount of such capital will continue to be available to the Company on favorable terms or at all. If the Company is not successful in obtaining sufficient capital, the Company's ability to: (i) add new aircraft engines, aircraft and spare parts packages to its portfolio, (ii) add inventory to support its spare parts sales, (iii) fund its working capital needs, (iv) develop the business of PGTC LLC, and (v) finance possible future acquisitions, would be impaired. The Company's inability to obtain sufficient capital would have a material adverse effect on the Company's business, financial condition and/or results of operations. The Company retains title to the aircraft engines, aircraft and parts packages that it leases to third parties. Upon termination of a lease, the Company will seek to re-lease or sell the aircraft equipment or will dismantle the equipment 15 and will sell the parts. The Company also engages in the selective purchase and resale of commercial aircraft engines and engine components. On occasion, the Company purchases engines or components without having a firm commitment for their sale. Numerous factors, many of which are beyond the Company's control, may have an impact on the Company's ability to re-lease or sell aircraft equipment on a timely basis, including the following: (i) general market conditions, (ii) the condition of the aircraft equipment upon termination of the lease, (iii) the maintenance services performed during the lease term and, as applicable, the number of hours remaining until the next major maintenance is required, (iv) regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft engines), (v) changes in the supply or cost of aircraft engines, and (vi) technological developments. There is no assurance that the Company will be able to re-lease or sell aircraft equipment on a timely basis or on favorable terms. The failure to re-lease or sell aircraft equipment on a timely basis or on favorable terms could have a material adverse effect on the Company's business, financial condition and/or results of operations. The Company experiences fluctuations in its operating results. Such fluctuations may be due to a number of factors, including: (i) general economic conditions, (ii) the timing of sales of engines and spare parts, (iii) financial difficulties experienced by airlines, (iv) interest rates, (v) fuel costs, (vi) downturns in the air transportation industry, (vii) increased fare competition, (viii) decreases in growth of air traffic, (ix) unanticipated early lease termination or a default by a lessee, (x) the timing of engine acquisitions, (xi) engine marketing activities, and (xii) fluctuations in market prices for the Company's assets. The Company anticipates that fluctuations from period to period will continue in the future. As a result, the Company believes that comparisons to results of operations for preceding periods are not necessarily meaningful and that results of prior periods should not be relied upon as an indication of future performance. A lessee may default in performance of its lease obligations and the Company may be unable to enforce its remedies under a lease. The Company's inability to collect receivables due under a lease or to repossess aircraft equipment in the event of a default by a lessee could have a material adverse effect on the Company's business, financial condition and/or results of operations. Various airlines have experienced financial difficulties in the past, certain airlines have filed for bankruptcy and a number of such airlines have ceased operations. In most cases where a debtor seeks protection under Chapter 11 of Title 11 of the United States Code, creditors are automatically stayed from enforcing their rights. In the case of United States certified airlines, Section 1110 of the Bankruptcy Code provides certain relief to lessors of aircraft equipment. The scope of Section 1110 has been the subject of significant litigation and there is no assurance that the provisions of Section 1110 will protect the Company's investment in an aircraft, aircraft engines or parts in the event of a lessee's bankruptcy. In addition, Section 1110 does not apply to lessees located outside of the United States and applicable foreign laws may not provide comparable protection. Leases of spare parts may involve additional risks. For example, it is likely to be more difficult to recover parts in the event of a lessee default and the residual value of parts may be less ascertainable than an engine. The Company's leases are generally structured at fixed rental rates for specified terms while much of the Company's borrowings are at floating rates. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue the Company realizes under its leases and the interest rate the Company pays under its borrowings, and have a material adverse effect on the Company's business, financial condition and/or results of operations. During the six month period ended June 30, 1999, 77% of the Company's lease revenue was generated by leases to foreign customers, including 9% from Asian customers and 16% from South American customers. Such international leases may present greater risks to the Company because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. The Company is subject to the timing and access to courts and the remedies local laws impose in order to collect its lease payments and recover its assets. In addition, political instability abroad and changes in international policy also present risk of expropriation of the Company's leased engines. Furthermore, many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company generates a portion of its revenue from sale of leased assets. The inability to execute transactions for gain on sale or a change in the accounting guidelines related to such sales could have a material impact on the Company's business, financial condition and/or results of operations. 16 The Company has recently experienced significant growth in revenues. The Company's growth has placed, and is expected to continue to place, a significant strain on the Company's managerial, operational and financial resources. There is no assurance that the Company will be able to effectively manage the expansion of its operations, or that the Company's systems, procedures or controls will be adequate to support the Company's operations, in which event the Company's business, financial condition and/or results of operations could be adversely affected. The Company may also acquire businesses that would complement or expand the Company's existing businesses. Any acquisition or expansion made by the Company may result in one or more of the following events: (i) the incurrence of additional debt, (ii) future charges to earnings related to the amortization of goodwill and other intangible assets, (iii) difficulties in the assimilation of operations, services, products and personnel, (iv) an inability to sustain or improve historical revenue levels, (v) diversion of management's attention from ongoing business operations, and (vi) potential loss of key employees. Any of the foregoing factors could have a material adverse effect on the Company's business, financial condition and/or results of operations. The markets for the Company's products and services are extremely competitive, and the Company faces competition from a number of sources. These include aircraft and aircraft part manufacturers, aircraft and aircraft engine lessors, airline and aircraft service companies and aircraft spare parts redistributors. Certain of the Company's competitors have substantially greater resources than the Company, including greater name recognition, larger inventories, a broader range of material, complementary lines of business and greater financial, marketing and other resources. In addition, equipment manufacturers, aircraft maintenance providers, FAA certified repair facilities and other aviation aftermarket suppliers may vertically integrate into the markets that the Company serves, thereby significantly increasing industry competition. There can be no assurance that competitive pressures will not materially and adversely affect the Company's business, financial condition and/or results of operations. The Company's leasing activities generate significant depreciation allowances that provide the Company with substantial tax benefits on an ongoing basis. In addition, the Company's lessees currently enjoy favorable accounting and tax treatment by entering into operating leases. Any change to current tax laws or accounting principles that make operating lease financing less attractive or affect the Company's recognition of revenue or expense would have a material impact on the Company's business, financial condition and/or results of operations. Before parts may be installed in an aircraft, they must meet certain standards of condition established by the FAA and/or the equivalent regulatory agencies in other countries. Specific regulations vary from country to country, although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. Parts must also be traceable to sources deemed acceptable by the FAA or such equivalent regulatory agencies. Such standards may change in the future, requiring engine components already contained in the Company's inventory to be scrapped or modified. In all such cases, to the extent the Company has such engine components in its inventory, their value may be reduced and the Company's business, financial condition and/or results of operations could be adversely affected The Company obtains a substantial portion of its inventories of aircraft, engines and engine parts from airlines, overhaul facilities and other suppliers. There is no organized market for aircraft, engines and engine parts, and the Company must rely on field representatives and personnel, advertisements and its reputation as a buyer of surplus inventory in order to generate opportunities to purchase such equipment. The market for bulk sales of surplus aircraft, engines and engine parts is highly competitive, in some instances involving a bidding process. While the Company has been able to purchase surplus inventory in this manner successfully in the past, there is no assurance that surplus aircraft, engines and engine parts of the type required by the Company's customers will be available on acceptable terms when needed in the future or that the Company will continue to compete effectively in the purchase of such surplus equipment. A change in the market for aircraft and engine parts could result in the Company's inventory being overvalued and could require the Company to write-down its inventory valuations in order to bring them into line with the revised fair market value. Furthermore, when the Company purchases and dismantles used aircraft, engines and parts, the Company assigns a value to the parts based on market price. Airline manufacturers may also develop new parts to be used in lieu of parts already contained in the Company's inventory. There is no assurance that a write-down would not adversely affect the Company's business, operating results or financial condition. 17 The Company uses computer systems in many areas of its operations. In addition, various third parties that are important to the Company's business (including lessees, customers, vendors and financial institutions) use computer systems in their areas of operations. Should the Company or certain of such third parties not be "Year 2000 compliant," certain of the Company's operations could be disrupted for an indeterminate period of time, potentially having a material adverse impact on the Company's results, business, financial condition and/or results of operations. As is the case with most companies, the Year 2000 computer problem creates risks for the Company. The Company has assessed the Year 2000 computer problem as it affects the Company's computer systems and information technology. As a result of the Company's assessment, the Company does not expect any material interruption of internal operations arising from the Company's computer systems and information technology not being Year 2000 compliant. The mission critical systems of the Company identified during the assessment are all off the shelf software packages with unmodified source codes which have been certified by the manufacturer as Year 2000 compliant. All internal hardware and software remediation was completed during the second quarter and testing will be conducted during the third quarter. The Company is not aware of any significant Year 2000 issues with respect to the airworthiness of the Company's aircraft, aircraft engines or spare parts; however, should such issues result in Airworthiness Directives or other manufacturer recommended maintenance for leased assets, the implementation and the majority of the cost of such implementation would generally be the responsibility of the lessee. Any resulting costs to the Company cannot be estimated at this time. Significant uncertainties remain about the effect on the Company's operations of third parties that may not be Year 2000 compliant and with whom the Company does business (including lessees, customers, vendors and financial institutions). The Company is in the process of assessing Year 2000 issues relating to such third parties and certain of the Company's officers have oversight of these assessments. The Company has circulated to significant third parties with whom the Company does business a written request for their plans and progress in addressing the Year 2000 issue. As of June 30, 1999, approximately two-thirds of the third parties polled had responded. A majority of the respondents are currently Y2K compliant and the remaining respondents indicated compliance no later than fourth quarter 1999. The Company will develop contingency plans to address any material risk of non-compliance by non-respondents. The Company expects to complete this process by October 1999. The costs associated with assessing the Year 2000 issue, including developing and implementing the above plan, are expected to be nominal. Non-compliance on the part of a third party could result in lost revenue and an inability to make lease or other payments to the Company. Non-compliance by the third party's financial institution could also affect the ability to process payments. A reasonable worst case scenario would be that a large number of third parties (including lessees and spare parts customers) will be unable to operate and generate revenues and as a result will be unable to make lease payments or purchase parts. The Company is unable to estimate the likelihood or the magnitude of the resulting lost revenue at this time. However, should this occur, the Company would attempt to repossess leased engines, aircraft and spare parts from non-compliant third parties and place such assets with compliant third parties. The Company cannot assure you that it would be able to re-lease such assets at favorable terms or at all. Similarly, the Company would attempt to find compliant customers for the Company's spare parts sales. If a significant number of leased assets could not be re-leased on favorable terms or at all, or their re-lease is delayed, or if compliant customers for spare parts sales were unavailable, the Company's business, financial condition and/or results of operations would be adversely affected. Providers of casualty and liability insurance to the aviation industry have indicated that they may exclude coverage for Year 2000 related risks and/or may require aviation equipment operators to answer, to the insurance provider's satisfaction, a questionnaire regarding the Year 2000 preparedness of aviation equipment operators, in order to provide coverage for Year 2000 risks. The inability of a lessee to obtain or maintain coverage for Year 2000 related losses and/or the Company's inability to obtain or maintain any contingent insurance for Year 2000 related risks would expose the Company to material risk of loss. The Company is in the process of informing its lessees of Year 2000 related insurance issues and is monitoring its lessees' ability to obtain insurance coverage for Year 2000 related risks. ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is that of interest rate risk. A change in the U.S. prime interest rate, LIBOR rate, or cost of funds based on commercial paper market rates, would affect the rate at which the Company could 18 borrow funds under its various borrowing facilities. Increases in interest rates to the Company, which may cause the Company to raise the implicit rates charged to its customers, could result in a reduction in demand for the Company's leases. Certain of the Company's warehouse credit facilities are variable rate debt. The Company estimates a one percent increase or decrease in the Company's variable rate debt would result in an increase or decrease, respectively, in interest expense of $1.5 million per annum. The Company estimates a two percent increase or decrease in the Company's variable rate debt would result in an increase or decrease, respectively, in interest expense of $3.0 million per annum. The foregoing effect of interest rate changes, net of interest rate hedges, on per annum interest expense is estimated as constant due to the terms of the Company's variable rate borrowings, which generally provide for the maintenance of borrowing levels given adequacy of collateral and compliance with other loan conditions. The Company hedges a portion of its borrowings, effectively fixing the rate of these borrowings. The Company is currently required to hedge a portion of debt of the WLFC Funding Corporation Facility. Such hedging activities may limit the Company's ability to participate in the benefits of any decrease in interest rates, but may also protect the Company from increases in interest rates. A portion of the Company's leases provide that lease payments be adjusted based on changes in interest rates. Furthermore, since lease rates tend to vary with interest rate levels, it is likely that the Company can adjust lease rates for the effect of change in interest rates at the termination of leases. Other financial assets and liabilities are at fixed rates. The Company is also exposed to currency devaluation risk. During the six month period ended June 30, 1999, 77% of the Company's total lease revenues came from non-United States domiciled lessees. All of the leases require payment in United States (U.S.) currency. If these lessees' currency devalues against the U.S. dollar, the lessees could potentially encounter difficulty in making the U.S. dollar denominated lease payments. 19 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the May 25, 1999 Annual Meeting of Shareholders of Willis Lease Finance Corporation, the following matters were voted upon:
DESCRIPTION VOTES ----------- ----- 1. Election of Class I Directors William M. LeRoy 6,959,617 For 14,800 Withheld Robert H. Rau 6,959,617 For 14,800 Withheld 2. Approval of ratification of two amendments to the Company's 5,912,616 For 1996 Stock Option/Stock 1,044,881 Against Issuance Plan (the "1996 Plan"). 16,920 Abstain 3. Approval of ratification of selection 6,971,797 For of KPMG LLP as independent 1,600 Against public accountants for the 1,020 Abstain Company for the fiscal year ended December 31, 1999
20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT DESCRIPTION NUMBER 3.1 Certificate of Incorporation, filed on March 12, 1998 together with Certificate of Amendment of Certificate of Incorporation filed on May 6, 1998. Incorporated by reference to Exhibits 4.01 and 4.02 of the Company's report on Form 8-K filed on June 23, 1998. 3.2 Bylaws. Incorporated by reference to Exhibit 4.03 of the Company's report on Form 8-K filed on June 23, 1998. 4.1 Specimen of Common Stock Certificate incorporated by reference to Exhibit 4.1 of the Company's report on form 10-Q for the quarter ended June 30, 1998. 10.1* Operating Agreement of PGTC LLC dated May 28, 1999 10.2* Contribution and Assumption Agreement dated May 28, 1999 11.1 Statement regarding computation of per share earnings. 27.1 Financial Data Schedule.
- ----------------------------------------- * Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the redacted material has been filed separately with the Commission. (b) Reports on Form 8-K None 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 13, 1999 Willis Lease Finance Corporation By: /s/ James D. McBride ---------------------- James D. McBride Chief Financial Officer EX-10.1 2 EXHIBIT 10.1 OPERATING AGREEMENT OF PACIFIC GAS TURBINE CENTER, LLC THIS OPERATING AGREEMENT OF Pacific Gas Turbine Center, LLC is made and entered into as of May 28, 1999 by and among Chromalloy Gas Turbine Corporation, a Delaware corporation ("CGTC"), Willis Lease Finance Corporation, a Delaware corporation ("WLFC"), as successor in interest to Pacific Gas Turbine Center, Incorporated ("PGTC"), a Delaware corporation and a wholly-owned-subsidiary of WLFC, and PGTC. RECITALS A. Concurrently herewith, (i) PGTC, WLFC, and the Company have entered into the WLFC Contribution Agreement (as defined below), pursuant to which PGTC has contributed to the Company certain assets, in exchange for which PGTC has received a 50% Percentage Interest (as defined below) in the Company, and (ii) (x) CGTC and the Company have entered into the CGTC Contribution Agreement (as defined below), pursuant to which CGTC has contributed to the Company $___________* in cash and (y) CGTC shall make an additional cash capital contribution pursuant to SECTION 4.3(B) hereof (the sum of (ii)(x) and (ii)(y), the "CGTC CASH CONTRIBUTION"), and in exchange for such CGTC Cash Contribution CGTC has received a 50% Percentage Interest in the Company. B. Immediately following the consummation of the transactions contemplated by the WLFC Contribution Agreement and the CGTC Contribution Agreement (collectively, the "CONTRIBUTION AGREEMENTS"), PGTC commenced dissolution pursuant to applicable law (the "DISSOLUTION") and filed a Certificate of Dissolution with the Secretary of State of the State of Delaware pursuant to a Plan of Corporate Liquidation adopted by the Board of Directors of PGTC on May 26, 1999. C. Immediately following the contribution to the Company by PGTC pursuant to the WLFC Contribution Agreement, the assets of PGTC (including PGTC's Member Interest in the Company) are being distributed to its sole stockholder, WLFC, and pursuant to this Agreement PGTC shall cease to be a Member of the Company and WLFC shall become a Member of the Company. NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement, the parties hereto hereby agree as follows: - ------------------- * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION 1.1 DEFINITIONS. The following definitions will apply to the capitalized terms used in this Agreement for all purposes, unless otherwise clearly indicated to the contrary: "AAA" has the meaning set forth in SECTION 14.13. "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Tax Year, after giving effect to the following adjustments: (a) decrease such deficit by any amounts that such Member is obligated to restore pursuant to this Agreement or by operation of law upon liquidation of such Member's Membership Interest or is deemed to be obligated to restore pursuant to Tax Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentence of each of Tax Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (b) increase such deficit by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of "Adjusted Capital Account Deficit" is intended to comply with the provisions of Tax Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with, such Person. For purposes of this Operating Agreement, "CONTROL" (including, with correlative meanings, the terms "CONTROLLING," "CONTROLLED BY" or "UNDER COMMON CONTROL WITH") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "AGREEMENT" means this Operating Agreement, as it may be amended, modified, supplemented or restated from time to time. "AVAILABLE CASH" of the Company means, at any time, all cash funds of the Company on hand after: (a) payment of all expenditures of the Company that are due and payable as of such time; (b) provision for payment of all expenditures of the Company that are anticipated to become due and payable within thirty days following such time; and (c) provision for adequate reserves (working capital and/or capital), as determined by the Management Committee. "BOOK VALUE" means, for any asset, the asset's adjusted basis for federal income tax purposes, except as follows: 2 (a) The initial Book Value of any asset contributed by a Member to the Company will be the gross fair market value of such asset on the date of contribution, as reasonably determined by the Management Committee (with the consent of the Required Members). (b) The Book Values of all Company assets will be adjusted to equal their respective gross fair market values, as determined by the Management Committee (with the consent of the Required Members), as of the following times: (i) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a DE MINIMIS Capital Contribution; (ii) the distribution by the Company to a Member of more than a DE MINIMIS amount of Company property as consideration for an interest in the Company; and (iii) the liquidation of the Company within the meaning of Tax Regulations Section 1.704-1(b)(2)(ii)(g). (c) The Book Value of any Company asset distributed to any Member will be adjusted to equal the gross fair market value of such asset on the date of distribution, as reasonably determined by the Management Committee (with the consent of the Required Members). (d) The Book Value of Company assets will be increased (or decreased) to reflect any adjustment to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are required to be taken into account in determining Capital Accounts pursuant to Tax Regulations Section 1.704-1(b)(2)(iv)(m); provided that Book Value will not be adjusted pursuant to this paragraph (d) to the extent the Management Committee (with the consent of the Required Members) determine that an adjustment pursuant to paragraph (b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d). "BUSINESS DAY" means any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of California. "CAPITAL ACCOUNT" means, with respect to any Member, the capital account maintained for such Member in accordance with the following provisions: (a) Such Capital Account will be increased by such Member's Capital Contributions, such Member's allocable share of Profits and any items in the nature of income or gain that are specifically allocated to such Member pursuant to SECTIONS 5.4 and 5.5, and the amount of any Company liabilities assumed by such Member or which are secured by any property distributed to such Member. (b) Such Capital Account will be decreased by the cash amount or Book Value of any property distributed to such Member pursuant to this Agreement, such Member's allocable share of Losses and any items in the nature of deductions or losses that are specially allocated to such Member pursuant to SECTIONS 5.4 and 5.5, and the amount of any liabilities of the Member assumed by the Company or for the satisfaction of which recourse may be made to any property contributed by such Member to the Company. 3 (c) In the event all or a portion of a Member Interest is Transferred in accordance with the terms of this Agreement, the transferee will succeed to the Capital Account of the transferor to the extent it relates to the Transferred Member Interest. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are generally intended to comply with Tax Regulations Section 1.704-1(b) and will be interpreted and applied in a manner consistent with such Tax Regulations. If the Management Committee (with the consent of the Required Members) determines that it is prudent to modify the manner in which the Capital Accounts, or any increases or decreases to the Capital Accounts, are computed in order to comply with such Tax Regulations, the Management Committee (with the consent of the Required Members) may authorize such modifications, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to SECTION 13.4 upon the dissolution of the Company, nor a material effect on the amounts of taxable income, gain, deduction, or loss allocable to the Members. The Management Committee (with the consent of the Required Members) may also (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of capital reflected on the Company's balance sheet, as computed for book purposes, in accordance with Tax Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Tax Regulations Section 1.704-1(b). "CAPITAL CALL NOTICE" has the meaning set forth in SECTION 4.3(C). "CAPITAL CONTRIBUTION" means, with respect to any Member, the amount of money and the initial Book Value of any property (other than money) contributed to the Company with respect to the Member Interest held by such Member. "CERTIFICATE OF FORMATION" means the Certificate of Formation of the Company as filed with the Office of the Secretary of State of the State of Delaware on March 19, 1999, as it may be amended or restated from time to time. "CGTC ADDITIONAL CASH CONTRIBUTION" has the meaning set forth in SECTION 4.3(B)(II). "CGTC CONTRIBUTION AGREEMENT" means the Contribution Agreement dated of even date herewith by and between CGTC and the Company. "CGTC MANAGER" has the meaning set forth in SECTION 7.2. "CLOSING DATE" means May 28, 1999. "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time. All references herein to the Code will include any corresponding provision or provisions of succeeding law. 4 "COMPANY" means Pacific Gas Turbine Center, LLC, the Delaware limited liability company formed by the filing of the Certificate of Formation. "COMPANY CONFIDENTIAL INFORMATION" means any and all trade secrets, knowledge, data or know-how of the Company, and any technical, training and/or business information treated as confidential by the Company, whether relating to Company Proprietary Technology or the business or operations of the Company, including, without limitation, any formula, concept, process, design, device, software, system, list of customers, training manuals, marketing or sales or service plans, records, financial information, source codes, programs, inventions, techniques, new products, budgets, projections, licenses, prices, costs, compilations of information used in the Company's business or any other information of the Company, in each case, that is not readily available to the public; PROVIDED that Company Confidential Information shall not include information that (a) subsequent to its disclosure, is obtained from a third party in possession of such information and not under a contractual or fiduciary obligation to the Company to keep such information in confidence, (b) subsequent to its disclosure, enters the public domain (except where such occurrence is the direct result of a violation of SECTION 14.11), (c) prior to disclosure, was already known to the Person receiving such information, as evidenced by its written records, (d) is filed with any government or regulatory agency in a manner that makes such information publicly available, (e) is disclosed pursuant to any judicial or governmental requirement or order or (f) is otherwise required by applicable law to be disclosed. "COMPANY MINIMUM GAIN" has the meaning set forth in Tax Regulations Section 1.704-2(b)(2) with respect to "partnership minimum gain." "COMPANY NONRECOURSE DEDUCTIONS" has the meaning set forth in Tax Regulations Section 1.704-2(b)(1) with respect to "nonrecourse deductions." "COMPANY PROPRIETARY TECHNOLOGY" means any and all Company Confidential Information consisting of inventions, discoveries, formulas, concepts, processes, designs, devices, software, systems, new products, trademarks, trade names, servicemarks, copyrights, patents, trade secrets, knowledge, data or know-how owned by the Company or developed or made by, or caused to be developed or made by, the Company during the term of this Agreement. "CONTRIBUTION AGREEMENTS" has the meaning set forth in the Recitals hereto. "DEADLOCK" means (a) any failure to agree between the members of the Management Committee or the Required Members (other than DE MINIMUS issues and issues involving an amount in controversy less than or equal to $100,000, in the event that the amount in dispute is readily ascertainable), resulting in the inability of the Management Committee or the Required Members, as the case may be, to reach agreement for a thirty (30) day period with respect to the subject matter of such deadlock situation, despite good faith efforts by the members of the Management Committee or the Required Members, as the case may be, to reach agreement with respect thereto, (b) the acquisition by a Person of a Member Interest pursuant to any foreclosure made upon any Pledge of such Member Interest or (c) as set forth in SECTION 4.3(C)(III). 5 "DEFAULT RATE" shall mean the sum of (a) the rate of interest for commercial loans established and publicly announced by First Union National Bank as its prime commercial lending rate, PLUS (b) 4%, as determined as of the Default Notice Date. "DEFAULT NOTICE DATE" has the meaning set forth in SECTION 4.3(C)(I). "DELAWARE ACT" means the Delaware Limited Liability Company Act, 6 Del. C. Section 18-101, et seq., as amended from time to time. "DEPRECIATION" means, for each Tax Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Tax Year, except that if the Book Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Tax Year, Depreciation shall be an amount which bears the same ratio to such beginning Book Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Tax Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Tax Year is zero, Depreciation shall be determined with reference to such beginning Book Value using any reasonable method selected by the Management Committee (with the consent of the Required Members). "FIRST REFUSAL NOTICE" has the meaning set forth in SECTION 11.2(A). "FIRST REFUSAL OFFER" has the meaning set forth in SECTION 11.2(A). "FISCAL QUARTER" means (a) the period commencing May 1, 1999 and ending on June 30, 1999, (b) any subsequent three-month period thereafter (or upon completion of the winding up of the Company, if sooner) or (c) such other Fiscal Quarter as the Management Committee may adopt. "FISCAL YEAR" means (a) the period commencing May 1, 1999 and ending on December 31, 1999, (b) any subsequent twelve (12) month period commencing on January 1 and ending on December 31, or (c) any portion of the period described in clause (b) of this sentence for which the Company is required to allocate Profits, Losses and other items of Company income, gain, loss or deduction pursuant to ARTICLE V hereof. "FORECLOSURE TRANSFEREE" has the meaning set forth in Section 11.4(b). "GAAP" means generally accepted accounting principles in the United States of America as from time to time in effect, applied on a consistent basis with those accounting principles applied at prior dates or for prior periods. "GOVERNMENTAL BODY" means any governmental or quasi-governmental agency, authority, commission, board or other body. "INDEMNITEE" has the meaning set forth in SECTION 7.16. "KPMG" has the meaning set forth in SECTION 2.11. 6 "LIEN" includes any mortgage, lien, pledge, security interest, conditional sale agreement, charge, claim, easement, right, condition, restriction or other encumbrance or defect of title of any nature whatsoever (including without limitation, any assessment, charge or other type of notice which is levied or given by any governmental body and for which a lien could be filed). "LIQUIDATOR" has the meaning set forth in SECTION 13.4. "LOSSES" has the meaning set forth in the definition of "Profits" and "Losses." "MANAGEMENT COMMITTEE" has the meaning set forth in SECTION 7.1. "MANAGER" means a member of the Management Committee. "MEMBER INTEREST" means the interest of a Member in the Company including, without limitation, such Member's right (a) to a distributive share of the Profits, Losses and other items of income, gain, loss, deduction and credit of the Company, (b) to a distributive share of the assets of the Company, and (c) to vote on or to consent or withhold consent on certain matters as described in this Agreement, each in accordance with its Percentage Interest. "MEMBER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in Tax Regulations Section 1.704-2(i)(2) with respect to "partner nonrecourse debt minimum gain" and shall be determined in accordance with Tax Regulations Section 1.704-2(i)(3). "MEMBER NONRECOURSE DEDUCTIONS" has the meaning set forth in Tax Regulations Section 1.704-2(i)(1) and (2) with respect to "partner nonrecourse deductions." "MEMBERS" means PGTC (prior to the transfer of its Member Interest to WLFC), WLFC (subsequent to the receipt of its Member Interest from PGTC), CGTC, and each other Person who has been admitted as a Member in the Company in accordance with SECTION 11.5 of this Agreement and whose admission has been reflected on the books and records of the Company. "NON-OFFERING MEMBER" has the meaning set forth in SECTION 12.1(A). "NOTICE OF ACCEPTANCE" has the meaning set forth in SECTION 11.2(C). "NOTIFIED MEMBER" has the meaning set forth in SECTION 11.2(A). "OFFER" has the meaning set forth in SECTION 12.1(A). "OFFERING MEMBER" has the meaning set forth in SECTION 12.1(A). "OFFER PRICE" has the meaning set forth in SECTION 11.2(A). "OFFICERS" has the meaning set forth in SECTION 7.4(A). "PERCENTAGE INTEREST" means, at any time, the percentage of Member Interests held by a Member at such time in relation to the total Member Interests outstanding at such time, as set 7 forth opposite such Member's name on EXHIBIT A, as such Percentage Interest may be adjusted from time to time pursuant to the terms of this Agreement. After any such adjustment, the Percentage Interest of such Member, as adjusted, shall constitute the Percentage Interest of such Member for all purposes under this Agreement. "PERSON" means an individual, corporation, partnership, limited liability company, joint venture, trust, estate, unincorporated organization, association, Governmental Body or other entity. "PLEDGE" means, with respect to all or any aspect of a Member Interest, a pledge, encumbrance, hypothecation or similar disposition in connection with the granting of a Lien to secure an obligation of the pledgor or an Affiliate of the pledgor. "PROFITS" and "LOSSES" mean, for each Tax Year or other period, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) will be included in taxable income or loss), with the following adjustments (without duplication): (a) Income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to this definition will be added to such taxable income or loss. (b) Any expenditures of the Company described in Code Section 705(a)(2)(B), or treated as Code Section 705(a)(2)(B) expenditures pursuant to Tax Regulations Section 1.704-1(b)(2)(iv)(i) will be subtracted from such taxable income or loss. (c) If the Book Value of any Company asset is adjusted pursuant to paragraphs (b), (c) or (d) of the definition thereof, the amount of such adjustment will be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits and Losses. (d) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes will be computed by reference to the Book Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Book Value. (e) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Tax Year, computed in accordance with the definition of Depreciation. (f) Notwithstanding any other provision of this definition, any items that are specially allocated pursuant to SECTIONS 5.4 or 5.5 will not be taken into account in computing Profits and Losses. "PURCHASE PRICE" has the meaning set forth in SECTION 11.3(B). 8 "REQUIRED MEMBERS" means WLFC and CGTC. "TAX RATE" means, as of any relevant date, the highest marginal effective federal income tax rate applicable to corporations during a period with respect to which a distribution is made pursuant to SECTION 6.3, plus 6%. "TAX REGULATIONS" means the Income Tax Regulations (including Temporary Regulations) promulgated under the Code, as amended and in effect (including corresponding provisions of any succeeding Tax Regulations). "TAX REGULATORY ALLOCATIONS" has the meaning set forth in SECTION 5.5. "TAX YEAR" means the twelve-month accounting period of the Company for federal and state income tax purposes ending on December 31 of each year or such other accounting period as the Company is required to use under Section 706(b) of the Code; provided that the initial Tax Year of the Company will be the period beginning on the Closing Date and ending on December 31, 1999 (or such other year end required to be used by the Company under Section 706(b) of the Code), and the last Tax Year of the Company (if not a full twelve-month accounting period) will be the period beginning on the day following the end of the penultimate Tax Year of the Company and ending on the date the final liquidation of the Company is completed. "THIRD PARTY" means any Person other than (a) the Company, (b) a Member, (c) the Manager, (d) any Affiliate of any of the foregoing, (e) any officer, director, shareholder, partner or member of any of the foregoing or (f) any other Person designated by either WLFC or CGTC in a written form delivered to the other Member on the Closing Date, which information is expressly incorporated herein by reference. "THIRD PARTY OFFER" means a bona fide offer made in writing by any Third Party to WLFC or CGTC to purchase a Member Interest from such Member on an arm's length basis. "TRANSFER" means a sale, assignment, gift, contribution, exchange or any other disposition of a Member Interest (other than a Pledge). "TRANSFERRING MEMBER" has the meaning set forth in SECTION 11.2(A). "VOTING POWER" has the meaning set forth in SECTION 7.3. "WASI SUBLEASE" means that certain Sublease Agreement dated of even date herewith by and between WLFC and Willis Aeronautical Services, Inc., a California corporation, and assigned to the Company pursuant to the Assignment and Assumption of Lease and Sublease dated of even date herewith by and between WLFC and the Company. "WLFC CONTRIBUTION" has the meaning set forth in SECTION 4.3(B)(I). "WLFC CONTRIBUTION AGREEMENT" means the Contribution Agreement dated of even date herewith by and among PGTC, WLFC and the Company. 9 "WLFC MANAGER" has the meaning set forth in SECTION 7.2. 1.2 RULES OF CONSTRUCTION. (a) All article, section and paragraph titles and captions in this Agreement are for convenience only, will not be deemed part of this Agreement, and in no way define, limit, extend, or describe the scope or intent of any provisions of this Agreement. Except as specifically provided otherwise, references to "Articles," "SECTIONS" and "EXHIBITS" are to Articles, Sections and Exhibits of or to this Agreement. (b) Whenever the context may require, any pronoun used in this Agreement includes the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs includes the plural and VICE VERSA. The locative adverbs "hereof," "herein," "hereafter," etc. refer to this Agreement as a whole. ARTICLE II ORGANIZATIONAL MATTERS 2.1 FORMATION. The Members have formed the Company as a limited liability company pursuant to the provisions of the Delaware Act. The Members are entering into this Agreement in order to set forth the rights and obligations of the Members with respect to the Company and certain related matters. Except as otherwise expressly provided herein or in the Contribution Agreements, the rights and obligations of the Members and the administration and dissolution of the Company will be governed by the Delaware Act. 2.2 NAME. The name of the Company is "Pacific Gas Turbine Center, LLC." 2.3 REGISTERED AGENT AND OFFICE. The registered agent and office of the Company in the State of Delaware shall be Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. The Management Committee may change the registered office or registered agent from time to time. 2.4 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Company shall be at 7007 Consolidated Way, San Diego, CA 92121, or at such other place in the United States as the Management Committee may from time to time designate. 2.5 TERM. The Company will continue in existence in perpetuity, or until the earlier dissolution of the Company in accordance with the provisions of ARTICLE XIII. 2.6 OWNERSHIP. The interest of each Member in the Company will be personal property for all purposes. All property and interests in property, real or personal, owned by the Company will be deemed owned by the Company as an entity, and no Member (as such) will have any ownership of such property or interest therein except by having an ownership interest in the Company as a Member. 10 2.7 RELATIONSHIP AMONG MEMBERS. The relationship among the Members provided for in this Agreement is limited to the conduct of the business of the Company as a limited liability company in accordance with the terms of the Delaware Act and this Agreement. Nothing contained in this Agreement will be construed to create a partnership (other than for tax purposes) between or among the Members or, except as otherwise expressly provided in this Agreement, to authorize any Member to act as agent for another Member. 2.8 INDEPENDENT ACTIVITIES OF MEMBERS. Each Member and its Affiliates may have business interests and engage in business activities in addition to those relating to the Company, and no other provision of this Agreement will be deemed to prohibit a Member or any of its Affiliates from conducting such other businesses and activities. 2.9 NO INDIVIDUAL AUTHORITY. No Member, acting alone, will have any authority to act for, or to undertake or assume any obligation or liability on behalf of, any other Member or the Company, except as otherwise expressly provided in this Agreement. 2.10 QUALIFICATION IN OTHER JURISDICTIONS. The President of the Company or his designee shall cause the Company to be qualified or registered as a foreign limited liability company authorized to transact business in all jurisdictions in which such qualification or registration is reasonably necessary or advisable, and shall cause the Company to register all trade names or fictitious names in or under which it conducts business in all jurisdictions in which the Company conducts business under such names and in which such registration is necessary or advisable. The President of the Company or his designee, as an "authorized person" within the meaning of the Delaware Act, may execute, deliver and file any certificates, affidavits and registrations (and any amendments and/or restatements thereof) necessary for the Company so to do. 2.11 ACCOUNTANT. The accountant for the Company for the remaining portion of the first calendar year following the Closing Date and for the subsequent two calendar years shall be KPMG Peat Marwick LLP ("KPMG"). CGTC shall name the Company's accountant to serve for the subsequent three calendar years. Thereafter, WLFC and CGTC shall alternate in designating the Company's accountant for each subsequent three-year period. ARTICLE III PURPOSE 3.1 PURPOSES AND SCOPE. Subject to the provisions of this Agreement, the purposes of the Company are: (a) to operate the business of storage and distribution of aircraft and engine spare parts inventory, overhaul and testing of jet engines, including the dismantling, cleaning, repair and testing of said jet engines; and (b) to do any and all other acts or things which may be desirable, expedient, convenient, incidental or necessary to carry on the business of the Company as herein contemplated. 3.2 POWERS OF THE COMPANY. The Company shall have the power and authority to take any and all actions necessary, proper, advisable, incidental or convenient to or for the 11 furtherance of the purposes set forth in SECTION 3.1, as determined by the Management Committee in accordance with the terms and conditions of this Agreement. ARTICLE IV CAPITAL CONTRIBUTIONS AND LOANS 4.1 INITIAL CAPITAL CONTRIBUTIONS. Pursuant to the Contribution Agreements: (a) PGTC has made a Capital Contribution of the assets described in Section 2.01 of the WLFC Contribution Agreement as of the Closing Date; WLFC shall succeed to such Capital Contributions and the Capital Account attributable thereto; and (b) CGTC has made a Capital Contribution of $___________* in cash as set forth in Section 2.01 of the CGTC Contribution Agreement as of the Closing Date, and shall make an additional cash Capital Contribution pursuant to SECTION 4.3(b). 4.2 MEMBER INTERESTS; PERCENTAGE INTERESTS. In consideration of the Capital Contributions referred to in SECTION 4.1, WLFC (as successor to PGTC) and CGTC will be deemed to have the following respective Percentage Interests as of the Closing Date:
Percentage Name of Member Interest -------------- ---------- WLFC 50% CGTC 50% ---- Total: 100%
4.3 ADDITIONAL CAPITAL CONTRIBUTIONS. (a) Except as otherwise provided in this SECTION 4.3 or as otherwise agreed by the Required Members pursuant to SECTION 7.5(k), no Member shall be obligated to make any Capital Contributions or loans to the Company. (b)(i) Within fifteen (15) days after the Closing Date, WLFC shall prepare and deliver to CGTC a computation of the contribution, calculated consistent with EXHIBIT C (the "WLFC CONTRIBUTION"), made by WLFC with respect to the PGTC Business (as defined in the WLFC Contribution Agreement) for the period beginning on May 1, 1999 and ending on May 28, 1999. CGTC shall have five (5) days from receipt of such computation to review such computation and to propose adjustments (if necessary) to the computation of the WLFC Contribution. If WLFC and CGTC are unable to agree on the computation of the WLFC Contribution within thirty (30) days after the Closing Date, the disputed amount shall be submitted to AAA for arbitration, the - -------------------- * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. 12 cost of which shall be borne equally by WLFC and CGTC, and whose decision shall be final and binding and without appeal. After the final determination by AAA of the WLFC Contribution, neither CGTC nor WLFC shall have any further right to make any claims against the other with respect to the calculation of any element of the WLFC Capital Expenditures, absent fraud. The foregoing shall not be construed as limiting any right or remedy of WLFC, CGTC or LLC under any other provision of this Agreement in the event any party hereto breaches any representation, warranty or covenant hereunder. (ii) On the date that a final determination is made pursuant to SECTION 4.3(b)(i) of the amount of the WLFC Contribution, CGTC shall be required, within five (5) days after the date of such determination, to make an additional Capital Contribution in cash (the "CGTC ADDITIONAL CASH CONTRIBUTION") in an amount equal to the amount of the WLFC Contribution. The WLFC Contribution will be recorded on EXHIBIT A as an increase to WLFC's "Initial Capital Account." Upon the contribution of the CGTC Additional Cash Contribution to the Company by CGTC in accordance with SECTION 4.3(b)(i), the CGTC Additional Cash Contribution will be recorded on EXHIBIT A as an increase to CGTC's "Initial Capital Account." The Members intend that, following the contribution by CGTC of the CGTC Additional Cash Contribution to the Company, the Capital Accounts of each of the Members shall equal the aggregate amount of cash contributed by CGTC pursuant to SECTIONS 4.1(b) and 4.3(B). (c) At any time during the period from the Closing Date through and including December 31, 2000, in the event that the annual operating budget of the Company in effect at such time (as approved by the Required Members pursuant to SECTION 7.5(q)) provides that each Member is required to make a Capital Contribution to the Company, then each Member agrees to make such Capital Contribution in an amount up to the aggregate annual amount set forth in such annual operating budget; PROVIDED, THAT (i) the aggregate annual amount set forth in such annual operating budget shall be the same amount for each Member, (ii) the aggregate annual amount set forth in such annual operating budget shall not exceed an amount equal to $5,000,000 for each Member, (iii) any such Capital Contribution shall be made only upon delivery of a written notice (a "CAPITAL CALL NOTICE") properly authorized by the Management Committee, and (iv) the total amount of Capital Contributions made by each Member for any calendar year (regardless of when such Capital Contributions are made during such year) shall not exceed the aggregate annual amount set forth in such annual operating budget. Subject to the provisions of this SECTION 4.3(c), the Management Committee shall provide a Capital Call Notice, which shall specify the date on which the Capital Contributions shall be made and which shall be provided to all Members no less than thirty (30) days prior to the date for payment specified in such notice. EXHIBIT A shall reflect the actual amount of each Member's Capital Contributions as of any given time, and the Management Committee shall amend EXHIBIT A from time to time to keep such information current. (i) In the event any Member shall default in the funding of any portion of its Capital Contribution when required to be made, and shall fail to provide such funds within ten (10) days after notice of default shall be given to it by the Management Committee (such tenth (10th) day being referred to herein as the "DEFAULT NOTICE DATE"), then such Member shall be a defaulting Member and the Management Committee may cause the Company to treat the 13 defaulted amount as a loan to the defaulting Member by the Company (and a deemed Capital Contribution by such defaulting Member), which loan shall bear interest, compounded annually, at the Default Rate, commencing from the date the defaulted amount was initially due until the date the "loan" is fully repaid. The Company may retain distributions otherwise payable to the defaulting Member, applying such amounts as described below. Notwithstanding the provisions of SECTIONS 7.3 and 7.5, the approval of the Managers appointed by the defaulting Member shall not be required with respect to any actions taken by the Management Committee during any period in which such Member is in default. Any amounts withheld from the distributions to the defaulting Member pursuant to this SECTION 4.3(c)(i) shall be applied in the following priorities: (x) first, to the expenses and costs, including, without limitation, attorneys' fees, if applicable, incurred by the Company in recovering the amounts due and (y) second, there shall be deducted and retained by the Company the principal portion of such defaulting Member's unfunded Capital Contribution that is treated as a loan, plus any accrued but unpaid interest thereon (with all amounts applied to interest first and then to such portion of such loan). The balance of proceeds remaining shall be distributed to the defaulting Member in accordance with ARTICLE VI or SECTION 13.4, as appropriate. The defaulting Member shall remain liable for all amounts due under this SECTION 4.3(c)(i) to the extent such amounts remain unpaid after exercise of the remedies provided for in this SECTION 4.3(c)(i). All amounts withheld and applied pursuant to this paragraph shall be treated as having been distributed to the defaulting Member for purposes of determining the Members' Capital Accounts and rights to other distributions from the Company. Each of the Members hereby consents to the application to it of the remedies provided in this SECTION 4.3(c)(i) in recognition of the risk and speculative damages its default would cause the Company and the other Member and further agrees that the availability of such remedies and the choice of any such remedy shall not preclude any other such remedy or any other remedies that may be available at law, in equity, by statute or otherwise. (ii) Notwithstanding anything to the contrary in SECTION 4.3(c)(i), upon the repayment by the defaulting Member to the Company of all amounts due under SECTION 4.3(c)(i) (including any and all accrued interest), the Company shall no longer be authorized to withhold distributions to the defaulting Member with respect to such Capital Contribution; PROVIDED, HOWEVER, that nothing in this SECTION 4.3(c)(ii) shall prohibit the Company from exercising its remedies as set forth in SECTION 4.3(c)(i) (including the withholding of distributions) with respect to any subsequent defaults by any Member with respect to any subsequent Capital Call Notices. (iii) Notwithstanding anything to the contrary contained herein, in the event that, as of the date that is one (1) year from any Default Notice Date, the defaulting Member has not repaid all of such defaulting Member's unfunded Capital Contribution, the non-defaulting Member shall be entitled to declare a Deadlock and exercise any and all rights of an Offering Member as set forth in ARTICLE XII. 4.4 CFM56 FINANCING. If at any time on or before the fifth anniversary of the date of this Agreement, the Company elects to seek certification and become a working ___________ 14 facility, CGTC shall, pursuant to the terms and conditions set forth on EXHIBIT B attached hereto, loan to the Company up to ___________ dollars ($___________) in cash to finance such certification and any other expenses in connection therewith. Any such monetary amounts provided by CGTC to the Company shall constitute a loan to the Company and shall not constitute a Capital Contribution.* ARTICLE V CAPITAL ACCOUNTS AND ALLOCATIONS 5.1 CAPITAL ACCOUNTS. For purposes of maintaining Capital Accounts in accordance with Code Section 704(b) and the Tax Regulations thereunder: (a) Maintenance of Capital Accounts. The Company will maintain for each Member a separate Capital Account in accordance with this Agreement, which will control the division of assets upon liquidation of the Company as provided in SECTION 13.4(d). (b) Negative Capital Accounts. If any Member has a deficit balance in its Capital Account, such Member shall have no obligation to restore such negative balance or to make any Capital Contribution to the Company by reason thereof, and such negative balance shall not be considered an asset of the Company or of any Member. (c) Initial Capital Accounts. The Members agree that the initial Capital Account of each Member after giving effect to the initial Capital Contributions provided for in SECTION 4.1 shall be as set forth on EXHIBIT A. (d) ALLOCATION OF INITIAL CAPITAL CONTRIBUTIONS AMONG CONTRIBUTED PROPERTY. The Members agree that the aggregate net Book Value of the cash or assets, as the case may be, contributed to the Company by each Member pursuant to SECTION 4.1 hereof is equal to the initial Capital Account of such Member after giving effect to such Capital Contribution, as set forth in paragraph (c) above. 5.2 INTEREST. No interest will be paid by the Company on Capital Contributions or on balances in Capital Accounts. 5.3 ALLOCATION OF PROFITS AND LOSSES. After giving effect to the allocations set forth in SECTIONS 5.4 and 5.5, and after giving effect to any distributions of cash or property, Profits and Losses for any Tax Year (or other period) will be allocated to the Members in proportion to their respective Percentage Interests. 5.4 SPECIAL ALLOCATIONS. Notwithstanding any provision herein, the following special allocations shall be made in the following order: - -------------------- * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. 15 (a) MINIMUM GAIN CHARGEBACK - COMPANY NONRECOURSE LIABILITIES. If there is a net decrease in Company Minimum Gain during any Tax Year, certain items of income and gain will be specially allocated (on a gross basis) to the Members in accordance with the rules described in Tax Regulations Section 1.704-2(f) and - 2(j)(2)(i) and (iii), subject to the exemptions set forth in Tax Regulations Section 1.704-2(f)(2), (3), (4) and (5). This SECTION 5.4(a) is intended to comply with the minimum gain chargeback requirement set forth in Tax Regulations Section 1.704-2(f) relating to Company nonrecourse liabilities (as defined in Tax Regulations Section 1.704-2(b)(3)) and will be so interpreted. (b) MINIMUM GAIN CHARGEBACK--MEMBER NONRECOURSE DEBT. If there is a net decrease in Member Nonrecourse Debt Minimum Gain during any Tax Year, certain items of income and gain will be specially allocated (on a gross basis) as quickly as possible to those Members who had a share of the Member Nonrecourse Debt Minimum Gain (determined pursuant to Section 1.704-2(i)(5) of the Tax Regulations) in accordance with the rules described in Tax Regulations Section 1.704-2(i)(4), (j)(2)(ii) and (iii). This SECTION 5.4(b) is intended to comply with the minimum gain chargeback requirement set forth in Tax Regulations Section 1.704-2(i)(4) relating to partner nonrecourse debt (as defined in Tax Regulations Section 1.704-2(b)(4)) and will be so interpreted. (c) QUALIFIED INCOME OFFSET. If any Member unexpectedly receives an adjustment, allocation or distribution described in Tax Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be allocated, in accordance with Tax Regulations Section 1.704-1(b)(2)(ii)(d), to such Member in an amount and manner sufficient to eliminate, to the extent required by such Tax Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this SECTION 5.4(c) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided in this ARTICLE V have been tentatively made as if this SECTION 5.4(c) were not in the Agreement. This SECTION 5.4(c) is intended to comply with the "qualified income offset" requirement set forth in Tax Regulations Section 1.704-1(b)(2)(ii)(d) and will be so interpreted. (d) COMPANY NONRECOURSE DEDUCTION. Company Nonrecourse Deductions for any Tax Year will be specially allocated among the Members in proportion to their Percentage Interests. (e) MEMBER NONRECOURSE DEDUCTION. Member Nonrecourse Deductions will be allocated pursuant to Tax Regulations Section 1.704-2(b)(4) and (i)(l) to the Member who bears the economic risk of loss with respect to the deductions. (f) TAX ALLOCATIONS; CODE SECTION 704(c). In accordance with Code Section 704(c) and the Tax Regulations thereunder, income, gain, loss and deductions with respect to any property contributed to the capital of the Company will, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its Book Value. Unless otherwise required by the Tax Regulations under Section 704(c) of the Code, the Company will take such 16 variations into account in accordance with the "traditional method" and the "ceiling rule" under Tax Regulations Section 1.704-3(b)(1). 5.5 CURATIVE ALLOCATIONS. The allocations set forth in SECTIONS 5.4(a) through (e) (the "TAX REGULATORY ALLOCATIONS") are intended to comply with certain requirements of the Tax Regulations. It is the intent of the Members that, to the extent possible, all Tax Regulatory Allocations will be offset either with other Tax Regulatory Allocations or with special allocations of other items of Company income, gain, loss, or deduction pursuant to this SECTION 5.5. Therefore, notwithstanding any other provisions of this ARTICLE V (other than the Tax Regulatory Allocations), the Management Committee will make such offsetting special allocations of Company income, gain, loss, or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Tax Regulatory Allocations were not part of this Agreement and all Company items were allocated pursuant to SECTION 5.3. In making allocations under this SECTION 5.5, the Management Committee will take into account future Tax Regulatory Allocation under Sections 5.4(a) and 5.4(b) that, although not yet made, are likely to offset other Tax Regulatory Allocations previously made under SECTIONS 5.4(d) and 5.4(e). 5.6 OTHER ALLOCATION RULES. (a) For purposes of determining the Profits, Losses, or any other item allocable to any period, Profits, Losses, and any such other item will be determined on a daily, monthly, or other basis, as determined by the Management Committee (with the consent of the Required Members) using any permissible method under Code Section 706 and the Tax Regulations thereunder. (b) For federal income tax purposes, every item of income, gain, loss, and deduction will be allocated among the Members in accordance with the allocations under SECTIONS 5.3, 5.4, 5.5 and 5.6. (c) The Members are aware of the income tax consequences of the allocations made by this ARTICLE V and agree to be bound by the provisions of this ARTICLE V in reporting their shares of the Company income and loss for income tax purposes. (d) It is intended that the allocations in SECTIONS 5.3, 5.4 and 5.5 effect an allocation for federal income tax purposes consistent with Code Section 704 and comply with any limitations or restrictions therein. The Management Committee (with the consent of the Required Members) may alter the allocations pursuant to this ARTICLE V in any manner consistent with Code Section 704 and to amend the provisions of this Agreement as appropriate to comply with the Tax Regulations promulgated under Code Section 704, if, in the opinion of counsel, such an amendment is advisable to reflect allocations among the Members consistent with those Tax Regulations, and any such allocation will not have a material effect on the distributions which would otherwise be made pursuant to SECTIONS 6.1, 6.3, 13.4 or 13.6, it being understood that, notwithstanding anything in ARTICLE V to the contrary, allocations shall be effected in a manner that will result in liquidating distributions pursuant to SECTION 13.4(d)(ii) (after taking into account Company Minimum Gain and Member Nonrecourse Debt Minimum Gain) being 17 made in the same amounts as if such liquidating distributions were made in the amounts set forth in SECTION 6.1. (e) The Members agree that their Percentage Interests represent their respective interests in Company profits for purposes of allocating excess nonrecourse liabilities (as defined in Tax Regulations Section 1.752-3(a)(3)) pursuant to Tax Regulations Section 1.752-3(a)(3). ARTICLE VI DISTRIBUTIONS 6.1 DISTRIBUTIONS. (a) The Management Committee shall review the Company's accounts at the end of each fiscal quarter to determine whether distributions are appropriate. Subject to SECTION 6.1(b), SECTION 6.3, Section 18-607(a) of the Delaware Act and EXHIBIT B to this Agreement, the Management Committee (with the consent of the Required Members) shall make such distributions of Available Cash to the Members as it may determine, in proportion to their respective Percentage Interests; PROVIDED, HOWEVER, that in the event that, on or at any time after January 1, 2001, the amount of Available Cash is greater than $5,000,000, the Management Committee shall distribute all Available Cash in excess of $5,000,000 to the Members in proportion to their respective Percentage Interests and such action shall not require the consent of the Required Members. (b) Notwithstanding any provision of SECTION 6.1(a) to the contrary, Available Cash that is derived from a transaction that occurs in connection with the dissolution, termination and liquidation of the Company shall be distributed to the Members in accordance with ARTICLE XIII. 6.2 AMOUNTS WITHHELD. Each Member authorizes the Company to withhold and pay any withholding or other taxes payable by the Company with respect to such Member as a result of such Member's participation in the Company. If the Company is required to withhold or pay any such taxes, such Member will be deemed for all purposes of this Agreement to have received a payment from the Company at the time of such withholding or payment, which will be deemed to be a distribution with respect to such Member's Member Interest. To the extent a Member receiving a deemed distribution under this SECTION 6.2 would not otherwise be entitled to such distribution during the Tax Year, such Member shall contribute to the Company in cash the amount of such deemed distribution which is in excess of the distribution the Member would have otherwise been entitled to for such Tax Year (but shall receive no credit for such contribution in circumstances in which Percentage Interests are redetermined). Any withholding authorized by this SECTION 6.2 will be made at the maximum applicable statutory rate under the applicable tax law unless the Management Committee has received an opinion of counsel or other evidence satisfactory to the Management Committee to the effect that a lower rate is applicable or that no withholding is applicable. 6.3 TAX DISTRIBUTIONS. Notwithstanding SECTION 6.1(a), no later than the filing of the Company's federal income tax return with respect to any Tax Year, the Management Committee shall cause the Company to distribute to each Member with respect to such Tax Year an amount 18 not less than (i) the product of (A) the excess, if any, of the cumulative taxable income of the Company allocated to such Member in each Tax Year from and after the inception of the Company (including such Tax Year) over (B) the cumulative taxable income of the Company allocated to such Member in each Tax Year of the Company (excluding such Tax Year), MULTIPLIED BY (ii) the Tax Rate in effect during such Tax Year to which such distribution relates, to the extent such product exceeds distributions made to such Member during such Tax Year (other than distributions to such Member during such Tax Year under this SECTION 6.3 with respect to the prior Tax Year). The Management Committee shall make such distributions on an annual basis, promptly following the filing of the Company's federal income tax return. Amounts distributed under this SECTION 6.3 shall be considered advance distributions under SECTION 6.1(a), and thus Members shall be entitled to distributions under SECTION 6.1(a) only to the extent that distributions to which such Member would be entitled under SECTION 6.1(a) (determined without regard to this SECTION 6.3) exceed amounts previously distributed to such Member under SECTION 6.1(a) and this SECTION 6.3. ARTICLE VII MANAGEMENT OF THE COMPANY 7.1 MANAGEMENT. The business and affairs of the Company shall be managed by a management committee (the "MANAGEMENT COMMITTEE") consisting of four (4) Managers. Except for situations in which the approval of a Member or Members is expressly required by this Operating Agreement or by the Delaware Act (where such requirement cannot be overridden by the agreement of Members), the Management Committee shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the business of the Company. The members of the Management Committee shall direct, manage and control the business of the Company to the best of their ability. 7.2 APPOINTMENT OF MANAGERS. Subject to SECTION 7.7, CGTC initially shall be entitled to appoint two (2) Managers to the Management Committee (the "CGTC MANAGERS"), and WLFC initially shall be entitled to appoint two (2) Managers to the Management Committee (the "WLFC MANAGERS"). The number of Managers may be increased, and the rights of each Member to elect Managers modified, from time to time upon the affirmative vote or consent of the Required Members; PROVIDED, however, that any such additional Managers may only be appointed by a Member owning a Percentage Interest equal to or greater than 50%. The initial CGTC Managers shall be the following individuals: Kenneth J. Binder Christine Richardson The initial WLFC Managers shall be the following individuals: James D. McBride Edwin F. Dibble 19 7.3 VOTE OF MANAGERS. Each Manager will have one vote, equally weighted with the vote of each other Manager, with respect to any decisions made by the Management Committee ("VOTING POWER"). Any action taken by the Management Committee shall require the affirmative vote or consent of Managers holding at least a majority of the Voting Power; PROVIDED, HOWEVER, that any action taken by the Management Committee shall require that the affirmative vote or consent of at least one (1) WLFC Manager and at least one (1) CGTC Manager. Except as may be authorized by the Management Committee, no Member, individual Manager, officer, employee, attorney-in-fact or other agent of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. 7.4 OFFICERS. (a) The officers of the Company shall consist of a (i) President, (ii) Controller, Director of Finance or Chief Financial Officer, (iii) Vice President and (iv) Corporate Secretary, and (v) any other officer as determined by the Management Committee (the "OFFICERS"). The Officers shall be appointed by, and shall exercise such powers and perform such duties as are prescribed by, the Management Committee; PROVIDED, however, that CGTC shall have the right to appoint the Chief Financial Officer and Corporate Secretary of the Company. The Officers need not be employees of the Company. Any number of offices may be held by the same individual, as the Management Committee may determine, except that no individual may simultaneously hold the offices of President and Secretary. The Officers shall hold office for the term for which they were appointed and until their successors are appointed and qualified; PROVIDED, HOWEVER, that any Officer may be removed with or without cause at any time by the Management Committee. (b) The initial officers of the Company shall be as follows:
NAME TITLE ---- ----- Graham Bell President, Chief Financial Officer and Corporate Secretary Robert Klapatch Vice President - Marketing Thomas M. McCoy Vice President - Engineering Hugh Orrell Vice President - Materials/Purchasing
7.5 SIGNIFICANT OPERATING DECISIONS. Notwithstanding any provision of this Agreement to the contrary, in addition to the making of any other decision or the taking of any other action under this Agreement that specifically requires the approval of the Required Members or that is to be made by the Required Members, neither the Management Committee nor any Officer will have the authority to cause the Company to approve, act on or effect, any of the following actions without the approval of the Required Members: (a) the sale of all or substantially all of the business or assets of the Company, whether by merger, consolidation, sale of assets or otherwise (other than pursuant to a sale of Member Interests on the basis contemplated by ARTICLE XI), or the acquisition by the Company of 20 any other Person or an operating business unit of any other Person, whether by merger, consolidation, purchase of equity interests or the acquisition of all or substantially all of the business or assets of such Person or operating business unit; (b) the making by the Company of any capital expenditure not provided for in the annual operating budget (as approved pursuant to Section 7.5(q)) in excess of $100,000 individually or $250,000 in the aggregate for any Fiscal Year; (c) the entering into by the Company of (i) any "Power-by-the-Hour" contract with expected revenues in excess of eight million dollars ($8,000,000) per annum or (ii) any contract or agreement, or any modification thereof or amendment thereto, if the obligations incurred or the expenditures made by the Company pursuant to such contract or agreement (or the increase in such obligations pursuant to such modification or amendment) could reasonably be expected to exceed eight million dollars ($8,000,000) in the aggregate; (d) the incurrence by the Company of any debt with a principal amount in excess of $500,000 in the aggregate; (e) except with respect to the transactions described in SECTION 8.7 and except with respect to the WASI Sublease, (i) the entering into by the Company of any contract or agreement with any Member or any Affiliate of any Member; or (ii) the termination of, or the amending, modifying or waiving of any provision of, any such contract or agreement approved pursuant to this SECTION 7.5(e); (f) the filing of any voluntary petition, or the acquiescence in any involuntary petition, in bankruptcy or receivership with respect to the Company or its property; (g) the Company's engaging in any business or activity that is not consistent with the purposes of the Company set forth in SECTION 3.2 hereof or the making of any material change in the nature of the Company's business; (h) the admission of additional Members (except in connection with a Transfer of a Member Interest made in accordance with ARTICLE XI); (i) the dissolution or winding up of the affairs of the Company; (j) the adoption of any amendment to the Certificate of Formation or to this Agreement; (k) the issuance of any Capital Call Notice to any or all of the Members requiring any or all of the Members to make a Capital Contribution; (l) the making of any election to treat the Company other than as a partnership for income tax purposes; (m) the making of any distribution by the Company to the Members (other than to the extent permitted or required by SECTION 6.3); 21 (n) the taking of any action which would make it impossible to carry on the ordinary business of the Company; (o) (i) the employment of any employee of the Company having compensation in excess of $100,000 annually, unless otherwise provided for in the annual operating budget as approved pursuant to Section 7.5(q), or (ii) the entering into of any employment agreement with any employee of the Company; (p) the changing of the accounting principles utilized by the Company or the application thereof in any manner not mandated by GAAP; (q) the approval of the annual operating budget of the Company (which shall be submitted to the Management Committee not less than twenty (20) days prior to the beginning of each Fiscal Year) and any material changes thereto; (r) the decision to become a CFM56 (or other aircraft engine type, other than JT8 and JT9 aircraft engine models) working overhaul and repair facility; (s) the entering into by the Company of any contract or agreement which would require the Company to disclose, license or assign any proprietary information of the Company (or would require the Company to license or accept assignment of any proprietary information from any other Person); and (t) the type of insurance and coverage limits obtained by the Company. Further, notwithstanding any provision of this Agreement to the contrary, each of WLFC and CGTC agree that only the CGTC Managers, and not the WLFC Managers, shall be entitled to enforce the Company's rights (including, but not limited to, all rights triggered by the subtenant's breach or failure to timely vacate) under the WASI Sublease. 7.6 RESIGNATION. Any Manager may resign at any time by giving written notice to the Members of the Company. The resignation of any Manager shall take effect upon receipt of such notice or at such later time as shall be specified in the notice. Unless otherwise specified in such notice, acceptance of the resignation of a Manager by the Company, the Members or the remaining Managers shall not be necessary to make it effective. 7.7 REMOVAL. WLFC may at any time remove and replace any WLFC Manager with or without cause. CGTC may at any time remove and replace any CGTC Manager with or without cause. No Member other than WLFC may remove or replace any WLFC Manager, and no Member other than CGTC may remove or replace any CGTC Manager. In the event either WLFC or CGTC shall cease to be a Member for any reason, WLFC or CGTC, as applicable, shall cease to be entitled to designate Managers, and each of the WLFC Managers or the CGTC Managers, as applicable, shall be automatically removed as Managers without any further action required to be taken by any party; and, notwithstanding SECTION 7.8(A), the Member whose Manager designee(s) are so removed will not be entitled to appoint a replacement Manager or Managers to fill the vacancies so created. 22 7.8 VACANCIES. Any vacancy occurring for any reason in the number of Managers may be filled pursuant to the following procedures: (a) If a vacancy occurs as a result of the death, disability, resignation or removal of a WLFC Manager or a CGTC Manager, WLFC or CGTC, as applicable, shall be entitled to appoint a replacement Manager; and (b) Any Person appointed as a replacement Manager shall hold office until such Person's death, disability, resignation or removal. 7.9 MEETINGS OF MANAGEMENT COMMITTEE. (a) The Management Committee may hold any of its meetings at such place or places within or without the State of Delaware as the Management Committee may from time to time by resolution designate or as called by any Manager. Managers may participate in any regular or special meeting of the Management Committee by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. (b) Regular meetings of the Management Committee may be held at such times as the Management Committee shall from time to time by resolution determine, but in any event no less than once per Fiscal Quarter, on or about April 12, July 12, October 12 and January 12 of each Fiscal Year. Notice of time and place of any regular meeting shall be mailed to each Manager, addressed to him at his usual place of business, at least four (4) days before the day on which the meeting is to be held. Special meetings of the Management Committee shall be held whenever called by any Manager or the President. Notice of the time and place of any special meeting shall be mailed to each Manager, addressed to him at his residence or usual place of business, at least four (4) days before the day on which the meeting is to be held, or shall be sent to him at such place by telegraph, telecopy or cable or be delivered personally not less than 48 hours before the time at which the meeting is to be held. The purpose of any special meeting shall be required to be included in any notice of a special meeting. Notice of any meeting of the Management Committee shall not be required to be given to any Manager who signs a waiver of notice, whether before or after the meeting, or who is present at such meeting, except for a Manager who shall attend such meeting for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business because the meeting is not lawfully called or convened. 7.10 QUORUM. Except as otherwise provided in this Operating Agreement, the presence of Managers holding at least a majority of the Voting Power shall constitute a quorum for the transaction of business at any meeting of the Management Committee; PROVIDED, HOWEVER, that the presence of at least one (1) WLFC Manager and at least one (1) CGTC Manager shall be required to constitute a quorum. 7.11 ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Management Committee (or of any committee thereof) may be taken without a meeting by the unanimous written consent of the Managers. 23 7.12 COMMITTEES. The Management Committee may designate such committees as the Management Committee may determine to serve at its pleasure, and may prescribe the manner in which proceedings of such committees shall be conducted. The provisions of this Operating Agreement with respect to notice and conduct of meetings of Managers shall govern committees of the Management Committee and actions by such committees. In resolutions adopted by the Management Committee authorizing any such committee, the Managers shall specify the authority of any such committee; PROVIDED, HOWEVER, that that at least one (1) WLFC Manager and at least one (1) CGTC Manager shall be a committee member of each such committee; and PROVIDED, FURTHER, that no committee shall have the authority to take any action that is subject to the special voting provisions set forth in SECTION 7.5 without the affirmative vote or consent of the Required Members. The provisions of SECTIONS 7.2 and 7.3 with respect to the appointment and voting rights of Managers shall govern the appointments and voting rights of any committee members of any committees designated by the Management Committee. 7.13 COMPENSATION. The compensation of the Officers and employees shall be paid directly by the Company and not by either Member. The compensation of the President of the Company shall be fixed from time to time by the Management Committee (or by any committee formed by the Management Committee to determine compensation matters), and the compensation of all other Officers and employees of the Company shall be fixed from time to time by the President; PROVIDED, HOWEVER, that any changes to the salaries and bonuses of any of the Company's Officers or employees for any Fiscal Year which, in the aggregate, would result in an increase in the overall amount provided for compensation in the annual operating budget for such Fiscal Year, and all changes to the benefit programs for such Officers and employees for such Fiscal Year, shall be determined by the Management Committee (or an authorized committee thereof). The Managers shall not be entitled to any compensation for their services as Managers, but shall be entitled to compensation for all reasonable, out-of-pocket costs incurred by them in the performance of their duties as Managers hereunder. 7.14 NO PARTICIPATION BY MEMBERS. Except as expressly set forth in this Agreement or as expressly required by the Delaware Act (where such requirement cannot be superseded by the agreement of Members), the Members shall not have any vote or take any part in the control or management of the business of the Company, nor have any authority or power to act for or on behalf of the Company in any manner whatsoever. No Member that is not otherwise authorized by the Management Committee as an agent shall take any action to bind the Company, and each Member shall indemnify the Company for any costs or damages incurred by the Company as a result of the unauthorized action of such Member. Upon prior written approval of the Management Committee, each Member shall be reimbursed by the Company for all reasonable, out-of-pocket costs and expenses incurred by it in connection with the authorized carrying out of the Company's Business. 7.15 COMPANY FUNDS. The funds of the Company will be deposited in such account or accounts maintained in the name of the Company with such bank or banks as are designated by the Management Committee. All withdrawals from or charges against such accounts shall require the signature of the Controller, Director of Finance or Chief Financial Officer, as the case may be, or his designee, and in each case one other authorized signatory, which signatory shall 24 be an Officer of the Company. Funds of the Company may be invested as determined by the Management Committee in accordance with the terms and provisions of this Agreement; PROVIDED, HOWEVER, that at all times the Controller, Director of Finance or Chief Financial Officer, as the case may be, shall maintain books of account that show the amount of funds of the Company on deposit in each such account and interest accrued with respect to such funds as are credited to the Company. 7.16 INDEMNIFICATION. Without duplication as to any matter indemnified against by the Company pursuant to SECTION 9.03 of each of the WLFC Contribution Agreement and the CGTC Contribution Agreement, and except as to any matter for which the Company is entitled to be indemnified pursuant to SECTION 9.02 of each of the WLFC Contribution Agreement and the CGTC Contribution Agreement, the Company shall indemnify and hold harmless (i) each Manager, (ii) each of the Members, (iii) the officers, directors and employees of each of the Members and the Company (each of the Persons set forth in clauses (i), (ii) or (iii) above, an "INDEMNITEE"), as follows: (a) In any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, and to which an Indemnitee was or is a party or is threatened to be made a party by reason of any act performed or omitted to be performed in the name of or on behalf of the Company in connection with the Company's business, the Company will indemnify such Indemnitee against reasonable attorneys' fees, judgments, fines, penalties, including excise and similar taxes, statements, and reasonable expenses actually incurred by such Indemnitee in connection with the defense and/or settlement of such action, suit, or proceeding, if such Indemnitee acted in good faith, within such Indemnitee's scope of authority, without gross negligence or willful misconduct, and in a manner reasonably believed by such Indemnitee to be in the best interests of the Company, and in the case of a criminal action or proceeding, if such Indemnitee had no reason to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that the Indemnitee had reasonable cause to believe that his conduct was unlawful. In no event, however, will indemnification ever be made in relation to a proceeding between the Members, in relation to a proceeding in which the Indemnitee has been found liable for or convicted of fraud or a criminal act or for grossly negligent, willful, or intentional misconduct in the Indemnitee's performance of its duty to the Company or in relation to a proceeding which arises out of a material violation by the Indemnitee of the terms and provisions of this Agreement. (b) Any indemnification permitted under this SECTION 7.16 will be made only out of the assets of the Company (including any insurance proceeds payable under any insurance policies held by the Company) and no Member will be obligated to contribute to the capital of, or lend funds to, the Company to enable the Company to provide such indemnification. 25 (c) The indemnification provided by this SECTION 7.16 will be in addition to any other rights to which each Indemnitee may be entitled under any agreement or vote of the Required Members, as a matter of law or otherwise, as to action in the Indemnitee's capacity as a Manager, Officer, Member, director, officer or employee of a Member, and will continue as to an Indemnitee who has ceased to serve in such capacity, and will inure to the benefit of the heirs, successors, assigns, administrators and personal representatives of the Indemnitee. (d) The Company shall be authorized to purchase and maintain insurance on behalf of the Indemnitees. (e) In no event may an Indemnitee subject a Member to personal liability by reason of the indemnification provisions of this Agreement. (f) The provisions of this SECTION 7.16 are for the benefit of the Indemnitees and the heirs, successors, assigns, administrators, and personal representatives of the Indemnitees and will not be deemed to create any rights for the benefit of any other Persons. 7.17 LIABILITY OF THE MANAGERS AND THE MEMBERS. (a) Subject to the provisions of this Agreement, neither the Managers, the Members nor the respective stockholders, directors, officers, employees or agents of the Members will be liable to the Company or to the other Members for errors in judgment or for any acts or omissions that do not constitute: (i) gross negligence; (ii) fraud; (iii) willful or wanton misconduct; or (iv) material violations of this Agreement, in each of cases (i), (ii), (iii) and (iv) above, pursuant to this Agreement or otherwise related to the Company. (b) Each Member may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its directors, officers, employees, agents or representatives. ARTICLE VIII MEMBERS 8.1 MANAGEMENT OF BUSINESS. No Member (in its capacity as a Member) will take part in the control of the Company's business, transact any business in the Company's name or have the power to sign documents for or otherwise bind the Company other than as specifically set forth in this Agreement. 8.2 RETURN OF CAPITAL. No Member will be entitled to the withdrawal or return of its Capital Contribution except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Company may be considered as such by law and then only to the extent provided for in this Agreement. 8.3 PARTITION. Each Member waives any and all rights that it may have to maintain an action for partition of the Company's property. 26 8.4 RESIGNATION. A Member may not resign from the Company prior to the dissolution and winding up of the Company except upon the assignment of its Member Interest in accordance with the provisions of ARTICLE XI of this Agreement. A resigning Member shall not be entitled to receive any distribution and shall not otherwise be entitled to receive the fair value of its Member Interest, except as otherwise expressly provided in this Agreement. 8.5 RESTRICTION ON PURCHASE OF MEMBER'S STOCK. Throughout the term of this Agreement, (a) Sequa Corporation and CGTC and each of their respective Affiliates shall each be strictly prohibited from purchasing, either directly or indirectly, securities of WLFC without the prior written consent of WLFC, which consent may be withheld in WLFC's sole and absolute discretion and (b) WLFC and each of its Affiliates shall each be strictly prohibited from purchasing, either directly or indirectly, securities of Sequa Corporation without the prior written consent of Sequa, which consent may be withheld in Sequa's sole and absolute discretion. 8.6 REPRESENTATIONS AND WARRANTIES OF MEMBERS. Each Member hereby represents and warrants to the Company and to the other Member that: (a) Such Member is acquiring its Member Interest for investment purposes and not with a view to the resale or distribution thereof; (b) Such Member understands and acknowledges that such Member's Member Interest has not been registered under the Securities Act of 1933, as amended, or any state securities or blue sky laws and may not be sold unless registered under the Securities Act of 1933, as amended, and qualified under applicable state securities or blue sky laws or such sale is made pursuant to an exemption from such registration and qualification requirements; (c) The limitations on assignment contained in ARTICLE XI create an economic risk that such Member is capable of bearing; and (d) Except as described herein, to the best knowledge of such Member, no condition exists (or would exist with the passage of time or the giving of notice or both) which would interfere with such Member's ability to perform its obligations hereunder. 8.7 TRANSACTIONS BETWEEN THE MEMBERS AND THE COMPANY. (a) CGTC AS__________________________________TO THE COMPANY. ____________________________________________________ __________________________________________. CGTC hereby agrees to offer ______________to the Company ___________________________. In no event shall CGTC be required to perform _________________________________________________. _________________________________________________________________________ ______________________________, ____________________________________________, and CGTC shall be entitled______________________. ______________________________________ ______________________________________ ________________________________________________________________________________ 27 __________________________, the Company shall _______________________. If CGTC does not __________________________________, the Company shall ____________________________________. In the event that CGTC, during its performance of _______________, determines, in its sole and absolute discretion, that___________________________________________________________________________ ______________________________________________________________________________. Further, in the event that_____________________________________________________ ______________________________________________________________________________. (b) WASI AS____________________________________. _______________________________________________________________________________ ______________________. WLFC hereby agrees to_________________________________. In no event shall WASI be required to ________________________________________. _______________________________________________________________________________ the Company_______________, the Company shall __________________________ and WASI shall ________________. ____________________________________________ __________________________, _________________________________________________ _______________________________________________ the Company shall ______________________. If WASI does not ______________________, the Company shall_______________________________. In the event that____________________________________________________________________ ______________________________________________________________________________ ____________________________________________________________________.* (c) Notwithstanding anything to the contrary contained herein, the Members hereby agree and acknowledge that in the event that WLFC or CGTC, as the case may be, ____________________________________ then WLFC, or CGTC, as the case may be, shall ____________________________________ provided to such Member by SECTIONS 8.7 (a) and (b). ARTICLE IX BOOKS, RECORDS, ACCOUNTING AND REPORTS 9.1 RECORDS AND ACCOUNTING. The Management Committee will keep or cause to be kept appropriate books and records with respect to the Company's business, which will at all times be kept at the principal office of the Company. Each Member will have access to such books and records at all reasonable times, and the Company shall have access to the tax and accounting books and records of PGTC held by WLFC at all reasonable times. The books of the Company will be maintained for financial reporting purposes on the accrual basis in accordance with GAAP. __________________________ * Portions of this Exhibit has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. 28 9.2 REPORTS. (a) The Management Committee will prepare and deliver to each Member, at the Company's expense, not later than ten (10) days following the end of each Fiscal Quarter and not later than thirty (30) days following the end of each Fiscal Year, a balance sheet, statement of income, statement of Members' Capital Accounts and statement of source and application of funds of the Company, as at the end of such Fiscal Quarter or Fiscal Year and for the Fiscal Year then ended, as applicable, in each case (commencing with the second such Fiscal Year) setting forth in comparative form the figures for the preceding Fiscal Year, along with the Management Committee's discussion and analysis of variances, all in reasonable detail. All such Fiscal Year reports shall be audited and certified without qualification by the Company's independent accountants. At the request of any Member, any such Fiscal Quarter reports shall be reviewed by the Company's independent accountants. (b) At the request of any Member and at the Company's expense, the Management Committee will additionally cause to be provided to the Members (i) an annual analysis detailing the components, and changes therein, of each Member's Capital Account, and (ii) an annual analysis detailing all allocations of Profit, Loss and other items of income, gain, loss and deduction, and (iii) such other reports, information or analysis that any Member may reasonably request. ARTICLE X TAX MATTERS 10.1 PREPARATION OF TAX RETURNS. The Management Committee will arrange for the preparation and timely filing of all returns necessary for federal, state and local income tax purposes. The Management Committee shall submit the returns to each Member for review and approval no later than fifteen (15) days prior to the due date of the returns, after giving effect to any extensions of time. If any Member objects to any item on a return, resolution of the items objected to shall be made by the Required Members. The classification, realization and recognition of income, gains, losses, deductions and other items will be based on the method of accounting for federal income tax purposes determined by the Management Committee. 10.2 TAX STATUS; ELECTIONS. It is intended that the Company will be classified as a partnership for federal income tax purposes and, where permitted or required in order to be so classified, will elect to be classified as a partnership for state and local tax purposes. Except as otherwise provided in this Agreement, the Management Committee (with the consent of the Required Members) will determine whether to make any other election available to the Company under the Code. 10.3 TAX CONTROVERSIES. (a) Subject to the provisions hereof (including SECTION 10.3(b) below), CGTC is designated as the "tax matters partner" (as defined in Section 6231 of the Code) and is authorized and required to represent the Company, at the Company's expense, in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and 29 judicial proceedings, and to expend Company funds for professional services and costs associated therewith. Each Member agrees to cooperate with the tax matters partner in connection with such proceedings. The tax matters partner will give all Members prompt notice of any communications from the Internal Revenue Service, or other taxing authorities, or any actions it proposes to take as "tax matters partner." (b) Notwithstanding anything to the contrary in this Agreement, the tax matters partner will have no authority without first obtaining the approval of the Required Members to: (i) enter into a settlement agreement with the Internal Revenue Service that purports to bind Members other than the tax matters partner; (ii) file a petition as contemplated in Code Section 6226(a) or 6228; (iii) intervene in any action as contemplated in Code Section 6226(b)(5); (iv) file any request contemplated in Code Section 6227(b); (v) enter into an agreement extending the period of limitations as contemplated in Code Section 6229(b)(1)(B); (vi) retain any outside professional (other than the Company's designated accountant) with respect to any tax matters; or (vii) file any state or federal income tax return on behalf of the Company. Notwithstanding the withdrawal of a Member from the Company or the dissolution of the Company, the provisions of this SECTION 10.3 will survive and remain binding upon each Member until the statute of limitations has run for the assessment of federal, state and local taxes with respect to the last taxable year in which such Member held an interest in the Company. 10.4 ORGANIZATIONAL EXPENSES. The Company will elect to deduct expenses incurred in organizing the Company ratably over a sixty-month period as provided in Section 709 of the Code. ARTICLE XI TRANSFER RESTRICTIONS; PLEDGES; CERTAIN RIGHTS; ADMISSION OF SUCCESSOR MEMBERS 11.1 TRANSFER RESTRICTIONS. No Member shall Transfer its Member Interest, in whole or in part, except in accordance with the terms and conditions set forth in this ARTICLE XI. Any Transfer, or purported Transfer, of any Member Interest not made in accordance with this ARTICLE XI shall be null and void. 30 11.2 FIRST REFUSAL RIGHTS. (a) If, at any time after the second anniversary of the date of this Agreement, either WLFC or CGTC (in either case, a "TRANSFERRING MEMBER") proposes to Transfer all of the Member Interests then owned by it to a Third Party pursuant to a Third Party Offer, then such Transferring Member shall first give a written notice (a "FIRST REFUSAL NOTICE") to the other Member (the recipient of such notice in either case, the "NOTIFIED MEMBER"), specifying (i) the identity of the Third Party making such Third Party Offer, (ii) the purchase price offered to such Transferring Member for its Member Interests pursuant to such Third Party Offer (the "OFFER PRICE"), and (iii) any other terms and conditions of such Third Party Offer, and containing an irrevocable offer (a "FIRST REFUSAL OFFER"), open to acceptance for a period of thirty (30) days after the date such First Refusal Notice is given, to sell to the Notified Member such Member Interests at the Offer Price and on the other terms and conditions of the Third Party Offer. The First Refusal Notice shall be accompanied by copies of all letters of intent, term sheets or other documents setting forth the proposed terms and conditions of such Third Party Offer. The Notified Member shall not be required to comply with any terms of the Third Party Offer that are unique to the Third Party. (b) The Notified Member may accept such First Refusal Offer by giving a written notice of such acceptance (a "NOTICE OF ACCEPTANCE") to the Transferring Member within thirty (30) days after the date the First Refusal Notice is given. If such a Notice of Acceptance is given, the closing of the Transfer of the Transferring Member's Member Interests to such Notified Member pursuant to the First Refusal Offer shall take place in accordance with the provisions of SECTION 11.3 hereof. (c) If, at the end of the thirtieth day after the First Refusal Notice is given, the Notified Member has not delivered a Notice of Acceptance of the First Refusal Offer contained in such notice, then the First Refusal Rights shall terminate with respect to the Transferring Member's Member Interests, the offer to sell the Member Interests to the Notified Member shall be deemed revoked and the Transferring Member, at any time within a period of three (3) months from the giving of said First Refusal Notice, may transfer all (but not less than all) of such Member Interests to the Third Party at the Offer Price and on the terms contained in the Third Party Offer; PROVIDED, HOWEVER, that in the event the Transferring Member has not so transferred said Member Interests to the Third Party within said three (3) month period, then said Member Interests thereafter shall continue to be subject to all of the restrictions contained in this Agreement as though no First Refusal Notice had ever been given. (d) In the event that a determination must be made (as described below) as to the fair market value of non-cash consideration, the thirty (30) day period referred to in SECTIONS 11.2(a)-(c) shall be extended to such greater period of time, not to exceed sixty (60) days after said First Refusal Notice, as specified by the Management Committee. In the event that the Third Party Offer provides, in whole or in part, for non-cash consideration, the Offer Price offered by the Third Party shall be deemed to be the amount of cash, if any, provided in the Third Party Offer plus the fair market value of the non-cash consideration as determined in good faith by the Management Committee. 31 (e) In no event shall any Member solicit or accept any Third Party Offer that does not provide for the rights set forth in this SECTION 11.2. 11.3 CLOSING OF PERMITTED TRANSFERS. (a) The closing of a Transfer provided for in SECTION 11.2(b) hereof shall take place on the date not later than three (3) months following the date on which the Notice of Acceptance referred to in SECTION 11.2(b) is given at the principal office of the Company (or at such other place as the Transferring Member and the Notified Member shall agree). (b) On the date of closing of any Transfer of Member Interests by a Transferring Member to the Notified Member pursuant to SECTION 11.2(b), the Transferring Member shall assign to the Notified Member the Member Interests being Transferred pursuant to such Section against delivery of the aggregate Offer Price for such Member Interests (the "PURCHASE PRICE"), either by (i) wire transfer of the Purchase Price to an account in a bank located in the United States designated by the Transferring Member for such purpose or (ii) delivery to the transferring Member of a cashier's check, payable to the order of the Transferring Member in the amount of the Purchase Price. Such Transfer shall be made without any representation or warranty whatsoever (other than to the effect that the transferring Member has good title to such Member Interests, free and clear of Liens, and has all requisite power and authority to assign such Member Interests to the transferee pursuant to SECTION 11.2 hereof). 11.4 PLEDGES OF MEMBER INTERESTS. (a) A Member may Pledge its Member Interest to any Person. (b) A Person acquiring a Member Interest pursuant to any foreclosure made upon any Pledge of such Member Interest (a "FORECLOSURE TRANSFEREE") will be entitled only to receive the distributive share of the Company's Profits, Losses and other items of income, gain, losses, deductions and credit and the distributions of cash and/or property attributable to such Transferred Member Interest, except as required by applicable law. Without limiting the foregoing, except as required by applicable law, a Foreclosure Transferee shall not be entitled to any of the rights of a Member pursuant to SECTION 7.5 of this Agreement, and such Foreclosure Transferee's consent shall not be required to any matter hereunder requiring the consent of the Required Members. 11.5 RIGHTS OF ASSIGNEE. (a) Except as provided in this ARTICLE XI and as required by operation of law, the Company will not be obligated for any purpose whatsoever to recognize the Transfer by any Member of a Member Interest unless such Transfer is made in accordance with the terms of this Agreement. A transferee or assignee of a Member's Member Interest other than in accordance with the provisions of this ARTICLE XI will be entitled only to receive the distributive share of the Company's Profits, Losses and other items of income, gain, losses, deductions and credit and the distributions of cash and/or property attributable to such transferred Member Interest. 32 (b) Any Transfer of a Member Interest must be in writing, may not contravene any of the provisions of this Agreement, and must be executed by the transferor and delivered to the Company and recorded on the books of the Company. Any Transfer which contravenes any of the provisions of this Agreement will be of no force and effect and will not be recognized by the Company. (c) A transferee of a Member Interest who is not admitted as a Member pursuant to SECTION 11.6 will have no right to require any information or account of the Company's transactions or to inspect the Company books or to vote, but will only be entitled to receive the allocations and distributions to which its transferor would otherwise be entitled under this Agreement. (d) Any transferee who does not become a Member and desires to make a further transfer of such Member Interest will be subject to all of the provisions of this ARTICLE XI to the same extent and in the same manner as any Member desiring to transfer its Member Interest. (e) No transferee, whether or not such transferee becomes a Member pursuant to SECTION 11.6, shall be entitled to any of the rights provided by SECTION 8.7. 11.6 ADMISSION AS A SUCCESSOR MEMBER. (a) CONDITIONS OF ADMISSION. Subject to the other provisions of this ARTICLE XI, a transferee of a Member Interest will be admitted as a Member only if the following conditions are satisfied: (i) The transferee accepts and agrees to be bound by the terms and provisions of this Agreement as a Member with respect to the Member Interest so transferred; (ii) A counterpart of this Agreement and such other documents or instruments as the Management Committee may reasonably require is executed by the transferee to evidence such acceptance and agreement; (iii) The transferee pays or reimburses the Company for all reasonable legal fees, filing and publication costs incurred by the Company in connection with the admission of the transferee as a Member with respect to the Member Interest so transferred; and (iv) If the transferee is not an individual, the transferee provides the Company with evidence satisfactory to counsel for the Company of the authority of such transferee to become a Member under the terms and provisions of this Agreement. (b) FILINGS. The Secretary will make all official filings and publications as promptly as practicable after the satisfaction by the transferee of the conditions contained in this ARTICLE XI to the admission of such transferee as a Member. 11.7 DISTRIBUTIONS AND ALLOCATIONS IN RESPECT OF TRANSFERRED MEMBER INTERESTS. If any Member Interest is Transferred during any Tax Year in compliance with the provisions of this 33 ARTICLE XI, Profits, Losses and all other items attributable to the transferred (or adjusted) interest for such period will be divided and allocated between the affected Persons by taking into account their varying interests during the period in accordance with Code Section 706(d), using any conventions permitted by law and selected by the Management Committee (with the consent of the Required Members). All distributions on or before the date of such Transfer will be made to the transferor. Solely for purposes of making such allocations and distributions in the case of a Transfer, the Company will recognize such Transfer not later than the end of the calendar month during which it is given notice of such Transfer. The Company will not incur any liability for making allocations and distributions in accordance with the provisions of this SECTION 11.7, whether or not the Company has knowledge of any Transfer of any interest. 11.8 TRANSFER OF MEMBER INTEREST BY PGTC TO WLFC. Notwithstanding any provision in this ARTICLE XI to the contrary, the Transfer of PGTC's Member Interest to WLFC as contemplated by the Recitals of this Agreement shall not be subject to any of the provisions of this ARTICLE XI. The parties to this Agreement acknowledge and agree that WLFC shall be admitted as a Member of the Company effective upon the distribution of PGTC's Member Interest to WLFC on the Closing Date, and shall succeed to all rights, obligations and Capital Contributions, and to the Capital Account of, PGTC. ARTICLE XII DEADLOCK; BUY-SELL 12.1 OFFER TO PURCHASE SHARES TRIGGERED BY DEFAULT OR DEADLOCK. (a) GENERAL. Notwithstanding anything to the contrary contained in this Agreement, if at any time after the second anniversary of the date of this Agreement, a Member has declared a Deadlock and has given written notice of such Deadlock to the other Member, then either WLFC or CGTC (the "OFFERING MEMBER") may provide the other Member (the "NON-OFFERING MEMBER") with written notice of an offer (the "OFFER") to purchase all of the Non-Offering Member's Member Interests within thirty (30) days of the receipt of written notice of the Deadlock. The notice shall include a purchase price in cash to be payable in full upon the closing, and must not be subject to any conditions other than receipt of any required regulatory approvals. The Non-Offering Member shall be obligated either to (i) sell all of the Non-Offering Member's Member Interests to the Offering Member or (ii) purchase from the Offering Member all of the Offering Member's Member Interests, in either case for the same purchase price, payment terms and any other conditions as were set forth by the Offering Member in the written notice, within ninety (90) days of the receipt of such written notice. (b) DUAL OFFERS. If both Members deliver an Offer pursuant to SECTION 12.1(a), the offer which has a greater cash value shall be deemed the Offer, and the party delivering such Offer shall be deemed the Offering Member and the party delivering the lower cash value offer shall be deemed the Non-Offering Member for purposes of this SECTION 12.1. If both Members deliver Offers pursuant to the preceding sentence which are equal in cash value, both Members may resubmit Offers within five (5) days of the delivery of the original offers and such new Offers shall be subject to the procedures set forth in the preceding sentence. 34 (c) CLOSING. At the closing of any purchase of Member Interests pursuant to this ARTICLE XII, the buying Member shall tender to the selling Member the purchase price for the Member Interests to be acquired, and, without any further action on the part of the selling Member, the selling Member shall cease to own such Member Interests and shall cease to be a Member of the Company. Any Member Interests purchased pursuant to this ARTICLE XII shall be free and clear of any and all Liens, and at the closing the selling Member shall represent and warrant to such effect and to the effect that the selling Member is the legal and beneficial owner of such Member Interests. The buying Member shall deliver at such closing, by wire transfer of immediately available funds, payment in full for the Member Interests being purchased by the buying Member. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise reasonably necessary or appropriate, consistent with the terms hereof. ARTICLE XIII DISSOLUTION AND LIQUIDATION 13.1 NO DISSOLUTION. The Company shall not be dissolved by the admission of Members in accordance with the terms of this Agreement or, except as provided in SECTION 13.2, by any event which terminates the continued membership of a Member in the Company, so long as the Company at all times has at least one Member. Upon the occurrence of any such event, the business of the Company shall be continued without dissolution. 13.2 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved and its affairs shall be wound up upon the occurrence of any of the following events: (a) the bankruptcy or dissolution of a Member, or the occurrence of any other event under the Delaware Act that terminates the continued membership of a Member (PROVIDED, HOWEVER, that the dissolution of PGTC shall not constitute a dissolution of the Company under this ARTICLE XIII or otherwise); (b) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act; (c) the completion of the sale of all or substantially all of the assets of the Company; or (d) the unanimous written consent of the Members to dissolve the Company. 13.3 CONTINUATION OF THE COMPANY. Upon the occurrence of an event described in SECTION 13.2(A) only, the Company may be reconstituted if the remaining Members at the time of such event unanimously elect to continue the Company within ninety days after such event. If no election to continue the Company is made within ninety days after such event, the Company will conduct only those activities necessary to wind up its affairs. If such an election to continue the Company is made, then: (a) the Company will be deemed to be reconstituted and will continue unless and until dissolved in accordance with this ARTICLE XIII; and (b) all necessary steps will be taken to amend or restate this Agreement and, if the Certificate of Formation has been canceled, then a new certificate of formation (or similar certificate) shall be filed in accordance with the Delaware Act. 13.4 LIQUIDATION. (a) Upon dissolution of the Company, a neutral liquidating trustee (the "LIQUIDATOR") of the Company shall be selected by the Required Members. (b) The Liquidator will agree not to resign at any time without fifteen (15) days' prior written notice. The Liquidator may be removed at any time, with or without cause, by notice of removal approved by the Required Members. Upon dissolution, removal or resignation of a Liquidator, a successor and substitute Liquidator (who will succeed to all rights, powers and duties of the original Liquidator) will, within thirty (30) days thereafter, be approved by the Required Members. The right to appoint a successor or substitute Liquidator in the manner provided herein will be recurring and continuing for so long as the functions and services of the Liquidator are authorized to continue under the provisions hereof, and every reference herein to a Liquidator will be deemed to refer also to any such successor or substitute Liquidator appointed in the manner herein provided. (c) Except as expressly provided in this ARTICLE XIII, the Liquidator will have and may exercise, without further authorization or consent of any of the Members, all of the powers conferred upon the Management Committee and the Required Members under the terms of this Agreement to the extent necessary or desirable in the good faith judgment of the Liquidator to complete the winding up and liquidation of the Company as provided for herein. (d) Except as provided in SECTION 13.6 below, the Liquidator will liquidate the assets of the Company, and, after making all allocations and distributions otherwise required by this Agreement, will apply and distribute the proceeds of such liquidation in the following order of priority, unless otherwise required by mandatory provisions of applicable law: (i) First, to creditors of the Company (including Members) in the order of priority provided by law, including the escrowing of a reserve of cash or other assets of the Company for contingent liabilities in an amount determined by the Liquidator to be appropriate for such purposes; and (ii) Second, to the Members in accordance with the positive balances in their respective Capital Accounts. 13.5 RESERVES. After all the assets of the Company have been distributed, the Company will terminate; PROVIDED that, if at any time thereafter any funds in any reserve referred to in SECTION 13.4(D)(I) are released because the need for such reserve has ended, such funds will be distributed to the Members in the same manner as if such distribution had been made pursuant to SECTION 13.4(D)(II). 13.6 DISTRIBUTIONS IN KIND. Notwithstanding the provisions of SECTION 13.4 that require liquidation of the Company's assets, but subject to the order of priorities set forth therein, if on dissolution of the Company the Liquidator determines that an immediate sale of part or all of the Company's assets would be impractical or would cause undue loss to the Members, the Liquidator may defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Company (other than those to Members). The Liquidator may distribute to the Members, in lieu of cash, such Company assets as the Liquidator deems not suitable for liquidation. Any distributions in kind will be subject to such conditions relating to the disposition and management thereof as the Liquidator deems reasonable and equitable. The Liquidator will value any property distributed in kind based upon such property's fair market value as determined using such reasonable method of valuation as it may adopt. The fair market value of such property will be the gross fair market value of such property for purposes of making the adjustments required by paragraph (b) of the definition of "Book Value" and paragraph (c) of the definition of "Profits and Losses." 13.7 FILING OF CERTIFICATE OF CANCELLATION. Upon the completion of the distribution of the Company's property as provided in SECTIONS 13.4, 13.5 and 13.6, the Liquidator (or the Members if necessary) will cause the Certificate of Formation to be canceled and will take such other actions as may be necessary to terminate the existence of the Company. 13.8 RETURN OF CAPITAL. No Member will be personally liable for the return of the Capital Contributions of the Members, or any portion thereof, it being expressly understood that any such return will be made solely from the Company's assets. ARTICLE XIV GENERAL PROVISIONS 14.1 AMENDMENT. Any amendment to this Agreement or the Certificate of Formation may be adopted only if unanimously approved in writing by all Members in accordance with SECTION 7.5(J). 14.2 FURTHER ACTION. The parties will execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. 14.3 INVALIDITY OF PROVISIONS. If any provision of this Agreement is declared or found to be illegal, unenforceable or void, in whole or in part, then the parties will be relieved of all obligations arising under such provision, but only to the extent that it is illegal, unenforceable or void, it being the intent and agreement of the parties that this Agreement be deemed amended by modifying such provision to the extent necessary to make it legal and enforceable while preserving its intent or, if that is not possible, by substituting therefor another provision that is legal and enforceable and achieves the same objectives. 14.4 NOTICES. All notices that are required or may be given pursuant to this Agreement must be in writing and delivered personally, by a recognized courier service, by a recognized overnight delivery service, by telecopy or by registered or certified mail, postage prepaid, to the attention of the following persons at their respective addresses, as follows (or to the attention of such other person or such other address as any party may provide to the other parties by notice in accordance with this SECTION 14.4): IF TO WLFC: Willis Lease Finance Corporation 2320 Marinship Way Suite 300 Sausalito, California 94965 Attention: General Counsel Telephone No.: (415) 275-5112 Telecopier No.: (415) 331-5167 IF TO CGTC: Chromalloy Gas Turbine Corporation 4430 Director Drive P.O. Box 200150 San Antonio, Texas 78219 Attention: Kenneth J. Binder Telephone No.: (210) 333-6010 Telecopier No.: IN EACH CASE, WITH A COPY TO: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Linda L. Curtis, Esq. Telephone No.: (213) 229-7582 Telecopier No.: (213) 229-6582 AND Sequa Corporation 200 Park Avenue New York, New York 10166 Attention: Stuart Z. Krinsly Telephone No.: (212) 986-5500 Telecopier No.: (212) 557-9465 Any such notice or other communication will be deemed to have been given and received (whether actually received or not) on the day it is personally delivered or delivered by courier or overnight delivery service or sent by telecopy or, if mailed, when actually received. 14.5 BINDING EFFECT. This Agreement will be binding upon and inure to the benefit of the parties hereto and their successors, legal representatives and permitted assigns. 14.6 INTEGRATION. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto. 14.7 NO THIRD PARTY BENEFICIARY. This Agreement is made solely and specifically between and for the benefit of the parties hereto, and their respective successors and assigns subject to the express provisions hereof relating to successors and assigns, and (except as specifically set forth in SECTION 7.16) no other Person whatsoever will have any rights, interest or claims hereunder or be entitled to any benefits under or on account of this Agreement as a third party beneficiary or otherwise. 14.8 WAIVER. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof will constitute waiver of any such breach or any other covenant, duty, agreement, or condition. 14.9 COUNTERPARTS. This Agreement may be executed and delivered in one or more counterparts and via facsimile, all of which together will constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. 14.10 GOVERNING LAW. This Agreement will be construed and interpreted in accordance with and governed by the Delaware Act with respect to all matters subject thereto, and otherwise will be governed by and construed and interpreted in accordance with the laws of the State of California applicable to contracts made and to be performed in that State. 14.11 CONFIDENTIALITY. (a) Except as may be required to be disclosed by a Member under applicable law, each Member and Manager shall keep confidential and shall not disclose, directly or indirectly, to any other Person (other than to its Affiliates, employees and/or agents in connection with such Member's performance of its obligations hereunder), or use for its personal benefit, any Company Proprietary Technology or Company Confidential Information or any other information belonging to the Company. This SECTION 14.11 shall not apply to (i) any disclosure by a Member of information that becomes generally available to the public through no fault of any such Member or Manager or (ii) any disclosure or use by a Member of any information that is licensed to the Company by such Member and that such Member retains ownership of and/or rights to use pursuant to any such licensing arrangement. (b) Each Member agrees to take any and all actions reasonably deemed necessary or appropriate by it to insure the continued confidentiality and protection of the confidential information that it has agreed to keep confidential pursuant to this SECTION 14.11. In the event that any Member is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any of the confidential information that it has agreed to keep confidential hereunder, it will provide the Company and the other Member with prompt notice of such request so that the Company and/or the other Member may seek an appropriate protective order or waive its compliance with the provisions of this SECTION 14.11. In the event that such protective order or other remedy is not obtained, or the Company or the other Member waives compliance with the provisions of this SECTION 14.11, such Member agrees that it will furnish only that portion of any confidential information that is legally required and will exercise its best efforts to obtain reliable assurance that confidential treatment will be accorded to that portion of any confidential information being disclosed. 14.12 PUBLICITY. During the term of this Agreement, no Member shall, nor shall such Member permit its directors, officers, employees, Affiliates, agents, advisors, representatives or designated Manager to, issue any press release or otherwise make any public statements or other announcements concerning the Company or the operations of the business of the Company, without first notifying and consulting with the other Member regarding the form and content of such press release, statement or other announcement; PROVIDED, HOWEVER, that neither Member shall be prevented at any time by this SECTION 14.12 from furnishing any required information to any Governmental Body or from complying with its legal obligations under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any other applicable law. 14.13 DISPUTE RESOLUTION. (a) Any controversy or claim arising out of or relating to this Agreement (or breach thereof, including without limitation any breach by CGTC of its obligations under SECTION 4.3(B)), other than a Deadlock, whether arising in tort, contract or otherwise, shall be settled in accordance with the following procedures: (i) The parties shall first attempt to resolve such controversy or claim by meeting with an independent mediator chosen by both Members. (ii) If the parties are unable to mutually agree upon a mediator, then the mediator shall be appointed by the American Arbitration Association in the San Diego, California metropolitan area ("AAA") in accordance with then-current commercial rules of mediation thereof. (iii) If such controversy or claim cannot be resolved by mediation within sixty (60) days after the party raising the controversy or claim first notifies the other party thereof in writing, then the controversy or claim shall be submitted to AAA for binding arbitration, to be held in the San Diego, California metropolitan area, in accordance with the then-current commercial rules of arbitration of AAA. (b) The award from any binding arbitration shall be binding upon the parties and their successors and permitted assigns, whether or not any party fails or refuses to participate therein, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (c) The arbitrator shall have the power to issue injunctions and otherwise to grant equitable relief, and shall award legal fees and costs (including fees and costs incurred by AAA and by the arbitrator) to the prevailing party. The arbitrator shall not have the power to award punitive, exemplary or indirect damages. (d) Except as may be otherwise ordered by the arbitrator in accordance with SECTION 14.13(C), each party shall bear its own costs and expenses in connection with any proceeding commenced under this SECTION 14.13, including, without limitation, legal fees and disbursements, travel expenses, witness fees and costs, photocopying and other preparation expenses. The costs and other fees charged by the independent mediator or AAA, whether in connection with a mediation and/or arbitration, shall be shared equally by the parties. FA992160.080 42 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have executed this Operating Agreement as of the date first above written. WILLIS LEASE FINANCE CORPORATION By: /s/ Donald A. Nunemaker Name: DONALD A. NUNEMAKER Title: EXECUTIVE VICE PRESIDENT CHROMALLOY GAS TURBINE CORPORATION By: /s/ Kenneth J. Binder Name: KENNETH J. BINDER Title: EXECUTIVE VICE PRESIDENT PACIFIC GAS TURBINE CENTER, INCORPORATED By: /s/ Graham P. Bell Name: GRAHAM P. BELL Title: PRESIDENT
- -------- * Portions of this Exhibit has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. * Portions of this Exhibit has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. EX-10.2 3 EXHIBIT 10.2 CONTRIBUTION AND ASSUMPTION AGREEMENT* BY AND AMONG PACIFIC GAS TURBINE CENTER, INCORPORATED, WILLIS LEASE FINANCE CORPORATION AND PACIFIC GAS TURBINE CENTER, LLC DATED AS OF MAY 28, 1999 - ------------------------ * Portions of this Exhibit have been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS..................................................................................2 1.01. Definitions..................................................................................2 1.02. Index of Other Defined Terms.................................................................4 ARTICLE II. CONTRIBUTION AND SALE OF ASSETS..............................................................5 2.01. Agreement to Contribute, Sell, Accept and Purchase...........................................5 2.02. Assumption of Liabilities....................................................................6 ARTICLE III. CONTRIBUTION CONSIDERATION...................................................................6 3.01. Contribution Consideration...................................................................6 ARTICLE IV. THE CLOSING..................................................................................6 4.01. The Closing..................................................................................6 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PGTC.......................................................7 5.01. Corporate Existence and Power................................................................7 5.02. Authorization................................................................................7 5.03. Non-Contravention............................................................................7 5.04. Financial Statements.........................................................................7 5.05. Properties; Leases...........................................................................8 5.06. Litigation...................................................................................8 5.07. Brokers......................................................................................8 ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF LLC........................................................8 6.01. Organization and Existence...................................................................8 6.02. LLC Authorization............................................................................8 ARTICLE VII. CONDITIONS TO CLOSING........................................................................8 7.01. Conditions to Obligations of PGTC and LLC....................................................8 ARTICLE VIII. MUTUAL COVENANTS.............................................................................9 8.01. Taxes........................................................................................9 8.02. Employee Matters.............................................................................9 8.03. Further Assurances...........................................................................9
i Page ---- ARTICLE IX. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AND INDEMNIFICATION....................9 9.01. Agreement Survival of Representations, Warranties and Covenants..............................9 9.02. Indemnification by WLFC......................................................................9 9.03. Indemnification by LLC......................................................................10 9.04. Limitations on Indemnification..............................................................10 9.05. Procedure for Indemnification...............................................................11 ARTICLE X. MISCELLANEOUS...............................................................................12 10.01. Notices.....................................................................................12 10.02. Amendments; No Waivers......................................................................13 10.03. Rights and Remedies Cumulative..............................................................13 10.04. Rights and Remedies of LLC..................................................................14 10.05. Construction; Interpretation................................................................14 10.06. Severability................................................................................14 10.07. Counterparts................................................................................14 10.08. Entire Agreement............................................................................14 10.09. Governing Law...............................................................................14 10.10. Expenses....................................................................................14 10.11. Third-Party Beneficiaries...................................................................14 10.12. Dispute Resolution..........................................................................15 10.13. Press Release...............................................................................15
ii
SCHEDULES --------- Schedule 2.01(a) Transferred Assets Schedule 2.01(n) Excluded Assets Schedule 2.02 Assumed Liabilities Schedule 5.06 Litigation
iii CONTRIBUTION AND ASSUMPTION AGREEMENT ------------------------------------- This CONTRIBUTION AND ASSUMPTION AGREEMENT (this "Agreement"), is dated as of May 28, 1999, by and among PACIFIC GAS TURBINE CENTER, INCORPORATED, a Delaware corporation ("PGTC"), and a wholly-owned subsidiary of WILLIS LEASE FINANCE CORPORATION, a Delaware corporation ("WLFC") and PACIFIC GAS TURBINE CENTER, LLC, a Delaware limited liability company ("LLC"). R E C I T A L S A. PGTC is currently engaged in the business of storage and distribution of aircraft and engine spare parts inventory, overhaul and testing of jet engines, including the dismantling, cleaning, repair and testing of said jet engines (the "PGTC Business"). B. PGTC, on behalf of WLFC, has formed LLC to develop, own, operate and maintain the PGTC Business. C. PGTC, on behalf of WLFC, and LLC are entering into this Contribution and Assumption Agreement, pursuant to which PGTC is contributing to LLC certain Transferred Assets, including the PGTC Business, in exchange for which, upon PGTC's dissolution pursuant to applicable law, WLFC will receive a Member Interest in LLC. D. (i) Concurrently herewith, Chromalloy Gas Turbine Corporation, a Delaware corporation ("CGTC") and LLC are entering into a Contribution and Assumption Agreement (the "CGTC Contribution Agreement"), which is substantially similar to this Agreement, pursuant to which CGTC is contributing to LLC $__________* in cash and (ii) CGTC shall contribute an additional amount in cash pursuant to Section 4.3(b) of the Operating Agreement (the sum of (i) and (ii), the "CGTC Cash Contribution"), in exchange for which CGTC Cash Contribution CGTC will also receive a Member Interest in LLC. A G R E E M E N T NOW, THEREFORE, in consideration of the premises, and the mutual representations, warranties, covenants and agreements hereinafter set forth, the parties hereto agree as follows. - ---------------------- * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. ARTICLE I. DEFINITIONS 1.01. DEFINITIONS. In addition to the terms defined elsewhere in this Agreement, the following capitalized terms shall have the following meanings when used herein: "AFFILIATE" has the meaning given to it in the Operating Agreement. "ANCILLARY DOCUMENTS" means the agreements, certificates, instruments or other documents to be executed and delivered in connection with this Agreement, including without limitation the Exhibits hereto and the Operating Agreement. "APPLICABLE LAW" means, with respect to any Person, any domestic or foreign, federal, state or local statute, law, ordinances, rule, administrative interpretation, regulation, order, writ, injunction, directive, judgment, decree or other requirement of any Governmental Authority (including any Environmental Law) applicable to such Person or any of its Affiliates or any of their respective properties, assets, officers, directors, employees, consultants or agents (in connection with such officer's, director's, employee's, consultant's or agent's activities on behalf of such Person or any of its Affiliates). "ASSUMED LIABILITIES" has the meaning given to it in Section 2.02. "CONTRACTS" means all material contracts, agreements, leases, licenses, sales and purchase orders, commitments and other instruments of any kind, whether written or oral, to which PGTC is a party as of the Closing Date and which relate to the PGTC Business. "CONTRIBUTION CONSIDERATION" has the meaning given to it in Section 3.01. "EXCLUDED ASSETS" means those assets of PGTC set forth on SCHEDULE 2.01(n). "EXCLUDED LIABILITIES" means those Liabilities that are not Assumed Liabilities and are not incurred in the ordinary course of business by PGTC or by WLFC, as the successor to PGTC. "FACILITIES" means all offices, warehouses, administration buildings and all real property and all related facilities leased by PGTC or WLFC in connection with the PGTC Business. "GAAP" means generally accepted accounting principles in the United States, consistently applied. "GOVERNMENTAL AUTHORITY" means any foreign, domestic, federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing. 2 "LIABILITY" means, with respect to any Person, any liability or obligation of such Person of any kind, character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise and whether or not the same is required to be accrued on the financial statements of such Person. "LIEN" includes any mortgage, lien, pledge, security interest, conditional sale agreement, charge, claim, easement, right, condition, restriction or other encumbrance or defect of title of any nature whatsoever (including without limitation, any assessment, charge or other type of notice which is levied or given by any Governmental Authority and for which a lien could be filed). "LOSSES" means all damages, judgments, and amounts paid in settlement (net of insurance proceeds and any tax-related benefits received). "MEMBERS" has the meaning given to it in the Operating Agreement. "MEMBER INTEREST" has the meaning given to it in the Operating Agreement. "OPERATING AGREEMENT" means the Operating Agreement, of even date herewith, by and between WLFC and CGTC, as may be amended from time to time. "PGTC INDEMNITEES" has the meaning given to it in Section 9.03. "PERCENTAGE INTEREST" has the meaning given to it in the Operating Agreement. "PERMITTED LIENS" means (a) Liens securing the repayment of Assumed Liabilities, (b) Liens for Taxes or governmental charges or claims (i) not yet due and payable, or (ii) being contested in good faith, if a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor, (c) statutory Liens of landlords, Liens of carriers, warehousepersons, mechanics and materialpersons and other Liens imposed by law incurred in the ordinary course of business for sums (i) not yet due and payable, or (ii) being contested in good faith, if a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor, (d) Liens incurred or deposits made in connection with workers' compensation, unemployment insurance and other similar types of social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return of money bonds and similar obligations, in each case in the ordinary course of business, consistent with past practice and (e) easements, rights of way and other imperfections of title or encumbrances that are a matter of public record and do not materially affect the marketability of the property subject thereto or materially interfere with the present or proposed use of such property. "PERSON " has the meaning given to it in the Operating Agreement. 3 "PREPAID EXPENSES" means the prepaid charges and expenses of PGTC relating to the PGTC Business, including, without limitation, any such charges and expenses with respect to ad valorem taxes, leases and rentals and utilities. "REQUIRED CONSENTS" means (a) each governmental or other material registration, filing, application, notice, transfer, consent, approval, order, qualification and waiver required under Applicable Law to be obtained by PGTC by virtue of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby to avoid the loss of any material permit or otherwise, and (b) each consent of the other party or parties to any Contract which must be obtained by PGTC pursuant to an express term or provision thereof by virtue of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby to avoid the invalidity of the transfer of such Contract, the termination thereof, a material breach or default thereunder or any other material change or modification to the terms thereof. "TAX" means all taxes imposed of any nature including federal, state, local or foreign net income tax, alternative or add-on minimum tax, profits or excess profits tax, franchise tax, gross income, adjusted gross income or gross receipts tax, employment related tax (including employee withholding or employer payroll tax, FICA or FUTA), real or personal property tax or ad valorem tax, sales or use tax, excise tax, stamp tax or duty, any withholding or back up withholding tax, value added tax, severance tax, prohibited transaction tax, premiums tax, occupation tax, together with any interest or any penalty, addition to tax or additional amount imposed by any governmental authority (domestic or foreign) responsible for the imposition of any such tax. 1.02. INDEX OF OTHER DEFINED TERMS. In addition to those terms defined above, the following terms shall have the respective meanings given thereto in the sections indicated below:
DEFINED TERM SECTION "AAA" 10.13 "Agreement" Preamble "Balance Sheet" 5.04 "CGTC Contribution Agreement" Recitals "CGTC" Recitals "Claimant" 9.05(a) "Closing Date" 4.01 "Indemnifying Party" 9.05(a) "LLC" Preamble "PGTC Business" Recitals "Proceedings" 5.12 "Transferred Assets" 2.01
4 ARTICLE II. CONTRIBUTION AND SALE OF ASSETS 2.01. AGREEMENT TO CONTRIBUTE, SELL, ACCEPT AND ----------------------------------------- PURCHASE. Upon the terms and subject to the conditions of this Agreement and in reliance upon the representations, warranties and agreements herein set forth, PGTC is contributing and delivering to LLC on the Closing Date, and LLC is accepting from PGTC, free and clear of all Liens, other than Permitted Liens, the following, except for any Excluded Assets set forth on SCHEDULE 2.01(n) that are included in any of the following: (a) The fixtures and equipment set forth on SCHEDULE 2.01(a); (b) Any Contracts; (c) The accounts receivable set forth on SCHEDULE 2.01(a); (d) The inventory set forth on SCHEDULE 2.01(a); (e) The prepaid expenses set forth on SCHEDULE 2.01(a); (f) All leasehold interests in the Facilities; (g) All rights of PGTC to insurance coverage covering or relating to the PGTC Business with respect to events occurring or claims arising prior to the Closing Date, but only to the extent such coverage and any proceeds therefrom covers or relates to any of the Assumed Liabilities or any pre-Closing liabilities or obligations of the PGTC Business which LLC becomes subject to notwithstanding the provisions of this Agreement; (h) The phone numbers used by the PGTC Business; (i) All goodwill associated with the PGTC Business or the Transferred Assets; (j) All of PGTC's rights, claims, credits, causes of action or rights of setoff against third parties relating to the Transferred Assets of PGTC, whether liquidated or unliquidated, fixed or contingent, including claims pursuant to all warranties, representations and guaranties made by suppliers, manufacturers, contractors and other third parties in connection with products or services purchased by or furnished to PGTC in connection with the PGTC Business and affecting any of the Transferred Assets of PGTC; (k) All transferable franchises, licenses, permits or other authorizations issued or granted by any Governmental Authority that are owned by, granted to or held or used by PGTC in connection with the PGTC Business, whether or not actually utilized by PGTC; (l) All books, records, files and papers of PGTC related to the conduct of the PGTC Business at any time prior to the Closing Date (except records relating to federal 5 and state income tax and accounting), whether in hard copy or computer format, including bank account records, books of account, invoices, sales and promotional literature, manuals and data, sales and purchase correspondence, lists of present and former suppliers, personnel and employment records of employees to be hired by LLC pursuant to Section 8.02 and documentation developed or used for marketing, manufacturing or any other purpose; (m) All cash and cash equivalents set forth on SCHEDULE 2.01(a); and (n) All other assets and properties of PGTC that exist on the Closing Date and are used in connection with the PGTC Business, whether tangible or intangible, real or personal. The collective assets, properties, rights, licenses, permits, contracts, causes of action, claims, operations and business to be transferred to LLC by PGTC pursuant hereto, exclusive of any Excluded Assets, are referred to collectively herein as the "Transferred Assets." The parties acknowledge and agree that each of the Excluded Assets shall remain property of PGTC or any successor in interest to PGTC (including WLFC) following the Closing Date. 2.02. ASSUMPTION OF LIABILITIES. Upon the terms and subject to the conditions of this Agreement and in reliance upon the representations, warranties and agreements herein set forth, LLC, effective as of the Closing Date, will assume and perform and in due course pay and discharge all obligations, Contracts and other Liabilities of PGTC as they exist on the Closing Date, including all trade payables and accrued expenses arising in the ordinary course of business as set forth on SCHEDULE 2.02 (the "Assumed Liabilities"). ARTICLE III. CONTRIBUTION CONSIDERATION 3.01. CONTRIBUTION CONSIDERATION. In consideration for the contribution and assignment to LLC of the Transferred Assets hereunder, in addition to LLC's assumption of the Assumed Liabilities, LLC will issue to PGTC a Member Interest in LLC (the "Contribution Consideration") pursuant to the Operating Agreement having a Percentage Interest equal to 50%. ARTICLE IV. THE CLOSING 4.01. THE CLOSING. (a) The Closing shall take place on May 28, 1999, at the offices of McKenna & Cuneo, LLP located at 750 B Street, Suite 3300, San Diego, CA 92101, unless another date, time or place is agreed to in writing by the parties hereto. (b) As of the Closing Date, PGTC and WLFC, as applicable, shall deliver to LLC the following, in form and substance reasonably satisfactory to LLC and its 6 counsel: (i) a duly executed bill of sale in the form attached hereto as EXHIBIT A; (ii) duly executed assignment and assumption agreements with respect to the Contracts, in the form attached hereto as EXHIBIT B; (iii) a duly executed assignment agreement with respect to the Facilities, in the form attached hereto as EXHIBIT C; and (iv) a duly executed Operating Agreement in the form attached hereto as EXHIBIT D. (c) As of the Closing Date, LLC shall deliver to PGTC (i) duly executed assignment and assumption agreements with respect to the Contracts, duly executed by LLC, in the form attached hereto as EXHIBIT B; and (ii) a duly executed assignment agreement with respect to the Facilities, in the form attached hereto as EXHIBIT C. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PGTC As an inducement to LLC to enter into this Agreement and to consummate the transactions contemplated herein, PGTC represents and warrants to LLC as follows: 5.01. CORPORATE EXISTENCE AND POWER. Until the date on which the Certificate of Dissolution with the Secretary of State of Delaware is filed to dissolve PGTC (as set forth in the Recitals to the Operating Agreement), PGTC is a corporation duly organized and validly existing and in good standing under the laws of the state of Delaware, and has all corporate power and authority required to carry on the PGTC Business as now conducted and to own and operate the Transferred Assets as now owned and operated. 5.02. AUTHORIZATION. The execution, delivery and performance by PGTC of this Agreement and the Ancillary Documents and the consummation by PGTC of the transactions contemplated hereby and thereby are within PGTC's corporate powers and have been duly authorized by all necessary corporate action on the part of PGTC. This Agreement and the Ancillary Documents have been duly and validly executed by PGTC and constitute the legal, valid and binding agreements of PGTC, enforceable against PGTC in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity. 5.03. NON-CONTRAVENTION. Assuming the Required Consents are obtained, to the knowledge of PGTC, the execution, delivery and performance by PGTC of this Agreement and the Ancillary Documents does not and will not materially conflict with, constitute a material default under or be prevented by the terms of any Contract. 5.04. FINANCIAL STATEMENTS. The unaudited balance sheet of PGTC as of December 31, 1998, the unaudited income statement for the year ended December 31, 1998, the unaudited balance sheet of PGTC as of April 30, 1999 (the "Balance Sheet") and the unaudited income statement for the four-month period ended April 30, 1999, a copy of each of which has been delivered to LLC, present fairly the financial position and assets and liabilities of PGTC in all material respects as of such date. 7 5.05. PROPERTIES; LEASES. PGTC holds title to all of the Transferred Assets owned by it and WLFC has a valid leasehold interest in all of the Facilities. 5.06. LITIGATION. Except as set forth on SCHEDULE 5.06, there are no (a) actions, suits, hearings, arbitrations, proceedings (public or private) or investigations that have been brought by or against any Governmental Authority or any other Person (collectively, "Proceedings") pending or, to the knowledge of PGTC, any threatened material Proceedings, against or affecting the PGTC Business or any of the Transferred Assets or which seek to enjoin or rescind the transactions contemplated by this Agreement or otherwise prevent PGTC from complying with the terms and provisions of this Agreement or (b) existing orders, judgments or decrees of any Governmental Authority affecting any of the Transferred Assets or the PGTC Business. 5.07. BROKERS. PGTC is not a party to any contract, agreement, arrangement or understanding with any Person which will result in the obligation of LLC to pay any finder's fee, brokerage commission or similar payment in connection with the transactions contemplated hereby. ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF LLC As an inducement to PGTC to enter into this Agreement and to consummate the transactions contemplated herein, LLC hereby represents and warrants to PGTC that: 6.01. ORGANIZATION AND EXISTENCE. LLC is a limited liability company duly organized, validly existing under the laws of the State of Delaware and has all corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby. 6.02. LLC AUTHORIZATION. The execution, delivery and performance by LLC of this Agreement and the Ancillary Documents and the consummation by LLC of the transactions contemplated hereby and thereby are within the powers of LLC and have been duly authorized by all necessary action on the part of LLC. This Agreement and the Ancillary Documents constitute a legal, valid and binding agreement of LLC, enforceable in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity. ARTICLE VII. CONDITIONS TO CLOSING 7.01. CONDITIONS TO LLC'S OBLIGATIONS. The respective obligations of each party under this Agreement shall be subject to the satisfaction (or waiver by each such party) on or prior to the Closing Date of the following conditions: 8 (a) Executed copies of each of the Ancillary Documents; (b) Evidence that all conditions to the closing of the transactions contemplated by the CGTC Contribution Agreement have been satisfied. ARTICLE VIII. MUTUAL COVENANTS LLC and PGTC hereby covenant and agree as follows: 8.01. TAXES. All sales, value added, use, transfer, registration, stamp and similar Taxes imposed in connection with the transfer of the Transferred Assets will be borne by PGTC. 8.02. EMPLOYEE MATTERS. LLC shall offer employment to each employee of PGTC. 8.03. FURTHER ASSURANCES. At any time or from time to time after the Closing Date, each party shall, at the request of the other party or the other party's counsel, execute and deliver any further instruments or documents and take all such further action as the other party or the other party's counsel may reasonably request in order to evidence or otherwise facilitate the consummation of the transactions contemplated hereby. ARTICLE IX. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AND INDEMNIFICATION 9.01. AGREEMENT SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations, warranties and covenants contained in this Agreement and any certificate, document or instrument delivered hereunder or in connection herewith shall be deemed continuing representations, warranties and covenants and shall survive the Closing Date for a period equal to the statute of limitations applicable thereto. 9.02. INDEMNIFICATION BY WLFC. WLFC shall indemnify and hold LLC harmless against and with respect to, and shall reimburse LLC for: (a) Any and all Losses resulting from a breach of any representation or warranty or nonfulfillment of any covenant of PGTC contained herein or in any bill of sale or assignment and assumption agreements delivered to LLC hereunder or in connection herewith; and (b) Any and all Losses constituting the payment by LLC of obligations and liabilities of PGTC that are Excluded Liabilities. 9 9.03. INDEMNIFICATION BY LLC. LLC shall indemnify and hold PGTC and WLFC (together, the "PGTC Indemnitees") harmless against and with respect to, and shall reimburse the PGTC Indemnitees for: (a) Any and all Losses resulting from a breach of any representation or warranty or nonfulfillment of any covenant or agreement by it contained herein or in any assignment and assumption agreements delivered to PGTC hereunder or in connection herewith; (b) Any and all Liabilities, accruals, deferments, debts, duties and obligations incurred or arising after the Closing Date in connection with the operation of the PGTC Business or any other business of LLC; and (c) Any and all Losses constituting the payment by PGTC or WLFC of obligations and liabilities of LLC that are Assumed Liabilities. 9.04. LIMITATIONS ON INDEMNIFICATION. (a) Notwithstanding Sections 9.02 and 9.03 hereto, the rights and obligations under this Article IX of the PGTC Indemnitees and LLC are subject to the following: (i) neither the PGTC Indemnitees nor LLC shall be entitled to any recovery unless a claim for indemnification is made in accordance with Section 9.05(a), the claim for indemnification is made within the time period of survival set forth in Section 9.01 and the entity seeking indemnification complies with the procedures set forth in Section 9.05; (ii) the PGTC Indemnitees, on the one hand, and LLC, on the other hand, shall not be entitled to any indemnification hereunder unless and until the Losses that the relevant party is entitled to be indemnified for hereunder exceed, in the aggregate, $250,000, in which event the relevant party shall only be entitled to recover Losses that are in excess of $250,000; PROVIDED, HOWEVER, that any Losses with respect to the items set forth on SCHEDULE 5.06 shall not be subject to the limitations of this Section 9.04(a)(ii); and (iii) neither the PGTC Indemnitees nor LLC shall be entitled to recover Losses from the other totaling in excess of the sum of $__________* PLUS the amount of the additional cash capital contribution made by CGTC to LLC pursuant to Section 4.3(b) of the Operating Agreement. - -------------------- * The material has been omitted pursuant to a request for confidential treatment and the material has been filed separately with the Commission. 10 (b) The indemnification provisions in this Article IX shall be the exclusive remedy for any breach of the representations and warranties set forth in this Agreement. 9.05. PROCEDURE FOR INDEMNIFICATION. The procedure for indemnification shall be as follows: (a) The party claiming indemnification (the "Claimant") shall promptly give written notice to the party from whom indemnification is claimed (the "Indemnifying Party") of any claim, whether between the parties or brought by a third party, specifying (i) in reasonable detail, the factual basis for such and (ii) in good faith, the estimated amount of the claim. If the claim relates to an action, suit or proceeding filed by a third party against the Claimant, such notice shall be given by Claimant within ten business days after written notice of such action, suit or proceeding was received by Claimant. The failure of the Claimant to provide such written notice within the time period specified shall not relieve the Indemnifying Party of its indemnification liability under Section 9.02 or Section 9.03, unless such failure materially prejudices the rights of the Indemnifying Party in defending against the claim or action. (b) Following receipt of notice from the Claimant of a claim, the Indemnifying Party shall have 30 days to make such investigation of the claim as the Indemnifying Party deems necessary or desirable. For the purposes of such investigation, the Claimant agrees to make available to the Indemnifying Party and/or its authorized representative(s) the information relied upon by the Claimant to substantiate the claim. If the Claimant and the Indemnifying Party agree at or prior to the expiration of said 30-day period (or any mutually agreed upon extension thereof) to the validity and amount of such claim, the Indemnifying Party shall immediately pay to the Claimant the full amount of the claim. If the Claimant and the Indemnifying Party do not agree within said period (or any mutually agreed upon extension thereof), subject to clause (c) below with respect to third party claims, the Claimant may seek appropriate legal remedy. (c) With respect to any claim by a third party as to which the Claimant is entitled to indemnification hereunder, the Indemnifying Party shall have the right, at its own expense, to participate in or assume control of the defense of such claim, and the Claimant shall cooperate fully with the Indemnifying Party. If the Indemnifying Party elects to assume control of the defense of any third-party claim, the Claimant shall have the right to participate in the defense of such claim with legal counsel of its own selection; PROVIDED, HOWEVER, that the Claimant shall pay the fees and expenses of such counsel. If the Indemnifying Party does not elect to assume control or otherwise participate in the defense of any third party claim, it shall be bound by the results obtained by the Claimant with respect to such Claim; PROVIDED, HOWEVER, that no settlement or compromise of any claim which may result in any indemnification liability may be made by the Claimant without the prior written consent of the Indemnifying Party. 11 (d) If a claim, whether between the parties or by a third party, requires immediate action, the parties will make every effort to reach a decision with respect thereto as expeditiously as possible. (e) Upon satisfaction of any third party claim pursuant to this Article IX, the Indemnifying Party shall be subrogated to all rights and remedies of the Claimant against any third party with respect to such claim. ARTICLE X. MISCELLANEOUS 10.01. NOTICES. All notices and other communications required or permitted to be made under this Agreement shall be in writing and shall be deemed duly given upon actual receipt if (a) delivered personally or by confirmed telecopier transmission, (b) delivered on by overnight carrier or (c) sent by United States registered mail, return receipt requested, postage prepaid, and addressed as follows: IF TO LLC: Pacific Gas Turbine Center, LLC 7007 Consolidated Way San Diego, California 92121 Attention: Graham Bell Telephone No.: (619) 877-2841 Telecopier No.: (619) 578-7009 IF TO PGTC: Pacific Gas Turbine Center, Incorporated, c/o WLFC Lease Finance Corporation 2320 Marinship Way Suite 300 Sausalito, California 94965 Attention: General Counsel Telephone No.: (415) 275-5112 Telecopier No.: (415) 331-5167 IF TO WLFC: 12 Willis Lease Finance Corporation 2320 Marinship Way Suite 300 Sausalito, California 94965 Attention: General Counsel Telephone No.: (415) 275-5112 Telecopier No.: (415) 331-5167 IN EACH CASE, WITH A COPY TO: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Linda L. Curtis, Esq. Telephone No.: (213) 229-7582 Telecopier No.: (213) 229-6582 IF TO CGTC: Chromalloy Gas Turbine Corporation 4430 Director Drive P.O. Box 200150 San Antonio, Texas 78219 Attention: Kenneth J. Binder Telephone No.: (210) 333-6010 Telecopier No.: (210) 337-3962 Sequa Corporation 200 Park Avenue New York, New York 10166 Attention: Stuart Z. Krinsly Telephone No.: (212) 986-5500 Telecopier No.: (212) 557-9465 10.02. AMENDMENTS; NO WAIVERS. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and is duly executed by LLC and PGTC. No failure or delay by any party in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof nor shall any single or partial waiver or exercise thereof preclude the enforcement of any other right, power or privilege. 10.03. RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. 13 10.04. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. No party may assign or delegate or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the other party. 10.05. CONSTRUCTION; INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Article, section, schedule, exhibit, recital and party references are to this Agreement unless otherwise stated. No party, nor its counsel, shall be deemed the drafter of this Agreement for purposes of construing the provisions of this Agreement, and all provisions of this Agreement shall be construed in accordance with their fair meaning, and not strictly for or against any party. 10.06. SEVERABILITY. Any term or provision of this Agreement that is or becomes invalid or unenforceable shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement. 10.07. COUNTERPARTS. This Agreement may be executed and delivered in any number of counterparts and via facsimile with the same effect as if all parties hereto had signed the same document. All counterparts shall be consumed together and shall constitute one instrument. 10.08. ENTIRE AGREEMENT. This Agreement, together with the Exhibits and Schedules and the Ancillary Documents, constitute the entire agreement among the parties pertaining to the subject matter hereof, and supersedes all prior oral and written, and all contemporaneous oral, agreements and understandings pertaining thereto. 10.09. GOVERNING LAW. This Agreement, and the application or interpretation hereof, shall be governed exclusively by its terms and by the laws of the State of California. 10.10. EXPENSES. WLFC shall pay all costs and expenses incurred by or on behalf of WLFC in connection with the negotiation of this Agreement and the performance of the transactions contemplated hereby, including, without limiting the generality of the foregoing, fees and expenses of its legal counsel; PROVIDED, HOWEVER, that all costs and expenses incurred in connection with the formation of LLC, including fees and expenses of legal counsel in connection therewith, shall be paid 50% by WLFC and 50% by CGTC. 10.11. THIRD-PARTY BENEFICIARIES. Nothing herein expressed or implied is intended to or shall be construed to confer upon or give any person or entity, other than the parties hereto, and their respective successors and permitted assigns, any rights or remedies under or by reason of this Agreement. 14 10.12. DISPUTE RESOLUTION. (a) Any controversy or claim arising out of or relating to this Agreement (or breach thereof), whether arising in tort, contract or otherwise, shall be settled in accordance with the following procedures: (i) The parties shall first attempt to resolve such controversy or claim by meeting with an independent mediator chosen by both parties. (ii) If the parties are unable to mutually agree upon a mediator, then the mediator shall be appointed by the American Arbitration Association in the San Diego, California metropolitan area ("AAA") in accordance with then-current commercial rules of mediation thereof. (iii) If such controversy or claim cannot be resolved by mediation within sixty (60) days after the party raising the controversy or claim first notifies the other party thereof in writing, then the controversy or claim shall be submitted to AAA for binding arbitration, to be held in San Diego, California metropolitan area in accordance with the then-current commercial rules of arbitration of AAA. (b) The award from any binding arbitration shall be binding upon the parties and their successors and permitted assigns, whether or not any party fails or refuses to participate therein, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (c) The arbitrator shall have the power to issue injunctions and otherwise to grant equitable relief, and shall award legal fees and costs (including fees and costs incurred by AAA and by the arbitrator) to the prevailing party. The arbitrator shall not have the power to award punitive, exemplary or indirect damages. (d) Except as otherwise provided in Article IX and as may be otherwise ordered by the arbitrator in accordance with Section 10.12(c), each party shall bear its own costs and expenses in connection with any proceeding commenced under this Section 10.12, including, without limitation, legal fees and disbursements, travel expenses, witness fees and costs, photocopying and other preparation expenses. The costs and other fees charged by the independent mediator or AAA, whether in connection with a mediation and/or arbitration, shall be shared generally by the parties. 10.13. PRESS RELEASE. Neither party shall make any press release or otherwise announce to the public the transactions described herein without the other party's written approval of the form and content of the press release or other announcement. If a public statement is required to be made by law, the parties shall consult with each other in advance as to the contents and timing thereof. 15 IN WITNESS WHEREOF, the parties hereto have caused this Contribution and Assumption Agreement to be duly executed by their respective authorized officers as of the day and year first above written. PGTC: PACIFIC GAS TURBINE CENTER, INCORPORATED By: /s/ Jim McBride Title: Chief Financial Officer WLFC: WILLIS LEASE FINANCE CORPORATION By: /s/ Donald A. Nunemaker Title: Executive Vice President LLC: PACIFIC GAS TURBINE CENTER, LLC By: /s/ Graham P. Bell Title: President 16 EX-11.1 4 EXHIBIT 11.1 Exhibit 11.1 Computation of Earnings EXHIBIT XI WILLIS LEASE FINANCE CORPORATION Computation of Earnings Per Share
Three Months Ended June 30 Six Months Ended June 30 ------------------------------------- ------------------------------------- 1999 1998 1999 1998 -------------- -------------- -------------- -------------- (in thousands, except per share data) (in thousands, except per share data) Income before extraordinary item Basic Earnings: Income before extraordinary item $2,787 $2,149 $5,573 $4,099 Shares: Average common shares outstanding 7,374 7,263 7,368 7,228 ------ ------ ------ ------ Basic earnings per common share before extraordinary item $0.38 $0.30 $0.76 $0.57 Assuming Full Dilution Earnings: Income before extraordinary item $2,787 $2,149 $5,573 $4,099 ------ ------ ------ ------ Shares: Diluted average common shares outstanding 7,453 7,488 7,455 7,466 ------ ------ ------ ------ Earnings per common share assuming full dilution, before extraordinary item $0.37 $0.29 $0.75 $0.55 ------ ------ ------ ------ Net income Basic Earnings: Net income $2,787 $2,149 $5,573 $3,899 ------ ------ ------ ------ Shares: Average common shares outstanding 7,374 7,263 7,368 7,228 ------ ------ ------ ------ Basic earnings per common share $0.38 $0.30 $0.76 $0.53 Assuming Full Dilution Earnings: Net income $2,787 $2,149 $5,573 $3,899 ------ ------ ------ ------ Shares: Diluted average common shares outstanding 7,453 7,488 7,455 7,466 ------ ------ ------ ------ Earnings per common share assuming full dilution $0.37 $0.29 $0.75 $0.52 ------ ------ ------ ------ Supplemental information: Difference between average common shares outstanding to calculate basic and assuming full dilution is due to options outstanding under the 1996 Stock Options/ Stock Issuance Plan
23 EX-27 5 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 31,884 0 11,839 0 35,340 0 317,209 16,189 416,635 0 0 0 0 74 71,727 416,635 6,217 25,501 4,629 20,813 4,421 0 5,113 4,648 1,861 0 0 0 0 2,787 0.38 0.37
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