-----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, U8C20Xlp1h/a29yMsGuUCY8lrUCh+vQhZNBvn7htAQ3SNBh5ZFKbWLY0jM7JBpRa pqDCra5iH2f8nqslbBAC4Q== 0000950117-98-000591.txt : 19980324 0000950117-98-000591.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950117-98-000591 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KELLSTROM INDUSTRIES INC CENTRAL INDEX KEY: 0000918275 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 133753725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23764 FILM NUMBER: 98570673 BUSINESS ADDRESS: STREET 1: 14000 NW 4 ST STREET 2: 11TH FL CITY: SUNRISE STATE: FL ZIP: 33325 BUSINESS PHONE: 9548450427 MAIL ADDRESS: STREET 1: 14000 NW 4TH STREET CITY: SUNRISE STATE: FL ZIP: 33325 FORMER COMPANY: FORMER CONFORMED NAME: ISRAEL TECH ACQUISITION CORP DATE OF NAME CHANGE: 19940301 10-K 1 KELLSTROM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-23764 KELLSTROM INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-3753725 - ---------------------------------------- ------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 14000 N.W. 4th STREET SUNRISE, FLORIDA 33325 - --------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) (954) 845-0427 (Registrant telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share (NASDAQ National Market) Preferred Stock Purchase Rights (NASDAQ National Market) -------------------------------------------------------- (Title of each class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 27, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $184,506,600 based on the closing price on that date of $24 per share. As of that date, there were 8,170,080 shares of the registrant's Common Stock outstanding. Documents Incorporated by Reference The information required by Items 10, 11, 12 and 13 of Part III of this Form 10-K is incorporated by reference to the definitive Proxy Statement of the Company relating to the 1998 Annual Meeting of Stockholders. Certain exhibits listed in Part IV of this annual report on Form 10-K are incorporated by reference from prior filings made by the registrant under the Securities Act of 1934, as amended. Kellstrom Industries, Inc. Annual Report on Form 10-K Index
PAGE NUMBER PART I Item 1. Business............................................. 3 Item 2. Description of Properties............................ 14 Item 3. Legal Proceedings.................................... 15 Item 4. Submission of Matters to a Vote of Security Holders.. 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 15 Item 6. Selected Financial Data.............................. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................... 25 Item 8. Financial Statements and Supplementary Data.......... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 26 PART III Item 10. Directors and Executive Officers of the Registrant... 27 Item 11. Executive Compensation............................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 27 Item 13. Certain Relationships and Related Transactions....... 27 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 27
PART I This report contains forward-looking statements, under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". These forward-looking statements are based on many assumptions and factors, and are subject to many conditions, including the Company's continuing ability to effectively integrate acquired companies and the effects of increased indebtedness as a result of the Company's business acquisitions, the Company's continuing ability to acquire adequate inventory and to obtain favorable pricing for such inventory, the Company's ability to arrange for the repair of aircraft engines by third-party contractors prior to resale or lease, competitive pricing for the Company's products, customer concentration, demand for the Company's products which depends upon the condition of the airline industry and the Company's ability to collect receivables and government regulation. ITEM 1. BUSINESS. GENERAL Kellstrom Industries, Inc. ("Kellstrom" or the "Company") is a leader in the airborne equipment segments of the international aviation services after- market. The Company's principal business is the purchasing, refurbishing (through subcontractors), marketing, reselling, and leasing of aircraft jet engines, jet engine parts and commercial aircraft. The Company is also an international after-market reseller of turbojet engines and turbojet engine parts for helicopters and large transport aircraft. The Company specializes in providing engines and engine parts for large turbo-fan engines manufactured by General Electric, CFM International, Pratt & Whitney and Rolls Royce. According to industry analysts, the engine types serviced and supplied by the Company comprise approximately 73% of the total world jet engine supply. The Company's customers include original equipment manufacturers ("OEMs"), major domestic and international airlines, engine manufactures, engine parts distributors and dealers and overhaul service suppliers throughout the world. The Company enables customers to reduce their engine maintenance costs by providing Federal Aviation Administration ("FAA")-approved engines and engine parts on a timely basis and at competitive prices. The Company previously conducted business under the name "Westco International" and "International Aircraft Support" and changed the operational name of both business units to "Kellstrom Industries" on January 30, 1997. The Company's principal executive office is located at Sawgrass International Corporate Park, 14000 N.W. 4th Street, Sunrise, Florida 33325. Its telephone number is (954) 845-0427. 3 HISTORY OF THE COMPANY KST Acquisition The Company, formerly Israel Tech Acquisition Corp., was formed in December 1993 as a Specified Purpose Acquisition Company ("SPAC"), the objective of which was to consummate an initial public offering and enter into a business combination with an operating business. In April 1994, the Company consummated the initial public offering, from which it derived net proceeds of $11,321,197 after expenses. On February 15, 1995, the Company entered into an Asset Purchase Agreement (the "Acquisition Agreement") with Rada Electronic Industries, Inc., an Israeli corporation ("Rada"), Tasco Electronics Inc. (a direct wholly-owned subsidiary of Rada), and Kellstrom Industries, Inc. ("KST") (an indirect wholly-owned subsidiary of Rada), to acquire substantially all of the assets and liabilities of KST's commercial jet aircraft engine part distribution business. In connection with the closing on June 22, 1995, the Company changed its name from Israel Tech Acquisition Corp. to Kellstrom Industries, Inc. IASI Acquisition On January 15, 1997, the Company completed the acquisition of substantially all of the assets and certain liabilities of International Aircraft Support, L.P. ("IASI") for approximately $25,100,000 in cash and warrants to acquire 500,000 shares of the Company's common stock, par value $.001 per share ("Common Stock"), at $9.25 per share, expiring January 15, 1999. IASI is a worldwide seller of new and used aircraft engine parts to maintenance and overhaul facilities, major commercial airlines and other redistributors. Along with the engine parts sales, IASI is a lessor of jet engines and offers engine repair management programs through its technical services business. IASI's mix of business and its purchasing activities ultimately contribute to its position as a "market-maker" in redistributed engines and various engine parts. The IASI acquisition has enabled the Company to enter into markets for additional engine types, including the JT8D, PWA 2000 and CFM-56 markets. According to industry analysts, these engine types power aircraft which constitute 65% of the world aircraft fleet. In addition, the IASI acquisition has accelerated the Company's entry into the engine leasing business, an area in which IASI had been an active participant. The IASI acquisition has also expanded and diversified the Company's customer base, particularly in European markets. IASI's customers include major airlines, engine overhaul facilities including those operated by airlines, independent overhaul and maintenance organizations and aircraft engine manufacturers. Following the acquisition, IASI's senior management joined the Company, further broadening the Company's management team. Aero Support Acquisition On September 10, 1997, the Company completed the acquisition of substantially all of the assets and liabilities of Aero Support USA, Inc. ("Aero Support") for approximately $13,800,000 in cash and three warrants. One warrant provides for the purchase of 75,000 shares of Common Stock at an exercise price of $22.00 per share, expiring on September 9, 2000. The other two warrants provide for the purchase of an aggregate of 175,000 shares of Common Stock at an exercise price of $19.00 per share, expiring on September 9, 2002. Up to an additional $5,000,000 cash consideration may be paid by the Company in the form of an earn-out payable over three years based upon certain specified criteria. 4 Aero Support is an international after-market reseller of turbojet engines and engine parts for helicopters and large transport aircraft. Aero Support has a customer base that includes domestic and foreign operators, commercial and industrial enterprises and engine overhaul facilities. Aero Support's primary focus is on the Allison (Rolls Royce) T56/501 engine, which powers the military's Hercules C-130 aircraft, a widely used military transport aircraft, and the Allison 250, with approximately 16,000 units actively in use by helicopters. During 1996, Aero Support served 495 customers worldwide from its headquarters in New York and its additional facility in Louisiana. Prior to the Aero Support acquisition, the Company's business was focused exclusively on the commercial jet engine industry. With the addition of Aero Support's business, the Company entered the large transport aircraft and commercial helicopter engine and engine parts market. Recent Developments On February 27, 1998, the Company signed a definitive agreement to acquire privately held Integrated Technology Corporation ("ITC") for approximately $20,225,000 in cash plus an earn-out payable over a three-year period based on certain specified criteria. In addition, the Company received a three-year option to purchase a 49% interest in an FAA-approved overhaul facility. ITC is a leading after-market supplier of jet engines and jet engine parts for the airline industry. It also provides related services such as engine leasing. ITC's principal product line features the Rolls Royce RB-211, Pratt & Whitney JT8D and Rolls Royce Allison models, and, to a lesser extent, it supplies Pratt & Whitney JT9D engines and engine parts. ITC has some 75 customers worldwide, including major commercial airlines and jet engine repair facilities. GROWTH STRATEGY The Company's growth plan is focused on strong internal growth, supplemented by strategic inventory purchases, as well as the acquisition of competing and complementary businesses meeting predefined criteria. The Company pursues acquisitions either to strengthen its current product lines, increase access to customers in its existing target markets, or to expand into new product lines and reach new markets. The Company's management has developed criteria, beyond marketing and operating due diligence, which are used to analyze acquisition opportunities. The evaluation criteria include (i) the effects on earnings per share, (ii) the expected stability and inherent strength of gross margins, and (iii) and a comparative study of returns on invested capital and assets. The Company's operating strategy enables it to pursue its growth plans while maintaining and improving operating efficiencies and results. As the Company's acquisition team focuses on identifying, structuring and completing acquisitions, the Company's operations team simultaneously enhances internal procedures and controls, streamlines distribution channels and improves customer retention and account management. This operating strategy, combined with the Company's acquisition methodology, enables the Company to smoothly manage the expansion of the Company's business resulting from acquisitions. Using the foregoing methodology, the Company has been pursuing the following growth and acquisition programs: Strategic Inventory Purchases. The Company believes that its potential to grow revenues from its existing business is largely dependent on its ability to deliver engines and engine parts on a "just-in-time" basis. The lead time between purchasing engines and engine parts and having a ready-for-sale product is generally 60-90 days. The Company focuses on developing new sources of supply, such as airlines replacing portions of their fleets or disposing of excess inventory, OEMs and overhaul facilities. By broadening its sources of supply, the Company is better able to maintain a strategic stock of inventory in order to remain responsive to customer delivery requirements. The Company relies on its market expertise to analyze both short and long-term demand and supply trends. Leasing. The Company is focusing its leasing efforts on the after-market commercial engine and engine parts business. This is accomplished through the extensive background and expertise of management in the commercial jet engine and engine parts business. The Company believes that there are advantages for its customer base to consider leasing as an alternative to traditional financing. Operating leases allow greater financial flexibility due to the short-term nature and relatively small initial capital investment. Currently, the Company focuses primarily on short-term operating lease financing, 5 with an emphasis on maximizing residual values. Leasing allows the Company access to future engines and engine parts as these operating leases expire enabling the Company to disassemble the engines for parts thereby enhancing the residual values. Acquisitions in Current Markets. As a result of its concentration in certain niche markets, the Company's management develops intimate knowledge of other resellers serving similar product lines, which may be potential acquisition candidates. The IASI acquisition expanded the Company's customer base within its existing product lines, enhanced its product offering and strengthened its distribution network. Acquisitions in Adjacent Markets. The Company seeks to acquire companies offering similar product lines to target markets in which the Company does not have a significant presence, as well as new product lines. As a result of the Aero Support acquisition, the Company now offers engines and engine parts to customers in the large transport aircraft and commercial helicopter markets, which were not previously served by the Company. The Company believes that similar expansion may be achieved through the acquisition of companies offering different product lines than that of the Company, such as resellers of avionics equipment and airframes. Future Acquisition Strategies. In the future, the Company will consider acquisitions aimed at gaining market share through the acquisition of competing and complementary businesses. In addition, the Company may seek to vertically integrate its operations by adding engine parts refurbishing and manufacturing facilities, and avionics refurbishing facilities. INDUSTRY OVERVIEW The market for commercial engine parts, consisting of new and refurbished parts, is approximately $3.0 billion, as estimated by the Canaan Group, a consulting firm that tracks the aviation market. The $2.5 billion new parts market includes parts manufactured by OEMs and third-party manufacturers. The $500 million refurbished parts market includes parts refurbished by third-party manufacturers and overhaul facilities. In addition, the market for whole engines is estimated to be $7.0 billion and includes the sale and leasing of new and overhauled engines. The Company competes in the entire $10.0 billion market for engines and engine parts. The demand for after-market engine parts is driven primarily by flying hours or cycles (defined as a take-off or landing). Regardless of the profitability of the airline industry, regulations require that parts be serviced or replaced at scheduled intervals; often after specified flight hours or cycles. As such, the demand for after-market parts is a function of demand for world air travel. The airline industry has experienced rapid growth in business and leisure air travel since 1993, primarily due to a world economic recovery. The high demand for airline capacity has increased the utilization of aircraft which in turn has significantly increased the demand for spare engine parts. The Company's business remains dependent upon the overall economic condition of the airline industry, which has historically been volatile. The engine and engine parts industry is being affected by the following trends: Increasing emphasis on documentation and traceability. As safety requirements have become more stringent, regulatory authorities have increased the level of documentation required of aircraft operators. Operators have in turn extended this requirement to independent dealers. The expense and sophistication required to track the history of inventory consisting of thousands of components is considerable and provides a barrier to entry into the aircraft engine parts after-market. In addition to the 6 barriers created by documentation requirements, management believes that tighter regulations regarding the operating procedures of resellers may eliminate smaller participants and create additional barriers to entry. Outsourcing of inventory management function. Some airlines have attempted to streamline their operations by outsourcing the entire inventory management function to independent third parties. This improves the airline's profitability, as measured by return on assets by removing parts inventories from the balance sheet. Outsourcing allows third-party inventory managers to achieve economies of scale unavailable to individual airlines. Under consignment agreements, the supplier is granted the right to sell spare parts from the airlines' inventory, with the proceeds divided between the supplier and the airline itself. Leasing. Similar to outsourcing, leasing aircraft jet engines or parts is an attempt by airlines to lower their overhead and/or working capital requirements. Short-term leases, often 30-90 days in duration, are used by some carriers that do not wish to maintain a pool of spare engines. Intermediate and long-term leases (up to 10 years) are used by many larger carriers as they upgrade their fleets. Almost all of the new aircraft flown by the major carriers are leased. These carriers prefer to lease rather than purchase spare engines for their fleet. In addition, many of the new entrant jet carriers are capital constrained and thereby prefer to lease rather than own engines. Reduction in number of approved suppliers and consolidation of the engine parts after-market. In order to reduce their administrative costs, airlines are increasingly limited to a small number of approved suppliers with whom they do business. To remain an approved supplier to the airlines, dealers must maintain high standards of quality control, enabling customers to trace the complete history of any part. This move to limit the number of approved suppliers is causing a realignment among independent dealers. A small number of dealers continue to do business directly with airlines, and a new tier of dealers sell to these approved suppliers. This reduction in supplier base will continue to lead to consolidation in the market for aircraft spare parts. Increased importance of capital. Suppliers need ready access to capital in order to take advantage of various profitable opportunities including outsourcing and leasing. Larger inventories, sophisticated information technology systems and more expensive jet engines require increased access to capital. THE ENGINE AND ENGINE PARTS AFTER-MARKET Airlines maintain inventories of engines and spare parts, with inventory levels determined by the expected usage for the particular part. These inventories are stored primarily at the airline's maintenance centers, although limited quantities of certain parts are also kept at each airport serviced by the operator in order to avoid revenue-damaging AOG (aircraft on ground) situations. For the first few years after a new engine is introduced, most parts are supplied by the engine manufacturer. After about five years, engine parts tend to become available on the surplus market. This availability is the result of three primary factors: (i) when aircraft and engines are sold, supporting inventories may be sold to third parties, (ii) the development of repair scenarios provides a supply of overhauled and serviceable parts, and (iii) with experience, operators become better able to forecast their need for a particular engine part, enabling them to sell excess new part inventories. 7 Three types of engine parts are available in the after-market: new parts; serviceable parts (i.e., used parts that were removed from aircraft and were inspected and designated airworthy by the airline or by an FAA approved repair station or that were overhauled by an FAA approved entity); and unserviceable parts (i.e., used parts that were removed from aircraft that may or may not be repairable). The decision as to which type of part to purchase is made based upon the relative price and availability of parts, the condition of the specific part, the repair facilities that have been used during the life of the part, the previous owners of the part, the life remaining on the part (if applicable), the maintenance policy of the airline which will use the part and other considerations. Commercial aircraft engine parts are available from a variety of sources, including OEMs, third-party dealers, brokers (who maintain no inventory), overhaul and repair facilities, lessors and airline operators. Relationships in the engine parts market are complex; at different times participants may act as both buyers and sellers, suppliers and clients. The Company, for example, both buys from and sells to airlines, OEMs, lessors, operators of refurbishment facilities and other independent dealers. Sources for surplus aircraft engines do not exist as an organized market, and the Company must rely on field representatives and personnel, advertisements and its reputation as a buyer of surplus aircraft engines and components in order to generate opportunities to purchase these materials. The market for bulk sales of surplus aircraft engines and components is highly competitive, in some instances involving a bidding process. While the Company has been able to purchase surplus aircraft engines in this manner successfully in the past, there can be no assurance that such parts will be available on acceptable terms when needed in the future. The engine after-market consists of several business segments including engine sales, leasing, maintenance management, parts distribution, parts repair and overhauls. The Company is active in most of these segments, either directly through in-house activity or indirectly, by contracting refurbishment work to third-party suppliers. OPERATING APPROACH The principal elements of the Company's operating approach are as follows: Continue Strong Quality Orientation. The Company's management believes that its comprehensive quality program is among the best in the industry. The Company is a member of the Coordinating Agency for Supplier Evaluation (CASE), a self-governing organization formed by the airlines that evaluates and audits parts suppliers and repair stations. In addition, the Company received certification under ISO 9002 from the International Standards Organization ("ISO"). ISO's comprehensive evaluation system seeks to ensure satisfaction of customer requirements, documentation of quality management systems and verification that a product or service is designed, delivered and maintained in accordance with specific requirements. The ISO 9002 designation indicates a quality assurance standard recognized by leading businesses throughout the world. The Company believes it was the first reseller of commercial jet engines and engine parts in the world to receive such certification, which provides a distinctive competitive advantage in the marketplace. In response to recent airline tragedies and resultant increased scrutiny of airline safety, airlines and maintenance repair facilities are demanding internationally recognized quality assurance certification as a condition of doing business. The Company is one of the few vendors in the industry to have invested in a sophisticated optical imaging system for documentation storage and retrieval. This system, which includes a WORM (write once, read many) drive, provides a high degree of traceability by serial number for engine parts sold by 8 the Company. The FAA accepts this form of electronic documentation as the equivalent of original documents. Additional Knowledgeable Personnel. The market for engine parts is highly specialized and technically complex. The Company believes that its success depends heavily on the high level of technical and engineering knowledge and experience possessed by its personnel. The Company continues to add to its technically proficient personnel as its business expands and through the acquisition of competing and complementary businesses. Significant Focus on a Limited Number of Market Niches. To date, the Company has specialized in engine parts for Pratt & Whitney engines, which represent the largest segment of the commercial jet engine and engine parts after-market. The Company believes that demand in this segment will increase as the JT9D engine continues to mature. The Company recently expanded its Pratt & Whitney business to include the PWA 4000 engine. The IASI acquisition expanded the Company's Pratt & Whitney market dominance as well as introduced the CFM-56 into the Company's product line. This diversification into the CFM-56 engines extends the life cycle of the Company's products. The Aero Support acquisition diversified the Company's products into the turbojet engine and engine parts marketplace by adding the Allison (Roll Royce) T56/501 and A250 engines and parts. Optimize Inventory. The Company manages its inventory carefully by: purchasing both whole engines and individual engine parts through well-structured transactions; disassembling engines for parts when market conditions are favorable; closely monitoring the refurbishment of selected parts by high quality subcontractors; maintaining a high level of documentation at all stages of the process; and storage of the engine parts in a carefully controlled environment. In addition, the Company's management has developed a systematic approach and management procedures to assess demand for engines and engine parts. The Company believes that its ability in structuring and financing inventory purchase transactions is critical to its success. Expand Marketing Relationships. The Company maintains close relationships with a variety of key customers, including OEMs, repair facilities, domestic and international airlines and other distributors. The Company has received approved supplier status from a broad customer base throughout the world. Increase Capital Resources. It is critical for the Company to have the capital to act quickly when purchasing opportunities present themselves. In addition, increasing the Company's access to capital markets to finance working capital requirements will allow the Company to take advantage of opportunities such as leasing, inventory outsourcing and long-term inventory management contracts. PRODUCTS Engine spare parts are purchased by customers in both the commercial and military sectors. The Company is active in the commercial aircraft sector, which is divided into large jet transports, smaller commercial aircraft (known as general aviation aircraft) and helicopters. General aviation includes both jet and propeller-driven planes for business and personal use. The Company currently specializes in the large jet segment of the business. With the recent acquisition of Aero Support, the Company has added certain military customers for turbojet engines and engine parts for large transport aircraft and commercial customers for helicopters. The Company has not entered the turboprop market which is typically low-end in terms of cost per unit. 9 The Company specializes in providing refurbished, new and as-removed parts for large fan engines, particularly the Pratt & Whitney JT9D engine and to a lesser extent the PWA 4000 engine, as well as narrow-body engines such as the Pratt & Whitney JT8D and PWA 2000 engines. The JT9D and PWA 4000 power the Boeing 747, 767, and 777 aircraft, McDonnell Douglas DC-10 and MD-11 and the Airbus A300/310/330, and the JT8D and PWA 2000 engines power the Boeing 727, 737 and 757 aircraft as well as the McDonnell Douglas MD-80 and DC-9 series aircraft. Moreover, the Company recently entered the CFM-56 engine market which powers the Boeing 737-300, -400 and -500 aircraft as well as the Airbus A320, A321 and A340 aircraft and the McDonnell Douglas DC-8. The Company also provides Allison (Rolls Royce) T56/501 turbojet engines and engine parts which power the military's Hercules C-130 aircraft and similar large transport aircraft and Allison 250 turbojet engines and engine parts which power a range of commercial helicopters. Purchasers of engine parts have strict approval processes through which a company may achieve status as an approved supplier for such purchaser. Some purchasers will do business only with a very limited number of approved suppliers. Since the Company's founding, it has achieved approved supplier's status with over 50 purchasers in six countries that maintain such a limited list of approved suppliers, including the leading aero engine OEMs, international airlines, and major aero engine refurbishment and repair facilities. In addition, the Company also maintains active relationships with many other customers that utilize a broader list of approved suppliers. Several manufacturers dominate the market for large commercial airplanes, including Boeing, McDonnell Douglas, and Airbus Industries. A small number of suppliers provide the bulk of engines used to power large jet aircraft. The suppliers include the Pratt & Whitney division of United Technologies, General Electric, Rolls Royce and CFM International. The following is a brief description of the engines for which the Company supplies engine parts: The JT9D Engine. JT9D engines, introduced by Pratt & Whitney in the late 1960's are used in Boeing 747 and 767 aircraft, the McDonnell Douglas DC-10, and Airbus A300/310's. The JT9D was the first commercial turbo fan with a high bypass ratio, enabling the engine to provide unprecedented thrust with outstanding fuel efficiency and relatively low noise. The JT9D engine has flown more than 135 million hours. Three thousand of these engines were built until production ceased in 1990; 2,800 are still flying on wide body aircraft operated by over 50 airlines. The Company estimates that JT9D engines will be widely used for the next ten to fifteen years. Pratt & Whitney continues to upgrade and improve in-service engines to meet current noise and emissions requirements, thus increasing the life span of these engines. The JT8D Engine. JT8D engines, a derivative military J-52 Turbojet, were originally developed by Pratt & Whitney for the Boeing 727 airliner in 1963. The engine is the most widely used engine in commercial aviation history. More than 13,000 of the JT8D family of engines have been produced and the engine is still in production today. A variant of the basic JT8D, called the 200 Series was introduced in 1977. The older, less fuel efficient JT8D engines are used in the Boeing 727 and 737, the McDonnell Douglas DC-9, the Aerospatiale Carvelle, Dassualt Mercure, and the C-9 and C-22, U.S. military versions of the DC-9 and 727 aircraft. The newer 200 Series JT8D engines are used throughout the McDonnell Douglas MD-80 range of aircraft models. The Company estimates that the older JT8D engines will be in service for at least ten more years, and the 200 Series JT8D engines will be in service for at least twenty more years. 10 The PWA 2000 Engine. Pratt & Whitney began development in 1974 of a series of advanced technology aircraft engines to power the commercial transports of the mid-1980s and beyond. The PWA 2037, the first in the series, was awarded FAA certification in December 1983. These highly fuel efficient engines feature high thrust, low noise and reduced emissions. The PWA 2000 series engines are used to power the Boeing 757 and are considered to be current technology engines that are likely to continue in service for at least twenty-five more years. The PWA 4000 Engine. In 1982, Pratt & Whitney launched development of the PWA 4000 Series turbofan-an all-new commercial jet engine series with improved fuel efficiency and higher takeoff thrust rating. The PWA 4000 entered commercial service in mid 1987. The PWA 4000 is designed for use on current and advanced versions of such wide-body aircraft as the Airbus A300, A310, A330, the Boeing 747, 767, 777 and the McDonnell Douglas MD-11. These engines are considered to be current technology engines and are likely to continue in service for at least twenty-five more years. The CFM-56 Engine. The CFM-56 is manufactured by CFM International, a joint venture between General Electric and SNECMA, and is the second most popular engine as measured by number of aircraft in the worldwide fleet powered by this engine type. The CFM-56 is used to power the Boeing 737 and the Airbus A320, A321, A340, and the McDonnell Douglas DC-8. These engines are considered to be current technology engines and are likely to continue in service for at least twenty-five more years. The T56/501 Engine. The T56/501 engine is used to power the widely used military transport aircraft, the Hercules C-130, manufactured by Lockheed. Over 17,000 engines have been produced. The A250 Engine. The A250 engine is used to power a wide range of helicopters manufactured by Bell, McDonnell Douglas and Eurocopter. There are 16,000 engines currently in use by 2,700 helicopter operators. The development of a new engine for a commercial aircraft can take five to fifteen years. Often, an engine becomes the basis for numerous series, tailored to the needs of particular aircraft. For example, the JT9D and JT8D engine families for Pratt & Whitney include more than 15 models each. QUALITY CONTROL Engine parts are generally more expensive, flight critical, technically complex and utilize more specialized heat tolerant metals than other aircraft parts. A high standard for quality control and documentation is an absolute necessity. The history of a given part from the date of original manufacture must be documented and available to regulators and maintenance personnel. The Company is dependent on third-party FAA certified repair facilities to perform repair services to bring surplus aircraft engines held for resale and certain engine components into a condition of airworthiness so that the Company can sell such equipment. The Company's management believes that obtaining approved supplier status is heavily dependent on quality assurance, and that the Company's comprehensive quality assurance program is among the best in its industry. The Company is (i) a member of the Coordinating Agency for Supplier Evaluation (CASE), a self-governing organization formed by the airlines that evaluates and audits parts suppliers and repair stations, (ii) a member of the Airline Suppliers Association for which the Company is an accredited distributor under the provisions of FAA AC 00-56, and (iii) is listed in the European Aerospace Suppliers Register. In addition, in September 1996, the Company received certification under 11 ISO 9002. The ISO 9002 designation indicates a quality assurance standard recognized by leading companies throughout the world. The Company believes it was the first after-market supplier of commercial jet engines and engine parts in the world to receive such a certification. In addition, the Company is one of the few vendors in the industry to have invested in a sophisticated optical imaging system for document storage and retrieval. This system provides a high degree of traceability by serial number for engine parts sold by the Company. TRADEMARKS AND DESIGN PATENTS The Company either owns or has applied for various trade names and trademarks in the United States (and abroad), for use with its products. The Company believes that its trade names and trademarks are well recognized within the aviation industry. The Company also believes that the loss of any trade name and/or trademark would not have a material adverse effect on its business operations. CUSTOMERS The Company's customers include airlines, OEMs, lessors, operators of refurbishment facilities and other independent dealers. These customers include American, Delta, Lufthansa, Swissair and Singapore Airlines, Daimler-Benz, Pratt & Whitney and GE Aircraft Engine Services. For the years ended December 31, 1997, 1996 and 1995, the five largest customers collectively accounted for approximately 38%, 55% and 96% of the Company's consolidated revenues. Certain significant customers vary from period to period as a result of the large unit prices associated with whole aircraft engine sales. The loss of, or significant curtailments of purchases by, the Company's significant customers could have a material adverse effect on the Company's business, consolidated financial condition, results of operations or cash flows. COMPETITION The aviation after-market is highly competitive. Competition is based on product quality, the ability to provide needed parts quickly and price. The largest segment of the after-market is served by OEMs. However, the relatively high overhead and slow response times which characterize these large organizations can present a handicap in a fast-moving, price-sensitive marketplace. OEMs generally concentrate on selling new parts, leaving the market in serviceable and refurbished parts to other suppliers. OEM-manufactured new parts generally do not compete with refurbished parts. The largest resellers include companies such as AAR Corp. and AGES Group. There are approximately 10 to 15 midsize competitors, which include the Company. Over 50 small after-market suppliers and brokers generate a large portion of the market revenue. As a result of industry consolidation, management expects that a number of these smaller operators will either be acquired or will have difficulty competing in this changing market. The Company competes based on its ability to deliver parts on a "just-in-time" basis, the breadth of its product offering, quality assurance and part traceability, proven technical capabilities and price. 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, consolidated financial condition, results of operations or cash flows. In addition, the engine parts supply business has been reshaped by the widespread adoption of ILS - the Inventory Locator Service. The ILS lists the availability of thousands of types of engine parts from brokers, distributors, repair facilities and airlines. The listing includes the quantity of parts available, 12 the condition of the parts, when the parts are available and a contact for more information. The ILS has created a much freer flow of information concerning the supply and demand for particular parts. Dealers now must compete not only on the basis of their relationships with customers and knowledge regarding a potential source for products, but also on the quality of the parts available, the documentation tracing the history of the parts and the price. GOVERNMENT REGULATION The aviation industry is highly regulated in the United States by the FAA and the equivalent regulatory agencies in other countries. While the business of selling after-market engines and engine parts is not regulated by the FAA, the aircraft engines, engine components and airframe materials must be accompanied by documentation which enable the customers to comply with applicable regulatory requirements. Aircraft operators must maintain logs concerning the utilization and condition of aircraft engines, life-limited engine components and airframes. Before engine components may be installed in an aircraft engine, they must meet certain standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. Specific regulations vary from country to country, although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. Engine components must also be traceable to sources deemed acceptable by such agencies. Although the Company believes it complies with the highest level of such regulatory standards, standards may change in the future, requiring engine components already contained in the Company's inventory to be scrapped or modified. Aircraft engine manufacturers may also develop new engine components to be used in lieu of engine components already contained in the Company's inventory. In all such cases, to the extent that the Company has such engine components in its inventory, their value may be reduced. Management believes that the industry will be subject to continued regulatory activity. Increased oversight has and will continue to originate with quality assurance departments at airline operators. The Company has been able to meet all such requirements to date, and believes that it will meet any additional requirements that may be imposed. There can be no assurance, however, that new, more stringent government regulations will not be adopted in the future or that any such new regulations, if enacted, would not have a material adverse impact on the Company. ENVIRONMENTAL MATTERS The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations and due to the current nature of the Company's business there is little or no direct cost associated with such compliance. PRODUCT LIABILITY The Company's business exposes it to possible claims for personal injury or death which may result from the failure of an aircraft spare part or engine sold by it. While the Company maintains what it believes to be adequate aviation product liability insurance to protect it from such claims, and while no material claims have, to date, been made against the Company, no assurance can be given that claims will not arise in the future or that such insurance coverage will be adequate. Although, the Company currently maintains insurance coverage in the amount of $500 million on an aggregate and per claim basis, there can be no assurance that insurance coverage can be maintained in the future at an acceptable cost. Any such liability not covered fully or partially by insurance or third-party indemnification could have a material 13 adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. EMPLOYEES As of December 31, 1997, the Company had 65 full-time employees. None of the Company's employees are members of a labor union. The Company believes that its relations with its employees are good. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC SALES Total revenues derived from sales to domestic and international customers accounted for 79% and 21%, respectively, for the year ended December 31, 1997, 77% and 23%, respectively, for the year ended December 31, 1996 and 95% and 5%, respectively, for the year ended December 31, 1995. ITEM 2. DESCRIPTION OF PROPERTIES. The Company owns its newly built 45,000 square foot office facility located on 2.5 acres in the Sawgrass International Corporate Park, Sunrise, Florida which is near Fort Lauderdale, Florida. The Company's address is 14000 N.W. 4th Street, Sunrise, Florida 33325. As of December 31, 1997, the property was subject to a mortgage held by BankAtlantic with a remaining balance of $1,079,787, which was fully repaid in January 1998. The Company leases a 29,200 square foot facility, assumed in connection with the acquisition of IASI, located at 821/837 Industrial Road, San Carlos, California 94070. The property is subject to a lease which expires January 31, 1999 (the "IASI Lease"). Under the terms of the lease, the current monthly base rental is $21,771 per month, subject to increases each year based on the consumer price index. The Company leases a 8,500 square foot facility of office and warehouse space entered into in connection with the acquisition of Aero Support, located at 44 Hudson Street, New York, New York 10013. The lease provides for an initial term ending on September 9, 1998 with an option on the part of the Company to extend the term for a one-year and then five-year period. The annual rent payable for the initial term is $50,000 and for the initial extension is $132,000, in the case of each extension, on a triple net basis. The rent for the five-year extension will be based on market conditions at the time of renewal. The Company leases a 4,000 square foot facility of office and warehouse space, assumed in connection with the acquisition of Aero Support, located at 112 Turn Row, Lafayette, Louisiana 70502. The lease provides for a term ending September 30, 2001 at a base rental of $14,400 per year plus certain operating expenses. In addition, the Company's Board of Directors has approved the construction of a new facility in the Sawgrass International Corporate Park area, which is near Fort Lauderdale, Florida in anticipation of the expiration of the IASI Lease and the consolidation of operations in a single location. The new facility will consist of approximately 195,000 square feet of office and warehouse space. The final cost of the new facility is estimated to be approximately $9,500,000. (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources".) 14 ITEM 3. LEGAL PROCEEDINGS. There are no material legal proceedings pending against the Company or any of its property. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of stockholders of the Company during the fourth quarter of the fiscal year ended December 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since June 1997, the Company's Common Stock has been listed on The Nasdaq Stock Market ("NASDAQ")-National Market under the symbol "KELL." Prior to that date, the Company's Common Stock was listed on the NASDAQ-SmallCap Market under the same symbol. The following table sets forth the range of high and low bid prices for the Common Stock for the period from January 1996 to December 1997, as reported by NASDAQ. The quotes represent "Inter-dealer" prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions.
Common Stock High Low Year Ended December 31, 1996: First Quarter $7 1/4 $4 3/4 Second Quarter $8 7/8 $6 1/2 Third Quarter $8 3/8 $7 Fourth Quarter $8 9/16 $7 3/8 Year Ended December 31, 1997: First Quarter $14 7/8 $8 1/4 Second Quarter $17 1/8 $11 7/8 Third Quarter $21 7/8 $15 Fourth Quarter $27 1/2 $17 1/8
As of February 27, 1998, there were 8,170,080 shares of Common Stock outstanding, held by 60 stockholders of record. The Company believes that certain holders of record hold a substantial number of shares of Common Stock as nominees for a significant number of beneficial owners. The closing price for the Company's Common Stock on February 27, 1998 was $24 per share. 15 The Company has not paid any cash dividends on its Common Stock to date. The payment of dividends is within the discretion of the Board of Directors. It is the present intention of the Board of Directors to retain all earnings for use in the Company's business operations and, accordingly, the Board does not anticipate declaring any dividends in the foreseeable future. ISSUANCE OF UNREGISTERED SECURITIES DURING 1997 All of the transactions listed below involve the issuance of securities of the Company in reliance upon Section (4)2 of the Securities Act of 1933, as amended. On January 15, 1997, in connection with the acquisition of substantially all of the assets and certain liabilities of IASI, the Company issued to IASI a warrant to acquire 500,000 shares of Common Stock at an exercise price of $9.25 per share, expiring January 15, 1999. During January 1998, the 500,000 warrants were exchanged for 274,390 shares of the Company's Common Stock. On January 15, 1997, in connection with the senior subordinated debt financing related to the IASI acquisition, the Company issued a warrant to The Equitable Life Assurance Society to acquire 305,660 shares of Common Stock at an exercise price of $10.00 per share, expiring on January 15, 2004. On January 15, 1997, in connection with the bridge financing related to the IASI acquisition, the Company issued warrants to Scoggin Capital Management LP, Bedford Falls Investors LP, Metropolitan Capital Advisors LP, Diversified Strategic Funds LP, Metropolitan Capital Advisors International, Ltd to acquire an aggregate 85,625 shares of Common Stock at an exercise price of $10.00 per share, expiring on April 15, 2000. On September 10, 1997, in connection with the acquisition of substantially all of the assets and liabilities of Aero Support, the Company issued to Aero Support (i) a warrant to acquire 75,000 shares of Common Stock at an exercise price of $22.00 per share, expiring September 9, 2000, and (ii) two warrants to acquire an aggregate of 175,000 shares of Common Stock at an exercise price of $19.00 per share, expiring September 9, 2002. On September 10, 1997, in connection with the acquisition of Aero Support, the Company issued to Helix Capital Corporation, LLC, (i) a warrant to acquire 2,250 shares of Common Stock at an exercise price of $22.00 per share expiring September 9, 2000, and (ii) a warrant to acquire 5,250 shares of Common Stock at an exercise price of $19.00 per share expiring September 9, 2002, relating to services performed by Helix. On October 10, 1997, the Company sold $50,000,000 aggregate principal amount of 5 3/4% Convertible Subordinated Notes due 2002, to BT Alex. Brown for resale to certain qualified institutional buyers. On November 14, 1997, BT Alex. Brown exercised its overallotment option and acquired an additional $4,000,000 of such notes for resale to certain qualified institutional buyers. The Notes are convertible into shares of Common Stock at a conversion price of $27.50 per share. The aggregate net proceeds to the Company from the sale of the notes was approximately $52,209,819. ITEM 6. SELECTED FINANCIAL DATA The financial data set forth below should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere herein. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 16
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------- INCEPTION DECEMBER 28, 1993 THROUGH DECEMBER 31, 1997 1996 1995 1994 _______ _______ _______ _______ (IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Total revenues $79,439 $24,922 $ 8,579 $ -- Total operating expenses 61,828 20,168 7,062 -- Net operating income 17,611 4,753 1,517 -- Interest expense, net of interest income 3,991 645 (225) (309) Non-operating expenses -- -- 1,110 317 Income taxes 5,077 1,462 257 -- ------- ------- ------- ------- Net income (loss) $ 8,543 $ 2,646 $ 374 $ (8) ======= ======= ======= =======
DECEMBER 31, ---------------------------------------- 1997 1996 1995 1994 ------ ------- -------- -------- BALANCE SHEET DATA: Total current assets $ 53,333 $ 19,655 $ 15,689 $ 685 Total current liabilities 19,020 8,565 6,019 100 Total assets 134,361 29,545 21,918 11,483 Non-current obligations 65,430 2,819 2,760 -- Stockholders' equity 49,912 18,161 13,139 9,227
17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following should be read in conjunction with the Company's consolidated financial statements and the related notes thereto included elsewhere herein. The Company, formerly named Israel Tech Acquisition Corp., was formed in December 1993 as a SPAC, the objective of which was to consummate an initial public offering and enter into a business combination with an operating business. In April 1994, the Company consummated the initial public offering. On June 22, 1995, the Company completed the acquisition of substantially all of the assets and liabilities of the commercial jet aircraft engine part distribution business of Kellstrom Industries, Inc., an indirect wholly-owned subsidiary of Rada Electronic Industries, Inc. In connection with the Closing, the Company changed its name from Israel Tech Acquisition Corp. to Kellstrom Industries, Inc. The operations of the SPAC are no longer pertinent and, accordingly, this analysis of results of operations will focus upon the actual operating results of the Company for the years ended December 31, 1997, 1996 and 1995 as reported in the Company's consolidated financial statements included elsewhere herein. On January 15, 1997, the Company through a wholly-owned subsidiary completed the acquisition of substantially all of the assets and certain liabilities of IASI for approximately $25,100,000 in cash and warrants to purchase 500,000 shares of Common Stock at $9.25 per share. The warrants expire in January 1999. (See Note 18(b) to the Company's consolidated financial statements for a pro forma consolidated combined statements of earnings for the years ended December 31, 1997 and 1996.) During January 1998, the 500,000 warrants were exchanged for 274,390 shares of the Company's Common Stock. On February 4, 1997, the Company called its publicly traded warrants (the "Public Warrants") pursuant to their terms. There were 4,166,510 Public Warrants outstanding at December 31, 1996. The Company received proceeds of $22,961,950 from the exercise of Public Warrants during the period from October 1, 1996 to March 21, 1997. On September 10, 1997, the Company through a wholly-owned subsidiary completed the acquisition of substantially all of the assets and certain liabilities of Aero Support for approximately $2,100,000 in cash and approximately $11,700,000 in short-term notes payable, plus 3-5 year warrants to purchase up to 250,000 shares of the Company's Common Stock at $19.00-22.00 per share. (See Note 18(b) to the Company's consolidated financial statements for a pro forma consolidated combined statements of earnings for the years ended December 31, 1997 and 1996.) On September 24, 1997, the Company through a wholly-owned subsidiary completed the acquisition of a portfolio of commercial aircraft and jet engines, all of which were under operating leases from Aerocar Aviation Corp. The leases expire beginning in early 1998 through the spring of 2002. The consideration paid by the Company consisted of approximately $20,300,000 in cash. On October 10, 1997, the Company completed a private placement of $50,000,000 aggregate principal amount of 5 3/4% Convertible Subordinated Notes (the "144A Notes") due 2002, plus an additional $4,000,000 to cover overallotments to BT Alex. Brown for resale to certain qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended. Proceeds from the offering were used for repayment of indebtedness, the purchase of inventory, and general corporate purposes including acquisitions of complementary businesses. On February 27, 1998, the Company signed a definitive agreement to acquire privately held Integrated Technology Corporation ("ITC") for approximately $20,225,000 in cash plus an earn-out 18 payable over a three-year period based on certain specified criteria. In addition, the Company received a three-year option to purchase a 49% interest in a related FAA-approved overhaul facility. The Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. Although the Company has historically experienced increasing net sales, the Company may experience significant fluctuations in its gross margins and operating results in the future, both on an annual and a quarterly basis, caused by various factors, including general economic conditions, specific economic conditions in the commercial aviation industry, the availability, package size and price of surplus aviation material, the size and timing of customer orders, returns by and allowances to customers and the cost of capital to the Company. In a strategic response to a changing, competitive environment, the Company may elect from time to time to make certain pricing, product or marketing decisions, and any such decisions could have a material adverse effect on the Company's periodic results of operations, including net sales and net income from quarter to quarter. A large portion of the Company's operating expenses are relatively fixed. Since the Company typically does not obtain long-term purchase orders or commitments from its customers with respect to the sale of engines or engine parts, it must anticipate the future volume of orders based upon the historic purchasing patterns of its customers and upon its discussions with its customers as to their future requirements. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on the Company's business, consolidated financial condition, results of operations or cash flows. Therefore, comparisons of recent net sales and operating results of the Company should not be taken as indicative of the results of operations that can be expected in the future. There can be no assurance that the net sales and operating results of the Company will continue at their current levels or will grow, or that the Company will be able to achieve sustained profitability on a quarterly or annual basis. The Company's Board of Directors has approved the construction of a new facility in the Sawgrass International Corporate Park area, which is near Fort Lauderdale, Florida in anticipation of the expiration of the IASI Lease and the consolidation of operations in a single location. The new facility will consist of approximately 195,000 square feet of office and warehouse space. The final cost of the new facility is estimated to be approximately $9,500,000. The Company's inability to collect receivables from a substantial sale could adversely affect the Company's financial position and results of operations for a particular period although the Company's policy is to generally sell whole engines for cash at closing. Although the Company's bad debt loss was $17,796 for the year ended December 31, 1997, the Company anticipates that it may incur greater bad debt losses in the future as its customer base grows and the Company experiences greater exposure to its customers as a result, in part, of the implementation of its program for the leasing of aircraft engines airframes. There can be no assurance that the Company will not incur significant bad debt losses in the future. RESULTS OF OPERATIONS Years Ended December 31, 1997 and 1996 Net sales of aircraft and engine parts increased by 198% to $71,534,539 for the year ended December 31, 1997 as compared to $24,019,999 for the year ended December 31, 1996. The increase in net sales of aircraft and engine parts was primarily due to (i) incremental sales of approximately $23,800,000 related to the acquisition of the IASI operations, (ii) internal growth of sales of approximately $16,900,000 primarily due to additional inventory availability as a result of the Company's increased capital resources, and (iii) incremental sales of approximately $6,800,000 related to the acquisition of the Aero Support operations. Rental revenues increased by 777% to $7,904,610 for the year ended December 31, 1997 as compared to $901,588 for the year ended December 31, 1996. The increase in rental revenues was 19 primarily due to (i) the Company's continued expansion into the short-term leasing business through purchases of individual assets resulting in incremental rental revenues of approximately $5,500,000 and (ii) the purchase of a portfolio of commercial aircraft and jet engines during the fourth quarter of 1997 resulting in additional rental revenues of approximately $1,500,000. Cost of goods sold increased by 199% to $46,800,589 for the year ended December 31, 1997 as compared to $15,649,127 for the year ended December 31, 1996; the gross profit margin decreased to 34.6% in 1997 from 34.9% in 1996. The increase in cost of goods sold was primarily due to the increased sales volume associated with the IASI and Aero Support operations as well as continued internal sales growth within the Company. Depreciation of equipment under operating leases increased by 684% to $4,594,399 for the year ended December 31, 1997 as compared to $586,032 for the year ended December 31, 1996. The increase in depreciation of equipment under operating leases was primarily due to (i) the Company's expansion into the short-term leasing business through purchases of individual assets resulting in incremental depreciation expense of approximately $3,300,000 and (ii) the purchase of a portfolio of commercial aircraft and jet engines during the fourth quarter of 1997, resulting in additional depreciation expense of approximately $700,000. Selling, general and administrative expenses increased by 154% to $8,877,598 for the year ended December 31, 1997 as compared to $3,491,457 for the year ended December 31, 1996; however, as a percentage of total revenues, selling, general and administrative expenses decreased to 11.2% in 1997 from 14.0% in 1996. The increase in selling, general and administrative expenses was primarily due to expenses of approximately $2,900,000 related to the continuing operations of IASI and Aero Support. In addition, approximately $2,500,000 related to the continued expansion of the Company's sales and warehouse operations in order to support a higher level of revenue and a corresponding greater number of whole engine and engine component transactions, and the continued addition of marketing and management personnel necessary to achieve and administer the revenue growth opportunities that are available due to the Company's expanded level of inventory investment. Selling, general and administrative expenses as a percentage of total revenues decreased primarily due to economies of scale and operating efficiencies. The Company expects selling, general and administrative expenses to continue to increase due to the Company's growth plans and need for additional personnel and facilities to support the Company's operations. Depreciation and amortization expense increased by 252% to $1,555,673 for the year ended December 31, 1997 as compared to $441,854 for the year ended December 31, 1996; however, as a percentage of total revenues, depreciation and amortization expense increased to 2.0% in 1997 from 1.8% in 1996. The increase in depreciation and amortization expense was primarily due to amortization of goodwill related to the IASI and Aero Support acquisitions. Interest expense (net of interest income) increased by 519% to $3,991,212 for the year ended December 31, 1997 as compared to $644,527 for the year ended December 31, 1996. The increase in interest expense was primarily due to interest expense and related costs of approximately $3,000,000 for the $35,600,000 and $17,300,000 of debt assumed and incurred related to the acquisitions of IASI and Aero Support, respectively, as well as interest expense of approximately $400,000 related to the overall increases in the Company's debt levels due to the investment in equipment under operating leases. The Company expects interest expense to continue to increase as the Company continues to expand its inventory levels and facilities to support future growth in operations and completes acquisitions funded 20 by debt. There can be no assurance, however, that the Company's operations will expand or that it will complete any material acquisitions. Net income increased by 223% to $8,542,519 for the year ended December 31, 1997 as compared to $2,646,343 for the year ended December 31, 1996. Basic earnings per common share increased by 31% to $1.18 for the year ended December 31, 1997 as compared to $0.90 for the year ended December 31, 1996. Diluted earnings per common share increased by 70% to $0.95 for the year ended December 31, 1997 as compared to $0.56 for the year ended December 31, 1996. Years Ended December 31, 1996 and 1995 Net sales of aircraft and engine parts increased by 180% to $24,019,999 for the year ended December 31, 1996 as compared to $8,579,017 for the year ended December 31, 1995. The increase in net sales of aircraft and engine parts was primarily due to the increased availability of cash resources to acquire inventory for resale. The Company believes that the availability of inventory is a critical factor in achieving sales growth in its industry. Rental revenues increased by 100% to $901,588 for the year ended December 31, 1996 as compared to no rental revenue for the year ended December 31, 1996. The increase in rental revenues was primarily due to the Company entering into two new operating leases during the year ended December 31, 1996. Cost of goods sold increased by 191% to $15,649,127 for the year ended December 31, 1996 as compared to $5,378,053 for the year ended December 31, 1995; however, gross profit margins decreased to 34.9% in 1996 from 37.3% in 1995. The increase in cost of goods sold was primarily due to increased sales volume and a shift in the sales mix during 1996. During the year ended December 31, 1995, the gross profit margin was unusually high as a result of several large, very profitable engine sales. The Company does not anticipate that the unusually high gross profit margins experienced in the fourth quarter of 1995 will continue on a regular basis. Depreciation of equipment under operating leases increased by 100% to $586,032 for the year ended December 31, 1996 as compared to no depreciation of equipment under operating leases for the year ended December 31, 1995. The increase in depreciation of equipment under operating leases was primarily due to the depreciation associated with the two new operating leases entered into during the year ended December 31, 1996. Selling, general and administrative expenses increased by 136% to $3,491,457 for the year ended December 31, 1996 as compared to $1,482,048 for the year ended December 31, 1995; however, as a percentage of total revenues, selling, general and administrative expenses decreased to 14.0% in 1996 from 17.3% in 1995. The increase in selling, general and administrative expenses was primarily due to expanding the Company's office and warehouse facilities along with its sales, administrative and warehouse personnel levels to efficiently address the Company's increased inventories and the resultant increased volume of revenues. Depreciation and amortization expense increased by 118% to $441,854 for the year ended December 31, 1996 as compared to $202,331 for the year ended December 31, 1995; however, as a percentage of total revenues, depreciation and amortization decreased to 1.8% in 1996 from 2.4% in 1995. The increase in depreciation and amortization expense was primarily due to increased depreciation 21 expense resulting from the expansion of the Company's office and warehouse facilities during the year ended December 31, 1996. Interest expense (net of interest income) increased by 186% to $644,527 for the year ended December 31, 1996 as compared to net interest income of $225,452 for the year ended December 31, 1995. The increase in interest expense was primarily due to the increase in the borrowing levels necessary to expand the Company's inventory levels, as well as financing of the expansion of the Company's office and warehouse facilities. Net income increased by 607% to $2,646,343 for the year ended December 31, 1996 as compared to $374,439 for the year ended December 31, 1995. Basic earnings per common share increased by 543% to $0.90 for the year ended December 31, 1996 as compared to $0.14 for the year ended December 31, 1995. Diluted earnings per common share increased by 460% to $0.56 for the year ended December 31, 1996 as compared to $0.10 for the year ended December 31, 1995. LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 1997, the Company's liquidity and capital resources included cash and cash equivalents of $462,676 and working capital of $34,313,730. As of December 31, 1997, total outstanding debt was $73,088,800 as compared to $8,187,595 as of December 31, 1996. As of December 31, 1997, the outstanding principal balance on the 144A Notes was $54,000,000 and the Company had contractual lines of credit totaling $55,000,000 of which $27,048,011 was available. Cash flows used in operating activities for the year ended December 31, 1997 was $22,356,482 compared with $2,622,996 for the year ended December 31, 1996. The primary uses of cash for operating activities during the year ended December 31, 1997 was due to purchases of equipment under operating leases of $51,891,994 and an increase in accounts receivable and prepaid expenses with a corresponding decrease in accounts payable which amounted to $8,183,434. The primary sources of cash for operating activities for the year ended December 31, 1997 was due to a decrease in inventory and increase in accrued expenses which amounted to $22,504,327, coupled with net income of $8,542,519 and total depreciation and amortization of $6,910,091. Cash flows used in investing activities for the year ended December 31, 1997 was $28,952,749 compared with $2,540,491 for the year ended December 31, 1996. The primary uses of cash for investing activities for the year ended December 31, 1997 was related to the acquisitions of IASI and Aero Support for $27,709,430 and purchases of property, plant and equipment for $2,418,677, offset by proceeds from the sale of investment securities of $428,499. On January 15, 1997, the acquisition of IASI was completed and primarily financed through the issuance of $15,000,000 in senior subordinated debt (the "Senior Debt") and warrants, as well as the proceeds of a $6,000,000 subordinated bridge loan ("Bridge Loan") and warrants with the balance from the Company's working capital. The Company also assumed IASI's existing debt, including various credit facilities with Union Bank of California ("Union Bank") secured by IASI's assets, which facilities provided for credit of up to a maximum of approximately $20,000,000 as of the date of the acquisition. The amount of credit outstanding as of the date of acquisition was $14,555,826. Interest on the credit facilities accrued daily and ranged from .50% to 1.00% above Union Bank's prime rate, and was payable monthly. In March 1997, the remaining balance outstanding on this credit facility was fully repaid. 22 The Company entered into certain short-term equipment leases during the years ended December 31, 1997 and 1996, and acquired certain other equipment under lease as part of the IASI acquisition. The Company continues to believe this activity should allow it to liquidate the remaining maintenance value of jet engines on a profitable basis by realizing both rental revenue as well as maintenance reserve fees charged to the Company's engine lease customers for their utilization of such engines. Upon the full consumption of the remaining maintenance value of the equipment, the Company will evaluate the equipment's condition in order to determine if such equipment should be refurbished or should be disassembled into piece parts in support of the Company's parts supply business. These leases are accounted for as operating leases. The Company's acquisition of Aero Support was financed primarily through the issuance of short-term notes payable, which were due from September 1997 to January 1998, the Company's working capital and warrants. The Company also assumed Aero Support's existing debt of $3,498,537, which was immediately paid by the Company upon consummation of the acquisition. The amount of short-term notes payable as of the date of acquisition and December 31, 1997 was $11,687,867 and $2,688,410, respectively. Interest on the remaining short-term notes payable accrued at an annual rate equal to the prime rate and was fully repaid during January 1998. Cash flows provided by financing activities for the year ended December 31, 1997 was $51,617,653 compared with $5,106,870 for the year ended December 31, 1996. The primary sources of cash for financing activities for the year ended December 31, 1997 related to proceeds from the issuance of the 144A Notes of $54,000,000 and issuance of Common Stock of $20,776,420, offset by repayments of debt incurred and assumed of $18,363,997 and payment of deferred financing costs of $4,432,355. On December 23, 1996, the Company entered into a Revolving Loan Agreement with Barnett Bank, N.A. This Revolving Loan Agreement replaced the working capital line and the guidance line with BankAtlantic, and increased the Company's bank credit lines from $8.0 million to $15.0 million. This arrangement reduced the interest rate paid by the Company from 1% above BankAtlantic's prime rate to 1/8% below Barnett's prime rate or, at the Company's option, to LIBOR plus 275 basis points. Indebtedness under the Revolving Loan Agreement was secured by substantially all the Company's assets. The advance rate formulas under this bank facility were liberalized to provide for advances against foreign receivables. This modification is important to the Company as its foreign business has recently represented a greater percentage of its total revenues. On April 24, 1997, in order to modify and consolidate its current credit facilities, the Company entered into a $55,000,000 revolving loan agreement with Barnett Bank, N.A. The loan bears interest at .25% below the bank's prime rate (which was 8.25% at February 27, 1998) and is due on April 24, 1998. On April 28, 1997, utilizing funds from the new facility, the Company paid $13,640,774 to fully satisfy the existing credit lines outstanding with Union Bank. The new loan agreement is secured by substantially all of the Company's assets. Effective March 11, 1998, the Company's credit facility has been expanded to a three-year $100,000,000 lending agreement. The interest rate under the new expanded credit facility is .25% below the bank's prime, or at the Company's option, LIBOR plus 175-275 basis points. During the year ended December 31, 1997, the Company's highest utilization of its Barnett Bank $55,000,000 working capital line was $26,868,581. The outstanding balance at December 31, 1997 on the Barnett Bank revolving credit facility was $4,070,603. As of December 31, 1997, the Company had a first mortgage of $1,079,787 (including a $750,000 construction/mortgage loan) held by BankAtlantic and secured by the Company's office and warehouse facilities. The interest on the mortgage is 10.49% per annum. Principal and interest are payable in monthly installments of $20,238. Principal is amortized over a ten-year period with a final 23 payment of $20,238 due May 2005. During January 1998, the Company fully repaid the first mortgage held by BankAtlantic. The Senior Debt is held by The Equitable Life Assurance Society of the United States ("Equitable"). The interest rate on the Senior Debt is 11 3/4% per annum, payable quarterly. Additionally, warrants to purchase 305,660 shares of Common Stock were issued to Equitable. The warrants are exercisable at $10 per share and expire on January 15, 2004. Principal on this debt is payable in two equal annual installments beginning January 15, 2002 and a final payment in the amount of $1,250,000 payable on January 15, 2004. The outstanding balance at December 31, 1997 on the Senior Debt was $11,250,000. An advance principal payment of $3,750,000, along with a prepayment penalty of 1%, was made by the Company on October 10, 1997 with the proceeds received from the 144A Notes offering. Moreover, the Company may at its option, redeem up to an additional $750,000 (along with a prepayment penalty of 1%) of principal amount of Senior Debt concurrently or within five days after the occurrence of any public offering of the Company's Common Stock as long as the principal balance of the debt is not reduced below $10,500,000. In connection with the Bridge Loan, the Company issued warrants to purchase 75,000 shares of Common Stock at an exercise price of $10 per share, exercisable until three years from the repayment of the Bridge Loan. A portion of the Bridge Loan, in the amount of $1,000,000, was repaid on February 12, 1997 with the remaining amount of $5,000,000 being repaid on April 15, 1997. On February 4, 1997, the Company called its publicly traded warrants pursuant to their terms. There were 4,166,510 publicly traded warrants outstanding at December 31, 1996. Each warrant entitled the holder to purchase one share of the Company's Common Stock at an exercise price of $5.00 per share. The Company received total proceeds of $22,961,950 from the exercise of warrants during the period from October 1, 1996 to March 21, 1997. On September 24, 1997, the Company signed a definitive agreement with Aerocar Aviation Corp. to purchase commercial aircraft and jet engines, all of which were under operating leases, for $20,300,000 in cash. The portfolio consists of aircraft and engines on leases expiring from early 1998 through 2002. The purchase is intended to enable the Company to enter the short-term aircraft leasing business and to increase its whole engine leasing business. The agreement with Aerocar Aviation Corp. closed on October 14, 1997, and was financed with the net proceeds from the sale of the 144A Notes. On October 10, 1997, the Company completed a private placement under Rule 144A of the Securities Act of 1933, as amended, of $54,000,000 aggregate principal amount of the 144A Notes. Proceeds of the offering were used for repayment of indebtedness, the purchase of inventory, acquisitions of complementary businesses and general corporate purposes. The Company plans to take advantage of growth opportunities that are consistent with the Company's expansion and profit objectives. These growth opportunities will require the investment of cash into inventories of jet engines and jet engine parts. Greater availability of such inventories will better enable the Company to continue to increase its revenues as well as to encourage the development of strategic relationships with new customers. The Company intends to finance its inventory expansion program through its credit facilities, which were expanded in March 1998, and through the employment of its cash flows along with the management of trade credits. In the future, the Company may require additional sources of capital to continue to fund its expansion. The Company's Board of Directors has approved the construction of a new facility in the Sawgrass International Corporate Park area, which is near Fort Lauderdale, Florida in anticipation of the expiration of the IASI Lease and the consolidation of operations in a single location. The new facility will consist of approximately 195,000 square feet of office and warehouse space. The final cost of the new facility is estimated to be approximately $9,500,000. 24 The Company's management believes that cash flow from operations, combined with the Company's borrowing facilities should be sufficient for the Company's current level of operations. In addition, the Company continues to evaluate the expansion of its credit facility and to increase inventory purchases. However, the Company may elect to seek equity capital in the future depending upon market conditions and the capital needs of the Company. YEAR 2000 ISSUE The Company has developed plans to address the possible exposures related to the impact on its computer systems of the Year 2000 problem. The plan provides for the conversion efforts to be completed by the end of 1999. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Management does not expect the financial impact of making the required system changes to be material to the Company's consolidated financial position, results of operations or cash flows which are being funded through operating cash flows. The Company is expensing all costs associated with these systems changes as the costs are incurred. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 130 on the Company's consolidated financial position, results of operations or cash flows. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports to shareholders. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 131 on the Company's consolidated financial position, results of operations or cash flows. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 standardizes the disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other postretirement benefits. SFAS 132 is effective for fiscal years beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 132 on the Company's consolidated financial position, results of operations or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 25 The Company's consolidated financial statements for the years ended December 31, 1997, 1996 and 1995, and the respective notes thereto, are set forth elsewhere in this report. An index of these financial statements appears in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 26 PART III The information required by Items 10, 11, 12 and 13 of Part III of Form 10-K will be set forth in the definitive Proxy Statement of the Company relating to the 1998 Annual Meeting of Stockholders and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) The following consolidated financial statements are filed as part of this Form 10-K: Kellstrom Industries, Inc. Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (2) The following financial statement schedules are filed as part of this Form 10-K: Schedule II - Valuation and Qualifying Accounts (3) See Index of Exhibits included elsewhere herein. (b) Reports on Form 8-K: On March 31, 1997, the Company filed an Amended Report on Form 8-K/A. The Form 8-K/A was filed to incude the financial statements and pro forma financial information relating to the Company's acquisition of substantially all of the assets and certain liabilities of International Aircraft Support, L.P. On November 24, 1997, the Company filed an Amended Report on Form 8-K/A. The Form 8-K/A was filed to include the financial statements and pro forma financial information relating to the Company's acquisition of substantially all of the assets and certain liabilities of Aero Support USA, Inc. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: March 23, 1998 KELLSTROM INDUSTRIES, INC. (Registrant) By: /s/ Zivi R. Nedivi ------------------------------ Title: Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf by the Registrant and in the capacities and on the dates indicated.
Signature Title Date _________ _____ ____ /s/ Zivi R. Nedivi President and Chief Executive March 23, 1998 - ------------------------ Officer and Director Zivi R. Nedivi (principal executive officer) /s/ Yoav Stern Chairman of the Board of Directors March 23, 1998 - ------------------------ Yoav Stern /s/ John S. Gleason Executive Vice President March 23, 1998 - ------------------------ Treasurer and President John S. Gleason of Kellstrom Commercial Aircraft Division and Director /s/ Michael W. Wallace Chief Financial Officer March 23, 1998 - ------------------------ (principal financial and Michael W. Wallace accounting officer) /s/ David Jan Mitchell Director March 23, 1998 - ------------------------ David Jan Mitchell /s/ Niv Harizman Director March 23, 1998 - ------------------------ Niv Harizman
28 EXHIBIT INDEX Exhibit No. Description _______________________ 3.1 The Company's Restated Certificate of Incorporation (incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, Number 33-75750, filed with the Commission April 1, 1994). 3.2 The Company's By-laws (incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, Number 33-75750, filed with the Commission April 1, 1994). 3.3 Certificate of Designations setting forth the terms of the Series A Junior Participating Cumulative Preferred Stock, par value $.001 per share (incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A filed with the Commission on January 16, 1997). 4.1 Indenture, dated as of October 10, 1997, by and between the Company and First Union National Bank (incorporated by reference to the Quarterly Report on Form 10-QSB filed with the Commission on November 11, 1997). 4.2 Form of Note (included in Exhibit 4.1). 4.3 Registration Rights Agreement dated as of October 10, 1997 by and between the Company and BT Alex. Brown Incorporated (incorporated by reference to the Quarterly Report on Form 10-QSB filed with the Commission on November 11, 1997). 10.1 Letter Agreement among each of the Stockholders of the Company, the Company, and GKN Securities Corp. (without schedules) (incorporated by reference to Registration Statement on Form S-1, Number 33- 75750, filed with the Commission February 25, 1994). 10.2 Asset Purchase Agreement, dated February 15, 1995, among ITAC, Rada Electronic Industries Limited, Tasco Electronics Inc. and the Company (incorporated by reference to the Current Report on Form 8-K/A filed with the Commission on March 14, 1994). 10.3* Management Agreement, dated January 1, 1997, between East Shore Ventures, Inc. and the Company (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.4* Employment Agreement, dated January 30, 1996, between Anthony Motisi and the Company (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.5* Employment Agreement, dated January 1, 1996, between Paul F. Steele and the Company (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.6* Employment Agreement, dated May 18, 1995, between John Gleason and the Company (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 30, 1996). 10.7* Employment Agreement, dated October 25, 1996, between Fred von Husen and the Company (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.8* Amendment No. 1 to Employment Agreement, dated February 14, 1997, between John Gleason and the Company (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.9* Employment Agreement, dated April 1, 1997, between Michael Wallace and the Company. 29 10.10* Employment Agreement, dated October 25, 1996, between Donald E. Reynolds and the Company. 10.11 Stockholders Agreement dated August 24, 1995 among Zivi R. Nedivi, Joram D. Rosenfeld and Yoav Stern (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 30, 1996). 10.12 Amendment, dated January 15, 1996, to Stockholders Agreement dated August 24, 1995, among Zivi R. Nedivi, Joram D. Rosenfeld and Yoav Stern (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.13 Stock Purchase Agreement dated August 24, 1995, between the Company and Zivi R. Nedivi (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 30, 1996). 10.14 Asset Purchase Agreement, dated October 28, 1996, by and among the Company, a wholly owned subsidiary of the Company and IASI (incorporated by reference to the Current Report on Form 8-K filed with the Commission on January 23, 1997). 10.15 Form of Warrant dated January 15, 1997 between the Company and IASI (incorporated by reference to the Current Report on Form 8-K filed with the Commission on January 23, 1997). 10.16 Securities Purchase Agreement dated as of January 15, 1997 between the Company and The Equitable Life Assurance Society of the United States (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.17 Amendment No. 1 to Securities Purchase Agreement dated February 14, 1997 between the Company and The Equitable Life Assurance Society of the United States (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.18 Warrant dated January 15, 1997 between the Company and The Equitable Life Assurance Society of the United States (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.19 Note Purchase Agreement dated as of January 9, 1997 by and among the Company and the Purchasers listed on Schedule I thereto (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.20 Amendment No. 1 to the Note Purchase Agreement dated January 15, 1997 by and among the Company and the Purchasers listed on Schedule I thereto (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.21 Form of warrant between the Company and the Purchasers listed on Schedule I to the Note Purchase Agreement (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.22 Revolving Loan Agreement dated as of March 11, 1998 by and between the Company and Barnett Bank, N.A. 10.23 Letter Agreement dated March 28, 1997 by and between Helix Management Company II, LLC and Helix Capital Services, LLC (collectively "Helix") and the Company. 10.24 Rights Agreement, dated January 14, 1997, by and between the Company and Continental Stock Transfer and Trust Company (incorporated by reference to the Registration Statement on Form 8-K/A filed with the Commission on January 16, 1997). 30 10.25* 1995 Stock Option Plan of the Company (incorporated by reference to the Current Report on Form 8-K filed with the Commission on September 24, 1997). 10.26* 1996 Stock Option Plan of the Company (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 10.27* 1997 Stock Option Plan of the Company. 10.28 Asset Purchase Agreement, dated September 10, 1997, by and among Kellstrom Industries, Inc. and Aero Support Holdings, Inc., on the one hand and Aero Support, U.S.A. Inc. Zvi Bar-On, Mordechai Markowicz and Michael Navon, on the other hand. (incorporated by reference to the Current Report on Form 8-K filed with the Commission on September 24, 1997). 10.29 Form of Warrant between the Company and Aero Support, USA, Inc. (incorporated by reference to the Quarterly Report on Form 10-QSB filed with the Commission on November 11, 1997). 10.30 Warrant dated September 10, 1997 between the Company and Helix. 10.31 Warrant dated September 10, 1997 between the Company and Helix. 21 Subsidiaries of the Registrant 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule * Compensatory plan or agreement. Kellstrom Industries, Inc. Schedule II - Valuation and Qualifying Accounts For the years ended December 31, 1997, 1996 and 1995
Additions- Additions- Deductions- Balance at charged to based on uncollectible Balance at beginning costs and purchase accounts end Description of period expenses accounting written off of period ----------- --------- ---------- ---------- ------------ ----------- 1997 Allowance for doubtful accounts $150,000 $ -- $167,990 $ 17,796 $ 335,786 Accumulated amortization-goodwill 409,863 1,145,663 -- -- 1,555,526 1996 Allowance for doubtful accounts $125,531 $ 24,469 $ -- $ -- $ 150,000 Accumulated amortization - goodwill 138,853 271,010 -- -- 409,863 1995 Allowance for doubtful accounts $ -- $ 11,000 $168,590 $ 54,059 $ 125,531 Accumulated amortization - goodwill -- 138,853 -- -- 138,853
31 STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as.............................. 'SS' The following Consolidated Financial Statements are attached hereto:
Page ____ Kellstrom Industries, Inc. Consolidated Financial Statements: Independent Auditors' Report F-1 Consolidated Balance Sheets at December 31, 1997 and 1996 F-2 Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and 1995 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-9
Independent Auditors' Report The Board of Directors and Stockholders Kellstrom Industries, Inc.: We have audited the accompanying consolidated balance sheets of Kellstrom Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1997. 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 Kellstrom Industries, Inc. and subsidiaries as of December 31, 1997 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, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Ft. Lauderdale, Florida February 27, 1998 F-1 ITEM I. FINANCIAL STATEMENTS KELLSTROM INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ 1997 1996 ------------ ------------- ASSETS Current Assets: Cash and cash equivalents $ 462,676 $ 154,254 Trade receivables, net of allowances for returns and doubtful accounts of $335,786 and $150,000 for 1997 and 1996, respectively 10,189,082 4,023,298 Notes receivable 2,475,856 -- Inventories 35,965,376 13,059,402 Prepaid expenses 2,646,629 588,286 Income tax receivable 531,762 -- Deferred tax assets (Note 10) 636,115 -- Investment in securities (Note 5) 425,759 1,829,532 ------------ ------------- Total current assets 53,333,255 19,654,772 Equipment under operating leases, net (Note 3) 39,932,388 2,663,968 Property, plant and equipment, net (Note 4, 7) 5,027,096 2,943,077 Goodwill, net 29,775,709 3,618,862 Deferred tax assets (Note 10) -- 287,594 Other assets 6,293,050 376,791 ------------ ------------ Total Assets $134,361,498 $ 29,545,064 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term notes payable (Note 7) $ 6,759,013 $ 5,157,302 Current maturities of long-term debt and capital lease obligations (Note 7) 1,079,787 211,068 Accounts payable 6,183,762 1,651,405 Accrued expenses (Note 6) 4,996,963 1,290,393 Income taxes payable -- 157,212 Deferred tax liabilities (Note 10) -- 97,718 ------------ ------------- Total current liabilities 19,019,525 8,565,098 Long-term debt and capital lease obligations, less current maturities (Note 7) 11,250,000 2,819,225 Convertible subordinated notes (Note 8) 54,000,000 -- Deferred tax liabilities (Note 10) 180,053 -- ------------ ------------- Total Liabilities 84,449,578 11,384,323 Stockholders' Equity: (Note 11) Preferred stock, $ .001 par value; 1,000,000 shares authorized; None issued -- -- Common stock, $ .001 par value; 20,000,000 shares authorized; 7,879,356 shares and 3,315,308 shares issued and outstanding in 1997 and 1996, respectively 7,879 3,315 Additional paid-in capital 39,027,053 14,871,559 Retained earnings 11,555,161 3,012,642 Loans receivable from directors and officers (362,415) -- Unrealized (loss)/gain on investment securities, net (315,758) 273,225 ------------- ------------- Total Stockholders' Equity 49,911,920 18,160,741 ------------- ------------- Total Liabilities and Stockholders' Equity $134,361,498 $29,545,064 ============= =============
See accompanying notes to consolidated financial statements F-2 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31, --------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Sales of aircraft and engine parts, net $ 71,534,539 $ 24,019,999 $ 8,579,017 Rental revenues 7,904,610 901,588 -- ------------ ------------ ------------ Total revenues 79,439,149 24,921,587 8,579,017 Cost of goods sold (46,800,589) (15,649,127) (5,378,053) Depreciation of equipment under operating leases (4,594,399) (586,032) -- Selling, general and administrative expenses (8,877,598) (3,491,457) (1,482,048) Depreciation and amortization (1,555,673) (441,854) (202,331) ------------ ------------ ------------ Total operating expenses (61,828,259) (20,168,470) (7,062,432) Operating income 17,610,890 4,753,117 1,516,585 SPAC operating costs and expenses -- -- (389,361) Investment advisory expenses -- -- (720,795) Interest expense (4,390,384) (662,528) (145,304) Interest income 399,172 18,001 370,756 ------------ ------------ ------------ Income before income taxes 13,619,678 4,108,590 631,881 Income taxes (Note 10) (5,077,159) (1,462,247) (257,442) ------------ ------------ ------------ Net income $ 8,542,519 $ 2,646,343 $ 374,439 ============ ============ ============ Earnings per common share - basic $ 1.18 $ 0.90 $ 0.14 ============ ============ ============ Earnings per common share - diluted $ 0.95 $ 0.56 $ 0.10 ============ ============ ============ Weighted average number of common shares outstanding - basic 7,266,534 2,943,902 2,745,265 ============ ============ ============ Weighted average number of common shares outstanding - diluted 9,394,439 4,759,890 3,609,956 ============ ============ ============
See accompanying notes to consolidated financial statements F-3 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Loans Common Stock Preferred Stock Retained Receivable Net unrealized -------------------- --------------------- Additional Earnings/ from (loss)/gain on Number Number Paid-in (Accumulated Directors Investment Stockholders' of shares Amount of shares Amount Capital Deficit) and Officers Securities Equity --------- ------ --------- ------ --------- -------- ------------ ----------- ------- Balances, December 31, 1994 2,220,215 $2,220 -- -- $9,232,814 $ (8,140) -- -- $9,226,894 Reclassify common stock whose redemption rights have expired 429,785 430 -- -- 2,155,733 -- -- -- 2,156,163 Issuance of common stock and warrants to investment banker in lieu of fees for financial advisory services provided with respect to the Acquisition 50,000 50 -- -- 381,200 -- -- -- 381,250 Purchase of common stock by Company President (@ 5.50 per share) 181,818 182 -- -- 999,818 -- -- -- 1,000,000 Net Income -- -- -- -- -- 374,439 -- -- 374,439 ------------------- -------------------- ------------------------- -------------------- ---------- Balances, December 31, 1995 2,881,818 2,882 -- -- 12,769,565 366,299 -- -- 13,138,746 Exercise of warrants 433,490 433 -- -- 2,101,994 -- -- -- 2,102,427 Unrealized gain on investment securities, net -- -- -- -- -- -- -- 273,225 273,225 Net income -- -- -- -- -- 2,646,343 -- -- 2,646,343 ------------------- -------------------- ------------------------- -------------------- ---------- Balances, December 31, 1996 3,315,308 3,315 -- -- 14,871,559 3,012,642 -- 273,225 18,160,741 Exercise of warrants 4,564,048 4,564 -- -- 20,771,856 -- -- -- 20,776,420 Issuance of warrants related to the IASI and Aero Support acquisitions -- -- -- -- 1,853,192 -- -- -- 1,853,192 Issuance of warrants in lieu of financing fees provided with respect to IASI acquisition -- -- -- -- 1,530,446 -- -- -- 1,530,446 Borrowings on loans receivable -- -- -- -- -- -- (362,415) -- (362,415) Unrealized loss on investment securities, net -- -- -- -- -- -- -- (588,983) (588,983) Net income -- -- -- -- -- 8,542,519 -- -- 8,542,519 ------------------- -------------------- ------------------------- -------------------- ---------- Balances, December 31, 1997 $7,879,356 7,879 -- -- $39,027,053 $11,555,161 $(362,415) $(315,758) $49,911,920 ===================== ==================== ========================= ===================== ===========
See accompanying notes to consolidated financial statements F-4 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,542,519 $ 2,646,343 $ 374,439 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,555,673 441,854 202,331 Depreciation of equipment under operating leases 4,594,399 586,032 -- Acquisition expenses paid through issuance of common stock -- -- 381,250 Amortization of deferred financing costs 760,019 30,172 4,132 Purchase of equipment under operating leases (51,891,994) (3,250,000) -- Deferred income taxes 80,631 12,285 (358,469) Loss on sales of investment securities 38,051 -- -- Changes in operating assets and liabilities: Increase in trade receivables, net (2,392,056) (704,273) (1,062,397) Decrease (increase) in inventories 18,797,757 (621,351) (7,616,960) Increase in prepaid expenses (3,042,546) (351,704) (121,284) Decrease (increase) in other assets 330,878 (255,655) (4,763) Decrease in accounts payable (2,748,832) (515,809) (366,250) Increase in accrued expenses 3,706,570 431,661 551,457 (Increase) decrease in income taxes payable (687,551) (486,519) 540,587 ------------- ------------- ------------ Net cash used in operating activities (22,356,482) (2,622,996) (7,475,927) ------------- ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of US Government securities -- -- 10,786,209 Proceeds from sale of Treasury bills -- -- 594,518 Purchase of investment securities -- (1,200,000) -- Purchase of KST assets, net of cash acquired -- -- (5,790,800) Purchase of IASI assets, net of cash acquired (25,053,141) -- -- Proceeds from sales of investment securities 428,499 -- -- Purchase of Aero Support assets, net of cash acquired (2,656,289) -- -- Purchase of property, plant and equipment (2,418,677) (1,372,244) (262,974) Proceeds from sales of property, plant and equipment 744,744 -- -- Other 2,115 31,753 -- ------------- ------------- ------------ Net cash provided by (used in) investing activities (28,952,749) (2,540,491) 5,326,953 ------------- ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement 1,086,699 -- -- Proceeds from the issuance of debt 21,000,000 27,577,960 2,250,000 Debt repayment, including capital lease obligation (40,450,696) (24,499,503) (943,560) Proceeds from the issuance of subordinated debentures 54,000,000 -- -- Proceeds from the issuance of common stock 20,776,420 2,102,427 1,000,000 Borrowings for loans receivable from directors and officers (362,415) -- -- Payment of deferred financing costs (4,432,355) -- -- Other -- (74,014) (18,951) ------------- ------------- ------------ Net cash provided by financing activities 51,617,653 5,106,870 2,287,489 ------------- ------------- ------------ NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 308,422 (56,617) 138,515 CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 154,254 210,871 72,356 ------------- ------------- ------------ CASH & CASH EQUIVALENTS, END OF PERIOD $ 462,676 $ 154,254 $ 210,871 ============= ============= ============
(continued) See accompanying notes to consolidated financial statements F-5 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ------------- ------------ ------------ Supplemental disclosures of non-cash investing and financing activities: KST assets acquired for notes payable $ -- $ -- $2,230,000 ============= ============ ============ Issuance of common stock for acquisition expenses $ -- $ -- $ 381,250 ============= ============ ============ IASI assets acquired for warrants $ 1,173,134 $ -- $ -- ============= ============ ============ Aero Support assets acquired for warrants $ 680,058 $ -- $ -- ============= ============ ============ Net transfer of equipment under operating leases to inventories $10,029,175 $ -- $ -- ============= ============ ============ Deferred financing costs paid through the issuance of warrants $ 1,530,446 $ -- $ -- ============= ============ ============ Unrealized gain/(loss) on investment securities, net $ (588,983) $ 273,225 $ -- ============= ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,436,209 $ 558,083 $ 155,144 ============= ============ ============ Income taxes $ 5,685,502 $ 1,936,481 $ 26,680 ============= ============ ============ Supplemental disclosures of purchase of IASI assets, net of liabilities: Cash $ 36,709 Receivables 1,621,664 Inventory 27,275,861 Prepaid expenses and other assets 1,132,400 Property, plant and equipment 74,865 Goodwill 14,055,172 Other assets 26,177 ------------- Total assets $ 44,222,848 ============= Accrued expenses $ 2,350,280 Accounts payable 1,530,786 Notes payable 14,078,798 ------------- Total liabilities 17,959,864 ============= Net acquisition cost 26,262,984 Less warrants issued to seller 1,173,134 ------------- Cash paid to seller at closing 25,089,850 Less cash acquired 36,709 ------------- Net cash used in acquisition $ 25,053,141 =============
(continued) See accompanying notes to consolidated financial statements F-6 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ------------ ------------- ------------- Supplemental disclosures of purchase of Aero Support assets, net of liabilities: Cash $ 426,929 Receivables 2,152,064 Inventory 5,091,063 Prepaid expenses and other current assets 359,253 Property, plant, and equipment 37,926 Goodwill 13,198,554 Intangible - Non compete 1,080,000 Other assets 4,014 ------------ Total assets $22,349,803 ============ Accrued expenses $ 238,803 Accounts payable 3,161,320 Notes payable - Bank 3,498,537 ----------- Total liabilities 6,898,660 ============ Net acquisition cost 15,451,143 Less warrants issued to sellers 680,058 Less notes payable to sellers 11,687,867 ----------- Cash paid to sellers at closing 3,083,218 Less cash acquired 426,929 ----------- Net cash used in acquisition $ 2,656,289 ============ Supplemental disclosures of purchase of KST assets net of liabilities: Cash $ 209,200 Receivables 2,256,628 Warrants 200,000 Inventory 4,235,059 Prepaid expenses 87,146 Property, plant and equipment 1,522,586 Goodwill 4,060,477 Other assets 64,491 ------------- Total assets $12,635,587 =============
(continued) See accompanying notes to consolidated financial statements F-7 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ------------ ------------- ------------- Accrued expenses $ 310,303 Accounts payable 2,533,464 Notes payable 1,561,820 ----------- Total liabilities 4,405,587 ========== Net acquisition cost 8,230,000 Less discounted present value of note given to seller 2,230,000 ------------ Cash paid to seller at closing 6,000,000 Less cash required 209,200 ------------- Net cash used in acquisition $ 5,790,800 =============
See accompanying notes to consolidated financial statements F-8 KELLSTROM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Kellstrom Industries, Inc. (the "Company") (formerly known as Israel Tech Acquisition Corp.) was incorporated in Delaware on December 28, 1993 as a Specified Purpose Acquisition Company ("SPAC"), the objective of which was to consummate an initial public offering and enter into a business combination with an operating business. On June 22, 1995, the Company consummated the acquisition of all of the assets of Kellstrom Industries, Inc. ("KST") and immediately changed its name to Kellstrom Industries, Inc. The Company's principal business is the purchasing, refurbishing (through subcontractors), marketing, reselling, and leasing of aircraft jet engines, jet engine parts and commercial aircraft. The Company is also an international after-market reseller of turbojet engines and turbojet engine parts for helicopters and large transport aircraft. The Company's customers include major domestic and international airlines, engine manufacturers, engine part distributors and dealers and overhaul service suppliers throughout the world. The Company's business enables customers to reduce their engine maintenance costs by providing Federal Aviation Administration approved engine parts on a timely basis and at competitive prices. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. REVENUE RECOGNITION Revenue is recognized upon shipment of the product to the customer net of an estimated allowance for sales returns. Revenue from equipment under operating leases is recognized as rental revenue on a straight-line basis over the lease term. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is primarily determined using the specific identification method for individual part purchases and on an allocated cost basis for whole engines and aircraft. Inventories are made up primarily of new, refurbished and as removed engines and engine parts. INVESTMENT IN SECURITIES Investment in securities at December 31, 1997 and 1996 consist of equity securities. All equity securities are classified as available for sale. Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Realized gains and losses from the sale of available for sale securities are determined on a specific identification basis. F-9 A decline in the market value of any available for sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned. EQUIPMENT UNDER OPERATING LEASES The cost of the asset under lease is the original purchase price plus overhaul costs. Depreciation of the cost is computed based on a usage-variable method, which adjusts straight-line depreciation to reflect the usage levels of the equipment. Maintenance and repair costs are expensed as incurred. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Machinery and equipment under capital leases are stated at the lesser of fair value or present value of minimum lease payments. Depreciation on property, plant and equipment is calculated on the straight-line method over the following estimated useful lives: building and improvements - 25 years, machinery and equipment - 3 to 10 years and furniture and fixtures - 7 years. Machinery and equipment held under capital leases are amortized straight-line over the shorter of the lease term or the estimated useful life indicated above. GOODWILL Goodwill represents the excess of purchase price over fair value of net assets acquired, which is amortized on a straight-line basis over the expected periods to be benefited, generally 15 to 20 years. Amortization expense of goodwill was $1,145,663, $271,010 and $138,853 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company assesses the recoverability of the carrying value of goodwill by determining whether the carrying value can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Accumulated amortization of goodwill was $1,555,526 and $409,863 at December 31, 1997 and 1996, respectively. DEFERRED FINANCING COSTS Deferred financing costs are capitalized and amortized on a straight-line basis over the life of the related debt, which currently approximates one to seven years. Amortization expense was $760,019, $30,172, and $4,132 for the years ended December 31, 1997, 1996 and 1995, respectively. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments, consisting of cash and cash equivalents, trade accounts receivables, other current assets, equipment under operating leases, trade accounts payables, accrued expenses, and notes payable to banks, is based on the short maturity of these instruments which approximates fair value at December 31, 1997 and 1996. The fair value of the senior subordinated debt and convertible subordinated debt is F-10 estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company's bankers which approximate fair value at December 31, 1997. Investment securities available for sale are recorded at fair value based on quoted market prices. COMMITMENTS AND CONTINGENCIES During 1997, the Company entered into agreements to purchase six aircraft engines at a total purchase price of $29,478,948. The Company is committed to purchasing the engines upon successful completion of certain inspections. At December 31, 1997, the purchases had not yet been consummated. The Company's Board of Directors has approved the construction of a new facility in the Sawgrass International Corporate Park area, which is near Fort Lauderdale, Florida in anticipation of the expiration of the IASI Lease and the consolidation of operations in a single location. The new facility will consist of approximately 195,000 square feet of office and warehouse space. The final cost of the new facility is estimated to be approximately $9,500,000. The Company records liabilities for loss contingencies, including those arising from claims, assessments, litigation, fines and penalties, and other sources when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. EARNINGS PER SHARE The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and presenting basic and fully diluted earnings per share and applies to entities with publicly held common stock or potential common stock. Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Common equivalent shares assume the exercise of all dilutive stock options and warrants. The weighted average number of common shares outstanding used to compute basic and fully diluted EPS was 7,266,534 and 9,394,439 for the year ended December 31, 1997, 2,943,902 and 4,759,890 for the year ended December 31, 1996, and 2,745,265 and 3,609,956 for the year ended December 31, 1995. Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year. IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on January 1, 1995. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this SFAS No. 121 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. STOCK OPTIONS Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the F-11 current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 31, 1997. Management does not anticipate a significant impact of the adoption of SFAS No. 130 on the Company's consolidated financial position, results of operations or cash flows. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports to shareholders. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS No. 131 on the Company's consolidated financial position, results of operations or cash flows. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 standardizes the disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other postretirement benefits. SFAS 132 is effective for fiscal years beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 132 on the Company's consolidated financial position, results of operations or cash flows. RECLASSIFICATIONS Certain 1996 financial statement amounts have been reclassified to conform with the 1997 presentation. 2. ACQUISITIONS On January 15, 1997, the Company through a wholly-owned subsidiary completed the acquisition of substantially all of the assets and assumed certain of the liabilities of International Aircraft Support, L.P. ("IASI"), a California limited partnership, for a cash purchase consideration of approximately $25,100,000 and issued warrants, with an expiration date of two years from January 15, 1997, to purchase 500,000 shares of the Company's Common Stock at $9.25 per share. The acquisition was financed through the issuance of $15,000,000 in senior subordinated debt and warrants, along with the proceeds of a $6,000,000 subordinated bridge loan and warrants ("Bridge Loan") with the balance from the Company's working capital. The Company also assumed IASI's existing debt including IASI's Union Bank of California various credit facilities that totaled approximately $20,000,000 as of the date of the acquisition. The Bridge Loan matured on April 15, 1997 and was fully repaid. The interest rate on the Bridge Loan was 10% and, additionally, 85,625 warrants that are exercisable at $10 and expire on April 15, 2000 were issued to the Bridge Loan lenders. The interest rate on the $15,000,000 senior subordinated debt is 11 3/4%, payable quarterly. Additionally, 305,660 warrants were issued to this lender, such warrants are exercisable at $10 and expire on January 15, 2004. Principal on this debt is payable in three equal annual installments beginning January 15, 2002. F-12 On September 10, 1997, the Company through a wholly-owned subsidiary completed the acquisition of substantially all of the assets and liabilities of Aero Support USA, Inc. ("Aero Support") for approximately $13,800,000 in cash (the "Cash Purchase Price") and three warrants. One warrant is for the purchase of 75,000 shares of Common Stock at an exercise price of $22.00 per share, expiring in three years. The other two warrants are for the purchase of an aggregate 175,000 shares of Common Stock at an exercise price of $19.00 per share, expiring in five years. Up to an additional $5,000,000 cash consideration may be paid in the form of an earn-out payable over three years based on certain specified criteria. In addition to the $2,100,000 paid at closing, a portion of the Cash Purchase Price consisted of the issuance of (i) a promissory note in the aggregate principal amount of $9,000,000,which matured and was fully repaid on September 17, 1997, bearing interest at the prime rate of interest charged from time to time by Barnett Bank, N.A. (Kellstrom's senior lender) on short-term loans and (ii) two promissory notes in the aggregate principal amount of $2,700,000, which matured and was fully repaid on January 15, 1998, bearing interest at the same rate. The financing for the payment of the Cash Purchase Price is being funded through the Company's Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at .25% below the prime rate or at LIBOR plus 225 basis points and are secured by substantially all the assets of the Company. Both the IASI and Aero Support acquisitions have been accounted for using the purchase method for accounting in accordance with APB Opinion No. 16, "Business Combinations," and accordingly, the operating results from both IASI and Aero Support have been included in the operating results since the dates of acquisition. A Pro Forma Consolidated Combined Statements of Earnings - Unaudited has been provided in Note 18(b) to report the results of operations for the years ended December 31, 1997 and 1996 as though the acquisitions had occurred at the beginning of the period being reported. 3. EQUIPMENT UNDER OPERATING LEASES, NET Equipment under operating leases consists primarily of aircraft and engines with typical lease terms of less than 18 months. At December 31, 1997 and 1996, equipment under operating leases consists of the following:
1997 1996 ----- ---- Equipment under operating leases $ 42,766,620 $ 3,250,000 Accumulated depreciation (2,834,232) (586,032) --------------- -------------- $ 39,932,388 $ 2,663,968 =============== ==============
At December 31, 1997, future minimum rental revenue on equipment under operating leases are as follows: 1998 $ 4,166,800 1999 2,300,000 2000 1,980,000 2001 1,980,000 2002 495,000 ------------ $10,921,800 ============ 4. PROPERTY, PLANT AND EQUIPMENT, NET F-13 Property, plant and equipment at December 31, 1997 and 1996 consists of the following:
1997 1996 ----- ---- Land $ 2,133,642 $ 422,600 Building and Improvements 1,824,552 1,807,192 Machinery and Equipment 1,496,438 715,038 Furniture and Fixtures 545,486 222,052 --------------- -------------- 6,000,118 3,166,882 Accumulated Depreciation (1,157,450) (223,805) --------------- -------------- 4,842,668 2,943,077 Construction in Progress 184,428 -- --------------- -------------- $ 5,027,096 $ 2,943,077 =============== ==============
5. INVESTMENT IN SECURITIES Upon consummation of the acquisition of the assets of KST, the Company received warrants to purchase 400,000 shares of common stock of Rada (the "Rada Warrants") at $3.00 per share, commencing on July 1, 1995 and expiring on or before July 1, 2000. The Rada Warrants were originally recorded at their fair value on the date of the acquisition. The Company classifies these warrants as "available for sale." In December 1996, the Company exercised the Rada Warrants upon payment of $1,200,000. As a result of certain antidilution provisions contained in the Rada Warrant, the Company received 464,643 shares of Rada, representing 5.6% of the outstanding shares of Rada at the time of exercise. The Company classifies the shares of Rada as "available for sale." As of December 31, 1997, the Company's ownership of Rada common stock is 309,643 shares, representing approximately 3.7% of the then current outstanding shares. At December 31, 1997 and 1996, the cost, gross unrealized holding gains, gross unrealized holding losses and fair value for investment in securities available for sale are as follows:
1997 ---- Gross Unrealized Gross Unrealized Cost Holding Gains Holding Losses Fair Value ---------------- ----------------- ----------------- -------------- Rada common stock $932,025 $0 $507,691 $425,759 ================ ================= ================= ==============
1996 ---- Gross Unrealized Gross Unrealized Cost Holding Gains Holding Losses Fair Value ---------------- ----------------- ----------------- -------------- Rada common stock $1,400,000 $429,532 $0 $1,829,532 ================ ================= ================= ==============
During the year ended December 31, 1997, the Company sold 155,000 shares of its investment in Rada. The Company received cash proceeds of $428,499 and recorded a realized loss of $38,051 related to these sales. Realized gains and losses on the sales of investments are determined on the specific identification method. 6. ACCRUED EXPENSES F-14 Accrued expenses at December 31, 1997 and 1996 consists of the following:
1997 1996 ---- ---- Accrued expenses $ 912,513 $ 198,072 Employee bonuses 1,033,580 422,000 Acquisition expenses -- 122,674 Accrued interest 1,359,508 111,147 Customer deposits 870,300 436,500 Deferred income 821,062 -- --------------- -------------- $ 4,996,963 $ 1,290,393 =============== ==============
F-15 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations at December 31, 1997 and 1996 consists of the following:
1997 1996 ---- ---- 11 3/4% Senior subordinated debt due January 15, 2004. $11,250,000 $ -- First mortgage note bearing interest at 10.49% payable in monthly installments of $20,238, including interest, with a final payment of $20,238 due April 2005; secured by real property with depreciated cost of $2,107,647 in 1997 and $2,175,265 in 1996. During January 1998, amount was fully repaid. 1,079,787 1,194,277 Borrowings under revolving line of credit, interest at prime - 1/4% (8.25% at December 31, 1997), and at prime - -1/8% (8.125% at December 31, 1996) is payable monthly; the revolving line of credit expires in April 1998. 4,070,603 5,157,302 Notes payable bearing interest at prime rate (8.25% at December 31, 1997) related to Aero Support acquisition with final payment due January 1998. During January 1998, amount was fully repaid. 2,688,410 -- Non-interest bearing note payable in semi-annual installments of $125,000, including interest, with final payment of $1,775,000 due June 1999. The note was discounted using an interest rate of 9%. During March 1997, amount was fully repaid. -- 1,830,150 Capital lease obligations -- 5,866 ----------- ----- Total long-term debt and capital lease obligations 19,088,800 8,187,595 Less short-term notes payable (6,759,013) (5,157,302) Less current installments on long-term debt and capital lease obligations (1,079,787) (211,068) ----------- ---------- Long-term debt and capital lease obligations, less current installments $11,250,000 $2,819,225 =========== ==========
F-16 During January 1997, the Company completed the acquisition of IASI, which was primarily financed through the issuance of $15,000,000 of 11 3/4% Senior Subordinated Debt (the "Senior Debt") maturing on January 15, 2004. Interest on the senior debt is payable semi-annually. Principal on this debt is payable in two equal annual installments beginning January 15, 2002 and a final payment in the amount of $1,250,000 payable on January 15, 2004. The Company made an advance principal payment of $3,750,000, along with a prepayment penalty of 1%, on October 10, 1997. The Company may, at its option, redeem up to an additional $750,000 (along with a prepayment penalty of 1%) of principal amount of Senior Debt concurrently or within five days after the occurrence of any public offering of the Company's common stock as long as the principal balance of the Senior Debt is not reduced below $10,500,000. Upon the consummation of the acquisition by the Company of the assets of KST, the Company assumed the mortgage note in the amount of $666,820. Subsequently, a $750,000 construction loan was added to this mortgage note in 1996. The mortgage note is secured by a first mortgage on the Company's land and building. During January 1998, the amount outstanding under this facility was fully repaid. As part of the purchase of the assets of KST, the Company issued an unsecured non-interest bearing note in the amount of $3,000,000. The note is payable in eight equal semi-annual payments of $125,000 with the remaining $2,000,000 to be paid on the fourth anniversary of the acquisition in cash or, under certain circumstances, in whole or in part by the issuance of additional shares of Common Stock which for such purpose shall be valued at the higher of the market price per share at such time or $5.00 per share. The note is discounted at a rate of 9%. During March 1997, the amount outstanding was fully repaid. On December 23, 1996, the Company entered into a Revolving Loan Agreement with a total commitment of $15,000,000 with Barnett Bank, N.A. This agreement replaced the lines of credit the Company had established with BankAtlantic. This agreement, which bore interest at 1/8% below the bank's prime rate (8.125% at December 31, 1996), was secured by substantially all the Company's assets. Interest is payable monthly. No compensatory balances were required under the agreement. On April 24, 1997, in order to modify and consolidate the $15,000,000 credit facility, the Company entered into a $55,000,000 revolving loan agreement with Barnett Bank, N.A. The loan bears interest at .25% below the bank's prime rate (which was 8.25% at March 24, 1998) is due on April 24, 1998. On April 28, 1997, utilizing funds from the new facility, the Company paid $13,640,774 to fully satisfy the existing credit lines outstanding with Union Bank. The new loan agreement is secured by substantially all of the Company's assets. At December 31, 1997, the Company had $27,048,311 available under the agreement. No compensatory balances are required under the modified revolving loan agreement. On September 10, 1997, the Company acquired Aero Support which was financed primarily through the issuance of short-term notes payable which were due from September 1997 to January 1998. The Company also assumed Aero Support's existing debt of $3,498,537 which was immediately paid by the Company upon consummation of the acquisition. The balance of short-term notes payable outstanding at December 31, 1997 was $2,688,410. Interest on the short-term notes payable accrued at an annual rate equal to the prime rate and was fully repaid during January 1998. Debt maturities for each of the five years subsequent to December 31, 1997 are as follows: 1998, $7,838,800; 2002, $59,000,000; and thereafter $6,250,000. F-17 8. CONVERTIBLE SUBORDINATED NOTES During October 1997, the Company completed the offering and sale in a private placement transaction of $50,000,000 of 5 3/4% Convertible Subordinated Notes (the "Notes") maturing on October 15, 2002. In November 1997, the underwriters of the Notes exercised their overallotment option for $4,000,000. The principal amount is convertible into shares of common stock at the option of the holders at a conversion price equal to $27.50, subject to adjustment in certain events. In addition, the Company may at any time on or after October 15, 2000, 2001, and 2002 redeem all or any part of the Notes at prices (expressed in percentages of the principal amount) of 102.30%, 101.15%, and 100%, respectively. Interest on the Notes is payable semi-annually. 9. LEASES The Company has several operating leases, primarily for transportation equipment and facilities that expire over the next five years. These leases generally require the Company to pay all executory costs such as maintenance and insurance and provide for early termination at stipulated values. Future minimum lease payments under operating lease agreements having an initial or remaining non-cancelable term in excess of one year as of December 31, 1997 are as follows: 1998 $454,760 1999 92,461 2000 43,733 2001 22,292 2002 20,435 --------- $ 633,681 ========= Total rent expense for all operating leases for the years ended December 31, 1997, 1996 and 1995 amounted to $346,291, $70,444, and $30,778, respectively. F-18 10. INCOME TAXES Income tax expense for the years ended December 31, 1997, 1996 and 1995 is summarized as follows:
1997 1996 1995 ---- ---- ---- Current: Federal $ 4,393,569 $ 1,299,550 $ 525,766 State and local 602,959 150,412 90,145 -------------- -------------- -------------- 4,996,528 1,449,962 615,911 Deferred: 80,631 12,285 (358,469) -------------- -------------- -------------- Total $ 5,077,159 $ 1,462,247 $ 257,442 ============== ============== ==============
The actual tax expense differs from the "expected" tax expense for the years ended December 31, 1997, 1996 and 1995 (computed by applying the U.S. federal corporate tax rate of 34% to income before income taxes), as follows:
1997 1996 1995 ----- ---- ---- Computed "expected" tax expense $ 4,630,691 $ 1,396,921 $ 214,840 State income tax, net of federal benefit 573,245 98,411 24,398 Reorganization costs -- -- 14,705 Foreign sales corporation benefit (123,771) -- -- Other (3,006) (33,085) (3,499) -------------- -------------- ------------ Actual tax expense $ 5,077,159 $ 1,462,247 $ 257,442 ============== ============== ============
Total income tax expense for the years ended December 31, 1997, 1996 and 1995 was allocated as follows:
1997 1996 1995 ---- ---- ---- Income from continuing operations $ 5,077,159 $1,462,247 $ 257,442 Stockholders' equity, for unrealized gain/(loss) on investment securities (346,817) 156,308 -- -------------- -------------- -------------- $ 4,730,342 $1,618,555 $ 257,442 ============== ============== ==============
F-19 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ----- ---- Deferred tax assets: Intangible assets $ 70,194 $ 214,174 Accounts receivable, principally due to allowance for doubtful accounts 70,688 54,586 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 278,403 90,491 Unrealized losses on investment securities 190,508 -- Accrued liabilities, principally for financial reporting purposes 92,335 -- Other 4,181 4,004 -------------- -------------- Total gross deferred tax assets 706,309 363,255 Less valuation allowance -- -- -------------- -------------- Deferred tax assets 706,309 363,255 Deferred tax liabilities: Property, plant and equipment (23,575) (17,071) Equipment under operating leases (226,672) -- Unrealized gains on investment securities -- (156,308) -------------- -------------- Deferred tax liabilities (250,247) (173,379) -------------- -------------- Net deferred tax assets $ 456,062 $ 189,876 ============== ==============
The Company's management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset. 11. STOCKHOLDERS' EQUITY The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. The Company is authorized to issue 20,000,000 shares of Common Stock, $.001 par value. The Company had 7,879,356 and 3,315,308 shares of Common Stock outstanding at December 31, 1997 and 1996, respectively. On January 17, 1997, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock ("Series Preferred Stock") at an exercise price of $80. F-20 The Rights are not exercisable, or transferable apart from the Common Stock, until the earlier to occur of (i) ten days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding Common Stock of the Company or (ii) ten business days (or such later date, as defined) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 19% or more of the outstanding Common Stock of the Company. Furthermore, if the Company enters into a consolidation, merger, or other business combination, as defined, each Right would entitle the holder upon exercise to receive, in lieu of shares of Series A Preferred Stock, that number of shares of common stock of the acquiring company having a value of two times the exercise price of the Right, as defined. The Rights contain antidilutive provisions, are redeemable at the Company's option, subject to certain defined restrictions, for $.01 per Right, and expire on January 14, 2007. As a result of the Rights dividend, the Board designated 200,000 shares of preferred stock as Series A Preferred Stock. Series A Preferred Stockholders will be entitled to a preferential cumulative quarterly dividend of the greater of $1.00 per share or 100 times the per share dividend declared on the Company's Common Stock. The Series A Preferred Stock has a liquidation preference, as defined. In addition, each share will have 100 votes and will vote together with the shares of Common Stock. On February 25, 1997, the Board of Directors of the Company approved loans in the aggregate amount of $530,000 to certain officers and directors of the Company for the purposes of purchasing shares of common stock. The loans will be unsecured and payable over four years for employees or five years for directors at an interest rate based on the applicable federal rate, as defined by the agreement, at the time of the loan. The interest rate at February 25, 1997 was 6.1% per annum. Interest will be paid annually by officers and will accrue and be paid at maturity by directors. As of December 31, 1997, the outstanding balance on the loans receivable was $362,415. Upon consummation of the acquisition of the assets of IASI and Aero Support, the Company issued warrants to purchase an additional 750,000 shares of the Company's Common Stock at stated prices of $9.25-$22.00, expiring two to five years from the dates of issuance. The amounts recorded by the Company as a result of the issuance of the shares and warrants was determined based on the fair value of the shares and warrants on the closing date of the acquisition. On February 4, 1997 the Company called its publicly traded warrants (the "Public Warrants") pursuant to their terms. There were 4,166,510 Public Warrants outstanding at December 31, 1996. The Company received proceeds of $22,961,950 from the exercise of Public Warrants during the period from October 1, 1996 to March 21, 1997. The Company had 1,593,155 and 4,576,510 warrants outstanding at December 31, 1997 and 1996, respectively. Each warrant entitles the holder to the purchase of one share of the Company's common stock at an average stated price of $10.14 and $5.08 respectively. These warrants are exercisable at various times principally commencing on June 22, 1995 and expiring on or before April 11, 2001. The Company has reserved 5,000,000 common shares for the exercise of these warrants. The Company had no unit purchase options outstanding at December 31, 1997 and 200,000 unit purchase options outstanding at December 31, 1996. Each unit purchase option entitled the holder to the purchase of one Unit for $7.62 per unit. Each unit consisted of one share of the Company's Common Stock and two redeemable common stock purchase warrants. These unit purchase options were exercisable commencing on April 11, 1995 and expiring on April 11, 1999. As of December 31, 1997, all of the issued unit purchase options had been exercised. F-21 12. EMPLOYEE STOCK OPTION PLANS The 1995 Stock Option Plan provides for the granting of stock options to purchase up to 250,000 shares of Common Stock to key employees, with no individual granted options to purchase more than 100,000 shares of Common Stock during the ten-year period commencing on June 22, 1995, at a price which will not be less than the fair market value of Common Stock on the date of grant. These options will be exercisable at such times, in such amounts and during such intervals as determined on the date of grant. However, no option will be exercisable during the first six months after the date of grant or more than 10 years after the date of grant. In 1995 the Company granted 235,000 stock options at an exercise price of $5.00; all of which provide that such options fully vest over a period of three years from the date of grant. The 1996 Stock Option Plan provides for the granting of incentive stock options to purchase shares of Common Stock at not less than the fair market value on the date of the option grant or the granting of nonqualified options and stock appreciation rights ("SARs") with any exercise price. SARs granted in tandem with an option have the same exercise price as the related option. The total number of shares with respect to which options and SARs may be granted under the Plan is currently 1,100,000. No option or SAR may be granted under the Plan after July 9, 2006, and no option or SAR may be outstanding for more than ten years after its grant. The 1997 Stock Option Plan provides for the granting of incentive stock options to purchase shares of Common Stock at not less than the fair market value on the date of the option grant and the granting of nonqualified options. The total number of shares with respect to which options may be granted under the Plan is currently 600,000. No option may be granted under the Plan after October 27, 2007, and no option may be outstanding for more than ten years after its grant. The following table summarizes the status of the Company's stock option plans:
Weighted Average Option Shares Exercise Price ------ -------------- Outstanding at January 1, 1996 235,000 $5.00 Granted 373,000 7.63 Exercised -- -- Expired or Canceled -- -- -------------- ------------------ Outstanding at December 31, 1996 608,000 6.61 Granted 1,542,000 12.66 Exercised 5,499 5.00 Expired or Canceled 81,000 6.94 -------------- ------------------ Outstanding at December 31, 1997 2,063,501 11.12 ============== ================== At December 31, 1997: Exercisable options 285,333 6.09 Shares Available for Future Grant -- --
The following table summarizes the status of stock options outstanding and exercisable as of December 31, 1997, by range of exercise price:
Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Term Price Exercisable Price -------- ----------- ------------ -------- ------------ --------- $ 5.00-$ 7.50 195,501 7 Years $ 5.00 166,667 $5.00 $ 7.51-$11.25 1,196,000 8 Years $ 8.13 118,666 $7.63 $11.26-$16.88 60,000 9 Years $13.84 -- -- $16.88-$22.00 612,000 10 Years $18.67 -- -- --------- ------- 2,063,501 285,333 ========= =======
F-22 The weighted average per share fair values of options granted under the Company's stock option plans during 1997, 1996 and 1995 were $12.66, $4.02 and $2.48, respectively. Had the fair value of the grants under these plans been recognized as compensation expense over the vesting period of the awards, the Company's net earnings and earnings per share would have reflected the pro forma amounts shown below:
1997 1996 1995 ----- ---- ---- Net earnings (as reported) $ 8,542,519 $2,646,343 $374,439 - pro forma 7,193,698 2,260,098 284,456 Earnings per share - basic (as reported) 1.18 0.90 0.14 - pro forma 0.99 0.77 0.10 Earnings per share - diluted (as reported) 0.95 0.56 0.10 - pro forma 0.77 0.47 0.08
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31, 1997, 1996 and 1995: dividend yield of 0%; expected volatility of 20%; a risk-free interest rate of 6.59%; and an expected holding period 5 years. Increased pro forma compensation expense in 1997 is the result of the additional options granted and further vesting of 1995 and 1996 grants during 1997. Pro forma expense for 1998 is expected to increase over 1997 for the same reasons. 13. EARNINGS PER SHARE Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." As such, prior years' earnings per share have been restated. Basic and diluted earnings per share for the years ended December 31, 1997, 1996 and 1995 were calculated based on the following:
1997 1996 1995 ---- ---- ---- Basic earnings per common share: Net income $8,542,519 $2,646,343 $ 374,439 ========== ========== ========== Weighted average shares outstanding 7,266,534 2,943,902 2,745,265 ========== ========== ========== Basic earnings per common share $ 1.18 $ 0.90 $ 0.14 ==== ==== ==== Diluted earnings per common share: Net income $8,542,519 $2,646,343 $ 374,439 Income adjustment relating to reduction of debt based on the if converted method 405,921 -- -- ---------- ---------- ---------- Net income available to common and common equivalent shares $8,948,440 $2,646,343 $ 374,439 ========== ========== ========== Weighted average shares outstanding 7,266,534 2,943,902 2,745,265 Net effect of dilutive stock options and warrants based on the treasury stock method 1,712,196 1,815,988 864,691 Net effect of dilutive convertible subordinated notes based on the if converted method 415,709 -- -- ---------- ---------- ---------- Weighed average shares outstanding - diluted 9,394,439 4,759,890 3,609,956 ========== ========== ========== Diluted earnings per common share $ 0.95 $ 0.56 $ 0.10 ==== ==== ====
14. BUSINESS AND CREDIT CONCENTRATIONS The Company's business is impacted by the general economic conditions of the commercial aviation industry. Airlines and other operators recognize the need to cut costs, shift inventory requirements, and conserve capital to sustain profitability. The Company's industry is also subject to regulation by various governmental agencies with responsibilities over civil aviation. Increased regulations imposed by organizations such as the Federal Aviation Administration may significantly affect industry operations. Accordingly economic and regulatory changes in the marketplace may significantly affect management's estimates and future performance. Total revenues derived from sales to domestic and international customers collectively accounted for 79% and 21%, respectively, for the year ended December 31, 1997, 77% and 23%, respectively, for the year ended December 31, 1996 and 95% and 5%, respectively, for the year ended December 31, 1995. For the years ended December 31, 1997, 1996 and 1995, the five largest customers collectively accounted for approximately 38%, 55% and 96%, respectively, of the Company's consolidated revenues. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently an adverse change in those factors could affect the Company's estimate of its bad debts. 15. OTHER MATTERS At December 31, 1997 there were no material legal proceedings pending against the Company or any of its property. However, the Company may become party to various claims, legal actions and complaints arising in the ordinary course of business. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of any matter that may arise will not have a material impact on the financial condition, results of operations or cash flows of the Company. The Company has certain employment agreements with officers with terms of five to seven years. The employment agreement provides that such officers may earn bonuses, based on the Company achieving certain F-23 target net income levels. Further, each of the employment agreements provide that in the event of termination without cause, the employment agreement shall be terminable by the mutual agreement between the Company and the officers, or by either party upon sixty days notice and provides for certain levels of severance compensation. 16. RELATED PARTY TRANSACTIONS During the year ended December 31, 1996, the Company paid Yoav Stern and Joram D. Rosenfeld, and in each case entities controlled by them, an aggregate of $90,000, each for services rendered by Yoav Stern and Joram D. Rosenfeld as Co-Chairmen of the Company's Board of Directors. These payments were terminated for Yoav Stern in December 1996 and for Joram D. Rosenfeld in March 1997. Payments to Joram D. Rosenfeld during 1997 amounted to $16,200. On March 28, 1997, the Company engaged Helix Management Company II, LLC and Helix Capital Services, LLC (collectively "Helix"), in which Yoav Stern, Chairman, and Zivi Nedivi, President and Chief Executive Officer, own a majority interest, to act as the Company's exclusive financial advisor with respect to merger and acquisition transactions and as principal financial advisor with respect to other transactions for an initial term of eighteen months beginning January 1, 1997. Under the terms of the agreement, Helix will receive a monthly retainer $25,000. The agreement entered into between the Company and Helix on December 24, 1996 was terminated. In addition, under the terms of the agreement, a success fee is to be determined by the Company on a per transaction basis, not to fall below 2% of the aggregate consideration in connection with the applicable transaction. During the year ended December 31, 1997, the Company paid $519,000 and issued warrants for the purchase of an aggregate 7,500 shares of the Company's common stock at an exercise price of $19.00 and $22.00 per share, expiring in three to five years, to Helix relating to such agreement. 17. SUBSEQUENT EVENTS On February 1, 1998, the Company sponsored a 401(k) savings plan covering most employees. Contributions made by the Company to the 401(k) savings plan are based on a specified percentage of employee contributions. On February 27, 1998, the Company signed a definitive agreement to acquire privately held Integrated Technology Corporation ("ITC") for approximately $20,225,000 in cash plus an earn-out payable over a three-year period based on certain specified criteria. In addition, the Company received a three-year option to purchase a 49% interest in an FAA-approved overhaul facility. F-24 18. SUPPLEMENTAL FINANCIAL DATA (a) QUARTERLY DATA - UNAUDITED
Quarters ---------------------------------------------- First Second Third Fourth ----- ------ ----- ------ Total revenues: 1997 $16,466,073 $17,949,910 $20,352,441 $24,670,725 1996 5,270,995 5,917,832 6,462,088 7,270,672 Earnings from continuing operations: 1997 $1,659,368 $1,941,214 $ 2,326,652 $ 2,615,285 1996 516,707 828,409 662,133 639,094 Net earnings: 1997 $1,659,368 $ 1,941,214 $ 2,326,652 $ 2,615,285 1996 516,707 828,409 662,133 639,094 Earnings per common share for continuing operations - diluted: 1997 $ 0.21 $ 0.22 $ 0.25 $ 0.27 1996 0.13 0.17 0.14 0.12 Net earnings per common share - diluted: 1997 $ 0.21 $ 0.22 $ 0.25 $ 0.27 1996 0.13 0.17 0.14 0.12
(b) PRO FORMA CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS - UNAUDITED The Company acquired substantially all of the assets and operations of IASI on January 15, 1997 (see Note 2). Accordingly, the Company's Consolidated Statement of Earnings for the year ended December 31, 1996 reflects the operations of Kellstrom. The operations of IASI for the period January 1, 1997 to January 14, 1997 were immaterial and are included in the Pro Forma Consolidated Statements of Earnings under the caption of Kellstrom. In addition, the Company acquired substantially all of the assets and operations of Aero Support on September 10, 1997 (see Note 2). Accordingly, the Company's Consolidated Statements of Earnings for the year ended December 31, 1997 reflect the operations of Aero Support from September 10, 1997 through December 31, 1997. Pro forma Consolidated Statements of Earnings have been provided herein to report the results of operations for the years ended December 31, 1997 and 1996 as though the companies had combined at the beginning of the periods being reported. The pro forma consolidated results do not purport to be indicative of results that would have occurred had the acquisitions been in effect for the periods presented, nor do they purport to be indicative of the results that will be obtained in the future. F-25 KELLSTROM INDUSTRIES, INC. PRO FORMA CONSOLIDATED COMBINED STATEMENTS OF EARNINGS (Unaudited)
Years Ended December 31, -------------------------------------- 1997 1996 ----------------- ----------------- Pro Forma Pro Forma Combined Combined ----------------- ----------------- Sales of aircraft and engine parts, net $ 84,758,251 $ 61,805,644 Rental revenues 7,904,610 2,783,274 ------------ ------------ Total revenues 92,662,861 64,588,918 Cost of goods sold (55,801,704) (40,939,792) Depreciation of equipment under operating leases (4,594,399) (1,809,128) Selling, general and administrative expenses (11,712,409) (8,243,017) Depreciation and amortization (2,108,837) (2,989,380) ------------ ------------ Total operating expenses (74,217,349) (53,981,317) Operating income 18,445,512 10,607,601 Interest expense, net of interest income (5,061,650) (4,543,090) ------------ ------------ Income before income taxes 13,383,863 6,064,511 Income taxes (4,989,397) (2,158,359) ------------ ------------ Net income $ 8,394,466 $ 3,906,152 ============ ============ Earnings per common share - basic $ 1.16 $ 1.33 ============ ============ Earnings per common share - diluted $ 0.88 $ 0.66 ============ ============ Weighted average number of shares outstanding - basic 7,266,534 2,943,902 ============ ============ Weighted average number of shares outstanding - diluted 9,587,564 5,908,675 ============ ============
Unaudited - See accompanying notes to pro forma consolidated combined statements of earnings F-26 KELLSTROM INDUSTRIES, INC. PRO FORMA CONSOLIDATED COMBINED STATEMENTS OF EARNINGS (Unaudited)
Year Ended December 31, 1997 ------------------------------------------------------------------------------------------- HISTORICAL PRO FORMA PRO FORMA KELLSTROM AERO SUPPORT ADJUSTMENTS (A) COMBINED ----------------------------------------- --------------- ------------- Sales of aircraft and engine parts, net $ 71,534,539 $ 20,041,644 $ (6,817,932) $ 84,758,251 Rental revenues 7,904,610 -- -- 7,904,610 ------------ ------------ ------------ ------------ Total revenues 79,439,149 20,041,644 (6,817,932) 92,662,861 Cost of goods sold (46,800,589) (13,162,382) 4,161,267 (55,801,704) Depreciation of equipment under operating leases (4,594,399) -- -- (4,594,399) Selling, general and administrative expenses (8,877,598) (3,690,856) 856,045 (11,712,409) Depreciation and amortization (1,555,673) (68,583) 16,500 (2,108,837) (659,517) 158,436 ------------ ------------ ------------ ------------ Total operating expenses (61,828,259) (16,921,821) 4,532,731 (74,217,349) Operating income 17,610,890 3,119,823 (2,285,201) 18,445,512 Interest expense, net of interest income (3,991,212) (197,011) 197,011 (5,061,650) (1,070,438) ------------ ------------ ------------ ------------ Income before income taxes 13,619,678 2,922,812 (3,158,627) 13,383,863 Income taxes (5,077,159) (196,401) 284,163 (4,989,397) ------------ ------------ ------------ ------------ Net income $ 8,542,519 $ 2,726,411 $ (2,874,464) $ 8,394,466 ============ ============ ============ ============ Earnings per common share - basic $ 1.18 $ 1.16 ============ ============ Earnings per common share - diluted $ 0.95 $ 0.88 ============ ============ Weighted average number of common shares outstanding - basic 7,266,534 7,266,534 ============ ============ Weighted average number of common shares outstanding - diluted 9,394,439 9,587,564 ============ ============
Unaudited - See accompanying notes to pro forma consolidated combined statements of earnings F-27 KELLSTROM INDUSTRIES, INC. NOTES TO PRO FORMA CONSOLIDATED COMBINED STATEMENT OF EARNINGS - UNAUDITED (A) For purposes of presenting the pro forma consolidated combined statement of earnings, the following adjustments have been made:
Year Ended December 31, 1997 ----------------- Increase (decrease) in income: Reversal of Aero Support revenues for the period September 10, 1997 to December 31, 1997 $ (6,817,932) Reversal of Aero Support cost of goods sold for the period September 10, 1997 to December 31, 1997 4,161,267 Reversal of Aero Support selling, general and administrative expenses for the period September 10, 1997 to December 31, 1997 856,045 Reversal of Aero Support depreciation and amortization for the period September 10, 1997 to December 31, 1997 16,500 Amortization of goodwill and non-compete agreement related to Aero Support Acquisition (659,517) Elimination of leasehold amortization expense for assets not acquired 158,436 Reduction in interest expense due to pay-off of debt on Aero Support line of credit 197,011 Interest expense on acquisition debt and debt incurred to repay existing Aero Support line of credit (1,070,438) ----------- (3,158,627) Tax effect of pro forma adjustments 284,163 ------------ Net adjustment $ (2,874,464) ============
F-28
KELLSTROM INDUSTRIES, INC. PRO FORMA CONSOLIDATED COMBINED STATEMENT OF EARNINGS (Unaudited) Year Ended December 31, 1996 ----------------------------------------------------------------------------------------------- HISTORICAL PRO FORMA PRO FORMA KELLSTROM IASI AERO SUPPORT ADJUSTMENTS (A) ADJUSTMENTS (B) COMBINED ------------------------- -------------- ------------------ -------------------- ------------ Sales of aircraft and engine parts, net $24,019,999 $20,982,061 $ 17,297,718 $ (494,134) $ -- 61,805,644 Rental revenues 901,588 1,881,686 -- -- -- 2,783,274 ------------ ------------ --------------- ------------- ------------------- ---------- Total revenues 24,921,587 22,863,747 17,297,718 (494,134) -- 64,588,918 Cost of goods sold (15,649,127) (13,860,420) (11,797,863) 367,618 -- (40,939,792) Depreciation of equipment under operating leases (586,032) (1,223,096) -- -- -- (1,809,128) Selling, general and administrative expenses (3,491,457) (1,744,434) (3,700,602) 693,476 -- (8,243,017) Depreciation and amortization (441,854) (937,716) (139,193) 23,952 (875,928) (2,989,380) (690,068) 71,427 ------------ ------------ --------------- ------------- ------------------- ---------- Total operating expenses (20,168,470) (17,765,666) (15,637,658) 394,978 (804,501) (53,981,317) Operating income 4,753,117 5,098,081 1,660,060 (99,156) (804,501) 10,607,601 Interest expense, net of interest income (644,527) (1,023,141) (181,962) 942,515 182,918 (4,543,090) (2,521,555) (1,297,338) Expenses related to sale of business -- 234,866 -- (234,866) -- -- ------------ ------------ --------------- ----------- --------------- ----------- Income before income taxes 4,108,590 3,840,074 1,478,098 (1,443,330) (1,918,921) 6,064,511 Income taxes (1,462,247) (3,075) -- (849,926) 156,889 (2,158,359) ------------ ------------ --------------- ----------- --------------- ----------- Net income $2,646,343 $3,836,999 $1,478,098 $(2,393,256) $ (1,762,032) $ 3,906,152 ============ ============ =============== ============ =============== =========== Earnings per common share - basic $ 0.90 $ 1.33 ============ =============== Earnings per common share - diluted $ 0.56 $ 0.66 ============ =============== Weighted average number of common shares outstanding - basic 2,943,902 2,943,902 ============ =============== Weighted average number of common shares outstanding - diluted 4,759,890 5,908,675 ============ ===============
Unaudited - See accompanying notes to pro forma consolidated combined statement of earnings F-29 KELLSTROM INDUSTRIES, INC. NOTES TO PRO FORMA CONSOLIDATED COMBINED STATEMENT OF EARNINGS - UNAUDITED (A) For purposes of presenting the pro forma consolidated combined statement of operations, the following adjustments have been made for the IASI acquisition:
Year Ended December 31, 1996 ----------------- Increase (decrease) in income: Decrease in net revenues from inter-company sales $ (494,134) Decrease in cost of goods sold from inter-company sales 367,618 Decrease in IASI selling, general and administrative expenses due to elimination of pension plan and bonus program and consolidation of insurance policies 693,476 Elimination of IASI goodwill amortization expense 23,952 Amortization of goodwill related to acquisition (690,068) Reduction of bank interest expense - exercise of warrants 942,515 Interest expense on acquisition debt (2,521,555) Elimination of expenses related to the sale of IASI 234,866 ----------- (1,443,330) Tax effect of pro forma adjustments (849,926) ----------- Net adjustment $(2,293,256) ===========
(B) For purposes of presenting the pro forma consolidated combined statement of operations, the following adjustments have been made for the Aero Support acquisition:
Year Ended December 31, 1996 --------------- Increase (decrease) in income: Amortization of goodwill and non-compete agreement related to Aero Support acquisition $ (875,928) Elimination of leasehold amortization expense on assets not acquired 71,427 Reduction of interest expense due to pay-off of debt on Aero Support line of credit 182,918 Interest expense on Aero Support acquisition debt and debt incurred to repay existing Aero Support line of credit (1,297,338) ------------- (1,918,921) Tax effect of pro forma adjustments 156,889 ------------ Net adjustment $(1,762,032) ============
F-30 EX-10 2 EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of April 1, 1997, between Kellstrom Industries, Inc., a Delaware corporation, having its principal place of business at Sawgrass International Corporate Park, 14000 Northwest Fourth Street, Sunrise, Florida 33325 (the "Company"), and Michael W. Wallace, an individual residing at 8995 Southern Orchard Road, Davie, Florida 33328 (the "Employee"). W I T N E S S E T H: WHEREAS, the Company desires to provide for the employment of the Employee, and the Employee desires to accept such employment, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises herein contained, the Company and the Employee hereby agree as follows: 1. Definitions. (a) The "Agreement" shall mean this Employment Agreement between the Company and the Employee. (b) The "Board" shall mean the Board of Directors of the Company. (c) The "Company" shall mean Kellstrom Industries, Inc., a Delaware corporation. (d) "Dependents" shall mean the Employee's spouse and children, if any. (e) A "Change of Control" shall mean (i) any transaction that has the result that stockholders of the Company immediately before such transaction cease to own at least 51% of (x) the voting stock of the Company or (y) of any entity that results from the participation of the Company in a reorganization, liquidation or any other form of corporate transaction; (ii) a merger, consolidation, reorganization, liquidation or dissolution in which the Company does not survive; or (iii) a sale, lease, exchange or other disposition of all or substantially all the property and assets of the Company. (f) The "Effective Date" shall mean April 14, 1997. (g) The "Employment Period" shall mean the period commencing on the Effective Date and ending on the fifth anniversary of the Effective Date. (h) The "Employee" shall mean Michael W. Wallace. (i) "GAAP" shall mean generally accepted accounting principles in the United States as in effect from time to time. (j) The "Health Insurance" shall mean health insurance benefits comparable to the other contract employees of the Company. (k) The "Salary" shall mean the amount set forth in Section 3(b)(i) of the Agreement. 2. EMPLOYMENT PERIOD. The Company hereby agrees to employ the Employee, and the Employee hereby agrees to be employed by the Company, for the duration of the Employment Period and pursuant to the other terms and conditions provided herein. This Agreement shall terminate at the end of the Employment Period, unless terminated prior to the end of the Employment Period by virtue of one of the provisions of Section 5 of this Agreement. 3. TERMS OF EMPLOYMENT. (a) Position and Duties. During the Employment Period the Employee's position shall be the Director of Finance. Upon mutually satisfactory performance of the duties of Director of Finance, during the first 12 months of employment, Mr. Wallace will be given the position of Chief Financial Officer. (b) Compensation. (i) Base Salary. As of the Effective Date, the Employee's annual salary (the "Salary") shall be $100,000, payable twice monthly, for the duration of the Employment Period. During the Employment Period, the Employee's Salary may be reviewed and changed; however, the Company shall not pay the Employee a Salary less than such amount during the Employment Period. Any increase in the Salary shall not serve to limit or reduce any other obligation of the Company under the Agreement. (ii) Annual Company Bonus. For each calendar year commencing with the year ending December 31, 1997, at the end of which the Employee is employed by the Company: (A) if the Company has Net Income (as hereinafter defined) for such year of an amount equal to the Company's target net income before taxes as determined solely by the Board (or the Executive Committee of the Board, if one exists) for such year (the "Target"), the Employee shall be entitled to a bonus in the amount equal to $20,000. (B) if the Company has Net Income for such year more than the Target and less than 150% of the Target, the Employee shall be entitled to a bonus as calculated below: B = $20,000 + $20,000 x (NI - T) -------- T where: B = the bonus earned in such year. T = the Target for such year. NI = the actual Net Income of the Company for such year as determined in accordance with GAAP. (C) if the Company has Net Income for such year of 150% of the Target or more, the Employee shall be entitled to a bonus of $30,000. (D) if the Company has Net Income for such year of less than 50% of the Target, the Employee shall not be entitled to a bonus. (E) if the Company has Net Income for such year of at least 50% of the Target 2 but less than the Target, the Employee shall be entitled to a bonus as calculated below: B = $20,000 - ($20,000 x 2 x (T - NI)) ---------------- T where: B = the bonus earned in such year. T = the Target for such year. NI = the actual Net Income of the Company for such year as determined in accordance with GAAP. (iii) Stock Options. As soon as practicable, the Company shall issue to the Employee options to purchase 15,000 shares of the Company's common stock, such options to be exercisable at a price equal to 100% of the fair market value of the common stock of the Company at the time such options are granted and shall vest with the Employee over three years. (c) Benefits. In addition to the compensation payable to the Employee as set forth in Section 3(b) above, during the Employment Period the Employee shall be eligible for the following: (i) Health Insurance. The Company shall provide Health Insurance for the Employee and his Dependents. The provision of the Health Insurance shall be subject to acceptance by the insurance company of the Employee and his Dependents to the Company's current program or whatever other program the Board may decide to elect. The Employee shall be solely responsible for all deductible and copayment amounts due according to the Health Insurance. Upon termination of this Agreement, all payments under this Section 3(c)(i) shall cease, provided, however, that the Employee shall be entitled to payments for periods prior to the date of the termination and for which the Employee has not yet been paid. (ii) Pension Plan. the Company shall contribute an amount equal to 5% of the Salary towards the accumulating life insurance plan/pension plan selected and established by the Employee. (iii) Other Benefits. The Employee shall be eligible for similar incentive, stock option grants, savings, welfare (including without limitation medical and dental insurance) plans, practices, policies and programs applicable on or after the Effective Date to other contract employees of the Company as determined in the discretion of the Board (or the Executive Committee, if any). (d) Vacation. During the Employment Period, the Employee shall be entitled to paid vacation in accordance with the policies and practices applicable on or after the Effective Date to other executives of the Company, provided that the Employee shall be entitled to a minimum of two (2) weeks of paid vacation per calendar year. Vacation accrued but unused at the end of a calendar year may be carried over into the following calendar year or years, provided that unused vacation days shall be accrued up to a maximum of four weeks. 3 (e) Holidays and Sick Leave. The Employee shall be entitled to all holidays that are prescribed by the Company's policies and practices. The Employee shall be entitled to 6 days paid sick leave per year. Unused sick leave days may not be carried over to the following calendar year or years. 4. Employee's Obligations and Representations; Indemnity. (a) During the Employment Period, and excluding any periods of vacation and sick leave to which the Employee is entitled, the Employee agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and to perform faithfully and efficiently the responsibilities assigned to the Employee by the Company. (b) The Employee represents and warrants to the Company that there are no agreements or arrangements, whether written or oral, in effect which would prevent the Employee from rendering exclusive service to the Company during the Employment Period, including without limitation any obligations or restrictions of the Employee to his prior employer. The Employee further represents, warrants and agrees with the Company that as of the Effective Date he has not made and will not make during the Employment Period any commitment or do any act in conflict with this Agreement, or take any action that might divert from the Company any opportunity which would be in the scope of any present or future business of the Company or any subsidiary thereof. 5. Termination. (b) Death. This Agreement shall terminate automatically upon the Employee's death. If the Employee's employment is terminated by reason of the Employee's death, the Company shall have no further obligations to the Employee's legal representatives under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of his death. In addition, the Employee's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Company to surviving families of other contract employees of the Company based on the terms of the benefit plans referenced in Section 3(c) of this Agreement as in effect on the date of the Employee's death. (c) Disability. If the Company determines in good faith that the Employee has a "disability" (as defined below), it may give the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 30th day after receipt by the Employee of such notice. No such notice of termination by reason of disability shall be given until the Employee has experienced a period of two consecutive months of disability and the disability is continuing. The notice of termination shall not be effective if the Employee returns to full-time performance of his duties prior to the expiration of the 30-day notice period. For purposes of this Agreement, "disability" shall mean a physical or mental condition which, two months after its commencement, is determined to be total and permanent by a physician selected by the Company. The Employee shall be entitled to all compensation and benefits provided for under this Agreement during the two-month waiting period for the disability determination and during the 30-day notice of termination period. In the event that the Company provides long-term disability benefits for the Employee, such benefits shall not commence until after the employment of the Employee has been terminated and the Company has ceased paying the Employee compensation pursuant to the foregoing sentence. If the Employee's employment is terminated by reason of the Employee's disability, this Agreement shall terminate without further obligations 4 to the Employee or the Employee's legal representatives under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. (d) Voluntary Termination. The Employee agrees to provide the Company with 15 days notice prior to voluntarily terminating his employment (other than for "good reason" as defined in Section 5(f) below). At the end of such 15-day period, this Agreement shall terminate automatically and the Company shall have no further obligations to the Employee under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. The Employee shall not be entitled to any Bonus in respect of the year of termination in the event the Employee's employment is terminated pursuant to this Section 5(c). (e) Cause. During the Employment Period, the Company may terminate the Employee's employment for "cause" as defined below. For purposes of the Agreement, "cause" shall mean: (i) an act or acts of fraud, embezzlement or any other act that would constitute a felony under the laws of the state of Florida or California taken by the Employee; (ii) repeated violations by the Employee of his obligations under Section 4(a) of this Agreement which are not remedied within a reasonable period of time after receipt of written notice from the Company of such violations or a breach by the Employee of his representations or obligations under Section 4(b) of this Agreement; (iii) any direct or indirect disclosure of any confidential information or other special knowledge of the finances, business or other affairs of the Company; or (iv) the indictment of the Employee of a crime, where the Company reasonably believes it would impair the Employee's ability to perform his services under this Agreement. If the Employee's employment is terminated for cause, this Agreement shall terminate without further obligations to the Employee under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. The Employee shall not be entitled to any Bonus in respect of the year of termination in the event the Employee's employment is terminated for cause pursuant to this Section 5(d). Notwithstanding anything herein to the contrary, the Company shall have the right, at any time upon notice to the Employee, to terminate the Employment. (f) Involuntary Termination. If during the Employment Period the Company terminates the Employee's employment other than for cause or disability it shall be deemed to be an involuntary termination and the Company shall pay to the Employee the following amounts: (i) to the extent not therefore paid, the Company shall pay the Employee's Salary through the date of such involuntary termination and any accrued bonus as determined by the Board; (ii) the Company shall pay the Employee on the date of such involuntary termination an amount equal to two months of the Employee's Base Salary and an amount equal to six months of the Employee's Base Salary in the event of termination following a Change of Control; and 5 (iii) the Company shall pay in one cash lump sum any vacation days accrued but unused as of the date of termination to be paid within 30 days of such involuntary termination. (g) Good Reason. During the Employment Period, the Employee may terminate his employment for "good reason" as defined below. For purposes of this Agreement, "good reason" shall mean: (i) the assignment to the Employee of any duties inconsistent in any respect with Employee's position, duties and responsibilities as set forth in Section 3(a) of this Agreement or any action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose any isolated, insubstantial and inadvertent action by the Company which is not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii) any failure by the Company to comply with any of the provisions of Sections 3(b) through 3(e) of this Agreement regarding the Employee's compensation, benefits, vacation, holidays and sick leave other than an isolated, insubstantial and inadvertent action by the Company which is not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee. In the event that the Employee terminates his employment for good reason as defined in this Section 5(f), it shall be deemed to be an "involuntary termination" as set forth in Section 5(e) above and the Employee shall be entitled to all payments and obligations set forth in Sections 5 (e)(i) through 5(e)(iii) of this Agreement as if the Employee's employment had been involuntarily terminated. 6. Notice of Termination. Any notice of termination by the Company for any reason or by the Employee for any reason shall be communicated by a written notice which indicates (i) the specific termination provision in this Agreement relied upon, (ii) the facts and circumstances claimed to provide a basis for such termination, and (iii) the date or proposed date of termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, incentive or other plans, programs, policies or practices provided by the Company and for which the Employee may otherwise qualify. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the termination of the Employee's employment shall be payable in accordance with such plan, policy, practice or program. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment or other claim, right or action which the Company may have against the Employee. 6 9. Confidentiality (a) The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret, proprietary or confidential information, knowledge or data relating to the Company and its business, including without limitation financial information and customer lists, which shall have been obtained by the Employee during his employment with the Company and which shall not be or become public knowledge (other than by acts by the Employee or his representatives in violation of this Agreement). Notwithstanding the foregoing, the Employee may disclose any such information if such information is compelled by legal process, provided that if Employee is so compelled, he shall provide the Company with prompt notice so that it may seek a protective order or other remedy. In any event, the Employee shall furnish only that portion of the confidential information that is legally required to be disclosed. (b) In the event that the Employee breaches any provision of this Section 9 or Sections 10 or 11, the Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining the Employee from committing or continuing any violation of this Agreement. The Employee agrees that there is no adequate remedy at law to remedy such a breach. 10. Non-Competition. The Employee agrees that (a) during the Employment Period and (b) unless the Employee terminates his employment for "good reason" or his employment is involuntarily terminated, other than for cause, for two years thereafter (or, in the case of a Change of Control, for 6 months) he will not, within the continental United States, Israel, Ireland, England or any other country in which the Company has operations at the time of termination and prior thereto, directly or indirectly, engage or participate or make any financial investments in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business activity which directly or indirectly is in competition with any of the business operations or activities of the Company and its subsidiaries as of the date of termination of his employment or for any time prior thereto. Nothing herein contained, however, shall restrict the Employee from making any investments in any company whose stock is listed on a national securities exchange or actively traded in the over-the-counter market, as long as such investment does not give him the right to control or influence the policy decisions of any such business or enterprise which is or might be directly or indirectly in competition with any of such business operations or activities of the Company or any of its subsidiaries. 11. Restriction on Solicitation. The Employee agrees that during the Employment Period and for two years thereafter, he will not: (i) directly or indirectly solicit, raid, entice or induce any employee of the Company or any of its subsidiaries to become an employee of any person, firm or corporation which is, directly or indirectly, in competition with the business or activities of the Company or any of its subsidiaries: (ii) directly or indirectly approach any such employee for these purposes; (iii) authorize or knowingly approve the taking of such actions by other persons on behalf of any such person, firm or corporation, or assist any such person, firm or corporation in taking such action; or 7 (iv) directly or indirectly solicit, raid, entice or induce any person, firm or corporation who or which on the date hereof is, or at the time during his employment with the Company shall be, a customer of the Company or of any of its subsidiaries to become a customer for the same or similar products which it purchased from the Company or any of its subsidiaries, of any other person, firm or corporation, and the Employee shall not approach any such customer for such purpose or authorize or knowingly approve the taking of such actions by any other person. 12. Successors. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee. 13. Binding Arbitration. In the event that the Company and the Employee cannot agree on an interpretation of any provision of this Agreement, or in the event that either of the parties fails to make any payments or otherwise fulfill any obligations required by the terms of this Agreement, the Company and the Employee agree to resolve any such dispute through arbitration under the rules then obtaining of the American Arbitration Association in the State of Florida. 14. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. (b) The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices, requests, demands and other communications hereunder shall be in writing and be deemed to have given if sent by facsimile transmission, delivered by overnight or other carrier service, or mailed, certified first class mail, postage prepaid, return receipt requested, to the parties hereto at the following addresses: If to the Company, to: Kellstrom Industries, Inc. 14000 N.W. 4th Street Sunrise, Florida 33325 Att: President Telecopier: (954) 845-0428 If to the Employee, to: Michael W. Wallace 8995 Southern Orchard Road David, Florida 33328 or to such other address as either party shall have furnished to the other in accordance herewith. 8 (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) A party's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. (g) This Agreement embodies the entire agreement between the Company and the Employee and supersedes all prior agreements and understandings, oral or written, with respect thereto. (h) This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. [Remainder of page intentionally omitted; signatures to follow.] 9 IN WITNESS WHEREOF, the Employee has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. KELLSTROM INDUSTRIES, INC. By:______________________________ Name: Zivi R. Nedivi Title: President & Chief Executive Officer EMPLOYEE --------------------------------- Michael W. Wallace 10 EX-10 3 EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of October 25, 1996, between Kellstrom Industries, Inc., a Delaware corporation, having its principal place of business at Sawgrass International Corporate Park, 14000 Northwest Fourth Street, Sunrise, Florida 33325 (the "Company"), and Donald E. Reynolds, an individual residing at 119 Blueberry Drive, Scotts Valley, CA 95066 (the "Employee"). W I T N E S S E T H: WHEREAS, the Company desires to provide for the employment of the Employee, and the Employee desires to accept such employment, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises herein contained, the Company and the Employee hereby agree as follows: 1. Definitions. (a) The "Agreement" shall mean this Employment Agreement between the Company and the Employee. (b) The "Board" shall mean the Board of Directors of the Company. (c) The "Company" shall mean Kellstrom Industries, Inc., a Delaware corporation. (d) "Dependents" shall mean the Employee's spouse and children, if any. (e) A "Change of Control" shall mean (i) any transaction that has the result that stockholders of the Company immediately before such transaction cease to own at least 51% of (x) the voting stock of the Company or (y) of any entity that results from the participation of the Company in a reorganization, liquidation or any other form of corporate transaction; (ii) a merger, consolidation, reorganization, liquidation or dissolution in which the Company does not survive; or (iii) a sale, lease, exchange or other disposition of all or substantially all the property and assets of the Company. (f) The "Effective Date" shall mean ________, 199_ and shall coincide with the Closing Date of the acquisition by the Company of substantially all of the assets of International Aircraft Support, L.P. (the "Acquisition"). (g) The "Employment Period" shall mean the period commencing on the Effective Date and ending on the eighteenth anniversary of the Effective Date. (h) The "Employee" shall mean Donald E. Reynolds. (i) "GAAP" shall mean generally accepted accounting principles in the United States as in effect from time to time. (j) The "Health Insurance" shall mean health insurance benefits comparable to the other contract employees of the Company. (k) The "Salary" shall mean the amount set forth in Section 3(b)(i) of the Agreement. 2. EMPLOYMENT PERIOD. The Company hereby agrees to employ the Employee, and the Employee hereby agrees to be employed by the Company, for the duration of the Employment Period and pursuant to the other terms and conditions provided herein. This Agreement shall terminate at the end of the Employment Period, unless terminated prior to the end of the Employment Period by virtue of one of the provisions of Section 5 of this Agreement. 3. TERMS OF EMPLOYMENT. (a) Position and Duties. During the Employment Period the Employee's position shall be the Vice President, Technical Operations. The Employee's services shall be performed at the Company's office in California. (b) Compensation. (i) Base Salary. As of the Effective Date, the Employee's annual salary (the "Salary") shall be $115,000, payable twice monthly, for the duration of the Employment Period. During the Employment Period, the Employee's Salary may be reviewed and changed; however, the Company shall not pay the Employee a Salary less than such amount during the Employment Period. Any increase in the Salary shall not serve to limit or reduce any other obligation of the Company under the Agreement. (ii) Annual Company Bonus. For each calendar year commencing with the year ending December 31, 1997, at the end of which the Employee is employed by the Company: (A) if the Company has Net Income (as hereinafter defined) for such year of an amount equal to the Company's target net income before taxes as determined solely by the Board (or the Executive Committee of the Board, if one exists) for such year (the "Target"), the Employee shall be entitled to a bonus in the amount equal to $57,500. (B) if the Company has Net Income for such year more than the Target and less than 150% of the Target, the Employee shall be entitled to a bonus as calculated below: B = $57,500 + $57,500 x (NI - T) -------- T where: B = the bonus earned in such year. T = the Target for such year. NI = the actual Net Income of the Company for such year as determined in accordance with GAAP. (C) if the Company has Net Income for such year of 150% of the Target or more, the Employee shall be entitled to a bonus of $86,250. (D) if the Company has Net Income for such year of less than 50% of the Target, the Employee shall not be entitled to a bonus. (E) if the Company has Net Income for such year of at least 50% of the Target but less than the Target, the Employee shall be entitled to a bonus as calculated below: B = $57,500 - ($57,500 x 2 x (T - NI)) ---------------- T where: B = the bonus earned in such year. T = the Target for such year. 2 NI = the actual Net Income of the Company for such year as determined in accordance with GAAP. (c) Benefits. In addition to the compensation payable to the Employee as set forth in Section 3(b) above, during the Employment Period the Employee shall be eligible for the following: (i) Health Insurance. The Company shall provide Health Insurance for the Employee and his Dependents. The provision of the Health Insurance shall be subject to acceptance by the insurance company of the Employee and his Dependents to the Company's current program or whatever other program the Board may decide to elect. The Employee shall be solely responsible for all deductible and copayment amounts due according to the Health Insurance. Upon termination of this Agreement, all payments under this Section 3(c)(i) shall cease, provided, however, that the Employee shall be entitled to payments for periods prior to the date of the termination and for which the Employee has not yet been paid. (ii) Pension Plan. the Company shall contribute an amount equal to 5% of the Salary towards the accumulating life insurance plan/pension plan selected and established by the Employee. (iii) Car. During the Employment Period, the Company shall furnish the Employee with an automobile commensurate with his position for use by the Employee in connection with the performance of this duties hereunder, and shall also pay or reimburse the Employee for all expenses of insurance, maintenance and operation of such automobile. (iv) Other Benefits. The Employee shall be eligible for similar incentive, stock option grants, savings, welfare (including without limitation medical and dental insurance) plans, practices, policies and programs applicable on or after the Effective Date to other contract employees of the Company as determined in the discretion of the Board (or the Executive Committee, if any). (d) Vacation. During the Employment Period, the Employee shall be entitled to paid vacation in accordance with the policies and practices applicable on or after the Effective Date to other executives of the Company, provided that the Employee shall be entitled to a minimum of twenty (20) days of paid vacation per calendar year. If during the Employment Period the Employee serves for less than a full calendar year, the minimum twenty (20) days shall be prorated for the period of the year in which the Employee served. Vacation accrued but unused at the end of a calendar year may be carried over into the following calendar year or years, provided that unused vacation days shall be accrued up to a maximum of four weeks. (e) Holidays and Sick Leave. The Employee shall be entitled to all holidays that are prescribed by the Company's policies and practices. The Employee shall be entitled to 5 days paid sick leave per year. Unused sick leave days may not be carried over to the following calendar year or years. 4. Employee's Obligations and Representations; Indemnity. (a) During the Employment Period, and excluding any periods of vacation and sick leave to which the Employee is entitled, the Employee agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and to perform faithfully and efficiently the responsibilities assigned to the Employee by the Company. (b) The Employee represents and warrants to the Company that there are no agreements or arrangements, whether written or oral, in effect which would prevent the Employee from rendering exclusive service to the Company during the Employment Period, including without limitation any obligations or restrictions of the Employee to his prior employer. The Employee further represents, warrants and agrees with the Company that as of the Effective Date he has not made and will not make during the Employment Period any commitment or do any act in conflict with this Agreement, or take any action that might divert from the Company any opportunity which would be in the scope of any present or future business of the Company or any subsidiary thereof. 3 5. Termination. (a) Death. This Agreement shall terminate automatically upon the Employee's death. If the Employee's employment is terminated by reason of the Employee's death, the Company shall have no further obligations to the Employee's legal representatives under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of his death. In addition, the Employee's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Company to surviving families of other contract employees of the Company based on the terms of the benefit plans referenced in Section 3(c) of this Agreement as in effect on the date of the Employee's death. (b) Disability. If the Company determines in good faith that the Employee has a "disability" (as defined below), it may give the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 30th day after receipt by the Employee of such notice. No such notice of termination by reason of disability shall be given until the Employee has experienced a period of two consecutive months of disability and the disability is continuing. The notice of termination shall not be effective if the Employee returns to full-time performance of his duties prior to the expiration of the 30-day notice period. For purposes of this Agreement, "disability" shall mean a physical or mental condition which, two months after its commencement, is determined to be total and permanent by a physician selected by the Company. The Employee shall be entitled to all compensation and benefits provided for under this Agreement during the two-month waiting period for the disability determination and during the 30-day notice of termination period. In the event that the Company provides long-term disability benefits for the Employee, such benefits shall not commence until after the employment of the Employee has been terminated and the Company has ceased paying the Employee compensation pursuant to the foregoing sentence. If the Employee's employment is terminated by reason of the Employee's disability, this Agreement shall terminate without further obligations to the Employee or the Employee's legal representatives under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. In addition, the Employee and the Employee's family shall be entitled to receive benefits, including without limitation disability benefits, at least equal to the most favorable benefits provided by the Company to other contract employees of the Company based on the terms of the benefit plans referenced in Section 3(c) of this Agreement as in effect on the date the Employee's disability commenced. (c) Voluntary Termination. The Employee agrees to provide the Company with 15 days notice prior to voluntarily terminating his employment (other than for "good reason" as defined in Section 5(f) below). At the end of such 15-day period, this Agreement shall terminate automatically and the Company shall have no further obligations to the Employee under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. The Employee shall not be entitled to any Bonus in respect of the year of termination in the event the Employee's employment is terminated pursuant to this Section 5(c). (d) Cause. During the Employment Period, the Company may terminate the Employee's employment for "cause" as defined below. For purposes of the Agreement, "cause" shall mean: (i) an act or acts of fraud, embezzlement or any other act that would constitute a felony under the laws of the state of Florida or California taken by the Employee; (ii) repeated violations by the Employee of his obligations under Section 4(a) of this Agreement which are not remedied within a reasonable period of time after receipt of written notice from the Company of such violations or a breach by the Employee of his representations or obligations under Section 4(b) of this Agreement; (iii) any direct or indirect disclosure of any confidential information or other special knowledge of the finances, business or other affairs of the Company; or (iv) the indictment of the Employee of a crime, where the Company reasonably believes it would 4 impair the Employee's ability to perform his services under this Agreement. If the Employee's employment is terminated for cause, this Agreement shall terminate without further obligations to the Employee under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. The Employee shall not be entitled to any Bonus in respect of the year of termination in the event the Employee's employment is terminated for cause pursuant to this Section 5(d). (e) Involuntary Termination. If during the Employment Period the Company terminates the Employee's employment other than for reasons set forth in Sections 5(a) through 5(d) above, it shall be deemed to be an involuntary termination and the Company shall pay to the Employee the following amounts: (i) to the extent not therefore paid, the Company shall pay the Employee's Salary through the date of such involuntary termination and any accrued bonus as determined by the Board; (ii) the Company shall pay the Employee on the date of such involuntary termination an amount equal to one month of the Employee's Base Salary; and (iii) the Company shall pay in one cash lump sum any vacation days accrued but unused as of the date of termination to be paid within 30 days of such involuntary termination. (f) Good Reason. During the Employment Period, the Employee may terminate his employment for "good reason" as defined below. For purposes of this Agreement, "good reason" shall mean: (i) the assignment to the Employee of any duties inconsistent in any respect with Employee's position, duties and responsibilities as set forth in Section 3(a) of this Agreement or any action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose any isolated, insubstantial and inadvertent action by the Company which is not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii) any failure by the Company to comply with any of the provisions of Sections 3(b) through 3(e) of this Agreement regarding the Employee's compensation, benefits, vacation, holidays and sick leave other than an isolated, insubstantial and inadvertent action by the Company which is not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee. In the event that the Employee terminates his employment for good reason as defined in this Section 5(f), it shall be deemed to be an "involuntary termination" as set forth in Section 5(e) above and the Employee shall be entitled to all payments and obligations set forth in Sections 5(e)(i) through 5(e)(iii) of this Agreement as if the Employee's employment had been involuntarily terminated. 6. Notice of Termination. Any notice of termination by the Company for any reason or by the Employee for any reason shall be communicated by a written notice which indicates (i) the specific termination provision in this Agreement relied upon, (ii) the facts and circumstances claimed to provide a basis for such termination, and (iii) the date or proposed date of termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, incentive or other plans, programs, policies or practices provided by the Company and for which the Employee may otherwise qualify. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the termination of the Employee's employment shall be payable in accordance with such plan, policy, practice or program. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment or 5 other claim, right or action which the Company may have against the Employee. 9. Confidentiality (a) The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret, proprietary or confidential information, knowledge or data relating to the Company and its business, including without limitation financial information and customer lists, which shall have been obtained by the Employee during his employment with the Company and which shall not be or become public knowledge (other than by acts by the Employee or his representatives in violation of this Agreement). Notwithstanding the foregoing, the Employee may disclose any such information if such information is compelled by legal process, provided that if Employee is so compelled, he shall provide the Company with prompt notice so that it may seek a protective order or other remedy. In any event, the Employee shall furnish only that portion of the confidential information that is legally required to be disclosed. (b) In the event that the Employee breaches any provision of this Section 9 or Sections 10 or 11, the Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining the Employee from committing or continuing any violation of this Agreement. The Employee agrees that there is no adequate remedy at law to remedy such a breach. 10. Non-Competition. The Employee agrees that (a) during the Employment Period and (b) unless the Employee terminates his employment for "good reason" or his employment is involuntarily terminated, for two years thereafter (or, in the case of a Change of Control, for 6 months, or in the case of an Involuntary Termination, for 12 months), he will not, within the continental United States, Israel, Ireland, England or any other country in which the Company has operations at the time of termination and prior thereto, directly or indirectly, engage or participate or make any financial investments in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business activity which directly or indirectly is in competition with any of the business operations or activities of the Company and its subsidiaries as of the date of termination of his employment or for any time prior thereto. Nothing herein contained, however, shall restrict the Employee from making any investments in any company whose stock is listed on a national securities exchange or actively traded in the over-the-counter market, as long as such investment does not give him the right to control or influence the policy decisions of any such business or enterprise which is or might be directly or indirectly in competition with any of such business operations or activities of the Company or any of its subsidiaries. 11. Restriction on Solicitation. The Employee agrees that during the Employment Period and for two years thereafter, he will not: (i) directly or indirectly solicit, raid, entice or induce any employee of the Company or any of its subsidiaries to become an employee of any person, firm or corporation which is, directly or indirectly, in competition with the business or activities of the Company or any of its subsidiaries: (ii) directly or indirectly approach any such employee for these purposes; (iii) authorize or knowingly approve the taking of such actions by other persons on behalf of any such person, firm or corporation, or assist any such person, firm or corporation in taking such action; or (iv) directly or indirectly solicit, raid, entice or induce any person, firm or corporation who or which on the date hereof is, or at the time during his employment with the Company shall be, a customer of the Company or of any of its subsidiaries to become a customer for the same or similar products which it purchased from the Company or any of its subsidiaries, of any other person, firm or corporation, and the Employee shall not approach any such customer for such purpose or authorize or knowingly approve the taking of such actions by any other person. 6 12. Successors. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee. 13. Binding Arbitration. In the event that the Company and the Employee cannot agree on an interpretation of any provision of this Agreement, or in the event that either of the parties fails to make any payments or otherwise fulfill any obligations required by the terms of this Agreement, the Company and the Employee agree to resolve any such dispute through arbitration under the rules then obtaining of the American Arbitration Association in the State of Florida. 14. This Agreement is subject to the acquisition by the Company of substantially all of the assets of International Aircraft Support. L.P. by no later than January 15, 1997. The failure of the Acquisition to occur by January 15, 1997 shall cause this Agreement to be null and void with no further rights or responsibilities or obligations to either party. 15. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. (b) The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices, requests, demands and other communications hereunder shall be in writing and be deemed to have given if sent by facsimile transmission, delivered by overnight or other carrier service, or mailed, certified first class mail, postage prepaid, return receipt requested, to the parties hereto at the following addresses: If to the Company, to: Kellstrom Industries, Inc. 14000 N.W. 4th Street Sunrise, Florida 33325 Att: President Telecopier: (954) 845-0428 If to the Employee, to: Donald E. Reynolds 119 Blueberry Dr. Scotts Valley, CA 95066 or to such other address as either party shall have furnished to the other in accordance herewith. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) A party's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. 7 (g) This Agreement embodies the entire agreement between the Company and the Employee and supersedes all prior agreements and understandings, oral or written, with respect thereto. (h) This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. [Remainder of page intentionally omitted; signatures to follow.] 8 IN WITNESS WHEREOF, the Employee has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. KELLSTROM INDUSTRIES, INC. By:______________________________ Name: Zivi R. Nedivi Title: President & Chief Executive Officer EMPLOYEE --------------------------------- Donald E. Reynolds 9 EX-10 4 EXHIBIT 10.22 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED REVOLVING LOAN AGREEMENT DATED AS OF MARCH 11, 1998 BY AND BETWEEN KELLSTROM INDUSTRIES, INC. (THE BORROWER) AND BARNETT BANK, N.A. (THE BANK) $100,000,000.00 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Copyright 1998 English, McCaughan & O'Bryan, P.A. All Rights Reserved. TABLE OF CONTENTS (The Table of Contents for this Amended and Restated Revolving Loan Agreement is for convenience of reference only and is not intended to define, limit or describe the scope or intent of any provisions of this Amended and Restated Revolving Loan Agreement.)
ARTICLE/SECTION HEADING PAGE - --------------- ---------------------------------------------------------------------- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS..........................................2 1.01 Definitions...............................................................2 1.02 Accounting Terms.........................................................21 ARTICLE II AMOUNTS AND TERMS OF LOAN................................................21 2.01 Loan.....................................................................21 2.02 Borrowing Base for the Loan..............................................21 2.03 Other Advance Limitations................................................23 2.04 The Note.................................................................24 2.05 Advance of Proceeds of the Loan..........................................24 2.06 Interest Rate; Payment of the Note.......................................24 2.07 Prepayments..............................................................25 2.08 Calculation of Interest..................................................25 2.09 Setoff...................................................................25 2.10 Late Payment Penalty.....................................................25 2.11 Use of Proceeds..........................................................26 2.12 Letter of Credit.........................................................26 2.13 Letter of Credit Requests; Notices of Issuance...........................27 2.14 Agreement to Repay Letter of Credit Drawings.............................27 2.15 Right to Debit Account...................................................27 2.16 Fees.....................................................................28 ARTICLE III CUSTODY, INSPECTION, COLLECTION AND HANDLING OF COLLATERAL AND RECORDS...28 3.01 Collection of Accounts...................................................28 3.02 Power of Attorney........................................................28 3.03 Liability for Handling Collateral........................................29 3.04 Custodian of Collateral..................................................29 3.05 Cash Collateral Account(s)...............................................29 ARTICLE IV REPRESENTATIONS AND WARRANTIES...........................................30 4.01 Organization, Corporate Powers, etc......................................30
-i- 4.02 Authorization of Loan, etc...............................................31 4.03 Financial Statements.....................................................31 4.04 Tax Returns and Payments.................................................31 4.05 Agreements...............................................................32 4.06 Title to Properties and Assets, Liens, etc...............................32 4.07 Litigation, etc..........................................................32 4.08 Consents and Approvals...................................................32 4.09 Enforceable Obligations..................................................32 4.10 Full Disclosure..........................................................32 4.11 Hazardous Materials......................................................33 4.12 Outstanding Debt.........................................................33 4.13 Designated Senior Indebtedness; Compliance with Indenture................34 4.14 Affirmation of Previous Transactions and Initial Loan Documents and Warranties and Representations; Assumption of Obligations under Initial Transactions and Initial Loan Documents...............................................34 ARTICLE V COVENANTS OF BORROWER....................................................34 5.01 Affirmative Covenants....................................................34 5.02 Negative Covenants.......................................................42 5.03 Financial Covenants......................................................46 ARTICLE VI CONDITIONS OF LENDING....................................................47 A. The First Advance.................................................................47 6.01 Evidence of Borrower Action..............................................47 6.02 Note.....................................................................47 6.03 Opinion of Counsel to Borrower...........................................47 6.04 Security Agreement and Other Security Documents..........................47 6.05 Financing Statements.....................................................48 6.06 Property and Public Liability Insurance..................................48 6.07 Fees.....................................................................48 6.08 Concerning the Subordinated Debt.........................................48 6.09 Other Documents..........................................................48 6.10 Asset-Based Lending Audit................................................48 6.11 Stock of Subsidiaries....................................................49 6.12 December 31, 1997 Draft Financial Statements.............................49 6.13 Credit Approval..........................................................49 B. All Advances......................................................................49 6.14 Compliance...............................................................49 6.15 Delivery of Documents....................................................50 6.16 Borrowing Request........................................................50
-ii- 6.17 Supplemental Opinions....................................................50 6.18 Documentation and Proceedings............................................50 6.19 Required Acts and Conditions.............................................50 6.20 Approval of Bank's Counsel...............................................50 6.21 Guaranty and Pledge Agreement from Affiliates Created Post-Closing.............................................................50 6.22 Representations and Warranties...........................................51 6.23 No Default or Adverse Change.............................................51 6.24 Loan Documents...........................................................51 6.25 Payment of Unused Fee....................................................51 6.26 Subordination Agreement..................................................51 6.27 FAA Filing and Lien Search...............................................52 ARTICLE VII EVENTS OF DEFAULT........................................................52 7.01 Events of Default........................................................52 ARTICLE VIII RIGHTS UPON DEFAULT......................................................54 8.01 Acceleration.............................................................54 8.02 Right of Setoff..........................................................54 8.03 Other Rights.............................................................54 8.04 Uniform Commercial Code..................................................55 ARTICLE IX MISCELLANEOUS............................................................55 9.01 No Waiver, Cumulative Remedies...........................................55 9.02 Entire Agreement; Amendments, etc........................................55 9.03 Addresses for Notices, etc...............................................55 9.04 Applicable Law...........................................................56 9.05 Survival of Representations and Warranties...............................56 9.06 Time of the Essence......................................................57 9.07 Headings.................................................................57 9.08 Severability.............................................................57 9.09 Counterparts.............................................................57 9.10 Conflict.................................................................57 9.11 Duration.................................................................57 9.12 Expenses.................................................................57 9.13 Successors and Assigns...................................................58 9.14 Cross Defaults...........................................................58 9.15 Non-Waiver...............................................................59 9.16 WAIVER OF TRIAL BY JURY..................................................59 JOINDER AND CONSENT OF GUARANTORS.........................................................60 EXHIBIT "A" Form of Advance Note.....................................................61
-iii- EXHIBIT "B" Form of Consolidated Note................................................62 EXHIBIT "C" Form of Security Agreement and FAA Security Agreement....................63 EXHIBIT "D" Opinion of Counsel.......................................................64 EXHIBIT "E" Form of Corporate Guaranty...............................................65 EXHIBIT "F" Borrowing Base Certificate...............................................66 EXHIBIT "G" Borrowing Request........................................................67 EXHIBIT "H" Preapproved Foreign Whole Aircraft Engines as of Closing.................68 SCHEDULE 4.07 Pending Litigation.......................................................69 SCHEDULE 5.01(l) Outstanding Debt.........................................................70 SCHEDULE 5.02(c) Places of Business.......................................................71 SCHEDULE 5.02(f) Permitted Liens..........................................................72 SCHEDULE 5.02(k) Returns and Credit Policies..............................................73
-iv-
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-vi- AMENDED AND RESTATED REVOLVING LOAN AGREEMENT PREAMBLE THIS AMENDED AND RESTATED REVOLVING LOAN AGREEMENT (this "AGREEMENT") is made and entered into as of March 11, 1998, by and between KELLSTROM INDUSTRIES, INC., a Delaware corporation ("BORROWER"), and BARNETT BANK, N.A., a national banking association, or its successors, assigns, and affiliates ("BANK"). RECITALS A. Bank entered into a loan transaction (the "INITIAL TRANSACTION") with Borrower on April 24, 1997, under which Bank provided to Borrower a loan (the "INITIAL LOAN") in the original principal amount of $55,000,000.00, secured by the "Collateral" (as hereinafter defined). B. The Initial Transaction was evidenced and secured by, among other things: (1) Promissory Note (the "INITIAL NOTE") dated April 24, 1997, executed in favor of Bank, in the original principal amount of $55,000,000.00; (2) Revolving Loan Agreement dated April 24, 1997 (the "INITIAL LOAN AGREEMENT"); (3) Security Agreement dated April 24, 1997 (the "SECURITY AGREEMENT"); and (4) UCC-1 Financing Statements filed with the Secretaries of State of Florida, New York, Connecticut, California, Georgia, Missouri, and Texas (the "INITIAL FINANCING STATEMENTS") (collectively, the Initial Note, the Initial Loan Agreement, the Security Agreement, and the Initial Financing Statements, the "INITIAL LOAN DOCUMENTS"). C. Borrower has requested that: (1) the amount of financing under the Initial Loan be increased to $100,000,000.00 (as so increased, the "LOAN", as it may be amended, renewed, or increased from time to time), to be evidenced by a one-day note executed by Borrower in favor of Bank, in the original principal amount of $45,000,000.00 (the "ADVANCE NOTE") and a revolving credit note executed by Borrower in favor of Bank in the original principal amount of $100,000,000.00, that would consolidate the Initial Note and the Advance Note (the "CONSOLIDATED NOTE"); (2) certain of the terms and conditions governing the Initial Loan Agreement be modified; and (3) the Initial Loan Agreement be amended and restated in its entirety. D. Bank has agreed to make and Borrower has agreed to accept the Loan described above, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, for and in consideration of the above premises and the mutual covenants and agreements contained herein, and for consideration, acknowledged to be adequate, Borrower and Bank, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS I.1 Definitions. For the purposes of this Agreement, the following terms shall have the respective meanings specified in this Section 1.01 (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Account" shall mean any right to payment for goods sold or leased or for services rendered by Borrower which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance, including, but not limited to, all contract rights and accounts receivable. "Account Debtor" shall mean any Person who is obligated on an Account. "Account Collateral Certificate" shall mean a certificate executed and certified correct by an Authorized Representative of Borrower and in form acceptable to Bank setting forth the name and address of each Account Debtor, the amount owed by each Account Debtor and the period of time said Account has been outstanding. "Adjusted Base Rate" shall mean a per annum rate of interest that is equal to the Base Rate (as hereinafter defined) minus the Base Rate Spread (as hereinafter defined). The rate of interest charged under this Agreement on sums bearing interest at the Adjusted Base Rate shall change each time the Base Rate is changed. Any such change in the rate of interest shall become effective as of the opening of business on the day on which such change in the Base Rate is made generally effective. A certificate executed by an officer of Bank shall be conclusive as to the Adjusted Base Rate but no certificate need be issued for the Adjusted Base Rate to be effective hereunder. "Adjusted Libor" shall mean a per annum rate of interest that is equal to Libor (as hereinafter defined) plus the Libor Spread (as hereinafter defined). "Advance" shall mean the proceeds of the Loan delivered to Borrower by Bank pursuant to Section 2.05. "Advance Date" shall mean the date of the Initial Advance or any Subsequent Advance under this Agreement. "Advance Note" shall have the meaning set forth in the Recitals. "Aero Support" shall mean Aero Support Holdings, Inc., a Delaware corporation. "Affiliate" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with Borrower, including a Subsidiary. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, through the ownership of voting stock, by contract, management, understanding, relationship, or otherwise, the power to direct or cause the direction of the management and policies of such corporation. "Agreement" shall have the meaning set forth in the Preamble. "Appraisal" shall mean an appraisal certified to Bank and current within thirty (30) days of the applicable time, and "appraised value" shall mean the value as of or within thirty (30) days before the applicable time. "Assets" shall mean all property, real or personal, tangible or intangible, in which Borrower has any legal, beneficial or other interest. "Authorized Representative" shall mean the president, vice president, chief executive officer, chief financial officer, controller or treasurer (or other officer, member, partner or other representative of an entity who is specifically authorized and whose authorization is approved by Bank to execute agreements, documents, or certifications on behalf of such entity and authorized to make decisions, institute litigation, and take all other necessary actions on behalf of such entity). "Bank" shall have the meaning set forth in the Preamble. "Bank's Parties" shall have the meaning set forth in Section 4.14 herein. "Base Rate" shall mean the Prime Rate. "Base Rate Loan" shall mean that portion of the outstanding principal balance of the Loan for which the interest rate is the Adjusted Base Rate. "Base Rate Portion" shall mean that portion of the outstanding principal balance of the Loan which is not included in any Libor Portion. "Base Rate Spread" shall mean one-fourth percent (1/4%). "Book Net Worth" shall mean common stock plus paid-in capital plus retained earnings, as defined according to GAAP. "Books" shall mean the full and complete books of accounts and other records reflecting the results of Borrower's and its Affiliates' operations, in accordance with GAAP, including but not limited to any documents, instruments, agreements, information, data, statements, certificates, or other matters that Borrower is required, pursuant to the terms of this Agreement and the other Loan Documents, to deliver to Bank. "Borrower" shall have the meaning set forth in the Preamble. "Borrowing Base" shall mean the assets of Borrower against which Advances may be made, as calculated according to the formula set forth in Sections 2.02 and 2.03. "Borrowing Base Certificate" shall mean a certificate executed with respect to the Loan and delivered to Bank pursuant to Section 5.01(a)(iii), such certificate being certified as being true and correct by the chief financial officer or other Authorized Representative of Borrower, setting forth the calculations leading to, as well as the amount of, the relevant Borrowing Base (as further described in Sections 2.02 and 2.03) and including a statement that Borrower is in full compliance with all provisions of the Loan Documents (including without limitation all financial covenants and conditions), the form of which certificate shall be substantially similar to Exhibit F hereto. "Borrowing Date" shall mean the date of the Initial Advance or any Subsequent Advance under this Agreement. "Borrowing Request" shall mean a request for a Loan, in the form of Exhibit "G" attached hereto. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in the State of Florida are authorized or required by law to close. "Capital Expenditure" shall mean, on a consolidated basis, expenditures considered to be capital expenditures under GAAP, including all expenditures made by Borrower and its Affiliates for the maintenance of its Assets, not including expenditures made in connection with periodic overhauls and inspections of equipment and engines in inventory (and not including expenditures made in connection with acquisitions of other entities or substantially all the assets of other entities), which expenditures are or are required to be capitalized on its balance sheet for financial reporting purposes in accordance with GAAP. "Capital Funds" shall mean the Book Net Worth plus Subordinated Debt, less any Intangible Assets. The calculation of Book Net Worth shall include one hundred percent (100%) of all equity offerings by Borrower. "Capital Funds Ratio" shall mean, as of any particular date, the ratio of all Liabilities of Borrower less Subordinated Debt, divided by Capital Funds. "Capitalized Lease Obligations" shall mean all rental obligations which, under GAAP, are or will be required to be capitalized on the balance sheet of Borrower. "Cash Collateral Account(s)" shall mean Borrower's account(s) established with Bank pursuant to Section 3.05 hereof, which account(s) shall, unless and until the occurrence of an Event of Default, constitute the primary depository account(s) for payments received by Borrower. Upon the occurrence of an Event of Default or on request of the Bank, the Cash Collateral Account(s) may, at Bank's sole discretion, be replaced with a lockbox/lockboxes established at Bank to receive payments under the Loan. "Chattel Paper" shall mean a writing or writings that evidence both a monetary obligation and a security interest in or a lease of specific goods. "CIRRA" shall mean the Convention on the International Recognition of Rights in Aircraft, signed June 19, 1948, and effective September 17, 1953 (as ratified by signatories thereto). "Closing Date" shall mean March ___, 1998. "Collateral" shall mean and include: a. all Accounts, contract rights, Instruments, Chattel Paper, Documents, Equipment and General Intangibles of Borrower including all bank accounts in which Borrower has deposited proceeds of any Collateral, all patents, trademarks and trade names, files, correspondence, advertising programs, customer lists, all monies becoming due Borrower from any sale of Collateral on account of rebates, warranty service, or bonuses; all amounts due under and all rights under any letters of credit for the benefit of Borrower or in which Borrower has rights; b. any other obligations or indebtedness owed to Borrower from whatever source arising; c. all rights of Borrower to receive any payments in money or in kind; d. all of Borrower's right, title and interest in and to, and all of Borrower's rights, remedies, security interests and liens under, guaranties or other contracts of suretyship, security therefor, security agreements, deposits, interest rate protection agreements, leases, maintenance and other reserves, or other agreements or property securing or relating to any of the items referred to in subparagraph (a) hereof or acquired for the purpose of securing and enforcing any of such items; e. all of Borrower's right, title, and interest in and with respect to the goods, services, or other property that gave rise to or that secure any of the foregoing and insurance policies relating thereto, and all of Borrower's rights as an unpaid seller of goods and services, including, but not limited to, the rights of stoppage in transit, replevin, reclamation, repossession, and resale; f. all Inventory now owned or hereafter owned or acquired by Borrower, wherever located, whether in possession of a seller and identified to a contract of sale between a seller and Borrower, in transit from the seller to Borrower, in transit from Borrower to a purchaser, or being returned to Borrower from any purchaser, on Borrower's premises or elsewhere, all contractual rights to purchase inventory, all shipping invoices, bills of lading, and warehouse receipts covering such inventory, all finished goods Inventory, all raw materials, work in process and other materials to be used or consumed in Borrower's business; g. all instruments, documents, securities, cash, post office boxes, lockboxes, and property owned by Borrower or in which Borrower has an interest (except as to which accounts Borrower is trustee), which now or hereafter are at any time in the possession or control of Bank or in transit by mail or carrier to or in the possession of any third party acting on behalf of Bank, without regard to whether Bank received the same in pledge, for safekeeping, as Bank for collection or transmission or otherwise or whether Bank had conditionally released the same, and all of Borrower's deposits, accounts, balances, sums and credits with, and all of Borrower's claims against, Bank; h. all Books and Records of Borrower, including computer records, files, directories, disks, manuals, imaging equipment, tapes and programs, correspondence, all computer software (including all imaging software) and hardware and Borrower's rights under license agreements or other agreements to any software necessary to utilize, access or obtain any thereof, and hard copies of information related to or retrieved using such items; i. all awards and settlements hereafter made, and all insurance proceeds paid, for any damage to the Collateral and all unearned insurance premiums on any insurance policies maintained by Borrower; j. all bank accounts, certificates of deposit, and trust accounts of Borrower and all other property and money of Borrower now or hereafter in the possession, custody or control of Bank; k. all of Borrower's Ownership Interests (as hereinafter defined); l. all of the foregoing, whether now owned or existing or hereafter created or acquired by Borrower; and m. proceeds and products of all such Collateral. "Commitment" shall mean the Bank's undertaking to make the Loan to Borrower, subject to the terms and conditions hereof, in an original principal amount not to exceed One Hundred Million and No/100 Dollars ($100,000,000.00). "Consent of Lessor" shall mean a landlord subordination agreement or waiver of statutory lien rights, as may be requested by Bank. "Consolidated Note" shall have the meaning set forth in the Recitals. "Contingent Liabilities" shall mean guarantees, endorsements (other than endorsements of negotiable instruments for collection in the ordinary course of business), and other contingent liabilities (whether direct or indirect) in connection with the obligations, stock, or dividends of any Person; both as determined in accordance with GAAP. "Core Trading Asset Level" shall mean the combined value of Borrower's Accounts and Inventory. "Current Liabilities" shall mean those liabilities of Borrower and its Subsidiaries on a consolidated basis, or any portion thereof, the maturity of which will not extend beyond one year from the date said determination is to be made, but excluding all inter-company Liabilities between Borrower and such Subsidiaries. "Debentures" shall mean the 5-3/4% Convertible Subordinated Notes due 2002 issued by Borrower as of October 10, 1997, pursuant to the Indenture, in the total principal amount of Fifty-Four Million and 00/100 Dollars ($54,000,000.00). "Debt Service Coverage Ratio" shall be calculated as follows: Net Profit + Interest Expense + Depreciation Expense + Amortization Expense - -------------------------------------------------------------------------------- Interest Expense + Current Maturities of Long Term Liabilities + Dividends "Default" shall mean any event or condition that with the passage of time or giving of notice, or both, would constitute an Event of Default. "Default Rate" shall mean the highest rate of interest permitted from time to time by applicable law. "Discriminatory Advances" shall mean all Advances made against Eligible Accounts, New Parts Inventory, FAA-Certified Overhauled Parts Inventory, Serviceable Parts Inventory, and Whole Aircraft Engines (including Inventoried Engines and Leased Engines). "Document" shall mean a bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which, in the regular course of business or financing, is treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and goods it covers. "Dollars" shall mean lawful money of the United States of America. "Domestic Account" shall mean Accounts arising from sales within the United States. "Domestic Whole Aircraft Engines" shall mean Inventoried Engines that are located in the United States. "EBITDA" shall mean earnings before interest, taxes, depreciation, and amortization expenses. "Eligible Accounts" shall mean Eligible Domestic Accounts and Eligible Foreign Accounts. "Eligible Domestic Accounts" shall mean the net amount of Domestic Accounts outstanding after eliminating from the aggregate amount of outstanding Domestic Accounts, such Domestic Accounts as to which more than ninety (90) days have elapsed since the invoice date, and after eliminating such Domestic Accounts as Bank desires in its sole discretion including, by way of example, but not limited to: a all Domestic Accounts arising from sales or services to any Account Debtor affiliated with Borrower; b the amount of Domestic Accounts existing as of any point in time during the term of the Loan arising from sales or services to any one Account Debtor that exceeds ten percent (10%) of Borrower's Tangible Capital Funds as of such time (unless such Domestic Accounts are otherwise approved by Bank, in its sole discretion); c all United States Government account receivables as to which Borrower has failed to execute such instruments and take all steps required by Bank or necessary in order that all monies due and to become due thereunder have been assigned to Bank and notice thereof given to the applicable department, agency and/or instrumentality of the United States Government under the Federal Assignment of Claims Act, as same may be amended from time to time; d those Domestic Accounts excluded because of the credit worthiness of any Account Debtor; e if ten percent (10%) or more of a Domestic Account arising from sales or services to one Account Debtor remains unpaid for ninety (90) or more days from the date of the invoice, then all Accounts from that debtor shall be deemed ineligible; and f deducting from the aggregate face amount of the remaining Domestic Accounts all payments, adjustments (including any contra accounts arising out of sales to and purchases from a particular party), allowances, deductions, discounts and credits applicable thereto and all amounts due thereon reasonably considered by Bank difficult to collect or uncollectible by reason of return, rejection, repossession, loss or damage of or to the merchandise giving rise thereto. This list is non-inclusive. The Borrowing Base is at all times subject to the right of Bank to modify it based on findings of its asset-based lending audits and Bank's sole judgment. "Eligible Foreign Accounts" shall mean the net amount of Foreign Accounts outstanding after eliminating from the aggregate amount of outstanding Foreign Accounts, such Foreign Accounts as to which more than ninety (90) days have elapsed since the invoice date, and after eliminating such Foreign Accounts as Bank desires in its sole discretion including, by way of example, but not limited to: a all Foreign Accounts arising from sales or services to any Account Debtor affiliated with Borrower; b the amount of Foreign Accounts existing as of any point in time during the term of the Loan arising from sales or services to any one Account Debtor that exceeds ten percent (10%) of Borrower's Tangible Capital Funds as of such time (unless such Foreign Accounts are otherwise approved by Bank, in its sole discretion); and c if ten percent (10%) or more of a Foreign Account arising from sales or services to one Account Debtor exceeds ninety (90) days from the date of the invoice, then all Accounts from that Account Debtor shall be deemed ineligible. Foreign Accounts are subject to specific individual pre-approval by Bank in addition to the eligibility requirements listed above for Eligible Foreign Accounts. Borrower will submit a list of international clients for eligibility as Foreign Accounts. Bank will pre-approve Foreign Accounts eligibility limits and foreign country limits individually. These limits may be reviewed and adjusted from time to time at Bank's sole discretion. "Eligible Inventory" shall mean all Inventory of Borrower that was acquired two years or less than two years before the date of any requested Advance based in part or in whole on such Inventory, provided that so long as any Inventory is located in California on real property leased by Borrower, any such California Inventory, to the extent by which its value exceeds Six Hundred Thousand and No/100 Dollars ($600,000.00), shall not be considered Eligible Inventory. "Equipment" shall mean all goods used or bought for use primarily in the business of Borrower that are not included in the definition of Inventory. "Equitable" shall have the meaning described in the definition of "Equitable Loan." "Equitable Loan" shall mean that certain subordinated loan in the original principal amount of Fifteen Million and No/100 Dollars ($15,000,000.00) extended by The Equitable Life Assurance Society of the United States ("THE EQUITABLE") to Borrower, evidenced by the Securities Purchase Agreement dated as of January 15, 1997, between Borrower and The Equitable, as amended, including Consent and Fourth Amendment of even date herewith. "ERISA" shall have the meaning described in the definition of "Plan." "Event of Default" shall mean any event of default specified in Article VIII of this Agreement, after the expiration of any applicable grace period. "FAA" shall mean the Federal Aviation Administration or any successor agency. "FAA-certified Overhauled Parts Inventory" shall mean those items of Parts Inventory that have accumulated zero hours and cycles since their refurbishment and re-certification by an FAA-certified repair station. "FAA Security Agreement" shall mean the FAA security agreement of each of Borrower and Guarantor, as applicable, granting a security interest to Bank in the Collateral, substantially in the form of Exhibit "C" attached hereto, as same may be amended from time to time. "Federal Assignment of Claims Act" shall mean 41 U.S.C. 'SS' 15 and 31 U.S.C. 'SS' 3727. "Fee Letter" shall have the meaning set forth in Section 6.07. "Financing Statement" shall mean all financing statements permitted under the UCC or any other state law or federal law for the purpose of perfecting the security interest in the Collateral granted by Borrower to Bank under the Security Agreement and the FAA Security Agreement (the "SECURITY INTEREST"), and shall include (without limitation) financing statements to be filed in the States of California, Louisiana, New York and Florida or any other state against Borrower as debtor, and FAA Security Agreements or other documents to be filed with the FAA. "Foreign Account" shall mean Accounts arising from sales or services to Account Debtors primarily conducting business in foreign countries whether or not supported by an irrevocable Letter of Credit issued in favor of Borrower. All Foreign Accounts shall be subject to individual preapproval by Bank. "Foreign Whole Aircraft Engines" shall mean Inventoried Engines that are located outside the United States. For purposes of calculating the Borrowing Base, Foreign Whole Aircraft Engines shall mean only those engines located in jurisdictions that are signatories to CIRRA. Furthermore, Foreign Whole Aircraft Engines are subject to specific individual pre-approval by Bank in addition to the eligibility requirements listed for eligible Whole Aircraft Engines. Borrower will submit a list of engines for eligibility as Foreign Whole Aircraft Engines. Any such preapproved Foreign Whole Aircraft Engines as of the Closing Date are set forth on Exhibit "H" hereto. Bank will preapprove Foreign Whole Aircraft Engine eligibility limits individually. These limits may be reviewed and adjusted from time to time at Bank's sole discretion. "GAAP" shall mean those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof. "General Intangibles" shall mean any personal property (including things in action) other than goods, Accounts, Chattel Paper, Instruments and money, and shall include, but not be limited to, tax refunds, returns of insurance premiums and customer lists. "Goods" shall mean all things that are moveable at the time the security interest attaches or that are fixtures, but shall not include money, Documents, Instruments, Accounts, Chattel Paper, General Intangibles, or minerals or the like (including oil and gas) before extraction. "Guarantor" shall mean, individually, any guarantor of the Loan, including each of Borrower's Subsidiaries existing as of the Closing Date and any other Subsidiary acquired or created during the term of the Loan. "Hazardous Materials" shall mean materials defined as "hazardous waste" under the Federal Resource Conservation and Recovery Act, as amended, and similar state laws, or as "hazardous substances" under the Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended, and similar state laws, and any solid, semi-solid, liquid or gaseous substances which are toxic, ignitable, corrosive, carcinogenic or otherwise dangerous to human, plant or animal health and well being. "Headquarters Transaction" shall mean the contemplated construction of a new headquarters for Borrower, which is currently planned to involve the issuance of development bonds backed by a letter of credit, and which is contemplated to total not more than Ten Million and No/100 Dollars ($10,000,000.00). The Headquarters Transaction shall be cross-defaulted with the Loan. "Improvements" shall mean the improvements now or hereafter made to the Collateral or any portion thereof, together with all fixtures, furnishings, machinery, equipment, and personal property necessary for the use or operation thereof. "Indenture" shall mean that certain Indenture dated October 10, 1997, between Borrower and First Union National Bank as Indenture Trustee. "Initial Advance" shall mean the initial delivery of a portion of the proceeds of the Loan pursuant to the terms hereof on or after the Closing Date. "Initial Advance Date" shall mean the date on which the first Advance is made under the Loan. "Initial Financing Statements" shall have the meaning set forth in the Recitals. "Initial Loan" shall have the meaning set forth in the Recitals. "Initial Loan Agreement" shall have the meaning set forth in the Recitals. "Initial Loan Documents" shall have the meaning set forth in the Recitals. "Initial Note" shall have the meaning set forth in the Recitals. "Initial Transaction" shall have the meaning set forth in the Recitals. "Instruments" shall mean a negotiable instrument or a security or any other writing which evidences a right to the payment of money (whether or not negotiable) and is not itself a security agreement or a lease and is of a type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment. "Intangible Assets" shall mean those assets of Borrower and its Subsidiaries on a consolidated basis which, in accordance with GAAP, are not Tangible Assets and shall include, but not be limited to, patents, copyrights, trademarks, trade names, franchises, goodwill, covenants not to compete, experimental expenses, prepaid finance charges and other similar assets which would be classified as "intangible assets" under GAAP. "Inventory" shall mean all Parts Inventory, Whole Aircraft Engines, goods, merchandise, and other personal property now owned or hereafter owned or acquired by Borrower that are held for sale or lease or that are possessed for sale or lease, or that are furnished or are to be furnished under any contract of service or are raw materials, work-in process, supplies, finished goods or materials used or consumed in Borrower's business, and all other tangible property now owned or hereafter acquired and held for sale or lease or furnished or to be furnished under contracts of service or used or consumed in Borrower's business, and all products, substitutions, replacements, additions, or accessions for or to any of the foregoing. The value of Inventory shall be based on the cost to Borrower or the market value of such Inventory, whichever is lower, after deducting an amount or percentage for slow-moving or obsolete Inventory, such amount or percentage to be determined solely by Bank in its reasonable discretion. "Inventory Collateral Certificate" shall mean a certificate executed and delivered to Bank pursuant to Section 5.01(a)(iii), certified as correct by an Authorized Representative of Borrower in form acceptable to Bank setting forth information concerning descriptions, quantities, costs, fair market value and the location of all Inventory. "Inventoried Engines" shall mean Whole Aircraft Engines that are part of the Inventory of Borrower. "IRS Code" shall have the meaning described in the definition of "Plan." "Kellstrom International Sales Corporation" shall mean Kellstrom International Sales Corporation, a United States Virgin Islands corporation and Subsidiary of Borrower. "Leased Engines" shall mean Whole Aircraft Engines that Borrower owns but are, at the time of such classification, subject to leases to third parties. "Leases" means any interest Borrower has in any real or personal property Leases, whether as lessor or lessee, and includes without limitation any interest Borrower currently has or in the future may have in rental monies and other proceeds of any Lease. "Letter of Credit" shall mean an irrevocable standby letter of credit for the account of Borrower in such form as may be approved by Bank. "Letter of Credit Fee" shall mean one percent (1%) per annum of the stated amount of each Letter of Credit, prorated for the term of such Letter of Credit to a minimum of one-quarter percent (1/4%) or Seven Hundred Fifty and No/100 Dollars ($750.00), whichever is less; and payable at issuance of each Letter of Credit issued on behalf of Borrower. "Letter of Credit Request" shall have the meaning set forth in Section 2.13 hereof. "Liabilities" shall mean all liabilities and obligations of Borrower, or all liabilities and obligations of Borrower and its Subsidiaries on a consolidated basis, as the case may be, and shall include Long Term and Contingent Liabilities and/or Current Liabilities, as the case may be, all as determined in accordance with GAAP. "Libor" shall mean the offered rate for deposits in United States dollars in the London Interbank market for the Libor Interest Period which appears on the Libor Rate Reference Page as of 11:00 a.m. (London time) on the day that is two Business Banking Days preceding the first Business Day of the Interest Period. If at least two such offered rates appear on the Libor Rate Reference Page, the rate will be the arithmetic mean of such offered rates. "Libor Interest Period" shall mean, for each Libor Portion, a period from the date of commencement of the Adjusted Libor on the subject portion of the outstanding principal balance of the Loan to the day which shall occur 1, 2, or 3 months after the date of such commencement, as selected by Borrower pursuant to this Agreement. However, if the last day of such Libor Interest Period would otherwise occur on a day which is not a Business Day, such last day shall be extended to the next succeeding Business Day unless such extension would extend the maturity date of such Libor Interest Period or cause the last day to occur in a new calendar month, in which event such last day shall be the immediately preceding Business Day. "Libor Portion" shall mean each portion of the outstanding principal balance of the Loan on which, as a result of Borrower's election hereunder, Borrower is being charged interest at the corresponding Adjusted Libor for the corresponding Libor Interest Period. Each Libor Portion must be an integral multiple of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) and be not less than One Million and No/100 Dollars ($1,000,000.00). "Libor Rate Reference Page" shall mean either (1) the Reuters Screen LIBO Page; (2) the Dow Jones Telerate Page 3750; or (3) such other nationally recognized source as may from time to time be used by Bank in its sole discretion as a reference for determining any applicable Libor rate. "Libor Spread" shall be the following: Senior Debt/EBITDA Ratio Libor Spread 4.00x through and including 5.00x 275 basis points 3.00x through and including 3.99x 250 basis points 2.50x through and including 2.99x 225 basis points 1.75x through and including 2.49x 200 basis points 0.00x through and including 1.74x 175 basis points The Senior Debt/EBITDA Ratio shall be measured as of the end of each calendar quarter based upon financial information provided by Borrower in accordance with the provisions of this Agreement. Changes in the Libor Spread shall be effective forty-five (45) days after the end of each fiscal quarter. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien, or charge of any kind and shall include, but not be limited to, any agreement to give any of the foregoing, any conditional sales or other title retention agreements, or any lease in the nature thereof, the filing of or agreement to give any financing statement under the UCC of any jurisdiction, the lien of a lien creditor as defined in the UCC, and the lien of a statutory lienor. "Loan" shall have the meaning set forth in the Recitals. "Loan Documents" shall mean this Agreement, the Advance Note, the Consolidated Note, the Financing Statement, the Security Agreement, the Subsidiary Guarantees, the other security documents, any Borrowing Base Certificate, Account Collateral Certificate, Inventory Collateral Certificate, Officer's Certificate, and all of the other documents, agreements, certificates, schedules, notes, statements, and opinions, however described, referenced herein or executed or delivered pursuant hereto or in connection with or arising with the Loan or the transactions contemplated by this Agreement. "Long Term Liabilities" shall mean and include without duplication any liability or obligation payable more than one year from the date of creation thereof (including any secured by any Lien on property owned by Borrower or any Subsidiary), which under GAAP is shown on the balance sheet as a liability (including Capitalized Lease Obligations, but excluding reserves for deferred income taxes and other reserves to the extent that such reserves do not constitute an obligation). "Mature Engines" shall mean any Domestic Whole Aircraft Engines that have been in the possession of Borrower for more than two (2) years and any Foreign Whole Aircraft Engines that have been in the possession of Borrower for more than one (1) year. "Maturity Date" shall mean March 10, 2001. "New Parts Inventory" shall mean those items of Parts Inventory that have accumulated zero hours and cycles since their original manufacture. "Net Profit" shall mean, with respect to any fiscal period, net income of Borrower and its Subsidiaries on a consolidated basis after taxes for that fiscal period, as defined according to GAAP. "Nondiscriminatory Advances" shall mean all Advances that do not meet the normal eligibility criteria established in the Borrowing Base. "Note" shall mean the Consolidated Note or any other note evidencing the Loan in the form of Exhibit "A" attached hereto, and any and all allonges thereto, and any and all extensions, renewals or modifications thereof. "Obligations", with respect to Borrower, shall mean, individually and collectively, the payment and performance duties, obligations and liabilities of Borrower to Bank evidenced by the Note and the other Loan Documents, together with all accrued but unpaid interest thereon, and all other payment and performance duties, obligations and liabilities of Borrower to Bank, including without limitation reimbursement obligations under Letters of Credit and Unpaid Drawings thereunder, whether or not presently contemplated by Borrower or Bank, however and whenever incurred, acquired or evidenced, whether primary or secondary, direct or indirect, absolute or contingent, sole or joint and several, or due or to become due, including, without limitation, all such duties, obligations and liabilities of Borrower to Bank, under and pursuant to this Agreement, the Note and the Security Documents and all renewals, modifications or extensions of any thereof. "Officer's Certificate" shall mean a certificate signed in the name of Borrower by its President, its Executive Vice President, its Treasurer, its Vice President, its Chief Financial Officer, or other Authorized Representative. "Opinion" shall mean the legal opinion of counsel to Borrower substantially in the form of Exhibit D attached hereto, which shall be satisfactory to Bank. "Other Personal Property" includes (without limitation) management contracts, construction contracts, architectural contracts, service contracts, engineering contracts, advertising contracts, contracts for purchase and sale, purchase orders, consignment agreements, equipment leases, monies in escrow accounts, reservation agreements, prepaid expenses, deposits and down payments with respect to the sale or rental of any of Borrower's Assets, options and agreements with respect to additional or after acquired property, surveys, abstracts of title, all brochures, and advertising materials. "Ownership Interests" means shares of stock, partnership interests, ownership interests in limited liability companies, beneficial interests in trusts, and any other evidence of ownership interests in any kind of entity. "Participant" shall mean any financial institution that is, during the term of the Loan, party to a participation agreement with regard to the Loan, and shall include Bank (as a party to such participation agreement). Borrower acknowledges Bank's right to enter into participation agreements with regard to the Loan, and agrees that Bank may provide Participants with such information about Borrower as it deems necessary or desirable in connection with such participation. "Parts Inventory" shall mean New Parts Inventory, FAA-certified Overhauled Parts Inventory, and Serviceable Parts Inventory. The value of the Parts Inventory shall be based upon either the cost to Borrower of said Parts Inventory or the market value thereof, whichever is lower, after deducting an amount or percentage for slow moving and/or obsolete Parts Inventory, such amount or percentage to be determined by Bank in its reasonable discretion. "Payment Default" shall mean a default or Event of Default set forth in Section 7.01(a) hereof. "Permitted Liens" shall mean those Liens in or upon the Collateral as further described in Section 5.02(f) hereof and set forth in Schedule 5.02(f) attached hereto. "Permitted Loan" shall mean, individually and collectively, the Subordinated Debt, the Headquarters Transaction, and indebtedness incurred in connection with the financing of a Mature Engine pursuant to Section 2.03(h) hereof or any of Borrower's Assets pursuant to Section 5.02(d) hereof. Any indebtedness incurred after the date of this Agreement (including Subordinated Debt) shall not be a Permitted Loan if, immediately after said indebtedness is incurred, Borrower is not in compliance with all the terms and conditions of this Agreement, and if Bank has not received prior written notice of such indebtedness. "Person" shall mean any individual, joint venture, partnership, firm, corporation, limited liability company, trust, unincorporated organization, foreign sales corporation, or other organization or entity, or a governmental body or any department or agency thereof, and shall include both the singular and the plural. "Place of Business" shall mean any location in which Borrower undertakes its business, including, but not limited to, the storage of Inventory, all as set forth in Schedule 5.02(c) attached hereto. "Plan" shall mean an employee benefit plan or other plan and any trust created thereunder which has been established or maintained or hereafter is established or maintained for employees of Borrower and covered by Title IV of the Employee Retirement Income Security Act of 1974, as amended, including the rulings and regulations issued thereunder or pursuant thereto ("ERISA"), or subject to the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended (the "IRS CODE"). "Prepayment Costs" shall mean, with respect to Borrower's prepayment of all or any portion of prepayment of an outstanding Libor Portion, whether voluntarily or due to Bank's acceleration of the maturity of the Note or portions thereof: (i) any loss, cost or expense incurred by Bank or Participants as a result of the timing of such payment, including, without limitation, the loss, cost or expense incurred by Bank or Participants in reinvesting such funds; (ii) any loss, cost or expense incurred by Bank or Participants in terminating, covering or redeploying their funding arrangements due to any delay or failure (other than a delay or failure solely of or caused solely by Bank or such Participant) in satisfying all conditions to having a Libor Portion bear interest on the commencement date of the applicable Libor Interest Period at the Adjusted Libor after Borrower has submitted a request for same; (iii) any loss, cost or expense incurred by Bank or Participants as a result of the conversion (for any reason whatsoever, whether voluntarily or involuntarily) of any Libor Portion to a Base Rate Portion on a date other than the last day of a Libor Interest Period; (iv) if Bank or any Participant is a party to any interest rate protection agreement with or on behalf of Borrower, any loss, cost or expense not attributable solely to Bank's or any Participant's acts under such interest rate protection agreement; and (v) any other out-of-pocket third-party costs or expenses incurred by Bank or Participants as a result of the timing of such prepayment and including all costs and sums due under or incurred in terminating or amending any interest rate protection agreement. All Prepayment Costs shall constitute additional sums payable with respect to the outstanding principal sum due under the Note; provided, however, that such sums, if characterized as interest under any applicable law, shall not be applied in reduction of accrued and unpaid interest. "Prime Rate" shall mean the annual rate of interest announced from time to time by Barnett Bank, N.A., or its successors and assigns as the prime rate (which interest rate is only a reference rate for the information and use of Bank in establishing the actual rates to be charged to its borrowers and which is purely discretionary and is not necessarily the best or lowest interest rate charged to borrowing customers of Barnett Bank, N.A.) "Proceeds" shall mean whatever is received upon the sale, exchange, collection, or other disposition of the Collateral or proceeds of the Collateral, whether cash or non-cash, including, but not limited to, insurance proceeds. "Property" shall mean any Place of Business of Borrower owned or leased by Borrower or a Subsidiary (as further described in Section 4.11 hereof). "Records" shall mean all books, records, ledger cards or sheets, customer lists, files, documents and instruments including, but not limited to, computer programs, files, directories, programs, tapes, software and related electronic data processing software, and all other property and General Intangibles evidencing an interest in or relating to Collateral. "Rents and Leases" means any interest Borrower has in any Leases or rental monies. "Required Participants" shall mean the Participants holding sixty-six and two-thirds percent (66-2/3%) or more of the Commitment. "Revolving Period" shall mean the period during which Borrower may obtain Advances under the Loan. The Revolving Period shall commence on the date hereof, and shall end on the earlier of an Event of Default and the Maturity Date. "Security Agreement" shall mean the security agreement of Borrower granting a security interest to Bank in the Collateral substantially in the form of Exhibit "C" attached hereto, as amended by Amendment No. 1 of even date herewith and as it may be further amended from time to time. "Security Documents" shall mean the Security Agreement and all other documents, agreements, mortgages, assignments, filings, financing statements, certificates of title, notices, returns and other security instruments and records, however described or denominated, now or hereafter created or existing, pledging or evidencing any pledge of any property or assets, however described, to secure any or all of the Obligations, as same may be amended from time to time. "Security Interest" shall have the meaning described in the definition of "Financing Statement." "Senior Debt" shall mean that portion of the Total Liabilities that is held by Bank and all other individuals or entities that is: (a) secured by a first (or purported to be first) lien on, or security interest in, any or all of the Assets; (b) is not secured by a lien or pledge and is not, by its terms, expressly subordinate to other specified indebtedness of Borrower; or (c) which Bank reasonably determines to be "senior debt" under customary banking standards of national or international lenders. Other than the Loan, the Borrower has no existing Senior Debt as of the Closing Date. "Senior Debt to EBITDA Ratio" shall mean the ratio of Senior Debt to EBITDA. "Serviceable Parts Inventory" shall mean items of Parts Inventory that have been deemed airworthy by an FAA-approved entity, that have hours and cycles remaining in their useful life. "Subordinated Debt" shall mean, individually and collectively: (a) the Equitable Loan; (b) the Debentures; and (c) any other indebtedness of Borrower (whether in the form of loans, guarantees or leases or any other form), subordinated to the Loan with subordination provisions satisfactory to Bank. "Subsequent Advance" shall mean any Advances made hereunder after the Initial Advance. "Subsidiary" shall mean any corporation, limited liability company, or partnership whether now existing or hereafter created or acquired, fifty percent (50%) or more of the voting stock, membership or partnership interests of which is owned, directly or indirectly, by Borrower, and shall include subsidiaries of a Subsidiary. "Subsidiary Guarantees" shall mean the Guarantees executed by certain of Borrower's Subsidiaries in favor of Bank, substantially in the form of Exhibit E attached hereto. "Swing Line" shall mean an option whereby Bank shall, at its sole discretion, make available to Borrower same-day Advances up to Five Million and No/100 Dollars ($5,000,000.00) in the aggregate on a weekly basis. Advances under the Swing Line shall bear interest at the Adjusted Base Rate pursuant to Section 2.06 hereof. "Tangible Assets" shall mean the assets of Borrower and its Subsidiaries on a consolidated basis, all as determined in accordance with GAAP, but excluding Intangible Assets. "Tangible Capital Funds" shall mean Book Net Worth less Intangible Assets plus Subordinated Debt. "Total Liabilities" shall mean all liabilities and obligations of Borrower, or all liabilities and obligations of Borrower and its Subsidiaries on a consolidated basis, as the case may be, and shall include Long Term and Contingent Liabilities and/or Current Liabilities, as the case may be, all as determined in accordance with GAAP. "UCC" shall mean the Uniform Commercial Code as adopted in any relevant jurisdiction, as same may be amended from time to time. "United States" shall mean the United States of America and its possessions and territories. "Unpaid Drawing" shall have the meaning set forth in Section 2.14 hereof. "Unused Fee" shall mean fifteen basis points (.15%) on the unused portion of the Loan, calculated as follows: (a) the lesser of One Hundred Million and No/100 Dollars ($100,000,000.00) or the Tangible Capital Funds of Borrower or an amount which is five times EBITDA; less (b) the average principal balance outstanding under the Loan during each calendar quarter. The Unused Fee shall be payable quarterly in arrears on the forty-fifth (45th) day after the end of each calendar quarter, commencing May 15, 1998. "Whole Aircraft Engines" shall mean, for purposes both of determining Collateral of Borrower and of calculating the Borrowing Base, aircraft engines that have not been disassembled into their parts, and shall include both Inventoried Engines and Leased Engines. For purposes of calculating the Borrowing Base (and subject to Bank's right to determine eligibility pursuant to the terms hereof), "Whole Aircraft Engines" shall further mean only: (a) Domestic Whole Aircraft Engines up to two (2) years after acquisition by Borrower; (b) Foreign Whole Aircraft Engines up to one (1) year after acquisition by Borrower; (c) all Leased Engines wherever located that have been approved by Bank pursuant to Section 2.03(i) hereof; (d) engines as to which Financing Statements were filed prior to the date an Advance is requested against such engines; and (e) engines as to which satisfactory Appraisals (obtained at Borrower's expense) were received and approved by Bank no later than five (5) days before such Advances are requested against such engines. Such approval shall be deemed to have been refused if Bank shall have received complete and accurate information necessary to approve the Appraisal (including copies of lien searches, lien filings, insurance policies and all other information covering such engines and listed in Section 6.27 hereof) and Bank shall either have given a written or oral refusal to an Authorized Representative of Borrower or Bank shall have failed to communicate to the Borrower relating to the Appraisal or to any other information provided to Bank within a reasonable time frame (which may be longer than but shall be not shorter than ten (10) Business Days after receipt of all information required). "Working Capital" shall mean the excess of Current Assets over Current Liabilities. 1.02 Accounting Terms. All accounting terms used herein shall be construed in accordance with GAAP (unless such terms are specifically defined otherwise herein) consistently applied and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP. All accounting and financial information shall be deemed to be prepared on a consolidated basis unless otherwise specified. All accounting and financial information shall be deemed to have been prepared on a consolidated basis unless otherwise specified. ARTICLE II AMOUNTS AND TERMS OF LOAN II.1 Loan. Bank agrees from time to time during the Revolving Period to lend to Borrower, upon Borrower's request, up to the aggregate principal amount of the Borrowing Base for the Loan on the terms and conditions set forth herein. During the Revolving Period, Borrower shall be entitled to receive the entire proceeds of the Loan in one or more Advances pursuant to Section 2.05 hereof, except as otherwise specifically set forth in this Agreement. Advances under this Loan shall be evidenced by the Note and the Security Documents. After the expiration of the Revolving Period, Borrower shall not be entitled to receive any Subsequent Advance. The Loan shall be a revolving loan and Borrower may borrow up to the maximum principal amount of the Loan, repay all or any portion of such principal amount of the Loan, and reborrow up to such maximum principal amount, subject to the terms and conditions set forth herein. II.2 Borrowing Base for the Loan. The Borrowing Base for the Loan shall be the lesser of: a One Hundred Million and No/100 Dollars ($100,000,000.00) minus the sum of (i) all Advances outstanding, and (ii) the aggregate stated amount of all Letters of Credit outstanding, or b the sum of the following (i. through vi.): i eighty percent (80%) of Eligible Domestic Accounts; plus ii the lesser of: (a) seventy percent (70%) of Eligible Foreign Accounts, or (b) Fifteen Million and No/100 Dollars ($15,000,000.00); plus iii the lesser of: (a) sixty-five percent (65%) of New Parts Inventory and FAA-certified Overhauled Parts Inventory; or (b) Thirty Million and No/100 Dollars ($30,000,000.00); plus iv the lesser of: (a) fifty percent (50%) of Serviceable Parts Inventory; or (b) Fifteen Million and No/100 Dollars ($15,000,000.00); plus v the least of: (a) during the first twelve (12) months after purchase of a Whole Aircraft Engine, seventy-five percent (75%) of the lesser of cost or appraised value of such Whole Aircraft Engine (calculated by appraisers satisfactory to Bank) provided that if the Whole Aircraft Engine is a Leased Engine, the total of the lease payments received as of the applicable time shall reduce such number which is the lesser of cost or appraised value before applying the advance rate for calculation of availability, and provided further that for purposes of this subparagraph v.(a) only (and not for subparagraph v.(b), Foreign Whole Aircraft Engines shall be considered eligible for such seventy-five percent (75%) advance rate during the first twelve (12) month period, or (b) during the second twelve (12) months after purchase of a Whole Aircraft Engine, fifty percent (50%) of the lesser of cost or market value of such Whole Aircraft Engine (calculated by appraisers satisfactory to Bank) provided that if the Whole Aircraft Engine is under lease, the total of the lease payments received shall reduce such number which is the lesser of cost or appraised value before applying the advance rates for calculation of availability, and provided further that Foreign Whole Aircraft Engines shall not be considered eligible for any Advances during such second 12-month period, or (c) Sixty Million and No/100 Dollars ($60,000,000.00), provided that Advances at any one time on Foreign Whole Aircraft Engines shall be no greater than Fifteen Million and No/100 Dollars ($15,000,000.00); plus vi the lesser of: (a) Twenty Million and No/100 Dollars ($20,000,000.00); or (b) Nondiscriminatory Advances, subject to the following condition precedent: Borrower's Senior Debt divided by EBITDA cannot exceed 4.0x. For the purpose of this calculation, until June 30, 1998, EBITDA will be calculated based on Borrower's trailing two quarters EBITDA annualized. For all periods thereafter, EBITDA will be calculated based on Borrower's trailing four quarters EBITDA. II.3 Other Advance Limitations. a Advances may be made against New Parts Inventory, FAA-certified Overhauled Parts Inventory, Serviceable Parts Inventory, and Whole Aircraft Engines until two (2) years after the date of purchase. b In no event shall the aggregate of Discriminatory Advances and Nondiscriminatory Advances outstanding at any one time exceed the Core Trading Asset Level. c In no event shall the aggregate of Discriminatory Advances and Nondiscriminatory Advances outstanding at any one time exceed the lesser of: One Hundred Million and No/100 Dollars ($100,000,000.00) or Borrower's Tangible Capital Funds. d Only outstanding Accounts and Inventory in which Bank has obtained a first priority perfected security interest, and Whole Aircraft Engines as to which Bank has received a lien search and a recorded FAA Security Agreement (as well as the other conditions listed in Section 6.27 hereof) shall be included in the calculation of the Borrowing Base. e If Borrower desires that an Account be considered an Eligible Account, Borrower shall submit information concerning such Account to Bank three (3) Business Days prior to submitting any Borrowing Request for purposes of which such Account is desired to be an Eligible Account. Bank shall inform Borrower as to Bank's acceptance or rejection of such Account as an Eligible Account before the date on which Borrower is to submit the related Borrowing Request. f As soon as dismantlement of a Whole Aircraft Engine begins for purpose of breaking it up into parts, the engine will become reclassified into the appropriate parts category. g Whole Aircraft Engine appraisals must be current within thirty (30) days before Advances may be made against such engines. h As to Mature Engines, Borrower may finance Mature Engines with other lenders and may grant a security interest therein upon prior written consent of Bank, which consent shall not be unreasonably withheld as long as Borrower is in compliance with all provisions of this Agreement including without limitation the financial covenants, both before and after giving effect to such release. Bank shall execute all necessary documents as requested by Borrower to release its Security Interest as to any such financed Mature Engines. i As to Leased Engines, inclusion in the Borrowing Base depends on fulfillment of the following conditions in addition to those listed in the definition of "Leased Engine:" Bank must review and approve and be named loss payee on all insurance policies covering such Leased Engines; and (as for all Collateral intended to be included in the Borrowing Base) the conditions listed in Section 6.27 must be fulfilled. In addition, for purposes of calculating the Borrowing Base, such leases and third parties must be preapproved by Bank to be considered part of the Borrowing Base and Appraisals of such Whole Aircraft Engines must be preapproved by Bank. Such approval shall be deemed to have been refused if Bank shall have received complete and accurate information necessary to approve such lease and such third party (including copies of insurance policies covering such engines and naming Bank as loss payee) and Bank shall either have given a written or oral refusal to an Authorized Representative of Borrower or Bank shall have failed to communicate to the Borrower relating to the lease or the third party or any such information within a reasonable time frame (which may be longer than but shall not be shorter than ten (10) Business Days) after receipt by Bank of all information required. II.4 The Note. The advances made by Bank pursuant to Section 2.01 herein shall be evidenced by the Note, in form and substance acceptable to Bank, and payable to the order of Bank. The Note shall be deemed to reflect the aggregate unpaid principal amount of all indebtedness to Bank under the Loan, whether or not the face amount of the Note is in excess of the amount actually outstanding from time to time, and whether or not the Indebtedness outstanding thereunder is from time to time repaid and reborrowed. II.5 Advance of Proceeds of the Loan. On the Initial Advance Date and on Subsequent Advance Dates, upon initial and continued satisfaction of the conditions precedent set forth in Article Six hereof, Borrower shall be entitled to receive Advances. Borrower shall give Bank written notice, signed by an officer of Borrower authorized by the borrowing resolutions, of any requested Advance hereunder. Such notice shall specify the proposed date of the Advance (if not the same Business Day) and the amount thereof. For any Advances under the Base-Rate Portion, such notice shall be received prior to 12 p.m. (Eastern Standard Time) for any same-day Advance. For any Advances under the Libor Portion, such notice shall be received prior to 12 p.m. (Eastern Standard Time) at least three (3) Business Days prior to the requested Advance Date. Each request for an Advance shall constitute, without the necessity of specifically containing a written statement, a representation and warranty by Borrower that no Default or Event of Default exists, that Borrower is in compliance with all the conditions of the Loan Documents, and that all representations and warranties contained in any Loan Document are true and correct on and as of the date the requested Advance is made. Requests by Borrower for any Advance hereunder on any date shall be in the minimum principal amount of One Hundred Thousand and No/100 Dollars ($100,000.00). II.6 Interest Rate; Payment of the Note. Borrower shall pay interest on the outstanding principal balance of the Note at the Adjusted Base Rate on the Base Rate Portion, and at the corresponding Adjusted Libor on each Libor Portion, according to the terms and provisions of the Note. Any Advances made under the Swing Line shall bear interest at the Adjusted Base Rate and shall constitute part of the Base Rate Portion. II.7 Prepayments. Provided that no Event of Default has occurred, Borrower may at any time prepay all or any part of the outstanding principal amount of the Loan. Prepayment of all or any part of the Base Rate Portion and prepayment of a Libor Portion at the expiration of a Libor Interest Period shall be without penalty. Prepayment of a Libor Portion other than at the expiration of a Libor Interest Period shall also be permitted upon payment of applicable Prepayment Costs. Each prepayment other than full payment shall be in the minimum amount of Fifty Thousand and No/100 Dollars ($50,000.00) and shall be made prior to 2:00 P.M. (Eastern Standard Time) on a Business Day in immediately available funds. II.8 Calculation of Interest. Any interest due on the Loan or any other Obligations shall be calculated on the basis of a year containing 360 days, to the extent accrued as of midnight on the last day immediately prior to each interest payment date. Notwithstanding anything herein or in any Loan Document to the contrary, the sum of all interest and all other amounts reserved, charged, or taken by Bank, as compensation for fees, services, or expenses incidental to the making, negotiation, or collection of the Loan that would be deemed interest under Florida or other applicable law, shall not exceed the maximum lawful interest rate permitted by such law from time to time. Bank and Borrower intend and agree that under no circumstance shall Borrower be required to pay interest on the Loan or on any other Obligations at a rate in excess of the maximum interest rate permitted by applicable law from time to time, and in the event any such interest is received or charged by Bank in excess of that rate, Borrower shall be entitled to an immediate refund of any such excess interest by a credit to and payment toward the unpaid balance of the Loan (such credit to be considered to have been made at the time of the payment of the excess interest) with any excess interest not so credited to be immediately paid to Borrower by Bank. II.9 Setoff. Borrower hereby grants to Bank a lien on, and a security interest in, the deposit balances, accounts, items, certificates of deposit (whether matured or unmatured), and monies of Borrower and each Subsidiary in the possession of or on deposit with Bank to secure and as collateral for the payment and performance of the Obligations. Upon an Event of Default, Bank may at any time and from time to time, without demand or notice, appropriate, setoff against and apply the same to the Obligations when and as due and payable. II.10 Late Payment Penalty. A late payment penalty of five percent (5%), calculated on the interest payment due on the last day of the month, will be assessed against Borrower on any payment not received by Bank by the tenth day after such payment was due, and the late payment penalty amount shall accompany such payment. II.11 Use of Proceeds. Borrower will use the proceeds of the Loan for working capital purposes and for other general corporate purposes, including acquisitions. The Proceeds of the Loan that are to be used for Letters of Credit shall be capped at Twenty Million and No/100 Dollars ($20,000,000.00). The proceeds of the Loan to be used for Nondiscriminatory Advances shall be capped at Twenty Million and No/100 Dollars ($20,000,000.00). II.12 Letter of Credit. Borrower shall have the right during the term of the Loan, upon prior written consent of Bank (and subject to the conditions set forth in this Section 2.12 and elsewhere in the Loan Documents), to request Bank to issue a Letter of Credit for the account of Borrower in such form as may be approved by Bank, and in an amount not to exceed the lesser of: a Twenty Million and No/100 Dollars ($20,000,000.00) minus the aggregate stated amount of all Letters of Credit outstanding (subject to the provisions hereof limiting aggregate Advances hereunder, including draws under Letters of Credit, to, at most, the amount of the Commitment); and b the applicable Borrowing Base limitations (for Letters of Credit constituting Discriminatory Advances). The Letter of Credit shall have an expiry date occurring not later than one (1) year after such Letter of Credit's date of issuance but in no case later than one day prior to the Maturity Date. Bank shall have no obligation to consent to the establishment of such Letter of Credit unless (and Borrower hereby agrees and acknowledges the following): i there exists no Default or Event of Default hereunder or under any Loan Document; ii the amount of the Letter of Credit shall reduce funds available for borrowing under the Loan as set forth in this Section 2.12 unless and until the Letter of Credit has been delivered back to Bank and terminated without a draw being made thereunder; iii if funds are drawn by the beneficiary under the Letter of Credit, such amounts shall be deemed an Advance under the Loan (unless an Event of Default of the type specified in Section 7.01(e) has occurred and is continuing); iv. one of the documentary conditions to the issuance of a Letter of Credit is that Borrower provide Bank with a certification that Borrower knows of no Default or Event of Default under the Loan Documents; and v. the Obligations secured by the Collateral shall from and after at the time of issuance of the Letter of Credit include Borrower's reimbursement obligations and all Unpaid Drawings (as hereinafter defined) under the Letter of Credit and interest thereon. II.13 Letter of Credit Requests; Notices of Issuance. Whenever Borrower desires that a Letter of Credit be issued, Borrower shall give Bank a written notice (including by way of facsimile transmission) prior to 1:00 P.M. (Eastern Standard Time) at least five (5) Business Days (or such shorter period as may be acceptable to Bank) prior to the proposed date of issuance (which shall be a Business Day) (each a "LETTER OF CREDIT REQUEST"), which Letter of Credit Request shall include an application for such Letter of Credit and any other documents that Bank customarily requires in connection therewith. Bank shall promptly notify each Participant of each Letter of Credit Request. Bank shall, on the date of each issuance of a Letter of Credit by it, give each Participant and Borrower written notice of the issuance of such Letter of Credit. II.14 Agreement to Repay Letter of Credit Drawings. Unless an Event of Default of the type specified in Section 7.01(e) exists and is continuing, Borrower hereby irrevocably authorizes an Advance under the Loan immediately upon each draw under a Letter of Credit in an amount equal to the draw. To the extent not so advanced under the Loan to reimburse Bank, Borrower agrees to reimburse Bank, by making payment to Bank in immediately available funds at the office of Bank, for any payment or disbursement made by Bank under any Letter of Credit (each such amount so paid or disbursed, until reimbursed, an "UNPAID DRAWING") immediately after, and in any event on the date on which, Bank notifies Borrower of such payment or disbursement (which notice to Borrower shall be delivered reasonably promptly after any such payment or disbursement), with interest on the amount so paid or disbursed by Bank, to the extent not reimbursed, from and including the date paid or disbursed to but not including the date Bank is reimbursed therefor (if such payment is received by Bank before 2:00 p.m. Eastern Standard Time; if such payment is received after such time, it must include interest for such date) at a rate per annum which shall be the rate then applicable to Base Rate Loans, such interest also to be payable on demand. Borrower's obligation under this Section 2.14 to reimburse Bank with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any set off, counterclaim, or defense to payment which Borrower may have or have had against Bank, including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit to conform to the terms of the Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds of such drawing, provided, however, that Borrower shall not be obligated to reimburse Bank for any wrongful payment made by Bank under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of Bank. II.15 Right to Debit Account. Unless an Event of Default of the type specified in Section 7.01(e) has occurred and is continuing, at Bank's option, Bank shall have the right to automatically debit the Cash Collateral Account with Bank on a daily basis for the amount of principal payable to Bank, with notice to Borrower thereof on the date of such debit. Bank shall have the right to debit the Cash Collateral Account on a monthly basis for all interest and fees payable to Bank, with notice to Borrower thereof on the date of such debit. II.16 Fees. As partial consideration for Bank entering into this Agreement and establishing the Loan, Borrower has paid to Bank one-half of a fully earned facility fee and an agent fee. Payment in full of the remaining balance of the Facility Fee, pursuant to the Fee Letter, shall be a condition of closing. In addition to the Facility Fee and the Agent Fee, Borrower shall pay to Bank any Unused Fee and any Letter of Credit Fee as may be payable during the term of the Loan. ARTICLE III CUSTODY, INSPECTION, COLLECTION AND HANDLING OF COLLATERAL AND RECORDS III.1 Collection of Accounts. Until Borrower's authority to do so is curtailed or terminated (which Bank may so terminate at any time after the occurrence and during the continuation of an Event of Default), Borrower will, at Borrower's cost and expense, collect and otherwise enforce all remittances and all amounts unpaid on Accounts. Bank shall at any time have the right after the occurrence and during the continuation of an Event of Default to send notice of assignment or notice of its Security Interest to any Account Debtor or any other Person obligated on, holding, or otherwise concerned with any of the Collateral, and thereafter Bank shall have the sole right to collect the Accounts and/or take possession of the Collateral and the Records. Any and all of Bank's reasonable collection expenses including, but not limited to, attorneys' fees, stationery and postage, telephone and telegraph, secretarial and clerical expenses and the salaries of any Person utilized to collect the Accounts, shall be charged to Borrower's account and added to the Obligations. During the duration of the Loan, Bank will credit collections of Eligible Accounts immediately to the Loan, and will charge a clearance fee consisting of an amount equal to one (1) day's interest at the Adjusted Base Rate on each collected item, which fee shall be calculated at the interest rate charged on the Loan. III.2 Power of Attorney. Borrower hereby constitutes Bank and any of its agents or designees as Borrower's attorney-in-fact, at Borrower's cost and expense, to exercise at any time all or any of the following powers, which, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) to receive, take, endorse, assign, deliver, accept and deposit, in Bank's or Borrower's name, any and all checks, notes, remittances, drafts and other documents and instruments relating to the Collateral; (b) after the occurrence and during the continuance of an Event of Default (without any further action being necessary), to receive, open and dispose of all mail addressed to Borrower and relating to the Collateral; (c) after the occurrence and during the continuance of an Event of Default (without any further action being necessary), to notify postal authorities to change the address for delivery of payments on Accounts from Borrower's address to such address (including to a lockbox) as Bank may designate; (d) after the occurrence and during the continuance of an Event of Default (without any further action being necessary), to transmit to Account Debtors notice of Bank's interest in the Accounts and to request from Account Debtors at any time, in Bank's or Borrower's name or that of any of Bank's designees, information concerning the Accounts; (e) after the occurrence and during the continuance of an Event of Default (without any further action being necessary), to notify Account Debtors to make payment directly to Bank; (f) to execute in Borrower's name and on Borrower's behalf any financing statements or amendments thereto; and (g) to take or bring, in Bank's or Borrower's name, all steps, actions or proceedings deemed by Bank necessary or desirable to effect collection of the Collateral or to preserve, protect or enforce Bank's interest therein. Bank acting as said attorney (whether through its agents or designees), and any of its agents or designees shall not be liable for any acts of omission or commission, nor for any error of judgment or mistake of fact or law, except for gross negligence or willful misconduct of Bank. III.3 Liability for Handling Collateral. Nothing herein contained shall be construed to constitute Borrower as Bank's agent for any purpose whatsoever. Bank shall not be responsible nor liable for any shortage, discrepancy, damage, loss or destruction of any Collateral wherever the same may be located and regardless of the cause thereof, before Bank takes possession of the Collateral. Bank shall not be responsible nor liable for any such shortage, discrepancy, damage, loss or destruction after Bank takes possession of such Collateral except for that caused by Bank's gross negligence or willful misconduct. III.4 Custodian of Collateral. Bank shall have the right, at any time after and during the continuance of an Event of Default and from time to time thereafter, to employ and have present on any of Borrower's premises one or more custodians selected by Bank each of whom shall have the right to exercise any and all of Bank's rights hereunder or under any other Loan Document. Borrower hereby agrees to cooperate with any such custodian and to do whatever Bank may reasonably request by way of leasing warehouses or otherwise preserving the Collateral. All expenses incurred by Bank by reason of the employment of the custodian shall be payable on demand and, until paid by Borrower, shall be charged to Borrower's account and added to and deemed part of the Obligations. III.5 Cash Collateral Account(s). Borrower shall establish one or more Cash Collateral Accounts at Bank in Borrower's name, into which Borrower and all domestic Subsidiaries will deposit all payments received by Borrower (including without limitation payments on Accounts, proceeds of sales of engines, insurance proceeds, and wire transfers) promptly after receipt thereof. Amounts deposited into the Cash Collateral Account(s) shall be swept by Bank on a daily basis out of the Cash Collateral Account(s) and applied to the Loan against the principal outstanding under the Base Rate Portion of the Loan as of such day. Once all outstanding Base Rate Advances have been repaid, the balance shall accumulate until the earlier of (a) the expiration of any outstanding Libor Interest Period, (b) the request of Borrower, or (c) the occurrence of an Event of Default. At such time, amounts swept out of the Cash Collateral Account shall be applied to the Loan against the principal outstanding under any Libor Portion of the Loan as of such day. The Cash Collateral Account(s), and all proceeds thereof, shall be pledged to Bank, and shall be a blocked account/blocked accounts (i.e., withdrawals from such account(s) may only be made by Bank). Upon the occurrence of an Event of Default under the Loan, or if Bank believes that the prospect of payment or performance of the obligations of Borrower under the Loan is impaired, Bank shall have the right, without prior notice to Borrower, to establish a lockbox for the Loan into which Bank may direct Account Debtors to deposit all payments on Accounts. Upon exercising its right to establish a lockbox or lockboxes after an Event of Default, Bank may apply the contents of such lockboxes, which shall be pledged to Bank, to any of Borrower's Obligations in its sole discretion. ARTICLE IV REPRESENTATIONS AND WARRANTIES Borrower, and each Subsidiary (as and when applicable as if specifically set forth and named herein), represents and warrants to Bank that: IV.1 Organization, Corporate Powers, etc. Borrower: a. is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, b. has all requisite power and authority, corporate and otherwise, to own its respective properties and assets and to carry on its respective business as now conducted and proposed to be conducted, c. is duly qualified to do business and is in good standing in every jurisdiction in which the character of its properties or assets owned or the nature of its activities conducted makes such qualification necessary, and d. has the corporate power and authority to execute and deliver, and to perform its obligations under this Agreement and the other Loan Documents. Borrower is in compliance with all laws, rules, regulations, orders and decrees of any legislative, administrative, or judicial body or official that are applicable to Borrower or to its properties, including the Collateral. As of the date of this Agreement, Borrower has three (3) operating Subsidiaries: Kellstrom Commercial Aircraft, Inc., a Delaware corporation; Aero Support Holdings, Inc., a Delaware corporation, and Integrated Technology Holdings Corp., a Delaware corporation, and one (1) non-operating foreign sales company, Kellstrom International Sales Corporation, incorporated under the laws of the United States Virgin Islands. IV.2 Authorization of Loan, etc. The execution, delivery and performance of the Loan Documents by Borrower: a. have been duly authorized by all requisite corporate action and b. will not: i. violate a) any provision of law, any governmental rule or regulation, any order of any court or other agency of government or the Certificate of Incorporation or Bylaws or any corporate resolution or minutes of Borrower or b) any provision of any indenture, agreement or other instrument to which Borrower is a party or by which Borrower or any of its properties or assets are bound, or ii. result in the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of Borrower other than as permitted by the terms hereof. IV.3 Financial Statements. Borrower has furnished Bank with the following financial statements, identified by the chief financial officer of Borrower: an audit level balance sheet of Borrower as of December 31, 1996, profit and loss statements, statements of cash flow, and statements of stockholder's equity of Borrower for the fiscal year ended on December 31, 1996, and unaudited interim statements as of September 30, 1997. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects and have been prepared in accordance with GAAP and show all liabilities, direct and contingent, of Borrower required to be shown in accordance with such principles. The balance sheets fairly present the condition of Borrower as of the dates thereof, and the profit and loss statements, statements of cash flow and statements of stockholders' equity fairly present the results of the operations of Borrower for the periods indicated. From the date of the annual financial statements to the date of this Agreement, there has been, and to the date of the Initial Advance and each Subsequent Advance there will be, no change in the properties, assets, liabilities (whether contingent or otherwise), financial condition, business, operations, affairs or prospects of Borrower and its Subsidiaries on a consolidated basis, as the case may be, from that set forth or reflected in the fiscal year-end balance sheet, which have been, either in any case or in the aggregate, materially adverse. IV.4 Tax Returns and Payments. All federal, state, and local tax returns and reports of Borrower required to be filed have been filed, and all taxes, assessments, fees and other governmental charges upon Borrower, or upon any of its properties, assets, incomes or franchises, which are due and payable have been paid, other than those presently contested in good faith and by appropriate and lawful proceedings prosecuted diligently. Borrower has and will establish all necessary reserves and make all payments required of Borrower to be set aside or made in regard to all F.I.C.A., withholding, sales or excise, and all other similar federal, state and local taxes. IV.5 Agreements. a. Borrower is not a party to any agreement, indenture, lease or instrument or subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree, rule, or regulation materially and adversely affecting its business, properties, assets, operations or condition (financial or otherwise). There are no material unrealized losses with respect to any such agreement, indenture, lease or instrument. b. Borrower is not in default in the performance, observance or fulfillment of any of the material obligations, covenants, or conditions contained in any material agreement or instrument to which it is a party. IV.6 Title to Properties and Assets, Liens, etc. Borrower has good title to all of its properties and assets, including the properties and assets reflected in the balance sheet as of September 30, 1997, hereinabove described (other than properties and assets disposed of in the ordinary course of business). Borrower enjoys peaceful and undisturbed possession of all leases. All such leases are valid and subsisting and are in full force and effect. Borrower owns or has the right to use all of the patents, trademarks, service marks, trade names, copyrights, franchises, and licenses, and rights with respect thereto necessary for the conduct of its business as now conducted or proposed to be conducted, without any known conflict with the rights of others. IV.7 Litigation, etc. There are no actions or proceedings pending or, to the knowledge of Borrower, threatened, against Borrower or affecting Borrower that, either in any case or in the aggregate, might result in any material adverse change in the financial condition, business, prospects, affairs, or operations of Borrower or in any of its properties or assets, or which questions the validity of this Agreement or the other Loan Documents or with the transactions contemplated hereby or thereby, except for the pending litigation of Borrower set forth in Schedule 4.07 attached hereto. IV.8 Consents and Approvals. No authorization, license, consent, approval, notice, filing (except for UCC financing statements and FAA filings), or undertaking is required under any applicable law in connection with the execution, delivery and performance by Borrower of this Agreement or any of the other Loan Documents. IV.9 Enforceable Obligations. The Loan Documents have been duly executed and delivered by Borrower and are the legal and binding Obligations of Borrower enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws at the time in effect affecting the rights of creditors generally, and to general equitable principles, whether applied in a proceeding at law or in equity. IV.10 Full Disclosure. There is no material fact (including, without limitation, any litigation or outstanding Long Term and Contingent Liabilities or Current Liabilities) that Borrower has not disclosed to Bank which would have a material adverse effect on the properties, business, prospects or condition (financial or otherwise) of Borrower (or of any Subsidiary, as applicable). Neither the financial statements referenced in Section 4.03 hereof, nor any certificate or statement delivered herewith or heretofore by Borrower to Bank in connection with this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein from being misleading. As to Liabilities, there exists no default and, after giving effect to the transactions contemplated in this Agreement, there will exist no default under the provisions of any instrument evidencing such Liabilities or of any agreement relating thereto. IV.11 Hazardous Materials. With regard to any real property heretofore, now, or hereafter owned or leased by Borrower (or by a Subsidiary, as applicable) (the "PROPERTY"): a. To the best of Borrower's knowledge, the Property is free from Hazardous Materials (except for de minimis amounts used in compliance with all applicable laws) and materials that could produce Hazardous Materials or toxic effects on humans, and does not constitute an environmental hazard of any type under local, state or federal law; b. There has been no inspection, audit, or other investigation conducted as to the quality of the air, surface, or subsurface conditions at or on the Property by a third party; and Borrower has not received written, oral, or any other type of notice that any other third party, including governmental agencies, proposes to carry out an inspection, audit, or other investigation of the Property; and c. To the best of Borrower's knowledge, there has been no treatment, storage, disposal, discharge, or other type of release on land adjacent or near to the Property which may constitute a risk of contamination of the Property or surface or ground water flowing to the Property. d. Borrower has put in place internal environmental policies, copies of which have been provided to Bank and which are satisfactory to Bank in its sole discretion. Borrower represents and warrants to Bank that such policies have been developed with adequate information and do not omit anything necessary in order to render such policy complete and thorough, and Borrower further represents and warrants to Bank that such policies are consistently enforced by Borrower. IV.12 Outstanding Debt. As of the date hereof, Borrower has no outstanding debt except for: a. the Loan, b. the Equitable Loan, c. the Debentures, and d. general trade accounts payables generated by Borrower in the ordinary course of business. IV.13 Designated Senior Indebtedness; Compliance with Indenture. The Indenture has not been amended, modified, or changed in any manner as of the date hereof and Borrower will not amend or modify same during the term of the Loan without the prior written consent of Bank. Borrower hereby provides that the Loan is to be included within the definition of "Designated Senior Indebtedness" under the Indenture and Bank is entitled to the rights and benefits accorded to the holders of such indebtedness, as described therein. IV.14 Affirmation of Previous Transactions and Initial Loan Documents and Warranties and Representations; Assumption of Obligations under Initial Transactions and Initial Loan Documents. Borrower hereby ratifies and affirms the Initial Loan Documents as same may be amended and restated or otherwise modified hereby, and the representations and warranties set forth therein (except as modified concurrently herewith), and affirms that the Initial Loan Documents (as amended and restated or otherwise modified) and all representations and warranties therein remain true and correct and in full force and effect (except as modified concurrently herewith). Borrower hereby: (i) acknowledges that as of the date hereof, to Borrower's knowledge, Bank has performed all of its obligations, if any, under the Initial Loan Documents; (ii) acknowledges that as of the date hereof it has no claims, defenses or rights of setoff against Bank or as to the validity or enforceability of the Initial Loan Documents, or any of them, or as to any other documents executed in connection therewith; and (iii) waives, discharges, and releases forever any and all existing claims, actions, causes of action, demands, defenses or rights of setoff, whether in contract, tort or otherwise, which Borrower might have against Bank and its affiliates and their respective officers, directors, shareholders, agents, or employees (collectively, "BANK'S PARTIES"), or the successors or assigns of any or all of the Persons constituting Bank's Parties, or which may affect the enforceability by Bank of Bank's rights and remedies under any or all of the Initial Loan Documents and which are based on events or occurrences existing or arising prior to the date hereof. ARTICLE V COVENANTS OF BORROWER V.1 Affirmative Covenants. Borrower (and each Subsidiary as and when applicable as if specifically set forth and named herein) covenants, for so long as any of the principal amount of or interest on the Note is outstanding and unpaid or any duty or obligation of Borrower hereunder or under any of the other Obligations remains unpaid or unperformed, as follows: a. Accounting: Financial Statements; etc. Borrower will deliver to Bank and all Participants at the addresses provided to Borrower at closing or during the term of the Loan, copies of each of the following: i. as soon as practicable and in any event within forty-five (45) days after the end of each fiscal quarter in each fiscal year, a consolidated and consolidating profit and loss statement of Borrower and its Subsidiaries for such fiscal year, and a consolidated balance sheet of Borrower and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form consolidated figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of Borrower, subject to changes resulting from year-end adjustments; ii. as soon as practicable and in any event within ninety (90) days after the end of each fiscal year, an audited consolidated and consolidating balance sheet, profit and loss statement, statement of stockholder's equity, and statement of cash flows of each of Borrower and its Subsidiaries, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, together with a copy of the accompanying auditors' letter to management, all to be audit level statements in form and scope acceptable to Bank and certified to Borrower by independent certified public accountants of recognized standing whose certificate shall be in scope and substance reasonably satisfactory to Bank. iii. as soon as practicable and in any event within fifteen (15) days after the end of each month during the duration of this Agreement, a Borrowing Base Certificate (at least once per month or more often if requested by Bank, up to twice per month, and also as a condition precedent to an Advance, to establish the required availability under the Borrowing Base in connection with such Advance); an Account Collateral Certificate, showing Accounts classified as Domestic and Foreign; and an Inventory Collateral Certificate showing Parts Inventory classified by type, cost and age, a detailed listing of Whole Aircraft Engines, an accounts receivable aging report, and an accounts payable report, and any other aging schedules Bank may reasonably request of Borrower in form satisfactory to Bank; iv. as soon as practicable and in any event within forty-five (45) days after the end of each fiscal quarter in each fiscal year, an Officer's Certificate calculating with reasonable detail and confirming full compliance with all financial covenants contained herein and all other provisions and conditions of the Loan Documents, which Officer's Certificate shall be in scope and substance reasonably satisfactory to Bank; v. as soon as practicable and in any event within forty-five (45) days after the end of each fiscal year, financial projections for the two-year period commencing with such recently ended fiscal quarter; vi. promptly upon receipt thereof, a copy of each other report submitted to Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of Borrower; and vii. with reasonable promptness, such other data and information as from time to time may be reasonably required by Bank. Borrower covenants that forthwith upon any officer of Borrower (or any Subsidiary, as applicable) obtaining knowledge of any Event of Default or Default under this Agreement or any other obligation of Borrower, it shall deliver to Bank and all Participants an Officer's Certificate specifying the nature thereof, the period of existence thereof, and what action Borrower proposes to take with respect thereto. b. Inspection of Records and Collateral. At all reasonable times, Bank (or its designated representative) shall have full access to, and the right to audit, check, inspect, examine and make abstracts and copies from, Borrower's Records and all other books, records, audits, correspondence and papers relating to the Collateral, the right to confirm and verify all Accounts, to discuss the Collateral with any Person having a Permitted Lien, and to do whatever Bank may deem reasonably necessary to preserve or protect its interest in the Obligations and the Collateral. Bank or its agents may enter upon any of Borrower's premises at any time and from time to time during business hours for the purpose of inspecting the Collateral and any and all Records. Such entry onto Borrower's premises shall be with prior oral notice to Borrower (unless a Default or Event of Default exists or Bank deems that the prospect of payment or performance of all or any part of the Obligations or the value of any of the Collateral is impaired or endangered, in which case no prior notice to Borrower is necessary). At any time after an Event of Default, Bank may take possession of and remove or require Borrower to deliver to Bank any or all Records. The rights of inspection and access granted to Bank herein are continuing rights and shall survive closing and remain in effect until payment in full of all Obligations regardless of the existence of an Event of Default or of any action to foreclose Bank's Security Interest or otherwise protect Bank's rights. Bank shall have the right, at its discretion, to conduct audits of the books, records and accounts of Borrower at a time or times reasonably acceptable to Borrower and Bank. Prior to the occurrence of an Event of Default, these audits shall be conducted at Bank's expense, except for asset-based lending audits, which shall be conducted at least quarterly at Borrower's expense (at $250.00/day, or the then current fee for such asset-based lending audits, plus costs). After the occurrence of an Event of Default, all audits shall be conducted at Borrower's expense. c. Maintenance of Corporate Existence: Compliance with Laws. Borrower (and each Subsidiary, as applicable), shall each at all times preserve and maintain in full force and effect its corporate existence, powers, rights, licenses, permits and franchises in the jurisdiction of its incorporation; continue to conduct and operate its business substantially as conducted and operated during the present and preceding fiscal year; operate in substantial compliance with all applicable laws, statutes, regulations, certificates of authority and orders in respect of the conduct of its business; and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or appropriate in view of its business and operations. d. Creation of Accounts. Upon Bank's request, Borrower will provide Bank with information as to each Account, including: i. confirmatory assignment schedules; ii. copies of all documents evidencing the sale and delivery of goods or the performance of services which created any Accounts, including, but not limited to, contracts, orders, invoices, bills of lading, warehouse receipts, delivery tickets and shipping receipts; and iii. such further schedules and/or information as Bank may reasonably require. e. Maintenance of Properties. Borrower (and each Subsidiary, as applicable), shall maintain or cause to be maintained in good repair, working order and condition all properties used in its business including, but not limited to, any real property and all improvements located thereon, and from time to time will make or cause to be made all appropriate repairs, renewals, improvements and replacements thereof and of leases or agreements covering such properties (including the Property) so that the businesses carried on in connection therewith may be properly conducted at all times. Borrower shall further keep and maintain, at its cost and expense, Records pertaining to the Collateral in such detail, form and scope as Bank shall from time to time require. Borrower will mark its Records with appropriate notations satisfactory to Bank, disclosing that such Collateral has been pledged, sold, assigned, mortgaged and transferred to Bank and that Borrower has granted to Bank a Security Interest therein. f. Notice of Suit, Proceedings, Adverse Change; Default. Borrower (and each Subsidiary, as applicable), shall promptly give Bank notice in writing: i. of all threatened or actual actions or suits (at law or in equity) and of all threatened or actual investigations or proceedings affecting Borrower or any Subsidiary or the rights or other properties of Borrower or any Subsidiary, (i) which involves potential liability of Borrower or any Subsidiary in an amount in excess of One Million and No/100 Dollars ($1,000,000.00) either in any individual case or in the aggregate for all such cases; ii. of any material adverse change in the condition (financial or otherwise) of Borrower or any such Subsidiary; iii. of any seizure or levy upon any material part of the properties of Borrower or any such Subsidiary under any process or by a receiver; and iv. of the happening, occurrence, or existence of any Event of Default or Default, and shall provide Bank with a detailed statement by an Authorized Representative of Borrower of all relevant facts and the action being taken or proposed to be taken by Borrower with respect thereto. g. Checking Accounts. For collateral purposes, Borrower and each domestic Subsidiary (except for Subsidiaries whose headquarters and operations are conducted in locations where Bank has no presence, as to which Subsidiaries business checking accounts may be maintained in other financial institutions in such locations until such time as Bank establishes a presence there) shall maintain all its main depository and concentration accounts and business accounts with Bank. All receipts by Borrower and all domestic Subsidiaries (except for non-material levels of funds retained in local checking accounts to cover daily expenses of such Subsidiaries in the ordinary course of business) shall be deposited in or promptly transferred to the Cash Collateral Account. h. Insurance. Borrower (and each Subsidiary) shall timely procure and maintain and comply with such insurance and policies of insurance (including without limitation public liability, product liability, business interruption, insurance on foreign accounts receivable (as currently in force), hazard, fire and extended coverage, property damage and casualty insurance) as may be required by law and such other insurance, to such extent and against such hazards and liabilities (including insurance covering engines with all riders and endorsements necessary to cover all engines whether or not attached to aircraft and whether such engines are Leased Engines or Inventoried Engines), as is customarily maintained by companies similarly situated and as may be requested by Bank hereunder, and to furnish to Bank upon its request evidence of said insurance. In any event, Borrower shall at all times maintain at least the policies of insurance and the levels of insurance coverage as are currently maintained by Borrower as of the date hereof. Bank shall be loss payee as to the business contents portion of hazard insurance policies as to all foreign Accounts and as to all Leased Engines. All policies or certificates thereof, including all endorsements thereof and those required hereunder, shall be deposited with Bank. i. Debts and Taxes and Liabilities. Borrower and each Subsidiary shall pay and discharge: i. all of its indebtedness and obligations in accordance with their terms and before they shall become in default, ii. all taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits or against its properties, prior to the date on which penalties attach thereto, and iii. all lawful claims which, if unpaid, might become a Lien or charge upon any of its properties; provided, however, that Borrower shall not be required to pay the items listed in subsections (i) through (iii) that are being contested in good faith by appropriate and lawful proceedings diligently pursued and for which adequate reserves (with respect to any material claims) have been set aside on its books. j. Further Assurances; Additional Collateral Documents. Borrower will, at its expense and in a reasonable time period not to exceed ten (10) Business Days (and in any event prior to any Advance), execute, acknowledge and deliver and cause to be executed, acknowledged and delivered, to Bank all such instruments, including, without limitation, financing statements, security agreements, assumptions and continuation statements, deliver to Bank all such legal opinions, and take all such other action as Bank may from time to time reasonably request for the purpose of further assuring to Bank the security for the Obligations provided for, or intended to be provided for, in this Agreement and the other Loan Documents, and to confirm the Obligations to carry out and fulfill the intent and purpose of this Agreement and the Loan Documents. Further, to the extent Borrower acquires from time to time any additional property within the definition of the term Collateral, Borrower shall immediately execute and deliver to Bank such documents as are necessary to grant Bank a valid and first priority perfected lien or security interest in such property. Borrower shall promptly (and in any event shall include such information in the next monthly Borrowing Base Certificate delivered to Bank) notify Bank of any new locations where Collateral shall be located, including without limitation any repair facilities, and shall execute any Financing Statements or other documents necessary to perfect Bank's Security Interest in Collateral at such locations. Borrower shall notify Bank of all new patents and trademarks acquired or originated by Borrower. To the extent that Bank considers any patent or trademark owned by Borrower to be materially economically significant to Borrower, Borrower shall promptly take all actions requested by Bank to perfect Bank's security interest in such patent or trademark. Borrower shall promptly transfer to Bank any stock or other certificates evidencing Borrower's Ownership Interests in any Subsidiary, and take all action necessary to perfect Bank's Security Interest in all Ownership Interests, provided that, in the absence of an Event of Default, Borrower shall be entitled to vote such Ownership Interests, as applicable, and receive distributions and dividends arising out of such Ownership Interests and exercise all other rights of an owner of such Ownership Interests, subject to the other provisions hereof. k. Consent of Lessor; California Inventory. In the event that any of the Collateral is at any time located on any leased premises, Borrower will promptly furnish to Bank a Consent of Lessor subordinating any landlord's lien to the lien of Bank, which Consent of Lessor shall be satisfactory to Bank in its sole discretion. If such Consent of Lessor is not obtained within a reasonable time not to exceed fifteen (15) Business Days, such collateral as is in the nature of Inventory will (at Bank's sole discretion) be designated as not eligible as Inventory until such consent is obtained. Notwithstanding the foregoing, no such Consent of Lessor shall be necessary for any real property in San Carlos, California leased by Borrower as of the Closing Date as long as the value of Inventory located on such premises does not exceed Six Hundred Thousand and No/100 Dollars ($600,000.00). l. Subordination of Non-Bank Debt; Permitted Loans. With regard to all Subordinated Debt of Borrower, whether existing as of the date hereof or incurred during the duration of the Loan, Borrower shall deliver or cause to be delivered to Bank a copy of the original promissory note evidencing such Subordinated Debt, together with all amendments, along with a subordination agreement, in form and substance acceptable to Bank. All Subordinated Debt (with the exception of the Equitable Loan and the Debentures, as more fully set forth in this Section 5.01(l)) shall be absolutely and unconditionally subordinated (pursuant to such subordination agreement) to the Loan, provided, however, that payment of interest on Subordinated Debt (with the exception of the Equitable Loan and the Debentures, as more fully set forth in this Section 5.01(l)) shall be allowed by Bank without prior consent provided that all financial covenants of Borrower contained in this Agreement are met on a quarterly basis and no Event of Default exists at the time of any interest payment or after giving effect thereto. All non-Bank group debt incurred after the date of this Agreement must be subordinated to the Loan. In addition, proceeds of all future non-Bank group debt involving capital markets must be used first to pay down and satisfy the Loan in full. No principal repayment of any future non-Bank group debt will be permitted without Bank's prior consent. No prepayment or acceleration of such loans may be made by Borrower. No payments in any form on future non-Bank group debt will be allowed if the Loan is in default. Borrower currently has Subordinated Debt from The Equitable Life Assurance Society of the United States in the current outstanding principal amount of Eleven Million Two Hundred Fifty Thousand and No/100 Dollars ($11,250,000.00). Borrower also currently has Subordinated Debt in the form of Debentures in the outstanding principal balance of Fifty Four Million and No/100 Dollars ($54,000,000.00). Notwithstanding anything contained in this Agreement or the other Loan Documents to the contrary, Borrower's Subordinated Debt under the Equitable Loan and the Debentures shall be subordinated only pursuant to the terms of the documents evidencing such Subordinated Debt as effective as of the Closing Date, which documents have been reviewed and approved by the Bank. As more specifically provided in the documents evidencing the Equitable Loan (and subject to the provisions of such documents), payments of interest and principal and premium payments (if applicable) on the Equitable Loan may be made as long as no Payment Default exists or is continuing under the Loan. During the continuance of a Default that is not a Payment Default, payments may be made under the Equitable Loan only after the expiration of the "blockage period" as described in the Securities Purchase Agreement (except for interest in the form of securities). The Equitable Loan may be accelerated pursuant to the terms of the Securities Purchase Agreement upon seven (7) days' written notice to Bank (and subject to the subordination provisions thereof). As more specifically provided in the Indenture (and subject to the provisions of the Indenture), payments of interest and principal and premium payments (if applicable) on the Debentures may be made as long as no Payment Default exists or is continuing under the Loan. During the continuance of a Default that is not a Payment Default, payments may be made under the Debentures only after the expiration of 179 days, as described in the Indenture. Acceleration of the Debentures is permitted subject to the subordination provisions of the Indenture. m. Hazardous Materials. Borrower shall immediately notify Bank orally and in writing of any notice of: i. the happening of any event involving the spill, release, leak, seepage, discharge or cleanup of any Hazardous Materials on the Property or in connection with Borrower's operations thereon or ii. any complaint, order, citation or notice with regard to air omissions, water discharges, or any other environmental, health or safety matter affecting Borrower or any of the Property. n. Future Capital Market Financing. Borrower shall apply the Proceeds of any future financings from the capital markets first to reduce the outstanding principal balance of the Loan, and shall provide Bank with evidence of such payment. o. SEC Filings, Subordinated Debt. Borrower will deliver to Bank and all Participants as soon as practicable and in any event within seven (7) days of filing, copies of all documents filed with the Securities and Exchange Commission, and will promptly deliver to Bank copies of all documents received from and required to be provided lenders under the Subordinated Debt. p. Capital Expenditures. Borrower shall limit annual Capital Expenditures to an amount not to exceed One Million and No/100 Dollars ($1,000,000.00) in the aggregate during any fiscal year. V.2 Negative Covenants. Borrower (and each Subsidiary, as and when applicable as if specifically set forth and named herein) covenants, for so long as any of the principal amount of or interest on the Note is outstanding and unpaid or any duty or obligation of Borrower hereunder or under any of the other Obligations remains unpaid or unperformed, as follows: a. Other Agreements. Borrower will not enter into any arrangements, contractual or otherwise, which would materially and adversely affect its duties or the rights of Bank under the Loan Documents or which is inconsistent with or limits or abrogates the Loan Documents. b. Sale of Assets or Stock. Neither Borrower nor any Subsidiary will sell, lease, assign, transfer, or otherwise dispose of all or a substantial part (being defined as equal to or greater than Two Hundred Thousand and No/100 Dollars ($200,000.00) worth of fixed assets which are not Current Assets) of its assets or properties, tangible or intangible, or all or a substantial part (being defined as equal to or greater than twenty percent (20%)) of its capital stock to any Person without the prior written consent of Bank, except for the sale or lease of Inventory in the ordinary course of business. c. Merger, Consolidation, Dissolution, Change of Name, Location or Business, etc. Without prior written consent of Bank, neither Borrower nor any Subsidiary will i. consolidate with or merge into any other corporation, or ii. permit another corporation to merge into it (unless, in the case of a merger or consolidation involving Borrower, Borrower is the surviving corporation), or iii. permit any other type of reorganization or recapitalization, or iv. dissolve or take or omit to take any action which would result in its dissolution, or v. acquire all or substantially all the properties, Ownership Interests or assets of any other Person (except the pending asset purchase by Integrated Technology Holdings Corp., pursuant to the Asset Purchase Agreement, dated as of February 27, 1998, between Integrated Technology Corp. and Borrower and Gideon Vaisman, which has been reviewed and approved by Bank), or vi. change the name or use of any trade names of Borrower or any Subsidiary (including the fictitious name "Westco International", which Borrower represents and warrants is the only name other than Borrower's legal name under which Borrower conducts its business; Borrower holds no trademarks) or the location of the chief executive office (as that term is used in the UCC) of Borrower or such Subsidiary, the location of any records pertaining to any Accounts or other Collateral, or the address where any Inventory is or may be stored (unless Borrower has given Bank ten (10) days' prior notice of such change, Bank shall first have performed all due diligence deemed by it to be necessary in order to assure proper perfection and maintenance of its Security Interest and consented to such change and Borrower shall have executed such documents and taken such actions as are required in the reasonable opinion of Bank, in order to perfect, under the laws of the state where said Place of Business or repair facility is located, the Security Interest granted Bank in the Collateral under the Security Agreement) (except that Inventory is permitted to be sent to repair facilities in various states in the ordinary course of business, which repair facilities change from time to time; the repair facilities in use as of the date hereof are set forth in Schedule 5.02(c) and Borrower shall promptly notify Bank of such changes), or vii. maintain a Place of Business or use a repair facility at any time outside the State of Florida other than those set forth in Schedule 5.02(c) attached hereto, or viii. engage in any business other than the business presently conducted by it on the date of this Agreement and business of substantially the same type or reasonably related thereto. d. Sale of Collateral; Liens on Collateral. Borrower will not sell, assign or discount any of the Collateral with or without recourse, except for the collection or disposition of Accounts or the sale or lease of Inventory in the ordinary course of business; or (except as provided in Section 2.03(h) herein) borrow from anyone on the security of or create, incur or suffer to exist any Lien (other than Bank's, which Borrower warrants is a first priority security interest) on any of the Collateral or permit any financing statement (other than Bank's Financing Statements) to be on file with respect thereto, except for Liens on specific items of Collateral permitted pursuant to Section 2.03(h) hereof. Assets other than the Collateral may be mortgaged in connection with the Headquarters Transaction, assuming consummation of the Headquarters Transaction in a form substantially similar to that described to Bank as of the Closing Date, and provided that if Bank is not involved in the Headquarters Transaction, the Headquarters Transaction must be secured exclusively by the real estate and related personal property, must not (in Bank's reasonable judgment) impair Borrower's ability to perform its duties under and comply with the Loan Documents, and Bank shall have the right to review and approve all documentation evidencing the Headquarters Transaction prior to its execution. Bank may, upon prior written request by Borrower, consent (which consent may be withheld at Bank's sole discretion) to the refinance by Borrower and the release from the Security Interest of any of Borrower's Assets (including Mature Engines, airframes, and Leased Engines) which Borrower desires to finance with a third party and in which Assets Borrower desires to grant a security interest to such third party, as long as Borrower is in compliance with all provisions of this Agreement, including without limitation the financial covenants, both before and after giving effect to such release. e. Fiscal Year. Borrower will not change its fiscal year from a year ending December 31 without prior reasonable notice to Bank. f. Liens. Neither Borrower nor any Subsidiary, as applicable, will create, assume, or suffer to exist any Lien, (including Capitalized Lease Obligations) upon any of its property or assets, whether now owned or hereafter acquired except: i. Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings; ii. Permitted Liens as described in Schedule 5.02(f) attached hereto and existing Liens on Borrower's Equipment; iii. Purchase money Liens and Capitalized Lease Obligations on machinery and Equipment hereafter acquired, and extensions or renewals of any of the same; iv. Liens not placed by Borrower on the Collateral, as to which Liens an Event of Default will not be deemed by Bank to exist for sixty (60) days after its placement if within such time it is removed or bonded off; or v. Liens incurred in connection with the Headquarters Transaction. g. Additional Indebtedness. Except for Permitted Loans and the Obligations, Borrower will not incur, create, guarantee, assume or otherwise permit the existence, at any time during any fiscal year of Borrower, of any indebtedness or liability for borrowed money, any indebtedness evidenced by notes, bonds, debentures, or similar obligations or any conditional sales or title retention agreement or capitalized leases without the prior written consent of Bank. Prior to obtaining any Permitted Loan, Borrower must first notify Bank and furnish to Bank any information which Bank may request regarding the proposed Permitted Loan. Further, any payment (of interest or principal) on a Permitted Loan may only be made pursuant to Section 5.01(l) hereof. h. Transactions with Affiliates. Neither Borrower nor any Subsidiary will directly or indirectly, purchase, acquire, or lease any property from, or sell, transfer, or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, or make or permit to remain outstanding any loan or advance to or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Affiliate except to the extent that such acts and transactions are on terms not less favorable to Borrower or to any Subsidiary than if no such relationship described above existed. Notwithstanding the foregoing, Borrower shall not so deal with any Affiliate controlled by Borrower that is not a Guarantor. i. Amendment to Existing Agreements; Adoption of Plan. Borrower shall not enter into any amendment, change or modification of the Indenture or the documents evidencing the Equitable Loan without prior written consent of Bank. Borrower shall not enter into any amendment, change or modification to any other existing agreements, which change or amendment would have a material effect on the business or condition of Borrower, or suffer or permit to occur any Event of Default or Default thereunder, or adopt a Plan, without the prior written consent of Bank. j. Establishment of Subsidiaries. Neither Borrower nor its Subsidiaries, as applicable, will establish or acquire any new subsidiaries without Bank's prior written consent thereto, which consent shall not be unreasonably withheld or denied. Upon the establishment of any such new Subsidiary, Borrower will obtain: i. execution of a Corporate Guaranty by such Subsidiary substantially in the form of Exhibit "E" hereto, and ii. a pledge of such Subsidiary's Stock and such Subsidiary's assets, and iii. in addition, its joinder upon such Loan Documents as Bank shall require in connection with the Loan if in Bank's sole judgment such new Subsidiary directly or indirectly benefits from the proceeds of the Loan. k. Policies; Returns and Credits. Borrower shall not materially amend or deviate from any of its policies and procedures with regard to returns of or rejection of Inventory, or with regard to any deduction, discount, credit, or allowance of any kind relating to the sale or lease of Inventory as set forth on Schedule 5.02(k) hereof. Borrower shall not accept returned goods following an Event of Default. l. Change in Management. Borrower shall not make, permit, or suffer any change in senior management of Borrower whereby (a) Zivi Nedivi and John Gleason would fail to remain active in the daily operations of Borrower or, (b) all of the other high level members of current management would fail to remain in place, provided that Borrower shall have ninety (90) days after any such departure, removal or other failure to remain active to select a replacement acceptable to Bank, such approval not to be unreasonably withheld. m. Distributions. Borrower shall not, without prior written consent of Bank, make any distribution, or dividend to or repurchase any of its stock from any shareholder or Affiliate of Borrower if such distribution, dividend, or repurchase exceeds fifty percent (50%) of current Net Profit and assuming compliance with the terms of this Agreement before and after giving effect thereto. V.3 Financial Covenants. Borrower covenants, for so long as any of the principal amount of or interest on the Note is outstanding and unpaid or any duty or Obligation of Borrower hereunder or under any of the other Loan Documents remains unpaid or unperformed, as follows: a. Maximum Capital Funds Ratio. The ratio of Total Liabilities (less Subordinated Debt to Capital Funds of Borrower on both an individual operating basis and a consolidated basis) shall never exceed 1.75 to 1.0 at any time during the duration of the Loan. The maximum Capital Funds Ratio shall be computed on a quarterly basis beginning with figures from the December 31, 1997 financial statement of Borrower. b. Minimum Consolidated Capital Funds Position. During the term of the Loan, the Capital Funds position of Borrower and its wholly-owned subsidiaries on a consolidated basis shall not be less than Seventy-Five Million and No/100 Dollars ($75,000,000.00) plus fifty percent (50%) of all net profits in each fiscal year, beginning with the fiscal year beginning January 1, 1998. The minimum Capital Funds position shall be computed quarterly beginning with figures from the December 31, 1997 financial statement of Borrower. c. Minimum Debt Service Coverage Ratio. Tested quarterly, on both an individual operating basis and a consolidated basis, beginning with the fiscal first quarter of 1998, Borrower's minimum Debt Service Coverage Ratio shall not be less than 1.25 to 1.0. d. Senior Debt to EBITDA Ratio. Tested quarterly, beginning with the first fiscal quarter of 1998, Borrower's Senior Debt to EBITDA Ratio shall not be greater than 5.00 to 1.00. For the purposes of this calculation, EBITDA will be calculated quarterly based on Borrower's trailing two quarters EBITDA annualized until June 30, 1998. For all periods thereafter, EBITDA will be calculated based on Borrower's trailing four quarters EBITDA. e. Loan. At no time will the outstanding principal balance of the Loan exceed the Borrowing Base. In the event the current principal balance of the Note outstanding at any time exceeds the Borrowing Base at such time, then Borrower shall be required to immediately reduce the outstanding principal balance of the Note (by payment in immediately available funds) to comply with the Borrowing Base. ARTICLE VI CONDITIONS OF LENDING A. The First Advance. The obligation of Bank to fund the Loan hereunder on the Initial Advance Date shall be subject to the fulfillment of the following conditions precedent (and, in addition, to the conditions to any Advance set forth in subsection B of this Article VI): VI.1 Evidence of Borrower Action. Bank shall have received a certificate, dated as of the Closing Date, signed by an Authorized Representative of Borrower, or Guarantor, as applicable: a. attaching true and complete copies of the resolutions of its Board of Directors, written action of general partner, or written action of members, as applicable, and of all documents (in form and substance satisfactory to Bank) evidencing other necessary corporate, partnership, or company action taken by Borrower or such Guarantor or Comfort Provider to authorize this Agreement, the Note and the other Loan Documents, b. attaching a true and complete copy of its certificate of incorporation and bylaws, partnership agreement, or articles of organization and regulations, as applicable; c. setting forth the incumbency of its officers who sign this Agreement, the Note, and the other Loan Documents, including therein signature specimens of such officers, and d. attaching a certificate of good standing of the Secretary of State of the state of incorporation or organization of Borrower or such Guarantor and of all states in which Borrower or such Guarantor is qualified to do business, together with such other documents as Bank shall reasonably require. VI.2 Note. Bank shall have received the Advance Note and the Consolidated Note, executed by an Authorized Representative of Borrower. VI.3 Opinion of Counsel to Borrower. Bank shall have received the opinion of Stearns Weaver Miller et al, P.A., counsel to Borrower, addressed to Bank and dated the Closing Date, substantially in the form of Exhibit "D" attached hereto, and Fulbright & Jaworski, LLP, counsel to Borrower in connection with the Indenture. VI.4 Security Agreement and Other Security Documents. Bank shall have received and be in possession of: a. the Security Agreement, duly executed by an Authorized Representative of Borrower; and b. FAA Security Agreements duly executed by an Authorized Representative of Borrower and attaching a complete and accurate list or lists of all engines owned by Borrower, a Corporate Guaranty from each of Kellstrom Commercial Aircraft, Aero Support Holdings, Inc. and Integrated Technology Holdings Corp.; and c. a Comfort Letter from Kellstrom International Sales Corporation, such other supporting documentation as shall be reasonably requested by Bank, in form and substance satisfactory to Bank. VI.5 Financing Statements. Borrower shall have executed such Financing Statements and other documents as may be required or advisable under the Security Agreement, the FAA Security Agreement or the other Loan Documents, as Bank may request, for the purpose of perfecting the security interests granted therein, including UCC and FAA Financing Statements. VI.6 Property and Public Liability Insurance. Bank shall have received the policy or policies of property, public and products liability and other insurance required by this Agreement with such endorsements and certificates as may be required thereby. VI.7 Fees. The Bank and the Participants shall have received the fees described in a side letter between Borrower and Bank (the "FEE LETTERS"), and the fees and disbursements of Bank's counsel shall have been paid. VI.8 Concerning the Subordinated Debt. Borrower's indebtedness evidenced by the Subordinated Debt shall not be in default. VI.9 Other Documents. Review and approval by Bank and/or Bank counsel shall have been obtained of: a. a Consent of Lessor and a conditional assignment of any real property lease to which Borrower is a party (except as to the San Carlos, California leased property, provided that the level of Inventory on the San Carlos, California leased property is less than Six Hundred Thousand and No/100 Dollars ($600,000.00) on the Closing Date). b. any other document requested by Bank or its counsel. VI.10 Asset-Based Lending Audit. Prior to the Initial Advance, Bank shall have conducted a comprehensive asset-based lending audit at Borrower's expense, the results of which shall be satisfactory to Bank, in Bank's sole judgment, and Bank shall have confirmed to Borrower that such audit is satisfactory. A comprehensive Inventory evaluation shall be conducted at Borrower's expense by a consulting firm satisfactory to Bank pre-closing, and the results of such audit shall be satisfactory to Bank, in Bank's sole judgment and Bank shall have confirmed to Borrower that such evaluation is satisfactory. VI.11 Stock of Subsidiaries. Borrower shall pledge all the stock of all Subsidiaries, whether currently existing or formed or acquired post-closing, and deliver possession of all stock certificates pledged, to Bank as further security for the Loan. All Borrower's Subsidiaries shall join in the covenants and other provisions of the Loan Documents, and shall guarantee the Loan and pledge their assets to Bank as further security for the Loan. VI.12 December 31, 1997 Draft Financial Statements. Borrower shall provide Bank with a copy of the draft December 31, 1997, financial statements; Bank acknowledges that such financial statements are in draft form and may be subject to further adjustment. VI.13 Credit Approval. Bank (and each Participant) shall have obtained credit approval for its proportionate share of the Commitment, which approval has been obtained. B. All Advances. The obligation of Bank to make any Advance on any Borrowing Date (including the Closing Date) is subject to the satisfaction of the following conditions precedent as of such Borrowing Date: VI.14 Compliance. On each Advance Date, and after giving effect to the Advances to be made thereon: a. Borrower shall be in compliance with all of the terms, covenants and conditions of this Agreement, the Note and the other Loan Documents; b. there shall exist no Default or Event of Default hereunder or thereunder; c. the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct, with the same effect as though such representations and warranties had been made on such Borrowing Date (after giving effect to any updating by Borrower of the Exhibits referred to in such representations and warranties), except such matters relating thereto as are indicated in each Borrowing Request, which shall be satisfactory to Bank in its reasonable discretion; and d. there shall have occurred no material adverse change in the financial condition, operations, status, business, prospects, Assets or property of Borrower and any Affiliate since the Closing Date. The acceptance of each Advance shall constitute a certification by Borrower as of such Borrowing Date that each of the foregoing matters is true and correct in all respects. VI.15 Delivery of Documents. All documents required by the provisions of this Agreement to be executed or delivered to Bank on or before such Borrowing Date shall have been executed and shall have been delivered at the office of Bank set forth in Section 9.03 on or before such Advance Date. VI.16 Borrowing Request. By 12 p.m. Eastern Standard Time on such Borrowing Date Bank shall have received a Borrowing Request duly executed by an Authorized Representative of Borrower, together with a Borrowing Base Certificate if required pursuant to Section 5.01(a)(iii). VI.17 Supplemental Opinions. If requested by Bank with respect to such Borrowing Date, there shall have been delivered to Bank favorable supplementary opinions of counsel to Borrower, addressed to Bank and dated such Borrowing Date, covering such matters incident to such transactions contemplated herein as Bank shall reasonably request. VI.18 Documentation and Proceedings. All corporate and legal proceedings and all documents and papers in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to Bank and Bank shall have received all information and copies of all documents that it may have reasonably requested in connection therewith, such documents where appropriate to be certified by an Authorized Representative of Borrower or proper governmental authorities. VI.19 Required Acts and Conditions. All acts, conditions and things (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any required filings, recordings or registrations) required to be done and performed and to have happened prior to such Borrowing Date and the continued performance and effectiveness of this Agreement, the Note and the other Loan Documents, shall have been done and performed and shall have happened in due compliance with all applicable laws, including the payment of all Unused Fees and other fees due and payable on or prior to such Borrowing Date. VI.20 Approval of Bank's Counsel. All legal matters in connection with the making of each Advance shall be satisfactory to Bank's counsel. VI.21 Guaranty and Pledge Agreement from Affiliates Created Post-Closing. Bank shall have received guaranties and pledge agreements duly executed by Borrower assigning to Bank as security for the Loan all Borrower's right, title and interest in and to any Affiliate of Borrower created after the Closing Date in which Borrower has an Ownership Interest, including any such Affiliate created for the purpose of acquiring Assets, and in the case of any such Affiliate that is a corporation, Borrower shall have delivered to Bank the stock of such Affiliate, together with all necessary endorsements. Borrower shall cause any such Affiliates that are Subsidiaries to be added as guarantors of the Loan immediately upon organization of any such Affiliates. VI.22 Representations and Warranties. The representations and warranties set forth in the Loan Documents shall be true and correct on and as of the date hereof, and on the date of each Advance hereunder, and no material omission shall have been made in any disclosure by Borrower to Bank concerning its business operations, financial condition or any aspect of the Loan. VI.23 No Default or Adverse Change. On the date hereof and on the date of each Advance, Borrower shall be in compliance with all the terms and provisions set forth in the Loan Documents on its part to be observed or performed, and no Event of Default or Default or adverse change in the condition or operations of Borrower shall have occurred and be continuing at such time. VI.24 Loan Documents. Borrower shall have delivered or caused to be delivered to Bank all the Loan Documents (including, without limitation, the Opinion, the Security Agreement and all applicable Consents of Lessor, in form and substance satisfactory to Bank, as Bank may request), and all of the Loan Documents shall be in full force and effect. Borrower shall have executed all Financing Statements necessary for perfection of Bank's security interest in the Collateral and taken all other steps necessary to enable Bank to perfect Bank's security interest in the Collateral. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby, and all documents incident thereto shall be satisfactory in substance and form to Bank, and Bank shall have received all such counterpart originals or certified or other copies of such documents as Bank may reasonably request. VI.25 Payment of Unused Fee. Borrower shall have paid to Bank any Unused Fee then due and owing. VI.26 Subordination Agreement. Bank shall have received a Consent of Lessor or other landlord subordination agreements and waivers and conditional assignments of any real property leases to which Borrower is a party, provided that no such landlord subordination agreement shall be necessary for any real property in San Carlos, California leased by Borrower as of the Closing Date or the date of a Subsequent Advance if the level of Inventory located on such premises does not exceed Six Hundred Thousand and No/100 Dollars ($600,000.00) as of the Closing Date, or the date of the related Subsequent Advance, as applicable. Borrower shall provide the Consent of Lessor, landlord subordination agreement, and other documents that Bank may require, in a form satisfactory to Bank. Bank shall have sole discretion in determining the satisfactory nature of any such documents. VI.27 FAA Filing and Lien Search. Prior to any Advance with respect to any Whole Aircraft Engine having at least 750 rated takeoff horsepower or equivalent or any aircraft propeller capable of absorbing 750 or more rated takeoff shaft horsepower, Borrower shall be required to: (a) grant to Bank and perfect a security interest therein including, without limitation, filing all applicable Financing Statements with the FAA; (b) provide to Bank copies of an Appraisal and all insurance covering such engine; (c) in addition, for any such engine that is a Leased Engine, provide to Bank an Appraisal, a copy of the lease covering such engine, and lessee's financial information (whether obtained from the lessee or from other sources); (d) in addition, for any Whole Aircraft Engine that is not a Leased Engine, provide to Bank copies of purchase agreements and other purchase information; (e) provide to Bank an Appraisal and a lien search satisfactory to Bank and from a search firm satisfactory to Bank that such Collateral is free and clear of any encumbrances; and (f) provide to Bank any other information reasonably requested by Bank. Borrower shall also provide to Bank a post-closing lien search indicating that liens other than Bank's lien have been released. ARTICLE VII EVENTS OF DEFAULT VII.1 Events of Default. The following each and all are Events of Default hereunder: a. Monetary Default. If Borrower shall default in any payment of principal, interest, or other charges in respect of any Obligations including, but not limited to, the Loan, within ten (10) days of the date due and payable, whether on demand, at maturity, by acceleration or otherwise; or b. Certain Non-Monetary Defaults. If Borrower shall default in the performance of or compliance with Subsection 5.01(c) as to corporate existence, any term or covenant contained in Section 5.02 of this Agreement as to negative covenants or in subsections (d) through (i) of this Article VII (after the expiration of any applicable grace periods); or c. Other Non-Monetary Defaults. If Borrower shall default in the performance of or compliance with Section 5.03, or with any other term or covenant contained in the Loan Documents, which default or non-compliance shall continue and not be cured within sixty (60) days of notice thereof to Borrower by Bank; or d. Misrepresentation. If any representation, warranty, certificate, schedule, or other information made or furnished in writing by or on behalf of Borrower herein or in any other Loan Document shall prove to have been false or incorrect in any material respect on the date as of which made or reaffirmed; or e. Bankruptcy, Insolvency, Dissolution, or Liquidation. If Borrower or any Subsidiary shall make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or if there shall have been filed any such petition or application against Borrower or any Subsidiary, or any such proceeding shall have been commenced against any thereof (provided that proceedings filed against Borrower or such Subsidiary shall not constitute Events of Default if: i. Bank shall have been notified promptly of such proceedings, ii. such proceedings have been released within sixty (60) days after being instituted, and iii. no other default or Event of Default exists under any Loan Document at the time of such proceeding or thereafter); or if Borrower, or any Subsidiary shall admit in writing its inability, or be generally unable, to pay its debts as they become due or shall make an assignment for the benefit of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for Borrower, or any such Subsidiary or a substantial part of its assets, or Borrower, or any Subsidiary by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application, or proceeding or order for relief or the appointment of a custodian, receiver or any trustee for Borrower, or any such Subsidiary or any substantial part of any of its properties; or if any order, judgment, or decree is entered in any proceedings against Borrower, or any Subsidiary decreeing the dissolution or liquidation of Borrower, or any such Subsidiary; or f. Final Judgment. If a final judgment for the payment of money in excess of Three Hundred Thousand and No/100 Dollars ($300,000.00) individually or One Million and No/100 Dollars ($1,000,000.00) in the aggregate shall be rendered against Borrower or any Subsidiary, and the same shall remain undischarged for a period of thirty (30) consecutive days during which execution shall not be effectively stayed; or g. Revocation of Consent or License. If any consent, approval, franchise, license or permit of any governmental agency or body necessary for the ownership of Borrower's assets or the operation of Borrower's business is cancelled, revoked or modified in a manner which materially adversely affects Borrower or its properties or there is any other event or occurrence which results in a material adverse change to the condition or operations of Borrower which adversely affects Borrower's ability to fulfill its obligations hereunder; or h. Enforceability of Loan Documents. If any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the Person executing the same in accordance with the respective terms thereof or shall in any way be terminated or become or be declared ineffective or inoperative or shall in any way whatsoever cease to give or provide the respective liens, security interest, rights, titles, interest, remedies, powers or privileges intended to be created thereby (except if such result is solely due to willful misconduct or gross negligence by Bank); or i. Impairment of Payment. If Bank in good faith believes that the prospect of payment or performance of all or any part of the Obligations or the value of any of the Collateral is impaired. ARTICLE VIII RIGHTS UPON DEFAULT Upon the occurrence of any Event of Default, Bank shall have and may exercise any or all of the rights set forth herein provided, however, Bank shall be under no duty or obligation to do so. VIII.1 Acceleration. To declare the indebtedness evidenced by the Note and all other Obligations to be forthwith due and payable, whereupon the Note and all other Obligations shall become forthwith due and payable, both as to principal and interest, without presentment, demand, protest or any other notice or grace period of any kind, all of which are hereby expressly waived, anything contained herein or in the Note or in such other Obligations to the contrary notwithstanding and, upon such acceleration, the unpaid principal balance and accrued interest upon the Note shall from and after such date of acceleration bear interest at the Default Rate. Notwithstanding anything to the contrary herein, upon the occurrence of an Event of Default of the type specified in Section 7.01(e), the Loan shall be automatically accelerated and the Commitment shall be automatically terminated. VIII.2 Right of Setoff. To exercise its right of setoff as permitted under Section 2.09. VIII.3 Other Rights. To exercise such other rights as may be permitted under any of the Loan Documents. VIII.4 Uniform Commercial Code. To exercise from time to time any and all rights and remedies of a secured creditor under the UCC as in effect from time to time in the State of Florida and any and all rights and remedies available to it under any other applicable law. ARTICLE IX MISCELLANEOUS IX.1 No Waiver, Cumulative Remedies. No failure or delay on the part of Bank in exercising any right, power or remedy hereunder, or under the Note or the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder or thereunder. The remedies herein and therein provided are cumulative and not exclusive of any remedies provided by law or in equity. IX.2 Entire Agreement; Amendments, etc. Except as otherwise expressly provided (including without limitation in Section 4.14 hereof), this Agreement and the other Loan Documents embody the entire Agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. No amendment, modification, termination or waiver of any provision of this Agreement, the Note or the other Loan Documents, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by Bank and Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. IX.3 Addresses for Notices, etc. All notices, requests, demands and other communications provided for hereunder shall be in writing (including telex, telecopier or telegraphic communications) and shall be sufficient if mailed, sent by overnight courier, telexed, telecopied, telegraphed or delivered to the applicable party at the address indicated below: If to Borrower: Michael W. Wallace Chief Financial Officer Kellstrom Industries, Inc. 14000 N.W. 4th Street Sunrise, FL 33325 Facsimile: 954-845-0428 With a copy to: Shawn Bayne, Esq. Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. 200 East Broward Boulevard Fort Lauderdale, Florida 33301 Facsimile: 954-462-9567 If to Bank: Andrew D. Hahn Barnett Bank, N.A. 1 East Broward Boulevard Fort Lauderdale, FL 33301 Facsimile: 954-765-1663 With a copy to: Judith L. Keiser, Esq. English, McCaughan & O'Bryan, P.A. 100 N.E. Third Avenue, Suite 1100 Fort Lauderdale, FL 33301 Facsimile: 954-763-2439 and to: Barnett Bank, N.A. 2700 Douglas Road Floor M, Suite 200 Coral Gables, FL 33134 Attn: Asset-Based Lending Department or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to the delivery with the terms of this Section. Except as otherwise expressly provided in this Agreement, all such notices, requests, demands and other communications shall, when mailed, telexed, telecopied or telegraphed, be effective four (4) days after being deposited in the mails (postage paid), on the date sent over a telex or telecopier owned or operated by a party hereto (with an answer back response set forth on the sender's copy of the document in the case of a telex) or delivered to Borrower addressed as aforesaid or delivered to the other party at the address set forth above. IX.4 Applicable Law. This Agreement, and each of the Loan Documents and transactions contemplated herein shall be governed by and interpreted in accordance with the laws of the State of Florida without regard to its principles of conflict of laws. IX.5 Survival of Representations and Warranties. All representations, warranties, covenants and agreements contained herein or made in writing by Borrower in connection herewith shall survive the execution and delivery of this Agreement, the Note and the other Loan Documents and be true and correct during the duration of the Loan. IX.6 Time of the Essence. Time is of the essence of this Agreement, the Note and the other Loan Documents. IX.7 Headings. The headings in this Agreement are intended to be for convenience of reference only, and shall not define or limit the scope, extent or intent or otherwise affect the meaning of any portion hereof. IX.8 Severability. In case any one or more of the provisions contained in this Agreement, the Note or the other Loan Documents shall for any reason be held to be invalid, illegal or unenforceable in any respect, the same shall not affect any other provision of this Agreement, the Note or the other Loan Documents, but this Agreement, the Note and the other Loan Documents shall be construed as if such invalid or illegal or unenforceable provision had never been contained therein. IX.9 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. IX.10 Conflict. In the event any conflict arises between the terms of this Agreement and the terms of any other Loan Document, Bank shall have the option of selecting which conditions shall govern the loan relationship evidence by this Agreement and, if Bank does not so indicate, the terms of this Agreement shall govern in all instances of such conflict. IX.11 Duration. The duration of this Agreement shall be for such period of time until the Loan and the Note have been repaid in full, and all of the other Obligations have been paid to Bank in full. IX.12 Expenses. Borrower agrees, whether or not the transactions hereby contemplated shall be consummated, to pay, and save Bank harmless against liability for the payment of, all out-of-pocket expenses arising in connection with this transaction (including attorneys' fees (whether incurred at trial, in any bankruptcy or appellate proceeding or otherwise) and the fees and commissions of collection agencies or other costs and penalties incurred by Bank in enforcing its rights under the Loan Documents or pursuant to law), all Prepayments Costs, all taxes, together in each case with interest and penalties, if any, which may be payable in respect of the execution, delivery and performance of this Agreement or the execution, delivery, and performance of the Note issued under or pursuant to this Agreement (excepting only any tax on or measured by net income of Bank determined substantially in the same manner, other than the rate of tax, as net income is presently determined under the IRS Code), all costs incurred by Bank in connection with Hazardous Materials found on or affecting the Property or Borrower's operations; the reasonable legal fees and expenses (whether incurred at trial, in any bankruptcy or appellate proceeding or otherwise) of counsel to Bank in connection with the negotiation, preparation and enforcement of this Agreement, the Note, the Security Agreement, or any of the other Loan Documents, or incurred by Bank in its efforts to enforce payment of Accounts, whether incurred through judicial proceedings or otherwise, and whether incurred at trial, in any bankruptcy or appellate proceeding or otherwise. Borrower either a. agrees to pay all documentary stamp taxes due as a result of the closing of this transaction within the State of Florida, or b. acknowledges that at its request the Loan is being closed outside of the State of Florida and that no Florida documentary stamp taxes are being paid by Bank on the Note. Borrower agrees to indemnify and hold Bank harmless from the payment of all documentary stamp taxes, together with any penalties and interest thereon, if Bank, at any time or for any reason, is required to pay such taxes under the laws of the State of Florida (other than any liability that results from Banks gross negligence or willful misconduct). The obligations of Borrower under this Section 9.12 shall survive payment of the Note. The obligations of Borrower hereunder and the provisions of any other Loan Document do not affect Borrower's right to contest any tax after payment of the disputed amounts or establishment of adequate reserves, as applicable. IX.13 Successors and Assigns. All covenants and agreements in this Agreement and the other Loan Documents by or on behalf of either of the parties hereto shall bind and inure to the benefit of the respective successors and assigns (including Participants and including NationsBank, N.A., as successor by merger to Barnett Bank, N.A.) of the parties hereto whether so expressed or not provided; however, this clause shall not by itself authorize any delegation of duties by Borrower or any other assignment which may be prohibited by the terms and conditions of this Agreement, and provided further that the parties (including any such successors and assigns and Participants) intend that this Agreement is solely for their benefit and no person not a party hereto shall have any rights or privileges under this Agreement whatsoever either as the third party beneficiary or otherwise. Bank may assign its interest in this Agreement and the Loan to persons other than Participants and NationsBank, N.A. upon prior written notice to Borrower, such notice to be provided in a reasonable time (not to exceed thirty (30) days) before the effective date of such assignment. Borrower shall have the right at any time during the term of the Loan to permanently reduce and/or terminate the Loan by payment in full of all principal, interest and other fees and expenses hereunder and under the other Loan Documents. Borrower shall not have any right to the refund of any fees upon such reduction or termination, but shall have no liability for Unused Fees due after such termination. IX.14 Cross Defaults. A Default under any Loan Document, including a Default under this Agreement, shall be and constitute a Default under each and every Loan Document, including this Agreement. A Default under the Headquarters Transaction shall be and constitute a Default under the Loan, and a Default under the Loan shall be and constitute a Default under the Headquarters Transaction (when and if consummated). IX.15 Non-Waiver. No delay, forbearance, or non-exercise by Bank in exercising any of its rights under this Agreement and no course of dealing between Bank and Borrower shall operate as a waiver of any rights of Bank unless Bank has expressly so waived said rights in a writing signed by it. Any such action shall not preclude Bank from thereafter exercising its rights as set forth in this Agreement. IX.16 WAIVER OF TRIAL BY JURY. EACH OF BORROWER AND BANK HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED ON THIS AGREEMENT, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, ANY LOAN DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF EITHER BANK OR BORROWER OR ANY OTHER PERSON. THIS WAIVER OF TRIAL BY JURY BY BORROWER IS A MATERIAL INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed, sealed and delivered, as applicable, by its duly Authorized Representatives on the day and year first above written. BORROWER: KELLSTROM INDUSTRIES, INC. By: -------------------------------------- Michael W. Wallace Chief Financial Officer BANK: BARNETT BANK, N.A. By: -------------------------------------- Andrew D. Hahn Senior Vice President JOINDER AND CONSENT OF GUARANTORS The undersigned, as Guarantors of that certain Note of even date herewith, executed and given by Kellstrom Industries, Inc., a Delaware corporation (the "BORROWER"), in favor of Barnett Bank, N.A., a national banking association, its successors, assigns and affiliates (the "BANK"), hereby join in the execution of this Agreement for the purpose of affirming the representations and warranties specifically set forth herein and signifying their consent and agreement to all of the covenants contained herein, and the Guarantors hereby agree to be bound by all of the provisions of this Agreement to the extent such provisions relate to or impose obligations on the Guarantors. Kellstrom Commercial Aircraft, Inc. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- Kellstrom International Sales Corporation By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- Aero Support Holdings, Inc. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- Integrated Technology Holdings Corp. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- EXHIBIT "A" FORM OF ADVANCE NOTE Attached EXHIBIT "B" FORM OF CONSOLIDATED NOTE Attached EXHIBIT "C" FORM OF SECURITY AGREEMENT Attached EXHIBIT "D" OPINION OF COUNSEL Attached EXHIBIT "E" FORM OF CORPORATE GUARANTY Attached EXHIBIT "F" BORROWING BASE CERTIFICATE Attached EXHIBIT "G" BORROWING REQUEST Attached EXHIBIT "H" PREAPPROVED FOREIGN WHOLE AIRCRAFT ENGINES AS OF CLOSING None SCHEDULE 4.07 PENDING LITIGATION None SCHEDULE 5.01(l) OUTSTANDING DEBT Equitable Loan Debentures SCHEDULE 5.02(c) PLACES OF BUSINESS Street Address Leased or Owned - -------------- --------------- Kellstrom Industries, Inc. Owned 14000 N.W. 4th Street Sunrise, FL 33325 Kellstrom Industries, Inc. Leased 821 Industrial Road San Carlos, CA 94070 Aero Support Holdings, Inc. Leased 112 Turn Row Lafayette, LA 70502 Aero Support Holdings, Inc. Leased 44 Hudson Street New York, NY 10013 LOCATION OF REPAIR FACILITIES AT WHICH COLLATERAL IS CURRENTLY LOCATED California Connecticut Florida Georgia Missouri New York Texas SCHEDULE 5.02(f) PERMITTED LIENS None SCHEDULE 5.02(k) RETURNS AND CREDIT POLICIES [provided to Bank] EX-10 5 EXHIBIT 10.23 1. PROPOSED SERVICES 1.1. Helix Management Company II, L.L.C. ("Helix") will act as the exclusive mergers & acquisitions and principal financial advisor to Kellstrom Industries, Inc. (the "Company") and will assist the Company in analyzing, structuring, negotiating, and effecting the Transactions, including the Proposed Transactions (as described in section 1.3) on the terms and conditions of this Agreement, below. In parallel with services relating to the Proposed Transactions, Helix will assist and consult with the Company on strategic financial and operational issues and tactical implementation of concepts relating to the growth of the Company. 1.2. Helix will assign its Managing Partner, Yoav Stern, to serve on the Company's board of directors as Co-Chairman and member of the executive committee of the board. Mr. Stern will devote a substantial amount of his time, as needed from time to time, to participate in meetings, lead strategic planning sessions, initiate and help in recruiting key personnel and advise management on operational issues in growth and/or turn around situations. Mr. Stern will not receive any fees in addition to the compensation described in section 2.3 herein. 1.3. PROPOSED TRANSACTION(S): 1.3.1. M&A TRANSACTION: As used herein, the term "Transaction" shall mean any transaction or series of transactions other than the purchase or sale of assets in the ordinary course of the Company's business, whereby, directly or indirectly, the Company or any of its businesses, assets or properties acquires, is acquired by or is merged with another entity, or any other similar business transaction or arrangement between the Company and a third party, including without limitation, a merger, combination or consolidation, regardless of the accounting or tax treatment of such transaction. 1.3.2. OTHER TRANSACTIONS: As used herein, the term "Transaction" shall also mean any transaction or series of transactions other than senior debt financing transactions arranged by the Company's management in the ordinary course of business, whereby, directly or indirectly, the Company or any of its businesses receives additional capital, debt financing or markets additional equity other than through a public offering. With regard to transactions described in this section 1.3.2, the Company's obligation to retain Helix is subject and subordinate to existing agreements with investment banking firms relating to private debt or equity financing. Moreover, the Company retains the right to engage an investment banking firm to assist it in arranging any such Transaction, provided that the Company will notify Helix in writing 60 days in advance regarding a proposed engagement with any investment banking firm. No fee will be payable to Helix as per section 2.3 with regards to any Transaction arranged by any such investment banking firm. 1.4. OTHER ACTIVITIES: Helix will undertake certain activities on the Company's behalf, including, if appropriate, the following: 1.4.1. Assisting the Company in its determination of appropriate values to be realized in Transactions; 1.4.2. Advising the Company in the negotiations as to the form and structure of Transactions; 1.4.3. Advising and assisting the Company's management in making presentations to the Company's Board of Directors about Transactions; 1.4.4. In addition to advising on any Transactions, rendering such other financial advisory and merchant banking services as may from time to time be agreed in writing between Helix and the Company. 2. FURTHER AGREEMENT TERMS 2.1. TRANSACTION TIMING. A Transaction shall be deemed to have occurred when Consideration Paid for a Transaction, having been received by the Company or the Company's shareholders, or in the event of a merger, acquisition, purchase by the Company, Consideration Paid has been sent to the receiving party, provided that if, Consideration Paid shall be paid in installments, the full amount will be construed to have been received on the receipt of the first installment exchanged between parties to a Transaction. 2.2. LIMITATION AND EXCLUSIVITY. To the extent that this agreement created an exclusive relationship with Helix in cases of Transactions described in section 1.3.2, and in all cases of Transactions described in section 1.3.1, the Company agrees that as of the date hereof, Helix shall be the exclusive advisor to the Company and the Company shall not enter into any agreement relating to a Transaction during the term of this Agreement without the participation of Helix. If the Company consummates a Transaction during the term of this Agreement (or for a period of one year thereafter as described below) without Helix's participation, the Company agrees that it, and its successors and assigns, shall nevertheless be -2- obligated to provide or cause to be provided to Helix, the compensation provided herein in paragraph 2.3. 2.3. COMPENSATION. The Company will compensate Helix in the form of a retainer, success fees and reimbursement of its reasonable expenses as described below. Fees will be paid directly to Helix, or to another entity as assigned from time to time by Helix. 2.3.1. RETAINER: The Company will pay Helix a monthly retainer in the amount of $25,000 for a minimum period of 18 months and thereafter for the length of this Agreement (see Termination in paragraph 2.8) 2.3.2. CONSIDERATION PAID: For the purpose of this Agreement, Consideration Paid is defined as: 2.3.2.1. In the event of a sale by the Company of newly issued securities, the amount of cash invested in the Company; 2.3.2.2. In the event of a sale, merger or acquisition of the Company or the Company's assets, the cash consideration plus the market value of non-cash consideration, plus the amount of debt and other interest bearing obligations assumed, refinanced by the acquiror, or retired, or defeased, in connection with the Transaction; 2.3.2.3. In the event of a purchase, merger or acquisition Transaction by the Company, the purchase price of the equity paid plus the amount of debt and other interest bearing Obligations assumed or refinanced by the Company, less any cash retained by the Company upon successful completion of the Transaction. 2.3.2.4. The fair market value of any non-cash consideration delivered in a Transaction will be the value agreed upon by the Company and Helix prior to the consummation of the Transaction. 2.3.3. SUCCESS FEES: 2.3.3.1. For an M&A Transaction as defined in section 1.3.1 the -3- Company shall pay Helix a success fee upon closing of each Transaction. Success fees for any Transaction as defined above, will be determined by mutual consent by Helix and the Company based on market conditions and on a per Transaction basis, but in any case will be no less than 2% of the Consideration Paid transferred to or transferred from the Company or the Company's shareholders. Success fees shall be due and payable if the Company completes a Proposed Transaction during the term of this Agreement and within one year of the termination of this Agreement with a party introduced by or that was in contact with Helix within the term of this Agreement. This success fee will be paid in cash, or in other negotiable securities and financial instruments as specifically agreed in writing by Helix and the Company. 2.3.3.2. For any other Transaction as defined in section 1.3.2, the Company and Helix will reach and agreement on a success fee for each specific Transaction if and when the Company instructs Helix to proceed with preparation for a specific Transaction. 2.3.4. EXPENSES: The Company shall reimburse Helix, upon Helix's request and regardless of whether the Company consummates any Transactions, for its reasonable and actual out of pocket expenses incurred by it in connection with this Agreement. In on event, however, shall the Company be liable to Helix for out-of-pocket expenses in excess of $10,000 per month without the prior approval of the Company. 2.3.5. LIFE INSURANCE: The Company shall obtain and maintain a life insurance policy on the life of Mr. Stern in the amount of $3,000,000 with a variable annuity feature mutually acceptable to Mr. Stern and the Company. The Company will pay the premium on such policy for the entire period commencing on the effective date of this agreement and ending on the seventh anniversary of the date hereof (the "Policy Period"). Until January 1, 1999, the Company shall own, and shall have the right to designate the beneficiary under, such insurance policy. Mr. Stern shall have the option of causing the Company to transfer the ownership of the policy (and the right to designate the beneficiary thereunder) to Mr. Stern at no cost to Mr. Stern after January 1, 1999 (but the Company will continue to pay -4- the premium on such policy for the entire Policy Period). If Mr. Stern does not exercise his option to transfer ownership of the policy, upon the termination of the Policy Period, the Company shall transfer the policy to Mr. Stern at no cost to Mr. Stern. In the event that this agreement is terminated (other than as a result of a breach by Helix of the terms of this agreement) prior to that time, the Company will transfer ownership of the policy to Mr. Stern and pay Mr. Stern a lump sum payment equal to the unpaid premium remaining through the end of the Policy Period. Such lump sum payment shall include an amount sufficient to compensate Mr. Stern for any Federal, state or local income taxes associated with the receipt of such payment. 2.4. INFORMATION & RELIANCE: In connection with Helix's engagement, the Company will furnish Helix with all information concerning the Company which Helix and the Company deem appropriate and will provide Helix with access to the Company's officers, directors, accountants and counsel. It is understood that Helix will rely on the accuracy and completeness of such information supplied by the Company, its officers and agents, or available from generally recognized public sources, without any independent investigation or verification thereof. 2.5. CONFIDENTIALITY. Any advice, data, materials, contacts or other information provided by Helix, its affiliates or subsidiaries to the Company under this Agreement, including the existence of this Agreement, shall not be disclosed to third parties other than attorneys, representatives and affiliates controlled by the Company, except to the extent such disclosure is in the opinion of counsel, required by law or legal process, without prior written approval by Helix, it being understood that a copy of this Agreement must be filed with the Securities and Exchange Commission and its terms be described in Company's public filings. All non-public information given to Helix by the Company will, likewise, be treated by Helix as confidential. 2.6. INDEMNIFICATION. The Company agrees to indemnify and hold Helix harmless from and against any and all losses, claims, damages and liabilities (or actions including security holder actions in respect thereof) related to or arising out of Helix's engagement hereunder or its role in connection herewith, and will reimburse Helix for all reasonable expenses (including reasonable counsel fees and expenses) as they are incurred by Helix in connection with investigating, preparing for or defending any such action or claim, whether or not in connection with pending or threatened litigation in which Helix is a party and whether or not initiated by or on behalf of the Company. The Company will not, however, be responsible for any claims, liabilities, losses, damages or expenses which have resulted from -5- the bad faith or gross negligence of Helix. The Company also agrees that Helix shall not have any liability to the Company for or in connection with Helix's engagement, except for liability for losses, claims, damages, liabilities or expenses incurred by the Company that result from the bad faith or gross negligence of Helix. 2.6.1. In the event that the foregoing indemnity is unavailable, then the Company shall contribute to amounts paid or payable by Helix in respect of its losses, claims, damages and liabilities: 2.6.1.1. in such proportion as appropriately reflects the relative benefits received by, the Company and Helix in connection with the matters as to which such losses, claims, damages or liabilities relate, or 2.6.1.2. if (but only if) the allocation provided for in 2.6.1.1 is for any reason held to unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in 2.6.1.1 but also the relative fault of the Company and Helix, as well as any other relevant equitable considerations; 2.6.1.3. provided, however, that in no event shall the amount to be contributed by Helix exceed the amount of the fee actually received by Helix. The foregoing shall be in addition to any rights that Helix may have at common law or otherwise and shall extend upon the same terms to and inure to the benefit of Helix and its affiliates and their respective directors, officers, employees, agents or controlling persons of Helix. 2.6.1.4. The Company agrees that, without Helix's prior written consent, it will not settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action, or proceeding in respect of which indemnification could be sought under the indemnification provisions of this Agreement (whether or not Helix or any other party is an actual or potential party to such claim, action or proceeding), unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. -6- 2.7. LIMITED COMMITMENT. It is understood that Helix makes no commitment to raise capital and/or effect any of the Proposed Transactions. In addition, the Company has the right not to accept any or all offers with respect to the Proposed Transactions. 2.8. TERM AND TERMINATION. This Agreement shall have an initial term of 18 months from January 1, 1997, and will be renewed automatically thereafter for additional 12 month-terms every 12 months, unless terminated by written notice at least 90 days prior to the last day of the initial term or any extensions thereof, by any party. Notwithstanding the foregoing, the provisions of paragraphs 2.3, 2.5, 2.6 and 2.8 will survive any termination. 2.9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida and the federal laws of the United States of America applicable therein. Any controversy or claim arising out of or relating to this letter agreement shall be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon an award arising in connection therewith may be entered in any court of competent jurisdiction. 2.10. SURVIVAL. In the event that any provision herein is determined to be unenforceable under the current law at the time of execution of this letter Agreement, or unenforceable under a law that may supersede that law in place at the time of execution, all other provisions and the intent of this Agreement shall survive such findings. 2.11. INDEPENDENT CONTRACTOR. The Company acknowledges and agrees that Helix has been retained solely as a M&A and financial advisor to the Company. In such capacity, Helix shall act as an independent contractor, and any duties arising out of its engagement pursuant to this Agreement shall be owed solely to the Company. 2.12. WAIVER OF RIGHTS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing by the party against whom the same is sought to be enforced and no failure by either party to enforce any of its rights hereunder shall, except as aforesaid, be deemed to be a waiver of such right. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any provision of this Agreement to be performed by such other party shall be deemed to be a waiver of a similar or dissimilar provision hereof at the same or any prior or subsequent time. 2.13. NOTICES. Any notice required or permitted to be given under this -7- Agreement shall be in writing and shall be properly given if delivered personally, mailed prepaid registered mail, overnight courier, or sent by telecopy (as long as the telecopy is followed by a hard copy) addressed as follows: IN THE CASE OF HELIX: Yoav Stern Helix Management Company II, L.L.C. 98 Battery Street Suite 600 San Francisco, CA 94104 Tel: (415) 956-9950 Fax: (415) 956-9951 IN THE CASE OF THE COMPANY: John Gleason Chief Financial Officer 14000 NW 4th St. Sunrise, Florida 33325 Tel: (954) 845-0427 Fax: (954) 845-0428 or to such other address as the parties shall from time to time specify by notice given in accordance herewith. Any notice so given shall be conclusively deemed to have been given or made on the day of delivery, if delivered, if mailed by registered mail, upon the date shown on the postal return receipt as the date upon which the envelope containing such notice was actually received by the addressee, if delivered by overnight courier, two (2) days after deposit with the overnight courier, and if by telecopy, upon transmission thereof, as long as the telecopy is followed by delivery of a hard copy. 2.14. ENTIRE AGREEMENT. This mutually signed Agreement, attached Exhibits and any properly executed and signed Amendments, constitutes the entire agreement between the parties with respect to the engagement of Helix contemplated hereby and cancels and supersedes all prior undertakings and agreements between the parties with respect thereto and no agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. -8- 3. MISCELLANEOUS. Each of the parties represents that it is duly authorized to execute this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be the same agreement. If you are in agreement with the foregoing, please execute a copy in the space provided below and return it to Helix Management Company II, L.L.C. Regards, Helix Management Company II, L.L.C. FOR HELIX MANAGEMENT COMPANY II, L.L.C. By: /s/ Yoav Stern ------------------------------------------- NAME: YOAV STERN TITLE: Principle Accepted this 28th day of March, 1997 FOR KELLSTROM INDUSTRIES INC. By: /s/ John Gleason ------------------------------------------- NAME: JOHN GLEASON TITLE: CHIEF FINANCIAL OFFICER -9- EX-10 6 EXHIBIT 10.27 KELLSTROM INDUSTRIES, INC. 1997 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN. The purpose of the Kellstrom Industries, Inc. 1997 Stock Option Plan (the "Plan") is to promote the interests of Kellstrom Industries, Inc., a Delaware corporation (the "Company"), and its stockholders by strengthening the Company's ability to attract and retain competent employees, to make service on the Board of Directors of the Company (the "Board") more attractive to present and prospective non-employee directors of the Company and to provide a means to encourage stock ownership and proprietary interest in the Company by officers, non-employee directors and valued employees and other individuals upon whose judgment, initiative and efforts the financial success and growth of the Company largely depend. The Plan became effective on October 27, 1997, by resolution of the Board, subject to ratification of the Plan by a majority vote of the stockholders of the Company at its 1998 Annual Meeting of Stockholders. 2. STOCK SUBJECT TO THE PLAN. (a) The total number of shares of the authorized but unissued or treasury shares of the Common Stock, $.001 par value per share, of the Company ("Common Stock") for which options may be granted under the Plan shall be 600,000, which shares may be of any class of Common Stock; provided, however, that such number of shares may from time to time be reduced to the extent that a corresponding number of issued and outstanding shares of Common Stock are purchased by the Company and set aside for issue upon the exercise of options. (b) If an option granted or assumed hereunder shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject thereto shall again be available for subsequent option grants under the Plan. (c) Stock issuable upon exercise of an option granted under the Plan may be subject to such restrictions on transfer, repurchase rights or other restrictions as shall be determined by the Board. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board. No member of the Board shall act upon any matter exclusively affecting an option granted or to be granted to himself or herself under the Plan. A majority of the members of the Board shall constitute a quorum, and any action may be taken by a majority of those present and voting at any meeting. The decision of the Board as to all questions of interpretation and application of the Plan shall be final, binding and conclusive on all persons. The Board may, in its sole discretion, grant options to purchase shares of Common Stock and issue shares upon exercise of such options, as provided in the Plan. The Board shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which may but need not be identical, and to make all other determinations in the judgment of the Board necessary or desirable for the administration of the Plan. The Board may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. No director shall be liable for any action or determination made in good faith. The Board may, in its discretion, delegate its power, duties and responsibilities to a committee, consisting of two or more members of the Board. If a committee is so appointed, all references to the Board herein shall mean and relate to such committee, unless the context otherwise requires. 4. TYPE OF OPTIONS. Options granted pursuant to the Plan shall be authorized by action of the Board (or a committee designated by the Board) and may be designated as either incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified options which are not intended to meet the requirements of Section 422 of the Code, the designation to be in the sole discretion of the Board. Options designated as incentive stock options that fail to continue to meet the requirements of Section 422 of the Code shall be redesignated as non-qualified options automatically on the date of such failure to continue to meet the requirements of Section 422 of the Code without further action by the Board. 5. ELIGIBILITY. Options designated as incentive stock options may be granted only to officers and key employees of the Company or of any subsidiary corporation (herein called "subsidiary" or "subsidiaries"), as defined in Section 424 of the Code and the Treasury Regulations promulgated thereunder (the "Regulations). Directors who are not otherwise employees of the Company or a subsidiary shall not be eligible to be granted incentive stock options pursuant to the Plan. Options designated as nonqualified options may be granted to (i) officers and key employees of the Company or of any of its subsidiaries, or (ii) agents and directors of and consultants to the Company, whether or not otherwise employees of the Company. In determining the eligibility of an individual to be granted an option, as well as in determining the number of shares to be optioned to any individual, the Board shall take into account the recommendation of the Company's Chairman, the position and responsibilities of the individual being considered, the nature and value to the Company or its subsidiaries of his or her service and accomplishments, his or her present and potential contribution to the success of the Company or its subsidiaries, and such other factors as the Board may deem relevant. 6. RESTRICTIONS ON INCENTIVE STOCK OPTIONS. Incentive stock options (but not non-qualified options) granted under this Plan shall be subject to the following restrictions: (a) Limitation on Number of Shares. The aggregate fair market value of the shares of Common Stock with respect to which incentive stock options are granted, determined as of the date the incentive stock options are granted, exercisable for the first time by an individual during any calendar year shall not exceed $100,000. If an incentive stock option is granted pursuant to which the aggregate fair market value of shares with respect to which it first becomes exercisable in any calendar year by an individual exceeds such $100,000 limitation, the portion of such option which is in excess of the $100,000 limitation, and any such options issued subsequently in the same calendar year, shall be treated as a non-qualified option pursuant to Section 422(d)(1) of the Code. In the event that an individual is eligible to participate in any other stock option plan of the Company or any parent or subsidiary of the Company which is also intended to comply with the -2- provisions of Section 422 of the Code, such $100,000 limitation shall apply to the aggregate number of shares for which incentive stock options may be granted under this Plan and all such other plans. (b) Ten Percent (10%) Stockholder. If any employee to whom an incentive stock option is granted pursuant to the provisions of this Plan is on the date of grant the owner of stock (as determined under Section 424(d) of the Code) possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, then the following special provisions shall be applicable to the incentive stock options granted to such individual: (i) The option price per share subject to such incentive stock options shall be not less than 110% of the fair market value of the stock determined at the time such option was granted. In determining the fair market value under this clause (i), the provisions of Section 8 hereof shall apply. (ii) The incentive stock option shall have a term expiring not more than five (5) years from the date of the granting thereof. 7. OPTION AGREEMENT. Each option shall be evidenced by an agreement (the "Agreement") duly executed on behalf of the Company and by the grantee to whom such option is granted, which Agreement shall comply with and be subject to the terms and conditions of the Plan. The Agreement may contain such other terms, provisions and conditions which are not inconsistent with the Plan as may be determined by the Board, provided that options designated as incentive stock options shall meet all of the conditions for incentive stock options as defined in Section 422 of the Code. No option shall be granted within the meaning of the Plan and no purported grant of any option shall be effective until the Agreement shall have been duly executed on behalf of the Company and the optionee. More than one option may be granted to an individual. 8. OPTION PRICE. (a) The option price or prices of shares of Common Stock for options designated as non-qualified stock options shall be as determined by the Board. (b) Subject to the conditions set forth in Section 6(b) hereof, the option price or prices of shares of Common Stock for options designated as incentive stock options shall be at least the fair market value of such Common Stock at the time the option is granted as determined by the Board in accordance with clause (c) below. (c) If the Common Stock is then listed on any national securities exchange, the fair market value shall be the mean between the high and low sales prices, if any, on the largest such exchange on the date of the grant of the option or, if none, shall be determined by taking a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the date of grant in accordance with Regulations Section 25.2512-2. If the Common Stock is not then listed on any such exchange, the fair market value shall be the mean -3- between the closing "Bid" and the closing "Ask" prices, if any, as reported in the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for the date of the grant of the option, or, if none, shall be determined by taking a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the date of grant in accordance with Regulations Section 25.2512-2. If the Common Stock is not then either listed on any such exchange or quoted in NASDAQ, the fair market value shall be the mean between the average of the "Bid" prices, if any, as reported in the National Daily Quotation Service for the date of the grant of the option, or, if none, shall be determined by taking a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the date of grant in accordance with Regulations Section 25.2512-2. If the fair market value of the Common Stock cannot be determined under the preceding three sentences, it shall be determined in good faith by the Board in accordance with the Regulations promulgated under Section 422 of the Code. 9. MANNER OF PAYMENT; MANNER OF EXERCISE. (a) Options granted under the Plan may provide for the payment of the exercise price by delivery of (i) cash or a check payable to the order of the Company in an amount equal to the exercise price of such options, (ii) shares of Common Stock owned by the optionee having a fair market value equal in amount to the exercise price of such options, or (iii) any combination of (i) and (ii); provided, however, that payment of the exercise price by delivery of shares of Common Stock owned by such optionee may be made only upon the condition that such payment does not result in a charge to earnings for financial accounting purposes as determined by the Board, unless such condition is waived by the Board. The fair market value of any shares of Common Stock which may be delivered upon exercise of an option shall be determined by the Board in accordance with Section 8 hereof. (b) To the extent that the right to purchase shares under an option has accrued and is in effect, options may be exercised in full at one time or in part from time to time, by giving written notice, signed by the person or persons exercising the option, to the Company, stating the number of shares with respect to which the option is being exercised, accompanied by payment in full for such shares as provided in subparagraph (a) above. Upon such exercise, delivery of a certificate for paid-up non-assessable shares shall be made at the principal office of the Company to the person or persons exercising the option at such time, during ordinary business hours, after three (3) days but not more than ninety (90) days from the date of receipt of the notice by the Company, as shall be designated in such notice, or at such time, place and manner as may be agreed upon by the Company and the person or persons exercising the option. 10. EXERCISE OF OPTIONS. Each option granted under the Plan shall, subject to Section 11(b) hereof, be exercisable at such time or times and during such period as shall be set forth in the Agreement; provided, however, that no option granted under the Plan shall have a term in excess of ten (10) years from the date of grant. To the extent that an option is not exercised when it becomes initially exercisable, it shall not expire but shall be carried forward and shall be exercisable, on a cumulative basis, until the expiration of the exercise period. No partial exercise may be made for less than one hundred (100) full shares of Common Stock. -4- 11. TERM OF OPTIONS; EXERCISABILITY. (a) Term. (i) Each option shall expire not more than ten (10) years from the date of the granting thereof, except as (a) otherwise provided pursuant to the provisions of Section 6(b) hereof, and (b) earlier termination as herein provided. (ii) Except as otherwise provided in this Section 11, an option granted to any grantee who ceases to perform services for the Company or one of its subsidiaries shall terminate three months after the date such grantee ceases to perform services for the Company or one of its subsidiaries, or on the date on which the option expires by its terms, whichever occurs first. (iii) If the grantee ceases to perform services for the Company because of dismissal for cause or because the grantee is in breach of any employment agreement, such option will terminate on the date the grantee ceases to perform services for the Company or one of its subsidiaries. (iv) If the grantee ceases to perform services for the Company because the grantee has become permanently disabled (within the meaning of Section 22(e)(3) of the Code), such option shall terminate twelve months after the date such grantee ceases to perform services for the Company, or on the date on which the option expires by its terms, whichever occurs first. (v) In the event of the death of any grantee, any option granted to such grantee shall terminate twelve months after the date of death, or on the date on which the option expires by its terms, whichever occurs first. (b) Exercisability. (i) Except as provided below, an option granted to a grantee who ceases to perform services for the Company or one of its subsidiaries shall be exercisable only to the extent that such option has accrued and is in effect on the date such grantee ceases to perform services for the Company or one of its subsidiaries. (ii) An option granted to a grantee who ceases to perform services for the Company or one of its subsidiaries because he or she has become permanently disabled (as defined above) shall be exercisable with respect to the full number of shares covered thereby, whether or not under the provisions of Section 10 hereof the grantee was entitled to do so at the date he or she became permanently disabled, and may be exercised by a legal representative on behalf of the grantee. (iii) In the event of the death of any grantee, the option granted to such grantee may be exercised with respect to the full number of shares covered thereby, whether or not under the provisions of Section 10 hereof the grantee was entitled to do so at the date of his or her death, by the estate of such grantee, or by any person or persons who acquired the right to exercise such option by bequest or inheritance or by reason of the death of such grantee. -5- 12. OPTIONS NOT TRANSFERABLE. The right of any grantee to exercise any option granted to him or her shall not be assignable or transferable by such grantee other than by will or the laws of descent, and any such option shall be exercisable during the lifetime of such grantee only by him. Any option granted under the Plan shall be null and void and without effect upon the bankruptcy of the grantee to whom the option is granted, or upon any attempted assignment or transfer except as herein provided, including without limitation, any purported assignment, whether voluntary or by operation of law, pledge, hypothecation or other disposition, attachment, trustee process or similar process, whether legal or equitable, upon such option. 13. RECAPITALIZATION, REORGANIZATION AND THE LIKE. In the event that the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividends payable in capital stock, appropriate adjustment shall be made in accordance with Section 424(a) of the Code in the number and kind of shares as to which options may be granted under the Plan and as to which outstanding options or portions thereof then unexercised shall be exercisable, to the end that the proportionate interest of the grantee shall be maintained as before the occurrence of such event; such adjustment in outstanding options shall be made without change in the total price applicable to the unexercised portion of such options and with a corresponding adjustment in the exercise price per share. In addition, unless otherwise determined by the Board in its sole discretion, in the case of any (i) sale or conveyance to another entity of all or substantially all of the property and assets of the Company or (ii) Change in Control (as hereinafter defined) of the Company, the purchaser(s) of the Company's assets or stock may, in his, her or its discretion, deliver to the optionee the same kind of consideration that is delivered to the stockholders of the Company as a result of such sale, conveyance or Change in Control, or the Board may cancel all outstanding options in exchange for consideration in cash or in kind which consideration in both cases shall be equal in value to the value of those shares of stock or other securities the optionee would have received had the option been exercised (to the extent then exercisable) and no disposition of the shares acquired upon such exercise been made prior to such sale, conveyance or Change in Control, less the exercise price therefor. Upon receipt of such consideration, the options shall immediately terminate and be of no further force and effect. The value of the stock or other securities the grantee would have received if the option had been exercised shall be determined in good faith by the Board, and in the case of shares of Common Stock, in accordance with the provisions of Section 8 hereof. The Board shall also have the power and right to accelerate the exercisability of any options, notwithstanding any limitations in this Plan or in the Agreement upon such a sale, conveyance or Change in Control. Upon such acceleration, any options or portion thereof originally designated as incentive stock options that no longer qualify as incentive stock options under Section 422 of the Code as a result of such acceleration shall be redesignated as non qualified stock options. -6- A "Change in Control" shall be deemed to have occurred if any person, or any two or more persons acting as a group, and all affiliates of such person or persons, who prior to such time owned less than fifty percent (50%) of the then outstanding Common Stock, shall acquire such additional shares of Common Stock in one or more transactions, or series of transactions, such that following such transaction or transactions, such person or group and affiliates beneficially own fifty percent (50%) or more of the Common Stock outstanding. If by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, the Board shall authorize the issuance or assumption of a stock option or stock options in a transaction to which Section 424(a) of the Code applies, then, notwithstanding any other provision of the Plan, the Board may grant an option or options upon such terms and conditions as it may deem appropriate for the purpose of assumption of the old option, or substitution of a new option for the old option, in conformity with the provisions of such Section 424(a) of the Code and the Regulations thereunder, and any such option shall not reduce the number of shares otherwise available for issuance under the Plan. No fraction of a share shall be purchasable or deliverable upon the exercise of any option, but in the event any adjustment hereunder in the number of shares covered by the option shall cause such number to include a fraction of a share, such fraction shall be adjusted to the nearest smaller whole number of shares. 14. NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in the Plan or in any option granted under the Plan shall confer upon any grantee any right with respect to the continuation of his or her employment by the Company (or any subsidiary) or interfere in any way with the right of the Company (or any subsidiary), subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the grantee from the rate in existence at the time of the grant of an option. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined in accordance with Regulations Section 1.421-7(h)(2). 15. WITHHOLDING. The Company's obligation to deliver shares upon the exercise of any non-qualified option granted under the Plan shall be subject to the option holder's satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. The Company and optionee may agree to withhold shares of Common Stock purchased upon exercise of an option to satisfy the above-mentioned withholding requirements; provided, however, that no such agreement may be made by a grantee who is an "officer" or "director" within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), except pursuant to a standing election to so withhold shares of Common Stock purchased upon exercise of an option, such election to be made not less than six months prior to such exercise and which election may be revoked only upon six months prior written notice. 16. RESTRICTIONS ON ISSUANCE OF SHARES. (a) Notwithstanding the provisions of Section 9 -7- hereof, the Company may delay the issuance of shares covered by the exercise of an option and the delivery of a certificate for such shares until one of the following conditions shall be satisfied: (i) The shares with respect to which such option has been exercised are at the time of the issue of such shares effectively registered or qualified under applicable Federal and state securities acts now in force or as hereafter amended; or (ii) Counsel for the Company shall have given an opinion, which opinion shall not be unreasonably conditioned or withheld, that such shares are exempt from registration and qualification under applicable Federal and state securities acts now in force or as hereafter amended. (b) It is intended that all exercises of options shall be effective, and the Company shall use its best efforts to bring about compliance with the above conditions, within a reasonable time, except that the Company shall be under no obligation to qualify shares or to cause a registration statement or a post-effective amendment to any registration statement to be prepared for the purpose of covering the issue of shares in respect of which any option may be exercised, except as otherwise agreed to by the Company in writing. 17. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT REGISTRATION. Unless the shares to be issued upon exercise of an option granted under the Plan have been effectively registered under the Securities Act of 1933, as amended (the "1933 Act"), the Company shall be under no obligation to issue any shares covered by any option unless the person who exercises such option, in whole or in part, shall give a written representation and undertaking to the Company which is satisfactory in form and scope to counsel for the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he or she is acquiring the shares issued pursuant to such exercise of the option for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any such shares, and that he or she will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the 1933 Act, or any other applicable law, and that if shares are issued without such registration, a legend to this effect may be endorsed upon the securities so issued. In the event that the Company shall, nevertheless, deem it necessary or desirable to register under the 1933 Act or other applicable statutes any shares with respect to which an option shall have been exercised, or to qualify any such shares for exception from the 1933 Act or other applicable statutes, then the Company may take such action and may require from each grantee such information in writing for use in any registration statement, supplementary registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for such purpose and may require reasonable indemnity to the Company and its officers and directors from such holder against all losses, claims, damages and liabilities arising from such use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. -8- 18. LOANS. At the discretion of the Board, the Company may loan to the optionee some or all of the purchase price of the shares acquired upon exercise of an option granted under the Plan. 19. MODIFICATION OF OUTSTANDING OPTIONS. Subject to limitations contained herein, the Board may authorize the amendment of any outstanding option with the consent of the grantee when and subject to such conditions as are deemed to be in the best interests of the Company and in accordance with the purposes of the Plan. 20. APPROVAL OF STOCKHOLDERS. The Plan shall be subject to approval by a majority vote of the stockholders of the Company voting in person or by proxy at the Company's 1998 Annual Meeting of Stockholders. The Plan became effective on October 27, 1997 by resolution of the Board. The Board may grant options under the Plan prior to such stockholder approval, but any such option shall become effective as of the date of grant only upon such approval and, accordingly, no such option may be exercisable prior to such approval. 21. TERMINATION AND AMENDMENT OF PLAN. Unless sooner terminated as herein provided, the Plan shall terminate on October 27, 2007. The Board may at any time terminate the Plan or make such modification or amendment thereof as it deems advisable; provided, however, that (i) the Board may not, without approval by a majority vote of the stockholders of the Company, increase the maximum number of shares for which options may be granted or change the designation of the class of persons eligible to receive options under the Plan, and (ii) any such modification or amendment of the Plan shall be approved by a majority vote of the stockholders of the Company to the extent that such stockholder approval is necessary to comply with applicable provisions of the Code, rules promulgated pursuant to Section 16 of the Exchange Act, applicable state law, or applicable National Association of Securities Dealers, Inc. or exchange listing requirements. Termination or any modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option theretofore granted to him or her. 22. LIMITATION OF RIGHTS IN THE UNDERLYING SHARES. A holder of an option shall not be deemed for any purpose to be a stockholder of the Company with respect to such option except to the extent that such option shall have been exercised with respect thereto and, in addition, a stock certificate shall have been issued theretofore and delivered to the holder. 23. NOTICES. Any communication or notice required or permitted to be given under the Plan shall be in writing, and mailed by registered or certified mail or delivered by hand, if to the Company, to its principal place of business, attention: Chairman, and, if to the holder of an option, to the address as appearing on the records of the Company. -9- EX-10 7 EXHIBIT 10.30 KELLSTROM INDUSTRIES, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK No. 2,250 Shares FOR VALUE RECEIVED, Kellstrom Industries, Inc., a Delaware corporation (the "COMPANY"), hereby certifies that Helix Capital II, L.L.C. ("Helix") or its permitted assigns, is entitled to purchase from the Company, at any time or from time to time commencing on September 10, 1997 (the "COMMENCEMENT DATE") and prior to 5:00 P.M., New York City time, on September 9, 2000 (the "Exercise Period"), two thousand two hundred fifty (2,250), subject to adjustment as hereinafter provided, fully paid and non-assessable shares of the common stock, $.001 par value per share, of the Company for an aggregate purchase price of $49,500 (computed on the basis of $22.00 per share). (Hereinafter, (i) said common stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "COMMON STOCK," (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to individually as a "WARRANT SHARE" and collectively as the "WARRANT SHARES," (iii) the aggregate purchase price payable for the Warrant Shares hereunder is referred to as the "AGGREGATE WARRANT PRICE," (iv) the price payable for each of the Warrant Shares hereunder is referred to as the "PER SHARE WARRANT PRICE," (v) this Warrant, all similar Warrants issued on the date hereof to Helix and all Warrants hereafter issued in exchange or substitution for this Warrant or such similar Warrants are referred to as the "WARRANTS" and (vi) the holder of this Warrant is referred to as the "HOLDER" and the holder of this Warrant and all other Warrants or Warrant Shares issued upon the exercise of any Warrant are referred to as the "HOLDERS.") The Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per Share Warrant Price in effect immediately after such adjustment. 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole at any time or in part from time to time, beginning on the Commencement Date and prior to 5:00 P.M., New York City time, on September 9, 2000, by the Holder by the surrender of this Warrant (with the subscription form or the cashless exercise notice, as applicable, at the end hereof, or a reasonable facsimile thereof, duly executed) at the address set forth in Subsection 10(a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part hereof if this Warrant is exercised in part. Payment for Warrant Shares shall be made at the election of the Holder, either (i) by certified or official bank check payable to the order of the Company or (ii) with a Cashless Exercise Form annexed hereto (or a reasonable facsimile thereof) duly executed (a "CASHLESS EXERCISE"). Presentation of the Cashless Exercise Form and surrender of this Warrant shall be deemed a waiver of the Holder's obligation to pay all of the Aggregate Warrant Price, or the applicable portion thereof with respect to a partial exercise. In the event of a Cashless Exercise, the Holder shall exchange its Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares being exercised by a fraction, the numerator of which shall be the difference between the then current market price per share of the Common Stock and the Per Share Warrant Price, and the denominator of which shall be the then current market price per share of Common Stock. For purposes of any computation under this Section 1(a)(ii), the then current market price per share of Common Stock at any date shall be deemed to be the average for the five consecutive business days immediately prior to the Cashless Exercise of the daily closing prices of the Common Stock on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the closing prices as reported by the Nasdaq National Market, or if not then listed on the Nasdaq National Market, the average of the highest reported bid and lowest reported asked prices as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or if not then publicly traded, the fair market price of the Common Stock as determined by the Board of Directors. (b) If this Warrant is exercised in part, this Warrant must be exercised for a number of whole shares of the Common Stock, and the Holder is entitled to receive a new Warrant covering the Warrant Shares which have not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to such Warrant Shares. Upon such surrender of this Warrant, the Company will, as promptly as practicable, (a) issue a certificate or certificates in the name of the Holder (or any designee of the Holder to whom the Warrant is transferred in accordance with Section 6 hereof) for the largest number of whole shares of the Common Stock to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company shall determine), and (b) deliver the other securities and properties receivable upon the exercise of this Warrant, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant. 2. RESERVATION OF WARRANT SHARES; LISTING. The Company agrees that, prior to the expiration of this Warrant, the Company will at all times (a) have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock and other securities and properties as from time to time shall be receivable upon the exercise of this Warrant, free and clear of all restrictions on sale or transfer and free and clear of all preemptive rights and rights of first refusal and (b) if the Company hereafter lists its Common Stock on any national securities exchange, keep the shares of the Common Stock receivable upon the exercise -2- of this Warrant authorized for listing on such exchange upon notice of issuance. 3. PROTECTION AGAINST DILUTION. (a) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Warrant Price shall be adjusted so that the Holder upon the exercise hereof shall be entitled to receive the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately following such action had such Warrant been exercised immediately prior thereto. An adjustment made pursuant to this Subsection 3(a) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (b) If, at any time or from time to time after the date of this Warrant, the Company shall issue or distribute to the holders of shares of Common Stock evidences of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding a subdivision, combination or reclassification, or dividend or distribution payable in shares of Common Stock, referred to in Subsection 3(a), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor if the full amount thereof, together with the value of other dividends and distributions made substantially concurrently therewith or pursuant to a plan which includes payment thereof, is equivalent to not more than a cumulative amount equal to 15% of the Company's net worth) (any such nonexcluded event being herein called a "SPECIAL DIVIDEND"), the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price then in effect by a fraction, the numerator of which shall be the then current market price (as defined above) of the Common Stock less the fair market value (as determined in good faith by the Company's Board of Directors) of the evidences of indebtedness, cash, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Common Stock and the denominator of which shall be such then current market price per share of Common Stock. An adjustment made pursuant to this Subsection 3(b) shall become effective immediately after the record date of any such Special Dividend. (c) In case of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, -3- cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this Subsection 3(c) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than 15 days prior to such event. (d) No adjustment in the Per Share Warrant Price shall be required unless such adjustment would require an increase or decrease of at least $0.05 per share of Common Stock; provided, however, that any adjustments which by reason of this Subsection 3(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided further, however, that adjustments shall be required and made in accordance with the provisions of this Section 3 (other than this Subsection 3(d)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of this Warrant or Common Stock issuable upon exercise hereof. All calculations under this Section 3 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Warrant Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (e) If the Board of Directors of the Company shall (i) declare any dividend or other distribution with respect to the Common Stock, other than a cash dividend subject to the first parenthetical in Subsection 3(b), (ii) offer to the holders of shares of Common Stock any additional shares of Common Stock, any securities convertible into or exercisable for shares of Common Stock or any rights to subscribe thereto, or (iii) propose a dissolution, liquidation or winding up of the Company, the Company shall mail notice thereof to the Holders of the Warrants not less than 15 days prior to the record date fixed for determining stockholders entitled to participate in such -4- dividend, distribution, offer or subscription right or to vote on such dissolution, liquidation or winding up. (f) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall in good faith determine the allocation of the adjusted Per Share Warrant Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. (g) Whenever the Per Share Warrant Price is adjusted as provided in this Section 3 and upon any modification of the rights of the Holder of Warrants in accordance with this Section 3, the Company shall promptly cause its Chief Financial Officer to provide a notice to the Holder setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same. 4. FULLY PAID STOCK; TAXES. The Company agrees that the shares of the Common Stock, or any other capital stock, represented by each and every certificate for Warrant Shares delivered on the exercise of this Warrant shall, at the time of such delivery, be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights or rights of first refusal, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes which may be payable in respect of the issue of any Warrant Share or certificate therefor. 5. REGISTRATION UNDER SECURITIES ACT OF 1933. (a) The Company agrees that if, at any time during the period beginning on the Commencement Date and ending on the third anniversary of the date the Warrants are exercised in full, the Holder and/or the Holders of any other Warrants and/or Warrant Shares who or which shall hold not less than 50% of the Warrants and/or Warrant Shares outstanding at such time and not previously sold pursuant to this Section 5 shall request that the Company file, under the Securities Act of 1933 (the "ACT"), a registration statement under the Act covering not less than 50% of the Warrant Shares issued or issuable upon the exercise of all of the Warrants and not so previously sold, the Company will (i) promptly notify each Holder of the Warrants and each holder of Warrant Shares not so previously sold that such registration statement will be filed and that the -5- Warrant Shares which are then held, and/or may be acquired upon exercise of the Warrants by the Holder and such Holders, will be included in such registration statement at the Holder's and such Holders' request, (ii) cause such registration statement to be filed with the Securities and Exchange Commission (the "Commission") as soon as possible following such request and to cover all Warrant Shares which it has been so requested to include, (iii) use its best efforts to cause such registration statement to become effective as soon as practicable and (iv) take all other action necessary under any Federal or state law or regulation of any governmental authority to permit all Warrant Shares which it has been so requested to include in such registration statement to be sold or otherwise disposed of, and will maintain such compliance with each such Federal and state law and regulation of any governmental authority for the period necessary for such Holder to effect the proposed sale or other disposition. The Company shall be required to effect a registration or qualification pursuant to this Subsection 5(a) on one occasion only, it being agreed that a registration pursuant to this Subsection 5(a) shall not be deemed to have been effected unless a registration statement with respect thereto has become effective; provided that if such registration statement failed to become effective as a result of the decision of the Holder not to consummate, or the failure of the Holder to satisfy the conditions to, the sale of the Warrant Shares pursuant to such registration statement, the Company shall have no further obligation to effect a registration pursuant to this Subsection 5(a). Notwithstanding the foregoing, if the Holder exercises its right to request that a registration statement be filed pursuant to this Subsection 5(a) at a time when the Company in good faith as evidenced by a Board resolution believes that a public offering of Common Stock would materially impair a pending financing or other material transaction of the Company, the Company shall have the right to defer filing a Registration Statement hereunder for a period not to exceed 90 days. (b) The Company agrees that if (without any obligation to do so), at any time and from time to time during the period beginning on the Commencement Date and ending on the third anniversary of the date the Warrants are exercised in full, the Board of Directors of the Company shall authorize the filing of a registration statement (any such registration statement being hereinafter called a "SUBSEQUENT REGISTRATION STATEMENT") under the Act (otherwise than pursuant to Subsection 5(a) hereof, or other than a registration statement on Form S-4 or Form S-8 or other form which does not include substantially the same information as would be required in a form for the general registration of securities) in connection with the proposed offer of any of its securities by it or any of its stockholders, the Company will (i) promptly notify the Holder and each of the Holders, if any, of other Warrants and/or Warrant Shares not previously sold pursuant to this Section 5 that such Subsequent Registration Statement will be filed and that the Warrant Shares which are then held, and/or which may be acquired upon the exercise of the Warrants, by the Holder and such Holders, will, at the Holder's and such Holders' request, be included in such Subsequent Registration Statement, (ii) upon the written request of a Holder made within 15 days after the giving of such notice by the Company, include in the securities covered by such Subsequent Registration Statement all Warrant -6- Shares which it has been so requested to include, and (iii) take all other action necessary under any Federal or state law or regulation of any governmental authority to permit all Warrant Shares which it has been so requested to include in such Subsequent Registration Statement to be sold or otherwise disposed of, and will maintain such compliance with each such Federal and state law and regulation of any governmental authority for the period necessary for the Holder and such Holders to effect the proposed sale or other disposition. Notwithstanding the foregoing, the Company shall be under no obligation to cause such Subsequent Registration Statement to become effective. (c) Whenever the Company is required pursuant to the provisions of this Section 5 to include Warrant Shares in a registration statement, the Company shall (i) furnish each Holder of any such Warrant Shares and each underwriter of such Warrant Shares with such copies of the prospectus, including the preliminary prospectus, conforming to the Act (and such other documents as each such Holder or each such underwriter may reasonably request) in order to facilitate the sale or distribution of the Warrant Shares, (ii) use its best efforts to register or qualify such Warrant Shares under the blue sky laws (to the extent applicable) of such jurisdiction or laws (to the extent applicable) of such jurisdiction or jurisdictions as the Holders of any such Warrant Shares and each underwriter of Warrant Shares being sold by such Holders shall reasonably request and (iii) take such other actions as may be reasonably necessary or advisable to enable such Holders and such underwriters to consummate the sale or distribution in such jurisdiction or jurisdictions in which such Holders shall have reasonably requested that the Warrant Shares be sold. (d) The Company shall pay all expenses incurred in connection with any registration statement or other action pursuant to the provisions of this Section 5, other than underwriting discounts, applicable transfer taxes relating to the Warrant Shares and the fees and expenses of counsel for the Holders of the Warrant Shares. (e) In connection with any public offering by the Company involving an underwriting of its securities effected pursuant to Section 5(b) hereof, the Company shall not be required to include in such registration any Warrant Shares held by the Holder unless the Holder agrees to the terms of the underwriting agreement between the Company and the managing underwriter of such offering, which agreement may require that the Warrant Shares be withheld from the market by the Holders for a certain period after the effective date of the registration statement by which such public offering is being effected. Furthermore, the Company shall be obligated to include in such registration only the quantity of Warrant Shares, if any, as will not, in the opinion of the managing underwriter, jeopardize the success of the offering by the Company. If the managing underwriter for the offering advises the Company in writing that the total amount of securities sought to be registered by the Holders and other shareholders or warrantholders of the Company having similar registration rights (collectively, the "Kellstrom Shareholders") exceeds the amount of securities that can be offered without -7- adversely affecting the offering by the Company or the Company's stockholders which had initially been included in such Subsequent Registration Statement, then the Company may reduce the number of shares to be registered by the Company for the Kellstrom Shareholders, including Warrant Shares, to a number satisfactory to such managing underwriter. Any such reduction shall be pro rata, based upon the total number of shares held by each Kellstrom Shareholder. (f) The Company will indemnify and hold harmless the Holder and any person or entity engaged by the Holder to sell the Holder's Warrant Shares, and each person, if any, who controls such persons or entities within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act") (collectively, a "Holder Indemnitee"), against any losses, claims, damages, liabilities or expenses (or actions, proceedings, or settlements in respect thereof) (joint or several) to which a Holder Indemnitee may become subject under the Act, the 1934 Act, or other federal or state law, insofar as such losses, claims, damages, liabilities or expenses (or actions, proceedings or settlements in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the 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 (iii) the employment by the Company of any device, scheme or artifice to defraud or the engagement by the Company in any act, practice or course of business which operates or would operate as a fraud or deceit upon the purchasers of its securities pursuant to such registration statement. The Company will also reimburse each Holder Indemnitee in connection with investigating, defending, and settling any such loss, claim, damage, liability, or action. The indemnity agreement contained in this Subsection 5(f) shall not apply to amounts paid in settlement of any loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, delayed or conditioned, nor shall the Company be liable to any Holder Indemnitee for any loss, claim, damage, liability or action (i) to the extent that it arises solely out of or is based solely upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of the Holder or any agent of the Holder, which consent shall not be unreasonably withheld, or controlling person of either; or (ii) in the case of a sale directly by the Holder (including a sale of such Warrant Shares through any underwriter retained by such Holder to engage in a distribution solely on behalf of such Holder), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and the Holder failed to deliver a copy of the final or amended prospectus at or prior to -8- the confirmation of the sale of the Warrant Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Act. (g) The Holder will indemnify and hold harmless the Company, each of its employees, officers, directors or persons who control the Company within the meaning of the Act or the 1934 Act, and each agent or underwriter for the Company or any other person or entity engaged by the Company to sell the Company's securities offered in the registration statement, or any of their respective directors, officers, partners, agents, employees or control persons (collectively, a "Company Indemnitee") against any losses, claims, damages, liabilities or expenses (joint or several) to which the Company or any such Company Indemnitee may become subject under the Act, the 1934 Act, or other federal or state law, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereto) arise solely out of or are based solely up;on any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of the Holder expressly for use in connection with such registration; and each Holder will reimburse any legal or other expenses reasonably incurred by a Company Indemnitee in connection with investigating or defending any such loss, claim, damage, liability, or action. Notwithstanding the above, the amount of any losses, claims, damages, liabilities,legal fees and expenses to be paid by any Holder shall not exceed the amount of the proceeds received by the Holder from the sale of its Warrant Shares. The indemnity agreement contained in this Subsection 5(g) shall not apply to amounts paid in settlement of any loss, claim damage, liability, or action if such settlement is effected without the consent of the indemnifying Holder, which consent shall not be unreasonably withheld, delayed or conditioned nor, in the case of a sale directly by the Company of its securities (including a sale of such securities through any underwriter retained by the Company to engage in a distribution solely on behalf of the Company), shall the Holder be liable to the Company in any case in which such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and the Company failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the securities to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Act. (h) (i) Promptly after receipt by an indemnified party under Subsections 5(f) and (g) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume and control the defense thereof with counsel mutually satisfactory to the indemnified and indemnifying parties, provided that an indemnified -9- party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests (as reasonably determined by either party) between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if actually prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under Subsection 5(f) or (g), respectively, to the extent of such actual prejudice, but the failure to so deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under Subsection 5(f) or (g), respectively. (ii) The obligations of the Company and the Holders under Subsections 5(f) and (g), respectively, shall survive the completion of any offering of Warrant Shares made pursuant to a registration under this Agreement. (iii) The amount paid or payable by a party as a result of the losses, claims, damages, or liabilities (or actions or proceedings in respect thereof) referred to in Subsections 5(f) and (g) shall include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. (i) If the indemnification provided for in the preceding subsections 5(f) or (g) is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall be entitled to contribution, except to the extent that contribution is not permitted under Section 11(f) of the Act. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission, and any other equitable considerations appropriate under the circumstances. Notwithstanding the provisions of this paragraph, the Holder shall not be required to contribute any amount in excess of the net proceeds received by the Holder from the sale of Warrant Shares. 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. (j) The Holder, in addition to being entitled to exercise all rights provided in this Section 5, including recovery of damages, will be entitled to specific performance of its rights hereunder. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Section 5 and hereby agrees to waive the defense in any action for -10- specific performance that a remedy at law would be adequate. (k) The Company shall not be obligated to register any Warrant Shares pursuant to this Section 5 at any time when the resale provisions of Rule 144 promulgated under the Act are available to the Holder with respect to the Warrant Shares without limitation as to volume; provided, however, that the Company shall file all reports required to be filed under the Act and the 1934 Act as set forth in paragraph (c) of Rule 144. 6. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act, and is so transferable only upon the books of the Company which it shall cause to be maintained for the purpose; provided, that the Company will cooperate with the Holder in the event that the Holder desires to effect a private placement of the Warrant. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All Warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the Holder thereof shall be identical to those of the Holder. 7. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 8. WARRANT HOLDER NOT SHAREHOLDER. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 9. INFORMATION TO HOLDER. The Company agrees that it shall from time to time deliver to the Holder promptly after their becoming available copies of all financial statements, reports and proxy statements which the Company shall have sent to its stockholders generally. 10. NOTICES. All notices and other communications required or permitted to be given under this Warrant shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission, or sent by recognized overnight courier or by certified mail, return receipt requested, postage paid, to the parties hereto as follows: -11- (a) if to the Company at 14000 NW 4th Street, Sunrise, Florida 33325, Attn.: Chief Executive Officer, facsimile no. 954-845-0428, or such other address as the Company has designated in writing to the Holder, or (b) if to the Holder at 98 Battery Street, Suite 600, San Francisco, California 94111 Attn.: Yoav Stern, or such other address or facsimile number as the Holder has designated in writing to the Company. 11. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 12. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the law of the State of Delaware without giving effect to the principles of conflicts of law thereof. -12- IN WITNESS WHEREOF, Kellstrom Industries, Inc. has caused this Warrant to be signed by its President and its corporate seal to be hereunto affixed and attested by its Secretary as of the 10th day of September, 1997. KELLSTROM INDUSTRIES, INC. By: ________________________ ATTEST: - ----------------------------------- Secretary ASSIGNMENT FOR VALUE RECEIVED ________________________ hereby sells, assigns and transfers unto ___________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint __________________, attorney, to transfer said Warrant on the books of Kellstrom Industries, Inc. Dated: ________________________ Signature: _______________________________ Address: ______________________________ PARTIAL ASSIGNMENT FOR VALUE RECEIVED ________________________ hereby assigns and transfers unto ___________________________ the right to purchase ________ shares of the Common Stock of _____________________ covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint __________________, attorney, to transfer that part of said Warrant on the books of Kellstrom Industries, Inc. Dated: ________________________ Signature: _______________________________ Address: _______________________________ -14- SUBSCRIPTION FORM (To be executed upon exercise of Warrant pursuant to Section 1(a)(i)) The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant for, and to purchase thereunder, _________ shares of Common Stock, as provided for in Section 1(a)(i), and tenders herewith payment of the purchase price in full in the form of cash or a certified or official bank check in the amount of $_________________. Please issue a certificate or certificates for such Common Stock in the name of, and pay any cash for any fractional share to: Name -------------------------------------- (Please Print Name, Address and Social Security No.) Address ----------------------------------- ----------------------------------- ----------------------------------- Social Security Number Signature --------------------------------- NOTE: The above signature should correspond exactly with the name on the first page of this Warrant or with the name of the assignee appearing in the assignment form previously delivered to the Company. Date -------------------------------------- And if said number of shares shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder. -15- CASHLESS EXERCISE FORM (To be executed upon exercise of Warrant pursuant to Section 1(a)(ii)) The undersigned hereby irrevocably elects to surrender _______ shares purchasable under this Warrant for such shares of Common Stock issuable in exchange therefor pursuant to the Cashless Exercise provisions of the within Warrant, as provided for in Section 1(a)(ii) of such Warrant. Please issue a certificate or certificates for such Common Stock in the name of, and pay cash for fractional shares to: Name______________________________ (Please Print Name, Address and Social Security No.) Address___________________________ ----------------------------- ----------------------------- Social____________________________ Security Number Signature_______________________________ NOTE: The above signature should correspond exactly with the name on the first page of this Warrant or with the name of the assignee appearing in the assignment form previously delivered to the Company. Date__________________________________ And if said number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder. -16- EX-10 8 EXHIBIT 10.31 KELLSTROM INDUSTRIES, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK No. 5,250 Shares FOR VALUE RECEIVED, Kellstrom Industries, Inc., a Delaware corporation (the "COMPANY"), hereby certifies that Helix Capital II, L.L.C. ("Helix") or its permitted assigns, is entitled to purchase from the Company, at any time or from time to time commencing on September 10, 1997 (the "COMMENCEMENT DATE") and prior to 5:00 P.M., New York City time, on September 9, 2002 (the "Exercise Period"), five thousand two hundred fifty (5,250), subject to adjustment as hereinafter provided, fully paid and non-assessable shares of the common stock, $.001 par value per share, of the Company for an aggregate purchase price of $99,750 (computed on the basis of $19.00 per share). (Hereinafter, (i) said common stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "COMMON STOCK," (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to individually as a "WARRANT SHARE" and collectively as the "WARRANT SHARES," (iii) the aggregate purchase price payable for the Warrant Shares hereunder is referred to as the "AGGREGATE WARRANT PRICE," (iv) the price payable for each of the Warrant Shares hereunder is referred to as the "PER SHARE WARRANT PRICE," (v) this Warrant, all similar Warrants issued on the date hereof to Helix and all Warrants hereafter issued in exchange or substitution for this Warrant or such similar Warrants are referred to as the "WARRANTS" and (vi) the holder of this Warrant is referred to as the "HOLDER" and the holder of this Warrant and all other Warrants or Warrant Shares issued upon the exercise of any Warrant are referred to as the "HOLDERS.") The Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per Share Warrant Price in effect immediately after such adjustment. 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole at any time or in part from time to time, beginning on the Commencement Date and prior to 5:00 P.M., New York City time, on September 9, 2002, by the Holder by the surrender of this Warrant (with the subscription form or the cashless exercise notice, as applicable, at the end hereof, or a reasonable facsimile thereof, duly executed) at the address set forth in Subsection 10(a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part hereof if this Warrant is exercised in part. Payment for Warrant Shares shall be made at the election of the Holder, either (i) by certified or official bank check payable to the order of the Company or (ii) with a Cashless Exercise Form annexed hereto (or a reasonable facsimile thereof) duly executed (a "CASHLESS EXERCISE"). Presentation of the Cashless Exercise Form and surrender of this Warrant shall be deemed a waiver of the Holder's obligation to pay all of the Aggregate Warrant Price, or the applicable portion thereof with respect to a partial exercise. In the event of a Cashless Exercise, the Holder shall exchange its Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares being exercised by a fraction, the numerator of which shall be the difference between the then current market price per share of the Common Stock and the Per Share Warrant Price, and the denominator of which shall be the then current market price per share of Common Stock. For purposes of any computation under this Section 1(a)(ii), the then current market price per share of Common Stock at any date shall be deemed to be the average for the five consecutive business days immediately prior to the Cashless Exercise of the daily closing prices of the Common Stock on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the closing prices as reported by the Nasdaq National Market, or if not then listed on the Nasdaq National Market, the average of the highest reported bid and lowest reported asked prices as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or if not then publicly traded, the fair market price of the Common Stock as determined by the Board of Directors. (b) If this Warrant is exercised in part, this Warrant must be exercised for a number of whole shares of the Common Stock, and the Holder is entitled to receive a new Warrant covering the Warrant Shares which have not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to such Warrant Shares. Upon such surrender of this Warrant, the Company will, as promptly as practicable, (a) issue a certificate or certificates in the name of the Holder (or any designee of the Holder to whom the Warrant is transferred in accordance with Section 6 hereof) for the largest number of whole shares of the Common Stock to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company shall determine), and (b) deliver the other securities and properties receivable upon the exercise of this Warrant, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant. 2. RESERVATION OF WARRANT SHARES; LISTING. The Company agrees that, prior to the expiration of this Warrant, the Company will at all times (a) have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock and other securities and properties as from time to time shall be receivable upon the exercise of this Warrant, free and clear of all restrictions on sale or transfer and free and clear of all preemptive rights and rights of first refusal and (b) if the Company hereafter lists its Common Stock on any national -2- securities exchange, keep the shares of the Common Stock receivable upon the exercise of this Warrant authorized for listing on such exchange upon notice of issuance. 3. PROTECTION AGAINST DILUTION. (a) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Warrant Price shall be adjusted so that the Holder upon the exercise hereof shall be entitled to receive the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately following such action had such Warrant been exercised immediately prior thereto. An adjustment made pursuant to this Subsection 3(a) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (b) If, at any time or from time to time after the date of this Warrant, the Company shall issue or distribute to the holders of shares of Common Stock evidences of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding a subdivision, combination or reclassification, or dividend or distribution payable in shares of Common Stock, referred to in Subsection 3(a), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor if the full amount thereof, together with the value of other dividends and distributions made substantially concurrently therewith or pursuant to a plan which includes payment thereof, is equivalent to not more than a cumulative amount equal to 15% of the Company's net worth) (any such nonexcluded event being herein called a "SPECIAL DIVIDEND"), the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price then in effect by a fraction, the numerator of which shall be the then current market price (as defined above) of the Common Stock less the fair market value (as determined in good faith by the Company's Board of Directors) of the evidences of indebtedness, cash, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Common Stock and the denominator of which shall be such then current market price per share of Common Stock. An adjustment made pursuant to this Subsection 3(b) shall become effective immediately after the record date of any such Special Dividend. (c) In case of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right -3- thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this Subsection 3(c) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than 15 days prior to such event. (d) No adjustment in the Per Share Warrant Price shall be required unless such adjustment would require an increase or decrease of at least $0.05 per share of Common Stock; provided, however, that any adjustments which by reason of this Subsection 3(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided further, however, that adjustments shall be required and made in accordance with the provisions of this Section 3 (other than this Subsection 3(d)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of this Warrant or Common Stock issuable upon exercise hereof. All calculations under this Section 3 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Warrant Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (e) If the Board of Directors of the Company shall (i) declare any dividend or other distribution with respect to the Common Stock, other than a cash dividend subject to the first parenthetical in Subsection 3(b), (ii) offer to the holders of shares of Common Stock any additional shares of Common Stock, any securities convertible into or exercisable for shares of Common Stock or any rights to subscribe thereto, or (iii) propose a dissolution, liquidation or winding up of the Company, the Company shall mail notice thereof to the Holders of the Warrants not less than 15 days -4- prior to the record date fixed for determining stockholders entitled to participate in such dividend, distribution, offer or subscription right or to vote on such dissolution, liquidation or winding up. (f) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall in good faith determine the allocation of the adjusted Per Share Warrant Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. (g) Whenever the Per Share Warrant Price is adjusted as provided in this Section 3 and upon any modification of the rights of the Holder of Warrants in accordance with this Section 3, the Company shall promptly cause its Chief Financial Officer to provide a notice to the Holder setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same. 4. FULLY PAID STOCK; TAXES. The Company agrees that the shares of the Common Stock, or any other capital stock, represented by each and every certificate for Warrant Shares delivered on the exercise of this Warrant shall, at the time of such delivery, be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights or rights of first refusal, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes which may be payable in respect of the issue of any Warrant Share or certificate therefor. 5. REGISTRATION UNDER SECURITIES ACT OF 1933. (a) The Company agrees that if, at any time during the period beginning on the Commencement Date and ending on the third anniversary of the date the Warrants are exercised in full, the Holder and/or the Holders of any other Warrants and/or Warrant Shares who or which shall hold not less than 50% of the Warrants and/or Warrant Shares outstanding at such time and not previously sold pursuant to this Section 5 shall request that the Company file, under the Securities Act of 1933 (the "ACT"), a registration statement under the Act covering not less than 50% of the Warrant Shares issued or issuable upon the exercise of all of the Warrants and not so previously sold, the Company will (i) promptly notify each Holder of the Warrants and each holder of Warrant -5- Shares not so previously sold that such registration statement will be filed and that the Warrant Shares which are then held, and/or may be acquired upon exercise of the Warrants by the Holder and such Holders, will be included in such registration statement at the Holder's and such Holders' request, (ii) cause such registration statement to be filed with the Securities and Exchange Commission (the "Commission") as soon as possible following such request and to cover all Warrant Shares which it has been so requested to include, (iii) use its best efforts to cause such registration statement to become effective as soon as practicable and (iv) take all other action necessary under any Federal or state law or regulation of any governmental authority to permit all Warrant Shares which it has been so requested to include in such registration statement to be sold or otherwise disposed of, and will maintain such compliance with each such Federal and state law and regulation of any governmental authority for the period necessary for such Holder to effect the proposed sale or other disposition. The Company shall be required to effect a registration or qualification pursuant to this Subsection 5(a) on one occasion only, it being agreed that a registration pursuant to this Subsection 5(a) shall not be deemed to have been effected unless a registration statement with respect thereto has become effective; provided that if such registration statement failed to become effective as a result of the decision of the Holder not to consummate, or the failure of the Holder to satisfy the conditions to, the sale of the Warrant Shares pursuant to such registration statement, the Company shall have no further obligation to effect a registration pursuant to this Subsection 5(a). Notwithstanding the foregoing, if the Holder exercises its right to request that a registration statement be filed pursuant to this Subsection 5(a) at a time when the Company in good faith as evidenced by a Board resolution believes that a public offering of Common Stock would materially impair a pending financing or other material transaction of the Company, the Company shall have the right to defer filing a Registration Statement hereunder for a period not to exceed 90 days. (b) The Company agrees that if (without any obligation to do so), at any time and from time to time during the period beginning on the Commencement Date and ending on the third anniversary of the date the Warrants are exercised in full, the Board of Directors of the Company shall authorize the filing of a registration statement (any such registration statement being hereinafter called a "SUBSEQUENT REGISTRATION STATEMENT") under the Act (otherwise than pursuant to Subsection 5(a) hereof, or other than a registration statement on Form S-4 or Form S-8 or other form which does not include substantially the same information as would be required in a form for the general registration of securities) in connection with the proposed offer of any of its securities by it or any of its stockholders, the Company will (i) promptly notify the Holder and each of the Holders, if any, of other Warrants and/or Warrant Shares not previously sold pursuant to this Section 5 that such Subsequent Registration Statement will be filed and that the Warrant Shares which are then held, and/or which may be acquired upon the exercise of the Warrants, by the Holder and such Holders, will, at the Holder's and such Holders' request, be included in such Subsequent Registration Statement, (ii) upon the written request of a Holder made within 15 days after the giving of such notice by the Company, -6- include in the securities covered by such Subsequent Registration Statement all Warrant Shares which it has been so requested to include, and (iii) take all other action necessary under any Federal or state law or regulation of any governmental authority to permit all Warrant Shares which it has been so requested to include in such Subsequent Registration Statement to be sold or otherwise disposed of, and will maintain such compliance with each such Federal and state law and regulation of any governmental authority for the period necessary for the Holder and such Holders to effect the proposed sale or other disposition. Notwithstanding the foregoing, the Company shall be under no obligation to cause such Subsequent Registration Statement to become effective. (c) Whenever the Company is required pursuant to the provisions of this Section 5 to include Warrant Shares in a registration statement, the Company shall (i) furnish each Holder of any such Warrant Shares and each underwriter of such Warrant Shares with such copies of the prospectus, including the preliminary prospectus, conforming to the Act (and such other documents as each such Holder or each such underwriter may reasonably request) in order to facilitate the sale or distribution of the Warrant Shares, (ii) use its best efforts to register or qualify such Warrant Shares under the blue sky laws (to the extent applicable) of such jurisdiction or laws (to the extent applicable) of such jurisdiction or jurisdictions as the Holders of any such Warrant Shares and each underwriter of Warrant Shares being sold by such Holders shall reasonably request and (iii) take such other actions as may be reasonably necessary or advisable to enable such Holders and such underwriters to consummate the sale or distribution in such jurisdiction or jurisdictions in which such Holders shall have reasonably requested that the Warrant Shares be sold. (d) The Company shall pay all expenses incurred in connection with any registration statement or other action pursuant to the provisions of this Section 5, other than underwriting discounts, applicable transfer taxes relating to the Warrant Shares and the fees and expenses of counsel for the Holders of the Warrant Shares. (e) In connection with any public offering by the Company involving an underwriting of its securities effected pursuant to Section 5(b) hereof, the Company shall not be required to include in such registration any Warrant Shares held by the Holder unless the Holder agrees to the terms of the underwriting agreement between the Company and the managing underwriter of such offering, which agreement may require that the Warrant Shares be withheld from the market by the Holders for a certain period after the effective date of the registration statement by which such public offering is being effected. Furthermore, the Company shall be obligated to include in such registration only the quantity of Warrant Shares, if any, as will not, in the opinion of the managing underwriter, jeopardize the success of the offering by the Company. If the managing underwriter for the offering advises the Company in writing that the total amount of securities sought to be registered by the Holders and other shareholders or warrantholders of the Company having similar registration rights (collectively, the -7- "Kellstrom Shareholders") exceeds the amount of securities that can be offered without adversely affecting the offering by the Company or the Company's stockholders which had initially been included in such Subsequent Registration Statement, then the Company may reduce the number of shares to be registered by the Company for the Kellstrom Shareholders, including Warrant Shares, to a number satisfactory to such managing underwriter. Any such reduction shall be pro rata, based upon the total number of shares held by each Kellstrom Shareholder. (f) The Company will indemnify and hold harmless the Holder and any person or entity engaged by the Holder to sell the Holder's Warrant Shares, and each person, if any, who controls such persons or entities within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act") (collectively, a "Holder Indemnitee"), against any losses, claims, damages, liabilities or expenses (or actions, proceedings, or settlements in respect thereof) (joint or several) to which a Holder Indemnitee may become subject under the Act, the 1934 Act, or other federal or state law, insofar as such losses, claims, damages, liabilities or expenses (or actions, proceedings or settlements in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the 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 (iii) the employment by the Company of any device, scheme or artifice to defraud or the engagement by the Company in any act, practice or course of business which operates or would operate as a fraud or deceit upon the purchasers of its securities pursuant to such registration statement. The Company will also reimburse each Holder Indemnitee in connection with investigating, defending, and settling any such loss, claim, damage, liability, or action. The indemnity agreement contained in this Subsection 5(f) shall not apply to amounts paid in settlement of any loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, delayed or conditioned, nor shall the Company be liable to any Holder Indemnitee for any loss, claim, damage, liability or action (i) to the extent that it arises solely out of or is based solely upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of the Holder or any agent of the Holder, which consent shall not be unreasonably withheld, or controlling person of either; or (ii) in the case of a sale directly by the Holder (including a sale of such Warrant Shares through any underwriter retained by such Holder to engage in a distribution solely on behalf of such Holder), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, -8- and the Holder failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Warrant Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Act. (g) The Holder will indemnify and hold harmless the Company, each of its employees, officers, directors or persons who control the Company within the meaning of the Act or the 1934 Act, and each agent or underwriter for the Company or any other person or entity engaged by the Company to sell the Company's securities offered in the registration statement, or any of their respective directors, officers, partners, agents, employees or control persons (collectively, a "Company Indemnitee") against any losses, claims, damages, liabilities or expenses (joint or several) to which the Company or any such Company Indemnitee may become subject under the Act, the 1934 Act, or other federal or state law, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereto) arise solely out of or are based solely up;on any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of the Holder expressly for use in connection with such registration; and each Holder will reimburse any legal or other expenses reasonably incurred by a Company Indemnitee in connection with investigating or defending any such loss, claim, damage, liability, or action. Notwithstanding the above, the amount of any losses, claims, damages, liabilities,legal fees and expenses to be paid by any Holder shall not exceed the amount of the proceeds received by the Holder from the sale of its Warrant Shares. The indemnity agreement contained in this Subsection 5(g) shall not apply to amounts paid in settlement of any loss, claim damage, liability, or action if such settlement is effected without the consent of the indemnifying Holder, which consent shall not be unreasonably withheld, delayed or conditioned nor, in the case of a sale directly by the Company of its securities (including a sale of such securities through any underwriter retained by the Company to engage in a distribution solely on behalf of the Company), shall the Holder be liable to the Company in any case in which such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and the Company failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the securities to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Act. (h) (i) Promptly after receipt by an indemnified party under Subsections 5(f) and (g) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume and control the defense thereof with counsel mutually -9- satisfactory to the indemnified and indemnifying parties, provided that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests (as reasonably determined by either party) between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if actually prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under Subsection 5(f) or (g), respectively, to the extent of such actual prejudice, but the failure to so deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under Subsection 5(f) or (g), respectively. (ii) The obligations of the Company and the Holders under Subsections 5(f) and (g), respectively, shall survive the completion of any offering of Warrant Shares made pursuant to a registration under this Agreement. (iii) The amount paid or payable by a party as a result of the losses, claims, damages, or liabilities (or actions or proceedings in respect thereof) referred to in Subsections 5(f) and (g) shall include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. (i) If the indemnification provided for in the preceding subsections 5(f) or (g) is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall be entitled to contribution, except to the extent that contribution is not permitted under Section 11(f) of the Act. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission, and any other equitable considerations appropriate under the circumstances. Notwithstanding the provisions of this paragraph, the Holder shall not be required to contribute any amount in excess of the net proceeds received by the Holder from the sale of Warrant Shares. 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. (j) The Holder, in addition to being entitled to exercise all rights provided in this Section 5, including recovery of damages, will be entitled to specific performance of its rights hereunder. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the -10- provisions of this Section 5 and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (k) The Company shall not be obligated to register any Warrant Shares pursuant to this Section 5 at any time when the resale provisions of Rule 144 promulgated under the Act are available to the Holder with respect to the Warrant Shares without limitation as to volume; provided, however, that the Company shall file all reports required to be filed under the Act and the 1934 Act as set forth in paragraph (c) of Rule 144. 6. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act, and is so transferable only upon the books of the Company which it shall cause to be maintained for the purpose; provided, that the Company will cooperate with the Holder in the event that the Holder desires to effect a private placement of the Warrant. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All Warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the Holder thereof shall be identical to those of the Holder. 7. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 8. WARRANT HOLDER NOT SHAREHOLDER. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 9. INFORMATION TO HOLDER. The Company agrees that it shall from time to time deliver to the Holder promptly after their becoming available copies of all financial statements, reports and proxy statements which the Company shall have sent to its stockholders generally. 10. NOTICES. All notices and other communications required or permitted to be given under this Warrant shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission, or sent by recognized overnight courier or by certified mail, return receipt requested, postage paid, to the parties hereto as -11- follows: (a) if to the Company at 14000 NW 4th Street, Sunrise, Florida 33325, Attn.: Chief Executive Officer, facsimile no. 954-845-0428, or such other address as the Company has designated in writing to the Holder, or (b) if to the Holder at 98 Battery Street, Suite 600, San Francisco, California 94111 Attn.: Yoav Stern, or such other address or facsimile number as the Holder has designated in writing to the Company. 11. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 12. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the law of the State of Delaware without giving effect to the principles of conflicts of law thereof. -12- IN WITNESS WHEREOF, Kellstrom Industries, Inc. has caused this Warrant to be signed by its President and its corporate seal to be hereunto affixed and attested by its Secretary as of the 10th day of September, 1997. KELLSTROM INDUSTRIES, INC. By: -------------------------------- ASSIGNMENT FOR VALUE RECEIVED ________________________ hereby sells, assigns and transfers unto ___________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint ________________, attorney, to transfer said Warrant on the books of Kellstrom Industries, Inc. Dated: Signature: ----------------------------- - ----------------------------------- Address: - ----------------------------------- PARTIAL ASSIGNMENT FOR VALUE RECEIVED ________________________ hereby assigns and transfers unto ___________________________ the right to purchase ________ shares of the Common Stock of _____________________ covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint __________________, attorney, to transfer that part of said Warrant on the books of Kellstrom Industries, Inc. Dated: Signature: ----------------------------- - ----------------------------------- Address: - ----------------------------------- -14- SUBSCRIPTION FORM (To be executed upon exercise of Warrant pursuant to Section 1(a)(i)) The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant for, and to purchase thereunder, _________ shares of Common Stock, as provided for in Section 1(a)(i), and tenders herewith payment of the purchase price in full in the form of cash or a certified or official bank check in the amount of $_________________. Please issue a certificate or certificates for such Common Stock in the name of, and pay any cash for any fractional share to: Name -------------------------------------- (Please Print Name, Address and Social Security No.) Address ----------------------------------- ----------------------------------- ----------------------------------- Social Security Number Signature ----------------------------------- NOTE: The above signature should correspond exactly with the name on the first page of this Warrant or with the name of the assignee appearing in the assignment form previously delivered to the Company. Date ---------------------------------------- And if said number of shares shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder. -15- CASHLESS EXERCISE FORM (To be executed upon exercise of Warrant pursuant to Section 1(a)(ii)) The undersigned hereby irrevocably elects to surrender _______ shares purchasable under this Warrant for such shares of Common Stock issuable in exchange therefor pursuant to the Cashless Exercise provisions of the within Warrant, as provided for in Section 1(a)(ii) of such Warrant. Please issue a certificate or certificates for such Common Stock in the name of, and pay cash for fractional shares to: Name -------------------------------------- (Please Print Name, Address and Social Security No.) Address ----------------------------------- ----------------------------------- ----------------------------------- Social Security Number Signature ----------------------------------- NOTE: The above signature should correspond exactly with the name on the first page of this Warrant or with the name of the assignee appearing in the assignment form previously delivered to the Company. Date ---------------------------------------- And if said number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder. -16- EX-21 9 EXHIBIT 21 Exhibit 21 Kellstrom Industries, Inc. and subsidiaries Subsidiaries of the Registrant The following list sets forth the subsidiaries of the Company: Kellstrom Industries, Inc. Aero Support Holdings, Inc. EX-23 10 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Kellstrom Industries, Inc.: We consent to incorporation by reference in the registration statements (No. 333-20727 and No. 333-41159) on Form S-8 and in the registration statements (No. 333-10313 and 333-44019) on Form S-3 of Kellstrom Industries, Inc. and subsidiaries of our report dated February 27, 1998, relating to the consolidated balance sheets of Kellstrom Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Kellstrom Industries, Inc. KPMG Peat Marwick LLP Ft. Lauderdale, Florida March 20, 1998 EX-27 11 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 DEC-31-1997 JAN-01-1997 DEC-31-1997 12-MOS 463 426 13,000 336 35,965 53,333 5,027 0 134,361 19,096 0 8 0 0 49,904 134,361 79,439 79,439 42,206 61,828 0 0 3,991 13,620 5,077 8,543 0 0 0 8,543 1.18 .95
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