-----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, RuaXTP5+ZL5Eh6Rxrq+5aQnxWcZJTplp2BUlFw3e4ybKI3L8JgkKt/L008aU9P3Q KSLdZqbUwMRxG69CuIkG1A== 0000950150-97-000513.txt : 19970409 0000950150-97-000513.hdr.sgml : 19970409 ACCESSION NUMBER: 0000950150-97-000513 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970408 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL AIRCRAFT INVESTORS CENTRAL INDEX KEY: 0001029688 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 954176107 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-19875 FILM NUMBER: 97576122 BUSINESS ADDRESS: STREET 1: 3655 TORRANCE BLVD STREET 2: SUITE 410 CITY: TORRANCE STATE: CA ZIP: 90503 BUSINESS PHONE: 3103163080 MAIL ADDRESS: STREET 1: 3655 TORRANCE BLVD STREET 2: SUITE 410 CITY: TORRANCE STATE: CA ZIP: 90503 S-1/A 1 AMENDMENT NO. 3 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1997 REGISTRATION NO. 333-19875 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ INTERNATIONAL AIRCRAFT INVESTORS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 7359 95-4176107 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER ID NO.) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.)
3655 TORRANCE BOULEVARD, SUITE 410 TORRANCE, CALIFORNIA 90503 (310) 316-3080 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) WILLIAM E. LINDSEY INTERNATIONAL AIRCRAFT INVESTORS 3655 TORRANCE BOULEVARD, SUITE 410 TORRANCE, CALIFORNIA 90503 (310) 316-3080 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: RICHARD A. BOEHMER, ESQ. PAUL H. IRVING, ESQ. STUART Y. KIM, ESQ. ALLEN Z. SUSSMAN, ESQ. O'MELVENY & MYERS LLP MANATT, PHELPS & PHILLIPS, LLP 400 SOUTH HOPE STREET 11355 W. OLYMPIC BOULEVARD LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90064 (213) 669-6000 (310) 312-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 8, 1997 PRELIMINARY PROSPECTUS 1,820,000 SHARES [LOGO] INTERNATIONAL AIRCRAFT INVESTORS COMMON STOCK ------------------------ All of the shares of Common Stock offered hereby are being sold by International Aircraft Investors (the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $10.00 and $12.00 per share. See "Underwriting" for information relating to the determination of the initial public offering price. The Common Stock of the Company has been approved for quotation on the National Association of Securities Dealers Automated Quotation National Market ("Nasdaq-NM") under the trading symbol "IAIS." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ----------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ - ----------------------------------------------------------------------------------------------- Total(3)........................... $ $ $ ===============================================================================================
(1) Excludes the value of warrants to purchase up to 182,000 shares of Common Stock at an exercise price per share equal to 120% of the initial public offering price per share issuable upon exercise of warrants to be issued to Sutro & Co. Incorporated upon the closing of this offering. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $630,000. (3) The Company has granted the Underwriters an option, exercisable for 45 days from the date of this Prospectus, to purchase a maximum of 273,000 additional shares of Common Stock from the Company solely to cover overallotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part and to withdraw, cancel or modify this offering without notice. It is expected that delivery of the certificates for the shares will be made on or about , 1997. SUTRO & CO. INCORPORATED FRIEDMAN, BILLINGS, RAMSEY & CO., INC. THE DATE OF THIS PROSPECTUS IS , 1997 3 [THREE AIRCRAFT IN FLIGHT. TWO B 737S, ONE WITH THE LOGO AND NAME OF SOUTHWEST AND ONE WITH THE LOGO AND NAME OF BRITISH MIDLAND. THE THIRD AIRCRAFT IS AN MD 82 WITH THE LOGO AND NAME OF ALASKA.] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus, including the information appearing under "Risk Factors." Unless otherwise indicated, all financial information and share and per share data in this Prospectus, other than the Consolidated Financial Statements, (i) reflect a 1-for-6 reverse split of Common Stock prior to the closing of the offering, (ii) assume no exercise of the Underwriters' over-allotment option, (iii) assume the conversion of all the outstanding shares of Convertible Preferred Stock (the "Preferred Stock") into 823,463 shares of Common Stock upon the closing of this offering, (iv) assume the exercise of options to purchase 358,045 shares of Common Stock, and (v) exclude up to 182,000 shares of Common Stock issuable upon exercise of a warrant to be issued to Sutro & Co. Incorporated (the "Sutro Warrant") upon the closing of this offering. See "Management -- Stock Option Plan," "Description of Capital Stock" and "Underwriting." References in this Prospectus to the Company or IAI shall be deemed to include International Aircraft Investors and its subsidiaries unless otherwise stated. THE COMPANY International Aircraft Investors (the "Company" or "IAI") is primarily engaged in the acquisition of used, single-aisle jet aircraft and engines for lease and sale to domestic and foreign airlines and other customers. As of December 31, 1996, the Company's portfolio, appraised at approximately $91.53 million, had seven aircraft on lease to seven customers. The Company leases its aircraft under "triple net" operating leases where the lessee is responsible for all operating costs (i.e., crew, fuel, insurance, taxes, licenses, landing fees, navigation charges, maintenance, repairs and associated expenses) and the Company retains the potential benefit and assumes the risk of the residual value of the aircraft, as distinct from finance leases where the full cost of the aircraft is recovered over the term of the lease at usually lower monthly rates. The profits of the global airline industry are on the rise and passenger traffic is expected to grow through 2016, according to the 1997 Current Market Outlook published by the Boeing Commercial Airplane Group ("Boeing") in March 1997 (the "Boeing Report"). Boeing projects that traffic will increase 4.9% annually through 2016 and that 16,162 new commercial jet aircraft will be required over the next approximately 20 years. Airlines will confront an increasingly competitive environment with long-term profitability dependent on successful cost reductions. Such reductions will include improvements in fleet planning designed to more closely match aircraft capacity with passenger demand. An important element of fleet planning for many airlines is the use of operating leases which tend to maximize fleet flexibility due to their short-term nature and relatively small capital outlay, while minimizing financial risks. While most operating leases are made for new aircraft, emphasis on cost containment has been increasing the attractiveness of leasing used commercial jet aircraft. The Boeing Report estimates that 16,162 new commercial jet aircraft will be required over the next approximately 20 years, resulting in a projected worldwide fleet of approximately 23,600 commercial jet aircraft in 2016, net of 4,069 retired aircraft. Single-aisle jet aircraft with seating capacity of 121 to 170 are projected by the Boeing Report to account for approximately 29.7% of new commercial jet aircraft deliveries over the next approximately 20 years. Due to the increasing cost of commercial jet aircraft, the anticipated modernization of the worldwide aircraft fleet, and the emergence of new niche-focused airlines which generally use leasing for capital asset acquisitions, the Company believes that airlines will increasingly turn to operating leases as an alternative method to finance their fleets. Although Boeing estimated in its 1996 Current Market Outlook that the fleets of operating lessors have grown from over 200 aircraft in 1986 to over 1,000 in 1995, commercial jet aircraft under operating lease represented only approximately 10% of total commercial jet aircraft in service at year-end 1995. Aviation Week & Space Technology ("Aviation Week") reports that leasing will be the primary means by which the global air transport industry acquires new aircraft between now and 1999, and probably beyond. Aviation Week, based upon data provided by GE Capital Aviation Services, states that in 1986, 41% of the world's airlines owned all of their equipment, 15% leased all of their equipment and 44% used a mix of 3 5 the two (with 80% owned and 20% leased). By contrast, in 1996, 16% owned all of their equipment, 42% leased all of their equipment and 42% used a mix of the two (with 60% leased and 40% owned). The larger operating lessors appear to be focused on the lease of new, rather than used, commercial jet aircraft. The Company believes that the market for the operating lease of used commercial jet aircraft, including for single-aisle jet aircraft with seating capacity of 121 to 170, should grow due to the factors discussed above as well as the emphasis on airline cost reduction, the desire of airlines for fleet flexibility and the growth in air travel. The Company's strategy is to focus on operating leases of used, single-aisle jet aircraft to a diversified base of customers worldwide, while employing strict risk management criteria. Key elements of the Company's business strategy include the following: Focus on Operating Leases. The Company believes that airlines are becoming increasingly aware of the benefits of financing their fleet equipment on an operating lease basis, including preservation of cash flow and flexibility regarding fleet size and composition. The Company believes the operating lease of jet aircraft, especially used jet aircraft, offers the potential for a higher rate of return to the Company than other methods of aircraft financing, such as finance leases. Focus on Used Commercial Jet Aircraft with a Broad Market Acceptance. The Company leases used, single-aisle jet aircraft, particularly aircraft between six and 15 years old at the time the aircraft is acquired by the Company. The Company is currently focusing on the acquisition and lease of single-aisle jet aircraft, primarily aircraft with a seating capacity of 121 to 170 passengers, which, according to the Boeing Report, accounted for approximately 35.9% of the world fleet at December 31, 1996. The Boeing Report estimates that the commercial replacement cycle for this type of aircraft is 25 to 28 years from manufacture date. This category of jet aircraft includes aircraft such as the Boeing 737-300/-400, the Airbus A320 and the McDonald Douglas MD80 series. The Company will also consider acquiring and leasing Boeing 757 aircraft, which have a seating capacity of 171 to 240 passengers. The Company will continue to purchase aircraft which enjoy significant manufacturer's support and fit the Company's criteria. Optimize Relationship with ILFC. The Company has had a long and continuous relationship with International Lease Finance Corporation, a wholly owned subsidiary of American International Group, Inc. ("ILFC"). ILFC was an initial investor in the Company and prior to the offering owned approximately 4.1% of the Company's equity. ILFC is a major owner-lessor of commercial jet aircraft having contacts with most airlines worldwide, the aircraft and engine manufacturers and most of the significant participants in the aircraft industry worldwide. The Company intends to use its relationship with ILFC to seek to gain access, where appropriate, to various airlines and other participants in the market to facilitate the purchase, lease, re-lease and sale of aircraft. ILFC's primary focus is the acquisition and leasing of new commercial jet aircraft. Thus, the Company believes that its business compliments rather than competes with ILFC. See "Business -- Relationship With ILFC." Leverage Management Experience. The successful purchase and leasing of used commercial jet aircraft requires skilled management in order to evaluate the condition and price of the aircraft to be purchased and the current and anticipated market demand for that aircraft. The management of the Company and the Board of Directors of the Company have significant global experience in the aviation industry, with an average of 28 years of experience, especially in the purchase, sale and financing of commercial jet aircraft, and have extensive contacts with airlines worldwide. See "Management -- Directors and Executive Officers." Access a Diversified Global Customer Base. The Company's objective is to diversify its customer base to avoid dependence on any one lessee, geographic area or economic trend. Employ Strict Risk Management Criteria. The Company will only purchase aircraft that are currently under lease or are subject to a contractual commitment for lease or purchase, will not purchase aircraft on speculation, and will generally seek financing using a non-recourse loan structure. The Company evaluates carefully the credit risk associated with each of its lessees and the lessee's ability to operate and properly maintain the aircraft. The Company also evaluates the return conditions in each lease since the condition of an 4 6 aircraft at the end of a lease can significantly impact the amount the Company will receive on the re-lease or sale of an aircraft. The Company was incorporated in California in 1988, its principal executive offices are located at 3655 Torrance Boulevard, Suite 410, Torrance, California 90503, and its telephone and facsimile numbers are (310) 316-3080 and (310) 316-8145, respectively. THE OFFERING Common Stock offered by the Company.. 1,820,000 shares Common Stock to be outstanding after the offering....................... 3,054,006 shares(1) Use of proceeds...................... To finance the acquisition of aircraft, and for working capital and other general corporate purposes Proposed Nasdaq-NM symbol............ IAIS
- --------------- (1) Excludes (i) 372,498 shares of Common Stock subject to options outstanding on the date of this Prospectus with an exercise price of $6.00 per share; (ii) 116,666 shares of Common Stock issuable upon conversion of a 5% Subordinated Convertible Note due August 13, 1998 in the principal amount of $700,000 (the "Convertible Note"); (iii) 182,000 shares of Common Stock issuable upon exercise of the Sutro Warrant; and (iv) 100,000 shares of Common Stock reserved for issuance under the Company's 1997 Employee Stock Option and Award Plan (the "1997 Option Plan") and the Company's 1997 Eligible Directors Stock Option Plan (the "1997 Directors Plan"). RISK FACTORS See "Risk Factors" beginning on page 8 for information that should be considered by prospective investors. Such risk factors include the risks associated with the ownership of aircraft; the effects of downturns or adverse effects on the air transportation industry; the limited number of aircraft and leases of the Company; the Company's reliance upon ILFC; the credit risks associated with the Company's customers; international risks to the Company as a result of leases to foreign customers; aircraft noise compliance; the Company's dependence upon the availability of financing; interest rate risks to the Company; substantial competition in the aircraft leasing industry; limitations on stock ownership of the Company which may affect registration of the Company's aircraft in the United States; uncertainty regarding limits on liability of lessors of aircraft; the requirements and costs associated with the maintenance and operation of aircraft; risks of changes in tax laws or accounting principles; dependence on key management; quarterly fluctuations in operating results; the absence of a prior public market for the Company's Common Stock and the possible volatility of the stock price of the Company's Common Stock; broad management, discretion in the allocation of the use of the net proceeds of the offering; the number of shares eligible for future sale; certain anti-takeover provisions; and the immediate and substantial dilution of purchasers of the Common Stock of the Company. 5 7 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1993 1994 1995 1996 1992(1) ------ ------ ------ ------- ----------- UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA Revenues: Rental of flight equipment....................................... $ 6,166 $6,098 $8,108 $7,765 $12,681 Consulting fees.................................................. 68 742 213 491 461 Gain on sale of aircraft equipment............................... 841 -- -- -- 141 Interest income.................................................. 35 7 68 118 169 ------ ------ ------ ------ ------- Total revenues............................................... 7,110 6,847 8,389 8,374 13,452 Expenses: Interest......................................................... 3,182 2,293 3,548 3,776 6,277 Depreciation..................................................... 2,970 2,014 3,165 3,354 5,550 General and administrative....................................... 690 447 548 526 553 Loss on sale of aircraft......................................... 3,645(2) -- -- -- -- Other............................................................ 185 -- -- -- -- ------ ------ ------ ------ ------- Total expenses............................................... 10,672 4,754 7,261 7,656 12,380 Equity in earnings of affiliates................................... -- -- -- 183 -- Income (loss) before income taxes and extraordinary items.......... (3,562) 2,093 1,128 901 1,072 Income tax expense................................................. 2 45 59 30 37 Income (loss) before extraordinary items........................... (3,564) 2,048 1,069 871 1,035 Extraordinary items -- gain from debt forgiveness.................. 4,326 -- -- -- -- ------ ------ ------ ------ ------- Net income......................................................... $ 762 $2,048 $1,069 $ 871 $ 1,035 ====== ====== ====== ====== ======= Net income (loss) per common and common equivalent share(3): Income (loss) before extraordinary items......................... $ (0.60) $ 0.24 $ 0.14 $ 0.11 $ 0.13 Extraordinary items.............................................. 0.73 -- -- -- -- ------ ------ ------ ------ ------- Net income..................................................... $ 0.13 $ 0.24 $ 0.14 $ 0.11 $ 0.13 ====== ====== ====== ====== ======= Weighted average number of common and common equivalent shares outstanding(3)................................................... 5,863 9,857 7,766 7,766 7,821 Pro forma net income per common and common equivalent share(4)..... .62 1.48 .83 .70 .80 Pro forma weighted average number of common and common equivalent shares outstanding(4)............................................ 1,503 1,503 1,503 1,503 1,520
DECEMBER 31, 1996 ----------------------- AS ACTUAL ADJUSTED(5) ------- ----------- (IN THOUSANDS) BALANCE SHEET DATA Flight equipment under operating lease................................................... $89,885 $89,885 Total assets............................................................................. 92,620 112,981 Debt financing(6)........................................................................ 82,710 82,710 Shareholders' equity..................................................................... 5,084 25,445
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1993 1994 1995 1996 1992 -------- ------- -------- ------- --------- UNAUDITED (DOLLARS IN THOUSANDS) OTHER DATA EBITDA(7)......................................................... $ 5,394 $ 6,400 $ 7,841 $ 8,031 $12,758 Cash Flow(8): From operating activities....................................... -- $ 4,499 $ 4,466 $ 3,939 $ 6,796 From investing activities....................................... -- (28,665) (3,304) (40,967) 156 From financing activities....................................... -- 24,278 (1,006) 36,755 (5,812) Return on average assets(9)....................................... 1.8% 5.8% 1.9% 1.5% 1.1% Return on average equity(10)...................................... -- -- 39.6% 24.6% 22.9% Aircraft equipment owned at period end(11)........................ 4 5 5 8 7
- --------------- (1) Included in the 1992 income statement data is the consolidation of a wholly owned subsidiary which the Company disposed of during 1992. The subsidiary had net liabilities of $3,552,000 and was sold to ILFC for no consideration as ILFC guaranteed the debt of the subsidiary. Accordingly, the Company recognized an extraordinary gain from the disposal of the subsidiary for relief of the net liabilities. During (footnotes continue on next page) 6 8 1992, revenues, expenses, gain on disposal, net loss and net loss per share related to this subsidiary were $712,000, $1,144,000, $3,552,000, $(432,000) and $(0.07), respectively. (2) See "Risk Factors -- Customer Credit Risks." (3) The treasury stock method was used to calculate net income (loss) per common and common equivalent share information and weighted average number of common and common equivalent shares outstanding. The treasury stock method was modified as the number of common stock equivalents exceeded 20% of the number of common shares outstanding at the end of each of the periods presented in the accompanying consolidated financial statements. Accordingly, the number of shares which could be repurchased with the proceeds from such conversions was limited to 20% of the number of common shares and the remaining balance was applied to reduce long-term debt. The modified treasury stock method was applied only to 1993 as the effect on 1992, 1994, 1995 and 1996 was anti-dilutive. See Note 1 to Consolidated Financial Statements. Does not give effect to the 1-for-6 reverse stock split of Common Stock, the assumed conversion of outstanding shares of Preferred Stock into Common Stock, or the assumed exercise of options to acquire shares of Common Stock. (4) Pro forma information was calculated as if the 1-for-6 reverse stock split, the conversion of all the outstanding shares of Preferred Stock into 823,463 shares of Common Stock and the exercise of options to acquire 358,045 shares of Common Stock had occurred at the beginning of the periods indicated, with the proceeds from the exercise of the options used to reduce long-term debt and related interest costs. For purposes of this calculation, Preferred Stock and stock options at December 31, 1996 are assumed to be outstanding for all periods presented and effected for the related conversions and exercises. (5) As adjusted to give effect to (i) the conversion of all the outstanding shares of Preferred Stock into 823,463 shares of Common Stock; (ii) exercise of options to purchase 358,045 shares of Common Stock; (iii) the sale of the 1,820,000 shares of Common Stock offered by the Company hereby at an assumed offering price to the public of $11.00 per share, after deducting underwriting discounts and commissions and estimated expenses of the offering; and (iv) the application of the estimated net proceeds therefrom. See "Use of Proceeds." (6) Includes current portion of long-term debt of $38.4 million. (7) EBITDA, defined as income before interest expense, income taxes, depreciation, gain (loss) on sale of aircraft and extraordinary items, is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance and is also not intended to represent an alternative to cash flow from operating activities as a measure of liquidity. Rather, it is included herein because management believes that it provides an important additional perspective on the Company's operating results and the Company's ability to fund its continuing operations. (8) See Consolidated Statement of Cash Flows included in the Consolidated Financial Statements. Cash flow information for 1992 is not available. (9) Calculations are based on the average monthly balances. (10) Calculations are based on average quarterly balances. Prior to 1994, results are not considered meaningful. (11) Aircraft equipment owned at period end includes one auxiliary power unit which was purchased in 1995 and sold for a gain of $141,000 in December, 1996. 7 9 RISK FACTORS An investment in the shares of Common Stock being offered hereby involves a high degree of risk. In addition to other information in this Prospectus, the following risk factors should be considered carefully by potential purchasers in evaluating an investment in the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein. OWNERSHIP RISKS The Company leases its portfolio of aircraft under operating leases rather than finance leases. Under an operating lease, the Company retains title to the aircraft and assumes the risk of not recovering its entire investment in the aircraft through the re-leasing and remarketing process. Operating leases require the Company to re-lease or sell aircraft in its portfolio in a timely manner upon termination of the lease in order to minimize off-lease time and recover its original investment in the aircraft. Numerous factors, many of which are beyond the control of the Company, may have an impact on the Company's ability to re-lease or sell an aircraft on a timely basis or to re-lease at a satisfactory lease rate. Among the factors are the demand for various types of aircraft, general market and economic conditions, regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft), changes in the supply or cost of aircraft and technological developments. In addition, the success of an operating lease depends in significant part upon having the aircraft returned by the lessee in marketable condition as required by the lease. Consequently, there can be no assurance that the Company's estimated residual value for aircraft will be realized. If the Company is unable to re-lease or resell aircraft on favorable terms, its business, financial condition and results of operations would be adversely affected. INDUSTRY RISKS The Company is in the business of providing leases of commercial jet aircraft to international and domestic airlines. Consequently, the Company is affected by downturns in the air transportation industry in general. Substantial increases in fuel costs or interest rates, increasing fare competition, slower growth in air traffic, or any significant downturn in the general economy could adversely affect the air transportation industry and may therefore negatively impact the Company's business, financial condition and results of operations. In recent months, there has been an increase in spot jet fuel prices. In addition, in recent years, a number of commercial airlines have experienced financial difficulties, in some cases resulting in bankruptcy proceedings. While the Company believes that its lease terms protect its aircraft and the Company's investment in such aircraft, there can be no assurance that the financial difficulties experienced by a number of airlines will not have an adverse effect on the Company's business, financial condition and results of operations. LIMITED NUMBER OF AIRCRAFT AND LESSEES The Company currently owns and leases seven aircraft to seven lessees. The loss of any one aircraft or the financial difficulty of or lease default by any one lessee could have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE UPON ILFC To date, five of the Company's current seven aircraft and leases were acquired from ILFC. See "Business -- Relationship With ILFC". In connection with all of the Company's aircraft, ILFC has provided guarantees or other financial support which have allowed the Company to finance the aircraft at more favorable leverage rates than the Company could have obtained without the guarantees and financial support of ILFC. In addition, ILFC has provided a portion of the consulting fees reported by the Company. See 8 10 "Management's Discussion and Analysis of Financial Condition and Results of Operations." There can be no assurance that the Company will be able to continue to acquire from ILFC or from other entities aircraft and leases of the type and on terms as favorable as or better than the aircraft and leases acquired from ILFC. If aircraft and leases are acquired from ILFC or others, there can be no assurance that guarantees or financial support will be given by the seller or whether the Company will be able to receive as favorable leverage and interest rates from its lenders. If the Company is unable to acquire aircraft and leases and to finance the acquired aircraft at competitive rates, the Company's business, financial condition and results of operations could be adversely affected. See "Business -- Relationship With ILFC," "Certain Transactions" and Note 6 to Consolidated Financial Statements. CUSTOMER CREDIT RISKS Certain of the Company's existing and prospective customers are smaller domestic and foreign passenger airlines which, together with major passenger airlines, may suffer from the factors which have historically affected the airline industry. See "Industry Risks" above. A lessee may default in performance of its lease obligations and the Company may be unable to enforce its remedies under a lease. A number of airlines have experienced financial difficulties, and certain airlines have filed for bankruptcy and a number of such airlines have ceased operations. In most cases where a debtor seeks protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), creditors are stayed automatically from enforcing their rights. In the case of United States certificated airlines, Section 1110 of the Bankruptcy Code provides certain relief to lessors of aircraft. Specifically, the airline has 60 days from the date the lessor makes its claim to agree to perform its obligations and to cure any defaults before the lessor may repossess the aircraft. The scope of Section 1110 has been the subject of significant litigation and there can be no assurance that the provisions of Section 1110 will protect the Company's investment in an aircraft in the event of a lessee's bankruptcy. In addition, Section 1110 does not apply to lessees located outside of the United States and applicable foreign laws may not provide comparable protection. During the years ended December 31, 1994, 1995 and 1996, lease revenues from flight equipment generated from foreign customers accounted for approximately 80%, 69% and 45%, respectively, of total revenues. See "International Risks" below. The following customers accounted for more than 10% of the Company's total revenues in one or more of the three years ended December 31, 1996: British Midland Airways Limited (36%, 36% and 23% for the years ended December 31, 1994, 1995 and 1996, respectively), Alaska Airlines, Inc. (21% for the year ended December 31, 1996), Southwest Airlines Co. (15% for the year ended December 31, 1996), ILFC (6%, 16% and 10% for the years ended December 31, 1994, 1995 and 1996, respectively), New Zealand International Airlines Limited (42%, 26% and 10% for the years ended December 31, 1994, 1995 and 1996, respectively) and Delta Air Lines, Inc. (12%, 11% and 7% for the years ended December 31, 1994, 1995 and 1996, respectively). In 1991, the Company had a DC-9 aircraft on lease to Midway Airlines ("Midway"). The aircraft was not acquired from ILFC and was financed under a recourse loan to the Company. Due in part to expansion by Midway and an economic downturn, Midway filed for protection under the Bankruptcy Code in March 1991. At the time of the bankruptcy filing, the Company's DC-9 aircraft was undergoing a scheduled major overhaul, which caused the aircraft to be in a condition that it could not be flown. After the filing under the Bankruptcy Code, the Company negotiated with Midway and the Company's lender regarding the continued lease or other disposition of the aircraft. Market conditions for the leasing of used commercial jet aircraft deteriorated while these negotiations were underway. Ultimately, the Company concluded that the aircraft should not remain on lease to Midway. Management concluded that, because of the Company's then limited capital resources and the significant capital investment required to return the aircraft to a condition where it could be re-leased, the aircraft should be sold and the Company's loan with respect to the aircraft should be renegotiated. The aircraft, minus one engine which was at an overhaul shop, was then recovered. The aircraft was sold, resulting in proceeds of $1.5 million. The purchaser was required to complete the major overhaul work on the aircraft and add an engine before the aircraft could be operated. In satisfaction of the outstanding recourse 9 11 loan of approximately $6.7 million (including accrued interest), the lender agreed to accept $4.0 million, a $750,000 Note due August 1998 and the Convertible Note. The $4.0 million was obtained from ILFC. The Company paid to ILFC the net proceeds from the sale of the aircraft, sold other assets to ILFC and issued to ILFC a $1.7 million Note due in installments through August 1999. These transactions resulted in a net loss to the Company in 1992 of $2.9 million. The Company's inability to collect receivables under a lease or to repossess aircraft in the event of a default by a lessee would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Aircraft Leasing." INTERNATIONAL RISKS During 1994, 1995 and 1996, approximately 80%, 69% and 45%, respectively, of the Company's lease revenue was generated by leases to foreign customers. Such leases may present greater risks to the Company because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. In addition, many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company attempts to minimize its currency and exchange risks by negotiating all of its aircraft lease transactions in U.S. Dollars. See "Business -- Aircraft Leasing." 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. Political instability abroad and changes in international policy also present risks associated with expropriation of the Company's leased aircraft. Although the Company has experienced no problems to date with its foreign lessees, there can be no assurance that the Company will not experience problems in collecting accounts due under leases to foreign customers or reacquiring aircraft from such customers in the future. International collection problems and problems in recovering aircraft could have a material adverse effect on the Company's business, financial condition and results of operations. Many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company attempts to minimize its currency and exchange risks by negotiating all of its aircraft leasing in U.S. dollars. The Company requires, as a condition to any foreign transaction, that the lessee in a foreign country first obtain, if required, written approval of the appropriate government agency, finance ministry or central bank for the remittance of all funds contractually owed to the Company in U.S. dollars. Although the Company has attempted to minimize the foreign currency risk, to the extent that significant currency fluctuations result in materially higher rental costs to a foreign lessee, the foreign lessee may be unable or unwilling to make the required lease payments. The Company's revenues and income may be affected by, among other matters, political instability abroad, changes in national policy, competitive pressures on certain air carriers, fuel shortages, labor stoppages, recessions and other political or economic events adversely affecting world or regional trading markets or impacting a particular customer. The Company's aircraft can be subject to certain foreign taxes and airport fees. Unexpected liens on an aircraft could be imposed in favor of a foreign entity, such as Eurocontrol or the airports of the United Kingdom. AIRCRAFT NOISE COMPLIANCE The Airport Noise and Capacity Act of 1990 ("ANCA") requires the phaseout of Stage 2 aircraft (defined as aircraft that comply with the Stage 2 noise levels prescribed in Part 36 of the Federal Aviation Regulations) by December 31, 1999, subject to certain exceptions. The FAA regulations which implement the ANCA require carriers to modify or reduce the number of Stage 2 aircraft operated by 50% by the end of 1996, 75% by the end of 1998 and 100% by the end of 1999. Alternatively, a carrier could satisfy these compliance requirements by phasing in aircraft meeting the stricter Stage 3 requirements (set forth in Part 36 of the Federal Aviation Regulations) so that it has at least 65% Stage 3 aircraft by the end of 1996, 75% Stage 3 aircraft by the end of 1998 and 100% of Stage 3 aircraft by the end of 1999. 10 12 Similar rules exist in other countries, including the countries in Western Europe, Australia, New Zealand and Japan, which either require compliance with regulations substantially identical to Stage 3 or which forbid the operation of additional non Stage 3 aircraft by carriers based in such jurisdictions, which has the effect of limiting the Company's ability to place aircraft on lease in such jurisdictions unless they have been modified to meet Stage 3 requirements. Four of the Company's aircraft currently meet Stage 3 requirements. Two of the Company's remaining three aircraft are currently leased in areas not imposing Stage 3 requirements. The Company may be required to modify one or more of its aircraft to meet Stage 3 requirements, which currently could cost in the range of $1.7 million to $2.5 million per aircraft. See "Business -- Government Regulation." The Company has no assurance that it will be able to obtain financing for any such modifications. See "Dependance Upon Availability of Financing" above. The ANCA also recognizes the right of airport operators with special noise problems to implement local noise abatement procedures as long as such procedures do not interfere unreasonably with the interstate and foreign commerce of the national air transportation system. ANCA generally requires FAA approval of local noise restrictions on Stage 3 aircraft and establishes a regulatory notice and review process for local restrictions on Stage 2 aircraft first proposed after October 1990. As the result of litigation and pressure from airport area residents, airport operators have taken local actions over the years to reduce aircraft noise. These actions have included regulations requiring aircraft to meet prescribed decibel limits by designated dates, curfews during night time hours, restrictions on frequency of aircraft operations and various operational procedures for noise abatement. The imposition of and the cost of compliance by the Company with statutory and regulatory requirements concerning noise restriction and abatement could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON AVAILABILITY OF FINANCING The operating lease business is a capital intensive business. The Company's typical operating lease transaction requires a cash investment by the Company of approximately 5% to 15% of the aircraft purchase price, commonly known as an "equity investment." The Company's equity investments have historically been financed from internally generated funds and other cash and seller financing (primarily from ILFC), and in the future will include a substantial portion of the net proceeds of the offering. The balance of the purchase price of an aircraft is typically financed with the proceeds of non-recourse, secured borrowings from banks or other financial institutions (to date with the support of ILFC as the seller of the flight equipment). Accordingly, the Company's ability to successfully execute its business strategy and to sustain its operations is dependent, in part, on the availability of debt and equity capital. In addition, the terms of the Company's loans generally end at the end of the noncancelable portion of the lease of the related aircraft. If the lease grants the lessee the option to renew the lease, the Company will be required to renegotiate the loan with its lender or obtain other financing. At December 31, 1996, approximately $38.4 million of the Company's debt financing was classified as current liabilities, primarily as a result of balloon payments due at the end of the noncancellable portion of leases occurring in 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance that the necessary amount of such capital will continue to be available to the Company on favorable terms, or at all. If the Company were unable to continue to obtain any portion of required financing on favorable terms, the Company's ability to add new leases to its lease portfolio, renew leases, re-lease an aircraft, repair or recondition an aircraft if required or retain ownership of an aircraft on which financing has expired would be limited, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's financing arrangements to date have been dependent in part upon ILFC. See "Reliance Upon ILFC" above and "Business -- Relationship With ILFC," "Certain Transactions" and Note 6 to Consolidated Financial Statements. 11 13 INTEREST RATE RISK The Company's leases are generally structured at fixed rental rates for specified terms. As of December 31, 1996, borrowings subject to interest rate risk, after taking into account guarantees and interest rate swaps in place, totaled $2.3 million or 3% of the Company's total borrowings. In addition, at December 31, 1996, approximately $38.4 million of the Company's debt financing matures or comes due within one year from such date, including approximately $33.4 million of debt relating to four leases which expire between January and August, 1997. Three of these leases were recently extended and a letter of intent has been entered into for the re-lease of the fourth aircraft. See "Business -- Lease Portfolio" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance that the Company will be able to finance or refinance its borrowings at fixed rates which result in acceptable interest rate spreads to the applicable leases, or at fixed rates at all. 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 loans. There can be no assurance that the Company's business, financial condition and operating results will not be adversely affected during any period of increases in interest rates. SUBSTANTIAL COMPETITION The aircraft leasing industry is highly competitive, depending in part upon the type of leased aircraft and prospective lessees. The Company believes that only a few comparably sized companies on a worldwide basis focus primarily on the same segment of the aircraft leasing market as the Company. In addition, a number of aircraft manufacturers, airlines and other operators, distributors, equipment managers, leasing companies (including ILFC), financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft compete with the Company, although their primary focus is not on the market segment on which the Company focuses. Many of these periodic competitors have significantly greater financial resources than the Company. The Company's competitors may lease aircraft at lower rates than the Company and provide benefits, such as direct maintenance, crews, support services and trade-in privileges, which the Company does not intend to provide. There can be no assurance that the Company will continue to compete effectively against present and future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations. STOCK OWNERSHIP AFFECTING AIRCRAFT REGISTRATION The Company intends to maintain United States registration of some of the aircraft which it owns. Aircraft may not be registered in the United States unless the registered owner is a citizen of the United States or other permissible persons under the Federal Aviation Act. If a corporation is the registered owner of an aircraft, the corporation must be organized under the laws of the United States or any State, and the president and two-thirds or more of the board of directors and at least 75% of the voting interest of the corporation must be controlled by persons who are citizens of the United States. Non-U.S. citizens may hold stock in a U.S. corporation through an appropriate voting trust. Any successful challenge to registration of an aircraft by the Federal Aviation Administration (the "FAA") may result in substantial penalties, including the forced sale of the aircraft, the potential for uninsured casualties to the aircraft, the loss of the benefits of the central recording system under federal law (thereby leaving the aircraft exposed to liens or other interests not of record with the FAA), and a breach by the Company of any leases or financing agreements with respect to the aircraft. See "Principal Shareholders." UNCERTAINTY REGARDING LIMITS ON LIABILITY OF LESSORS Section 44112 of Title 49 of the United States Code provides that a lessor of aircraft generally will not be liable for any personal injury or death, or damage to or loss of property, provided that such lessor is not in actual possession or control of the aircraft at the time of such injury, death or damage. Under certain circumstances, however, courts have interpreted Section 44112 narrowly, limiting its protection to certain aircraft lessors and have held that state common law remedies may apply, notwithstanding the limitations on liability under Section 44112. Under common law, the owner of an aircraft may be held liable for injuries or 12 14 damage to passengers or property, and such damage awards can be substantial. Because there is little case law interpreting Section 44112, there can be no assurance that the provisions of Section 44112 would fully protect the Company from all liabilities in connection with any injury, death, damage or loss that may be caused by any aircraft it owns. For example, Section 44112 may not preempt state law with respect to liability for third party injuries arising from a lessor's or owner's own negligence. It is anticipated that each lessee under the terms of each lease to be entered into by the Company will be obligated to indemnify the Company for, or insure the Company against, virtually all claims by third parties; however, in the event that Section 44112 were not applicable, no assurance can be given that the lessees could fulfill their indemnity obligations under any such leases or that any insurance obtained will be sufficient. REQUIREMENTS AND COSTS ASSOCIATED WITH THE MAINTENANCE AND OPERATION OF AIRCRAFT The maintenance and operation of aircraft are strictly regulated by the FAA and foreign aviation authorities which oversee such matters as aircraft certification, inspection, maintenance, certification of personnel, and record-keeping. The cost of complying with such requirements are significant. The Company will seek to lease its aircraft to lessees that agree to bear all or a significant portion of the costs of complying with governmental regulations. All of the Company's current leases require the lessee to bear all of the costs of complying with governmental regulations. However, in the event a lessee fails to maintain aircraft in accordance with the terms of a lease or a lease terminates shortly before a major required overhaul, the Company may be required to spend substantial sums to repair or recondition the aircraft and may be required to borrow funds for the purpose. See "Customer Credit Risks" above. The FAA issued several Airworthiness Directives ("ADs") in 1990 mandating changes to the maintenance program for older aircraft. These ADs were issued to ensure that the oldest portion of the nation's transport aircraft fleet remains airworthy. The FAA is requiring that these aircraft undergo extensive structural modifications. These modifications are required upon accumulation of 20 years' time in service or prior to the accumulation of a designated number of flight-cycles, whichever occurs later. Future regulatory changes may also increase the cost of operating or maintaining the aircraft and may adversely affect the residual value of the aircraft. The failure of a lessee to comply with lease maintenance and operation obligations or the imposition of governmental requirements involving substantial compliance costs could have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF CHANGES IN TAX LAWS OR ACCOUNTING PRINCIPLES The Company's leasing activities generate significant depreciation allowances that provide the Company with substantial tax benefits on an ongoing basis. In addition, the Company's lessees currently enjoy favorable accounting and tax treatment by entering into operating leases. Any change to current tax laws or accounting principles that make operating lease financing less attractive would adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON KEY MANAGEMENT The Company's business operations are dependent in part upon the expertise of certain key employees. Loss of the services of such employees, particularly William E. Lindsey and Michael P. Grella, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company will have employment agreements with Mr. Lindsey and Mr. Grella. The Company will maintain key man life insurance of $2.0 million on each of Mr. Lindsey and Mr. Grella. See "Management." QUARTERLY FLUCTUATIONS IN OPERATING RESULTS The Company has experienced fluctuations in its quarterly operating results and anticipates that these fluctuations may continue. Such fluctuations may be due to a number of factors, including the timing of purchases or sales of aircraft, the timing and extent of consulting and remarketing fees, unanticipated early lease terminations, termination of a lease and the subsequent re-lease at a different lease rate or a default by a lessee. Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations for preceding quarters are not necessarily meaningful and that results for any one quarter should not 13 15 be relied upon as an indication of future performance. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's Common Stock. ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to the offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market for the Common Stock will develop or continue after the offering. The initial public offering price of the Common Stock will be determined through negotiations between the Company and Sutro & Co. Incorporated ("Sutro") and Friedman, Billings, Ramsey & Co., Inc., as representatives of the several Underwriters (the "Representatives"), and may not be indicative of the market price. Additionally, the market price of the Common Stock could be subject to significant fluctuations in response to operating results of the Company, changes in general conditions in the economy, the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or its lessees, or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance, and changes in earnings estimates or recommendations by securities analysts. See "Underwriting." BROAD MANAGEMENT DISCRETION IN ALLOCATION OF NET PROCEEDS The Company expects to use the net proceeds of the offering to acquire additional aircraft for lease and for working capital and other general purposes, but has not yet entered into agreements to purchase any specific aircraft or otherwise identified any other specific uses for such net proceeds. The Company's management, subject to approval by the Company's Board of Directors, will retain broad discretion as to the allocation of the proceeds of the offering. The failure of management to apply such proceeds effectively could have a material adverse effect on the Company's business, financial condition and results of operations. SHARES ELIGIBLE FOR FUTURE SALE After completion of the offering, the Company will have 3,054,006 shares of Common Stock outstanding. Of those shares, the 1,820,000 shares of Common Stock offered hereby (2,093,000 if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144"). The remaining 1,234,006 shares were issued by the Company in private transactions prior to this offering and are "restricted securities" as that term is defined in Rule 144 and are tradeable subject to compliance with Rule 144. In addition, 372,498 shares are subject to existing options and 100,000 shares are reserved for issuance under the Company's 1997 Option Plan and the 1997 Directors Plan. The Company plans to register the shares issuable upon exercise of these options under the Securities Act. The Company, its officers and directors, and certain of the shareholders of the Company, who upon completion of this offering will own an aggregate of 1,234,006 shares of Common Stock, have agreed not to offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock, subject to certain exceptions, for a period of 180 days from the date of this Prospectus, without the prior written consent of Sutro. Because there has been no public market for shares of Common Stock of the Company, the Company is unable to predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price for the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect market prices for the Common Stock and could impair the Company's future ability to obtain capital through an offering of equity securities. See "Shares Eligible for Future Sale." 14 16 ANTI-TAKEOVER PROVISIONS Certain provisions of law and the Company's Amended and Restated Articles of Incorporation and Bylaws (as they will be amended prior to the offering) could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise, and the removal of incumbent officers and directors. These provisions include authorization of the issuance of up to 15,000,000 shares of Preferred Stock, with such characteristics that may render it more difficult or tend to discourage a merger, tender offer or proxy contest. The Company's Amended and Restated Articles of Incorporation also provides that shareholder action can be taken only at an annual or special meeting of shareholders and may not be taken by written consent. The Company's Bylaws also limit the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice. In addition, upon qualification of the Company as a "listed corporation" as defined in Section 301.5(d) of the California Corporations Code, cumulative voting will be eliminated. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids, and to encourage persons seeking to acquire control of the Company to negotiate first with the Company. See "Description of Capital Stock -- Certain Anti-Takeover Provisions." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the offering will experience immediate and substantial dilution of approximately $2.67 per share in the net tangible book value per share of Common Stock from the assumed initial public offering price of $11.00 per share. See "Dilution." USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,820,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $18.0 million (or $20.8 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated expenses of the offering, and assuming an initial public offering price of $11.00 per share. The Company intends to use the net proceeds, together with debt financing, to acquire additional aircraft for lease and for working capital and other general purposes. The Company has not yet entered into agreements to purchase any specific aircraft or otherwise identified any other specific uses of such net proceeds. See "Risk Factors -- Broad Management Discretion in Allocation of Net Proceeds." Pending such uses, the Company will invest the net proceeds in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY The Company has not paid any cash dividends on its capital stock. The payment of cash dividends in the future will be made at the discretion of the Board of Directors of the Company and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant. Following consummation of the offering, the Company intends to retain all available funds for use in its business. Accordingly, the Company does not anticipate declaring or paying any dividends on the Common Stock in the foreseeable future. 15 17 CAPITALIZATION The following table sets forth the capitalization of the Company at December 31, 1996 on an actual basis, which gives effect to a 1-for-6 reverse stock split, and as adjusted to give effect to (i) the conversion of all the outstanding shares of Preferred Stock into 823,463 shares of Common Stock; (ii) the exercise of options to acquire 358,045 shares of Common Stock; (iii) the sale of the 1,820,000 shares of Common Stock offered by the Company hereby at an assumed offering price to the public of $11.00 per share, after deducting underwriting discounts and commissions and estimated expenses of the offering; and (iv) the application of the estimated net proceeds therefrom. See "Use of Proceeds."
DECEMBER 31, 1996 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Debt financing(1)...................................................... $82,710 $ 82,710 ------- --------- Shareholders' equity: Convertible preferred stock, $.01 par value per share; 15,000,000 shares authorized; 4,941,000 shares issued and outstanding, actual; none issued, as adjusted.................................. 49 -- Common stock, $.01 par value per share; 20,000,000 shares authorized; 52,498 shares outstanding, actual; and 3,054,006 shares outstanding, as adjusted(2)....................................... 3 31 Additional paid-in capital............................................. 5,170 25,553 Accumulated deficit.................................................... (139) (139) ------- --------- Total shareholders' equity........................................... 5,083 25,445 ------- --------- Total capitalization......................................... $87,793 $ 108,155 ======= =========
(1) Includes current portion of long-term debt of $38.4 million. (2) Excludes (i) 372,498 shares of Common Stock subject to options outstanding on the date of this Prospectus with an exercise price of $6.00 per share; (ii) 116,666 shares of Common Stock issuable upon conversion of the Convertible Note; (iii) 182,000 shares of Common Stock issuable upon exercise of the Sutro Warrant; and (iv) 100,000 shares of Common Stock reserved for issuance under the 1997 Option Plan and the 1997 Directors Plan. See "Management -- Director Compensation" and " -- Stock Option Plan" and "Underwriting." 16 18 DILUTION At December 31, 1996, the net tangible book value of the Company was $5.1 million or $96.83 per share of Common Stock. Net tangible book value per share represents the Company's total tangible assets, less total liabilities, divided by the number of shares of Common Stock outstanding after giving effect to a 1-for-6 reverse stock split. After giving effect to (i) the conversion of all the outstanding shares of Preferred Stock into 823,463 shares of Common Stock; and (ii) the exercise of options to acquire 358,045 shares of Common Stock, the net tangible book value of the Company at December 31, 1996 would have been $7.5 million, or $6.04 per share of common stock. After giving effect to these conversions, the sale by the Company of the 1,820,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price to the public of $11.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses, the as adjusted net tangible book value of the Company at December 31, 1996 would have been $25.4 million, or $8.33 per share. This represents an immediate increase in net tangible book value of $2.29 per share to the existing shareholders and an immediate dilution in net tangible book value to new investors of $2.67 per share. The following table illustrates the per share dilution: Assumed initial public offering price...................... $11.00 Net tangible book value per share at December 31, 1996... $96.83 Decrease attributable to conversion of Preferred Stock and exercise of stock options......................... (90.79) ------ Adjusted net tangible book value per share before the offering.............................................. 6.04 Increase attributable to new investors in the offering... 2.29 ------ As adjusted, net tangible book value per common share after the offering............................................. 8.33 ------ Dilution per common share to new investors................. $ 2.67 ======
The following table summarizes, as of December 31, 1996, after giving effect to a 1-for-6 reverse stock split, the conversion of all the outstanding shares of Preferred Stock into 823,463 shares of Common Stock and the exercise of options to acquire 358,045 shares of Common Stock, the difference between the current shareholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid, assuming an initial public offering price to the public of $11.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE --------- ------- ----------- ------- --------- Existing shareholders.................. 1,234,006 40.4% $ 7,595,943 27.5% $ 6.16 New investors.......................... 1,820,000 59.6 20,020,000 72.5 11.00 --------- ----- ----------- ----- Total........................ 3,054,006 100.0% $27,615,943 100.0% ========= ===== =========== =====
The foregoing excludes (i) 372,498 shares of Common Stock subject to options outstanding on the date of this Prospectus with an exercise price of $6.00 per share; (ii) 166,666 shares of Common Stock issuable upon conversion of the Convertible Note; (iii) 182,000 shares of Common Stock issuable upon exercise of the Sutro Warrant; and (iv) 100,000 shares of Common Stock reserved for issuance under the 1997 Option Plan and the 1997 Directors Plan. See "Management -- Director Compensation" and " -- Stock Option Plan" and "Underwriting." 17 19 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) The following selected consolidated financial and operating data should be read in conjunction with the accompanying Consolidated Financial Statements and the related notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated financial data set forth below as of and for the fiscal years ended December 31, 1993, 1994, 1995 and 1996 have been derived from the consolidated financial statements of the Company audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial data set forth below as of and for the fiscal year ended December 31, 1992 have been derived from the unaudited consolidated financial statements of the Company.
AT AND FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1992(1) 1993 1994 1995 1996 ----------- ----------- ----------- ----------- ----------- STATEMENT OF INCOME DATA Revenues: Rental of flight equipment...................... $ 6,166 $ 6,098 $ 8,108 $ 7,765 $ 12,681 Consulting fees................................. 68 742 213 491 461 Gain on sale of aircraft equipment.............. 841 -- -- -- 141 Interest income................................. 35 7 68 118 169 ---------- ----------- ---------- ---------- ---------- Total revenues.............................. 7,110 6,847 8,389 8,374 13,452 Expenses: Interest........................................ 3,182 2,293 3,548 3,776 6,277 Depreciation.................................... 2,970 2,014 3,165 3,354 5,550 General and administrative...................... 690 447 548 526 553 Loss on sale of aircraft........................ 3,645(2) -- -- -- -- Other........................................... 185 -- -- -- -- ---------- ----------- ---------- ---------- ---------- Total expenses.............................. 10,672 4,754 7,261 7,656 12,380 Equity in earnings of affiliates.................. -- -- -- 183 -- Income (loss) before income taxes and extraordinary items............................. (3,562) 2,093 1,128 901 1,072 Income tax expense................................ 2 45 59 30 37 Income (loss) before extraordinary items.......... (3,564) 2,048 1,069 871 1,035 Extraordinary items -- gain from debt forgiveness..................................... 4,326 -- -- -- -- ---------- ----------- ---------- ---------- ---------- Net income........................................ $ 762 $ 2,048 $ 1,069 $ 871 $ 1,035 ========== =========== ========== ========== ========== Net income (loss) per common and common equivalent share(3): Income (loss) before extraordinary items........ $ (0.60) $ 0.24 $ 0.14 $ 0.11 $ .13 Extraordinary items............................. 0.73 -- -- -- -- ---------- ----------- ---------- ---------- ---------- Net income.................................. $ 0.13 $ 0.24 $ 0.14 $ 0.11 $ .13 ========== =========== ========== ========== ========== Weighted average number of common and common equivalent shares outstanding(3)................ 5,863 9,857 7,766 7,766 7,821 Pro forma net income per common and common equivalent share(4)............................. .62 1.48 .83 .70 .80 Pro forma weighted average number of common and common equivalent shares outstanding(4)......... 1,503 1,503 1,503 1,503 1,520 BALANCE SHEET DATA Flight equipment under operating lease............ $ 29,694 $ 56,346 $ 56,162 $ 95,450 $ 89,885 Total assets...................................... 30,180 57,036 57,131 96,779 92,620 Debt financing(5)................................. 28,895 52,873 51,688 87,825 82,710 Shareholders' equity.............................. (340) 2,008 3,078 4,048 5,084 OTHER DATA EBITDA(6)......................................... $ 5,394,000 $ 6,400,000 $ 7,841,000 $ 8,031,000 $12,758,000 Cash Flows(7): From operating activities....................... -- 4,498,832 4,465,779 3,938,585 6,796,134 From investing activities....................... -- (28,665,000) (3,303,555) (40,966,917) 156,026 From financing activities....................... -- 24,278,491 (1,005,942) 36,754,685 (5,811,689) Return on average assets(8)....................... 1.8% 5.8% 1.9% 1.5% 1.1% Return on average equity(9)....................... -- -- 39.6% 24.6% 22.9% Aircraft equipment owned at period end(10)........ 4 5 5 8 7
- --------------- (footnotes on next page) 18 20 (1) Included in the 1992 income statement data is the consolidation of a wholly owned subsidiary which the Company disposed of during 1992. The subsidiary had net liabilities of $3,552,000 and was sold to ILFC for no consideration as ILFC guaranteed the debt of the subsidiary. Accordingly, the Company recognized an extraordinary gain from the disposal of the subsidiary for relief of the net liabilities. During 1992, revenues, expenses, gain on disposal, net loss and net loss per share related to this subsidiary were $712,000, $1,144,000, $3,552,000, $(432,000) and $(0.07), respectively. (2) See "Risk Factors -- Customer Credit Risks." (3) The treasury stock method was used to calculate net income (loss) per common and common equivalent share information and weighted average number of common and common equivalent shares outstanding. The treasury stock method was modified as the number of common stock equivalents exceeded 20% of the number of common shares outstanding at the end of each of the periods presented in the accompanying consolidated financial statements. Accordingly, the number of shares which could be repurchased with the proceeds from such conversions was limited to 20% of the number of common shares and the remaining balance was applied to reduce long-term debt. The modified treasury stock method was applied only to 1993 as the effect on 1992, 1994, 1995 and 1996 was anti-dilutive. See Note 1 to Consolidated Financial Statements. Does not give effect to the 1-for-6 reverse stock split of Common Stock, the assumed conversion of outstanding shares of Preferred Stock into Common Stock, or the assumed exercise of options to acquire shares of Common Stock. (4) Pro forma information was calculated as if the 1-for-6 reverse stock split, the conversion of all the outstanding shares of Preferred Stock into 823,463 shares of Common Stock and the exercise of options to acquire 358,045 shares of Common Stock had occurred at the beginning of the periods indicated, with the proceeds from the exercise of the options used to reduce long-term debt and related interest costs. For purposes of this calculation, Preferred Stock and stock options at December 31, 1996 are assumed to be outstanding for all periods presented and effected for the related conversions and exercises. (5) Includes current portion of long-term debt. (6) EBITDA, defined as income before interest expense, income taxes, depreciation, gain (loss) on sale of aircraft and extraordinary items, is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance and is also not intended to represent an alternative to cash flow from operating activities as a measure of liquidity. Rather, it is included herein because management believes that it provides an important additional perspective on the Company's operating results and the Company's ability to fund its continuing operations. (7) See Consolidated Statement of Cash Flows included in the Consolidated Financial Statements. Cash flow information for 1992 is not available. (8) Calculations are based on the average monthly balances. (9) Calculations are based on average quarterly balances. Prior to 1994, results are not considered meaningful. (10) Aircraft equipment owned at end of period includes one auxiliary power unit which was purchased in 1995 and sold for a gain of $141,000 in December, 1996. 19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands) The following discussion of financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." The Company is primarily engaged in the acquisition of used, single-aisle jet aircraft and engines for lease and sale to domestic and foreign airlines and other customers. The Company leases aircraft under short- to medium-term operating leases where the lessee is responsible for all operating costs and the Company retains the potential benefit or risk of the residual value of the aircraft, as distinct from finance leases where the full cost of the aircraft is generally recovered over the term of the lease. Rental amounts are accrued evenly over the lease term and are recognized as revenue from the rental of flight equipment. The Company's cost of the leased equipment is recorded on the balance sheet and is depreciated on a straight-line basis over the estimated useful life to the Company's estimated salvage value. Revenue, depreciation expense and resultant profit for operating leases are recorded evenly over the life of the lease. Initial direct costs related to the origination of leases are capitalized and amortized over ten years. RESULTS OF OPERATIONS Revenues from rental of flight equipment decreased by 4% from $8,108 in 1994 to $7,765 in 1995 principally as a result of the re-lease of one aircraft in June 1995 at a lower lease rate. The increase of 63% to $12,681 in 1996 from $7,765 in 1995 was principally due to the acquisition in December 1995 of two aircraft and their related leases. In addition to leasing operations, the Company provides consulting services. In 1994, consulting revenues totalled $213, including $144 paid by Great Lakes Holding, a company owned 100% by the Chief Executive Officer and the President of the Company ("Great Lakes"), and $69 paid by ILFC. In 1995, consulting revenues totalled $491, including $144 paid by Great Lakes and $347 paid by ILFC. In 1996, consulting revenues totalled $461, including $144 paid by Great Lakes, $78 paid by ILFC, $49 paid by an unrelated airline and $190 paid by an unrelated leasing company. No consulting fees are expected to be paid by Great Lakes after 1996. In 1996, the Company realized a gain on sale of aircraft equipment of $141 for the sale of an auxillary power unit previously on lease. The Company did not realize any gains on the sale of aircraft equipment in 1994 and 1995. Interest income increased from $68 in 1994 to $118 in 1995 principally as a result of interest earned on increased maintenance reserves under certain leases. The increase to $169 in 1996 resulted primarily from interest earned on receivables from ILFC relating to an aircraft acquired from ILFC in December 1995. See Note 6 to the Consolidated Financial Statements. Expenses as a percent of total revenues were 86.5% in 1994, 91.4% in 1995 and 92.0% in 1996. Interest expense increased from $3,548 in 1994 to $3,776 in 1995 and $6,277 in 1996. The increase from 1994 to 1995 was principally the result of $2,430 of additional debt incurred during the third quarter of 1994 to upgrade an aircraft to Stage 3. The increase in 1996 resulted from $39,288 of additional debt to acquire two aircraft in December 1995. Depreciation expense increased from $3,165 in 1994 to $3,354 in 1995 and $5,550 in 1996, resulting from four aircraft acquisitions -- one in May 1993, one in December 1993 and two in December 1995. 20 22 General and administrative expenses were $548 in 1994, $526 in 1995 and $553 in 1996. Variations were due mainly to travel and marketing expenses. The number of personnel remained constant and management salary levels were unchanged. Following the offering, the Company expects increased expenses as a result of adding a corporate Controller and a Vice President, Technical, additional requirements imposed due to maintaining the Company's status as a public company and additional compensation expense as a result of new employment agreements. See "Management -- Employment Agreements." As a result of the revision of options held by certain executive officers, the Company expects to incur additional compensation expense of approximately $250 in each of 1997, 1998, 1999 and 2000. See "Management -- Existing Stock Options." Equity in earnings of affiliates in 1995 consisted of the Company's share of income of $66 of International Engine Investors ("IEI"), a company formed exclusively for the acquisition of one engine, and the Company's share of the gain of $118 on the sale of the aircraft engine which constituted the sole asset of IEI. See Note 3 to Consolidated Financial Statements, IEI was liquidated in November 1995. The Company recognized income tax expense of $59, $30 and $37 representing effective income tax rates of 5%, 3% and 3% during 1994, 1995 and 1996, respectively. The difference between the effective rates and the federal statutory rate was primarily due to the recognition of deferred tax assets. See Note 4 to Consolidated Financial Statements. Net income decreased from $1,069 in 1994 to $871 in 1995 and increased to $1,035 in 1996 due to the factors described above. Inflation during recent years has not impacted the Company's operations or profitability. The Company anticipates that it will incur non-cash compensation expense of approximately $250 in each of years 1997, 1998, 1999 and 2000 due to the vesting of stock options granted to executive officers. See "Management -- Existing Stock Options." LIQUIDITY AND CAPITAL RESOURCES The Company's principal external sources of funds have been term loans from banks and seller financing secured by aircraft. As a result, a substantial amount of the Company's revenue from rental of flight equipment is applied to principal and interest payments on secured debt. See "Business -- Financing/Source of Funds." The principal use of cash is for financing the acquisition of the Company's lease portfolio, which are financed by loans secured by the applicable aircraft. As a result, the Company does not currently maintain a line of credit. At December 31, 1996 and January 31, 1997, the Company had cash and cash equivalents of $1,174 and $1,136, respectively. In connection with the refinancing of certain loans in 1997, the Company deposited $400 into a restricted account with the lender which is not available to the Company through March 1998. Net cash provided by operating activities decreased from $4,466 in 1994 to $3,939 in 1995 and increased to $6,796 in 1996. The decrease in 1995 was principally the result of the re-lease of one aircraft in June 1995 at a lower lease rate. The increase in 1996 was principally the result of the cash flow from the acquisition in December 1995 of two aircraft and their related leases. In 1994 and 1995, net cash used in investing activities was $3,304 and $40,967, substantially all of which were used to purchase aircraft. In 1996, $156 was provided by investing activities as a result of the sale of aircraft equipment for $355, offset by flight equipment purchases of $199. In 1994, net cash used in financing activities was $1,006, consisting of the repayment of notes of $3,616 offset by proceeds of additional borrowings of $2,610. In 1995, net cash provided by financing activities was $36,755, including the proceeds of borrowings of $39,805 offset by repayments of notes of $3,150. In 1996, net cash used in financing activities was $5,812, consisting of repayments of notes and other payables of $6,544 offset by the proceeds of additional borrowings of $732. Cash and cash equivalents vary from year to year principally as a result of the timing of the purchase and sale of aircraft. The Company uses interest swap arrangements to reduce the potential impact of increases in interest rates on floating rate long-term debt and does not use them for trading purposes. Premiums paid for purchased interest rate swaps agreements are amortized to interest expense over the terms of the swap agreements. 21 23 The current portion of long term debt totalled $38,428 at December 31, 1996, of which $33,419 relate to four leases which expire between January and August, 1997. Two of these leases have been extended to 1998, one has been extended to 1999 and a letter of intent has been executed to re-lease the fourth aircraft to May 2000. Negotiations are underway with the lenders to extend the $32,324 of related debt. See "Risk Factors -- Dependence Upon Availability of Financing." The Company's ability to execute successfully its business strategy and to sustain its operations is dependent, in part, on its ability to obtain financing and to raise equity capital. There can be no assurance that the necessary amount of such capital will continue to be available to the Company on favorable terms or at all. If the Company were unable to continue to obtain any portion of required financing on favorable terms, the Company's ability to add new aircraft to its lease portfolio, renew leases, re-lease an aircraft, repair or recondition an aircraft if required, or retain ownership of an aircraft on which financing has expired would be impaired, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's financing arrangements to date have been dependent in part upon ILFC. See "Risk Factors -- Reliance Upon ILFC" and "-- Dependence Upon Availability of Financing." 22 24 BUSINESS The Company is primarily engaged in the acquisition of used, single-aisle jet aircraft and engines for lease and sale to domestic and foreign airlines and other customers. As of December 31, 1996, the Company had seven aircraft on lease to seven customers. The Company leases its aircraft under "triple net" operating leases where the lessee is responsible for all operating costs (i.e., crew, fuel, insurance, taxes, licenses, landing fees, navigation charges, maintenance, repairs and associated expenses) and the Company retains the potential benefit and assumes the risk of the residual value of the aircraft, as distinct from finance leases where the full cost of the aircraft is recovered over the term of the lease at usually lower monthly rates. COMPANY HISTORY The Company was formed in August 1988 by Mr. William E. Lindsey, Mr. Michael P. Grella and Mr. Richard O. Hammond to take advantage of their significant experience in both the airline industry in general and the aircraft marketing industry in particular, and to meet the growing demand of customers in a segment of the aircraft leasing market, specifically those customers interested in the operating lease of used, single-aisle jet aircraft. See "Management -- Directors and Executive Officers." Management believes that leasing of used commercial jet aircraft under operating leases represents an investment that is secured by a moveable asset which is required to be maintained to FAA standards and which should maintain a substantial residual value for a number of years. They also believe that a well developed risk management criteria can minimize risk by prudent selection of aircraft, an appropriate mix of lease termination dates, a worldwide customer base and strict monitoring of technical and regulatory changes. The initial investors in the Company included ILFC, a major owner-lessor of commercial jet aircraft, and Christer and Sven Salen, whose family interests hold significant investments in airline operations in Sweden. See "Relationship with ILFC" below, "Management -- Directors and Executive Officers" and "Principal Shareholders." The initial equity investment in the Company was $2.8 million, which allowed the Company to purchase from ILFC a Boeing 727-200 Advanced aircraft under lease to Delta Air Lines. INDUSTRY BACKGROUND The profits of the global airline industry are on the rise and passenger traffic is expected to grow through 2016, according to the Boeing Report. Boeing projects that traffic will increase 4.9% annually through 2016 and that 16,162 new commercial jet aircraft will be delivered over the next approximately 20 years. Airlines will confront an increasingly competitive environment with long-term profitability dependent on successful cost reductions. Such reductions will include improvements in fleet planning designed to more closely match aircraft capacity with passenger demand. An important element of fleet planning for many airlines is the use of operating leases which tend to maximize fleet flexibility due to their short-term nature and relatively small capital outlay, while minimizing financial risks. While most operating leases are made for new aircraft, emphasis on cost containment has been increasing the attractiveness of leasing used commercial jet aircraft. The Boeing Report estimates that 16,162 new commercial jet aircraft will be delivered over the next approximately 20 years, resulting in a projected worldwide fleet of approximately 23,600 commercial jet aircraft in 2016, net of 4,069 retired aircraft. Single-aisle jet aircraft with seating capacity of 121 to 170 are projected by the Boeing Report to account for approximately 29.7% of new commercial jet aircraft deliveries over the next approximately 20 years. Due to the increasing cost of commercial jet aircraft, the anticipated modernization of the worldwide aircraft fleet, and the emergence of new niche-focused airlines which generally use leasing for capital asset acquisitions, the Company believes that airlines will increasingly turn to operating leases as an alternative method to finance their fleets. Although Boeing estimated in its 1996 Current Market Outlook that the fleets of operating lessors have grown from over 200 aircraft in 1986 to over 1,000 in 1995, commercial jet aircraft under operating lease represented only approximately 10% of total commercial jet aircraft in service at year-end 1995. Aviation Week reports that leasing will be the primary means by which the global air transport industry acquires new aircraft between now and 1999, and probably beyond. Aviation Week, based upon data 23 25 provided by GE Capital Aviation Services, states that in 1986, 41% of the world's airlines owned all of their equipment, 15% leased all of their equipment and 44% used a mix of the two (with 80% owned and 20% leased). By contrast, in 1996, 16% owned all of their equipment, 42% leased all of their equipment and 42% used a mix of the two (with 60% leased and 40% owned). The larger operating lessors appear to be focused on the lease of new, rather than used, commercial jet aircraft. The Company believes that the market for the operating lease of used commercial jet aircraft, including for single-aisle jet aircraft with seating capacity of 121 to 170, should grow due to the factors discussed above as well as the emphasis on airline cost reduction, the desire of airlines for fleet flexibility and the growth in air travel. STRATEGY The Company's strategy is to focus on entering into operating leases of used, single-aisle jet aircraft to a diversified base of customers worldwide, while employing strict risk management criteria. Key elements of the Company's business strategy include the following: Focus on Operating Leases. The Company believes that airlines are becoming increasingly aware of the benefits of financing their fleet equipment on an operating lease basis, including preservation of cash flow and flexibility regarding fleet size and composition. The Company believes the operating lease of jet aircraft, especially used jet aircraft, offers the potential for a higher rate of return to the Company than other methods of aircraft financing, such as finance leases. Focus on Used Commercial Jet Aircraft with a Broad Market Acceptance. The Company leases used, single-aisle jet aircraft, particularly aircraft between six and 15 years old at the time the aircraft is acquired by the Company. The Company is currently focusing on the acquisition and lease of single-aisle jet aircraft, primarily aircraft with a seating capacity of 121 to 170 passengers, which, according to the Boeing Report, accounted for approximately 35.9% of the world fleet at December 31, 1996. The Boeing Report estimates that the commercial replacement cycle for this type of aircraft is 25 to 28 years from manufacturer date. This category of jet aircraft includes aircraft such as the Boeing 737-300/-400, the Airbus A320 and the McDonald Douglas MD80 series. The Company will also consider acquiring and leasing Boeing 757 aircraft, which have a seating capacity of 171 to 240 passengers. The Company will continue to purchase aircraft which enjoy significant manufacturer's support and fit the Company's criteria. Optimize Relationship with ILFC. The Company has had a long and continuous relationship with ILFC. ILFC was an initial investor in the Company and prior to the offering owned approximately 4.1% of the Company's equity. ILFC is a major owner-lessor of commercial jet aircraft having contacts with most airlines worldwide, the aircraft and engine manufacturers and most of the significant participants in the aircraft industry worldwide. The Company intends to use its relationship with ILFC to seek to gain access, where appropriate, to various airlines and other participants in the market to facilitate the purchase, lease, re-lease and sale of aircraft. ILFC's primary focus is the acquisition and leasing of new commercial jet aircraft. Thus, the Company believes that its business compliments rather than competes with ILFC. See "Relationship With ILFC" below. Leverage Management Experience. The successful purchase and leasing of used commercial jet aircraft requires skilled management in order to evaluate the condition and price of the aircraft to be purchased and the current and anticipated market demand for that aircraft. The management of the Company and the Board of Directors of the Company have significant experience in the aviation industry, with an average of 28 years of experience, especially in the purchase, sale and financing of commercial jet aircraft, and have extensive contacts with airlines worldwide. See "Management -- Directors and Executive Officers." Access a Diversified Global Customer Base. The Company's objective is to diversify its customer base to avoid dependence on any one lessee, geographic area or economic trend. Employ Strict Risk Management Criteria. The Company will only purchase aircraft that are currently under lease or are subject to a contractual commitment for lease or purchase, will not purchase aircraft on speculation, and will seek financing using a non-recourse loan structure. The Company evaluates carefully the 24 26 credit risk associated with each of its lessees and the lessee's ability to operate and properly maintain the aircraft. The Company also evaluates the return conditions in each lease since the condition of an aircraft at the end of a lease can significantly impact the amount the Company will receive on the re-lease or sale of an aircraft. AIRCRAFT LEASING All of the Company's current leases are operating leases rather than finance leases. Under an operating lease, the Company retains title to the aircraft thereby retaining the potential benefits and assuming the risk of the residual value of the aircraft. Operating leases allow airlines greater fleet and financial flexibility due to their shorter-term nature, the relatively small initial capital outlay necessary to obtain use of the aircraft and off-balance sheet treatment. Operating lease rates are generally priced higher than finance lease rates, in part because of the risks to the lessor associated with the residual value. See "Risk Factors -- Ownership Risks." Before committing to purchase specific aircraft, the Company takes into consideration factors such as the condition and maintenance history of the aircraft, the rental rate and other lease terms, the breadth of the customer base for the aircraft, trends in global supply and demand for the aircraft type, the technology included in the aircraft, the stage of the production cycle and manufacturer's support for the aircraft, estimates of future values, remarketing potential and anticipated obsolescence. Certain types and vintages of aircraft do not fit the profile for inclusion in the Company's portfolio of aircraft. The Company targets the medium-term operating lease market, which generally consists of leases with three to eight year initial noncancelable terms. The Company's leases are "triple net leases" whereby the lessee is responsible for all operating costs, i.e. crew, fuel, insurance, taxes, licenses, landing fees, navigation charges, maintenance, repairs and associated expenses. In addition, the leases contain extensive provisions regarding the remedies and rights of the Company in the event of a default thereunder by the lessee. The leases have payment clauses whereby the lessee is required to continue to make the lease payments regardless of circumstances, including whether or not the aircraft is in service. Certain of the Company's leases limit the lessee's obligation to make lease payments if the Company violates the covenant of quiet enjoyment regarding the aircraft or if the Company enters bankruptcy and does not assume the lease. During the term of the lease, the Company is required to be named as an additional insured on the lessee's aviation liability insurance policies. Also, the leases contain very specific criteria for the maintenance and regulatory status of the asset as well as the return conditions for the airframe, engines, landing gears, auxiliary power unit and associated components. Generally, the lessee provides the Company with an initial security deposit that is returnable at the expiration of the lease if all lease return conditions are met by the lessee and there is no default under the lease. Depending on the creditworthiness of a lessee, in some instances the lessee will also pay into a maintenance reserve account a certain amount monthly for each hour the aircraft and/or engine has flown. These maintenance reserves may be drawn upon by the lessee to be applied towards the cost of periodic scheduled overhaul and maintenance checks. At the termination of the lease, the lessee is required to return the asset to the Company in the same condition as it was received, normal wear and tear excepted, so the asset is in a proper condition for re-lease or sale. Normally, any remaining maintenance reserves are retained by the Company. See "Risk Factors -- Ownership Risks." The Company makes an analysis of the credit risk associated with each lease before entering into a lease. The Company's credit analysis consists of evaluating the prospective lessee's available financial statements and trade and banking references, and working with the Company's lender to evaluate country and political risk, insurance coverage, liability and expropriation risk. The process for credit approval is a joint undertaking between the Company and the senior lender providing the debt financing for the lease. The Company obtains extensive financial information regarding the lessee. See "Risk Factors -- Customer Credit Risks." Upon termination of a lease, the objective of the Company is to re-lease or sell the aircraft. The Company's leases generally require that the lessee notify the Company at least six to nine months prior to the termination of the lease as to whether the lessee intends to exercise any option to extend the lease. This allows the Company to commence its remarketing efforts well in advance of the termination of a lease. Over the past 25 27 two years, three of the Company's aircraft came off lease and were re-leased to new customers. One Boeing 737-200 ADVANCED went from Britannia Airways (United Kingdom) to New Zealand International Airlines Limited, a subsidiary of Air New Zealand Limited; one Boeing 737-200 ADVANCED went from New Zealand International Airlines Limited to TACA International Airlines (El Salvador) and subsequently to its sister company, Compania Panamena De Aviacion, S.A. ("COPA") (Panama); and one Boeing 737-200 ADVANCED went from Air New Zealand Limited to COPA. The Company has entered into an agreement with ILFC pursuant to which ILFC has agreed to assist the Company, if requested by the Company, in the remarketing of its aircraft for a fee to be negotiated for each transaction. See "Relationship With ILFC" below. If the Company is unable to re-lease or sell an aircraft on favorable terms, its business, financial condition and results of operations may be adversely affected. See "Risk Factors -- Ownership Risks" and "-- Customer Credit Risks." Many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company attempts to minimize its currency and exchange risks by negotiating all of its aircraft leasing in U.S. dollars. The Company requires, as a condition to any foreign transaction, that the lessee in a foreign country first obtain, if required, written approval of the appropriate government agency, finance ministry or central bank for the remittance of all funds contractually owed to the Company in U.S. dollars. Although the Company has attempted to minimize the foreign currency risk, to the extent that significant currency fluctuations result in materially higher rental costs to a foreign lessee, the foreign lessee may be unable or unwilling to make the required lease payments. The Company's revenues and income may be affected by, among other matters, political instability abroad, changes in national policy, competitive pressures on certain air carriers, fuel shortages, labor stoppages, recessions and other political or economic events adversely affecting world or regional trading markets or impacting a particular customer. See "Risk Factors -- Industry Risks." During the years ended December 31, 1994, 1995 and 1996, lease revenues from flight equipment generated from foreign customers accounted for approximately 80%, 69% and 45%, respectively, of total revenues. See "Risk Factors -- International Risks." The following customers accounted for more than 10% of the Company's total revenues in one or more of the three years ended December 31, 1996: British Midland Airways Limited (36%, 36% and 23% for the years ended December 31, 1994, 1995 and 1996, respectively), Alaska Airlines, Inc. (21% for the year ended December 31, 1996), Southwest Airlines Co. (15% for the year ended December 31, 1996), ILFC (6%, 16% and 10% for the years ended December 31, 1994, 1995 and 1996, respectively), New Zealand International Airlines Limited (42%, 26% and 10% for the years ended December 31, 1994, 1995 and 1996), respectively, and Delta Air Lines, Inc. (12%, 11% and 7% for the years ended December 31, 1994, 1995 and 1996, respectively). LEASE PORTFOLIO The following table sets forth certain information concerning the status of flight equipment leased by the Company to others as of February 15, 1997:
MANUFACTURE NONCANCELABLE LEASE EXTENSION AIRCRAFT YEAR LESSEE LEASE PERIOD OPTIONS - ---------------------- ----------- ----------------------- -------------- ----------------------- B-727-200 ADVANCED(1) 1979 Delta Air Lines, Inc. April 1998 None B-737-200 1978 ILFC/COPA (Panama) August 1999 None ADVANCED(1)(2) B-737-200 ADVANCED(1) 1980 COPA (Panama) June 1998 Two one year options B-737-200 ADVANCED(3) 1980 New Zealand March 1998 Two six month options International Airlines Limited B-737-300(3) 1989 British Midland Airways April 1997(4) None Limited B-737-300(3) 1985 Southwest Airlines Co. December 2002 Four one year options MD-82(3) 1989 Alaska Airlines, Inc. October 1998 One one year option
26 28 - --------------- (1) Stage 2 aircraft. See "Government Regulation" below. (2) This aircraft is leased to ILFC and subleased to COPA. (3) Stage 3 aircraft. See "Government Regulation" below. (4) British Midland Airways Limited has notified the Company that it will not renew its lease. A letter of intent has been executed to lease the aircraft to Shanghai Airlines to May 2000. APPRAISAL OF LEASE PORTFOLIO Simat, Helliesen & Eichner, Inc. ("SH&E"), a recognized appraiser of aircraft, has performed an appraisal of the aircraft and has determined that the aggregate "Current Market Value" of this equipment as of December 31, 1996 was $91.53 million, which compares favorably to the aggregate net book value of the Company's aircraft at December 31, 1996 of $89.9 million. "Current Market Value" is defined as SH&E's opinion of the most likely trading price that may be generated for an aircraft under the market circumstances that are perceived to exist at the time in question. Current Market Value assumes that the aircraft is valued for its highest, best use, that the parties to the hypothetical sale transaction are willing, able, prudent and knowledgeable, and under no unusual pressure for a prompt sale, and that the transaction would be negotiated in an open and unrestricted market on an arm's-length basis, for cash or equivalent consideration, and given an adequate amount of time for effective exposure to prospective buyers. See the appraisal report of SH&E appearing at page A-1 of this Prospectus for a discussion of the assumptions utilized and various factors considered by SH&E in performing its appraisal. Since appraisals are only estimates of resale values, there can be no assurance that such appraised values will not materially change due to factors beyond the Company's control including, but not limited to, obsolescence and/or changing market conditions, or that upon expiration of the leases, due to the absence of purchasers or re-lease demand for the Company's aircraft, the Company will realize either the then book or appraised value through either sale or re-leasing of the aircraft. SH&E was paid $17,000, plus out-of-pocket expenses, for its services in connection with its appraisal. FINANCING/SOURCE OF FUNDS The Company purchases used aircraft and aircraft engines on lease to airlines directly from other leasing companies or from airlines for leasing back to the airline. The typical purchase requires both secured debt and an equity investment by the Company. The Company generally makes an equity investment of approximately 5% to 15% of the purchase price of aircraft and engines from internally generated and other cash and seller financing (primarily from ILFC). The balance of the purchase price is typically financed with the proceeds of secured borrowings from banks or other financial institutions (to date with the support of ILFC as the seller of the flight equipment). The Company maintains banking relationships primarily with four commercial banks providing long-term secured equipment financing to the Company at December 31, 1996 in an aggregate amount of $68.8 million. ILFC has provided certain guarantees and other financial support with respect to the Company's borrowings which have allowed the Company to finance its aircraft at more favorable leverage rates than the Company could have obtained without ILFC's support. See Notes 5 and 6 to Consolidated Financial Statements and "Risk Factors -- Reliance Upon ILFC." At December 31, 1996, $69.0 million (or 83%) of the Company's borrowings to finance aircraft purchases are on a non-recourse basis. Non-recourse loans are structured as loans to special purpose subsidiaries of the Company which only own the assets which secure the loan. The Company, other than the relevant special purpose subsidiary, is not liable for the repayment of the non-recourse loan unless the Company breaches certain limited representations and warranties under the applicable pledge agreement. The lender assumes the credit risk of each lease, and its only recourse upon a default under the lease is against the lessee, the leased equipment and the special purpose subsidiary of the Company. Interest rates under this type of financing are negotiated on a transaction-by-transaction basis and reflect the financial condition of the lessee, the terms of the lease, any guarantees and the amount of the loan. The remaining $13.7 million of the Company's 27 29 borrowings are on a recourse basis. ILFC has agreed to indemnify the Company for any payments under this recourse loan not funded by lease or sale payments. The term of all of the Company's current borrowings ends within 30 to 60 days after the minimum noncancelable period under the related lease. Thus, the Company will be required to renegotiate the loan or obtain other financing if the lessee has and exercises an option to extend the term of the lease. See "Risk Factors -- Dependence Upon Availability of Financing." At December 31, 1996, the Company's borrowings had interest rates ranging from 5.4% to 7.8% per annum, with a weighted average interest rate of 7.4% per annum. At December 31, 1996, approximately 19% of the Company's borrowings accrued interest on a floating rate basis. See "Risk Factors -- Reliance Upon ILFC." The Company has previously provided for all of its financing needs through internally generated funds and borrowings. There is no assurance that such sources will provide the Company with additional capital resources. The Company's future growth is dependent upon raising additional capital. See "Risk Factors -- Dependence Upon Availability of Financing." RELATIONSHIP WITH ILFC ILFC was an initial investor in the Company, and prior to the offering owned approximately 4.1% of the Company's Common Stock. See "Company History" above. Five of the Company's seven present aircraft were acquired from ILFC and ILFC has provided certain guarantees and other financial support with respect to the Company's borrowings. See "Financing/Source of Funds" above. ILFC has also paid various fees to the Company for consulting and remarketing services. The Company has entered into an agreement with ILFC pursuant to which ILFC has agreed to assist the Company in the remarketing of its aircraft if requested by the Company. See "Aircraft Leasing" above, "Risk Factors -- Reliance Upon ILFC," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations," "Certain Transactions" and Note 6 to Consolidated Financial Statements. ILFC is a wholly owned subsidiary of American International Group, Inc. ("AIG") and a major owner-lessor of commercial jet aircraft. At December 31, 1996, ILFC owned 296 aircraft and managed an additional 18 aircraft. ILFC's flight equipment under operating lease at December 31, 1996 had an aggregate book value of approximately $12.2 billion. For the year ended December 31, 1996, ILFC had total revenues of $1.6 billion and net income of $252 million. AIG is a holding company which, through its subsidiaries, is primarily engaged in a broad range of insurance and insurance-related activities in the United States and abroad. At December 31, 1996, AIG had total assets of approximately $149 billion and, for the year ended December 31, 1996, had net income of approximately $2.9 billion. AIG's principal executive offices are located at 70 Pine Street, New York, New York 10270. The Common Stock of AIG is listed on, among others, the New York Stock Exchange. AIG does not guarantee the obligations of the Company nor the obligations of ILFC to the Company. COMPETITION The aircraft leasing industry is highly competitive, depending in part upon the type of leased aircraft and prospective lessees. Competition is primarily based upon the availability of the aircraft required by the customer and the lease rate. The Company believes that only a few comparably sized companies focus primarily on the same segment of the aircraft leasing market as the Company. In addition, a number of aircraft manufacturers, airlines and other operators, distributors, equipment managers, leasing companies (including ILFC), financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft compete with the Company, although their primary focus is not on the same market segment on which the Company focuses. Many of these periodic competitors have significantly greater financial resources than the Company. The Company's competitors may lease aircraft at lower rates than the Company and provide benefits, such as direct maintenance, crews, support services and trade-in privileges, which the Company does not intend to provide. The Company believes that it is able to compete in the leasing 28 30 of used jet aircraft due to its experience in the industry and its reputation and expertise in acquiring and leasing aircraft. See "Risk Factors -- Competition." GOVERNMENT REGULATION The FAA, the Department of Transportation and the Department of State exercise regulatory authority over the air transportation industry in the United States. Most other countries have similar regulatory agencies. The FAA has regulatory jurisdiction over registration and flight operations of aircraft operating in the United States, including equipment use, ground facilities, maintenance, communications and other matters. The FAA regulates the repair and operation of all aircraft operated in the United States. Its regulations are designed to insure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in most other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for the various types of aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if their airworthiness is in question. The Department of State and the Department of Transportation, in general, have jurisdiction over economic regulation of air transportation, but since the Company does not operate its aircraft for public transportation of passengers and property, it is not directly subject to their regulatory jurisdiction. To export aircraft from the U.S. to a foreign destination, the Company is required to obtain an export license from the United States Department of Commerce. To date, the Company has not experienced any difficulty in obtaining required certificates, licenses and approvals either from the FAA, the Department of Commerce or any other regulatory agency or their foreign counterparts. Member countries of the United Nations are signatories to the International Civil Aviation Organization (the "ICAO"). Each signatory has agreed to comply with airworthiness directives of the country of manufacture of the aircraft. The Company will not lease its aircraft to any carrier domiciled in a country which is not a member of ICAO. The Company also requires its lessees to comply with the most restrictive standards of either the FAA or its foreign equivalent. In some instances, the Company may have to share in the cost of complying with regulatory airworthiness directives. For older aircraft, a special group of airworthiness directives require extensive inspections and repairs to bring such aircraft into compliance, which are required to be paid by the lessee. The FAA and the civil aviation authorities of most countries and international entities issue regulations limiting permitted noise and other emissions from aircraft. In most instances, older non-complying aircraft may be brought into compliance by modifying the engines. One of the Company's aircraft had noise compliance work performed at a cost of $2.45 million (all of which was paid by the Company and the lease rate on the aircraft was increased) and three of the Company's aircraft will require this work to be performed over the next three years unless the aircraft is leased to a lessee in an area that does not require the modifications. Currently, these modifications range in cost from $1.7 million to $2.5 million per aircraft. In some instances, it is necessary to perform noise compliance work to lease the aircraft into a new jurisdiction. For example, Western Europe and the United States have non-addition rules which state that an aircraft which does not meet specified noise compliance regulations cannot be operated by an airline licensed by one of these governments. A non-complying aircraft can only be leased or sold into a market that does not require compliance with the stricter standards. See "Risk Factors -- Aircraft Noise Compliance." INSURANCE The Company requires its lessees to carry those types of insurance which are customary in the air transportation industry, including comprehensive liability insurance and aircraft hull insurance. The Company 29 31 is named as an additional insured on liability policies carried by the lessees. All policies contain a breach of warranty endorsement so that the interests of the Company are not prejudiced by any act or omission of the operator-lessee. Insurance premiums are prepaid by the lessee on a periodic basis, with payment acknowledged to the Company through an independent insurance broker. The territorial coverage is, in each case, suitable for its lessee's area of operations and the policies contain, among other provisions, a "no co-insurance" clause and a provision prohibiting cancellation or material change without at least 30 days advance written notice to the Company. Furthermore, the insurance is primary and not contributory and all insurance carriers are required to waive rights of subrogation against the Company. The stipulated loss value schedule under aircraft hull insurance policies is on an agreed value basis acceptable to the Company, which usually exceeds the book value of the aircraft. Aircraft hull policies contain standard clauses covering aircraft engines with deductibles required to be paid by the lessee. Furthermore, the aircraft hull policies contain full war risk endorsements, including, but not limited to, confiscation, seizure, hijacking and similar forms of retention or terrorist acts, subject to certain specified exclusions. All losses under such policies are payable in U.S. Dollars. The comprehensive liability insurance policies include provisions for bodily injury, property damage, passenger liability, cargo liability and such other provisions reasonably necessary in commercial passenger and cargo airline operations with minimal deductibles. Such policies generally have combined comprehensive single liability limits of not less than $200 million and require all losses to be paid in U.S. Dollars. Insurance policies are generally placed or reinsured in the Lloyds of London or U.S. markets. The insurance carrier under the insurance policies must be approved by the Company. EMPLOYEES As of December 31, 1996, the Company had four employees. None of the Company's employees is covered by a collective bargaining agreement and the Company believes its employee relations are good. The Company intends to add a Vice President, Technical and a Controller during 1997. FACILITIES The Company's principal offices are located at 3655 Torrance Boulevard, Suite 410, Torrance, California. The Company occupies space in Torrance under a lease that covers approximately 1,364 square feet of office space and expires on February 1, 1999. The Company believes that its current facilities are adequate for its needs and does not anticipate any difficulty replacing such facilities or locating additional facilities, if needed. See Note 8 to Consolidated Financial Statements. LEGAL PROCEEDINGS The Company is not currently involved in any litigation. 30 32 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Directors and executive officers of the Company are as follows:
SERVED AS DIRECTOR NAME POSITION WITH THE COMPANY AGE(1) SINCE - ----------------------------- --------------------------------------- -------------------------------------- --------- William E. Lindsey Chairman of the Board, Chief Executive 59 1988 Officer and Director Michael P. Grella President and Director 40 1988 Richard O. Hammond Vice President -- Finance and Treasurer 67 Christopher W. Vorderkunz(2) Vice President -- Technical 47 Stuart M. Warren Secretary and Director 53 1988 Aaron Mendelsohn Director 45 1988 Christer Salen Director 55 1989 Kenneth Taylor Director 65 1994
- --------------- (1) As of December 31, 1996. (2) Mr. Vorderkunz's employment with the Company will commence in April 1997. All members of the Board of Directors hold office until the next annual meeting of shareholders or until their successors are duly elected and qualified. Executive officers serve at the discretion of the Board of Directors. MR. LINDSEY has served as Chairman of the Board of Directors, Chief Executive Officer and a Director of the Company since 1988. He has over 30 years of aviation experience as an aeronautical and astronautical engineer, attorney, aircraft salesman, fleet and financial planner, and airline manufacturing executive. Prior to joining the Company, he was Chairman of the Board of Directors of Aircraft Finance Corporation ("AFC"), a privately held company engaged in the acquisition, disposition and leasing of used commercial aircraft, for approximately three years. In 1987, AFC was engaged by Sunworld Airlines to manage its operations because Sunworld Airlines was in financial distress. As a result of that engagement, Mr. Lindsey became Chairman of the Board of Sunworld Airlines. In 1988, Sunworld Airlines entered bankruptcy proceedings and discontinued operations the same year. Previously, Mr. Lindsey was employed by Western Airlines for approximately 15 years as the Manager of Operations, as an attorney in the corporate law department, and as the Director of Fleet Planning with responsibility for the evaluation, negotiation and acquisition of aircraft. From 1967 to 1972, in addition to his duties for Western Airlines, Mr. Lindsey was qualified as a Designated Engineering Representative (DER) for the FAA, which allowed him to approve all of Western Airlines' aircraft operational parameters on behalf of the FAA. He holds a B.S. in aeronautical engineering from Northrop University and a J.D. from Loyola University School of Law, Los Angeles. MR. GRELLA has served as President of the Company since 1988. Prior to joining the Company, he was President of Aircraft Finance Corporation for approximately three years. Previously, Mr. Grella served for seven years as Director of Marketing for Aircraft Investment Corporation. In that capacity, he was responsible for the marketing, negotiation and sale of commercial jet aircraft on several continents, as well as for research, evaluation, pricing and contract administration. Mr. Grella's experience also includes the evaluation, inspection, selection and acquisition of aircraft on an international basis; and the negotiation and management of a multiple aircraft modification program for a major U.S. manufacturer. Mr. Grella holds a B.S. in business from Brockport University. MR. HAMMOND has served as the Vice President -- Finance and Treasurer of the Company since 1988. Prior to joining the Company, he was the Chief Financial Officer of Aircraft Finance Corporation for three years. For the past approximately 35 years, Mr. Hammond has been actively engaged in the airline industry and in aircraft financing, including Vice President and Treasurer of Western Airlines from 1969 to 1982. His experience includes negotiating aircraft leases and equipment trusts, raising corporate debt and equity capital, negotiating domestic and foreign bank lines of credit, and arranging aircraft hull and liability insurance. 31 33 Mr. Hammond also has experience in insurance brokerage, specializing in aviation insurance. He holds a B.S. with Honors in Accounting from the University of California at Los Angeles. MR. VORDERKUNZ will become a Vice President -- Technical in April 1997. For the four years prior to December 1996, Mr. Vorderkunz was the Vice President of Airclaims, Inc., an aviation loss adjustment company, responsible for investigating and adjusting hull, liability, cargo, product and premises claims primarily for insurance underwriters. Prior to his employment with Airclaims, Inc., Mr. Vorderkunz was the Vice President-Technical for the Company for three years. Mr. Vorderkunz has been an FAA licensed airframe and powerplant technician since 1972. MR. WARREN has served as Secretary and a Director of the Company since 1988. Mr. Warren is currently a principal in Warren & Sklar, a law corporation. He has been a practicing attorney for the past 26 years, during the last 24 of which he has been actively engaged in representing clients in the aviation industry. Mr. Warren was engaged as an attorney for The Flying Tiger Line Inc. for approximately 14 years and thereafter represented ILFC as well as other leasing companies and airlines in connection with the purchase, finance and lease of aircraft. He received his A.B. from Princeton University and his LL.B. from the Harvard Law School and is a member of the State Bars of California and New York. MR. MENDELSOHN was an Associate Director of Bear Stearns & Co. Inc. from 1988 to March 1997. Mr. Mendelsohn was responsible for the public financing in 1984 of Wings West Airlines Inc, a commuter airline that was sold to American Airlines in 1987. He currently serves on the Board of Directors of Display Products, Inc (an electronics firm), Golden Ocean Group Limited (an international shipping firm), Advanced Bionics Corporation (a medical device technology company), and AMMI(a company engaged in the design and manufacture of "smart cards"). He received his B.A. from the University of California at Los Angeles, his J.D. from Loyola University School of Law, Los Angeles and is a member of the State Bar of California (inactive status). MR. TAYLOR retired from ILFC in early 1994 where he served as Vice President-Technical. Prior to joining ILFC in 1983, Mr. Taylor was an officer, director and principal shareholder of Century International, Ltd., which was engaged in the business of aircraft sales, leasing and financing from 1978 to 1983. Prior to 1978, Mr. Taylor was an executive of TigerAir, Inc. and he was active in the airline industry with Douglas Aircraft Company, Fairchild Aircraft Marketing Company and DeHavilland Aircraft of Canada. MR. SALEN has been engaged in the shipping and aviation sectors of the transport industry for his entire working life. He is a director of EXXTOR Group, Ltd., a London-based holding company for ventures principally engaged in surface transportation and airline operations out of the United Kingdom. Mr. Salen was the founding partner of Cargolux Airlines International, S.A. and currently is also Chairman of European Aircraft Investors (an aviation holding company), Caledonian Steamship Company (a shipping holding company) and SCS Management Limited (a management company). DIRECTOR COMPENSATION No director currently receives any compensation or other remuneration for their services as members of the Board of Directors. The Company proposes to pay outside directors after the closing of the offering an annual fee of $8,000 and a fee of $1,000 for each board meeting attended in person and $500 for each telephonic board meeting attended and $500 for each committee meeting attended. All directors will be reimbursed for their reasonable out-of-pocket expenses incurred to attend Board of Directors or committee meetings. The Board of Directors and shareholders of the Company have adopted the Company's 1997 Directors Plan. The purpose of the 1997 Directors Plan is to promote the success of the Company by providing an additional means through the grant of stock options to attract, motivate and retain experienced and knowledgeable Eligible Directors (as defined below). The 1997 Directors Plan provides that annually an Eligible Director will receive an option to purchase 5,000 shares of Common Stock at an exercise price equal to the market price of the Common Stock on the date of grant. The Board of Directors has authorized 50,000 shares of Common Stock for issuance under the 1997 Directors Plan. Stock options granted 32 34 under the 1997 Directors Plan will expire five years after the date of grant. If a person's service as a member of the Board of Directors terminates, any unexercisable portion of the option shall terminate and the option will terminate six months after the date of termination or the earlier expiration of the option by its terms. Options generally vest over a three-year period. Upon a Change in Control Event (as defined in the 1997 Directors Plan), the options will become fully exercisable. "Eligible Director" means a member of the Board of Directors of the Company who as of the applicable date of grant is not (i) an officer or employee of the Company or any subsidiary, or (ii) a person to whom equity securities of the Company or an affiliate have been granted or awarded within the prior year under or pursuant to any other plan of the Company or an affiliate that provides for the grant or award of equity securities. INDEMNIFICATION AND LIMITATION OF LIABILITY The Amended and Restated Articles of Incorporation will contain provisions that eliminate the personal liability of its directors for monetary damages arising from a breach of their fiduciary duties in certain circumstances to the fullest extent permitted by law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. Prior to the consummation of the offering, the Company will enter into indemnity agreements with its officers and directors containing provisions which are in some respects broader than the specific indemnification provisions contained in the California Corporations Code. The indemnity agreements may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. AUDIT COMMITTEE An Audit Committee has been formed, the members of which are Aaron Mendelsohn, Christer Salen and Kenneth Taylor. The Audit Committee's duties include reviewing internal financial information, monitoring cash flow, budget variances and credit arrangements, reviewing the audit program of the Company, reviewing with the Company's independent auditors the results of all audits upon their completion, annually selecting and recommending independent accountants, overseeing the quarterly unaudited reporting process and taking such other action as may be necessary to assure the adequacy and integrity of all financial information distributed by the Company. COMPENSATION COMMITTEE After the offering, a Compensation Committee will be formed and consist of at least three directors, a majority of whom will not be present or former employees or officers of the Company. The Compensation Committee will recommend compensation levels of senior management and work with senior management on benefit and compensation programs for Company employees. 33 35 EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation earned, for services rendered in all capacities to the Company, by the Company's Chief Executive Officer for the year ended December 31, 1996. No other executive officer of the Company had total salary and bonus in excess of $100,000 for the year ended December 31, 1996. Certain columns have been omitted from this Summary Compensation Table because they are not applicable. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ----------------- NAME AND PRINCIPAL POSITION SALARY BONUS ----------------------------------------------------------- -------- ------ William E. Lindsey Chairman of the Board and Chief Executive Officer........ $120,000 $ --
EXISTING STOCK OPTIONS As of the date of the offering, executive officers will hold options to acquire 372,498 shares of Common Stock, including options to acquire 220,000 shares of Common Stock granted to William E. Lindsey, the Chairman of the Board and Chief Executive Officer. These options have an exercise price of $6.00 per share, will vest 25% at December 31, 1997 and 25% at each anniversary thereafter and will expire on March 31, 2007. If the executive is terminated for whatever reason, the options vest in full. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with each of William E. Lindsey, the Chairman of the Board and Chief Executive Officer of the Company, and Michael P. Grella, the President of the Company. Each employment agreement provides for a term of three years and will automatically extend annually one additional year unless notice is given by the Company or the employee. Mr. Lindsey and Mr. Grella will be entitled to a base salary of $160,000 and $140,000 per year, respectively, and each will be entitled to a bonus based upon certain pretax income targets, which could amount to bonuses of up to 125% of the employee's base salary. Under each employment agreement, in the event of a termination of the employee's employment without cause, his total disability (as defined in the agreements) or the employee resigns for "good reason" (as defined in the agreements) within one year of a "change in control" (as defined below), the employee is entitled to receive, in addition to salary and bonuses accrued to the date of termination, all amounts payable under the agreement as though such termination, total disability or resignation for good reason had not occurred. A "change in control" occurs under the agreements upon (i) approval by the shareholders of the Company of the dissolution or liquidation of the Company; (ii) approval by the shareholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities not a subsidiary of the Company, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be owned, directly or indirectly, by shareholders of the Company immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Company's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization, but including in such determination any securities of the other parties to such reorganization held by affiliates of the Company); (iii) approval by the shareholders of the Company of the sale, lease, conveyance or other disposition of all or substantially all of the Company's business and/or assets to a person or entity which is not a wholly owned subsidiary of the Company; (iv) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a person who is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding shares of Common Stock of the Company at the time of the execution of the employment agreements (or an affiliate, successor, heir, descendant or related party of or to any such person), becomes the 34 36 beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 25% of the combined voting power of the Company's then outstanding securities entitled to then vote generally in the election of directors of the Company; or (v) a majority of the Board of Directors of the Company not being comprised of Continuing Directors. For purposes of this definition, "Continuing Directors" are persons who were (A) members of the Board of Directors of the Company on the date of the employment agreements or (B) nominated for election or elected to the Board of Directors of the Company with the affirmative vote of at least a majority of the directors who were Continuing Directors at the time of such nomination or election. STOCK OPTION PLAN The Board of Directors and shareholders of the Company have adopted the Company's 1997 Option Plan. The 1997 Option Plan provides a means to attract, motivate, retain and reward key employees of the Company and its subsidiaries and other selected persons and promote the success of the Company. A maximum of 50,000 shares of Common Stock (subject to certain anti-dilutive adjustments) may be issued pursuant to grants and awards under the 1997 Option Plan. The maximum number of shares that may be subject to all qualifying share-based awards, either individually or in the aggregate, that during any calendar year are granted under the 1997 Option Plan to any one participant will not exceed 20,000 (subject to certain anti-dilutive adjustments). Administration and Eligibility. The 1997 Option Plan will be administered by the Board of Directors or a committee appointed by the Board of Directors (the "Administrator"). The 1997 Option Plan empowers the Administrator among other things, to interpret the 1997 Option Plan, to make all determinations deemed necessary or advisable for the administration of the 1997 Option Plan and to award to officers and other key employees of Company and its subsidiaries and certain other eligible persons ("Eligible Employees"), as selected by the Administrator, options, including incentive stock options ("ISOs") as defined in the Internal Revenue Code (the "Code"), stock appreciation rights ("SARs"), shares of restricted stock, performance shares and other awards valued by reference to Common Stock, based on the performance of the participant, the performance of the Company or its Common Stock and/or such other factors as the Administrator deems appropriate. The various types of awards under the 1997 Option Plan are collectively referred to as "Awards." It is expected that after the consummation of the offering there will be approximately five officers and other employees eligible to participate in the 1997 Option Plan. Transferability. Generally speaking, Awards under the 1997 Option Plan are not transferable other than by will or the laws of descent and distribution, are exercisable only by the participant, and may be paid only to the participant or the participant's beneficiary or representatives. However, the Administrator may establish conditions and procedures under which exercise by and transfers and payments to certain third parties are permitted, to the extent permitted by law. Options. An option is the right to purchase shares of Common Stock at a future date at a specified price. The option price is generally the closing price for a share of Common Stock as reported on the Nasdaq-NM ("fair market value") on the date of grant, but may be a lesser amount if authorized by the Administrator. The 1997 Option Plan authorizes the Administrator to award options to purchase Common Stock at an exercise price which may be less than 100% of the fair market value of such stock at the time the option is granted, except in the case of ISOs. An option may be granted as an incentive stock option, as defined in the Code, or a nonqualified stock option. An ISO may not be granted to a person who, at the time the ISO is granted, owns more than 10% of the total combined voting power of all classes of stock of the Company and its subsidiaries unless the exercise price is at least 110% of the fair market value of shares of Common Stock subject to the option and such option by its terms is not exercisable after the expiration of five years from the date such option is granted. The aggregate fair market value of shares of Common Stock (determined at the time the option is granted) for which ISOs may be first exercisable by an option holder during any calendar year under the 1997 Option Plan or any other plan of the Company or its subsidiaries may not exceed $100,000. A nonqualified stock option is not subject to any of these limitations. 35 37 The 1997 Option Plan permits optionees, with certain exceptions, to pay the exercise price of options in cash, Common Stock (valued at its fair market value on the date of exercise), a promissory note, a combination thereof or, if an option award so provides, by delivering irrevocable instructions to a stockbroker to promptly deliver the exercise price to the Company upon exercise (i.e., a so-called "cashless exercise"). Cash received by the Company upon exercise will constitute general funds of the Company and shares of Common Stock received by the Company upon exercise will return to the status of authorized but unissued shares. Consideration for Awards. Typically, the only consideration received by the Company for the grant of an Award under the 1997 Option Plan will be the future services by the optionee (as contemplated by the vesting schedule or required by agreement), past services, or a combination thereof. SARs. The 1997 Option Plan authorizes the Administrator to grant SARs independent of any other Award or concurrently (and in tandem) with the grant of options. An SAR granted in tandem with an option is only exercisable when and to the extent that the related option is exercisable. An SAR entitles the holder to receive upon exercise the excess of the fair market value of a specified number of shares of Common Stock at the time of exercise over the option price. This amount may be paid in Common Stock (valued at its fair market value on the date of exercise), cash or a combination thereof, as the Administrator may determine. Unless the Award agreement provides otherwise, the option granted concurrently with the SAR must be cancelled to the extent that the appreciation right is exercised and the SAR must be cancelled to the extent the option is exercised. SARs limited to certain periods of time around a major event, such as a reorganization or change in control, may also be granted under the 1997 Option Plan. Restricted Stock. The 1997 Option Plan authorizes the Administrator to grant restricted stock to Eligible Employees on such conditions and with such restricted periods as the Administrator may designate. During the restricted period, stock certificates evidencing the restricted shares will be held by the Company or a third party designated by the Administrator and the restricted shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Performance Share Awards. The Administrator may, in its discretion, grant Performance Share Awards to Eligible Employees based upon such factors as the Administrator deems relevant in light of the specific type and terms of the Award. The amount of cash or shares or other property that may be deliverable pursuant to these Awards will be based upon the degree of attainment over a specified period of not more than ten years (a "performance cycle") as may be established by the Administrator of such measures of the performance of the Company (or any part thereof) or the participant as may be established by the Administrator. The Administrator may provide for full or partial credit, prior to completion of a performance cycle or the attainment of the performance achievement specified in the Award, in the event of the participant's death, retirement, or disability, a Change in Control Event (as defined in the 1997 Option Plan) or in such other circumstances as the Administrator may determine. Special Performance-Based Share Awards. In addition to awards granted under other provisions of the 1997 Option Plan, performance-based awards within the meaning of Section 162(m) of the Code and based on revenues, net earnings, cash flow, return on equity or on assets, or other business criteria ("Other Performance-Based Awards") relative to preestablished performance goals, may be granted under the 1997 Option Plan. The specific performance goals relative to these business criteria must be approved by the Administrator in advance of applicable deadlines under the Code and while the performance relating to the goals remains substantially uncertain. The applicable performance measurement period may not be less than one nor more than ten years. Performance goals may be adjusted to mitigate the unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time the goals were set. The eligible class of persons for Other Performance-Based Awards is executive officers of the Company. In no event may grants of this type of Award in any fiscal year to any participant relate to more than 20,000 shares or $600,000 if payable only in cash. Before any Other Performance-Based Award is paid, the Administrator must certify that the material terms of the Other Performance-Based Award were satisfied. The Administrator will have discretion to determine the restrictions or other limitations of the individual Awards. 36 38 Stock Bonuses. The Administrator may grant a stock bonus to any Eligible Employee to reward exceptional or special services, contributions or achievements in the manner and on such terms and conditions (including any restrictions on such shares) as determined from time to time by the Administrator. The number of shares so awarded shall be determined by the Administrator and may be granted independently or in lieu of a cash bonus. Cash Awards. If Awards payable only in cash are not considered derivative securities and are not intended to constitute a performance-based award under the Code, such Awards will not reduce the number of shares available under the 1997 Option Plan. Some cash only awards, however, such as SARs, will reduce the numbers of shares available under the 1997 Option Plan. Subject to the provisions of the 1997 Option Plan, the Administrator has the sole and complete authority to determine the employees to whom and the time or times at which such awards will be made, the number of shares awarded and other conditions of the awards. Term and Exercise Period of Awards. The 1997 Option Plan provides that awards may be granted for such terms as the Administrator may determine but not greater than ten years after the date of the Award. The 1997 Option Plan does not impose any minimum vesting period, post-termination exercise period or pricing requirement, although in the ordinary course, customary restrictions will likely be imposed. Options and SARs will generally be exercisable during the holder's employment by the Company or by a related company and unearned restricted stock and other Awards will generally be forfeited upon the termination of the holder's employment prior to the end of the restricted or performance period. Generally speaking, options which have become exercisable prior to termination of employment will remain exercisable for three months thereafter (12 months in the case of retirement, disability or death). Such periods, however, cannot exceed the expiration dates of the Options. SARs have the same post-termination provisions as the Options to which they relate. The Administrator has the authority to accelerate the exercisability of Awards or (within the maximum ten-year term) extend the exercisability periods. Termination, Amendment and Adjustment. The Plan may be terminated by the Board of Directors at any time. In addition, the Board may amend the 1997 Option Plan from time to time, without the authorization or approval of the Company's shareholders, unless the amendment (i) materially increases the benefits accruing to participants under the 1997 Option Plan, (ii) materially increases the aggregate number of securities that may be issued under the 1997 Option Plan or (iii) materially modifies the requirements as to eligibility for participation in the 1997 Option Plan, but in each case only to the extent then required by the Code or applicable law, or deemed necessary or advisable by the Board of Directors. No Award may be granted under the 1996 Option Plan after March 1, 2007, although Awards previously granted may thereafter be amended consistent with the terms of the 1997 Option Plan. Upon the occurrence of a Change in Control Event (as defined in the 1997 Option Plan), there will be an acceleration of vesting unless the Administrator determines otherwise prior to the Change in Control Event. In addition, upon the occurrence of an extraordinary dividend or distribution or any extraordinary corporate transaction, an appropriate adjustment to the number and type of shares or other securities or property subject to an Award and the price thereof may be made in order to prevent dilution or enlargement of rights under Awards. Individual awards may be amended by the Administrator in any manner consistent with the 1997 Option Plan. Amendments that adversely affect the holder of an Award, however, are subject to his or her consent. The 1997 Option Plan is not exclusive and does not limit the authority of the Board of Directors or the Administrator to grant other awards, in stock or cash, or to authorize other compensation, under any other plan or authority. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company did not have a compensation committee for the fiscal year ended December 31, 1996. For the year ended December 31, 1996, all decisions regarding executive compensation were made by the Board of Directors of the Company. William E. Lindsey and Michael P. Grella, directors and executive officers of the Company, did not participate in deliberations by the Board of Directors of the Company regarding executive compensation. None of the executive officers of the Company currently serves on the compensation committee of another entity or any other committee of the board of directors of another entity performing similar functions. 37 39 CERTAIN TRANSACTIONS ILFC is a shareholder of the Company. See "Business -- Relationship With ILFC." During 1993 and 1995, the Company purchased aircraft from ILFC aggregating $30.2 million and $41.5 million, respectively. None were purchased during 1994 or 1996. At December 31, 1996, 79% of the Company's gross fleet cost was comprised of aircraft acquired from ILFC. The Company financed these acquisitions through bank loans, partially guaranteed by ILFC, as well as loans from ILFC. ILFC provides these guarantees to lenders through an asset value guarantee ("AVG") which generally covers financing in excess of the asset value, as defined. ILFC's financial support has allowed the Company to finance aircraft purchases at more favorable leverage than the Company could otherwise obtain. The Company's typical operating lease transaction with an AVG requires a cash investment by the Company of approximately 5% to 15% of the aircraft purchase price while the industry standard ranges from 20% to 30%. At December 31, 1996, $34.2 million of long-term debt was covered by AVG and $10.2 million was due to ILFC. During 1993, the Company sold an aircraft to an unrelated party and received proceeds of $1.5 million, of which $800,000 was from ILFC. ILFC had assured the Company that it would recover at least $1.5 million from the sale of this aircraft. See "Risk Factors -- Reliance Upon ILFC." At December 31, 1996, the Company had one aircraft on lease to ILFC which is subleased to COPA. See "Business -- Lease Portfolio." The lease originated in August 1994 and provides for monthly rents of $80,000 through August 1999. The Company recognized rental income of $400,000, $960,000 and $960,000 during the years ended 1994, 1995 and 1996, respectively, from this lease. The Company has an agreement with ILFC relating to the December 1995 purchase of an aircraft which provides for recovery of an operating loss, as defined in the acquired lease. The Company estimates this loss will be incurred through 1999. Accordingly, the Company reduced the purchase price of the related aircraft and recognized a receivable for the present value of the estimated recovery aggregating $579,000. The amount due from ILFC at December 31, 1996 was $441,000, which includes accrued interest of $87,000. The loss stems from a stated lease rate which is less than the market lease rate at the date of acquisition. Accordingly, the Company allocated additional cost to the purchase price and recognized deferred rent aggregating $1.7 million for the present value of the difference between the market and stated rent. Deferred rent will be amortized on the straight line method over the remaining lease term. The Company realized consulting fee revenues of $69,000, $347,000 and $78,000 during the years 1994, 1995 and 1996, respectively, for services to ILFC. The consulting services provided to ILFC by the Company included assisting in the marketing and remarketing of aircraft and related assets. The Company's Chief Executive Officer and President own Great Lakes, an affiliated company. From time to time, these officers provide consulting services to Great Lakes, consisting of portfolio management and technical services. In consideration of these services, Great Lakes paid the Company $144,000 for each of the years 1994, 1995 and 1996. In connection with the purchase of aircraft by the Company, the Company borrowed from Great Lakes an aggregate of $2.1 million, due in June 1997 and bearing interest at 5.4%. If the borrowings are not refinanced, Great Lakes will extend the maturity date. See Note 5 of Consolidated Financial Statements. During 1994, ILFC incurred $179,628 for certain improvements to an aircraft which it leased from the Company. The Company accrued for such costs at December 31, 1994 and reimbursed ILFC in 1995. During 1995, ILFC advanced the Company $696,000 to assist with the financing of an aircraft purchase which the Company repaid during 1996. At December 31, 1994 and 1995, the Company had amounts due to ILFC of $179,628 and $696,000, respectively. No amounts were due at December 31, 1996. The Company intends to continue its relationship with ILFC, where appropriate, to facilitate the purchase, lease, re-lease and sale of aircraft. See "Risk Factors -- Reliance Upon ILFC" and "Business -- Strategy -- Optimize Relationship with ILFC." Management of the Company believes that the terms of the above described transactions were as or more favorable to the Company than the Company could have received from non-affiliated third parties. 38 40 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of the date of this Prospectus as adjusted to reflect to 1-for-6 reverse stock split, the conversion of all the outstanding shares of Preferred Stock into 823,463 shares of Common Stock, the exercise of options to acquire 358,045 shares of Common Stock and the sale of the shares of Common Stock offered hereby for (i) each person known by the Company to be the beneficial owner of more than five percent of the outstanding shares of the Company's Common Stock, (ii) each director of the Company, (iii) the Chief Executive Officer and (iv) all executive officers and directors of the Company as a group.
PERCENT OF CLASS ----------------------- NUMBER OF BEFORE THE AFTER THE NAME(1) SHARES OFFERING OFFERING - ----------------------------------------------------------------- --------- ---------- ---------- Christer Salen(2)................................................ 301,904 24.5% 9.9% Sven Salen(3).................................................... 254,791 20.6 8.3 Gunnar Bjorg(4).................................................. 157,187 12.7 5.1 William E. Lindsey............................................... 29,000 2.4 * Michael P. Grella................................................ 19,332 1.6 * Aaron Mendelsohn(5).............................................. 52,704 4.3 1.7 Kenneth Taylor................................................... 7,722 * * Stuart M. Warren(6).............................................. 44,166 3.6 1.4 All directors and executive officers as a group (8 persons)(7)... 458,994 37.2 15.0
- --------------- * Less than one percent (1) The address for each of named individuals is 3655 Torrance Boulevard, Suite 410, Torrance, California 90503. (2) 166,666 of the shares are held by George Alexander, as Voting Trustee under a Voting Trust for European Aircraft Investors Limited and 26,333 of the shares are held by George Alexander, as Trustee for European Aircraft Investors Limited. The address of Mr. Alexander is East 4511 Mockingbird Lane, Paradise Valley, Arizona 85253. Christer Salen is a director of and owns 9% of the outstanding stock of European Aircraft Investors Limited. The remaining stock of European Aircraft Investors Limited is indirectly owned by discretionary trusts of which Mr. Salen is not a beneficiary. Mr. Salen disclaims beneficial ownership of the shares held by such trusts. Christer Salen is the brother of Sven Salen and disclaims beneficial ownership of the shares beneficially owned by Sven Salen. (3) Shares are held by John T. McMahan, as Voting Trustee under a Voting Trust for Salenia AB. The address for Mr. McMahan is 1980 Post Oak Boulevard, Houston, Texas 77056. Salenia AB is beneficially owned by Sven Salen and his family. Sven Salen is the brother of Christer Salen and disclaims beneficial ownership of the shares beneficially owned by Christer Salen and European Aircraft Investors. (4) Shares are held by Menzane International Corp., P.O. Box 184, Lettstrasse 37, FC-9490 Vaduz, Liechtenstein. Gunnar Bjorg is the beneficial owner of Menzane International Corp. (5) Shares are owned by G-G Associates, a general partnership. Mr. Mendelsohn shares voting and dispositive power. (6) Does not include 10,000 shares held by C. H. Cleworth Pension Plan, as to which Mr. Warren does not have voting or dispositive power. Mr. Warren and his parents are the sole beneficiaries of the C. H. Cleworth Pension Plan. (7) See footnotes (2), (5) and (6). 39 41 DESCRIPTION OF CAPITAL STOCK Upon consummation of the offering, the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock, $.01 par value, and 15,000,000 shares of Preferred Stock, $.01 par value. After giving effect to the offering, there will be 3,054,006 shares of Common Stock outstanding, assuming the conversion of all the outstanding Preferred Stock into 823,463 shares of Common Stock and the exercise of options to purchase 358,045 shares of Common Stock. COMMON STOCK Subject to the rights of the holders of any Preferred Stock which may be outstanding, each holder of Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor, and, in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of shareholders. Holders of Common Stock have no preemptive rights to purchase or subscribe for any stock or other securities and there are no conversion rights or redemption or sinking fund provisions with respect to such Common Stock. All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be when issued, fully paid and nonassessable. PREFERRED STOCK As of December 31, 1996, the Company had outstanding 4,941,000 shares of Convertible Preferred Stock with a liquidation preference of $1.00 per share. Each share of Convertible Preferred Stock, after giving effect to the 1-for-6 reverse stock split, will be convertible into one-sixth of a share of Common Stock subject to adjustment upon the occurrence of certain events, including the issuance of Common Stock or rights, options or securities convertible into or exchangeable for Common Stock at a price per share of Common Stock less than the then effective conversion price of the Convertible Preferred Stock. The holders of the Convertible Preferred Stock are entitled to receive dividends pro rata with the holders of the Common Stock and vote together with the holders of the Common Stock, voting as one class, on all matters except for certain amendments to the terms of the Convertible Preferred Stock which require the approval of the holders of 67% (and in some cases 90%) of the shares of Convertible Preferred Stock, voting as a separate class. Upon consummation of the offering, all of the shares of the Convertible Preferred Stock will be converted to Common Stock. The Company is authorized to issue 15,000,000 shares of Preferred Stock in one or more series, and to designate the rights, preferences, limitations, restrictions of and upon shares of each series, including voting, redemption and conversion rights. The Board of Directors may also designate dividend rights and preferences in liquidation. It is not possible to state the effect of the authorization and issuance of any series of Preferred Stock upon the rights of holders of Common Stock until the Board of Directors determines the specific terms, rights and preferences of such a series of Preferred Stock. However, such effects might include, among other things, restricting dividends on the Common Stock, diluting the voting power of the Common Stock or impairing the liquidation rights of such shares without further action by holders of Common Stock. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management, which could thereby depress the market price of the Company's Common Stock. At present, the Company has no plans to issue any additional shares of Preferred Stock. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Amended and Restated Articles of Incorporation and Bylaws (as they will be amended prior to the offering) summarized in the following paragraphs may be deemed to have anti-takeover effects and may delay, defer or prevent a tender offer or takeover attempt that a shareholder 40 42 might consider to be in such shareholder's best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. The Company's Amended and Restated Articles of Incorporation will include authorization of the issuance of up to 15,000,000 shares of Preferred Stock, with such characteristics that may tend to discourage a merger, tender offer or proxy contest, as described in "Preferred Stock" above. The Company's Amended and Restated Articles of Incorporation will also provide that shareholder action can be taken only at an annual or special meeting of shareholders and may not be taken by written consent. The Company's Bylaws also will limit the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice. In addition, upon qualification of the Company as a "listed corporation" as defined in Section 301.5(d) of the California Corporations Code, cumulative voting will be eliminated. The Amended and Restated Articles of Incorporation and the Bylaws will provide that the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of the Company then entitled to vote on the matter is required to amend the Bylaws and certain provisions of the Amended and Restated Articles of Incorporation, including those provisions relating to the number of directors, the filling of vacancies on the Board of Directors, the prohibition on shareholders action without a meeting, indemnification of directors, officers and others, the limitation on liability of directors and the supermajority voting requirements in the Amended and Restated Articles of Incorporation and Bylaws. These voting requirements will have the effect of making more difficult any amendment by stockholders, even if a majority of the Company's stockholders believes that such amendment would be in its best interests. The Company will also include in its Amended and Restated Articles of Incorporation provisions to eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the California General Corporation Law. See "Risk Factors -- Anti-Takeover Provisions." TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar of the Common Stock is American Stock Transfer & Trust Company. REPORTS TO SHAREHOLDERS The Company will furnish its shareholders with annual reports containing financial statements audited by independent accountants and quarterly reports for the first three quarters of each year containing unaudited financial statements. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have outstanding 3,054,006 shares of Common Stock. Of these shares, the 1,820,000 shares sold in the offering plus any additional shares sold upon exercise of the Underwriters' over-allotment option will be freely tradeable without restriction or further registration under the Securities Act except for any of such shares held by "affiliates" of the Company. The remaining shares of Common Stock held by the existing shareholders are "restricted securities" as that term is defined in Rule 144 of the Securities Act. 1,234,006 of these restricted securities are subject to lock-up agreements with the Underwriters. Pursuant to these agreements, the Company's shareholder has agreed not to offer, sell or otherwise dispose of any shares of Common Stock or any equity securities or securities convertible into or exchangeable for equity securities or any options, rights or warrants with respect to any equity securities, subject to certain exceptions, for a period of 180 days from the date of this Prospectus, without the prior written consent of Sutro. All of such restricted shares will be eligible for sale in the public market in accordance with Rule 144 under the Securities Act upon expiration of such agreements. In general, under Rule 144 as currently in effect, beginning 90 days after the consummation of the offering, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, as well as persons who may be deemed "affiliates" of the Company, will be entitled to sell in 41 43 any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are also subject to certain other requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the three months immediately preceding the sale is entitled to sell restricted shares pursuant to Rule 144(k) without regard to the limitations described above, provided that two years have expired since the later of the date on which such restricted shares were first acquired from the Company or from an affiliate of the Company. Currently 372,498 authorized shares of Common Stock are subject to outstanding options. Additionally, 100,000 shares of Common Stock of the Company have been reserved for issuance pursuant to the 1997 Option Plan and the 1997 Directors Plan. Following the offering, the Company intends to file a registration statement under the Securities Act to register the 100,000 shares of Common Stock reserved for issuance upon the exercise of stock options outstanding and to be granted under the 1997 Option Plan and the 1997 Directors Plan. Shares granted or issued upon the exercise of stock options after the effective date of such registration statement generally will be available for sale in the open market as long as they are not held by affiliates. Because there has been no public market for shares of Common Stock of the Company, the Company is unable to predict the effect that sales made under Rule 144, pursuant to future registration statements or otherwise may have on any then prevailing market price of shares of the Common Stock. Nevertheless, sales of a substantial amount of Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices. 42 44 UNDERWRITING The Underwriters named below, acting through their representatives, Sutro & Co. Incorporated and Friedman, Billings, Ramsey & Co., Inc. (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement with the Company, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER OF SHARES --------- Sutro & Co. Incorporated.......................................... Friedman, Billings, Ramsey & Co., Inc. ........................... --------- Total................................................... 1,820,000 =========
The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the initial public offering, the price and concessions and reallowances to dealers may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or part. The Company has granted the Underwriters an option exercisable for 45 days after the date of the Underwriting Agreement to purchase up to a maximum of 273,000 additional shares of Common Stock to cover over-allotments, if any. If the Underwriters exercise such option, the Underwriters have severally agreed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the foregoing table. The Underwriting Agreement provides that the Company will indemnify the several Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company, its directors, officers and certain shareholders have agreed not to offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock of the Company for a period of 180 days after the date of this Prospectus without the prior written consent of Sutro & Co. Incorporated except for: (i) the sale of the shares hereunder, (ii) the issuance by the Company of Common Stock pursuant to the exercise of options under the Company's stock plans disclosed in the Prospectus; (iii) the granting by the Company of stock options after the date of this Prospectus under the 1997 Option Plan or the 1997 Directors Plan; or (iv) as a bona fide gift to a third party or as a distribution to the partners or shareholders of a Company shareholder, provided that the recipient(s) thereof agree in writing to be bound by the terms of the Lock-Up Agreement to which such shareholder is bound. If the Underwriters create a short position in the Common Stock in connection with the offering, (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Representatives also may impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. 43 45 The imposition of a penalty bid may have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in the offering. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of, or any effect that the transactions described above may have on, the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or, once commenced, will not be discontinued without notice. The Company has agreed to sell to Sutro & Co. Incorporated, for $.01 per warrant, the Sutro Warrant to purchase from the Company up to 182,000 shares of Common Stock at an exercise price per share equal to 120% of the initial public offering price per share. The Sutro Warrant may not be sold, transferred, assigned, pledged or hypothecated for a period of twelve (12) months from the date of this Prospectus except to officers or partners of Sutro and other members of the underwriting or selling group and officers or partners thereof in compliance with the applicable provisions of the Corporate Financing Rule of the National Association of Securities Dealers, Inc. The Sutro Warrant will be exercisable for a three year period beginning one year from the date of this Prospectus. In addition, the Company has granted certain demand and piggyback registration rights to the holders of the Sutro Warrant which enable them to register the Common Stock underlying the Sutro Warrant under the Securities Act. Under the terms of the Sutro Warrant, Sutro & Co. Incorporated will be the underwriter of any demand registration requested to be in the form of an underwritten offering. Prior to this offering, there has been no public market for the Common Stock. Accordingly, the initial public offering price for the Common Stock was determined by negotiations between the Company and the Representatives. Among the factors considered in such negotiations were the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present operations, its past and present earnings and the trend of such earnings, the prospects for future earnings, the present state of the Company's development, the general conditions of the securities market at the time of the offering, and the market prices of publicly traded common stocks of comparable companies in recent periods. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by O'Melveny & Myers LLP, Los Angeles, California. Certain legal matters will be passed upon for the Underwriters by Manatt, Phelps & Phillips, LLP, Los Angeles, California. EXPERTS The Consolidated Financial Statements of the Company as of December 31, 1995 and December 31, 1996 and for each of the years in the three year period ended December 31, 1996 included in this Prospectus have been so included in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, given on the authority of said firm as experts in accounting and auditing. The report of Simat, Helliesen & Eichner, Inc. is included herein in reliance upon the authority of such firm as an expert with respect to the matters contained in such report. 44 46 ADDITIONAL INFORMATION A Registration Statement on Form S-1, including amendments thereto, relating to the Common Stock offered hereby has been filed by the Company with the Securities and Exchange Commission, Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. Copies of the Registration Statement may be obtained from the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, upon the payment of certain fees prescribed by the Commission or may be examined without charge at the offices of the Commission, or accessed through the Commission's Internet address at http://www.sec.gov. 45 47 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-3 Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996................................................................................ F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996....................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996................................................................................ F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 48 INDEPENDENT AUDITORS' REPORT The Board of Directors International Aircraft Investors: We have audited the accompanying consolidated balance sheets of International Aircraft Investors and subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Aircraft Investors and subsidiaries as of December 31, 1995 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California January 31, 1997, except the third paragraph of Note 9 which is as of March 4, 1997 and Note 5 which is as of March 26, 1997 F-2 49 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, --------------------------- 1995 1996 ----------- ----------- Current assets: Cash and cash equivalents (note 5).............................. $ 33,898 $ 1,174,369 Accounts receivable from ILFC (note 6).......................... 54,000 12,106 Due from ILFC (note 6).......................................... 293,000 332,000 Other assets.................................................... 118,747 627,535 ----------- ----------- Total current assets.................................... 499,645 2,146,010 Flight equipment, at cost, net (notes 2, 5 and 6)................. 95,449,700 89,884,974 Due from ILFC, less current portion (note 6)...................... 286,000 109,000 Deferred fees..................................................... 366,515 268,776 Cash, restricted (note 1)......................................... 177,008 210,827 ----------- ----------- $96,778,868 $92,619,587 =========== =========== LIABILITY AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt (note 5)................. $ 5,272,554 $38,428,219 Accounts payable and accrued expenses........................... 37,762 195,193 Accrued interest................................................ 205,800 632,500 Lease deposits.................................................. 835,000 835,000 Maintenance reserves............................................ 181,426 468,060 Advanced rentals................................................ 795,850 798,000 Deferred rent (note 6).......................................... 250,000 250,000 Payable to affiliate (note 3)................................... 36,750 -- Payable to ILFC (note 6)........................................ 696,695 -- ----------- ----------- Total current liabilities............................... 8,311,837 41,606,972 Deferred rent, less current portion (note 6)...................... 1,497,000 1,247,000 Deferred tax liability (note 4)................................... 369,017 400,000 Long-term debt, less current installments (note 5)................ 82,552,733 44,282,074 ----------- ----------- 92,730,587 87,536,046 ----------- ----------- Commitments and contingencies (note 8) Shareholders' equity (notes 9 and 10): Convertible preferred stock, $.01 par value. Authorized 15,000,000 shares; issued and outstanding 4,941,000 shares; liquidation value of $1 per share............................ 49,410 49,410 Common Stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 315,000 shares in 1995 and 1996....... 3,150 3,150 Additional paid-in capital...................................... 5,170,098 5,170,098 Accumulated deficit............................................. (1,174,377) (139,117) ----------- ----------- Net shareholders; equity................................ 4,048,281 5,083,541 ----------- ----------- $96,778,868 $92,619,587 =========== ===========
See accompanying notes to consolidated financial statements F-3 50 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 ---------- ---------- ----------- Revenues (note 6) Rental of flight equipment.............................. $8,107,751 $7,764,763 $12,681,153 Consulting fees......................................... 213,500 491,045 460,950 Gain on sale of aircraft equipment...................... -- -- 141,000 Interest income (note 1)................................ 67,997 117,961 169,023 ---------- ---------- ---------- Total revenues.................................. 8,389,248 8,373,769 13,452,126 Expenses: Interest................................................ 3,547,600 3,776,165 6,277,388 Depreciation............................................ 3,164,800 3,354,400 5,549,700 General and administrative.............................. 548,494 526,021 552,778 ---------- ---------- ---------- Total expenses.................................. 7,260,894 7,656,586 12,379,866 ---------- ---------- ---------- Operating income.............................. 1,128,354 717,183 1,072,260 ---------- ---------- ---------- Equity in earnings of affiliate (note 3): Earnings from operations................................ -- 66,028 -- Gain on sale of aircraft engine......................... -- 117,500 -- ---------- ---------- ---------- Total equity in earnings........................ -- 183,528 -- ---------- ---------- ---------- Income before income taxes................................ 1,128,354 900,711 1,072,260 ---------- ---------- ---------- Income tax expense (note 4)............................... 59,000 30,000 37,000 ---------- ---------- ---------- Net income...................................... $1,069,354 $ 870,711 $ 1,035,260 ========== ========== ========== Net income per common and common equivalent shares........ $ .14 $ .11 $ .13 ========== ========== ========== Weighted average common and common equivalent shares outstanding (note 1).................................... 7,766,452 7,766,452 7,821,096 ========== ========== ========== See accompanying notes to consolidated financial statements
F-4 51 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CONVERTIBLE COMMON STOCK ADDITIONAL PREFERRED ---------------- PAID-IN ACCUMULATED STOCK SHARES AMOUNT CAPITAL DEFICIT NET ----------- -------- ------ ---------- ----------- ---------- Balance at December 31, 1993.... $49,410 215,000 $2,150 $5,071,098 $(3,114,442) $2,008,216 Net income...................... -- -- -- -- 1,069,354 1,069,354 ------- ------- ------ ---------- ----------- ---------- Balance at December 31, 1994.... 49,410 215,000 2,150 5,071,098 (2,045,088) 3,077,570 Issuance of common stock from exercise of stock options..... -- 100,000 1,000 99,000 -- 100,000 Net income...................... -- -- -- -- 870,711 870,711 ------- ------- ------ ---------- ----------- ---------- Balance at December 31, 1995.... 49,410 315,000 3,150 5,170,098 (1,174,377) 4,048,281 Net income...................... -- -- -- -- 1,035,260 1,035,260 ------- ------- ------ ---------- ----------- ---------- Balance at December 31, 1996.... $49,410 315,000 $3,150 $5,170,098 $ (139,117) $5,083,541 ======= ======= ====== ========== =========== ==========
See accompanying notes to consolidated financial statements F-5 52 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 ----------- ------------ ----------- Cash flow from operating activities: Net income....................................................... $ 1,069,354 $ 870,711 $ 1,035,260 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of flight equipment............................... 3,164,800 3,354,400 5,549,700 Amortization of deferred transaction fees...................... 171,348 101,082 158,410 Gain on sale of aircraft equipment............................. -- -- (141,000) Equity in earnings of affiliate................................ -- (183,528) -- (Increase) decrease in assets: Accounts receivable from ILFC................................ (20,570) (28,430) 41,894 Due from ILFC................................................ -- -- 138,000 Deferred fees................................................ (66,836) (225,811) (60,671) Other assets................................................. 117,593 (225,142) (542,607) Increase (decrease) in liabilities: Accounts payable and accrued expenses........................ (54,033) 61,587 120,681 Accrued interest............................................. 39,023 413 426,700 Lease deposits............................................... (500,000) 475,000 -- Maintenance reserves......................................... -- 181,426 286,634 Advance rentals.............................................. 123,356 (103,396) 2,150 Deferred rent................................................ -- -- (250,000) Deferred taxes............................................... 58,622 23,395 30,983 Due to lessee................................................ 363,122 (363,122) -- ----------- ------------ ----------- Net cash provided by operating activities.................... 4,465,779 3,938,585 6,796,134 ----------- ------------ ----------- Cash flows from investing activities: Purchase of flight equipment................................... (2,981,305) (41,472,695) (198,974) Proceeds from sale of aircraft................................. -- -- 355,000 Investment in (dividends and sale of IEI)...................... (322,250) 505,778 -- ----------- ------------ ----------- Net cash provided by (used in) investing activities.......... (3,303,555) (40,966,917) 156,026 ----------- ------------ ----------- Cash flows from financing activities: Repayment of notes payable..................................... (1,884,003) (2,749,082) (5,322,926) Repayment of notes payable to ILFC............................. (1,731,567) (400,800) (524,292) Proceeds from notes payable.................................... 2,430,000 29,725,000 244,724 Proceeds from notes payable to ILFC............................ -- 7,950,000 -- Proceeds from notes payable to GLH............................. -- 1,612,500 487,500 Issuance of common stock....................................... -- 100,000 -- Payable to ILFC................................................ 179,628 517,067 (696,695) ----------- ------------ ----------- Net cash provided by (used in) financing activities.......... (1,005,942) 36,754,685 (5,811,689) ----------- ------------ ----------- Net increase (decrease) in cash and cash equivalents......... 156,282 (273,647) 1,140,471 Cash and cash equivalents at beginning of year................... 151,263 307,545 33,898 ----------- ------------ ----------- Cash and cash equivalents at end of year......................... $ 307,545 $ 33,898 1,174,369 =========== ============ =========== Supplemental disclosure of cash flow information -- cash paid for interest....................................................... $ 3,339,156 $ 3,548,054 $ 5,722,256 =========== ============ ===========
Supplemental disclosure of noncash investing and financing activities: During 1995, the Company earned $311,000 of consulting fees from ILFC which were applied to amounts owed ILFC. See accompanying notes to consolidated financial statements F-6 53 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business International Aircraft Investors (the Company) is primarily engaged in the acquisition of used, single aisle jet aircraft and engines for lease and sale to domestic and foreign airlines and other customers. The Company leases aircraft under short- to medium-term operating leases where the lessee is responsible for all operating costs and the Company retains the potential benefit or risk of the residual value of the aircraft, as distinct from finance leases where the cost of the aircraft is generally recovered over the term of the lease. Five of the Company's seven aircraft at December 31, 1996 were acquired from International Lease Finance Corporation (ILFC), a 5.7% shareholder of the Company. In connection with certain of these aircraft acquisitions, ILFC has provided loan guarantees or other financial support which have provided more favorable borrowing arrangements than the Company could otherwise have obtained. Additionally, the Company has derived certain consulting fees from ILFC for providing remarketing and other services. The accompanying consolidated financial statements include the accounts of the Company and wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash and cash equivalents includes cash and highly liquid investments purchased with an original maturity of less than 90 days. Cash and short-term investments restricted for the repayment of a security deposit pursuant to a certain lease agreement was $210,827 at December 31, 1996. Such security deposit matures June 15, 1998. In connection with the 1997 refinancing, the Company provided the lender cash collateral of $400,000 which is restricted from use by the Company through March 1998 (note 5). Deferred Transaction Fees The direct costs related to purchase and lease agreements are capitalized and amortized to expense using the straight-line method , which approximates the effective interest method, over the term of the related lease. The costs related to asset value guarantees (AVGs - note 6) are capitalized and amortized to expense using the straight-line method over the term of the AVG, generally ten years. At December 31, 1996, deferred transaction fees related to AVGs were $207,500. Rentals The Company leases flight equipment under operating leases. Accordingly, income is recognized over the life of noncancelable lease terms under the straight-line method. Flight Equipment and Depreciation Flight equipment is stated at cost. Depreciation of flight equipment is generally computed on a straight-line method over the estimated remaining useful lives (25 year original life less years in service at the date of acquisition) of the related assets. At December 31, 1996, the Company's fleet, related useful lives and estimated salvage values were as follows: F-7 54 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USEFUL LIFE AT YEAR OF ACQUISITION DESCRIPTION OF ASSET ACQUISITION DATE SALVAGE VALUE ---------------------------------------- ----------- -------------- ------------- 1979 Boeing 727-200..................... 1988 16 years $ 2,500,000 1978 Boeing 737-219..................... 1990 13 2,500,000 1980 Boeing 737-219..................... 1991 14 2,500,000 1989 Boeing 737-300..................... 1993 21 3,000,000 1980 Boeing 737-204..................... 1993 12 3,000,000 1985 Boeing 737-300..................... 1995 15 3,000,000 1989 McDonnell MD-82.................... 1995 19 3,000,000
Maintenance Reserves and Interest Income Normal maintenance and repairs of flight equipment on lease are provided by and paid for by the lessee. Maintenance reserves received under certain leases amounted to $181,426 and $268,581 during the year ended December 31, 1995, and 1996, respectively. Additionally, one of the Company's lessees holds a related maintenance reserve with ILFC in accordance with an agreed-upon arrangement. The Company receives interest earned on this reserve held with ILFC which amounted to $48,885, $95,116 and $62,100 during 1994, 1995 and 1996, respectively. The related lease expires in April 1997 at which time this arrangement will cease. Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," issued in March 1995 and effective for fiscal years beginning after December 15, 1995, establishes accounting standards for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill either to be held or disposed of. The Company adopted SFAS No. 121 during 1996. The adoption of SFAS No. 121 did not have a material impact on the Company's financial position or results of operations. The Company evaluates the carrying value of its flight equipment on an ongoing basis and when required will provide for any impairment of long-lived assets. Income Taxes The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences for differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years when such temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income at the enactment date. Earnings per Share Net earnings per share has been computed using the weighted average number of common and common equivalent shares outstanding for each of the periods presented. Common stock equivalents represent the number of shares which would be issued assuming the exercise of common stock options, conversion of preferred stock and conversion of a note payable reduced by the number of shares which could be purchased with the proceeds from such conversions using the treasury stock method. Fully diluted net income per common and common equivalent share is not presented since the amounts do not differ significantly from the primary net income per share presented. F-8 55 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Compensation Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," issued in October 1995 and effective for fiscal years beginning after December 15, 1995, encourages, but does not require, a fair-value-based method of accounting for employee stock options or similar equity instruments. SFAS No. 123 allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25 (APBO No. 25), "Accounting for Stock Issued to Employees," but requires pro forma disclosures of net earnings and earnings per share as if the fair-value- based method of accounting had been applied. The Company elected to continue to measure compensation cost under APBO No. 25. During the year ended December 31, 1996, no stock options were granted by the Company, accordingly, no pro forma disclosures are presented. Interest Rate Swap Agreements The Company uses interest rate swap arrangements to reduce the potential impact of increases in interest rates on floating rate long-term debt and does not use them for trading purposes. Premiums paid for purchased interest rate swap agreements are amortized to interest expense over the terms of the swap agreements. All outstanding swap agreements are hedges and, therefore, are not marked to market. Fair Values of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and payable to ILFC approximate fair market value because of the short maturity of these items. The fair values of the Company's interest rate swaps approximates unamortized costs as the remaining amortization periods are short-term. The fair value of the amount due from ILFC approximates the carrying value as it was determined using the present value method with the Company's internal rate of return. The fair values of the Company's debt instruments, including the related AVGs, approximate the carrying values because 1) the rates currently offered to the Company are similar to the rates for these items, or 2) the yields to maturity approximate the rates for these items. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These affect the reported amounts of assets, liabilities, revenues and expenses and the amount of any contingent assets or liabilities disclosed in the financial statements. Actual results could differ from the estimates made. The Company leases aircraft to various commercial airline fleets, on short-to-medium-term operating leases, generally three to five years. The related aircraft are generally financed by borrowings that becomes due at or near the end of the lease term through a balloon payment. As a result, the Company's operating results depend on management's ability to roll over debt facilities, renegotiate favorable leases and realize estimated salvage values. F-9 56 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant Customers The following customers individually accounted for 10% or more of revenues:
NUMBER OF SIGNIFICANT PERCENTAGE OF REVENUES BY CUSTOMERS SIGNIFICANT CUSTOMERS --------- --------------------------- Year ended December 31: 1994............................... 3 12%, 42% and 36% 1995............................... 4 11%, 16%, 26% and 36% 1996............................... 5 10%, 10%, 15%, 21% and 23%
(2) FLIGHT EQUIPMENT The Company's investment in flight equipment (primarily purchased from ILFC) as of December 31, 1995 and 1996 is as follows:
1995 1996 ------------ ------------ Flight equipment.............................. $108,788,000 $108,736,974 Accumulated depreciation...................... (13,338,300) (18,852,000) ------------ ------------ Flight equipment, net......................... $ 95,449,700 $ 89,884,974 ============ ============
(3) INVESTMENT IN JOINT VENTURE During 1994, the Company purchased a 50% non-controlling interest in International Engine Investors (IEI) for $322,250. IEI was formed in December 1994 between the Company and Partimande Holding Anstalt (wholly owned by a shareholder of the Company) for the purpose of acquiring an aircraft engine. The Company used the equity method to account for its investment. The Company's share of IEI's income for 1995 was $66,028. On November 11, 1995, the engine was sold by IEI, and IEI was liquidated. The Company's share of the gain on sale was $117,500. At December 31, 1995, the Company had a payable to Partimande Holding Anstalt of $36,750 related to the sale of the engine. (4) INCOME TAXES Provision for taxes on income consisted of the following:
TOTAL CURRENT DEFERRED ------- ------- -------- Year ended December 31: 1994: Federal.................................. $ -- -- $ -- State.................................... 59,000 -- 59,000 ------- ------- ------- $59,000 -- $ 59,000 ======= ======= ======= 1995: Federal.................................. $ -- $ -- $ -- State.................................... 30,000 7,000 23,000 ------- ------- ------- $30,000 $ 7,000 $ 23,000 ======= ======= ======= 1996: Federal.................................. $ -- $ -- $ -- State.................................... 37,000 6,000 31,000 ------- ------- ------- $37,000 $ 6,000 $ 31,000 ======= ======= =======
F-10 57 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1996, the Company had net operating loss carryforwards ("NOL") for Federal and state income tax purposes of approximately $23,082,000 and $4,472,000 expiring from 2005 through 2011 and from 1996 through 2001, respectively, as follows:
EXPIRES FEDERAL NOL STATE NOL --------------------------------------------------- ----------- ---------- 1997............................................... -- $3,436,000 1998............................................... -- -- 1999............................................... -- -- 2000............................................... -- -- 2001............................................... -- 660,000 2002-2006.......................................... $17,741,000 376,000 2007-2011.......................................... 3,136,000 -- 2012............................................... 2,205,000 -- ----------- ---------- $23,082,000 $4,472,000 =========== ==========
Temporary differences which give rise to deferred tax liabilities result primarily from timing differences for depreciation and net operating losses. The deferred tax liabilities of $369,017 and $400,000 at December 31, 1995 and 1996, respectively, are comprised of the following:
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ Net operating loss carryforward................... $ 7,098,058 $ 7,847,880 Flight equipment, principally due to differences in depreciation................................. (7,754,765) (8,542,840) Deferred and advanced rent........................ 1,048,186 691,832 Other............................................. (116,641) (113,539) ----------- ----------- 274,838 (116,667) Valuation allowance............................... (643,855) (283,333) ----------- ----------- $ (369,017) (400,000) =========== ===========
Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize deferred tax assets net of the valuation allowance. A reconciliation of total income tax expense with the expected amount computed by applying the Federal and state statutory tax rates to earnings before income taxes follows:
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 --------- --------- --------- Computed "expected" Federal tax expense......... $ 384,000 $ 306,000 $ 364,000 State taxes, net of Federal income tax benefit....................................... 21,000 17,000 10,000 Change in valuation allowance................... (308,000) (284,000) (361,000) Other........................................... (38,000) (9,000) 24,000 --------- --------- --------- $ 59,000 $ 30,000 $ 37,000 ========= ========= =========
F-11 58 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) LONG-TERM DEBT Long-term debt as of December 31, 1995 and 1996 is summarized as follows:
DECEMBER 31, ------------------------- 1995 1996 ----------- ----------- Notes payable to bank bearing interest at 7.50% on $7,000,000 and LIBOR plus 1.125% (6.7% at December 31, 1996) on $649,079, secured by flight equipment, 33 1/3% guaranteed by ILFC, payable in monthly installments of $75,000 including interest, balloon payment of $7,500,000, due August 1997............................ $ 7,960,343 $ 7,649,079 Note payable to bank bearing interest at 7.3125% on $3,500,000 and LIBOR plus 1.125% (6.7% at December 31, 1996) on $1,641,000, secured by flight equipment, 33 1/3% guaranteed by ILFC, payable in monthly installments of $87,000 including interest, balloon payment of $4,000,000, due June 1998.............................. 5,595,152 5,141,600 Notes payable to bank, refinanced March 26, 1997, bearing interest at 7.545% (Floating plus Swap), secured by flight equipment, 50% guaranteed by ILFC up to $2,400,000, balloon payment of $3,750,000, due March 1998........................................ 4,943,028 4,401,028 Notes payable to bank bearing interest at 7.60% (Floating plus Swap), secured by flight equipment, 50% guaranteed by ILFC, balloon payment of $3,180,000, due on demand...................... 3,796,000 3,307,000 Note payable to bank bearing interest at 7.10% (Floating plus Swap), secured by flight equipment, 50% guaranteed by ILFC, balloon payment of $1,814,979, due on demand.............................. 2,045,600 1,804,300 Note payable to bank bearing interest at 7.73% (Floating plus Swap), secured by flight equipment, 50% guaranteed by ILFC, balloon payment of $18,085,371, due July 1997............................. 19,734,963 18,582,417 Note payable to bank, refinanced November 4, 1996, bearing interest at LIBOR plus 1.2 (6.8% at December 31, 1996), secured by flight equipment, 100% guaranteed by ILFC, payable in quarterly installments of $445,000 including interest, due January 2003..... 14,500,000 13,700,000 Note payable to bank, refinanced May 17, 1996, bearing interest at 7.75%, secured by flight equipment, guaranteed up to $2,175,000 by ILFC, payable in quarterly installments of $510,000 including interest, due May 2001............................................ 15,225,000 14,193,403 Note payable to bank with interest accrued at 6%, payment is based on profit sharing agreements on certain flight equipment, principal due August 1998......................................... 909,551 887,608 Convertible note payable to bank with interest accrued at 5.0%, payable quarterly, principal due August 1998...................... 792,000 757,000 Note payable to ILFC bearing interest at 5.9%, payable in quarterly installments including interest, balloon payment of $3,513,000, due October 1998.................................................. 3,600,000 3,572,000 Note payable to ILFC, refinanced March 11, 1997, bearing interest at 6.0%, secured by flight equipment, balloon payment of $441,000, due December 31, 1997............................................. 444,000 441,600 Note payable to ILFC bearing interest at 5.5%, secured by flight equipment, balloon payment of $889,585, due July 1997............. 1,160,305 982,330 Note payable to ILFC bearing interest at 6.0%, balloon payment of $511,845, due August 1999......................................... 1,156,845 976,845
F-12 59 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, ------------------------- 1995 1996 ----------- ----------- Note payable to ILFC bearing interest at 7.8%, payable in quarterly installments of $110,000 including interest, balloon payment of $3,718,293 due December 2000...................................... 4,350,000 4,214,083 Notes payable to Great Lakes Holdings (affiliated company), refinanced in 1996, bearing interest at 5.4%, due June 1997....... 612,500 700,000 Notes payable to Great Lakes Holdings (affiliated company), refinanced in 1996, bearing interest at 5.4%, due July 1997....... 1,000,000 1,400,000 ----------- ----------- Total..................................................... 87,825,287 82,710,293 ----------- ----------- Less current installments........................................... 5,272,554 38,428,219 ----------- ----------- $82,552,733 $44,282,074 ========== ==========
As indicated above, certain borrowings aggregating $31,337,500 and $4,842,628 at December 31, 1995 and 1996 were refinanced during 1996 and 1997, respectively. Accordingly, the amounts due under these notes payable have been classified in the accompanying December 31, 1995 and 1996 consolidated balance sheets based on the refinanced terms. In connection with the 1997 refinancing, the Company provided the lender with cash collateral of $400,000 which is restricted from use by the Company through March 1998. The Company plans to refinance long-term debt expiring in 1997 in connection with the re-leasing or lease extensions of the related aircraft. At January 31, 1997, the Company has extended leases on three of its aircraft, two for additional one-year periods and one for an additional two-year period. Long-term debt related to these aircraft at December 31, 1996, subject to current negotiation, was approximately $12,760,000. At December 31, 1996, $34,186,000 of the Company's long-term debt was guaranteed by ILFC and $10,186,000 of the Company's long-term debt was due to ILFC. The convertible note payable was entered into in August 1992 with an original principal balance of $700,000. The note payable, or $1,000 multiples thereof, is convertible into shares of preferred stock at $1 per share or up to 700,000 shares at any time prior to August 13, 1998. Scheduled future repayments of long-term debt subsequent to December 31, 1996 are as follows:
DECEMBER 31: ---------------------------------------- 1997............................... $38,428,219 1998............................... 15,595,095 1999............................... 2,870,808 2000............................... 6,140,780 2001............................... 10,976,391 Thereafter......................... 8,699,000 ----------- $82,710,293 ===========
Certain notes payable contain various financial covenants including tangible net worth and delivery of audited financial statements. The Company was in compliance with these covenants at December 31, 1996. F-13 60 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has entered into interest rate swaps with financial institutions under terms that provide payment of interest on the notional amount of the swap. In accordance with these arrangement, the Company pays interest at a fixed rate and the financial institution pays interest at variable rates pursuant to terms of the loans. The following table presents the Company's interest rate swap agreements at December 31, 1995 and 1996: DECEMBER 31, 1995
WEIGHTED AVERAGE TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY --------------------------------- --------------- ----------------- --------- Fixed/variable................... $30,520,000 7.64/7.13 2/97-7/97
DECEMBER 31, 1996
WEIGHTED AVERAGE TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY --------------------------------- --------------- ----------------- --------- Fixed/variable................... $28,094,000 7.65/6.66 2/97-7/97
The net effect of swaps was to record $372,000, $131,000 and $265,000 of additional interest expense during 1994, 1995 and 1996, respectively. (6) RELATED PARTY TRANSACTIONS During 1996, the Company sold certain aircraft equipment in connection with an ILFC transaction to a third party. The Company recognized a gain on sale of this equipment of $141,000. During 1995, the Company purchased aircraft from ILFC aggregating $41,473,000. None were purchased during 1994 and 1996. At December 31, 1996, 79% of the Company's gross fleet cost was comprised of aircraft acquired from ILFC. The Company financed these acquisitions through bank loans, partially guaranteed by ILFC, as well as loans from ILFC (note 5). ILFC provides these guarantees to lenders through an asset value guarantee (AVG) which generally covers financing in excess of the asset value, as defined. ILFC's financial support has allowed the Company to finance aircraft purchases at more favorable leverage than the Company could otherwise obtain. The Company's typical operating lease transaction with an AVG requires a cash investment by the Company of approximately 5% to 15% of the aircraft purchase price while the industry standard ranges from 20% to 30%. At December 31, 1996, $34,186,000 of long-term debt was covered by AVGs and $10,186,000 was due to ILFC. The Company has one aircraft leased to ILFC at December 31, 1996. The lease originated in August 1994 and provides for monthly rents of $80,000 through August 1999. The Company recognized rental income of $400,000, $960,000 and $960,000 during the years ended 1994, 1995 and 1996, respectively, from this lease. The Company has an agreement with ILFC related to the December 1995 purchase of an aircraft which provides for recovery of an operating loss, as defined, in the acquired lease. The Company estimates this loss will be incurred through 1999. Accordingly, the Company reduced the purchase price of the related aircraft and recognized a receivable for the present value of the estimated recovery aggregating $579,000. The amount due from ILFC at December 31, 1996 was $441,000, which includes accrued interest of $87,000. The loss stems from a stated lease rate which is less than the market lease rate at the date of acquisition. Accordingly, F-14 61 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the Company allocated additional cost to the purchase price and recognized deferred rent aggregating $1,747,000 for the present value of the difference between the market and stated rent. Deferred rent will be amortized on the straight line method over the remaining lease term. The Company realized consulting fee revenues of $69,000, $347,000 and $78,000 during the years 1994, 1995 and 1996, respectively, for services to ILFC. The Company's Chairman and President collectively own Great Lakes Holdings (GLH), an affiliated company. From time to time, these officers provide consulting services to GLH. GLH paid the Company $144,000 for each of the years 1994, 1995 and 1996 for these services. Additionally, the Company earned consulting fees of $239,000 during 1996 from unrelated parties, however, $190,000 of the amount was derived from a transaction in which the Company provided services in connection with a sale by ILFC of aircraft equipment to a third party. During 1994, ILFC incurred $179,628 for certain improvements to an aircraft which it leased from the Company. The Company accrued for such costs at December 31, 1994 and reimbursed ILFC in 1995. During 1995, ILFC advanced the Company $696,000 to assist the financing of an aircraft purchase. The advance was repaid during 1996. At December 31, 1994 and 1995, $179,628 and $696,695, respectively, was due to ILFC. (7) RENTAL INCOME Minimum future rental income on noncancelable operating leases of flight equipment at December 31, 1996, adjusted for the lease renewals below, is as follows: Year ended December 31: 1997.......................................... $10,421,000 1998.......................................... 6,483,000 1999.......................................... 2,926,000 2000.......................................... 2,326,000 2001.......................................... 2,076,000 Thereafter.................................... 2,076,000 ----------- $26,308,000 ===========
During December 1996 and January 1997, the Company renewed three of its leases extending the expiration dates to March 1998, April 1998 and August 1999, respectively. One of the aircraft leases expires in 1997, four expire in 1998, one expires in 1999 and one expires in 2002. (8) COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases offices from a third party under a noncancelable operating lease. Future minimum lease payments are: Year ended December 31: 1997............................................. $22,000 1998............................................. 22,000 1999............................................. 2,000 ------- $46,000 =======
F-15 62 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Total rent expense under operating leases for the years ended December 31, 1994, 1995 and 1996 was $24,600, $20,665 and $20,460, respectively. Government Regulations The maintenance and operation of aircraft are regulated by the Federal Aviation Administration (FAA) and foreign aviation authorities which oversee such matters as aircraft certification, inspection, maintenance, certification of personnel, and record-keeping. All current leases require the lessee to bear the costs of complying with governmental regulations. However, in the event a lessee fails to maintain aircraft in accordance with the terms of a lease, the Company could be required to repair or recondition the aircraft. Failure of a lessee to fulfill lease maintenance and operation obligations could have a material adverse effect on the Company's financial condition and results of operations. The FAA and civil aviation authorities of most countries and international entities issue regulations limiting permitted noise and other emissions from aircraft. These older non-complying aircraft can be brought into compliance by modifying the engines. One of the Company's aircraft had noise compliance work performed at a cost of approximately $2.4 million during 1994 (all of which was paid by the Company) and three aircraft will require this work to be performed over the next three years unless the aircraft is leased and operated in an area that does not require the modification. (9) STOCKHOLDERS' EQUITY The holders of convertible preferred stock are entitled to convert each share to one share of common stock. In the event of liquidation, holders of preferred stock are entitled to receive $1 per share plus accrued and unpaid dividends, if any, before distributions to holders of common stock. The convertible preferred stock do not bear dividends and contains certain defined antidilution provisions. Through March 1993, the Company granted options to purchase 2,913,735 shares of common stock at management's estimate of fair value, $1 per share; 100,000 options were exercised during December 1995. Through May 1991, the Company granted options to purchase 1,569,550 shares of convertible preferred stock at management's estimate of fair value, primarily $1.15 per share. These options are exercisable no later than the earlier of December 31, 1998 or a sale of the Company's shares under the Securities Act of 1933. At December 31, 1996, 4,383,285 options were outstanding and all were exercisable. During March, 1997, the Company extended the expiration date on 2,235,000 stock options to March 31, 2007. Such options will vest ratably through December 31, 2000. Accordingly, the Company will recognize aggregate compensation of approximately $1 million over the four-year vesting period. (10) PROPOSED INITIAL PUBLIC OFFERING AND REVERSE STOCK SPLIT The Company is currently contemplating an initial public offering (IPO) of its common stock. In connection with the IPO, the Company plans to effect a 1-for-6 reverse stock split of its common stock. Concurrent with the IPO, the Company anticipates the conversion of all issued and outstanding shares of preferred stock into 823,463 shares of common stock, and the exercise of stock options to acquire 358,045 shares (post reverse stock split) (note 9). F-16 63 APPENDIX 1 Simat, Helliesen & Eichner, Inc. 212-682-8455 Fax: 212-986-1825 90 Park Avenue Telex: 4949296 New York, New York 10016 SITA: BOSSHCR [SH&E LOGO] March 1, 1997 International Aircraft Investors 3655 Torrance Boulevard, Suite 410 Torrance, California 90503 Gentlemen: Simat, Helliesen & Eichner, Inc. ("SH&E") has been retained to determine the aggregate Current Market Value ("CMV") for one (1) Boeing 727-200ADV, three (3) 737-200ADV and two (2) 737-300 aircraft and one (1) McDonnell Douglas MD-82 aircraft (the "Subject Aircraft"), all owned by International Aircraft Investors ("IAI"). The Subject Aircraft and APU are collectively referred to herein as (the "Collateral") and are identified on Attachment A. SH&E has determined the aggregate Current Market Value of the Collateral as of December 31, 1996 to be $91.53 million. VALUATION DETERMINATION SH&E has studied many aircraft transactions over the past 30 years. This list includes a wide variety of pure jet, fan-powered and turboprop powered two, three and four-engined transports. Models studied have covered many types, including Boeing 707, 727, 737, 757, 767 and 747 aircraft; Douglas DC-8, DC-9, DC-10, MD80 and MD-11 models; Airbus A300, A310, A320, A330 and A340 models; Lockheed L-1011; BAC 1-11; and various turboprop models, including most major commuter aircraft. The SH&E valuation approach starts by determining a half-life value. The term "half-life" represents an aircraft whose major components (e.g. airframe, engines, landing gear and APU) have used 50 percent of the time between scheduled or expected overhauls. This initial appraisal can then be adjusted (positive or negative) for each individual unit to reflect the airframe's maintenance status relative to next overhaul. In most cases, the Base Value (as defined below) of an aircraft assumes its physical condition is average for an aircraft of its type and age, and its maintenance time status is at mid-life (or benefitting from an above-average maintenance status if it is new or nearly new, as the case may be). In the case of new aircraft, the above half-life values are automatically adjusted upwards to reflect the fact that the aircraft has the full span of maintenance overhaul intervals available. Consequently, SH&E's initial depreciation of new aircraft is considerably greater than for a used aircraft, thereby accounting for both the change in its maintenance status and its intrinsic depreciation. SH&E half-life values are determined on a semi-annual basis by reviewing recent past sales, aircraft availability trends, technological aspects, environmental constraints and maintenance requirements. The Base Value is the appraiser's opinion of the underlying economic value of an aircraft in an open, unrestricted and stable market environment with a reasonable balance of supply and demand, and also assumes full considerations of its "highest and best use". An aircraft's Base Value is founded in the historical trend of values and in the projection of value trends and presumes an arm's-length, cash transaction between willing, able and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing. 64 Since Base Value pertains to a somewhat idealized aircraft and market combination it may not necessarily reflect the actual value of the aircraft in question, but is a nominal starting value to which adjustments may be applied to determine an actual value. The Base Value of each aircraft is derived from SH&E's aircraft valuation models. The SH&E Base Value models provide trend lines derived from known transactions, econometric factors affecting aircraft values, and aircraft economic life estimates. Because it is related to long-term market trends, the Base Value definition is normally applied to analyses of historical values and projections of residual values. The Current Market Value (CMV) is SH&E's opinion of the most likely trading price that may be generated for an aircraft under the market circumstances that are perceived to exist at the time in question. CMV assumes that the aircraft is valued for its highest, best use, that the parties to the hypothetical sale transaction are willing, able, prudent and knowledgeable, and under no unusual pressure for a prompt sale, and that the transaction would be negotiated in an open and unrestricted market on an arm's-length basis, for cash or equivalent consideration, and given an adequate amount of time for effective exposure to prospective buyers. The CMV of a specific aircraft is derived from, and will tend to be somewhat consistent with its Base Value in a stable market environment, but where a reasonable equilibrium between supply and demand does not exist, trading prices, and therefore CMVs, are likely to be at variance with the Base Value of that aircraft. CMV may be based upon either the actual (or specified) physical condition and maintenance time status of the aircraft, or alternatively upon an assumed average physical condition and mid-life, mid-time maintenance time status, depending on the nature of the appraisal assignment. QUALIFICATIONS SH&E has provided consulting services to the aviation industry since its founding 30 years ago. The staff consists of more than 75 professionals with many years of experience of air transportation management, planning, operations, and economic research. SH&E has performed numerous world-wide assignments for clients which include airlines, manufacturers, government agencies and financial institutions. An appraiser from SH&E is certified by the International Society of Transport Aircraft Trading (ISTAT). LIMITATIONS SH&E used information supplied by IAI together with in-house data accumulated through other recent studies of aircraft transactions. SH&E's opinions are based upon historical relationships and expectations that it believes are reasonable. Some of the underlying assumptions, including those described above, may not materialize because of unanticipated events and circumstances. SH&E's opinions could, and would, vary materially, should any of the above assumptions prove to be inaccurate. The opinions expressed herein are not given for, or as an inducement or endorsement of, any financial transaction. This report reflects SH&E's expert opinion and best judgment based upon the information available to it at the time of its preparation. SH&E does not have, and does not expect to have, any financial interest in the appraised property. For SH&E: /s/ CLIVE G. MEDLAND -------------------------------------- Clive G. Medland Vice President Certified Appraiser International Society of Transport Aircraft Trading A-2 65 ATTACHMENT A
MAXIMUM AIRCRAFT SERIAL YEAR OF ENGINE TAKEOFF TYPE NUMBER MANUFACTURE TYPE WEIGHT (LBS) CURRENT OPERATOR - ---------- ------ ------------ --------- ------------ ------------------ 727-200ADV 21826 1979 JT8D-15 190,500 Delta Air Lines 737-200ADV 21645 1978 JT8D-15 117,000 COPA 737-200ADV 22088 1980 JT8D-15 117,500 COPA 737-200ADV 22364 1980 JT8D-15A 121,500 Air New Zealand 737-300 24300 1989 CFM56-3B1 134,500 British Midland 737-300 23264 1985 CFM56-3B1 135,000 Southwest Airlines MD-82 49925 1989 JT8D-219 149,500 Alaska Airlines
A-3 66 [THREE AIRCRAFT IN FLIGHT. TWO B 737 AIRCRAFT, ONE WITH THE LOGO AND NAME OF COPA AND ONE WITH THE LOGO AND NAME OF AIR NEW ZEALAND. THE THIRD AIRCRAFT IS A B 727 WITH THE LOGO AND NAME OF DELTA.] 67 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON STOCK TO WHICH IT RELATES OR AN OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 Use of Proceeds....................... 15 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Consolidated Financial and Operating Data...................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 23 Management............................ 31 Certain Transactions.................. 38 Principal Shareholders................ 39 Description of Capital Stock.......... 40 Shares Eligible for Future Sale....... 41 Underwriting.......................... 43 Legal Matters......................... 44 Experts............................... 44 Additional Information................ 45 Index to Consolidated Financial Statements.......................... F-1 Simat, Helliesen & Eichner, Inc. Appraisal........................... A-1
------------------------ UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 1,820,000 SHARES LOGO INTERNATIONAL AIRCRAFT INVESTORS COMMON STOCK -------------------- PROSPECTUS -------------------- SUTRO & CO. INCORPORATED FRIEDMAN, BILLINGS, RAMSEY & CO., INC. , 1997 ====================================================== 68 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD fee.
AMOUNT TO BE PAID --------- SEC registration fee.............................................. $ 7,611 NASD fee.......................................................... 3,012 Nasdaq-NMS listing fee............................................ 25,340 Printing and engraving expenses................................... 100,000 Legal fees and expenses........................................... 200,000 Accounting fees and expenses...................................... 200,000 Blue Sky qualification fees and expenses.......................... 10,000 Transfer Agent and Registrar fees................................. 5,000 Miscellaneous fees and expenses................................... 79,037 --------- Total................................................... $ 630,000 =========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Amended and Restated Articles of Incorporation of the Company will contain a provision eliminating the personal liability of the directors to the Company or its shareholders to the fullest extent permitted under the California General Corporations Law. The Bylaws of the Company provide for indemnification of directors, officers, employees and agents of the Company consistent with the provisions of the California General Corporation Law. Reference is also made to Section 10 of the Underwriting Agreement, contained in Exhibit 1 hereto, indemnifying officers and directors of the Company against certain liabilities. See also the form of Indemnity Agreement, included herein as Exhibit 10.3, to be entered into with the directors and officers of the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Upon the consummation of the offering, the outstanding shares of Convertible Preferred Stock of the Company will be converted pursuant to their terms into shares of the Common Stock of the Company. The issuance of shares of Common Stock of the Company is exempt from registration under the Securities Act of 1933 pursuant to Section 3(a)(9) or 4(2) of that Act. Immediately prior to the consummation of the offering, options to purchase 358,045 shares of Common Stock of the Company will be exercised. The options expire by their terms upon consummation of the offering. The issuance of shares of Common Stock of the Company is exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of that Act. II-1 69 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
NUMBER DESCRIPTION ------- ------------------------------------------------------------------------- 1 Form of Underwriting Agreement (including Common Stock Warrant and Registration Rights Agreement) *3.1 Articles of Incorporation of the Company *3.2 Certificate of Amendment of Articles of Incorporation of the Company, dated November 15, 1988 *3.3 Certificate of Amendment of Articles of Incorporation of the Company, dated April 1, 1992 *3.4 Certificate of Determination with respect to Convertible Preferred Stock *3.5 Bylaws of the Company 3.6 Form of Amended and Restated Articles of Incorporation of the Company to be effective upon consummation of the Offering 3.7 Form of Bylaws of the Company to be effective upon consummation of the Offering *4.1 Specimen of Common Stock certificate *4.2 Amended and Restated Aircraft Loan Agreement dated as of November 4, 1996 between SWA I Corporation and Wells Fargo Bank, N.A. *4.3 Secured Promissory Note in the original principal amount of $13,700,000 made November 4, 1996 by SWA I Corporation in favor of Wells Fargo Bank, N.A. *4.4 Amended and Restated Guaranty Agreement dated as of November 4, 1996 made by International Aircraft Investors in favor of Wells Fargo Bank, N.A. *4.5 Senior Term Loan Agreement dated as of May 17, 1996 between IAI Alaska I Corporation and City National Bank *4.6 Aircraft Secured Promissory Note in the original principal amount of $14,650,000 made May 17, 1996 by IAI Alaska I Corporation in favor of City National Bank *4.7 Secured Credit Agreement dated as of December 21, 1993 between IAI II, Inc. and Continental Bank, N.A. *4.8 Note in the original principal amount of $21,976,677 made by IAI II, Inc. in favor of Continental Bank, N.A. 4.9 The Company hereby agrees to furnish to the Commission upon request a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the consolidated assets of the Company *5 Opinion of O'Melveny & Myers LLP regarding the legality of the securities to be registered *10.1 Form of 1997 Employee Stock Option and Award Plan *10.2 Lease of principal offices *10.3 Form of indemnity agreement *10.4 Letter agreement, dated November 6, 1996, between the Company and ILFC. *10.5 Letter agreement, dated January 14, 1997, between the Company and ILFC. 10.6 Employment Agreement with William E. Lindsey. 10.7 Employment Agreement with Michael P. Grella. *10.8 Form of 1997 Eligible Directors Stock Option Plan. *10.9 Form of Restated Stock Option Agreements for options outstanding at consummation of the offering.
II-2 70
NUMBER DESCRIPTION ------- ------------------------------------------------------------------------- *11 Statement regarding computation of earnings per share. 21 The Company's subsidiaries are as follows: IAI Atlantic Leasing, Inc., IAI-I, Inc., IAI-II, Inc., IAI Pacific Leasing, Inc., IAI Alaska I Corporation and SWA I Corporation. 23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants *23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5) *23.3 Consent of Simat Helliesen & Eichner, Inc. *24 Power of Attorney *27.1 Financial Data Schedule for the year ended December 31, 1996.
- --------------- * Previously filed. (b) FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in the applicable accounting regulations of the Commission are provided in the Notes to the Consolidated Financial Statements included elsewhere in this Registration Statement or are not required under the applicable instructions or are inapplicable and therefore have been omitted. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 71 SIGNATURE Pursuant to the requirements of the Securities Act of 1933, the Registrant has caused this Amendment No. 3 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on this 7th day of April, 1997. INTERNATIONAL AIRCRAFT INVESTORS By: /s/ MICHAEL P. GRELLA --------------------------------- Michael P. Grella President Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------- ---------------------------- ----------------- /s/ WILLIAM E. LINDSEY Chairman of the Board, Chief April 7, 1997 - ----------------------------------------------- Executive Officer and William E. Lindsey Director (Principal Executive Officer) /s/ MICHAEL P. GRELLA* President and Director April 7, 1997 - ----------------------------------------------- Michael P. Grella /s/ RICHARD O. HAMMOND* Vice President -- Finance April 7, 1997 - ----------------------------------------------- and Treasurer (Principal Richard O. Hammond Financial and Accounting Officer) /s/ STUART M. WARREN* Director April 7, 1997 - ----------------------------------------------- Stuart M. Warren /s/ AARON MENDELSOHN* Director April 7, 1997 - ----------------------------------------------- Aaron Mendelsohn /s/ CHRISTER SALEN* Director April 7, 1997 - ----------------------------------------------- Christer Salen /s/ KENNETH TAYLOR* Director April 7, 1997 - ----------------------------------------------- Kenneth Taylor * /s/ MICHAEL P. GRELLA - ----------------------------------------------- Michael P. Grella Attorney-in-fact
II-4 72 EXHIBIT INDEX
NUMBER DESCRIPTION ------- ------------------------------------------------------------------------- 1 Form of Underwriting Agreement (including Common Stock Warrant and Registration Rights Agreement) *3.1 Articles of Incorporation of the Company *3.2 Certificate of Amendment of Articles of Incorporation of the Company, dated November 15, 1988 *3.3 Certificate of Amendment of Articles of Incorporation of the Company, dated April 1, 1992 *3.4 Certificate of Determination with respect to Convertible Preferred Stock *3.5 Bylaws of the Company 3.6 Form of Amended and Restated Articles of Incorporation of the Company to be effective upon consummation of the Offering 3.7 Form of Bylaws of the Company to be effective upon consummation of the Offering *4.1 Specimen of Common Stock certificate *4.2 Amended and Restated Aircraft Loan Agreement dated as of November 4, 1996 between SWA I Corporation and Wells Fargo Bank, N.A. *4.3 Secured Promissory Note in the original principal amount of $13,700,000 made November 4, 1996 by SWA I Corporation in favor of Wells Fargo Bank, N.A. *4.4 Amended and Restated Guaranty Agreement dated as of November 4, 1996 made by International Aircraft Investors in favor of Wells Fargo Bank, N.A. *4.5 Senior Term Loan Agreement dated as of May 17, 1996 between IAI Alaska I Corporation and City National Bank *4.6 Aircraft Secured Promissory Note in the original principal amount of $14,650,000 made May 17, 1996 by IAI Alaska I Corporation in favor of City National Bank *4.7 Secured Credit Agreement dated as of December 21, 1993 between IAI II, Inc. and Continental Bank, N.A. *4.8 Note in the original principal amount of $21,976,677 made by IAI II, Inc. in favor of Continental Bank, N.A. 4.9 The Company hereby agrees to furnish to the Commission upon request a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the consolidated assets of the Company *5 Opinion of O'Melveny & Myers LLP regarding the legality of the securities to be registered *10.1 Form of 1997 Employee Stock Option and Award Plan *10.2 Lease of principal offices *10.3 Form of indemnity agreement *10.4 Letter agreement, dated November 6, 1996, between the Company and ILFC. *10.5 Letter agreement, dated January 14, 1997, between the Company and ILFC. 10.6 Employment Agreement with William E. Lindsey. 10.7 Employment Agreement with Michael P. Grella. *10.8 Form of 1997 Eligible Directors Stock Option Plan. *10.9 Form of Restated Stock Option Agreements for options outstanding at consummation of the offering. *11 Statement regarding computation of earnings per share.
73
NUMBER DESCRIPTION ------- ------------------------------------------------------------------------- 21 The Company's subsidiaries are as follows: IAI Atlantic Leasing, Inc., IAI-I, Inc., IAI-II, Inc., IAI Pacific Leasing, Inc., IAI Alaska I Corporation and SWA I Corporation. 23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants *23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5) *23.3 Consent of Simat Helliesen & Eichner, Inc. *24 Power of Attorney *27.1 Financial Data Schedule for the year ended December 31, 1996.
- --------------- * Previously filed. EX-1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1 1,820,000 Shares (Subject to increase of up to 273,000 additional shares in the event of an oversubscription) INTERNATIONAL AIRCRAFT INVESTORS (A CALIFORNIA CORPORATION) Common Stock (par value $0.01 per share) UNDERWRITING AGREEMENT _______________, 1997 Sutro & Co. Incorporated Friedman, Billings, Ramsey & Co., Inc. As Representatives of the several Underwriters c/o Sutro & Co. Incorporated 11150 Santa Monica Boulevard, Suite 1500 Los Angeles, California 90025 Ladies and Gentlemen: International Aircraft Investors, a California corporation (the "Company") proposes, subject to the terms and conditions stated herein, to issue and sell, or to sell, as the case may be, to the several Underwriters named in Schedule A hereto (the "Underwriters"), for which you are acting as representatives (the "Representatives"), an aggregate of 1,820,000 shares (the "Firm Common Shares") of common stock, par value $0.01 per share (the "Common Stock"), of the Company. In addition, the Company proposes to grant to the Underwriters an option to purchase up to 273,000 additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 5 hereof, for the purpose of covering over-allotments in connection with the sale of the Firm Common Shares. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares are hereinafter collectively referred to as the "Common Shares." The Company understands that the Underwriters propose to make a public offering of the Common Shares on the effective date of the registration statement hereinafter referred to or as soon thereafter as in your judgment is advisable. The Company hereby confirms that the Underwriters and any dealers have been authorized to distribute or cause to be distributed each Preliminary Prospectus (as defined below) and are authorized to distribute the Prospectus (as 1 2 defined below), as from time to time amended or supplemented, on the effective date of the registration statement hereinafter referred to or as soon thereafter as in your judgment is advisable. The Company confirms its agreement with respect to the purchase of the Common Shares by the Underwriters as follows: SECTION 1. Representations and Warranties of the Company. The Company hereby represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-1 (File No. 333-19875) with respect to the Common Shares has been prepared by the Company in conformity in all material respects with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Company has prepared and has filed or proposes to file prior to the effective date of such registration statement an amendment or amendments to such registration statement, which amendment or amendments have been or will be similarly prepared. There have been delivered to you two signed copies of such registration statement and amendments, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments thereto and related preliminary prospectuses have been delivered to you in such reasonable quantities as you have requested. The Company will next file with the Commission one of the following: (i) prior to effectiveness of such registration statement, a further amendment thereto, including the form of final prospectus, (ii) a final prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations or (iii) a term sheet (the "Term Sheet") as described in and in accordance with Rules 434 and 424(b) of the Rules and Regulations. As filed, the final prospectus, if one is used, or the Term Sheet and the latest Preliminary Prospectus sent or given to purchasers of the Common Shares by the Underwriters prior to or at the same time as the confirmation of such sale, if a final prospectus is not used, shall include all Rule 430A Information (as defined below) and, except to the extent that you shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto, or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company shall have previously advised you in writing would be included or made therein. The term "Registration Statement" as used herein shall mean such registration statement at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date (as defined below), shall also mean such registration statement as so amended; provided, however, that such term shall also include (i) all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations and (ii) any registration statement filed pursuant to Rule 462(b) of the 2 3 Rules and Regulations relating to the Common Shares. The term "Preliminary Prospectus" shall mean any preliminary prospectus relating to the Common Shares and delivered to you as well as any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Prospectus" shall mean: (i) the prospectus relating to the Common Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations; (ii) if a Term Sheet is not used and no filing pursuant to Rule 424(b) of the Rules and Regulations is required, the form of final prospectus included in the Registration Statement at the time it becomes effective; or (iii) if a Term Sheet is used, the Term Sheet in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, together with the latest Preliminary Prospectus sent or given to purchasers of the Common Shares by the Underwriters prior to or at the same time as the confirmation of such sale. The term "Rule 430A Information" shall mean information with respect to the Common Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the Rules and Regulations. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including each Closing Date hereinafter mentioned, the Registration Statement and the Prospectus, and any amendments or supplements thereto, will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and the Registration Statement will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and neither the Prospectus, nor any amendment or supplement thereto, will include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary, in light of the circumstances under which they were made, to make the statements therein not misleading; provided, however, no representation or warranty contained in this subsection 1(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement that is described in clauses (i) and (ii) of Section 3 hereof. (c) The subsidiaries of the Company are IAI Atlantic Leasing, Inc., a Nevada corporation; IAI-I, Inc., a Nevada corporation; IAI-II, Inc., a Nevada corporation; IAI Pacific Leasing, Inc., a Nevada corporation; IAI Alaska I Corporation, a _______________ corporation; and SWA I Corporation, a Nevada corporation (collectively, the "Subsidiaries" and individually, a "Subsidiary"). The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the Subsidiaries. The Company and each of the Subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of their respective jurisdiction of incorporation, with full power and authority (corporate and 3 4 other) to own and lease its assets and properties and conduct its business as now being conducted and as described in the Registration Statement. The Company owns all of the outstanding capital stock of each of the Subsidiaries free and clear of all claims, liens, charges and encumbrances, other than as disclosed in the Registration Statement. The Company and each of the Subsidiaries are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect upon the Company and the Subsidiaries, taken as a whole; and to the Company's knowledge, no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (d) The Company and each of the Subsidiaries holds and is operating in compliance with all licenses, approvals, certificates, permits, authorizations, consents and orders from governmental and regulatory authorities, foreign and domestic, which are necessary or required in the conduct of their respective businesses. (e) The Company has an authorized capitalization as set forth under the heading "Capitalization" in the Prospectus; the issued and outstanding shares of capital stock of the Company are duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws, have not been issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform in all material respects to the description thereof contained in the Prospectus. All issued and outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, none of the Company or any Subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of capital stock of the Company or any of the Subsidiaries or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (f) The Common Shares have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be validly issued, fully paid and nonassessable, and will conform in all material respects to the description thereof contained in the Prospectus. No preemptive rights or other rights to subscribe for or purchase exist with respect to the issuance and sale of the Common Shares. No shareholder of the Company has any right which has not been waived to require the Company to register the sale of any shares owned by such shareholder under the Act in the public offering contemplated by this Agreement. The shares of Common Stock proposed to be issued upon exercise of the Sutro Warrant (as defined below) 4 5 have been duly authorized and, when issued, delivered and paid for in the manner set forth in the Warrant Agreement (as defined below), will be validly issued, fully paid and nonassessable. No further approval or authorization of the shareholders or the Board of Directors of the Company is required for the issuance and sale of the Common Shares as contemplated herein or the shares of Common Stock proposed to be issued upon exercise of the Sutro Warrant. (g) The Company has full right, power and authority to enter into this Agreement and the Warrant Agreement and perform the transactions contemplated in such agreements. This Agreement has and, prior to the First Closing Date (as defined below), the Warrant Agreement will have been, duly authorized, executed and delivered by the Company, and they constitute the valid and binding agreements of the Company enforceable against it in accordance with their terms, except (A) as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, (B) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought and (C) to the extent that rights to indemnity or contribution under this Agreement or the Warrant Agreement may be limited by federal, state or provincial securities laws or the public policy underlying such laws. The execution and delivery of this Agreement and the Warrant Agreement by the Company and the consummation of the transactions contemplated in such agreements by the Company does not violate any provisions of the certificate or articles of incorporation or bylaws of the Company or any Subsidiary and will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of the Subsidiaries or any of their respective properties. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Warrant Agreement or the consummation of the transactions contemplated by such agreements, except for compliance with the Act, the Blue Sky laws applicable to the public offering of the Common Shares by the several Underwriters and the clearance of such offering with the National Association of Securities Dealers, Inc. (the "NASD"). (h) KPMG Peat Marwick LLP, who have expressed their opinion with respect to the financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent accountants as required by the Act and the Rules and Regulations. (i) The consolidated financial statements of the Company and its Subsidiaries, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Company and the Subsidiaries, as of the respective 5 6 dates of such financial statements and schedules, and the consolidated results of operations, cash flows and shareholders' equity and the other information purported to be shown therein of the Company and its Subsidiaries for the respective periods covered thereby. Such statements and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as noted therein) as certified by the independent accountants named in subsection 1(h). The Registration Statement includes all of the financial statements and schedules required under the Act to be included therein. The selected financial data set forth in the Prospectus under the captions "Prospectus Summary -- Summary Consolidated Financial Data," "Capitalization" and "Selected Consolidated Financial and Operating Data" present fairly the information set forth therein on the basis stated in the Registration Statement. (j) Except as disclosed in the Prospectus, and except as to defaults which individually or in the aggregate would not be material to the Company and the Subsidiaries, taken as a whole, (i) none of the Company or any of the Subsidiaries is in violation or default of any provision of their respective certificate or articles of incorporation or bylaws, or is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties is bound; and (ii) there does not exist any state of facts which constitutes an event of default (as defined in such documents) on the part of the Company or any such Subsidiary or which, with notice or lapse of time or both, would constitute such an event of default. (k) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. The contracts so described in the Prospectus are in full force and effect on the date hereof; and, except as disclosed in the Prospectus and except as to defaults which individually or in the aggregate would not be material to the Company and the Subsidiaries, taken as a whole, neither the Company nor any of the Subsidiaries, nor to the best of the Company's knowledge, any other party, is in breach of or in default under any of such contracts. (l) There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened to which the Company or any of the Subsidiaries is a party or of which property owned or leased by the Company or any of the Subsidiaries is the subject, including actions related to environmental or discrimination matters, which actions, suits or proceedings (i) might reasonably be expected to, individually or in the aggregate, prevent or materially and adversely affect the transactions contemplated by this Agreement or result in a material adverse change in the condition (financial or otherwise), properties, business, results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or (ii) questions the validity of any of the securities of the Company, this Agreement or the Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement or the Warrant Agreement; and no labor disturbance by the employees of the Company or any of the Subsidiaries exists or is imminent which might 6 7 reasonably be expected to affect materially and adversely such condition, properties, business, results of operations or prospects or the Company's business. None of Company or any of the Subsidiaries is a party or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. (m) The Company and each Subsidiary has good and valid title to all the properties and assets reflected as owned in the financial statements hereinabove described or as described elsewhere in the Prospectus, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements or as described elsewhere in the Prospectus and (ii) those which are not material in amount and do not materially and adversely affect the use made and proposed to be made of such property and assets by the Company and the Subsidiaries. The Company and each Subsidiary holds its leased properties under valid and binding leases, with such exceptions as are not materially significant in relation to the business of the Company and the Subsidiaries. Except as disclosed in the Prospectus, the Company and the Subsidiaries own or lease all such properties as are necessary to their respective operations as now conducted. (n) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) neither the Company nor any of the Subsidiaries have incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could reasonably be expected to result in a material reduction in the future earnings of the Company and each of the Subsidiaries, taken as a whole; (ii) the Company and the Subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, earthquake, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company and each of the Subsidiaries are not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the sale of the Common Shares hereunder) or indebtedness of the Company or any of the Subsidiaries that is material to the Company and the Subsidiaries, taken as a whole (other than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (o) The Company and each of the Subsidiaries have sufficient trademarks, trade names, service marks, patent rights, mask works, copyrights, licenses, know-how and other similar rights and proprietary knowledge (collectively, "Intangibles") to conduct their respective businesses as now conducted, and the Company has no knowledge of any material infringement by any of the Company or the Subsidiaries of any Intangible of others, and there is no claim being made against the Company or the Subsidiaries regarding any Intangible which could have a 7 8 material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (p) The Company has not been advised, and has no reason to believe, that any of the Company or any Subsidiary is not conducting its business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, state and federal environmental laws and regulations, except where failure to be in compliance therewith would not materially and adversely affect the condition (financial or otherwise), business, results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (q) The Company and each of the Subsidiaries have filed, or applied in good faith for extensions of, all necessary federal, state and foreign tax returns and have paid all taxes shown as due thereon; and the Company has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company or the Subsidiaries which could materially and adversely affect the business, operations or properties of the Company and the Subsidiaries, taken as a whole. (r) Neither the Company nor any of the Subsidiaries is, and upon completion of the sale of Common Shares contemplated hereby will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (s) The Company has not distributed and will not distribute prior to the First Closing Date any offering materials in connection with the offering and sale of the Common Shares other than any Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the Act. (t) The Company and each of the Subsidiaries maintains insurance of the types and in the amounts generally deemed adequate for its respective business, including, but not limited to, insurance covering aircraft, aircraft parts and components and real and personal property owned or leased by the Company or any Subsidiary, against loss, theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (u) Neither the Company nor any of the Subsidiaries has at any time during the past five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (v) All material transactions between the Company or the Subsidiaries and their respective officers and directors and their affiliates have been accurately disclosed in the 8 9 Prospectus; and the terms of such transactions are fair to the Company and/or the Subsidiaries, as the case may be. (w) Neither the Company nor any of the Subsidiaries has taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. Any certificate signed by any officer of the Company and delivered to you or to your counsel shall be deemed a representation and warranty by the Company to you as to the matters covered thereby. Any certificate delivered by the Company to its counsel for purposes of enabling such counsel to render the opinions referred to in Section 7(e) will also be furnished to the Underwriter and its counsel and shall be deemed to be additional representations and warranties by the Company to the Underwriter as to the matters covered thereby and the Underwriter and its counsel are entitled to rely thereon. SECTION 2. Reserved. SECTION 3. Representations and Warranties of the Underwriters. The Representatives, on behalf of the several Underwriters, represent and warrant to the Company that the information set forth (i) on the cover page of the Prospectus with respect to price, underwriting discounts and commissions and terms of offering and (ii) under the caption "Underwriting" in the Prospectus was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus, and such information is correct in all material respects. The Representatives represent and warrant that they have been authorized by each of the other Underwriters as the Representatives to enter into this Agreement on behalf of each such Underwriter and to act on behalf of each such Underwriter in the manner herein provided. SECTION 4. Purchase, Sale and Delivery of Common Shares. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter the number of Firm Common Shares set forth herein or in Schedule A hereto, and each Underwriter agrees, severally and not jointly, to purchase from the Company the number of Firm Common Shares set forth opposite their respective names in Schedule A hereto. The purchase price per share to be paid by the several Underwriters shall be $_____ per share. (b) Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Sutro & Co. Incorporated, 11150 Santa Monica Boulevard, Suite 1500, Los Angeles, California (or such other place as may be agreed upon by the Company and the Representatives) at 7:00 a.m., local time, on ________, 1997 (or at such other time and date, not later than one week after such date, as may be agreed 9 10 upon by the Company and the Underwriters) (the "First Closing Date"); provided, however, that if the Prospectus is at any time prior to the First Closing Date recirculated to the public, the First Closing Date shall occur upon the later of the third full business day following the first date that any of the Common Shares are released by you for sale to the public or the date that is 48 hours after the date that the Prospectus has been so recirculated. Delivery of certificates for the Firm Common Shares shall be made by or on behalf of the Company to you, for the respective accounts of the several Underwriters, against payment by you, for the accounts of the several Underwriters, of the purchase price therefor by wire transfers payable in same day funds to such account as the Company shall have designated to the Representatives in writing at least two business days prior to the First Closing Date. The certificates for the Firm Common Shares shall be registered in such names and denominations as you shall have requested at least two business days prior to the First Closing Date, and shall be made available for checking and packaging on the business day preceding the First Closing Date at such location in [New York, New York] as may be designated by you. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (c) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 273,000 Optional Common Shares at the purchase price per share to be paid by the Underwriters for the Firm Common Shares, for use solely in covering any over-allotments made by the Underwriters for the account of the Underwriters in the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) within 45 days after the first date that any of the Common Shares are released by you for sale to the public, upon notice by you to the Company setting forth the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such Optional Common Shares are to be registered and the time and place at which such certificates are to be delivered. Such time of delivery (which may not be earlier than the First Closing Date and being herein referred to as the "Second Closing Date") shall be determined by you, but if at any time other than the First Closing Date shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. The number of Optional Common Shares to be purchased by each Underwriter shall be determined by multiplying the number of Optional Common Shares to be sold by the Company pursuant to such notice of exercise by a fraction, the numerator of which is the number of Firm Common Shares to be purchased by such Underwriter as set forth opposite its name in Schedule A and the denominator of which is 1,820,000 (subject to such adjustments to eliminate any fractional share purchases as you in your discretion may make). Certificates for the Optional Common Shares being purchased will be made available for checking and packaging on the business day preceding the Second Closing Date at such location in [New York, New York] as may be designated by you. The manner of payment for and delivery of such Optional Common Shares shall be the same as for the Firm Common Shares purchased from the Company as specified in 10 11 the two preceding paragraphs. At any time before lapse of the option, you may cancel such option by giving written notice of such cancellation to the Company. (d) You have advised the Company that each Underwriter has authorized you to accept delivery of its Common Shares, to make payments and receipt therefore. You, individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payments for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by you by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (e) Subject to the terms and conditions hereof, the Underwriters propose to make a public offering of their respective portions of the Common Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and at the public offering price per share (the "Offering Price") set forth on the cover page of and on the terms set forth in the final prospectus, if one is used, or on the first page of the Term Sheet, if one is used. (f) On the First Closing Date, the Company shall issue and sell to Sutro & Co. Incorporated, at a purchase price of $0.01, a warrant (the "Sutro Warrant") entitling the holder(s) thereof to purchase from the Company an aggregate of 182,000 shares of the Common Stock. The Sutro Warrant shall be exercisable for a period of three (3) years commencing one (1) year from the effective date of the Registration Statement at a price per share equal to one hundred twenty percent (120%) of the Offering Price. The Sutro Warrant shall be substantially in the form of the Common Stock Purchase Warrant attached hereto as Exhibit A (the "Warrant Agreement"), which the Company and Sutro & Co. Incorporated shall enter into on the First Closing Date, along with a related Registration Rights Agreement substantially in the form attached hereto as Exhibit B. SECTION 5. Covenants of the Company. The Company hereby covenants and agrees that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective. If the Registration Statement has become or becomes effective pursuant to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, the Company will file the Prospectus, properly completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules and Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company will promptly advise you in writing (i) of the receipt of any comments of the Commission, (ii) of any request of the Commission for amendment of or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus or for additional information, (iii) when the Registration Statement shall have become effective and (iv) of the issuance by the Commission 11 12 of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose. If the Commission shall enter any such stop order at any time, the Company will use its commercially reasonable best efforts to obtain the lifting of such order at the earliest possible time. The Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus if you have not been furnished with a copy a reasonable time prior to such filing, if you reasonably object to the Company filing such document or if the document to be filed is not in compliance with the Act and the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or the Prospectus which in your judgment may be necessary or advisable to enable the Underwriters to continue the distribution of the Common Shares and will use its best efforts to cause the same to become effective as promptly as possible. The Company will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) If at any time during which a prospectus relating to the Common Shares is required to be delivered under the Act any event occurs, as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements, to comply with the Act or the Rules and Regulations, the Company will promptly advise you thereof and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment or supplement which will effect such compliance and will use its best efforts to cause the same to become effective as soon as possible. (d) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company, at its expense, will furnish to you or mail to your order copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you may reasonably request, for the purposes contemplated in the Act. (e) As soon as practicable, but not later than 50 days after the end of the first quarter ending after the first anniversary of the effective date of the Registration Statement (as defined in Rule 158(c) of the Rules and Regulations), the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of 12 consecutive months beginning after the effective date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. 12 13 (f) The Company shall cooperate with you and your counsel in order to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as you designate, will comply with such laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, will use its best efforts to obtain the withdrawal thereof. (g) For a period of five years from the First Closing Date, the Company will furnish to the Representatives: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the consolidated balance sheet of the Company as of the close of such fiscal year and consolidated statements of income, shareholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement and annual and other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. (h) During the period of 180 days after the effective date of the Registration Statement, without the prior written consent of Sutro & Co. Incorporated (which consent may be withheld at the sole discretion of Sutro & Co. Incorporated), the Company will not issue, offer, sell or otherwise dispose of any shares of Common Stock of the Company or any securities convertible into or exchangable for shares of Common Stock of the Company, other than (i) the sale of the Common Shares hereunder; (ii) the issuance of Common Stock of the Company pursuant to the exercise of options under the Company's stock plans disclosed in the Prospectus; or (iii) the granting of stock options after the date of the Prospectus under the Company's stock plans disclosed in the Prospectus. (i) The Company will apply the net proceeds of the sale of the Common Shares substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus. (j) The Company will use its best efforts to designate and maintain the Common Stock for quotation on the Nasdaq National Market. (k) The Company will file with the Commission such reports on Form SR as may be required by Rule 463 under the Act. 13 14 You, on behalf of the Underwriters, may, in your sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 6. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective or is terminated, the Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limiting the generality of the foregoing: (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of counsel and independent accountants of the Company and the Subsidiaries, (v) all costs and expenses incurred in connection with the printing, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire, the Underwriters' Power of Attorney, the Preliminary and the Final Blue Sky Memoranda, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the U.S. state Blue Sky laws, (vii) the NASD and any fees and expenses relating to the inclusion of the Common Shares on the Nasdaq National Market, and (viii) all other fees, costs and expenses referred to in Item 13 of the Registration Statement. Except as provided in this Section 6, Section 8 and Section 10 hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualification, registration or exemption under the securities and Blue Sky laws and the Blue Sky Memoranda referred to above). SECTION 7. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M. (or in the case of a registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not later than 10:00 P.M.), Washington, D.C. time, on the date of this Agreement, or at such later time as shall have been consented to by you; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the 14 15 Rules and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and prior to such Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company or you, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your satisfaction. (b) Since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) except as set forth in or contemplated by the Registration Statement or the Prospectus, there shall not have been any change in the capital stock of the Company or any of the Subsidiaries or any material change in the indebtedness (other than in the ordinary course of business) of the Company or any of the Subsidiaries, (ii) except as set forth in or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company or any of the Subsidiaries, which is not in the ordinary course of business or which could reasonably be expected to result in a material reduction in the future earnings of the Company and the Subsidiaries, taken as a whole, (iii) no loss or damage (whether or not insured) to the property of the Company, or any of the Subsidiaries shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and the Subsidiaries, taken as a whole, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of the Subsidiaries which is material to the Company and the Subsidiaries, or which affects or may affect the transactions contemplated by this Agreement shall have been instituted or threatened and (v) there shall not have been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and the Subsidiaries, taken as a whole, which makes it impractical or inadvisable in your reasonable judgment to proceed with the public offering or purchase the Common Shares as contemplated hereby. (c) There shall have been delivered to you the Firm Common Shares and, if any Optional Common Shares are then being purchased, such Optional Common Shares. (d) The NASD, upon review of the terms of the public offering of the Common Shares, shall not have objected to the fairness and reasonableness of the underwriting terms and arrangements as proposed in this Agreement. (e) There shall have been furnished to you, as Representatives of the Underwriters on each Closing Date, in form and substance reasonably satisfactory to you, except as otherwise expressly provided below: (i) An opinion of O'Melveny & Myers LLP, counsel for the Company and each of the Subsidiaries, addressed to the Underwriters and dated the 15 16 First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) Each of the Company and each of the Subsidiaries has been duly organized and is validly existing in good standing under the laws of its jurisdiction of incorporation, with corporate power to own its properties and assets, to carry on its business as described in the Prospectus, and, as to the Company, to enter into this Agreement and to perform its obligations under this Agreement. (2) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of the capital stock of the Company have been duly authorized by all necessary corporate action on the part of the Company and are validly issued, fully paid and non-assessable. (3) The Common Shares being issued and sold by the Company and the shares of Common Stock to be issued by the Company upon exercise of the Sutro Warrant have been duly authorized by all necessary corporate action on the part of the Company and, upon payment for and delivery of such shares in accordance with this Agreement and the Warrant Agreement and the countersigning of the certificate or certificates representing such shares by a duly authorized signatory of the registrar for the Common Stock, such shares will be validly issued, fully paid and non-assessable. (4) The statements in the Prospectus under the caption "Description of Capital Stock", insofar as they summarize provisions of the Articles of Incorporation and Bylaws of the Company, and the statements in the Prospectus under the caption "Business -- Regulation", insofar as they summarize matters of law, fairly present the information required by Form S-1. (5) The outstanding shares of the capital stock of each Subsidiary have been duly authorized by all necessary corporate action on the part of each such corporation, are validly issued, fully paid and non-assessable, and are owned of record by the Company. (6) Holders of the capital stock of the Company are not entitled to any preemptive right to subscribe to any additional shares of the Company's capital stock under the Company's Articles of Incorporation or Bylaws. (7) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued or threatened by the Commission. 16 17 (8) The Registration Statement and each amendment thereto, on the date it was filed, appeared on its face to comply in all material respects with the requirements as to form for registration statements on Form S-1 under the Act and the Rules and Regulations in effect at the date of filing, except such counsel need express no opinion concerning the financial statements and other financial information contained therein. (9) Such counsel does not know of any contract or other document of a character required to be filed as an exhibit to the Registration Statement which is not filed as required. (10) The execution, delivery and performance of this Agreement and the Warrant Agreement have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement and the Warrant Agreement have been duly executed and delivered by the Company. (11) No order, consent, permit or approval by any California or federal governmental authority is required on the part of the Company for the execution and delivery of this Agreement or the Warrant Agreement, or for the issuance and sale of the Common Shares being sold by the Company under this Agreement or the issuance of the shares of Common Stock upon exercise of the Sutro Warrant, except as have been obtained under the Act and as may be required under applicable Blue Sky or state securities laws or by the NASD. (12) The execution and delivery by the Company of this Agreement and the Warrant Agreement, and the performance of the Company's obligations on or prior to the date of this opinion under this Agreement do not (i) violate any California or federal statute, rule or regulation that such counsel has, in the exercise of customary professional diligence, recognized as applicable to the Company or to transactions of the type contemplated by this Agreement, except that such counsel need express no opinion regarding any federal securities laws, the Blue Sky or state securities laws or with respect to Section 10 of this Agreement, except as otherwise expressly stated in such counsel's opinion; or (ii) violate, breach or result in a default under the articles or certificates of incorporation or bylaws of the Company or any Subsidiary or under any of the agreements, instruments, contracts, orders, injunctions or judgments identified to such counsel in a certificate of officers of the Company as agreements, instruments, contracts, orders, injunctions or judgments binding on the Company or any of the Subsidiaries which have provisions relating to the issuance by the Company of capital stock, except such counsel need express no opinion regarding the effect, if any, of the issuance of the Common Shares upon the Company's or Subsidiary's compliance with any of the financial covenants contained in any of said agreements, instruments, contracts, orders, injunctions or judgments. 17 18 (13) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Except for such matters described in an attachment to such counsel's opinion, such counsel shall state that it has not, since January 1, 1995, given substantive attention on behalf of the Company or any Subsidiary to, or represented the Company or any Subsidiary in connection with, any actions, suits or proceedings pending or threatened against the Company or any Subsidiary before any court, arbitrator or governmental agency. Such counsel may call to your attention the fact that its engagement is limited to specific matters as to which it is consulted by the Company or any Subsidiary. Such counsel shall state that in connection with such counsel's participation in the preparation of the Registration Statement and the Prospectus, such counsel has not independently verified the accuracy, completeness or fairness of the statements contained therein, and the limitations inherent in the examination made by such counsel and the knowledge available to such counsel are such that such counsel is unable to assume, and does not assume, any responsibility for such accuracy, completeness or fairness (except as otherwise specifically stated in paragraph 4 above), However, on the basis of such counsel's review and participation in conferences in connection with the preparation of the Registration Statement and the Prospectus, and relying as to materiality to a large extent upon opinions of officers and other representatives of the Company, such counsel shall state that it does not believe that the Registration Statement as of its effective date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and counsel shall state that it does not believe that the Prospectus as of its date and as of the date of such opinion, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. However, such counsel need express no opinion or belief as to the financial statements and other financial information contained in the Registration Statement or the Prospectus. In rendering such opinions, such counsel may rely (A) as to matters involving the application of the laws of any jurisdiction other than the federal laws of the United States of America, the laws of the State of California and the General Corporation Law of the State of Nevada, to the extent deemed proper and specified in such opinion, upon the opinion of other counsel who are satisfactory to counsel for the Underwriters and (B) as to matters of fact, to the extent deemed proper, on certificates of responsible officers of the Company and public officials. 18 19 (ii) Such opinion or opinions of Manatt, Phelps & Phillips, LLP, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinions, such counsel may rely on representations or certificates of officers of the Company and governmental officials. (iii) A certificate of the Company executed by the Chief Executive Officer and the Chief Financial Officer of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) The representations and warranties of the Company set forth in Section 1 of this Agreement were true and correct as of the date of this Agreement and are true and correct in all material respects as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied in all material respects with all the agreements and satisfied in all material respects all the conditions on its part to be performed or satisfied on or prior to such Closing Date. (2) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment or supplement thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act. (3) Each of the respective signers of the certificate has carefully examined the Registration Statement and the Prospectus; in his opinion and to the best of his knowledge, the Registration Statement and the Prospectus and any amendments or supplements thereto contain all statements required to be stated therein regarding the Company; and neither the Registration Statement nor the Prospectus nor any amendments or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (4) Since the initial date on which the Registration Statement was filed, no agreement, whether written or oral, transaction or event has occurred which should have been set forth in an amendment to the Registration Statement 19 20 or in a supplement to or amendment of any prospectus which has not been disclosed in such a supplement or amendment. (5) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), business, properties, results of operations, management or prospects of the Company and the Subsidiaries; and no legal or governmental action, suit or proceeding is pending or threatened against the Company or any Subsidiary which is material to the Company and the Subsidiaries, whether or not arising from transactions in the ordinary course of business, or which may adversely affect the transactions contemplated by this Agreement; since such dates and except as so disclosed, the Company and the Subsidiaries have not entered into any verbal or written agreement or other transaction which could result in a material reduction in the future earnings of the Company and the Subsidiaries or incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock, made any material change in its short-term debt or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to shareholders of record on a date prior to the First Closing Date or Second Closing Date; and (6) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed in or contemplated by the Prospectus, the Company and its Subsidiaries have not sustained a material loss or damage by strike, fire, flood, windstorm, accident or other calamity (whether or not insured). (iv) On the date before this Agreement is executed and also on each Closing Date, a letter addressed to you, as Representatives of the Underwriters, from KPMG Peat Marwick LLP, independent accountants, the first one to be dated the date of this Agreement, the second one to be dated the First Closing Date and the third one (in the event of a second closing hereunder) to be dated the Second Closing Date, in form and substance reasonably satisfactory to you, to the effect that they are independent public accountants with respect to the Company within the meaning of the Act and the related Rules and Regulations, and containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (v) On or before the First Closing Date, letters from [each] shareholder, director and executive officer of the Company, in form and substance reasonably 20 21 satisfactory to you, (i) confirming that for a period of 180 days from the date of the Prospectus, such person will not, directly or indirectly, offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights or options with respect to (each, a "Disposition") any shares of the Common Stock, any options or warrants to purchase any shares of the Common Stock or any securities convertible into or exercisable or exchangeable for shares of the Common Stock, whether then owned or thereafter acquired by such person or with respect to which such person has or thereafter acquires the power of disposition, or transfer, in any manner, all or a portion of the economic consequences associated with the ownership of such Common Stock, any options or warrants to purchase any shares of the Common Stock or any securities convertible into or exercisable or exchangeable for shares of the Common Stock, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by the terms of such letter, (ii) as a distribution to partners or shareholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of such letter, or (iii) with the prior written consent of the Representatives, which consent may be withheld in the sole discretion of the Representatives. (f) On or before the date any of the Common Shares are released by the Representatives for sale to the public and on the First Closing Date, the Common Shares shall be authorized for quotation on the Nasdaq National Market. (g) The Common Shares shall be qualified for sale in such States and jurisdictions as the Representatives may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the First Closing Date and the Second Closing Date. (h) On or before the Closing Date, the Company shall have executed and delivered to Sutro & Co. Incorporated, the Warrant Agreement, substantially in the form of Exhibit A hereto, and the Registration Rights Agreement, substantially in the form of Exhibit B hereto. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory to you and to Manatt, Phelps & Phillips, LLP, counsel for the Underwriters. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification by you to the Company without liability on the part of you or any Underwriter or the Company except for the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof. 21 22 SECTION 8. Reimbursement of Underwriters' Expenses. Notwithstanding any other provisions hereof, if this Agreement shall be terminated by you pursuant to Section 7 or Section 13b(iii) or (iv) hereof, or if the sale to the Underwriters of the Firm Common Shares at the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse you and the other Underwriters upon demand for all out-of-pocket expenses that shall have been reasonably incurred by them in connection with the proposed purchase and the sale of the Firm Common Shares, including but not limited to reasonable fees and disbursements of counsel, printing expenses, travel expenses, postage and telephone charges relating directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section and Section 6 and Section 10 hereof shall at all times be effective and shall apply. SECTION 9. Effectiveness of Registration Statement. You and the Company will use your and its respective best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 10. Indemnification and Contribution. (a) The Company agrees to (i) indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages, liabilities or expenses, joint or several, to which such Underwriter or such controlling person may become subject, under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them not misleading, or arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company contained herein or any failure of the Company to perform its obligations hereunder or under law; and (ii) reimburse each Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made (i) in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance 22 23 upon and in conformity with the information furnished to the Company pursuant to Section 3 hereof; or (ii) in any Preliminary Prospectus if a copy of the Prospectus (or the Prospectus as then amended or supplemented) was not sent or given by or on behalf of the Underwriters to such person at or prior to the written confirmation of the sale of such Common Shares to such person in any case where such delivery is required by the Act, such untrue statement contained in or omission from such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as so amended or supplemented) and the Company had previously furnished copies of such corrected Prospectus to the Underwriters. In addition to its other obligations under this Section 10(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any untrue statement or omission, or any alleged untrue statement or omission, or any inaccuracy in the representations and warranties of the Company or any failure to perform its obligations hereunder, all as described in this Section 10(a), the Company will reimburse each Underwriter (and to the extent applicable each controlling person) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse each Underwriter (and to the extent applicable each controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter (and to the extent applicable each controlling person) shall promptly return it to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by [BANK OF AMERICA NT&SA, SAN FRANCISCO], California (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees to severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages, liabilities or expenses to which the Company or any such director, officer or controlling person may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements in any of them not misleading, in each case to the extent, but only to the extent, that 23 24 such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished to the Company pursuant to Section 3 hereof; and will reimburse the Company and each such director, officer or controlling person for any legal and other expenses, as such expenses are reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. In addition to its other obligations under this Section 10(b), each Underwriter severally agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any untrue statement or omission, or any alleged untrue statement or omission, described in this Section 10(b) which relates to information furnished to the Company pursuant to Section 3 hereof; it will reimburse the Company and each such officer, director or controlling person on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and each such officer, director or controlling person for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company and each such officer, director or controlling person shall promptly return it to the Underwriters, together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the appropriate person within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Underwriters may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under the indemnity agreement contained in this Section or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise 24 25 participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Underwriters in the case of paragraph (a) of this Section 10, representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying party. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent, which will not be unreasonably withheld. (d) If the indemnification provided for in this Section 10 is required by its terms but is for any reason held to be unavailable to hold harmless an indemnified party under subsections (a), (b) or (c) of this Section 10 in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Common Shares and the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion, in the case of the Company, as the total price paid to the Company for the Common Shares sold by it to the Underwriters (net of underwriting commissions but before deducting expenses), and, in the case of the Underwriters, as the underwriting commissions received by them, bears to the total of such amounts paid to the Company and the amounts received by the Underwriters as underwriting commissions. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subsection (c) of this Section 10, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. 25 26 The provisions set forth in subsection (c) of this Section 10 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this subsection (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under subsection (c) for purposes of indemnification. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined solely by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 10, no Underwriter shall be required to contribute any amount in excess of the amount of the total underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 10 are several in proportion to their respective underwriting commitments and not joint. (e) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 10(a) and 10(b) hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein selecting the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in Sections 10(a) and 10(b) hereof and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of such Sections 10(a) and 10(b) hereof. SECTION 11. Default of Underwriters. It shall be a condition to this Agreement and the obligations of the Company to sell and deliver the Common Shares hereunder, and of each Underwriter to purchase the Common Shares in the manner as described herein, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all the Common Shares agreed to be purchased by such Underwriter hereunder upon tender to the Underwriters of such shares in accordance with the terms hereof. If applicable, if any Underwriter or Underwriters default in their obligations to purchase Common Shares hereunder on either the First or Second Closing Date, and the aggregate number of Common Shares which such defaulting entity agreed but failed to purchase on such Closing Date does not exceed 10% of the total number of Common Shares which the Underwriters are obligated to purchase on such Closing Date, the nondefaulting entities shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Common Shares which such defaulting entities agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so 26 27 default and the aggregate number of Common Shares with respect to which such default occurs is more than the above percentage, and arrangements satisfactory to you and the Company for the purchase of such Common Shares by other persons are not made within two full business days after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company, except for the expenses to be paid by the Company pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof. If applicable, in the event that Common Shares to which a default relates are to be purchased by a nondefaulting Underwriter or by another person or persons, the Representatives shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus, this Agreement and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 12. Effective Date. This Agreement shall become effective immediately as to Sections 6, 8, 10, 13 and 14 hereof and, as to all other provisions, (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 6:30 a.m., California time, on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement the Registration Statement has been declared effective, at 6:30 a.m., California time, on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section 12, the Common Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by you of notices (i) advising Underwriters that the Common Shares are released for public offering, or (ii) offering the Common Shares for sale to securities dealers, whichever may occur first. SECTION 13. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company or by you by notice to the other parties hereto at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company to you or any Underwriter (except for the expenses to be paid by the Company pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof) or of you or any Underwriter to the Company (except to the extent provided in Section 10 hereof). (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to the Company (i) if material governmental restrictions, not in force and effect 27 28 on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal, New York or California authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the reasonable judgment of the Representatives, to affect materially and adversely the marketability of the Common Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or the Prospectus or which is not reflected in the Registration Statement or the Prospectus but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect or (iv) if there shall be any action, suit or proceeding pending or threatened, or there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or any of the Subsidiaries or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Representatives, may materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Common Shares. Any termination pursuant to this Section 13(b) shall be without liability on the part of any Underwriter to the Company or on the part of the Company to you or any Underwriter (except for expenses to be paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof). SECTION 14. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, its officers and the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company, or any of its or their partners, officers or directors or any controlling persons, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder. SECTION 15. Notices. All communications hereunder shall be in writing and, if sent to the Underwriters, shall be mailed, delivered or telecopied and confirmed to you at 1150 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025, with a copy to Manatt, Phelps & Phillips, LLP, 11355 W. Olympic Blvd., Los Angeles, California 90064, Attention: Paul H. Irving, Esq., FAX: (310) 312-4224; if sent to the Company, shall be mailed, delivered or telecopied and confirmed to the Company at 3655 Torrance Boulevard, Suite 410, Torrance, California 90503, Attention: William E. Lindsey, FAX: (310) 316-8145, with a copy to O'Melveny & Myers LLP, 400 South Hope Street, Los Angeles, California 90071, Attention: Richard A. Boehmer, Esq., FAX: (213) 669-6407. The Company or you may change the address for receipt of communications hereunder by giving notice to the others. 28 29 SECTION 16. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 11 hereof, and to the benefit of the officers and directors and controlling persons referred to in Section 10 hereof, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. No such assignment shall relieve any party of its obligations hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 17. Representation of Underwriters. You will act as Representatives for the several Underwriters in connection with all dealings hereunder, and any action under or in respect of this Agreement taken by you, as Representatives, will be binding upon all the Underwriters. SECTION 18. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 19. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of California. SECTION 20. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original, and all of which shall constitute one and the same document. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The Section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and you. 29 30 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement between the Company and you, all in accordance with its terms. Very truly yours, INTERNATIONAL AIRCRAFT INVESTORS By:______________________________ William E. Lindsey, Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted by us in Los Angeles, California as of the date first above written. SUTRO & CO. INCORPORATED FRIEDMAN, BILLINGS, RAMSEY & CO., INC. As Representatives of the several Underwriters By Sutro & Co. Incorporated By: _____________________________ Its:_____________________________ 30 31 SCHEDULE A SCHEDULE OF UNDERWRITERS
Number of Firm Common Shares Name of Underwriter to be Purchased - ------------------- --------------- Sutro & Co. Incorporated . . . . . . . . . . . . . . . . . . Friedman, Billings, Ramsey & Co., Inc. . . . . . . . . . . . [NAMES OF OTHER UNDERWRITERS]. . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . .
32 EXHIBIT A WARRANT AGREEMENT 33 EXHIBIT A THE SECURITIES REPRESENTED BY THIS DOCUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON EXEMPTIONS THEREFROM. THE HOLDER MAY NOT OFFER, SELL, TRANSFER, ASSIGN, PLEDGE, HYPOTHECATE, OR OTHERWISE DISPOSE OF OR ENCUMBER THE SECURITIES REPRESENTED BY THIS DOCUMENT EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS, OR UPON RECEIPT BY THE ISSUER OF AN OPINION OF LEGAL COUNSEL FOR THE HOLDER REASONABLY SATISFACTORY TO THE ISSUER AND ITS LEGAL COUNSEL THAT SUCH OFFER, SALE, TRANSFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, OR OTHER DISPOSITION OR ENCUMBRANCE IS EXEMPT FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER AND THE REGISTRATION AND/OR QUALIFICATION PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. Warrant to Purchase up to 182,000 Shares of Common Stock (subject to adjustment) INTERNATIONAL AIRCRAFT INVESTORS COMMON STOCK PURCHASE WARRANT Void after April ___, 2001 This certifies that, for value received, Sutro & Co. Incorporated, a Delaware corporation, or its transferee(s) as provided herein (in any event, the "Holder") is entitled, subject to the terms set forth below, to purchase from International Aircraft Investors, a California corporation (the "Company"), one hundred and eighty-two thousand (182,000) shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), as constituted on the date hereof, upon surrender hereof with the Notice of Exercise attached hereto (the "Notice of Exercise") duly executed, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the exercise price as set forth in Section 2 hereof. The number, character, and exercise price of such shares of Common Stock are subject to adjustment as provided below. 1. TERM OF WARRANT. Subject to the terms and conditions set forth herein, this Warrant shall become exercisable on April ____, 1998, and shall remain exercisable until 5:00 p.m. Pacific time on April ___, 2001, and shall be void thereafter. 1 34 2. EXERCISE AND ADJUSTMENTS. 2.1 Exercise Price. The exercise price at which this Warrant may be exercised is ________________________ ($_____) per share of Common Stock, subject to adjustment as set forth herein (as adjusted, the "Exercise Price"). 2.2 Adjustment for Stock Splits and Combinations. If the Company should, at any time or from time to time after the date hereof, fix a record date for a split, subdivision, or combination of the outstanding shares of Common Stock, then as of such record date (or the date of such stock split, subdivision, or combination if no record date is fixed) the number of shares of Common Stock that this Warrant is exercisable to purchase as of such time shall be adjusted to be the same number of shares of Common Stock that the Holder would have if this Warrant had been exercised immediately prior to such split, subdivision, or combination. The Exercise Price shall be adjusted to be the then Exercise Price multiplied by a fraction, the numerator of which is the number of shares of Common Stock purchasable under this Warrant immediately prior to such stock split, subdivision, or combination, and the denominator of which is the number of shares of Common Stock purchasable by this Warrant immediately after such event. 2.3 Adjustment for Dividends in Stock or Other Securities or Property. If the Company should, at any time or from time to time after the date hereof, fix a record date for the determination of eligible stockholders to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the Common Stock receivable upon exercise of this Warrant, and without payment of any additional consideration therefor upon such exercise, the amount of such other or additional stock or other securities or property (other than cash) of the Company receivable upon payment of such dividend as a holder of the number of shares of Common Stock for which this Warrant would have been exercisable immediately prior to such record date would have had been entitled to receive, and had such holder thereafter, during the period from the date of payment of such dividend to and including the date of exercise of this Warrant, retained such shares and/or all other additional stock payable in such dividend or dividends during such period, giving effect to all adjustments called for during such period by the provisions of this Section 2. 2.4 Adjustment for Reclassification, Exchange, or Substitution. If the Common Stock issuable upon the exercise of this Warrant shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution, or otherwise (other than a stock split, combination or dividend provided for in Sections 2.2 or 2.3 hereof, or a reorganization, merger, consolidation, or sale of assets provided for in Section 2.5 hereof), then and in such event the Holder shall have the right thereafter to receive upon exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable upon such reclassification, exchange, substitution, or other change as a holder of the number of shares of Common Stock for which this Warrant would have been exercisable immediately prior to such reclassification, exchange, substitution, or other change would have had. 2 35 2.5 Reorganization, Merger, Consolidation, or Sale of Assets. If at any time or from time to time, there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification, or exchange of shares provided for elsewhere in this Section 2) or a merger or consolidation of the Company with or into another entity where the Company is not the surviving entity, or the sale of all or substantially all of the Company's assets to any other person, then as a part of such reorganization, merger, consolidation, or sale, effective provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities, instruments or property of the Company or of the successor entity resulting from such merger, consolidation, or sale to which a holder of the Common Stock issuable upon exercise of this Warrant would have been entitled upon such capital reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 2.5 with respect to the rights of the Holder after such reorganization, merger, consolidation, or sale to the end that the provisions of this Section 2 (including adjustment of the exercise price then in effect) shall be applicable after that event as nearly equivalent as may be practicable. The provisions of this Section 2.5 shall similarly apply to successive reorganizations, mergers, consolidations or sale of assets, and to the stock, securities or instruments of any other entity which are at the time receivable upon the exercise of this Warrant. 2.6 Limits on Adjustments. No adjustment in the Exercise Price shall be required unless such an adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that any adjustments which by reason of this Section 2.6 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Notwithstanding anything in this Section 2 to the contrary, the Exercise Price shall not be reduced to less than the then existing par value of the Common Stock as a result of any adjustment made hereunder. 2.7 No Impairment. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 2. 2.8 Notice. (a) Whenever an adjustment is to be made pursuant to Sections 2.2, 2.3, 2.4 or 2.5 hereof, the Company shall issue and promptly provide to the Holder a certificate signed by the Company's Secretary setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the exercise price and number of shares or amount of property purchasable hereunder, after giving effect to such adjustment. 3 36 (b) In case (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another entity, or any sale, lease or conveyance of all or substantially all of the assets of the Company to another person, or (iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will promptly provide to the Holder a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. The Company shall provide such notice at least ten (10) days prior to the date therein specified. 3. EXERCISE OF WARRANT. 3.1 Manner of Exercise. The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, but not for less than one hundred (100) shares at a time (or such lesser number of shares which may then constitute the maximum number purchasable; such number being subject to adjustment as provided in Section 2 hereof), at any time or from time to time during the term hereof as described in Section 1 hereof, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), upon payment (i) in cash or other immediately available funds acceptable to the Company, (ii) by cancellation by the Holder of indebtedness of the Company to the Holder, or (iii) by a combination of (i) and (ii), of the purchase price of the shares of Common Stock to be purchased. 3.2 Effect of Exercise. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided in Section 3.1 hereof and the persons entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holders of record of such shares as of the close of business of such date. As promptly as practicable on or after such date, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares of Common Stock issuable upon such exercise. In the event that this Warrant is exercised in part, the Company shall execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. 4 37 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional shares to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the then exercise price multiplied by such fraction. 5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of loss, theft, or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company, or in the case of mutilation, on surrender and cancellation of the remainder of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. 6. NO RIGHTS AS STOCKHOLDER. Nothing contained herein shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matter or any right as a stockholder of the Company, and no dividends shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares of Common Stock obtainable hereunder until, and only to the extent that, this Warrant shall have been exercised as set forth herein. 7. TRANSFERS OF THE WARRANT. 7.1 Company Records. The Holder may change its address as shown on the Company records by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to the Holder at the address shown on the Company records. Until this Warrant is transferred on the Company records, the Company may treat the Holder as shown on the Company records as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. 7.2 Warrant Agent. The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Company records referred to in Section 7.1 hereof, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging or replacing this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent. 7.3 Transfer of Warrant. The Holder may not transfer or assign this Warrant in whole or in part without compliance with all applicable federal and state securities laws and the rules and regulations thereunder (the "Securities Laws") by the Holder and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). In addition, this Warrant may not be sold, transferred, assigned, pledged or hypothecated for a period of twelve (12) months from the date hereof, except (i) to officers or partners of Sutro & Co. Incorporated, (ii) to other members of the 5 38 underwriting or selling group for the Company's initial public offering to which this Warrant relates, (iii) to the officers or partners of such other members, or (iv) otherwise without compliance with the Corporate Financing Rule of the National Association of Securities Dealers, Inc. Subject to the foregoing, title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. 7.4 Exchange of Warrant Upon a Transfer. On surrender of this Warrant, properly endorsed on the Assignment Form, for exchange, and subject to compliance with the Securities Laws and the limitations on assignment and transfer contained in this Section 7, the Company at its expense shall issue to or to the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder may direct for the number of shares issuable upon exercise hereof. 8. COMPLIANCE WITH SECURITIES LAWS 8.1 The Holder of this Warrant, by acceptance hereof, acknowledges that the shares of Common Stock to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of any shares of Common Stock to be issued upon exercise hereof, except under circumstances that will not result in a violation of the Securities Laws. Upon exercise of this Warrant, the Holder shall, if requested by the Company, and subject to the applicability of the Registration Rights Agreement between the Company and the Holder of even date herewith (the "Registration Rights Agreement"), confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. 8.2 Legend. Subject to the applicability of the Registration Rights Agreement, all shares of Common Stock issued upon exercise hereof may be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED. 6 39 9. RESERVATION OF COMMON STOCK. The Company covenants that during the term that this Warrant is exercisable, the Company will reserve from its authorized and unissued shares of Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant, and from time to time will take all steps necessary to provide sufficient reserves of shares of Common Stock issuable upon exercise of the Warrant, including, if necessary, amending its Articles of Incorporation. The Company further covenants that all shares that may be issued upon the exercise of rights represented by this Warrant, upon exercise of the rights represented by this Warrant and payment of the exercise price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 10. INFORMATION. During the term of this Warrant, the Company shall provide the Holder with the same financial information, annual reports, notices of stockholder meetings, and other information as and to the same extent that the Company provides the same to its stockholders from time to time. 11. GENERAL PROVISIONS. 11.1 Amendment. Any amendment or modification of this Warrant shall be in writing and shall be signed by all of the parties hereto. 11.2 Waiver. Any waiver of any right, power, or privilege hereunder must be in writing and signed by the party being charged with the waiver. No delay on the part of any party hereto in exercising any right, power, or privilege hereunder shall operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. 11.3 Notices. All notices or other communications required or permitted to be given pursuant to this Warrant shall be in writing and shall be delivered personally or sent by overnight courier or by first-class United States mail. Notices delivered personally or sent by overnight courier shall be effective on the date received, while notices sent by first-class mail shall be deemed to have been received and to be effective three (3) business days after deposit into the United States mails. Notices shall be given to the parties at the following respective addresses, or to such other addresses as any party shall designate in writing: If to the Company: International Aircraft Investors 3655 Torrance Blvd., Suite 410 Torrance, California 90503 Attn: Chief Executive Officer 7 40 If to the Holder: Sutro & Co. Incorporated 11150 Santa Monica Blvd., 15th Floor Santa Monica, California 90025 Attn: Scott E. Wendelin, Managing Director 11.4 Law Governing. This Warrant has been negotiated, executed, and delivered and shall be performed in the State of California and shall be governed by and construed and enforced in accordance with the laws of the State of California, without regard for its conflict of laws principles. 11.5 Counterparts. This Warrant may be executed in two or more counterparts, including by facsimile transmission, all of which together shall constitute a single instrument. 11.6 Construction. The headings in the Sections of this Warrant are for convenience only and shall not constitute a part hereof. Whenever the context so requires, the masculine shall include the feminine and the neuter, the singular shall include the plural, and conversely. The terms and all parts of this Warrant shall in all cases be interpreted simply and according to their plain meaning and neither for nor against any party hereto. IN WITNESS WHEREOF, the parties have duly executed and delivered this Warrant as of this ____ day of April, 1997. International Aircraft Investors Sutro & Co. Incorporated By: ____________________________ By:__________________________ Name: __________________________ Name:________________________ Its: ___________________________ Its:_________________________ 8 41 NOTICE OF EXERCISE To: International Aircraft Investors 1. The undersigned hereby elects to purchase ___________________ shares of the common stock (the "Common Stock") of International Aircraft Investors pursuant to the terms of the attached Common Stock Purchase Warrant (the "Warrant"), and tenders herewith payment of the purchase price for such shares in full. 2. In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock being purchased hereby are being acquired solely for the account of the undersigned and not as a nominee for any other party, for investment purposes only, and that the undersigned will not offer, sell, or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any applicable state securities laws. 3. Please issue a certificate or certificates representing such shares of Common Stock in the name of the undersigned or in such other name as specified below: ______________________________________ 4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ______________________________________ Date: _________________________ Sutro & Co. Incorporated By: __________________________________ Name: (Print) ________________________ Its: _________________________________ 42 ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of the attached Common Stock Purchase Warrant (the "Warrant") hereby sells, assigns, and transfers unto the Assignee named below all of the rights of the undersigned under the Warrant with respect to the number of shares of the common stock (the "Common Stock") of International Aircraft Investors (the "Company") set forth below: Name of Assignee Address Number of Shares and does hereby irrevocably constitute and appoint ___________________________, attorney-in-fact, to make such transfer on the books and records of the Company maintained for this purpose, with full power of substitution and resubstitution. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of Common Stock issuable on exercise hereof are being acquired for investment and not with a view toward distribution or resale, and that the Assignee will not offer, sell, or otherwise dispose of this Warrant or any shares of Common Stock issuable on exercise hereof except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any applicable state securities laws. Further, in compliance with Section 7.3 of the Warrant, the Assignee shall, if requested by the Company, confirm in writing in a form satisfactory to the Company that this Warrant or any shares of Common Stock issuable on exercise hereof are being acquired for investment and not with a view toward distribution or resale. Date: __________________________ ___________________________________ ___________________________________ ___________________________________ 43 EXHIBIT B REGISTRATION RIGHTS AGREEMENT 44 EXHIBIT B REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of April ___, 1997, by and among International Aircraft Investors, a California corporation (the "Company") and Sutro & Co. Incorporated, a Delaware corporation. RECITAL The Company is issuing to the Holder (as defined below) that certain Common Stock Purchase Warrant (the "Warrant"), of even date herewith, granting to the Holder the right to purchase up to 182,000 Shares of the Company's Common Stock, subject to adjustment, for $_______ per share. The Company desires to grant certain demand and incidental registration rights to the Holder in connection with the shares purchasable on exercise of the Warrant. NOW, THEREFORE, in consideration of the foregoing, the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and adequacy of which are here-by acknowledged, the parties hereby agree as follows: AGREEMENT 1. DEFINITIONS. Unless the context requires otherwise, the following underlined terms shall have the following respective meanings: 1.1 Agreement. This Registration Rights Agreement. 1.2 Common Stock. The Company's common stock, par value $0.01 per share. 1.3 Company. International Aircraft Investors, a California corporation. 1.4 Exchange Act. The Securities Exchange Act of 1934, as amended. 1.5 Holder or Holders. Sutro & Co. Incorporated and its permitted assigns. 1.6 Registrable Securities. The shares of Common Stock issued upon exercise of the Warrant. 1.7 Registration Expenses. All expenses of registration, including but not limited to registration and filing fees, including filing fees for Nasdaq and all stock exchanges on which the Common Stock is traded, fees and expenses of complying with the Securities Laws, printing expenses, transfer agent fees, and the fees and expenses of the Company's independent certified 1 45 public accountants, the Company's investment banker and underwriter and the Company's legal counsel, but excluding the Holder's brokerage fees, underwriting fees and discounts, transfer taxes, if any, and the fees and expenses of any Selling Shareholder's legal counsel. 1.8 SEC. The United States Securities and Exchange Commission. 1.9 Securities. The Warrant and the shares of Common Stock issuable on exercise thereof of the Warrant. 1.10 Securities Act. The Securities Act of 1933, as amended. 1.11 Securities Laws. The Securities Act, the Exchange Act and all applicable state securities laws, and all rules and regulations promulgated thereunder. 1.12 Selling Shareholder. With respect to any registration statement, any Holder whose Registrable Securities are included therein. 1.13 Sutro. Sutro & Co. Incorporated or its successors. 1.14 Warrant. The Company's Common Stock Purchase Warrant dated April ___, 1997, issued to the Holder and exercisable to purchase up to 182,000 shares of Common Stock at $_______ per share. 2. REGISTRATION RIGHTS. 2.1 Incidental Registration Rights. (a) Notice of Registration; Registration. Whenever the Company proposes to file a registration statement under the Securities Act to offer publicly shares of the Common Stock (other than in connection with any merger, acquisition, exchange offer, dividend reinvestment plan, employee benefit plan, or stock option plan), the Company shall give each Holder written notice of such intention at least twenty (20) days prior to the anticipated initial filing date of such registration statement. The Company shall include in such registration statement all Registrable Securities requested to be so included by a Holder upon written notice to the Company within ten (10) days of the Company's notice. If the registration statement is for an underwritten offering, the Selling Shareholder shall sell its Registrable Securities in such offering on the same terms and conditions as all other shares of Common Stock being offered in such registration statement. (b) Holdback. If the notice of registration under this Section 2.1 is for an underwritten public offering and the Company is advised in writing by the managing underwriter of such offering that in its reasonable judgment the number of Registrable Securities for which incidental registration is requested pursuant to this Agreement cannot be sold without impairing the ability to complete the preestablished plan for distribution of the Common Stock (the grounds for 2 46 which shall be confidentially disclosed to any Selling Shareholder who so requests and who agrees to maintain the confidentiality of such disclosure) then the number of Registrable Securities to be sold by the Selling Shareholder shall be reduced. The Company shall so advise all Holders proposing to distribute their securities through such underwriting and the number of shares of securities that may be included in the registration and underwriting (other than on behalf of the Company) shall be allocated among all Holders and such other holders, if any, with contractual rights to participate in such registration which are not subordinate to the Holders, in proportion, as nearly as practicable, to the respective amounts of Registrable Securities or other securities requested to be included in such registration by such Holders and such other holders. If the number of Registrable Securities of the Selling Shareholder is reduced, the Selling Shareholder may withdraw all or part of the Registrable Securities from registration without affecting such Selling Shareholder's registration rights hereunder for the Registrable Securities so withdrawn or reduced. (c) Underwriting Agreement. As a condition for the inclusion of any Registrable Securities in any registration statement, at the request of the Company, the Selling Shareholder shall enter into an underwriting agreement with the Company and the underwriter(s) with respect to the registration of its Registrable Securities, in such customary form that is reasonably acceptable to the Company, the Selling Shareholder and such underwriter(s), consistent with the provisions of this Agreement. (d) Withdrawal by the Company. The Company shall retain the absolute right to withdraw any registration statement prior to the effective date thereof, even if the Company shall have given notice to the Holder pursuant to Section 2.1(a) hereof and the Selling Shareholder has requested inclusion of its Registrable Securities therein. (e) Expenses. The Company shall pay all Registration Expenses for registrations under this Section 2.1. The Selling Shareholder shall pay all brokerage fees, underwriting fees and discounts, transfer taxes, if any, and the fees and expenses of the Selling Shareholder's legal counsel in connection with the registration and sale of its Registrable Securities. (f) Term. The incidental registration rights granted pursuant to this Section 2.1 shall terminate on the earliest of the sale of all Registrable Securities by the Holder or the receipt by the Holder of the written opinion of legal counsel for the Company that all of the Registrable Securities may be publicly sold without the need for compliance with the registration provisions of the Securities Laws. 2.2 Demand Registration. (a) Notice of Demand. If, any time after April ___, 1998, the Company shall receive a written notice from a Holder demanding that the Company register its Registrable Securities, then the Company shall promptly give written notice of such demand to all other Holders of Registrable Securities, if any, and will, subject to the other provisions of this Agreement, include in a registration statement all Registrable Securities requested to be so included by Holders upon 3 47 written notice to the Company within twenty (20) days after the date of the notice by the Company to the Holders, as long as the total of all Registrable Securities for which registration is demanded represents a majority of the outstanding Registrable Securities. The Holders as a group shall be entitled to one (1) demand registration under this Section 2.2. (b) Registration. Promptly after receipt of a demand for registration as set forth in Section 2.2(a) hereof, the Company shall prepare and file with the SEC a registration statement, on the applicable form deemed appropriate by the Company, for all the Registrable Securities for which registration is demanded, and the Company shall use reasonable efforts to cause such registration statement to become effective as soon as practicable and any necessary or appropriate qualification or compliance (including, without limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Laws and any other governmental requirements or regulations). Notwithstanding the foregoing, the Company shall have the right to delay the filing of the registration statement once for up to one hundred twenty (120) days if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be materially detrimental to the Company or its shareholders for a registration statement to be filed or become effective during such period. (c) Expenses. The Company shall pay all Registration Expenses for registrations under this Section 2.2. The Selling Shareholder shall pay all brokerage fees, underwriting fees and discounts, transfer taxes, if any, and the fees and expenses of the Selling Shareholder's legal counsel in connection with the registration and sale of its Registrable Securities. (d) Term. The demand registration rights granted pursuant to this Section 2.2 shall terminate on the earliest of the sale of all Registrable Securities by the Holder or the receipt by the Holder of the written opinion of legal counsel for the Company that the Registrable Securities may be publicly sold without the need for compliance with the registration provisions of the Securities Laws. (e) Underwriting by Sutro. If a registration under this Section 2.2 is requested by one or more Selling Shareholders to be in the form of an underwritten offering, then the Company and the Selling Shareholder(s) shall retain and cooperate with Sutro as the managing underwriter of such offering, subject to the execution of an underwriting agreement in such customary form that is reasonably acceptable to the Company, the Selling Shareholder(s) and Sutro and consistent with the provisions of this Agreement; provided that Sutro maintains, at the time of such offering, all federal and state governmental and other licenses and permits necessary to act as an underwriter of securities. 2.3 Registration Procedures. (a) Selling Shareholder Information. Each Selling Shareholder shall provide the Company with such information about the Selling Shareholder and its intended manner 4 48 of distribution of the Registrable Securities, and shall otherwise cooperate with the Company and the underwriters, if any, as may be needed or helpful to complete any obligation of the Company hereunder. (b) Consultation. The Company shall supply drafts of any registration statement to the Selling Shareholder prior to filing the registration statement with the SEC, and shall reasonably consult with the Selling Shareholder and its legal counsel with respect to the form and content of such filing. The Company will amend such registration statement to include such revisions as the Selling Shareholder or its legal counsel shall reasonably request. If material revisions reasonably requested by the Selling Shareholder or its legal counsel are not effected by the Company, the Selling Shareholder may withdraw all or part of the Registrable Securities from registration without affecting such Selling Shareholder's registration rights hereunder for the Registrable Securities so withdrawn or reduced. (c) Provision for Prospectuses. The Company shall furnish the Selling Shareholder with the number of copies of a summary prospectus or other prospectus, including a preliminary prospectus in conformity with the requirements of the Securities Act, and such other documents as the Selling Shareholder may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities. (d) State Securities Law Compliance. The Company shall use reasonable efforts to register or qualify the Registrable Securities covered by the registration statement under the Securities Laws of such states as the Selling Shareholder may reasonably request in light of the costs of such registration or qualification for the Company (provided, however, that the Company shall not be required to consent to the general service of process for all purposes in any jurisdiction where it is not then qualified to do business or to qualify to do business) and do any and all other acts or things that may be reasonably necessary or advisable to enable the Selling Shareholder to consummate the public sale or other disposition of their Registrable Securities in such states. (e) Amendments. In the case of a demand registration pursuant to Section 2.2, the Company shall use reasonable efforts to prepare and file promptly with the SEC such amendments and supplements to the registration statement filed with the SEC in connection with such registration and the prospectus used in connection therewith as may be necessary to keep such registration statement continuously effective and in compliance with the Securities Act for up to six (6) months, or until all Registrable Securities registered in such registration statement have been sold, whichever is earlier. (f) Prospectus Delivery. At any time when a sale or other public disposition of Common Stock pursuant to a registration statement is subject to a prospectus delivery requirement, the Company shall immediately notify the Selling Shareholder of the occurrence of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then 5 49 existing. Upon receipt of such a notice, the Selling Shareholder shall immediately discontinue sales or other dispositions of Registrable Securities pursuant to such registration statement. The Selling Shareholder may resume sales only upon receipt of an amended prospectus or after the Selling Shareholder has been advised by the Company that use of the previous prospectus may be legally resumed. (g) Opinions. At the request of the Selling Shareholder, the Company shall use reasonable efforts to furnish on the date that the Registrable Securities are delivered to the underwriter for sale in connection with an underwritten offering registration pursuant to this Agreement (i) a letter from the legal counsel representing the Company for the purposes of such registration giving the Selling Shareholder the right to rely upon the opinion of such legal counsel delivered to the underwriter(s) acting on behalf of the Company in connection with such registration insofar as such opinion relates to the Selling Shareholder, and (ii) a letter from the independent certified public accountants of the Company substantially the same as the letter of such accountants delivered to the underwriter(s) acting on behalf of the Company in connection with such registration, provided that the Selling Shareholder provides to such accountants the opinion or representation letter required by Statement of Auditing Standards No. 72. (h) Stop Orders. The Company shall immediately notify the Selling Shareholder of the issuance by the SEC of any stop order or order suspending the effectiveness of any registration statement, the issuance by any state regulatory authority of any order suspending the registration or qualification of the Registrable Securities for sale in such jurisdiction, or the initiation of any proceeding for such purposes. The Company, with the reasonable cooperation of the Selling Shareholder, shall make every reasonable effort to contest any such proceeding or to obtain the withdrawal of any such order at the earliest possible date. (i) Review of Records. The Company shall make available all financial and other records, pertinent corporate documents, and properties of the Company for inspection by the Selling Shareholder or its underwriter, legal counsel, or accountants, and shall cause the Company's officers, directors, and employees to supply all information reasonably requested by any such person in connection with any registration statement filed or to be filed hereunder, so long as such person agrees to keep confidential any records, information, or documents designated by the Company in writing as confidential. (j) Compliance with Securities Laws. In all actions taken under this Agreement, the Company and the Selling Shareholder shall use their best efforts to comply with all provisions of the Securities Laws. (k) Market Stand-Off. If requested by the Company, the Holder may not sell or otherwise transfer any Registrable Securities held by the Holder, other than those Registrable Securities included in a registration statement, during the one hundred eighty (180) day period following the effective date of a registration statement filed by the Company under the Securities Act with respect to any underwritten offering. The Company may impose stop-transfer instructions 6 50 with respect to the Registrable Securities subject to the foregoing restrictions until the end of such one hundred eighty day period. 2.5 Sales under Rule 144. With the view to making the benefits of Rule 144 under the Securities Act available to the Holder, the Company shall use reasonable efforts to (a) ensure that there is adequate current public information (as set forth in Rule 144(c)) available with respect to the Company; (b) timely file with the SEC all reports and other documents required to be filed by the Company under the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder; and (c) promptly furnish to the Holder upon request a written statement by the Company as to the Company's compliance with these covenants and the provisions of Rule 144. 2.6 Indemnification. (a) The Company's Indemnification. The Company shall indemnify, defend, save, and hold the Selling Shareholder (and any person who controls the Selling Shareholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), with respect to which a registration or qualification has been effected pursuant to this Agreement, harmless from and against any and all liabilities, claims, damages, demands, expenses, and losses, including but not limited to interest, penalties, court costs, attorneys' fees, and settlements approved by the Company, which consent shall not be unreasonably withheld, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement or prospectus, or any amendment or supplement thereto, incident to any such registration or qualification, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act applicable to the Company in connection with any such registration or qualification, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable to any such person in any case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission (or alleged untrue statement or omission), made in reliance upon and in conformity with written information furnished to the Company by such Holder or controlling person and stated to be specifically for use therein or the preparation thereby. (b) The Selling Shareholder's Indemnification. Each Selling Shareholder with Registrable Securities included in a registration statement under this Agreement shall indemnify, defend, save, and hold (i) the Company and its directors, officers, and controlling persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), (ii) the underwriter(s), if any, and their controlling persons, and (iii) all other selling shareholders participating in such offering (and their respective officers, directors, underwriters, and controlling persons) harmless from and against any and all liabilities, claims, damages, demand, expenses, and losses, including but not limited to interest, penalties, court costs, attorneys' fees, and settlements 7 51 approved by the Selling Shareholder, which consent shall not be unreasonably withheld, arising out of (i) any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement or a related prospectus, or any amendment or supplement thereto, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) or any violation by such Selling Shareholder of the Securities Act in connection with such registration or qualification, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in the case of clause (i) above to the extent, but only to the extent that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement or in a related prospectus in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein or the preparation thereby. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited to the gross proceeds from the offering received by such Holder. (c) Contribution. If the indemnification provided for in this Section 2.6 from an indemnifying party is unavailable to an indemnified party hereunder in respect to any liability, claim, damage, demand, expense, or loss referred to herein, then the indemnifying party in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such liability, claim, damage, demand, expense, or loss in such proportion as is appropriate to reflect the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions that resulted in such liability, claim, damage, demand, expense, or loss, as well as any other relevant equitable consideration. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue statement of a material fact or the omission to state a material fact relates to information supplied by such indemnifying party or indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by a party as a result of the liabilities, claims, damages, demands, expenses, and losses referred to above shall be deemed to include any court costs, attorneys' fees, and other expenses reasonably incurred by such party in connection with investigating or defending any action, suit, or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 2.6(c) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in this Section 2.6(c). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not also guilty of such fraudulent misrepresentation. 3. GENERAL PROVISIONS. 3.1 Amendment. All amendments or modifications of this Agreement shall be in writing and shall be signed by all of the parties hereto. 8 52 3.2 Waiver. Any waiver of any right, power, or privilege hereunder must be in writing and signed by the party being charged with the waiver. No delay on the part of any party hereto in exercising any right, power, or privilege hereunder shall operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. 3.3 Notices. All notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be delivered personally or sent by overnight courier, by telecopy with confirmation by first-class mail, or by certified mail, return receipt requested. Notices delivered personally or sent by overnight courier or by telecopy with confirmation by first-class mail shall be effective on the date first received, while notices sent by certified mail, return receipt requested, shall be deemed to have been received and to be effective three (3) business days after deposit into the mails. Notices shall be given to the parties at the following respective addresses, or to such other addresses as any party shall designate in writing: If to the Company: International Aircraft Investors 3655 Torrance Blvd., Suite 410 Torrance, California 90503 Attn: Chief Executive Officer If to the Holder: Sutro & Co. Incorporated 11150 Santa Monica Blvd., 15th Floor Santa Monica, California 90025 c/o Scott E. Wendelin, Managing Director 3.4 Successors and Assigns This Agreement and each of its provisions shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators successors, and assigns. The Holder may assign this Agreement and its rights hereunder only in connection with a transfer or assignment of all or part of the Warrant or the Registrable Securities. 3.5 Law Governing. This Agreement has been negotiated, executed and delivered and shall be performed in the State of California and shall be governed by and construed and enforced in accordance with the laws of the State of California, without regard for its conflict of laws rules. 3.6 Attorneys' Fee. In any suit to interpret or enforce the terms and provisions of this Agreement, the prevailing party shall be entitled to recover court costs and attorneys' fees, in addition to any other remedy or recovery to which such party may be entitled. 3.7 Counterparts. This Agreement may be executed in two or more counterparts, including by facsimile transmission, all of which together shall constitute a single instrument. 9 53 3.8 Severability of Provisions. In the event any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. 3.9 Construction. The headings in the sections and paragraphs of this Agreement are for convenience only and shall not constitute a part hereof. Whenever the context so requires, the masculine shall include the feminine and the neuter, the singular shall include the plural, and conversely. The terms and all parts of this Agreement shall in all cases be interpreted simply and according to their plain meaning and neither for nor against any party hereto. IN WITNESS WHEREOF, the parties have duty executed and delivered this Agreement as of the date first written above. International Aircraft Investors Sutro & Co. Incorporated By: _______________________________ By: _____________________________ William E. Lindsey Chief Executive Office Name (Printed): _________________ Title: __________________________ 10 EX-3.6 3 FORM OF AMENDED AND RESTATED ARTICLES OF INC. 1 EXHIBIT 3.6 FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INTERNATIONAL AIRCRAFT INVESTORS ARTICLE I The name of this corporation is International Aircraft Investors. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III This corporation is authorized to issue two classes of shares designated, respectively, "Common Stock" and "Preferred Stock," and referred to herein either as Common Stock or Common Shares and Preferred Stock or Preferred Shares, respectively. The number of shares of Common Stock is 20,000,000, $0.01 par value, and the number of shares of Preferred Stock is 15,000,000, $0.01 par value. The Preferred Shares may be issued from time to time, in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Shares and to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Shares, and within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. Upon filing of this mended and Restated Articles of Incorporation, all outstanding shares of Common Stock shall be subject to a reverse 1-for-6 stock split. No fractional shares of Common Stock are to 2 be issued in connection with the reverse stock split, but instead cash shall be distributed to each shareholder who would otherwise have been entitled to receive a fractional share, and the amount of cash to be distributed shall be based upon a price of $______ per share. 2 3 ARTICLE IV The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ARTICLE V Any action required or permitted to be taken by the shareholders of the corporation must be effected at an annual or special meeting of shareholders of the corporation and may not be effected by any consent in writing of such shareholders. ARTICLE VI The corporation is authorized to indemnify its agents to the fullest extent permissible under California law. For purposes of this provision, the term "agent" has the meaning set forth from time to time in Section 317 of the California Corporations Code. ARTICLE VII Advance notice of shareholder nominations for the election of directors and of business to be brought by shareholders before any meeting of the shareholders of the corporation shall be given in the manner provided in the bylaws of the corporation. ARTICLE VIII The election of directors by the shareholders shall not be by cumulative voting. At each election of directors, each shareholder entitled to vote may vote all the shares held by that shareholder for each of the several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares held by that shareholder. This Article VIII shall become effective only when the corporation becomes a "listed corporation" within the meaning of the California Corporations Code Section 301.5(d). 3 4 ARTICLE IX (A) The corporation reserves the right to repeal, alter, amend or rescind any provision contained in the articles of incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph (B) of this Article IX, and all rights conferred on shareholders herein are granted subject to this reservation. (B) Notwithstanding any other provision of the articles of incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of securities required by law, the articles of incorporation or any Preferred Stock Designation, the affirmative vote of the holders entitled to exercise at least 66-2/3% of the voting power of the corporation, voting together as a single class, shall be required to alter, amend or repeal Articles IV, V, VI, VII, VIII and IX hereof. 4 EX-3.7 4 FORM OF BYLAWS TO BE EFFECTIVE UPON CONSUMMATION 1 EXHIBIT 3.7 AMENDED AND RESTATED BYLAWS of INTERNATIONAL AIRCRAFT INVESTORS (a California corporation) 2 TABLE OF CONTENTS
Page ARTICLE I. OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1. PRINCIPAL EXECUTIVE OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1. PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. ANNUAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 3. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 4. NOTICE OF ANNUAL OR SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 5. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 6. ADJOURNED MEETINGS AND NOTICE THEREOF . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 7. VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 8. RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 9. CONSENT OF ABSENTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 10. ACTION WITHOUT MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 11. PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 12. INSPECTORS OF ELECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 13. CONDUCT OF MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 14. NOMINATION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
i 3 ARTICLE III. DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 1. POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2. NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 3. ELECTION AND TERM OF OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4. VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 5. PLACE OF MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 6. REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 7. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 8. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE . . . . . . . . . . . . . . . . 12 SECTION 10. WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 11. ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 12. FEES AND COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 13. ACTION WITHOUT MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 14. RIGHTS OF INSPECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 15. COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE IV. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 1. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 2. ELECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 3. SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 4. REMOVAL AND RESIGNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ii 4 SECTION 5. VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 6. CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 7. PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 8. VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 9. SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 10. CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 11. COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE V. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 1. INDEMNIFICATION OF OFFICERS AND DIRECTORS . . . . . . . . . . . . . . . . . . . . 17 SECTION 2. INDEMNIFICATION OF EMPLOYEES AND AGENTS . . . . . . . . . . . . . . . . . . . . . 18 SECTION 3. RIGHT OF DIRECTORS AND OFFICERS TO BRING SUIT . . . . . . . . . . . . . . . . . . 18 SECTION 4. SUCCESSFUL DEFENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 5. INDEMNITY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 6. SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 7. NONEXCLUSIVITY OF RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 8. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 9. EXPENSES AS A WITNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 10. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . 19 SECTION 11. SEPARABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
iii 5 SECTION 12. EFFECT OF REPEAL OR MODIFICATION . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE VI. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 1. INSPECTION OF CORPORATE RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2. INSPECTION OF BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 4. CERTIFICATES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . . . . . . . . 22 SECTION 6. STOCK PURCHASE PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 7. CONSTRUCTION AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 8. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9. ANNUAL REPORT TO SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 23
iv 6 AMENDED AND RESTATED BYLAWS for the regulation, except as otherwise provided by statute or its Articles of Incorporation, of INTERNATIONAL AIRCRAFT INVESTORS (a California corporation) The Bylaws of International Aircraft Investors are hereby amended and restated in their entirety to read as follows: ARTICLE I. OFFICES SECTION 1. PRINCIPAL EXECUTIVE OFFICE. The corporation's principal executive office shall be fixed and located at such place as the Board of Directors (herein called the "Board") shall determine. The Board is granted full power and authority to change said principal executive office from one location to another. SECTION 2. OTHER OFFICES. Branch or subordinate offices may be established at any time by the Board at any place or places. ARTICLE II. SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. Meetings of shareholders shall be held either at the principal executive office of the corporation or at any other place within or without the State of California which may be designated either by the Board or by the written consent of all persons entitled to vote thereat, given either before or after the meeting and filed with the Secretary. SECTION 2. ANNUAL MEETINGS. The annual meetings of shareholders shall be held on such date and at such time as may be fixed by the Board. At such meetings, directors shall be elected and any other proper business may be transacted. 1 7 SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten percent of the votes at such meeting. Upon request in writing to the Chairman of the Board, the President, any Vice President or the Secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five nor more than sixty days after the receipt of the request. If the notice is not given within twenty days after receipt of the request, the persons entitled to call the meeting may give the notice. SECTION 4. NOTICE OF ANNUAL OR SPECIAL MEETINGS. Written notice of each annual or special meeting of shareholders shall be given not less than ten nor more than sixty days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other businesses may be transacted, or (ii) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the meeting by or at the direction of the Board, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the shareholder to be timely must be so received not later than the close of 2 8 business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 4. The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 4, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by first-class mail or, if the corporation has outstanding shares held of record by 500 or more persons on the record date for the meeting, notice may be given by third-class mail, or by other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice, or, if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. 3 9 SECTION 5. QUORUM. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is present, the affirmative vote of a majority of the shares represented and voting at the meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or by the Articles, except as provided in the following sentence. The shareholders present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. SECTION 6. ADJOURNED MEETINGS AND NOTICE THEREOF. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but in the absence of a quorum (except as provided in Section 5 of this Article) no other business may be transacted at such meeting. It shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which such adjournment is taken; provided, however, when any shareholders' meeting is adjourned for more than 45 days or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. SECTION 7. VOTING. The shareholders entitled to notice of any meeting or to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the corporation on the record date determined in accordance with Section 8 of this Article. The election of directors by the shareholders shall not be by cumulative voting. At each election of directors, each shareholder entitled to vote may vote all the shares held by that shareholder for each of the several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares 4 10 held by that shareholder. This paragraph shall become effective only when the corporation becomes a "listed corporation" within the meaning of Section 301.5(d) of the California General Corporation Law. Elections need not be by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at the meeting and before the voting begins. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. Voting shall in all cases be subject to the provisions of Chapter 7 of the California General Corporation Law, and to the following provisions: (a) Subject to clause (g), shares held by an administrator, executor, guardian, conservator or custodian may be voted by such holder either in person or by proxy, without a transfer of such shares into the holder's name; and shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the trustee's name. (b) Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority to do so is contained in the order of the court by which such receiver was appointed. (c) Subject to the provisions of Section 705 of the California General Corporation Law and except where otherwise agreed in writing between the parties, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (d) Shares standing in the name of a minor may be voted and the corporation may treat all rights incident thereto as 5 11 exercisable by the minor, in person or by proxy, whether or not the corporation has notice, actual or constructive, of the nonage, unless a guardian of the minor's property has been appointed and written notice of such appointment given to the corporation. (e) Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxyholder as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the Board of Directors of such other corporation may determine or, in the absence of such determination, by the chairman of the board, president or any vice president of such other corporation, or by any other person authorized to do so by the chairman of the board, president or any vice president of such other corporation. Shares which are purported to be voted or any proxy purported to be executed in the name of a corporation (whether or not any title of the person signing is indicated) shall be presumed to be voted or the proxy executed in accordance with the provisions of this clause, unless the contrary is shown. (f) Shares of the corporation owned by its subsidiary shall not be entitled to vote on any matter. (g) Shares held by the corporation in a fiduciary capacity, and shares of the issuing corporation held in a fiduciary capacity by any subsidiary, shall not be entitled to vote on any matter, except to the extent that the settlor or beneficial owner possesses and exercises a right to vote or to give the corporation binding instructions as to how to vote such shares. (h) If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees, persons entitled to vote under a shareholder voting agreement or otherwise, or if two or more persons (including proxyholders) have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: 6 12 (i) If only one votes, such act binds all; (ii) If more than one vote, the act of the majority so voting binds all; (iii) If more than one vote, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately. If the instrument so filed or the registration of the shares shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this section shall be a majority or even split in interest. SECTION 8. RECORD DATE. The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment or rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than forty-five days. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than set forth in this Section 8 or Section 10 of this Article shall be at the close of business on the day on which the 7 13 Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. SECTION 9. CONSENT OF ABSENTEES. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the California General Corporation Law to be included in the notice but not so included, if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601(f) of the California General Corporation Law. SECTION 10. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the shareholders of the corporation must be effected at an annual or special meeting of shareholders of the corporation and may not be effected by any consent in writing of such shareholders. SECTION 11. PROXIES. Every person entitled to vote shares has the right to do so either in person or by one or more persons authorized by a written proxy executed by such shareholder and filed with the Secretary with respect to such shares. Any proxy duly executed is not revoked and continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto. Such revocation may be effected either, (i) by a writing delivered to the Secretary of the Corporation stating that the proxy is revoked, (ii) or by a subsequent proxy executed by the person executing the prior proxy 8 14 and presented to the meeting, or (iii) by attendance at the meeting and voting in person by the person executing the proxy; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of its execution unless otherwise provided in the proxy. SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Board may appoint inspectors of election to act at such meeting and any adjournment thereof. If inspectors of election be not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any shareholder or shareholder's proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to be appointed. The duties of such inspectors shall be as prescribed by Section 707(b) of the California General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each; determining the shares represented at the meeting; determining the existence of a quorum; determining the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. SECTION 13. CONDUCT OF MEETING. The President shall preside as chairman at all meetings of the shareholders. The chairman shall conduct each such meeting in a businesslike and fair manner, but shall not be obligated to follow any technical, formal or parliamentary rules or principles of procedure. The chairman's rulings on procedural matters shall be conclusive and binding on all shareholders, unless at the time of a ruling a request for a vote is made to the shareholders holding shares entitled to vote and which are represented in person or by proxy at the meeting, in which case the decision of a majority of such 9 15 shares shall be conclusive and binding on all shareholders. Without limiting the generality of the foregoing, the chairman shall have all of the powers usually vested in the chairman of a meeting of shareholders. SECTION 14. NOMINATION OF DIRECTORS. Only persons who are nominated in accordance with the procedures set forth in this Section 14 shall be eligible for election as directors. Nominations of persons for election to the Board of the corporation may be made at a meeting of shareholders by or at the direction of the Board or by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 14. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such persons' written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the corporation's books, of such shareholder and (ii) the class and number of shares of the corporation which are beneficially owned by such shareholder. At the request of the Board any person nominated by the Board for election as a director shall furnish 10 16 to the Secretary of the corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 14. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III. DIRECTORS SECTION 1. POWERS. Subject to limitations of the Articles, of these Bylaws and of the California General Corporation Law relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. The Board may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in these Bylaws: (a) To select and remove all the other officers, agents and employees of the corporation, prescribe the powers and duties for them as may not be inconsistent with law, the Articles or these Bylaws, fix their compensation and require from them security for faithful service. (b) To conduct, manage and control the affairs and business of the corporation and to make such rules and regulations therefor not inconsistent with law, the Articles or these Bylaws, as they may deem best. (c) To adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the 11 17 form of such seal and of such certificates from time to time as they may deem best. (d) To authorize the issuance of shares of stock of the corporation from time to time, upon such terms and for such consideration as may be lawful. (e) To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. SECTION 2. NUMBER OF DIRECTORS. The authorized number of directors shall not be less than five nor more than nine until changed by amendment of the Articles or by a Bylaw duly adopted by the shareholders amending this Section 2. The exact number of directors shall be fixed, within the limits specified by amendment to the next sentence duly adopted either by the Board or the shareholders. The exact number of directors shall be seven until changed as provided in this Section 2. SECTION 3. ELECTION AND TERM OF OFFICE. The directors shall be elected at each annual meeting of the shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director shall hold office until the next annual meeting and until a successor has been elected and qualified. SECTION 4. VACANCIES. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Vacancies in the Board, except those existing as a result of a removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold 12 18 office until the next annual meeting and until such director's successor has been elected and qualified. A vacancy or vacancies in the Board shall be deemed to exist in case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of the director's term of office. SECTION 5. PLACE OF MEETING. Regular or special meetings of the Board shall be held at any place within or without the State of California which has been designated from time to time by the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. SECTION 6. REGULAR MEETINGS. Immediately following each annual meeting of shareholders the Board shall hold a regular meeting for the purpose of organization, election of officers and the transaction of other business. Other regular meetings of the Board shall be held without call on such dates and at such times as may be fixed by the Board. Call and notice of all regular meetings of the Board are hereby dispensed with. SECTION 7. SPECIAL MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or by any two directors. 13 19 Special meetings of the Board shall be held upon four days' written notice or forty-eight hours' notice given personally or by telephone, including voice messaging system or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the corporation or as may have been given to the corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. SECTION 8. QUORUM. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business, except to adjourn as provided in Section 11 of this Article. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by the Articles. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. SECTION 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board may participate in a meeting through use of conference telephone, electronic video screen communication or other communications equipment. Participation in a meeting pursuant to this Section 9 constitutes presence in person at that meeting if all of the following apply: 14 20 (A) Each member participating in the meeting can communicate with all of the other members concurrently; (B) Each member is provided the means of participating in all matters before the Board, including the capacity to propose, or to interpose an objection, to a specific action to be taken by the corporation; (C) The corporation adopts and implements some means of verifying both of the following: (i) A person communicating by telephone, electronic video screen, or other communications equipment is a director entitled to participate in the Board meeting; and (ii) All statements, questions, actions, or votes were made by that director and not by another person not permitted to participate as a director. SECTION 10. WAIVER OF NOTICE. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 11. ADJOURNMENT. A majority of the directors present, whether or not a quorum is present, may adjourn any directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned, except as provided in the next sentence. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. 15 21 SECTION 12. FEES AND COMPENSATION. Directors and member of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board. This section shall not preclude any director from serving the corporation as an officer, agent, employee, or in any other capacity, and receiving compensation for those services. SECTION 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such consent or consents shall have the same effect as a unanimous vote of the Board and shall be filed with the minutes of the proceedings of the Board. SECTION 14. RIGHTS OF INSPECTION. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. SECTION 15. COMMITTEES. The Board may appoint one or more committees, each consisting of two or more directors, and delegate to such committees any of the authority of the Board except with respect to: (a) The approval of any action for which the General Corporation Law also requires shareholders' approval or approval of the outstanding shares; (b) The filling of vacancies in the Board or on any committee; (c) The fixing of compensation of the directors for serving on the Board or on any committee; (d) The amendment or repeal of bylaws or the adoption of new bylaws; 16 22 (e) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the corporation except at a rate or in a periodic amount or within a price range determined by the Board; or (g) The appointment of other committees of the Board or the members thereof. Any such committee must be designated, and the members or alternate members thereof appointed, by resolution adopted by a majority of the authorized number of directors and any such committee may be designated an Executive Committee or by such other name as the Board shall specify. Alternate members of a committee may replace any absent member at any meeting of the committee. The Board shall have the power to prescribe the manner in which proceedings of any such committee shall be conducted. In the absence of any such prescription, such committee shall have the power to prescribe the manner in which its proceedings shall be conducted. Unless the Board or such committee shall otherwise provide, the regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article applicable to meetings and actions of the Board. Minutes shall be kept of each of meeting of each committee. ARTICLE IV. OFFICERS SECTION 1. OFFICERS. The officers of the corporation shall be a President, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board, a Chairman of the Board, one or more Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Chief Financial Officers, and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article. SECTION 2. ELECTION. The officers of the corporation, except such officer as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by, and shall serve at the pleasure of, the Board, and shall hold their respective offices 17 23 until their resignation, removal, or other disqualification from service, or until their respective successors shall be elected. SECTION 3. SUBORDINATE OFFICERS. The Board may elect, and may empower the President to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these Bylaws or as the Board may from time to time determine. SECTION 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by the Board at any time or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any such removal shall be without prejudice to the rights, if any, of the officer under any contract of employment of the officer. Any officer may resign at any time by giving written notice to the corporation, but without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office. SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board and exercise and perform such other powers and duties as may be from time to time assigned by the Board. SECTION 7. PRESIDENT. Subject to such powers, if any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the President is the general manager and chief executive officer of the corporation and has, subject to the control of the Board, general supervision, direction and control of the business and officers of the corporation. The 18 24 President shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board. The President has the general powers and duties of management usually vested in the office of president and general manager of a corporation and such other powers and duties as may be prescribed by the Board. SECTION 8. VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board. SECTION 9. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board and its committees, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Board and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the corporation at the principal executive office or business office in accordance with Section 213 of the California General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board and any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the corporation in safe custody, 19 25 and shall have such other powers and perform such other duties as may be prescribed by the Board. SECTION 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer, who may also be referred to as the Treasurer, is the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, and shall send or cause to be sent to the shareholders of the corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all times be open to inspection by any director. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board, shall render to the President and the directors, whenever they request it, an account of all transactions as Treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. SECTION 11. COMPENSATION. Salaries of officers and other shareholders employed by the corporation shall be fixed from time to time by the Board or established under employment agreements approved by the Board. No officer shall be prevented from receiving this salary because he or she is also a director of the corporation. 20 26 ARTICLE V. INDEMNIFICATION SECTION 1. INDEMNIFICATION OF OFFICERS AND DIRECTORS. (a) Indemnification. Each person who was or is a party or is threatened to be made a party or is otherwise involved in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a "proceeding"), by reason of being or having been a director or officer of the corporation, or of any predecessor corporation, or being or having been a director or officer serving at the request of the corporation as a director, officer, employee, or other agent of another corporation, partnership, joint venture, trust, or other enterprise (including service with respect to corporation-sponsored employee benefit plans), whether the basis of the proceeding is alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall, subject to the terms of any agreement between the corporation and that person, be indemnified and held harmless by the corporation to the fullest extent permissible under California law and the Articles, against all expense, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred or suffered by that person in connection therewith, except that amounts shall be payable in settlement of a proceeding only if the settlement is approved in writing by the corporation. This indemnification shall continue as to a person who has ceased to be a director or officer for acts performed while a director or officer and shall inure to the benefit of his or her heirs, executors, and administrators. Notwithstanding the foregoing, the corporation shall indemnify any such person in connection with a proceeding (or part thereof) initiated by that person only if the proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Article shall include the right to be paid by the corporation the expenses incurred in defending and proceeding in advance of final disposition to the fullest extent permitted by law, except that payment under this Article of such expenses in advance of the final disposition of a proceeding shall be conditioned upon delivery to the corporation of a written request for such payment and of an undertaking by or on behalf of the director or officer to repay all amounts so advanced if it shall be ultimately determined that the director or officer is not entitled to be indemnified. 21 27 (b) Exclusions. Notwithstanding the foregoing or any other provisions under this Article, the corporation shall not be liable under this Article to indemnify a director or officer against expenses, liabilities, or losses incurred or suffered in connection with, or to make any advances with respect to, any proceeding against a director or officer: (i) as to which the corporation is prohibited by applicable law from paying an indemnity; (ii) with respect to expenses of defense or investigation, if the expenses were or are incurred without the corporation's consent (which consent may not be unreasonably withheld); (iii) for which final payment is actually made to the director or officer under an insurance policy maintained by the corporation, except in respect of any excess beyond the amount of payment under the policy; (iv) for which payment is actually made to the director or officer under an indemnity by the corporation otherwise than pursuant to this Article, except in respect of any excess beyond the amount of payment under that indemnify; (v) based upon or attributable to the director or officer gaining in fact any personal profit or advantage to which not legally entitled; (vi) for an accounting of profits made from the purchase or sale by the director or officer of securities of the corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (vii) based upon acts or omissions involving intentional misconduct or a knowing and culpable violation of law. SECTION 2. INDEMNIFICATION OF EMPLOYEES AND AGENTS. A person who was or is a party or is threatened to be made a party to or is involved in any proceeding by reason of being or having been an employee or agent of the corporation or being or having been an employee or agent of the corporation serving at the request of the corporation as an employee or agent of another enterprise, including service with respect to corporation-sponsored employee benefit plans, whether the basis of such action is alleged action or inaction in an official capacity or in any other capacity while serving as an employee or agent, may, upon appropriate action by the corporation and subject to the terms of any agreement between the corporation and that person, be indemnified and held harmless by the corporation up to the fullest extent permitted by California law and the Articles, against all expense, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and 22 28 amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by that person in connection therewith. SECTION 3. RIGHT OF DIRECTORS AND OFFICERS TO BRING SUIT. If a claim under Section 1 of this Article is not paid by the corporation or on its behalf within 90 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant also shall be entitled to be paid the expense of prosecuting the claim. SECTION 4. SUCCESSFUL DEFENSE. Notwithstanding any other provision of this Article, to the extent that a director or officer has been successful on the merits or otherwise (including the dismissal of a proceeding without prejudice or the settlement with the written consent of the corporation of a proceeding without admission of liability), in defense of any proceeding referred to in Section 1 or in defense of any claim, issue, or matter therein, that director or officer shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. SECTION 5. INDEMNITY AGREEMENTS. The corporation may enter into agreements with any director, officer, employee, or agent of the corporation providing for indemnification to the fullest extent permissible under applicable law and the Articles. SECTION 6. SUBROGATION. In the event of payment by the corporation of a claim under Section 1 or Section 2 of this Article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified person, who shall execute all papers required and shall do everything that may be necessary or appropriate to secure such rights, including the execution of such documents necessary or appropriate to enable the corporation effectively to bring suit to enforce such rights. SECTION 7. NONEXCLUSIVITY OF RIGHTS. The right to indemnification provided by this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, agreement, vote of shareholders or disinterested directors, or otherwise. 23 29 SECTION 8. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of the corporation or another corporation, partnership, joint venture, trust, or other enterprise against any expense, liability, or loss, whether or not the corporation would have the power to indemnify that person against such expense, liability, or loss under California law. SECTION 9. EXPENSES AS A WITNESS. To the extent that any director, officer, or employee of the corporation is by reason of that position a witness in any action, suit, or proceeding, he or she will be indemnified against all costs and expenses actually and reasonably incurred by him or her or on his or her behalf in connection therewith. SECTION 10. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS. This Article does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of the corporation. The corporation shall have power to indemnify that trustee, investment manager, or other fiduciary to the extent permitted by Corporations Code Section 207(f). SECTION 11. SEPARABILITY. Each and every paragraph, sentence, term, and provision of this Article is separate and distinct so that if any paragraph, sentence, term, or provision shall be held to be invalid or unenforceable for any reason, its invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term, or provision of this Article. To the extent required, any paragraph, sentence, term, or provision of this Article may be modified by a court of competent jurisdiction to preserve its validity and to provide the claimant with, subject to the limitations set forth in this Article and any agreement between the corporation and the claimant, the broadest possible indemnification permitted under applicable law. SECTION 12. EFFECT OF REPEAL OR MODIFICATION. No repeal or modification of this Article shall adversely affect any right of indemnification of a director, officer, employee, or agent of the corporation existing at the time of the repeal or modification with respect to any action or omission occurring prior to such repeal or modification. 24 30 ARTICLE VI. OTHER PROVISIONS SECTION 1. INSPECTION OF CORPORATE RECORDS. (a) A shareholder or shareholders holding at least five percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent of those voting shares and have filed a Schedule 14A with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have an absolute right to do either or both of the following: (i) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the corporation; or (ii) Obtain from the transfer agent, if any, for the corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. (b) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (c) The accounting books and records and minutes of proceedings of the shareholders and the Board and committees of the Board shall be open to inspection upon written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. 25 31 (d) Any inspection and copying under this Article may be made in person or by agent or attorney. SECTION 2. INSPECTION OF BYLAWS. The corporation shall keep in its principal executive office in the State of California, or if its principal executive office is not in such State at its principal business office in such State, the original or a copy of these Bylaws as amended to date, which shall be open to inspection by shareholders at all reasonable times during office hours. If the principal executive office of the corporation is located outside the State of California and the corporation has no principal business office in such state, it shall upon the written request of any shareholder furnish to such shareholder a copy of these Bylaws as amended to date. SECTION 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance or other instrument in writing and any assignment or endorsements thereof executed or entered into between the corporation and any other person, when signed by the Chairman of the Board, the President or any Vice President and the Secretary, any Assistant Secretary, the Treasurer or Chief Financial Officer or any Assistant Treasurer or Assistant Chief Financial Officer of the corporation is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same. Any such instruments may be signed by any other person or persons and in such manner as from time to time shall be determined by the Board, and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. SECTION 4. CERTIFICATES OF STOCK. Every holder of shares of the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman of the Board, the President or a Vice-President and by the Treasurer or Chief Financial Officer or an Assistant Treasurer or Assistant Chief Financial Officer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series or shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. If any officer, 26 32 transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board may provide; provided, however, that on any certificate issued to represent any partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Except as provided in this section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and cancelled at the same time. The Board may, however, if any certificate for shares is alleged to have been lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, and the corporation may require that the corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. SECTION 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or any other officer or officers authorized by the Board or the President are each authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. The authority herein granted may be exercised either by any such officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officer. SECTION 6. STOCK PURCHASE PLANS. The corporation may adopt and carry out a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for such consideration as may be fixed of its unissued shares, or of issued shares acquired or to be acquired, to one or more of the employees or directors of the corporation or of a subsidiary or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for aiding any 27 33 such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. Any such stock purchase plan or agreement or stock option plan or agreement may include, among other features, the fixing of eligibility for participation therein, the class and price of shares to be issued or sold under the plan or agreement, the number of shares which may be subscribed for, the method of payment therefor, the reservation of title until full payment therefor, the effect of the termination of employment, an option or obligation on the part of the corporation to repurchase the shares upon termination of employment, restrictions upon transfer of the shares, the time limits of and termination of the plan, and any other matters, not in violation of applicable law, as may be included in the plan as approved or authorized by the Board or any committee of the Board. SECTION 7. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Provisions of the California Corporations Code and in the California General Corporation Law shall govern the construction of these Bylaws. SECTION 8. AMENDMENTS. These Bylaws may be amended or repealed either by the approval of the Board; or by the affirmative vote of the holders entitled to exercise at least 66-2/3% of the voting power of the corporation, voting together as a single class; provided, however, that after the issuance of shares, a bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable number of directors or vice versa may only be adopted by the affirmative vote of the holders entitled to exercise at least 66-2/3% of the voting power of the corporation, voting together as a single class, and a bylaw reducing the fixed number or the minimum number of directors to a number less than five shall be subject to the provisions of Section 212(a) of the California General Corporation Law. SECTION 9. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly waived, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to shareholders. 28 34 CERTIFICATE OF SECRETARY OF INTERNATIONAL AIRCRAFT INVESTORS (a California corporation) I hereby certify that I am the duly elected and acting Secretary of said corporation and that the foregoing Bylaws, comprising __ pages, constitute the Bylaws of said corporation as duly adopted at a meeting of the Board of Directors thereof held on ______________________________ Secretary 29 EX-10.6 5 EMPLOYMENT AGREEMENT/WILLIAM E. LINDSEY 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of April 1, 1997 by and between International Aircraft Investors, a California corporation ("Employer") and William E. Lindsey ("Employee"). WITNESSETH: WHEREAS, Employee has been employed by Employer in various capacities, most recently as Chairman of the Board and Chief Executive Officer, and Employer desires to obtain the benefit of continued service by Employee, and Employee desires to render services to Employer; WHEREAS, the Board of Directors of Employer (the "Board") has determined that because of Employee's substantial experience and business relationships in connection with the business of aircraft leasing and Employee's familiarity with the clientele served by Employer, it is in Employer's best interest and that of its stockholders to secure the services of Employee, to secure certain additional commitments from Employee and to provide Employee certain additional benefits; and WHEREAS, Employer and Employee desire to set forth in this Agreement the terms and conditions of Employee's employment with Employer. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: 1. Term. Employer agrees to employ Employee and Employee agrees to serve Employer, in accordance with the terms of this Agreement, for a term of three years, commencing as of January 1, 1997 and ending December 31, 1999, unless this Agreement is earlier terminated in accordance with the provisions which follow; provided, however, that unless Employer or Employee gives written notice to the other party to the contrary at least 30 days prior to any anniversary of the date hereof, the term of this 2 Agreement shall automatically be extended for an additional term of one (1) year on such anniversary date. The term of this Agreement shall include any automatic extensions pursuant to the preceding sentence. 2. Services and Exclusivity of Services. So long as this Agreement shall continue in effect, Employee shall devote his full business time, energy and ability exclusively to the business, affairs and interests of Employer and its subsidiaries and matters related thereto, shall use Employee's best efforts and abilities to promote Employer's interests, and shall perform the services contemplated by this Agreement in accordance with policies established by and under the direction of the Board. Employee agrees to serve without additional remuneration in such official capacities for one or more direct or indirect subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitations under applicable law. Employee agrees to faithfully and diligently promote the business, affairs and interests of Employer and its subsidiaries. Without the prior express written authorization of the Board, Employee shall not, directly or indirectly, during the term of this Agreement: (a) render services to any other person or firm for compensation or (b) engage in any activity competitive with or adverse to Employer's business, whether alone, as a partner, or as an officer, director, employee or significant investor of or in any other entity; provided, however, that Employee may continue to own an investment in Great Lakes Holdings, which is the parent of Northern Lakes Financial Corp. and Northern Lakes Equity, which are special purposes companies that each own one B 727-200 aircraft on lease to Sun Country Airlines, Inc. (An investment of greater than 10% of the outstanding capital or equity securities of an entity shall be deemed significant for these purposes.) Employee may make and manage personal business investments of his choice and serve in any capacity with any civic, educational or charitable organization without seeking or obtaining approval by the Board, provided that such activities and services do not substantially interfere or conflict with the performance of duties hereunder or create any conflict of interest with such duties. An investment that exceeds 10% of the 2 3 equity securities or capitalization of a competitor, supplier or customer of Employer shall be deemed to constitute such a conflict. Employee shall not serve in any of such capacities for any business enterprise unless such service is expressly authorized by the Board in advance. 3. Specific Position; Duties and Responsibilities. Employer and Employee agree that, subject to the provisions of this Agreement, Employer will employ Employee and Employee will serve Employer as a senior officer for the duration of this Agreement. The specific position in which Employee shall initially serve shall be Chairman of the Board and Chief Executive Officer. Employee agrees to observe and comply with the rules and regulations of Employer as adopted by the Board respecting the performance of Employee's duties and agrees to carry out and perform orders, directions and policies of Employer and its Board as they may be, from time to time, stated either orally or in writing. Employee shall have such corporate power and authority as shall reasonably be required to enable the discharge of duties in any office that may be held. 4. Compensation. (a) Base Compensation. During the term of this Agreement, Employer agrees to pay Employee a base salary at the rate set forth below, payable in equal twice monthly installments. From the effective date of this Agreement through March 31, 1998, Employee's base salary shall be $160,000 per year. Thereafter, Employee's base salary shall be determined by the Board of Directors for each subsequent 12-month period and the Board of Directors shall notify Employee of his base salary in advance of the applicable period. Employee's base salary in each successive 12-month period shall not be less than the preceding 12-month period. The Board of Directors will retain a qualified compensation consultant to determine a competitive base salary range for the position. The Board of Directors will then set the Employee's base salary at an appropriate level based on the advice of the compensation consultant and the result of the Employee's annual performance review. (b) Bonus. 3 4 Employee shall be eligible to participate in Employer's current long-term and annual bonus programs and any other incentive programs hereafter established for senior officers of Employer. The bonus amounts (the "Bonus") shall be determined each calendar year at the time of the annual salary review and shall be based on Employee's performance against a mutually agreed upon written performance criteria. The Bonus program for the first year shall be as follows and for subsequent years shall in no event be less than the preceding 12-month period.
% of Employee's % of Employer's Base Compensation Target Pretax Income ----------------- -------------------- 50% 100% 75% 120% 100% 140% 125% 159%
The Bonus shall be calculated on a pro rata basis between the bonus percentages set forth above. If the Employer's consolidated pretax income is greater than 160% of Target Pretax Income, Employee shall be entitled to such other or additional Bonus as the Employer's Board of Directors may deem appropriate. The Employer's consolidated pretax income shall be calculated in accordance with generally accepted accounting principles, except that consolidated pretax income shall be calculated prior to any deductions for any bonuses payable to any employees. "Target Pretax Income" means the targeted consolidated pretax income for a fiscal year established by the Board of Directors. The Bonus for any fiscal year shall be payable on or before the date 60 days after the end of such fiscal year and shall be payable one-half in cash and one- half in Common Stock of Employer, valued at the closing price of the Common Stock of Employer on NASDAQ on the date three business days after the Employer publicly discloses its financial results for the fiscal year. (c) Additional Benefits. Employee shall also be entitled to all rights and benefits for which Employee is otherwise eligible under any bonus plan, incentive, participation or extra compensation plan, pension plan, profit-sharing plan, life, medical, dental, 4 5 disability, or insurance plan or policy or other plan or benefit that Employer or its subsidiaries may provide for Employee or (provided Employee is eligible to participate therein) for senior officers or for employees of Employer generally, as from time to time in effect, during the term of this Agreement (collectively, "Additional Benefits"). The Additional Benefits shall be provided at the level commensurate with the office held at the time. (d) Perquisites. Employee shall be entitled to paid vacation in accordance with Employer's policies which are applicable to other executive employees of Employer. Commencing with this Agreement, the annual paid vacation shall be four (4) weeks. During the term of this agreement, Employer shall provide Employee a vehicle or vehicle allowance in accordance with Employer's automobile policy as from time to time in effect. (e) Limited Benefit Succession. If Employee's full-time services are terminated hereunder, other than pursuant to Section 5(c), and Employee is no longer eligible for Additional Benefits because of such termination, Employee (or in event of death, such person or persons as Employee shall have directed in writing or, in the absence of a designation, the estate of Employee (the "Beneficiary")) shall be entitled to and Employer shall provide benefits substantially equivalent to those benefits in the nature of health and welfare type benefits to which Employee was entitled immediately prior to such termination, but shall not be entitled to option, equity, appreciation, profit sharing, deferred compensation, savings, bonus, participation, pension, extra compensation and other incentive plan benefits except to the extent otherwise expressly provided in any then outstanding awards to such Employee, but in each case (1) only for the period (if any) during which Employee (or (if expressly entitled thereto) Beneficiary, as the case may be) remains entitled to receive Base Salary, (2) only to the extent that Employee or such Beneficiary is not entitled to comparable benefits from another employer or provider, and (3) subject to any other express limitations elsewhere in this Agreement or any applicable plan. 5 6 (f) Overall Qualification. Employer reserves the right to modify, suspend or discontinue any and all of the above referenced benefit plans, practices, policies and programs at any time (whether before or after termination of employment) without notice to or recourse by Employee so long as (i) such action is taken generally with respect to other similarly situated persons and does not single out Employee, and (ii) Employer makes provision that all benefits accrued to Employee to the date such plan is terminated will be paid to Employee. 5. Termination. The employment of Employee by Employer, shall be terminated prior to expiration of the term of this Agreement only as provided in this Section 5 or Section 6: (a) Disability. In the event that Employee shall fail, because of illness, incapacity or injury which is determined to be total and permanent by a physician selected by Employer or its insurers and acceptable to Employee or Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably) to render for three consecutive months or for shorter periods aggregating 75 or more business days in any twelve (12)-month period, the services contemplated by this Agreement, Employee's employment hereunder may be terminated by written notice of termination from Employer to Employee. Thereafter, Employer shall continue for the then remaining term of this Agreement to pay Base Salary to Employee at a rate and time and in an amount and manner equal to (i) the Base Salary payable immediately prior to the termination, minus (ii) the amount of any cash payments to Employee under the terms of any Employer's disability insurance. Thereafter, no further salary shall be paid. 6 7 (b) Death. In the event of Employee's death during the term, Employee's Base Salary and any other right or benefit which does not by its terms end at the death of Employee shall be paid to the Beneficiary for the then remaining term of this Agreement. This Agreement in all other respects will terminate upon the death of Employee, except as otherwise expressly provided in Section 4(f). (c) For Cause. Employee's employment hereunder shall be terminated and all of his rights to receive Base Salary, Bonus and (subject to the terms of any plans relating thereto) Additional Benefits hereunder in respect of any period after such termination, shall terminate upon a determination by the Board, acting in good faith based upon actual knowledge at such time, that Employee is engaging or has engaged in willful misconduct, or has willfully violated any law, rule or regulation or has been convicted of a felony. Notwithstanding the foregoing, Employee shall not be terminated for cause pursuant to this Section 5(c) unless and until Employee has received notice of a proposed termination for cause and Employee has had an opportunity to be heard before at least a majority of the members of the Board. 7 8 (d) Without Cause. Notwithstanding any other provision of this Section 5, the Board shall have the right to terminate Employee's employment with Employer at any time, but any such termination other than as expressly provided in Section 5(c) herein shall be without prejudice to Employee's rights to receive Base Salary and the Additional Benefits provided under this Agreement for the remainder of the term. If Employee is so terminated without cause, Employee may elect to receive a lump sum payment representing the present value of aggregate unpaid Base Salary discounted to present value at a rate of 7% per annum in lieu of all rights of Employee, including any rights to Additional Benefits hereunder, all of which shall terminate upon the payment of such lump sum amount. (e) Exclusive Remedy. Employee agrees that the payments expressly provided and contemplated by this Agreement shall constitute the sole and exclusive obligation of Employer in respect of Employee's employment with and relationship to the Company and that the payment thereof shall be the sole and exclusive remedy for any termination of Employee's employment. Employee covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of employment. 6. Change in Control. If a "Change in Control" of Employer (or any successor), as defined below, occurs during the term of this Agreement and if, within one year after the Change in Control Employee's employment hereunder is terminated for any reason other than pursuant to Section 5(c) hereof or Employee terminates his employment hereunder for "good reason", as defined below, then the Base Salary and all of the other benefits to which Employee is entitled under Section 4 hereof shall continue to the expiration of the term of this Agreement. For purposes of the foregoing provisions, "Change in Control" shall mean the occurrence of any of the following: (i) approval by the shareholders of Employer of the dissolution or liquidation of Employer; (ii) approval by the shareholders of Employer of an agreement to merge or consolidate, otherwise reorganize, with or into one or more entities, as a result of 8 9 which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned, directly or indirectly, by shareholders of the Employer immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of Employer's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization, but including in such determination any securities of the other parties to such reorganization held by affiliates of Employer); (iii) approval by the shareholders of Employer of the sale, lease, conveyance or other disposition of all or substantially all of Employer's business and/or assets to a person or entity which is not a wholly-owned subsidiary of Employer; (iv) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a person who is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding shares of Common Stock of Employer at the date of this Agreement (or an affiliate, successor, heir, descendent or related party of or to any such person), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Employer representing more than 25% of the combined voting power of Employer's then outstanding securities entitled to then vote generally in the election of directors of Employer; or (v) a majority of the Board of Directors of Employer not being comprised of Continuing Directors. For purposes of this clause, "Continuing Directors" are persons who were (A) members of the Board of Directors of Employer on the date of this Agreement or (B) nominated for election or elected to the Board of Directors of Employer with the affirmative vote of at least a majority of the directors who were Continuing Directors at the time of such nomination or election. For purposes of the foregoing provisions, "good reason" shall mean: (i) the assignment to Employee of any duties inconsistent in any respect with Employee's position (including status, offices and reporting requirements), authority, duties or responsibilities as of the date immediately preceding the Change in Control of Employer or any other action by Employer which 9 10 results in a diminishment in such position, authority, duties or responsibilities, excluding for this purpose an isolated and insubstantial action not taken in bad faith and not intended to be inconsistent with this Agreement and which is remedied by Employer promptly after receipt of notice thereof given by Employee; (ii) any reduction in salary or percentages of compensation available as target incentives, or any material change in fringe benefits or perquisites not agreed to by Employee; (iii) the cessation of Employee's eligibility to participate in any stock-based compensation plans maintained by Employer for executives prior to the Change in Control of Employer; (iv) Employer requiring Employee to be based in any office or location other than one within 30 miles of the office at which Employee is based at the time of the Change in Control of Employer, except for travel reasonably required in the performance of Employee's responsibilities; and (v) failure of any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer to expressly assume this Agreement. 7. Business Expenses. During the term of this Agreement, to the extent that such expenditures satisfy the criteria under the Internal Revenue Code for deductibility by Employer (whether or not fully deductible by Employer) for federal income tax purposes as ordinary and necessary business expenses, Employer shall reimburse Employee promptly for reasonable business expenditures, including travel, entertainment, parking, business meetings and professional dues made and substantiated in accordance with policies, practices and procedures established from time to time by the Board and incurred in pursuit and furtherance of Employer's business and good will. 8. Indemnity. To the fullest extent permitted by applicable law and the bylaws of Employer, as from time to time in effect, Employer shall indemnify Employee and hold Employee harmless for any acts or decisions made in good faith while performing services for Employer. To the same extent, Employer will pay and, subject to any legal limitations, advance all expenses, including reasonable attorneys' fees and costs of court approved settlements, actually and necessarily incurred by Employee in connection with the defense of any action, suit or 10 11 proceeding and in connection with any appeal thereon, which has been brought against Employee by reason of Employee's service as an officer or agent of Employer or of a subsidiary of Employer. 9. Miscellaneous. (a) Succession; Survival. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Employee this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of Employer or a similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of Employer hereunder including without limitation those in Section 6 hereof in respect of such successor or assignee. The obligations and duties of Employee hereunder are personal and otherwise not assignable. Employee's obligations and representations under this Agreement will survive the termination of Employee's employment, regardless of the manner of such termination. (b) Notices. Any notice or other communication provided for in this Agreement shall be in writing and sent if to Employer to its office at: International Aircraft Investors 3655 Torrance Boulevard Suite 410 Torrance, California 90503 Attention: Chairman of the Board or at such other address as Employer may from time to time in writing designate, and if to Employee at such address as Employee may from time to time in writing designate (or Employee's business address of record in the absence of such designation). Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or 11 12 pursuant to) this Section 9(b) and an appropriate answerback is received, (ii) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address. (c) Entire Agreement; Amendments. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and it supersedes any prior agreements, undertakings, commitments and practices relating to Employee's employment by Employer. No amendment or modification of the terms of this Agreement shall be valid unless made in writing and signed by Employee and, on behalf of Employer, by an officer expressly so authorized by the Board. (d) Waiver. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof or of any other right, nor shall any single or partial exercise preclude any further or other exercise of such right or any other right. (e) Choice of Law. This Agreement, the legal relations between the parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, the relationship of the parties or the subject matter hereof shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State and without regard to conflicts of law doctrines, to the extent permitted by law. (f) Agreement to Mediate Dispute. If any dispute, controversy or claim (collectively, a "Dispute") under, arising out of, in connection with, or relating to this Agreement or the respective obligations of 12 13 the parties hereto including, without limitation, any Dispute involving an alleged breach of this Agreement shall arise, representatives of the parties hereto shall meet and attempt to resolve the Dispute. If they cannot resolve the Dispute within 15 days, the parties shall, in good faith, attempt to select a third party to mediate the Dispute. The cost and expenses of the person selected to mediate the Dispute shall be paid by Employer. (g) Attorneys' Fees in Action on Contract. If any litigation shall occur between Employee and Employer which litigation arises out of or as a result of this Agreement or the acts of the parties hereto pursuant to this Agreement, or which seeks an interpretation of this Agreement. The prevailing party shall be entitled to recover all costs and expenses of such litigation, including reasonable attorneys' fees and costs. (h) Waiver of Jury Trial. EMPLOYER AND EMPLOYEE HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE EMPLOYMENT RELATIONSHIP BETWEEN THEM OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT OR SUCH RELATIONSHIP. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court or that relate to the subject matter of this Agreement, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims, to the maximum extent permitted by law. Employer and Employee each acknowledge that this waiver is a material inducement to enter into this Agreement, that each has already relied on the waiver in entering into this Agreement, and that each will continue to rely on the waiver in their related future dealings. EMPLOYER AND EMPLOYEE FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT MODIFICATIONS TO OR EXTENSIONS OF 13 14 THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. (i) Confidentiality; Proprietary Information. Employee agrees to not make use of, divulge or otherwise disclose, directly or indirectly any trade secret or other confidential or proprietary information concerning the business (including but not limited to its products, employees, services, practices or policies) of Employer or any of its affiliates of which Employee may learn or be aware as a result of Employee's employment during the Term or prior thereto as stockholder, employee, officer or director of or consultant to Employer, except to the extent such use or disclosure is (i) necessary to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other sources, or (iv) authorized in writing by Employer. The provisions of this subsection (h) shall survive the expiration, suspension or termination, for any reason, of this Agreement. (j) Trade Secrets. Employee, prior to and during the term of employment, has had and will have access to and become acquainted with various trade secrets, consisting of customer lists, contracts, and compilations of information, records and specifications, which are owned by Employer and regularly used in the operation of their respective businesses and which may give Employer an opportunity to obtain an advantage over competitors, who do not know or use such trade secrets. Employee agrees and acknowledges that Employee has been granted access to these valuable trade secrets only by virtue of the confidential relationship created by Employee's employment and Employee's prior relationship to, interest in and fiduciary relationships to Employer. Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of employment by Employer and for its benefit. 14 15 All records, files, documents, specifications, equipment, and similar items relating to the business of Employer or its affiliates, including without limitation all records relating to customers (the "Documents"), whether prepared by Employee or otherwise coming into Employee's possession, shall remain the exclusive property of Employer or such affiliates and shall not be removed from the premises of Employer or its affiliates under any circumstances whatsoever without the prior consent of a Senior Officer. Upon termination of employment, Employee agrees to promptly deliver to Employer all Documents in the possession or under the control of Employee. (k) Severability. If this Agreement shall for any reason be or become unenforceable in any material respect by any party, this Agreement shall thereupon terminate and become unenforceable by the other party as well. In all other respects, if any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances, to the fullest extent permitted by law. (l) Withholding; Deductions. All compensation payable hereunder, including salary, Bonus and other benefits, shall be subject to applicable taxes, withholding and other required, normal or elected employee deductions. (m) Section Headings. Section and other headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 15 16 (n) Counterparts. This Agreement and any amendment hereto may be executed in one or more counterparts. All of such counterparts shall constitute one and the same agreement and shall become effective when a copy signed by each party has been delivered to the other party. (o) Representation By Counsel; Interpretation. Employer and Employee each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the matters contemplated by this Agreement. Accordingly, any rule of law, including but not limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties. 16 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EMPLOYER" INTERNATIONAL AIRCRAFT INVESTORS By /s/ KENNETH D. TAYLOR ---------------------------------- Kennth D. Taylor Its Compensation Committee Chairman --------------------------------- "EMPLOYEE" /s/ WILLIAM E. LINDSEY ------------------------------------- [name] William E. Lindsey ------------------------------------- 3655 Torrance Blvd. ------------------------------------- Torrance, CA 90503 ------------------------------------- [address] 17 EX-10.7 6 EMPLOYMENT AGREEMENT/MICHAEL P. GRELLA 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of April 1, 1997 by and between International Aircraft Investors, a California corporation ("Employer") and Michael P. Grella ("Employee"). WITNESSETH: WHEREAS, Employee has been employed by Employer in various capacities, most recently as President, and Employer desires to obtain the benefit of continued service by Employee, and Employee desires to render services to Employer; WHEREAS, the Board of Directors of Employer (the "Board") has determined that because of Employee's substantial experience and business relationships in connection with the business of aircraft leasing and Employee's familiarity with the clientele served by Employer, it is in Employer's best interest and that of its stockholders to secure the services of Employee, to secure certain additional commitments from Employee and to provide Employee certain additional benefits; and WHEREAS, Employer and Employee desire to set forth in this Agreement the terms and conditions of Employee's employment with Employer. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: 1. Term. Employer agrees to employ Employee and Employee agrees to serve Employer, in accordance with the terms of this Agreement, for a term of three years, commencing as of January 1, 1997 and ending December 31, 1999, unless this Agreement is earlier terminated in accordance with the provisions which follow; provided, however, that unless Employer or Employee gives written notice to the other party to the contrary at least 30 days prior to any anniversary of the date hereof, the term of this Agreement shall automatically be extended for an additional term of one (1) year on such anniversary date. The term of this 2 Agreement shall include any automatic extensions pursuant to the preceding sentence. 2. Services and Exclusivity of Services. So long as this Agreement shall continue in effect, Employee shall devote his full business time, energy and ability exclusively to the business, affairs and interests of Employer and its subsidiaries and matters related thereto, shall use Employee's best efforts and abilities to promote Employer's interests, and shall perform the services contemplated by this Agreement in accordance with policies established by and under the direction of the Board. Employee agrees to serve without additional remuneration in such official capacities for one or more direct or indirect subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitations under applicable law. Employee agrees to faithfully and diligently promote the business, affairs and interests of Employer and its subsidiaries. Without the prior express written authorization of the Board, Employee shall not, directly or indirectly, during the term of this Agreement: (a) render services to any other person or firm for compensation or (b) engage in any activity competitive with or adverse to Employer's business, whether alone, as a partner, or as an officer, director, employee or significant investor of or in any other entity; provided, however, that Employee may continue to own an investment in Great Lakes Holdings, which is the parent of Northern Lakes Financial Corp. and Northern Lakes Equity, which are special purposes companies that each own one B 727-200 aircraft on lease to Sun Country Airlines, Inc. (An investment of greater than 10% of the outstanding capital or equity securities of an entity shall be deemed significant for these purposes.) Employee may make and manage personal business investments of his choice and serve in any capacity with any civic, educational or charitable organization without seeking or obtaining approval by the Board, provided that such activities and services do not substantially interfere or conflict with the performance of duties hereunder or create any conflict of interest with such duties. An investment that exceeds 10% of the 2 3 equity securities or capitalization of a competitor, supplier or customer of Employer shall be deemed to constitute such a conflict. Employee shall not serve in any of such capacities for any business enterprise unless such service is expressly authorized by the Board in advance. 3. Specific Position; Duties and Responsibilities. Employer and Employee agree that, subject to the provisions of this Agreement, Employer will employ Employee and Employee will serve Employer as a senior officer for the duration of this Agreement. The specific position in which Employee shall initially serve shall be President. Employee agrees to observe and comply with the rules and regulations of Employer as adopted by the Board respecting the performance of Employee's duties and agrees to carry out and perform orders, directions and policies of Employer and its Board as they may be, from time to time, stated either orally or in writing. Employee shall have such corporate power and authority as shall reasonably be required to enable the discharge of duties in any office that may be held. 4. Compensation. (a) Base Compensation. During the term of this Agreement, Employer agrees to pay Employee a base salary at the rate set forth below, payable in equal twice monthly installments. From the effective date of this Agreement through March 31, 1998, Employee's base salary shall be $140,000 per year. Thereafter, Employee's base salary shall be determined by the Board of Directors for each subsequent 12-month period and the Board of Directors shall notify Employee of his base salary in advance of the applicable period. Employee's base salary in each successive 12-month period shall not be less than the preceding 12-month period. The Board of Directors will retain a qualified compensation consultant to determine a competitive base salary range for the position. The Board of Directors will then set the Employee's base salary at an appropriate level based on the advice of the compensation consultant and the result of the Employee's annual performance review. (b) Bonus. 3 4 Employee shall be eligible to participate in Employer's current long-term and annual bonus programs and any other incentive programs hereafter established for senior officers of Employer. The bonus amounts (the "Bonus") shall be determined each calendar year at the time of the annual salary review and shall be based on Employee's performance against a mutually agreed upon written performance criteria. The Bonus program for the first year shall be as follows and for subsequent years shall in no event be less than the preceding 12-month period.
% of Employee's % of Employer's Base Compensation Target Pretax Income ----------------- -------------------- 50% 100% 75% 120% 100% 140% 125% 159%
The Bonus shall be calculated on a pro rata basis between the bonus percentages set forth above. If the Employer's consolidated pretax income is greater than 160% of Target Pretax Income, Employee shall be entitled to such other or additional Bonus as the Employer's Board of Directors may deem appropriate. The Employer's consolidated pretax income shall be calculated in accordance with generally accepted accounting principles, except that consolidated pretax income shall be calculated prior to any deductions for any bonuses payable to any employees. "Target Pretax Income" means the targeted consolidated pretax income for a fiscal year established by the Board of Directors. The Bonus for any fiscal year shall be payable on or before the date 60 days after the end of such fiscal year and shall be payable one-half in cash and one- half in Common Stock of Employer, valued at the closing price of the Common Stock of Employer on NASDAQ on the date three business days after the Employer publicly discloses its financial results for the fiscal year. (c) Additional Benefits. Employee shall also be entitled to all rights and benefits for which Employee is otherwise eligible under any bonus plan, incentive, participation or extra compensation plan, pension plan, profit-sharing plan, life, medical, dental, disability, or insurance plan or policy or other plan or benefit 4 5 that Employer or its subsidiaries may provide for Employee or (provided Employee is eligible to participate therein) for senior officers or for employees of Employer generally, as from time to time in effect, during the term of this Agreement (collectively, "Additional Benefits"). The Additional Benefits shall be provided at the level commensurate with the office held at the time. (d) Perquisites. Employee shall be entitled to paid vacation in accordance with Employer's policies which are applicable to other executive employees of Employer. Commencing with this Agreement, the annual paid vacation shall be four (4) weeks. During the term of this agreement, Employer shall provide Employee a vehicle or vehicle allowance in accordance with Employer's automobile policy as from time to time in effect. (e) Limited Benefit Succession. If Employee's full-time services are terminated hereunder, other than pursuant to Section 5(c), and Employee is no longer eligible for Additional Benefits because of such termination, Employee (or in event of death, such person or persons as Employee shall have directed in writing or, in the absence of a designation, the estate of Employee (the "Beneficiary")) shall be entitled to and Employer shall provide benefits substantially equivalent to those benefits in the nature of health and welfare type benefits to which Employee was entitled immediately prior to such termination, but shall not be entitled to option, equity, appreciation, profit sharing, deferred compensation, savings, bonus, participation, pension, extra compensation and other incentive plan benefits except to the extent otherwise expressly provided in any then outstanding awards to such Employee, but in each case (1) only for the period (if any) during which Employee (or (if expressly entitled thereto) Beneficiary, as the case may be) remains entitled to receive Base Salary, (2) only to the extent that Employee or such Beneficiary is not entitled to comparable benefits from another employer or provider, and (3) subject to any other express limitations elsewhere in this Agreement or any applicable plan. 5 6 (f) Overall Qualification. Employer reserves the right to modify, suspend or discontinue any and all of the above referenced benefit plans, practices, policies and programs at any time (whether before or after termination of employment) without notice to or recourse by Employee so long as (i) such action is taken generally with respect to other similarly situated persons and does not single out Employee, and (ii) Employer makes provision that all benefits accrued to Employee to the date such plan is terminated will be paid to Employee. 5. Termination. The employment of Employee by Employer, shall be terminated prior to expiration of the term of this Agreement only as provided in this Section 5 or Section 6: (a) Disability. In the event that Employee shall fail, because of illness, incapacity or injury which is determined to be total and permanent by a physician selected by Employer or its insurers and acceptable to Employee or Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably) to render for three consecutive months or for shorter periods aggregating 75 or more business days in any twelve (12)-month period, the services contemplated by this Agreement, Employee's employment hereunder may be terminated by written notice of termination from Employer to Employee. Thereafter, Employer shall continue for the then remaining term of this Agreement to pay Base Salary to Employee at a rate and time and in an amount and manner equal to (i) the Base Salary payable immediately prior to the termination, minus (ii) the amount of any cash payments to Employee under the terms of any Employer's disability insurance. Thereafter, no further salary shall be paid. 6 7 (b) Death. In the event of Employee's death during the term, Employee's Base Salary and any other right or benefit which does not by its terms end at the death of Employee shall be paid to the Beneficiary for the then remaining term of this Agreement. This Agreement in all other respects will terminate upon the death of Employee, except as otherwise expressly provided in Section 4(f). (c) For Cause. Employee's employment hereunder shall be terminated and all of his rights to receive Base Salary, Bonus and (subject to the terms of any plans relating thereto) Additional Benefits hereunder in respect of any period after such termination, shall terminate upon a determination by the Board, acting in good faith based upon actual knowledge at such time, that Employee is engaging or has engaged in willful misconduct, or has willfully violated any law, rule or regulation or has been convicted of a felony. Notwithstanding the foregoing, Employee shall not be terminated for cause pursuant to this Section 5(c) unless and until Employee has received notice of a proposed termination for cause and Employee has had an opportunity to be heard before at least a majority of the members of the Board. 7 8 (d) Without Cause. Notwithstanding any other provision of this Section 5, the Board shall have the right to terminate Employee's employment with Employer at any time, but any such termination other than as expressly provided in Section 5(c) herein shall be without prejudice to Employee's rights to receive Base Salary and the Additional Benefits provided under this Agreement for the remainder of the term. If Employee is so terminated without cause, Employee may elect to receive a lump sum payment representing the present value of aggregate unpaid Base Salary discounted to present value at a rate of 7% per annum in lieu of all rights of Employee, including any rights to Additional Benefits hereunder, all of which shall terminate upon the payment of such lump sum amount. (e) Exclusive Remedy. Employee agrees that the payments expressly provided and contemplated by this Agreement shall constitute the sole and exclusive obligation of Employer in respect of Employee's employment with and relationship to the Company and that the payment thereof shall be the sole and exclusive remedy for any termination of Employee's employment. Employee covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of employment. 6. Change in Control. If a "Change in Control" of Employer (or any successor), as defined below, occurs during the term of this Agreement and if, within one year after the Change in Control Employee's employment hereunder is terminated for any reason other than pursuant to Section 5(c) hereof or Employee terminates his employment hereunder for "good reason", as defined below, then the Base Salary and all of the other benefits to which Employee is entitled under Section 4 hereof shall continue to the expiration of the term of this Agreement. For purposes of the foregoing provisions, "Change in Control" shall mean the occurrence of any of the following: (i) approval by the shareholders of Employer of the dissolution or liquidation of Employer; (ii) approval by the shareholders of Employer of an agreement to merge or consolidate, otherwise reorganize, with or into one or more entities, as a result of 8 9 which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned, directly or indirectly, by shareholders of the Employer immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of Employer's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization, but including in such determination any securities of the other parties to such reorganization held by affiliates of Employer); (iii) approval by the shareholders of Employer of the sale, lease, conveyance or other disposition of all or substantially all of Employer's business and/or assets to a person or entity which is not a wholly-owned subsidiary of Employer; (iv) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a person who is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding shares of Common Stock of Employer at the date of this Agreement (or an affiliate, successor, heir, descendent or related party of or to any such person), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Employer representing more than 25% of the combined voting power of Employer's then outstanding securities entitled to then vote generally in the election of directors of Employer; or (v) a majority of the Board of Directors of Employer not being comprised of Continuing Directors. For purposes of this clause, "Continuing Directors" are persons who were (A) members of the Board of Directors of Employer on the date of this Agreement or (B) nominated for election or elected to the Board of Directors of Employer with the affirmative vote of at least a majority of the directors who were Continuing Directors at the time of such nomination or election. For purposes of the foregoing provisions, "good reason" shall mean: (i) the assignment to Employee of any duties inconsistent in any respect with Employee's position (including status, offices and reporting requirements), authority, duties or responsibilities as of the date immediately preceding the Change in Control of Employer or any other action by Employer which 9 10 results in a diminishment in such position, authority, duties or responsibilities, excluding for this purpose an isolated and insubstantial action not taken in bad faith and not intended to be inconsistent with this Agreement and which is remedied by Employer promptly after receipt of notice thereof given by Employee; (ii) any reduction in salary or percentages of compensation available as target incentives, or any material change in fringe benefits or perquisites not agreed to by Employee; (iii) the cessation of Employee's eligibility to participate in any stock-based compensation plans maintained by Employer for executives prior to the Change in Control of Employer; (iv) Employer requiring Employee to be based in any office or location other than one within 30 miles of the office at which Employee is based at the time of the Change in Control of Employer, except for travel reasonably required in the performance of Employee's responsibilities; and (v) failure of any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer to expressly assume this Agreement. 7. Business Expenses. During the term of this Agreement, to the extent that such expenditures satisfy the criteria under the Internal Revenue Code for deductibility by Employer (whether or not fully deductible by Employer) for federal income tax purposes as ordinary and necessary business expenses, Employer shall reimburse Employee promptly for reasonable business expenditures, including travel, entertainment, parking, business meetings and professional dues made and substantiated in accordance with policies, practices and procedures established from time to time by the Board and incurred in pursuit and furtherance of Employer's business and good will. 8. Indemnity. To the fullest extent permitted by applicable law and the bylaws of Employer, as from time to time in effect, Employer shall indemnify Employee and hold Employee harmless for any acts or decisions made in good faith while performing services for Employer. To the same extent, Employer will pay and, subject to any legal limitations, advance all expenses, including reasonable attorneys' fees and costs of court approved settlements, actually and necessarily incurred by Employee in connection with the defense of any action, suit or 10 11 proceeding and in connection with any appeal thereon, which has been brought against Employee by reason of Employee's service as an officer or agent of Employer or of a subsidiary of Employer. 9. Miscellaneous. (a) Succession; Survival. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Employee this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of Employer or a similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of Employer hereunder including without limitation those in Section 6 hereof in respect of such successor or assignee. The obligations and duties of Employee hereunder are personal and otherwise not assignable. Employee's obligations and representations under this Agreement will survive the termination of Employee's employment, regardless of the manner of such termination. (b) Notices. Any notice or other communication provided for in this Agreement shall be in writing and sent if to Employer to its office at: International Aircraft Investors 3655 Torrance Boulevard Suite 410 Torrance, California 90503 Attention: Chairman of the Board or at such other address as Employer may from time to time in writing designate, and if to Employee at such address as Employee may from time to time in writing designate (or Employee's business address of record in the absence of such designation). Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or 11 12 pursuant to) this Section 9(b) and an appropriate answerback is received, (ii) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address. (c) Entire Agreement; Amendments. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and it supersedes any prior agreements, undertakings, commitments and practices relating to Employee's employment by Employer. No amendment or modification of the terms of this Agreement shall be valid unless made in writing and signed by Employee and, on behalf of Employer, by an officer expressly so authorized by the Board. (d) Waiver. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof or of any other right, nor shall any single or partial exercise preclude any further or other exercise of such right or any other right. (e) Choice of Law. This Agreement, the legal relations between the parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, the relationship of the parties or the subject matter hereof shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State and without regard to conflicts of law doctrines, to the extent permitted by law. (f) Agreement to Mediate Dispute. If any dispute, controversy or claim (collectively, a "Dispute") under, arising out of, in connection with, or relating to this Agreement or the respective obligations of 12 13 the parties hereto including, without limitation, any Dispute involving an alleged breach of this Agreement shall arise, representatives of the parties hereto shall meet and attempt to resolve the Dispute. If they cannot resolve the Dispute within 15 days, the parties shall, in good faith, attempt to select a third party to mediate the Dispute. The cost and expenses of the person selected to mediate the Dispute shall be paid by Employer. (g) Attorneys' Fees in Action on Contract. If any litigation shall occur between Employee and Employer which litigation arises out of or as a result of this Agreement or the acts of the parties hereto pursuant to this Agreement, or which seeks an interpretation of this Agreement. The prevailing party shall be entitled to recover all costs and expenses of such litigation, including reasonable attorneys' fees and costs. (h) Waiver of Jury Trial. EMPLOYER AND EMPLOYEE HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE EMPLOYMENT RELATIONSHIP BETWEEN THEM OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT OR SUCH RELATIONSHIP. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court or that relate to the subject matter of this Agreement, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims, to the maximum extent permitted by law. Employer and Employee each acknowledge that this waiver is a material inducement to enter into this Agreement, that each has already relied on the waiver in entering into this Agreement, and that each will continue to rely on the waiver in their related future dealings. EMPLOYER AND EMPLOYEE FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT MODIFICATIONS TO OR EXTENSIONS OF 13 14 THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. (i) Confidentiality; Proprietary Information. Employee agrees to not make use of, divulge or otherwise disclose, directly or indirectly any trade secret or other confidential or proprietary information concerning the business (including but not limited to its products, employees, services, practices or policies) of Employer or any of its affiliates of which Employee may learn or be aware as a result of Employee's employment during the Term or prior thereto as stockholder, employee, officer or director of or consultant to Employer, except to the extent such use or disclosure is (i) necessary to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other sources, or (iv) authorized in writing by Employer. The provisions of this subsection (h) shall survive the expiration, suspension or termination, for any reason, of this Agreement. (j) Trade Secrets. Employee, prior to and during the term of employment, has had and will have access to and become acquainted with various trade secrets, consisting of customer lists, contracts, and compilations of information, records and specifications, which are owned by Employer and regularly used in the operation of their respective businesses and which may give Employer an opportunity to obtain an advantage over competitors, who do not know or use such trade secrets. Employee agrees and acknowledges that Employee has been granted access to these valuable trade secrets only by virtue of the confidential relationship created by Employee's employment and Employee's prior relationship to, interest in and fiduciary relationships to Employer. Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of employment by Employer and for its benefit. 14 15 All records, files, documents, specifications, equipment, and similar items relating to the business of Employer or its affiliates, including without limitation all records relating to customers (the "Documents"), whether prepared by Employee or otherwise coming into Employee's possession, shall remain the exclusive property of Employer or such affiliates and shall not be removed from the premises of Employer or its affiliates under any circumstances whatsoever without the prior consent of a Senior Officer. Upon termination of employment, Employee agrees to promptly deliver to Employer all Documents in the possession or under the control of Employee. (k) Severability. If this Agreement shall for any reason be or become unenforceable in any material respect by any party, this Agreement shall thereupon terminate and become unenforceable by the other party as well. In all other respects, if any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances, to the fullest extent permitted by law. (l) Withholding; Deductions. All compensation payable hereunder, including salary, Bonus and other benefits, shall be subject to applicable taxes, withholding and other required, normal or elected employee deductions. (m) Section Headings. Section and other headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 15 16 (n) Counterparts. This Agreement and any amendment hereto may be executed in one or more counterparts. All of such counterparts shall constitute one and the same agreement and shall become effective when a copy signed by each party has been delivered to the other party. (o) Representation By Counsel; Interpretation. Employer and Employee each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the matters contemplated by this Agreement. Accordingly, any rule of law, including but not limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties. 16 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EMPLOYER" INTERNATIONAL AIRCRAFT INVESTORS By /s/ KENNETH D. TAYLOR ---------------------------------- Its Compensation Committee Chairman --------------------------------- "EMPLOYEE" /s/ MICHAEL P. GRELLA ------------------------------------- [name] Michael P. Grella ------------------------------------- 3655 Torrance Blvd., Suite 410 ------------------------------------- Torrance, CA 90503 ------------------------------------- [address] 17 EX-23.1 7 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors International Aircraft Investors We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Consolidated Financial and Operating Data" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Los Angeles, California April 7, 1997 -----END PRIVACY-ENHANCED MESSAGE-----