-----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, Dgg3Uj+1xJvf7oCsINfRvn3sMNwS+2Vdfnsovo2S0rsrDBYq5+WowdV6FQgHSQRy byOP2H0Y3Hw/rbafaxVOtQ== 0000950144-99-003798.txt : 19990402 0000950144-99-003798.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003798 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99582851 BUSINESS ADDRESS: STREET 1: 1100 INTERNATIONAL PARKWAY CITY: SUNRISE STATE: FL ZIP: 33325 BUSINESS PHONE: 9548450427 MAIL ADDRESS: STREET 1: 1100 INTERNATIONAL PARKWAY CITY: SUNRISE STATE: FL ZIP: 33325 FORMER COMPANY: FORMER CONFORMED NAME: ISRAEL TECH ACQUISITION CORP DATE OF NAME CHANGE: 19940301 10-K 1 KELLSTROM INDUSTRIES FORM 10-K 12/31/98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-23764 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.) 1100 INTERNATIONAL PARKWAY SUNRISE, FLORIDA 33323 - ---------------------------- ----- (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 26, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $182,729,907 based on the closing price on that date of $16 3/16 per share. As of that date, there were 11,784,515 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 1999 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. 2 Kellstrom Industries, Inc. Annual Report on Form 10-K Index
PAGE NUMBER ----------- PART I Item 1. Business............................................................................ 4 Item 2. Properties.......................................................................... 20 Item 3. Legal Proceedings................................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders................................. 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................................................. 22 Item 6. Selected Financial Data............................................................. 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 33 Item 8. Financial Statements and Supplementary Data......................................... 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................ 33 PART III Item 10. Directors and Executive Officers of the Registrant.................................. 34 Item 11. Executive Compensation.............................................................. 34 Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 34 Item 13. Certain Relationships and Related Transactions...................................... 34 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K..................... 34
2 3 PART I This report contains or incorporates by reference forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include information concerning the financial condition, results of operations, plans, objectives, future performance and business of Kellstrom Industries, Inc. (the "Company"). The Company includes forward-looking statements in descriptions of future earnings and cash flows, anticipated capital expenditures and management's strategies, plans and objectives. Statements preceded by, followed by or that include the words "believes," "expects," "anticipates" or similar expressions are generally considered to be forward-looking statements. Forward-looking statements involve both known and unknown risks and uncertainties and actual results or performance may therefore differ materially from the expected results or performance expressed or implied by the forward-looking statements. The following important factors, in addition to factors the Company discusses elsewhere in this report and in the documents that are incorporated into this report by reference, could affect the Company's actual results or performance: o 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; o the Company's continuing ability to acquire adequate inventory and to obtain favorable pricing for such inventory; o the Company's ability to arrange for the repair of aircraft engines and engine parts by third-party contractors prior to resale or lease; o the Company's ability to control costs; o competitive pricing for the Company's products; o customer concentration; o fluctuations in demand for the Company's products which are dependent upon the condition of the airline industry and the Company's ability to collect receivables; o changes in government regulation; o the availability to the Company of acquisition and expansion opportunities on attractive terms; o the Company's ability to develop and implement systems to manage rapidly growing operations; o the availability of capital to fund growth and acquisition opportunities; o the effect and costs of Year 2000 issues; and o adverse conditions in the capital markets or in the general economy. In light of these risks and uncertainties the forward-looking events discussed in this report might not occur. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 3 4 ITEM 1. BUSINESS. GENERAL 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, overhauling (through subcontractors), reselling and leasing of aircraft, avionics and aircraft rotables, and engines and engine parts. The Company specializes in providing engines and after-market engine parts for large turbo-fan engines manufactured by CFM International, General Electric, Pratt & Whitney and Rolls Royce. The Company believes that the engine types which it sells and leases and for which it supplies parts comprise in excess of 85% of the total world jet engine supply. The Company is a supplier to a broad base of approximately 1,000 domestic and international customers representing nearly all segments of the worldwide aviation industry, including commercial airlines such as American, Delta, Lufthansa, Swiss Air and Singapore Airlines, and original equipment manufacturers ("OEMs") and engine overhaul facilities such as Daimler-Benz, GE Aircraft Engine Services and Pratt & Whitney. The Company enables customers to reduce their inventory, inventory carrying costs and airborne equipment maintenance costs by offering a broad inventory of engines and engine parts on a timely basis and at competitive prices. For the year ended December 31, 1998, the Company generated revenues of $180.0 million, earnings before interest, taxes, depreciation and amortization ("EBITDA") of $60.8 million and net earnings of $19.6 million (or $1.53 per diluted share). The Company's business strategy is focused on strong and controlled internal growth, supplemented by strategic inventory purchases and acquisitions of competing and complementary businesses meeting pre-defined criteria. In evaluating acquisition opportunities, the Company's management considers the following criteria in addition to customary business and operational due diligence: the effects on earnings per share, the expected stability and inherent strength of gross margins and a comparative analysis of returns on invested capital and assets. The Company pursues acquisitions to strengthen current product lines, increase access to customers in its existing markets and expand into new product lines and markets. The Company's operating approach enables it to pursue its growth plans while maintaining and improving operating efficiencies and results. As the Company's operations team strives to enhance internal procedures and controls, streamline distribution channels and maintain and expand customer relationships and account management, the Company's acquisition team works continuously with outside advisors to identify, structure and consummate acquisitions. This operating approach enables the Company to manage the internal growth of its business and to integrate acquired businesses while continuing to evaluate acquisition opportunities. The Company's principal executive office is located at Sawgrass International Corporate Park, 1100 International Parkway, Sunrise, Florida 33323. Its telephone number is (954) 845-0427. THE INDUSTRY The airline industry has experienced rapid growth in the level of air travel and the volume of air cargo in recent years and is expected by industry analysts to continue to experience such growth in the future. According to the Boeing 1998 Current Market Outlook (the "Boeing Report"), air travel is expected to rise over 1997 levels by over 60% by 2007 and by over 160% by 2017. While this growth to date has been accommodated largely by increasing load factors, airlines are responding by expanding fleet size. The Boeing Report projects that the worldwide fleet of commercial passenger aircraft is expected to more than double from approximately 10,845 at the end of 1997 to over 23,000 by 2017, and the worldwide fleet of cargo jet aircraft is expected to increase from approximately 1,430 in 1997 to approximately 2,700 by 2017. This increase in worldwide air travel has resulted in a corresponding increase in demand for aircraft, avionics and aircraft rotables, and engines and engine parts. In light of the requirements of the Federal Aviation Administration (the "FAA") that aircraft engines and engine parts be serviced at scheduled intervals of flying hours, the increase in worldwide air travel has resulted in the need for more frequent servicing cycles and a corresponding increase in demand for engines and engine parts. The Company believes that, due to cost constraints, many airlines and repair and maintenance facilities that historically purchased parts from new parts manufacturers are increasingly utilizing after-market parts sold by resellers such as the Company. At the same time that demand for aircraft, avionics and aircraft rotables, and aircraft engines and engine parts has been increasing, the competitive environment of the commercial airline industry has led many airlines to "outsource" a larger percentage of non-core functions, including ownership of such inventory, in order to focus resources on improving passenger and freight services. As a result, airlines are increasingly turning to operating leases and inventory management providers to maximize operational and financial flexibility while minimizing upfront capital requirements. The aircraft engine and engine parts market is estimated by the United States Department of Commerce to exceed $18 billion annually. The resale segment of this market is highly fragmented, characterized by a limited number of large suppliers with broad product offerings and numerous smaller competitors serving niche markets. Several notable trends in the industry have recently emerged to improve safety, reduce costs and increase efficiency, including increasing emphasis on documentation and traceability of parts, outsourcing of inventory management functions, implementing "just-in-time" inventory management systems and reducing the number of approved suppliers. The Company believes that only those companies with superior quality assurance programs, sophisticated information systems and adequate capital will succeed in this changing environment. The Company is an active participant in the consolidation of the industry, having completed five acquisitions with combined annual revenues in the years preceding the respective acquisitions of approximately $187 million. The airborne equipment segment of the worldwide aviation services 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 the independent dealers from which they purchase after-market parts. 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 engine parts after-market. In addition to the barriers created by documentation requirements, management believes that the potential adoption of tighter regulations by government and industry regulators regarding the operating procedures of resellers may eliminate smaller participants and create additional barriers to entry. OUTSOURCING OF INVENTORY MANAGEMENT FUNCTION. Some airlines have streamlined 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 inventory from the balance sheet. Outsourcing allows airlines to secure parts on an "as-needed" basis without incurring the costs associated with carrying their own expensive inventory. This enables a company such as the Company to acquire directly or through consignment arrangements a large inventory and to make such inventory attractive to a broad customer base. 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 engines or engine parts enables airlines to meet short-term operating needs while lowering 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 or engine parts. Intermediate and long-term leases (up to 10 years) are used by many larger carriers as they upgrade their fleets. A significant portion of the new aircraft flown by the major carriers are leased and such carriers typically 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 aircraft and engines in order to minimize upfront capital outlays. REDUCTION IN NUMBER OF SUPPLIERS AND CONSOLIDATION OF THE ENGINE PARTS AFTER-MARKET. In order to ensure better control of their safety standards and reduce their administrative costs, airlines are limiting the number of suppliers with which they do business. To remain a 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 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. The Company believes that 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 purchasing large portfolios of assets to be made available for outsourcing and leasing. Larger inventories, sophisticated information technology systems and more expensive jet engines require increased access to capital. BUSINESS STRATEGY The Company has experienced significant growth over the past few years. The Company believes that the following strategies should provide opportunities for continued growth: STRONG AND CONTROLLED INTERNAL GROWTH. The Company has achieved strong and controlled internal growth by increasing business with its existing customers, expanding its customer base and constantly improving the efficiency of its operations. On a pro forma basis (assuming the acquisitions of Aero Support USA, Inc. ("Aero Support"), Integrated Technology Corporation ("ITC") and Aerocar Aviation Corp. ("Aerocar Aviation") and Aerocar Parts, Inc. ("Aerocar Parts", and together with Aerocar Aviation, "Aerocar") had been made on January 1, 1997) the total revenue of the Company increased by 36% from 1997 to 1998. During this time period, the Company has increased the size of its marketing department to support its customer base. The Company believes that the focus of its core business on purchasing, overhauling (through subcontractors), reselling and leasing of aircraft, avionics and aircraft rotables, and engines and engine parts results in cost-efficient operations which maximize its profit margins and minimize its dependence on expensive machinery, equipment and labor. The Company believes that its efficiency is exemplified by its decreased selling, general and administrative expenses as a percent of total revenues. From 1996 to 1998 this ratio has decreased from 14.0% in 1996 to 11.2% in 1997 and 10.6% in 1998. The Company intends to further improve efficiency by continuing to centralize its management and consolidate its operations. STRATEGIC INVENTORY PURCHASES. The Company believes that its potential to increase revenues from its existing business is largely dependent on its ability to deliver aircraft, avionics and aircraft rotables, and engines and engine parts on a "just-in-time" basis. The lead time between purchasing aircraft, avionics and aircraft rotables, and engines and engine parts and having a ready-for-sale product is generally 60 to 90 days. The Company focuses on developing new sources of supply, such as OEMs and overhaul facilities, as well as airlines which are replacing portions of their fleets or disposing of excess inventory. 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 and industry network to analyze both short and long-term trends in supply and demand in the aviation industry. AIRBORNE EQUIPMENT LEASING. In 1997, the Company established Kellstrom Commercial Aircraft, Inc. ("KELLCAD"), a wholly-owned subsidiary, which manages a portfolio of aircraft and aircraft engines that are available to the Company's customers on short to medium term (approximately 3 to 60 month) operating leases. KELLCAD supports and complements the Company's core after-market sales business by providing assured access to a future supply of aircraft, avionics and aircraft rotables, and aircraft engines and engine parts while providing the Company with an attractive current return on capital invested in such inventory. As the operating leases expire and the equipment is returned, the Company can re-lease, resell or disassemble the equipment depending upon then existing market supply and demand. As of December 31, 1998, the Company, leased 8 aircraft and 68 engines to third parties. ACQUISITIONS IN EXISTING COMMERCIAL AVIATION MARKETS. As a result of its concentration in certain niche markets, the Company's management develops in-depth knowledge of other resellers serving similar product lines that may be potential acquisition candidates. The acquisitions of ITC and Aerocar expanded the Company's customer base within its existing commercial aviation product lines, enhanced its product offering and strengthened its distribution network. ACQUISITIONS IN ADJACENT MARKETS. As a result of its position in the industry, the Company's management also becomes familiar with companies serving complementary markets that may be attractive acquisition candidates. The Company continually works with outside advisors to evaluate and pursue companies that will enable it to expand into product lines and markets in which the Company does not have a significant presence. As a result of the acquisition of Aero Support in September 1997, the Company is able to offer engines and engine parts to customers in the large cargo transport aircraft and commercial helicopter markets, which were not previously served by the Company. In addition, as a result of the acquisition of Solair, Inc. ("Solair") in December 1998, the Company is able to offer avionics equipment, a complimentary product line, which was not previously sold by the Company. The Company believes that the continued expansion may be achieved through the acquisition of companies offering different product lines than those of the Company. 4 5 PRODUCTS The Company's principal business is the purchasing, overhauling (through subcontractors) and reselling of airborne equipment, principally airframe components, engines and engine parts. The Company also maintains a portfolio of aircraft and engines that it leases to its customers on a short to medium term basis. This leasing activity complements the Company's core business by providing access to a predictable source of airframe components, engines and engine parts as lessees return the leased aircraft and engines to the Company at the end of the lease term. AFTER-MARKET SALES BUSINESS. Customers in both the commercial and military sectors purchase spare and replacement parts and other airborne equipment. The Company is active in both the commercial aircraft sector, which is divided into large jet transports, smaller commercial aircraft (known as general aviation aircraft) and helicopters, and the military sector. General aviation includes both jet and propeller-driven planes for business and personal use. The Company specializes in engine parts for the large jet segment of the commercial aircraft sector. Through its small engine and military group, the Company also services certain military customers for turbojet engines, and engine parts for large transport aircraft and commercial customers for helicopters. The Company does not participate in the turboprop market, which is typically low margin in terms of cost per unit. Boeing (which acquired McDonnell Douglas) and Airbus Industries dominate the market for the production of large commercial aircraft. A small number of suppliers provide the bulk of engines used to power these large commercial 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 models 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. Approximately 3,000 of these engines were built until production ceased in 1990; approximately 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 10-15 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 20 more years. 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 engine model the first in the series of such models, 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 25 more years. 5 6 THE PWA 4000 ENGINE. In 1982, Pratt & Whitney launched development of the PWA 4000 Series turbo fan - 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 25 more years. THE ROLLS ROYCE RB-211 ENGINE. The RB-211 was built by Rolls Royce beginning in 1970 for the Lockhead L-1011, the majority of which were purchased by Delta and Eastern. Approximately 230 aircraft are still in use which use the RB-211. 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 25 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 approximately 16,000 engines currently in use by approximately 2,700 helicopter operators. AIRCRAFT ROTABLES AND EXPENDABLE COMPONENTS. Aircraft rotables are major aircraft components which are regularly removed, replaced and overhauled in the course of aircraft operation and maintenance. Aircraft rotables supplied by the Company include flight data recorders, electrical and mechanical equipment and radar and navigation systems. The Company stocks a wide variety of rotable and expendables for all commercial jet aircraft types manufactured by Boeing, McDonnell-Douglas, Airbus, British Aerospace and Fokker Aircraft. QUALITY CONTROL Airborne equipment is typically highly engineered as to dimension, composition and performance characteristics. In addition, 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 works closely with 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 its ability to continue to act as an approved supplier for the major airlines, OEMs and overhaul facilities 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 reseller under the provisions of FAA AC 00-56, and (iii) listed in the European Aerospace Suppliers Register. In addition, in August 1998, the Company received its recertification under ISO 9002 which was originally received in 1996. 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. 6 7 CUSTOMERS The Company's customers include airlines, OEMs, lessors, operators of overhaul facilities and other independent dealers. These customers include American, Daimler-Benz, Delta, Lufthansa, GE Aircraft Engine Services, Pratt & Whitney, SwissAir and Singapore Airlines. For the years ended December 31, 1998, 1997 and 1996, the five largest customers collectively accounted for approximately 42%, 38% and 55% 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. 7 8 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 CASE, a self-governing organization formed by the airlines that evaluates and audits parts suppliers and repair stations. The Company believes it is one of the few resellers of commercial jet engines and engine parts in the world to receive ISO 9002 certification which the Company believes provides it with a distinctive competitive advantage. 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. 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. 8 9 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 the Company. The FAA and customers accept this form of electronic documentation as the equivalent of original documents. In addition, the Company is working to make such documentation available online to customers worldwide. 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 both internally and through the acquisition of competing and complementary businesses. 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, and closely monitoring the overhauling of selected parts by high quality subcontractors, while maintaining a high level of documentation at all stages of the process and storing the engine parts in a carefully controlled environment. In addition to management's expertise of market forces and conditions, the Company has developed a series of management procedures to assess demand for engines and engine parts. In such assessments, the Company compiles a periodic analysis of the industry's supply and demand on a product-by-product basis, reevaluates its available supply of inventory and interfaces with customers and suppliers to forecast supply and demand. The Company believes that its ability to structure and finance inventory purchase transactions is critical to success. EXPAND MARKETING RELATIONSHIPS. The Company maintains and strives to expand its close relationships with a variety of key customers, including OEMs, repair facilities, domestic and international airlines and other distributors. The Company continually seeks to expand its customer base, by among other things, regularly attending industry trade conferences. 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. 9 10 COMPETITION The aviation after-market is highly competitive. Competition is based on product quality, price, and the ability to provide needed parts quickly. 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 overhauled parts to other suppliers. OEM-manufactured new parts generally do not compete with overhauled parts. The largest resellers include companies such as AAR Corp. and The AGES Group. There are approximately 10 to 15 midsize competitors, including 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. 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, resellers, repair facilities and airlines. The listing includes the quantity of parts available, 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 by the FAA in the United States 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 supplied by after-market suppliers must be accompanied by documentation which enables 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. 10 11 STRATEGIC ACQUISITIONS KST ACQUISITION. The Company, formerly Israel Tech Acquisition Corp., was formed in December 1993 as a specified purpose acquisition company, 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 $11.3 million after expenses. 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. ("Rada"). 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 $25.1 million 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 was 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 was a lessor of jet engines and offered engine repair management programs through its technical services business. IASI's mix of business and its purchasing activities ultimately contributed to its position as a "market-maker" in redistributed engines and various engine parts. The IASI acquisition 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 as of the date of the IASI Acquisition constitute a majority of the world aircraft fleet. In addition, the IASI acquisition accelerated the Company's entry into the engine leasing business, an area in which IASI had been an active participant. The IASI acquisition also expanded and diversified the Company's customer base, particularly in European markets. IASI's customers included 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 for approximately $2.7 million in cash, three promissory notes in the aggregate principal amount of $11.7 million, 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 $5.0 million cash consideration may be paid by the Company in the form of an earn-out payable over three years based upon certain specified criteria of which $1.6 million was earned during 1998. Aero Support was an international after-market reseller of turbojet engines and engine parts for helicopters and large transport aircraft. Aero Support had a customer base that included domestic and foreign operators, commercial and industrial enterprises and engine overhaul facilities. Aero Support's primary focus was 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. Prior to its acquisition, Aero Support served 495 customers worldwide from its headquarters in New York and its additional facility in Louisiana. With the addition of Aero Support's business, the Company entered the large transport aircraft and commercial helicopter engine and engine parts market. ITC ACQUISITION. On April 1, 1998, the Company completed the acquisition of substantially all of the assets and liabilities of ITC for $20.5 million in cash plus up to $10.0 million cash consideration which may be paid in the form of an earn-out payable over three years based on certain specified criteria, of which $3.3 million was earned during 1998. In addition, the Company received a three-year option to purchase a 49% interest in a related FAA-approved overhaul facility. ITC was an after-market supplier of jet engines and jet engine parts for the airline industry. It also provided related services such as engine leasing. ITC's principal product line featured the Rolls Royce RB-211, Pratt & Whitney JT8D and Rolls Royce Allison models, and, to a lesser extent, it supplied Pratt & Whitney JT9D engines and engine parts. ITC had some 75 customers worldwide, including major commercial airlines and jet engine repair facilities. 11 12 AEROCAR ACQUISITION. On June 17, 1998, the Company acquired all of the outstanding capital stock of Aerocar for $42.3 million in cash, warrants to purchase an aggregate of 250,000 shares of the Company's Common Stock at an exercise price of $26.00 per share, expiring on June 17, 2001, plus an additional $5.0 million payable within a two-year period after closing, either in cash, or at the option of the Company, in shares of Common Stock having an equivalent value as of the date of the acquisition. Aerocar was engaged in the sale and leasing of aircraft engines and aircraft engine parts to major airlines and regional carriers. Aerocar's primary focus was on the Pratt & Whitney JT8D engine. SOLAIR ACQUISITION. On December 31, 1998, the Company acquired all of the outstanding capital stock of Solair, a wholly-owned subsidiary of Banner Aerospace, Inc., for approximately $57.4 million in cash and a warrant to purchase 300,000 shares of Common Stock at an exercise price of $27.50 per share, expiring on December 31, 2002. Solair is engaged in the sale of a wide variety of aircraft rotables and expendable components including flight data recorders, electrical and mechanical equipment and radar and navigation systems. Through the acquisition of Solair, the Company expanded into the adjacent avinonics and aircraft rotables business. 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 believes that its tradename and trademarks are not critical to its continued business success and that the loss of any trade name and/or trademark would not have a material adverse effect on its business operations. 12 13 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. 13 14 PRODUCT LIABILITY The Company's business exposes it to possible claims for personal injury or death that may result from the failure of an aircraft or engine owned and leased by it or an engine part sold by it. The Company currently maintains product liability insurance coverage in the amount of $750 million on an aggregate and per claim basis. CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS The Company does not provide financial performance forecasts. The Company's operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risks and uncertainties. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors, among others, may have a material adverse effect upon the Company's business, results of operation and financial condition. LIMITED OPERATING HISTORY; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. 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 revenues, the Company may experience significant fluctuations in its net revenues, 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 aviation industry, the availability and price of surplus aviation equipment, the size and timing of customer orders 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 revenues and net income from quarter to quarter. A large portion of the Company's operating expenses is relatively fixed. Since the Company typically does not obtain long-term purchase orders or commitments from its customers with respect to the sale of aircraft, avionics and aircraft rotables, and engines and 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, financial condition and results of operations. Therefore, recent net revenues 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 revenues 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. MANAGEMENT OF GROWTH. The Company has recently experienced significant expansion that has placed substantial demands upon its management, systems and resources. The Company's ability to manage its future growth, if any, will require the Company continually to improve its financial controls, management controls, reporting systems and procedures on a timely basis, implement new systems as necessary and expand, train and manage its workforce. There can be no assurance that the Company's controls, systems or procedures will continue to be adequate to support the Company's operations. The failure of the Company's management to respond effectively to changing business conditions would have a material adverse effect upon the Company's business, financial condition and results of operations. GROWTH STRATEGY AND RISKS RELATING TO ACQUISITIONS. A key element of the Company's strategy involves growth through the acquisition of additional inventories of aircraft, avionics and aircraft rotables, and engines and engine parts and the acquisition of other companies, assets or product lines that would complement or expand the Company's existing business. The Company's ability to grow by acquisition is dependent upon, and may be limited by, the availability of suitable aircraft, avionics and aircraft rotables, and engines and engine parts inventories, acquisition candidates and capital, and by restrictions contained in the Company's credit agreements. The company completed the IASI acquisition in January 1997, the Aero Support acquisition in September 1997, the ITC acquisition in April 1998, the Aerocar acquisition in June 1998 and the Solair acquisition in December 1998. The process of seeking to integrate an acquired company's business into the Company's operations may result in ongoing and extraordinary operating difficulties and expenditures, may absorb significant management attention that would otherwise be available for the ongoing 14 15 development of the Company's business and may result in charges against income. In addition, future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could materially adversely affect the Company's operating results and financial condition. There can be no assurance that the Company will be able to consummate any future acquisitions on satisfactory terms or that it will be able to successfully integrate newly acquired businesses into its existing operations. UNCERTAIN SUPPLY OF INVENTORY. The Company obtains its inventories of aircraft, avionics and aircraft rotables, and engines and engine parts by purchasing surplus inventory from airlines, overhaul facilities and other suppliers. There is not an organized market for surplus aircraft, avionics and aircraft rotables, and engines and engine parts, and the Company must rely on field representatives and personnel, advertisements and its reputation as a buyer of surplus inventory in order to generate opportunities to purchase such equipment. The market for bulk sales of surplus aircraft, avionics and aircraft rotables, and engines and engine parts is highly competitive, in some instances involving a bidding process. While the Company has been able to purchase surplus inventory in this manner successfully in the past, there can be no assurance that surplus aircraft, avionics and aircraft rotables, and engines and engine parts of the type required by the Company's customers will be available on acceptable terms when needed in the future or that the Company will continue to compete effectively in the purchase of such surplus equipment. DEPENDENCE ON THIRD-PARTY AIRCRAFT ENGINE REPAIR FACILITIES. The Company is dependent on third-party FAA-approved repair facilities to perform repair services to bring surplus aircraft, avionics and aircraft rotables, and engines and engine parts into a condition of airworthiness so that the Company can then sell or lease such equipment to its customers. Third-party repair facilities may experience heavy workloads or may allocate their resources to customers with which they have entered into long-term, regularly scheduled aircraft engine and airframe maintenance agreements and thereby delay the services to be provided to the Company. The repair facilities utilized by the Company are responsible for inspecting and certifying engines and engine parts to be of serviceable quality. The Company does not have direct control over the quality of repairs performed by such repair facilities or the accuracy of the airworthiness condition designated by such facility. It is possible that engines and engine parts could pass inspection by the Company, be sold by the Company and be incorporated into an aircraft, and subsequently be determined to be unsafe or in need of further repair. In such event, the FAA has the authority to take actions which may include the grounding of an aircraft which contains such parts. Additionally, the customer who purchased such engines or engine parts could demand a replacement from the Company. While the Company has insurance coverage to cover related losses, the effect of such a development on passenger confidence and customer relations could have a material adverse effect upon the Company. CUSTOMER CONCENTRATION. The Company's five largest customers accounted for approximately 42% of total revenue for the year ended December 31, 1998. While the relative significance of customers varies 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, one or more of the Company's significant customers at any time could have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMER CREDIT RISKS. 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 Company policy is generally to sell whole engines for cash at closing. The Company's bad debt expense was less than 0.5% of revenues for the years ended December 31, 1996, 1997 and 1998. 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 a program for the leasing of aircraft engines and airframes. There can be no assurance that the Company will not incur significant bad debt losses in the future which individually, or in the aggregate, could have a material adverse effect on the Company's business, financial condition and results of operations. ADVERSE CONSEQUENCES OF DEBT AND LEVERAGE. As a result of incurring debt, the Company is subject to the risks normally associated with debt financing, including, without limitation, the following: (i) a substantial portion of the Company's net cash provided by operations may be committed to the payment of the Company's interest expense and principal repayment obligations and will not be available to the Company for other purposes; (ii) the Company's ability to 15 16 obtain additional financing in the future for working capital, capital expenditures or acquisitions may be limited; and (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in its industry and general economic conditions. The Company's ability to pay interest on its debt and to satisfy its other debt obligations will depend upon its future operating performance, including its ability to implement its business strategy, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond the Company's control. If the Company is unable to service its indebtedness, it will be forced to adopt an alternative strategy that may include actions such as reducing or delaying planned acquisition activity, selling assets, restructuring or refinancing its indebtedness or seeking additional capital. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all, or that the Company's failure to service any of its indebtedness will not have a material adverse effect on the Company's business, financial condition and results of operations. RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS. The Company has debt obligations which restrict, among other things, the ability of the Company and/or its subsidiaries to: (i) incur additional indebtedness; (ii) incur liens; (iii) pay dividends or make certain other restricted payments; (iv) consummate certain asset sales; (v) enter into certain transactions with affiliates; (vi) merge or consolidate with any other person; or (vii) sell, assign, transfer, lease, convey or otherwise dispose of its assets. In addition, the Company's senior credit facility requires the Company to maintain specified financial ratios and satisfy certain financial tests. The Company's ability to maintain those financial ratios and to satisfy those tests will be affected by events beyond its control, and there can be no assurance that the Company will be able to do so. A breach of any of the financial covenants in the senior credit facility, or certain other debt obligations could result in a default under each of the governing agreements. Upon the occurrence of an event of default under the senior credit facility, the respective lenders could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. Substantially all of the assets of the Company and each of its U.S. subsidiaries are pledged as collateral security for the senior credit facility. If the Company were unable to repay all such outstanding amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness, and any proceeds realized upon the sale of such collateral would be used first to satisfy all amounts outstanding under the senior credit facility, and thereafter, any other liabilities of the Company. If the indebtedness under the senior credit facility were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full that indebtedness and any other indebtedness of the Company, which could have a material adverse effect upon the Company's business, financial condition and results of operations. DEPENDENCE UPON KEY PERSONNEL. The Company depends upon the efforts of its officers and directors. The loss of the services of such key personnel could have a material adverse effect on the Company's ability to successfully achieve its business objectives. Although each of the key employees has executed an employment agreement that prohibits the employee from competing against the Company for a specified period of time, there can be no assurance that such remedy will be available to the Company or that such protection will mitigate any losses incurred as a result of termination of employment. PRODUCT LIABILITY. The Company's business exposes it to possible claims for personal injury or death that may result from the failure of an aircraft or engine owned and leased by it or an engine part sold by it. The Company currently maintains product liability insurance coverage in the amount of $750 million on an aggregate and per claim basis. There can be no assurance that claims will not arise in the future, that such insurance coverage can be maintained in the future at an acceptable cost or that such coverage will be adequate to cover any future liability of the Company. Any such liability not covered by insurance could have a material adverse effect on the financial condition of the Company. YEAR 2000. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Company has engaged a software consulting firm to replace its accounting and inventory management software programs with programs that are Year 2000 compliant. There can be no assurance, however, that replacing such software programs will result in Year 2000 compliant software systems. The Company expects the conversion efforts to be completed by the end of 1999. 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. Even if the Company becomes Year 2000 compliant, there can be no assurance that all of the Company's customers and suppliers will be Year 2000 compliant by the end of 1999. The failure of the Company or any of its customers or suppliers to become Year 2000 compliant by the end of 1999 could have a material adverse effect on the Company's business, financial condition and results of operations. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Issue. 16 17 DEPENDENCE ON THE CONDITION OF THE AIRLINE INDUSTRY. Aircraft engine and engine parts pricing is affected to a degree by the overall economic condition of the airline industry, which has historically been volatile. The demand for after-market engines and engine parts is driven primarily by flying hours or cycles. Regardless of the profitability of the airline industry, parts must be serviced or replaced at scheduled intervals. As such, the demand for after-market parts is a function of the level of worldwide air traffic. Additionally, factors such as the price of fuel affect the aircraft parts market, since older aircraft (into which aircraft parts are most often placed) become less economically viable as the price of fuel increases. During a downturn in the aviation industry, there may be reduced overall demand for aircraft, avionics and aircraft rotables, and engines and engine parts, lower selling prices for the Company's products and increased credit risk associated with doing business with industry participants. There can be no assurance that economic and other factors that might affect the airline industry will not have an adverse impact on the Company's business, financial condition and results of operations. COMPETITION. The aviation parts after-market is highly competitive. Competition is based on product quality, price and the ability to provide needed parts quickly. The largest segment of the after-market is served by OEMs. However, the relatively high overhead and slow response times often associated with such 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 overhauled parts to other suppliers. OEM-manufactured new parts generally do not compete with overhauled parts. The largest resellers include companies such as AAR Corp. and The AGES Group. There are approximately 10 to 15 midsize resellers, including the Company. A large portion of the market revenue is generated by over 50 small after-market suppliers and brokers. 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. 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 parts from brokers, distributors, repair facilities and airlines. The listing includes the quantity of parts available, 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. There can be no assurance that the Company will continue to compete effectively against present and future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION. The aviation industry is highly regulated by the FAA in the United States and the equivalent regulatory agencies in other countries. While the Company's reselling business is not regulated, the aircraft, avionics and aircraft rotables, and engines and engine parts that the Company sells to its customers must be accompanied by documentation that enables the customer to comply with applicable regulatory requirements. There can be no assurance that new and more stringent government regulations will not be adopted in the future or that any such new regulations, if enacted, would not have an adverse impact on the Company. Before engine parts 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 and the Company's business, financial condition and results of operations could be adversely affected. NO DIVIDENDS. The Company intends to retain all earnings for the foreseeable future for use in the operations and expansion of its business. Consequently, the Company does not anticipate paying any cash dividends on its Common Stock to its stockholders for the foreseeable future. In addition, the debt financing agreements to which the Company is a party contain restrictions on the Company's ability to declare dividends. 17 18 EMPLOYEES As of December 31, 1998, the Company had approximately 124 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. STOCK OPTION PLANS CORPORATE POLICY. The Company is operating in a unique environment where its relatively small number of employees (consisting of 17 executives and 107 employees) make the daily decisions that directly effect the Company's operational and financial results. The Company continually strives to build and maintain a team comprised of the best executives and employees in their field by offering the most attractive work environment and performance based compensation packages available. The Board believes that the Company's stock option plans are an essential component of the Company's compensation package which promote the interests of the Company and its stockholders by strengthening the Company's ability to attract, retain and incentivize competent employees and executives and making service on the Company's Board of Directors more attractive to present and prospective non-employee directors. Such stock option plans encourage stock ownership and proprietary interest in the Company by the individuals upon whose judgment, initiative and efforts the financial success and growth of the Company largely depend. STOCK OPTION REPRICING AND EXTENSION OF VESTING SCHEDULES. In early October 1998, the Company faced a significant decline in the market price of its Common Stock, while financial and operating performance remained strong. Thus, a significant portion of the stock options previously issued to employees and non-employee directors which were to vest that month, had exercise prices which exceeded the then-current market value of the underlying shares. In a special effort to fend off competitive pressures and reincentivize employees while securing their long-term commitment to the Company, the Board approved the extension of the vesting schedule and the repricing of certain previously granted options in lieu of granting additional options to existing executives and employees. The Company offered all employees and directors of the Company who held options which had been granted under the Company's stock option plans the opportunity to exchange outstanding options having an exercise price above $10.125, the closing price of a share of Common Stock on October 8, 1998, for a corresponding number of options having an exercise price of $10.125. The Company also offered this opportunity to certain individuals who held options granted outside of the plans. The Company secured the long term commitment of employees and executives electing to exchange such options by requiring that the vesting schedules on the unvested portions of the new options would be extended by, in general, 50%. As a result of this program, options to purchase approximately 1,170,998 shares, representing approximately 45% of the outstanding common stock options were exchanged and vesting schedules extended. In light of the repricing of stock options and extension of vesting schedules, the Company believes its existing officers and employees are properly incentivized with long term commitments to the Company. Therefore, it is the Company's intent not to grant options to its current officers or employees until at least 2000, and to thereby avoid any dilutive effect resulting from a full scale grant of options during 1999. STOCK OPTION PLAN FOR NEW EXECUTIVES AND EMPLOYEES AND OUTSIDE DIRECTORS. Consistent with the corporate policy placing importance on stock options as part of compensation packages, the Company intends to continue to use stock options as part of the performance based compensation packages used to attract and incentivize new executives and employees. The Company also intends to use stock options in lieu of cash compensation to continue to make service by present and prospective outside directors attractive. For these reasons, the Board adopted, subject to shareholder approval, a 1998 Stock Option Plan (the "Plan") effective as of November 15, 1998 and intends to only grant options under this Plan to newly hired executives and employees as an inducement to enter into employment arrangements with the Company, and to outside members of the Board, in lieu of cash compensation, as an incentive for their service on the Board. The Plan authorizes the issuance of stock options to purchase an aggregate of 250,000 shares of the Company's Common Stock and contains substantially the same terms as the Company's 1997 Stock Option Plan. The Company intends to seek shareholder approval of the Plan at the 1999 Annual Meeting of Shareholders. 18 19 FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC REVENUES Total revenues derived from domestic and international customers accounted for 67% and 33%, respectively, for the year ended December 31, 1998, 79% and 21%, respectively, for the year ended December 31, 1997, and 77% and 23%, respectively, for the year ended December 31, 1996. See Footnote 15 to the Consolidated Financial Statements. SUBSEQUENT EVENTS TERMINATION OF HELIX ENGAGEMENT AGREEMENT. On March 30, 1999, the Company entered into a Termination Agreement (the "Helix Termination Agreement") with Helix Management Company II, LLC. ("Helix"), a company owned by Yoav Stern, Chairman of Company's Board of Directors, and Zivi Nedivi, President, Chief Executive Officer and a Director of the Company, pursuant to which the Company agreed to terminate the Engagement Agreement dated as of March 28, 1997 between the Company and Helix (the "Helix Engagement Agreement"). Under the terms of the Helix Engagement Agreement, Helix has served as the Company's exclusive mergers and acquisitions and principal financial advisor and advised the Company in all of its significant acquisitions since March 1997. Under the terms of the Helix Termination Agreement, the Company will only be required to pay Helix success fees on those transactions procured by Helix which have either been consummated or signed prior to the date of termination. Helix has waived all other fees which it is entitled to under the terms of the Helix Engagement Agreement, including monthly retainer fees on account of the ninety day period following termination and success fees on account of transactions procured by Helix which are undertaken by the Company within one year of termination. Helix has also agreed that it will, for no additional consideration, provide the Company such assistance (including access to its members and employees and copies of its records and files) as is necessary to assure an orderly transition in the services provided by Helix. TERMINATION OF EAST SHORE MANAGEMENT AGREEMENT. On March 30, 1999, the Company entered into a Termination Agreement (the "East Shore Termination Agreement") with East Shore Ventures, Inc. ("East Shore"), a company owned by Mr. Nedivi, pursuant to which the Company agreed to terminate the Management Agreement dated of January 1, 1997 between the Company and East Shore (the "Management Agreement"). Under the terms of the Management Agreement, East Shore provided the Company through the services of Mr. Nedivi with the management services required of the chief executive officer responsible for the overall direction and administration of the business of the Company. The Company concluded that it is in its best interests to employ Mr. Nedivi directly to provide such services on substantially the same terms on which such services were provided to the Company under the Management Agreement. Under the terms of the East Shore Termination Agreement, East Shore will only be paid management fees and related benefits prorated through the date of termination. EMPLOYMENT AGREEMENTS. In connection with the execution of the East Shore Termination Agreement, the Company entered into an Employment Agreement with Mr. Nedivi (the "Nedivi Employment Agreement") with substantially the same terms as those included in the Management Agreement. Under the terms of the Nedivi Employment Agreement, Mr. Nedivi will be employed as President and Chief Executive Officer of the Company through December 31, 2004 and will be responsible for the overall direction of the operations and administration of the business of the Company. In connection with the execution of the Helix Termination Agreement, the Company entered into an Employment Agreement with Yoav Stern (the "Stern Employment Agreement") providing for substantially the same terms as those included in the Nedivi Employment Agreement. Under the terms of the Stern Employment Agreement, Mr. Stern is employed as Chairman of the Company through December 31, 2004 and will be responsible for the development and implementation of the strategic plans for the growth and development of the Company's business and operations, including overseeing all aspects of the Company's mergers and acquisitions activities (including, without limitation, analyzing, structuring, negotiating and effecting acquisitions and integrating newly acquired businesses with the business and operations of the Company). ACQUISITION OF CERTIFIED AIRCRAFT PARTS, INC. On March 27, 1999, the Company entered into a definitive agreement to acquire Certified Aircraft Parts, Inc. ("Certified") for approximately $16 million in cash. Certified is a leader in the parts, aftermarket support and logistics segment for Lockheed Martin C-130/L100 Hercules aircraft. The acquisition of Certified will significantly expand the Company's military transport business. The transaction is subject to customary closing conditions and is expected to close by the end of April 1999. 19 20 ITEM 2. DESCRIPTION OF PROPERTIES. The Company owns its newly built 193,000 square foot headquarters and warehouse facility located on 11.5 acres in the Sawgrass International Corporate Park, Sunrise, Florida which is near Ft. Lauderdale, Florida. The Company's address is 1100 International Parkway, Sunrise, Florida 33323. The Company is in the process of consolidating most of it geographically separate locations into its new headquarters. The property is subject to a mortgage held by Bank of America, N.A. to secure the Company's obligations under its bank credit facility. The Company owns its previous 45,000 square foot office and warehouse facility located on 2.5 acres in the Sawgrass International Corporate Park, Sunrise, Florida which is near Ft. Lauderdale, Florida at 14000 N.W. 4th Street, Sunrise, Florida 33325. The property is subject to a mortgage held by Bank of America, N.A. 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 rent of approximately $14,000 per year plus certain operating expenses. The Company leases a 9,360 square foot facility of office and warehouse space, assumed in connection with the acquisition of ITC, located at 776 Grand Avenue, Ridgefield, New Jersey 07657. The lease provides for a term ending March 31, 1999 at a base rent of approximately $5,000 per month. The Company leases a 7,000 square foot facility of office and warehouse space, assumed in connection with the acquisition of ITC, located at 500 Nordhoff Place, Englewood, New Jersey 07657. The lease provides for a term ending March 31, 1999 at a base rent of approximately $2,000 per month. The Company leases a 2,775 square foot facility of office and warehouse space, assumed in connection with the acquisition of ITC, located at 13818 and 13992 S.W. 139th Court, Miami, Florida 33186. The lease provides for a term ending October 31, 1999 at a base rent of approximately $1,300 per month. The Company leases a 20,000 square foot facility of office and warehouse space, assumed in connection with the acquisition of Aerocar, located at 1495 N. Park Drive, Weston, Florida 33326. The lease provides for a term ending December 31, 1999 at a base rent of approximately $21,000 per month. The Company leases a 44,000 square foot facility of office and warehouse space, assumed in connection with the acquisition of Solair, located at 3380 S.W. 11th Avenue, Ft. Lauderdale, Florida 33315. The lease provides for a term ending August 31, 2007 at a base rent of $20,000 per month through August 31, 2002 and $23,000 per month through August 31, 2007. The Company leases a 2,000 square foot facility of office and warehouse space, assumed in connection with the acquisition of Solair, located at 4694 Aviation Parkway, Suite K, Atlanta, Georgia 30349. The month to month lease provides for a base rent of approximately $1,300 per month. The Company leases a 70,000 square foot facility of office and warehouse space, assumed in connection with the acquisition of Solair, located at 4900 Lakeland Commerce Parkway, Lakeland, Florida 33805. The lease provides for a term ending June 30, 2002 at a base rent of $227,500 per year. The Company leases a 600 square foot facility of office space, assumed in connection with the acquisition of Solair, located at 121 Fairfield Way, Suite 305, Bloomingdale, Illinois 60108. The lease provides for a term ending March 1, 2000 at a base rent of $6,600 per year. 20 21 The Company leases a 2,000 square foot facility of office and warehouse space, assumed in connection with the acquisition of Solair, located at Unit 15 Farnborough Business Centre, Pelmoor Road, Farnborough England. The lease provides for a term ending April 7, 2003 at a base rent of approximately $19,000 plus value added taxes per year. The Company leases a 1,300 square foot facility for office space, assumed in connection with the acquisition of Solair, located at 360 Orchard Road, International Building, Singapore 238869. The lease provides for a term ending July 31, 1999 at a base rent of approximately $5,000 per month. The Company leases a 4,000 square foot facility for office space, assumed in connection with the acquisition of Solair, located at 47A Gentle Road, Singapore 309999. The lease provides for a term ending April 30, 2000 at a base rent of approximately $5,000 per month. ITEM 3. LEGAL PROCEEDINGS. The Company was named as a defendant in an action in the Supreme Court of the State of New York, County of New York, brought by an alleged beneficiary of the Estate of the late Mr. Joram Rosenfeld (a former Co-Chairman of the Company) and the Executor of the Estate of Mr. Rosenfeld. The Complaint alleged, INTER ALIA, that the Company breached a purported agreement to provide Rosenfeld with options to purchase 345,000 shares of the Company's common stock under the Company's 1996 Stock Option Plan, several months before his death. The Complaint further alleged that the Company aided and abetted and/or participated in breaches of fiduciary duty that Yoav Stern, the Company's Chairman of the Board, and Zivi Nedivi, the Company's President and Chief Executive Officer, owed to Rosenfeld as co-members of two private Delaware limited liability companies. The plantiffs are seeking compensatory and punitive damages. The Company believes that the claims asserted against it are totally without merit and has moved for summary judgement dismissing the claims against it on the grounds that the uncontradicted evidence shows that the claims have no basis. There are no other 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 or otherwise. The Company cannot determine whether such actions would have a material impact on the financial condition, results of operations or cash flows of the Company. 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, 1998. 21 22 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 1997 to December 1998, 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, 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 Year Ended December 31, 1998: First Quarter $27 3/4 $20 Second Quarter $29 3/8 $23 Third Quarter $27 1/8 $12 7/8 Fourth Quarter $28 3/4 $9 1/8 As of February 26, 1999, there were 11,784,515 shares of Common Stock outstanding, held by 62 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 26, 1999 was $16 3/16 per share. 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. The debt financing arrangements to which the Company is a party contain restrictions on the Company's ability to pay dividends. 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 1998 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 June 17, 1998, in connection with the acquisition of the outstanding capital stock of Aerocar, the Company issued to Rosa Shashua and Carmel Shashua, the shareholders of Aerocar, warrants to acquire in the aggregate 250,000 shares of Common Stock at an exercise price of $26.00 per share, expiring on June 17, 2001. 22 23 On December 18, 1998, in connection with the acquisition of Aerocar, the Company issued to Helix a warrant to acquire 5,000 shares of Common Stock at an exercise price of $26.00 per share, expiring on June 17, 2001, in partial consideration for the services performed by Helix in connection with the transaction. On December 31, 1998, in connection with the acquisition of the outstanding capital stock of Solair, the Company issued to Banner Aerospace, Inc., the sole shareholder of Solair, a warrant to acquire 300,000 shares of Common Stock at an exercise price of $27.50 per share, expiring on December 31, 2002. On March 23, 1999, in connection with the acquisition of Solair, the Company issued to Helix a warrant to acquire 2,250 shares of Common Stock at an exercise price of $27.50 per share, expiring on December 31, 2002, in partial consideration for the services performed by Helix in connection with the transaction. 23 24 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."
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- INCEPTION DECEMBER 28, 1993 THROUGH DECEMBER 31, 1998 1997 1996 1995 1994 -------- ------- ------- ------- --------- (IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Total revenues $180,049 $79,439 $24,922 $ 8,579 $ -- Total operating expenses 139,019 61,828 20,169 7,062 -- Net operating income 41,030 17,611 4,753 1,517 -- Interest expense, net of interest income 9,773 3,991 645 (225) (309) Non-operating expenses -- -- -- 1,110 317 Income taxes 11,679 5,077 1,462 258 -- ------- ------- ------- ------- -------- Net income $19,578 $ 8,543 $ 2,646 $ 374 $ (8) ======= ======= ======= ====== ========
December 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- ------- ------- ------- --------- BALANCE SHEET DATA: Total current assets $272,530 $74,215 $19,655 $15,689 $ 685 Total current liabilities 42,147 19,020 8,565 6,019 100 Total assets 434,050 134,361 29,545 21,918 11,483 Non-current obligations 242,144 65,430 2,819 2,760 -- Stockholders' equity 149,759 49,912 18,161 13,139 9,227
24 25 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. GENERAL The Company is a leader in the airborne equipment segments of the international aviation services after-market. The Company's net revenues have increased from $24.9 million for the year ended December 31, 1996 to $180.0 million for the year ended December 31, 1998. During the same time period, the Company's net income increased from $2.6 million to $19.6 million. The increase in revenues and net income is the result of a number of factors, including the expansion of the Company's product lines, customer base and market share, increases in the Company's internal growth, cost controls and overall operating efficiencies, acquisitions in existing and adjacent markets and significant capital investments. On January 15, 1997, September 10, 1997, April 1, 1998, June 17, 1998 and December 31, 1998 the Company acquired IASI, Aero Support, ITC, Aerocar and Solair, respectively. These acquisitions were accounted for using the purchase method of accounting for business combinations and accordingly, those companies' operating results have been included in the Company's results of operations since the date of acquisition. 25 26 RESULTS OF OPERATIONS For the periods indicated, the following table sets forth the percentage of certain income statement items to total revenues derived from the Company's consolidated statements of earnings.
PERCENTAGE OF TOTAL REVENUES ----------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1997 1998 ------------ ---------------------- Revenues: Sales of aircraft and engine parts, net 96.4% 90.1% 82.7% Rental Revenues 3.6 9.9 17.3 Total Revenues 100.0 100.0 100.0 Operating Expenses: Cost of Goods Sold 62.8 58.9 55.7 Depreciation of Equipment Under Operating Leases 2.3 5.7 9.3 Selling, General and Administrative Expenses 14.0 11.2 10.6 Depreciation and Amortization Expense 1.8 2.0 1.7 Total Operating Expenses 80.9 77.8 77.3 Interest Expense (net of Interest Income) 2.6 5.0 5.4 Income before income taxes 16.5 17.2 17.3 Income Taxes 5.9 6.4 6.4 Net Income 10.6 10.8 10.9
26 27 YEARS ENDED DECEMBER 31, 1998 AND 1997 Net sales of aircraft and engine parts increased by 108% to $148.9 million for the year ended December 31, 1998 as compared to $71.5 million for the year ended December 31, 1997. The increase in net sales of aircraft and engine parts was primarily due to (i) growth of sales of approximately $38.4 million due to additional inventory availability as a result of the Company's increased capital resources as well as the acquisition of Aerocar being combined into Kellstrom, and (ii) incremental sales of approximately $39.0 million related to the acquisition of Aero Support and ITC. Rental revenues increased by 294% to $31.1 million for the year ended December 31, 1998 as compared to $7.9 million for the year ended December 31, 1997. The increase in rental revenues was primarily due to (i) the Company's continued expansion into the leasing business through purchases of individual assets as well as the acquisition of Aerocar being combined into Kellstrom resulting in increased rental revenues of approximately $20.0 million, and (ii) incremental rental revenues of approximately $3.2 million related to the acquisition of the ITC operations. Cost of goods sold increased by 114% to $100.2 million for the year ended December 31, 1998 as compared to $46.8 million for the year ended December 31, 1997; the gross profit margin decreased to 32.7% in 1998 from 34.6% in 1997. The increase in cost of goods sold was primarily due to increased sales volume across all product lines. The decrease in the gross profit margin was primarily due to the mix of product sales during 1998, resulting in lower gross profit margin. However, despite the decrease in the gross profit margin during 1998, the gross profit margin remains in the range of the Company's historical gross profit margin. Depreciation of equipment under operating leases increased by 263% to $16.7 million for the year ended December 31, 1998 as compared to $4.6 million for the year ended December 31, 1997. The increase in depreciation of equipment under operating leases was primarily due to (i) the Company's continued expansion into the short-term leasing business through purchases of individual assets as well as the acquisition of Aerocar being combined into Kellstrom, resulting in increased depreciation of approximately $10.2 million, and (ii) incremental depreciation of approximately $1.9 million related to the acquisition of ITC. Selling, general and administrative expenses increased by 115% to $19.1 million for the year ended December 31, 1998 as compared to $8.9 million for the year ended December 31, 1997; however, as a percentage of total revenues, selling, general and administrative expenses decreased to 10.6% in 1998 from 11.2% in 1997. The increase in selling, general and administrative expenses was primarily due to (i) expenses of approximately $5.2 million related to the continuing operations of Aero Support and ITC, and (ii) expenses of approximately $5.0 million related to the continued expansion of the Company's sales and warehouse operations. This expansion consisted of greater resources 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 as well as the acquisition of Aerocar being combined into Kellstrom. Selling, general and administrative expenses as a percentage of total revenues decreased during 1998 primarily due to economies of scale and operating efficiencies derived from the consolidation of operations related to completed acquisitions. 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. 27 28 Depreciation and amortization expense increased by 97% to $3.1 million for the year ended December 31, 1998 as compared to $1.6 million for the year ended December 31, 1997; however, as a percentage of total revenues, depreciation and amortization expense decreased to 1.7% in 1998 from 2.0% in 1997. The increase in depreciation and amortization expense was primarily due to amortization of goodwill related to the Aero Support, ITC and Aerocar acquisitions. Interest expense (net of interest income) increased by 145% to $9.8 million for the year ended December 31, 1998 as compared to $4.0 million for the year ended December 31, 1997. The increase in interest expense was primarily driven by an increase in the Company's average debt levels during 1998, resulting from the acquisition of ITC and growth in inventories and 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 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 129% to $19.6 million for the year ended December 31, 1998 as compared to $8.5 million for the year ended December 31, 1997. Basic earnings per common share increased by 64% to $1.94 for the year ended December 31, 1998 as compared to $1.18 for the year ended December 31, 1997. Diluted earnings per common share increased by 61% to $1.53 for the year ended December 31, 1998 as compared to $0.95 for the year ended December 31, 1997. YEARS ENDED DECEMBER 31, 1997 AND 1996 Net sales of aircraft and engine parts increased by 198% to $71.5 million for the year ended December 31, 1997 as compared to $24.0 million 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 $23.8 million related to the acquisition of IASI, (ii) internal growth of sales of $16.9 million primarily due to additional inventory availability as a result of the Company's increased capital resources, and (iii) incremental sales of $6.8 million related to the acquisition of Aero Support. Rental revenues increased by 777% to $7.9 million for the year ended December 31, 1997 as compared to $902,000 for the year ended December 31, 1996. The increase in rental revenues was 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 $5.5 million 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 $1.5 million. Cost of goods sold increased by 199% to $46.8 million for the year ended December 31, 1997 as compared to $15.6 million 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 $4.6 million for the year ended December 31, 1997 as compared to $586,000 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 $3.3 million 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 $700,000. 28 29 Selling, general and administrative expenses increased by 154% to $8.9 million for the year ended December 31, 1997 as compared to $3.5 million 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 $2.9 million related to the continuing operations of IASI and Aero Support. In addition, $2.5 million 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 $1.6 million for the year ended December 31, 1997 as compared to $442,000 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 $4.0 million the year ended December 31, 1997 as compared to $645,000 for the year ended December 31, 1996. The increase in interest expense was primarily due to interest expense and related costs of $3.0 million for the $35.6 million and $17.3 million of debt assumed and incurred related to the acquisitions of IASI and Aero Support, respectively, as well as interest expense of $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 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 $8.5 million for the year ended December 31, 1997 as compared to $2.6 million 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. LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 1998, the Company's liquidity and capital resources included cash and cash equivalents of $1.1 million and working capital of $230.4 million. At December 31, 1998, total outstanding debt was $239.9 million as compared to $73.1 million as of December 31, 1997. As of December 31, 1998, the outstanding principal balance on the Company's convertible subordinated notes was $140.3 million and the Company had contractual lines of credit totaling $256.7 million of which $83.9 million was outstanding and $22.9 million was available. Cash flows used in operating activities for the year ended December 31, 1998 was $89.0 million compared with $22.4 million for the year ended December 31, 1997. The primary uses of cash for operating activities during the year ended December 31, 1998 was due to increases in inventories and equipment under operating leases of $46.1 million and $91.9 million, respectively, and a decrease in accounts payable of $5.1 million. The primary sources of cash for operating activities for the year ended December 31, 1998 was due to net income of $19.6 million, coupled with total depreciation and amortization of $19.7 million and an increase in accrued expenses of $11.2 million. Cash flows used in investing activities for the year ended December 31, 1998 was $130.1 million compared with $29.0 million for the year ended December 31, 1997. The primary uses of cash for investing activities for the year ended December 31, 1998 was related to the acquisitions of ITC, Aerocar, and Solair, for $120.3 million in the aggregate and purchases of property, plant and equipment for $10.7 million. On April 1, 1998, the Company through a wholly-owned subsidiary completed the acquisition of substantially all of the assets and assumed certain liabilities of Integrated Technology Corp. ("ITC") for $20.5 million in cash plus up to $10.0 million cash consideration may be paid in the form of an earn-out payable over three years based on certain specified criteria of which $3.3 million was earned during 1998. In addition, the Company received a three-year option to purchase a 49% interest in a related FAA-approved overhaul facility. On June 17, 1998, the Company completed the acquisition of the outstanding capital stock of Aerocar Aviation Corp. ("Aerocar Aviation") and Aerocar Parts, Inc. ("Aerocar Parts,") and together with Aerocar Aviation, "Aerocar") for $42.3 million in cash, warrants to purchase an aggregate of 250,000 shares of the Company's common stock, exercisable at $26.00 per share, expiring on June 17, 2001 plus an additional $5.0 million payable within a two-year period after closing, either in cash, or at the option of the Company, in shares of common stock having an equivalent value as of the date of acquisition. On December 31, 1998, the Company acquired all of the outstanding capital stock of Solair, Inc. ("Solair"), a wholly-owned subsidiary of Banner Aerospace, Inc. for $57.4 million in cash and a warrant to purchase 300,000 shares of common stock at an exercise price of $27.50 per share, expiring on December 31, 2002. 29 30 Cash flows provided by financing activities for the year ended December 31, 1998 was $219.7 million compared with $51.6 million for the year ended December 31, 1997. The primary sources of cash for financing activities for the year ended December 31, 1998 related to proceeds from the issuance of the 5 1/2% ConvertibLE Subordinated Notes (the "5 1/2% Notes") of $86.3 million, an increase in borrowings under line of credit agreements of $79.9 million and issuance of Common Stock of $78.4 million, offset by repayments of debt incurred and assumed of $18.7 million and payment of deferred financing costs of $5.1 million. The Company's Senior Subordinated Debt is held by The Equitable Life Assurance Society of the United States ("Equitable"). The interest rate on the Senior Subordinated 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 $10.00 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 $1.25 million payable on January 15, 2004. The outstanding balance at December 31, 1998 on the Senior Subordinated Debt was $11.25 million. An advance principal payment of $3.75 million, along with a prepayment penalty of 1%, was made by the Company on October 10, 1997 with the proceeds received from the 5 3/4% Convertible Subordinated Notes (the "5 3/4% 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 $10.5 million. On June 17, 1998, the Company completed a secondary public offering of 2,750,000 shares of Common Stock at $26.00 per share, resulting in net proceeds of $67.4 million. On July 2, 1998, the Company's underwriters exercised their overallotment option to purchase an additional 412,500 shares of Common Stock at $26.00, resulting in additional net proceeds of $10.2 million. Proceeds of the offering were used to repay the outstanding borrowings under its then current revolving credit facility, to finance the Aerocar acquisition and for general corporate purposes. On June 17, 1998, the Company completed a public offering of $75.0 million aggregate principal amount of the 5 1/2% Notes due 2003, resulting in net proceeds of $72.8 million. On July 2, 1998, the Company's underwriters exercised their overallotment option to purchase an additional $11.3 million aggregate principal amount of the 5 1/2% Notes, resulting in additional net proceeds of $10.9 million. Proceeds of the offering were used to repAY outstanding borrowings under its then current revolving credit facility and for general corporate purposes. On December 14, 1998, in order to expand its current credit facility, the Company entered into a five-year, $256.7 million syndicated credit facility with Bank of America, N.A. (formerly NationsBank, N.A.) ("Bank of America") as the agent bank, consisting of a $250.0 million revolving credit facility and a letter of credit in the amount of up to $6.7 million, with an option by the Company to increase the revolving credit facility by an additional $50.0 million for a total of $306.7 million throughout the term, subject to the approval of Bank of America and the satisfaction of certain conditions. The new credit facility bears interest ranging from prime rate plus 0 to 50 basis points, or at the Company's option, LIBOR plus 150 to 250 basis points. The letter of credit component of the $256.7 million syndicated credit facility was specifically committed to the permanent financing of the Company's new world headquarters. The $6.7 million financing was completed by the Company on February 22, 1999. During the year ended December 31, 1998, the Company's highest utilization of its NationsBank $256.7 million syndicated credit facility was $83.9 million. The outstanding balance at December 31, 1998 on the NationsBank syndicated credit facility was $83.9 million. 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, jet engine parts and avionics and rotables. 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 syndicated credit facility, which was expanded in December 1998, and through the employment of its cash. In the future, the Company may require additional sources of capital to continue to fund its expansion. 30 31 The Company's management believes that free cash flow (net income plus depreciation of property, plant and equipment and amortization of goodwill), combined with the Company's syndicated credit facility should be sufficient for the Company's current level of operations. However, the Company may elect to seek equity capital or other debt financing in the future depending upon market conditions and the capital needs of the Company. YEAR 2000 ISSUE The Year 2000 problem is primarily the result of computer programs being written using two digits rather than four to define the applicable year. Such programs will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, including possible miscalculations, and a disruption in the operation of such systems. This is commonly referred to as the Year 2000 issue. The Company and each of its operating subsidiaries are executing a plan to identify and address any possible business issues related to the impact of the Year 2000 problem on both its information technology ("IT") and non-IT systems (e.g., embedded technology). This plan addresses the Year 2000 issue in multiple phases, including (i) determining an initial inventory of the Company's systems, equipment (including embedded technology in the Company's aircraft, engine and parts inventory as well as leased equipment), vendors, customers and third party administrators that may be vulnerable to system failures or processing errors as a result of Year 2000 issues, (ii) assessment and prioritization of inventoried items to determine risks associated with their failure to be Year 2000 compliant, (iii) testing of systems and equipment to determine Year 2000 compliance, (iv) remediation and implementation of systems and equipment, and (v) contingency planning to assess reasonably likely worst case scenarios. As part of the Company's plan, the Company has retained a third party Year 2000 solution provider to assist with a risk analysis of the Company's Year 2000 issue and assist with project office management. For those systems which the Company determines are not currently Year 2000 compliant, implementation of the required changes is expected to be completed by September 1999. Incremental costs, which include consulting costs and costs associated with internal resources to modify existing systems in order to achieve Year 2000 compliance are charged to expense as incurred. The Company does not expect the cost of making the required system changes to exceed $500,000. The anticipated costs of the project and the dates on which the Company believes it will complete the Year 2000 modifications and assessments are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to locate and correct all relevant systems. With respect to the Company's customers, suppliers and vendors, the Company is in the process of contacting customers, suppliers and vendors to assess the potential impact on operations if such third parties are not successful in ensuring that their systems and operations are Year 2000 compliant in a timely manner. The Company's Year 2000 issues and any potential business interruptions, costs, damages or losses related thereto, are also dependent upon the Year 2000 compliance of other third parties such as governmental agencies (e.g., Federal Aviation Administration and foreign equivalents). To date, the Company is unable to determine whether it will be materially affected by the failure of any of its customers, suppliers, vendors or other third parties to be Year 2000 compliant. The Company believes that its compliance efforts have and will reduce the impact on the Company of any such failures. Failure of any third parties with which the Company interacts to achieve Year 2000 compliance could have a material adverse effect on the Company's business, financial condition and results of operations. Risk assessment, readiness evaluation, action plans and contingency plans related to the Company's suppliers, vendors and other third parties are expected to be completed by September 1999. The Company's risk management program includes emergency backup and recovery procedures to be followed in the event of failure of a business critical system. These procedures will be expanded to include specific procedures for the potential Year 2000 issue. Contingency plans to protect the Company from Year 2000 related interruptions are also being developed and are expected to be completed by September 1999. These plans will include development of backup procedures, identification of alternate suppliers, possible increases in inventory levels and other appropriate measures. 31 32 RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 outlines the accounting treatment for certain costs related to the development or purchase of software to be used internally and requires that costs incurred during the preliminary project and post-implementation/operation stages be expensed, and costs incurred during the application development stage be capitalized and amortized over the estimated useful life of the software. Adoption of this statement is not expected to have a material impact on the Company's results of operations or financial position. In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, requires that all costs of start-up activities, including organization costs, be expensed as incurred. Adoption of this statement is not expected to have material impact on the Company's results of operations or financial position. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Management does not anticipate a significant impact of the adoption of SFAS No. 133 on the Company's consolidated financial position, results of operations or cash flows. 32 33 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's exposure to market risk is limited primarily to the fluctuating interest rates associated with variable rate indebtedness outstanding under the Company's $256.7 million bank credit facility. The bank credit facility, which expires in 2003, bears interest at the bank's prime rate plus 0-50 basis points or, at the Company's option, LIBOR plus 150-250 basis points. These variable interest rates are subject to interest rate changes in the United States and Eurodollar markets. The Company does not currently use, and has not historically used, derivative financial instruments to hedge against such market interest rate risk. At December 31, 1998, the Company had approximately $83.9 million in variable rate indebtedness outstanding under the credit facility, representing approximately, 84% of the Company's total debt outstanding, at an average interest rate of 7.5%. An increase in interest rates by 1% would not have a material impact on the financial condition, results of operations or cash flows of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements for the years ended December 31, 1998, 1997 and 1996, 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. 33 34 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 1999 Annual Meeting of Stockholders and is incorporated herein by reference. The Proxy Statement will be filed within 120 days of the end of the fiscal year ended December 31, 1998. 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, 1998 and 1997 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) The following financial statement schedule is 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: None 34 35 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 31, 1999 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 31, 1999 - ------------------------------------ Officer and Director Zivi R. Nedivi (principal executive officer) /s/ Yoav Stern Chairman of the Board of Directors March 31, 1999 - ------------------------------------ Yoav Stern /s/ Michael W. Wallace Chief Financial Officer March 31, 1999 - ------------------------------------ (principal financial and Michael W. Wallace accounting officer) /s/ David Jan Mitchell Director March 31, 1999 - ------------------------------------ David Jan Mitchell /s/ Niv Harizman Director March 31, 1999 - ------------------------------------ Niv Harizman /s/ General William Lyon Director March 31, 1999 - ------------------------------------ General William Lyon /s/ Admiral William J. Crowe, Jr. Director March 31, 1999 - ------------------------------------ Admiral William J. Crowe, Jr.
35 36 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 3.1 The Company's Restated Certificate of Incorporation, as amended (incorporated by reference to the Current Report on Form 8-K filed with the Commission on June 22, 1995). 3.2 The Company's By-laws, as amended (incorporated by reference to the Current Report on Form 8-K filed with the Commission on June 22, 1995). 3.3 Form of 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 the 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 12, 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). 4.4 Indenture dated June 17, 1998 by and between the Company and First Union National Bank (incorporated by reference to Amendment No. 2 to Registration Statement on Form S-3, Number 333-52917 filed with the Commission on June 11, 1998). 4.5 Form of Note (included in Exhibit 4.4) 4.6 Indenture of Trust dated as of February 1, 1999 between the Company and Norwest Bank Minnesota, N.A., as Trustee (filed herewith). 4.7 Form of Note (included in Exhibit 4.6). 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 on 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 (incorporated by reference to the Annual Report on Form 10-K filed with the Commission on March 23, 1998). 10.10* Employment Agreement dated March 30, 1999 between Zivi R. Nedivi and the Company (filed herewith). 10.11* Employment Agreement dated March 30, 1999 between Yoav Stern and the Company (filed herewith). 36 37 10.12 Stockholders Agreement dated August 24, 1995 between Zivi R. Nedivi and Yoav Stern (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 30, 1996). 10.13 Amendment, dated January 15, 1996, to Stockholders Agreement dated August 24, 1995 between Zivi R. Nedivi and Yoav Stern (incorporated by reference to the Annual Report on Form 10-KSB filed with the Commission on March 31, 1997). 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 Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996). 10.15 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). 10.16 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). 10.17 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). 10.18 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). 10.19 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). 10.20 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). 10.21 Amended and Restated Loan and Security Agreement dated as of December 14, 1998 among the Company, certain of its subsidiaries, the lenders party thereto, from time to time, Bank of America, N.A. (as successor to NationsBank, N.A.), as agent for the lenders, and NationsBanc Montgomery Securities, LLC, as syndication agent (filed herewith). 10.22 Form of Revolving Credit Note (filed herewith). 10.23 Engagement Agreement dated March 28, 1997 between Helix Management Company II, LLC and the Company (incorporated by reference to the Annual Report on Form 10-K filed with the Commission on March 23, 1998). 10.24 Amendment No. 1, dated August 25, 1998, to the Engagement Agreement dated March 28, 1997 between Helix Management Company II, LLC and the Company (incorporated by reference to the Quarterly Report on Form 10-Q filed with the Commission on November 12, 1998). 10.25 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-A filed with the Commission on January 16, 1997). 10.26 Amendment No. 1, dated February 27, 1997, to Rights Agreement dated January 14, 1997 by and between the Company and Continental Stock Transfer and Trust Company (incorporated by reference to the Current Report on Form 8-K/A filed with the Commission on March 7, 1997). 10.27* 1995 Stock Option Plan of the Company (incorporated by reference to the Proxy Statement of the Company filed with the Commission on May 15, 1995). 10.28* 1996 Stock Option Plan of the Company, as amended (filed herewith). 37 38 10.29* 1997 Stock Option Plan of the Company, as amended (filed herewith). 10.30* 1998 Stock Option Plan of the Company (filed herewith). 10.31 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). 10.32 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). 10.33 Form of Warrant dated September 10, 1997 between the Company and Helix (incorporated by reference to the Annual Report on Form 10-K filed with the Commission on March 23, 1998). 10.34 Form of Warrant dated September 10, 1997 between the Company and Helix (incorporated by reference to the Annual Report on Form 10-K filed with the Commission on March 23, 1998). 10.35 Asset Purchase Agreement dated as of February 27, 1998 among the Company, Integrated Technology Holdings Corp., Integrated Technology Corp. and Gideon Vaisman (incorporated by reference to the Current Report on Form 8-K filed with the Commission on April 14, 1998). 10.36 Amendment No. 1, dated as of March 13, 1998, to the Asset Purchase Agreement dated as of February 27, 1998 among the Company, Integrated Technology Holdings Corp., Integrated Technology Corp. and Gideon Vaisman (incorporated by reference to the Quarterly Report on Form 10-Q filed with the Commission on November 12, 1998). 10.37 Amendment No. 2, dated as of September 15, 1998, to the Asset Purchase Agreement dated as of February 27, 1998 among the Company, Integrated Technology Holdings Corp., Integrated Technology Corp. and Gideon Vaisman (incorporated by reference to the Quarterly Report on Form 10-Q filed with the Commission on November 12, 1998). 10.38* Employment Agreement dated February 27, 1998 between Gideon Vaisman and the company (filed herewith). 10.39* Amendment No. 1, dated as of September 15, 1998, to the Employment Agreement dated February 27, 1998 between Gideon Vaisman and the Company (incorporated by reference to the Quarterly Report on Form 10-Q filed with the Commission on November 12, 1998). 10.40 Stock Purchase Agreement dated as of May 6, 1998 among the Company, Aerocar Parts, Inc., Aeorcar Aviation Corp., Rosa Shashua and Carmel Shashua (incorporated by reference to the Current Report on Form 8-K filed with the Commission on May 18, 1998). 10.41 Warrant dated June 17, 1998 between the Company and Carmel Shashua (incorporated by reference to the Current Report on Form 8-K filed with the Commission on August 11, 1998). 10.42 Warrant dated June 17, 1998 between the Company and Rosa Shashua (incorporated by reference to the Current Report on Form 8-K filed with the Commission on August 11, 1998). 10.43 Warrant dated December 18, 1998 between the Company and Helix Management Company II, LLC (filed herewith). 10.44 Stock Purchase Agreement dated as of December 5, 1998, by and between the Company, Solair, Inc. and Banner Aerospace, Inc. (incorporated by reference to the Current Report on Form 8-K filed with the Commission on January 14, 1999). 10.45 Warrant dated December 31, 1998 between the Company and Banner Aerospace, Inc. (incorporated by reference to the Current Report on Form 8-K/A filed with the Commission on March 16, 1999). 10.46 Warrant dated March 23, 1999 between the Company and Helix Management Company II, LLC (filed herewith). 10.47 Termination Agreement dated as of March 30, 1999 between the Company and East Shore Ventures, Inc. (filed herewith). 10.48 Termination Agreement dated as of March 30, 1999 between the Company and Helix Management Company II, LLC (filed herewith). 10.49 Stock Purchase Agreement dated March 27, 1999 among the Company, Certified Aircraft Parts, Inc., R. Dean Stickler and Donald E. Marshall (filed herewith). 10.50 Joinder Agreement dated January 15, 1999 between Solair, Inc., the Company and NationsBank, N.A., as agent for the lenders party thereto (filed herewith). 10.51 Letter of Credit Reimbursement Agreement dated as of February 1, 1999 between the Company and NationsBank, N.A. (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23 Consent of KPMG LLP (filed herewith). 27 Financial Data Schedule (filed herewith). - -------------- * Compensatory plan or agreement. 38 39 Kellstrom Industries, Inc. Schedule II - Valuation and Qualifying Accounts For the years ended December 31, 1998, 1997 and 1996
Additions - Deductions - Balance at Charged to Additions - Uncollectible Balance at Beginning Costs and Due to Accounts End Description of Period Expenses Acquisitions Written Off of Period - ----------- --------- ----------- ------------ ------------- ----------- 1998 Allowance for returns and doubtful accounts $ 335,786 $ 830,914 $4,296,755 $ 45,459 $5,417,996 Accumulated amortization - goodwill 1,555,526 2,226,999 -- -- 3,782,525 1997 Allowance for returns and doubtful accounts $ 150,000 $ 35,592 $ 167,990 $17,796 $ 335,786 Accumulated amortization - goodwill 409,863 1,145,663 -- -- 1,555,526 1996 Allowance for returns and doubtful accounts $ 125,531 $ 24,469 $ -- $ -- $ 150,000 Accumulated amortization - goodwill 138,853 271,010 -- -- 409,863
39 40 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, 1998 and 1997 F-2 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996 F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-5 Notes to Consolidated Financial Statements F-9
41 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, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts for the years ended December 31, 1998, 1997 and 1996. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kellstrom Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Ft. Lauderdale, Florida February 17, 1999, except as to note 18, which is as of March 30, 1999 F-1 42 ITEM I. FINANCIAL STATEMENTS KELLSTROM INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------------ 1998 1997 --------------- ---------------- ASSETS Current Assets: Cash and cash equivalents $ 1,107,102 $ 462,676 Trade receivables, net of allowances for returns and doubtful accounts of $5,417,996 and $335,786 for 1998 and 1997, respectively 31,367,337 10,189,082 Notes receivable -- 2,475,856 Inventories (Note 3) 149,957,320 35,965,376 Equipment under short-term operating leases (Note 4) 77,201,289 20,881,713 Prepaid expenses 3,166,158 2,646,629 Income tax receivable -- 531,762 Deferred tax assets (Note 11) 9,730,577 636,115 Investment in securities (Note 6) -- 425,759 --------------- ---------------- Total current assets 272,529,783 74,214,968 Equipment under long-term operating leases, net (Note 4) 63,323,008 19,050,675 Property, plant and equipment, net (Note 5) 16,755,185 5,027,096 Goodwill, net 71,501,153 29,775,709 Other asset 9,941,367 6,293,050 --------------- ---------------- Total Assets $434,050,496 $134,361,498 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term notes payable (Note 8) $ 2,317,982 $ 6,759,013 Current maturities of long-term debt (Note 8) -- 1,079,787 Accounts payable 13,333,709 6,183,762 Accrued expenses (Note 7) 25,715,518 4,996,963 Income taxes payable 779,972 -- --------------- ---------------- Total current liabilities 42,147,181 19,019,525 Long-term debt, less current maturities (Note 8) 97,336,821 11,250,000 Convertible subordinated notes (Note 9) 140,250,000 54,000,000 Deferred tax liabilities (Note 11) 4,557,256 180,053 --------------- ---------------- Total Liabilities 284,291,258 84,449,578 Stockholders' Equity: (Note 12) Common stock, $ .001 par value; 20,000,000 shares authorized; 11,762,015 shares and 7,879,356 shares issued and outstanding in 1998 and 1997, respectively 11,762 7,879 Additional paid-in capital 120,007,268 39,027,053 Retained earnings 31,133,280 11,555,161 Accumulated other comprehensive income -- (315,758) Loans receivable from directors and officers (1,393,072) (362,415) --------------- ---------------- Total Stockholders' Equity 149,759,238 49,911,920 --------------- ---------------- Total Liabilities and Stockholders' Equity $ 434,050,496 $134,361,498 =============== ================
See accompanying notes to consolidated financial statements F-2 43 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31, ----------------------------------------------------- 1998 1997 1996 ----------------- ---------------- ----------------- Sales of aircraft and engine parts, net $ 148,901,686 $ 71,534,539 $ 24,019,999 Rental revenues 31,147,123 7,904,610 901,588 ----------------- -------------- ----------------- Total revenues 180,048,809 79,439,149 24,921,587 Cost of goods sold (100,221,300) (46,800,589) (15,649,127) Depreciation of equipment under operating leases (16,688,141) (4,594,399) (586,032) Selling, general and administrative expenses (19,051,869) (8,877,598) (3,491,457) Depreciation and amortization (3,057,847) (1,555,673) (441,854) ----------------- -------------- ----------------- Total operating expenses (139,019,157) (61,828,259) (20,168,470) Operating income 41,029,652 17,610,890 4,753,117 Interest expense (10,259,749) (4,390,384) (662,528) Interest income 486,857 399,172 18,001 ----------------- -------------- ----------------- Income before income taxes 31,256,760 13,619,678 4,108,590 Income taxes (Note 11) (11,678,641) (5,077,159) (1,462,247) ----------------- -------------- ----------------- Net income $ 19,578,119 $ 8,542,519 $ 2,646,343 ================= ============== ================= Earnings per common share - basic $ 1.94 $ 1.18 $ 0.90 ================= ============== ================= Earnings per common share - diluted $ 1.53 $ 0.95 $ 0.56 ================= ============== ================= Weighted average number of common shares outstanding - basic 10,086,875 7,266,534 2,943,902 ================= ============== ================= Weighted average number of common shares outstanding - diluted 15,060,512 9,394,439 4,759,890 ================= ============== =================
See accompanying notes to consolidated financial statements F-3 44 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
LOANS RETAINED RECEIVABLE ACCUMULATED COMMON STOCK EARNINGS/ FROM OTHER TOTAL COMPRE- ------------------- ADDITIONAL (ACCUMU- DIRECTORS COMPRE- STOCK- HENSIVE NUMBER PAID-IN LUMATED) AND HENSIVE HOLDER INCOME OF SHARES AMOUNT CAPITAL DEFICIT) OFICERS INCOME EQUITY ------- --------- ------ ------- ----------- -------- ------- -------- 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 Net income 2,646,343 -- -- -- 2,646,343 -- -- 2,646,343 Unrealized gain on investment Securities (net of taxes of $156,308) 273,225 -- -- -- -- -- 273,225 273,225 ---------- Comprehensive income 2,919,568 ========== - ---------------------------------------------------------------------------------------------------------------------------------- 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 Net income 8,542,519 -- -- -- 8,542,519 -- -- 8,542,519 Unrealized loss on investment Securities, net of reclassifi- cation adjustments (net of taxes of $346,817) (588,983) -- -- -- -- -- (588,983) (588,983) ---------- Comprehensive income 7,953,536 ========== Borrowings on loans receivable -- -- -- -- (362,415) -- (362,415) - ----------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 7,879,356 7,879 39,027,053 11,555,161 (362,415) (315,758) 49,911,920 Issuance of common stock 3,882,659 3,883 78,423,642 -- -- -- 78,427,525 Issuance of warrants related to the Aerocar and Solair acquisition -- -- 2,556,573 -- -- -- 2,556,573 Net income 19,578,119 -- -- -- 19,578,119 -- -- 19,578,119 Unrealized gain on investment Securities, net of reclassifi- cation adjustments (net of taxes of $190,506) 315,758 -- -- -- -- -- 315,758 315,758 ---------- Comprehensive income 19,893,877 ========== Borrowings on loans receivable -- -- -- -- (1,030,657) -- (1,030,657) =================================================================================================================================== Balances, December 31, 1998 11,762,015 11,762 120,007,268 31,133,280 (1,393,072) -- 149,759,238 ===================================================================================================================================
See accompanying notes to consolidated financial statements F-4 45 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 ----------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,578,119 $ 8,542,519 $ 2,646,343 Adjustments to reconcile net income to net cash Used in operating activities: Depreciation and amortization 3,057,847 1,555,673 441,854 Depreciation of equipment under operating leases 16,688,141 4,594,399 586,032 Amortization of deferred financing costs 1,376,807 760,019 30,172 Deferred income taxes 1,722,246 80,631 12,285 Loss on sales of investment securities 119,472 38,051 -- Gain on sales of property, plant and equipment (102,145) -- -- Changes in operating assets and liabilities: Increase in trade receivables, net (2,922,492) (2,392,056) (704,273) (Increase) decrease in inventories (46,121,637) 8,768,582 (1,207,383) Increase in equipment under operating leases (91,947,589) (41,862,819) (3,250,000) Increase in prepaid expenses (308,659) (3,042,546) (351,704) Decrease (increase) in other assets 2,492,539 330,878 (255,655) Decrease in accounts payable (5,114,524) (2,748,832) (515,809) Increase in accrued expenses 11,175,219 3,706,570 431,661 Increase (decrease) in income taxes payable 1,311,734 (687,551) (486,519) ----------------- --------------- ---------------- Net cash used in operating activities (88,994,922) (22,356,482) (2,622,996) ----------------- --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities -- -- (1,200,000) Proceeds from sales of investment securities 812,553 428,499 -- Purchase of property, plant and equipment (10,729,964) (2,418,677) (1,372,244) Proceeds from sales of property, plant and equipment 104,607 744,744 -- Purchase of ITC assets, net of cash acquired (20,519,903) -- -- Purchase of Aerocar assets, net of cash acquired (42,341,684) -- -- Purchase of Solair assets (57,390,887) -- -- Purchase of IASI assets, net of cash acquired -- (25,053,141) -- Purchase of Aero Support assets, net of cash acquired -- (2,656,289) -- Other (24,321) 2,115 31,753 ----------------- --------------- ---------------- Net cash used in investing activities (130,089,599) (28,952,749) (2,540,491) ----------------- --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement 79,878,811 1,086,699 -- Proceeds from the issuance of debt -- 21,000,000 27,577,960 Proceeds from the issuance of subordinated debentures 86,250,000 54,000,000 -- Debt repayment, including capital lease obligation (18,679,625) (40,450,696) (24,499,503) Proceeds from the issuance of common stock 78,427,525 20,776,420 2,102,427 Borrowings for loans receivable from directors and officers (1,030,657) (362,415) -- Payment of deferred financing costs (5,117,107) (4,432,355) -- Other -- -- (74,014) ----------------- --------------- ---------------- Net cash provided by financing activities 219,728,947 51,617,653 5,106,870 ----------------- --------------- ---------------- NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 644,426 308,422 (56,617) CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 462,676 154,254 210,871 ----------------- --------------- ---------------- CASH & CASH EQUIVALENTS, END OF PERIOD $ 1,107,102 $ 462,676 $ 154,254 ================= =============== ================
(continued) See accompanying notes to consolidated financial statements F-5 46 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 --------------- --------------- -------------- Supplemental disclosures of non-cash investing and financing activities: Aerocar assets acquired for warrants $ 1,405,000 $ -- $ -- =============== =============== ============== Solair assets acquired for warrants $ 1,151,573 $ -- $ -- =============== =============== ============== IASI assets acquired for warrants $ -- $ 1,173,134 $ -- =============== =============== ============== Aero Support assets acquired for warrants $ -- $ 680,058 $ -- =============== =============== ============== Deferred financing costs paid through the issuance of warrants $ -- $ 1,530,446 $ -- =============== =============== ============== Unrealized gain/(loss) on investment securities, net $ 315,758 $ (588,983) $ 273,225 =============== =============== ============== Supplementaldisclosures of cash flow information: Cash paid during the period for: Interest $ 8,481,524 $ 2,436,209 $ 558,083 =============== =============== ============== Income taxes $ 8,644,661 $ 5,685,502 $ 1,936,481 =============== =============== ============== Supplemental disclosures of purchase of ITC assets, net of liabilities: Cash $ 841,012 Receivables 6,095,225 Inventory 16,965,831 Prepaid expenses and other assets 29,553 Equipment under operating leases 4,594,456 Property, plant and equipment 33,121 Goodwill 5,289,587 Other assets 119,171 --------------- Total assets $ 33,967,956 =============== Accrued expenses $ 3,147,436 Account payable 3,109,605 Notes payable 6,350,000 --------------- Total liabilities $ 12,607,041 =============== Net acquisition cost 21,360,915 Less cash acquired 841,012 --------------- Net cash used in acquisition $ 20,519,903 ===============
(continued) See accompanying notes to consolidated financial statements F-6 47 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 --------------- --------------- -------------- Supplemental disclosures of purchase of Aerocar assets, net of liabilities: Cash $ 227,855 Receivables 473,118 Inventory 9,683,625 Equipment under operating leases 20,738,005 Property, plant and equipment 151,103 Goodwill 28,073,728 Other assets 39,532 --------------- Total assets $59,386,966 =============== Account payable $ 2,395,610 Notes payable 13,016,817 --------------- Total liabilities $15,412,427 =============== Net acquisition cost 43,974,539 Less warrants issued to seller 1,405,000 --------------- Cash paid to seller at closing 42,569,539 Less cash acquired 227,855 --------------- Net cash used in acquisition $42,341,684 =============== Supplemental disclosures of purchase of Solair assets, net of liabilities: Receivables $11,687,420 Inventory 41,371,604 Prepaid expenses and other assets 181,317 Property, plant and equipment 1,413,210 Deferred tax asset 6,630,011 Goodwill 5,414,056 --------------- Total assets $66,697,618 =============== Accrued expenses $ 1,395,902 Account payable 6,759,256 --------------- Total liabilities $8,155,158 =============== Net acquisition cost 58,542,460 Less warrants issued to seller 1,151,573 --------------- Net cash used in acquisition $57,390,887 ===============
(continued) See accompanying notes to consolidated financial statements F-7 48 KELLSTROM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 --------------- --------------- -------------- 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 Account 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 =============== 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 assets 359,253 Property, plant and equipment 37,926 Goodwill 13,198,554 Other assets 1,084,014 --------------- Total assets $ 22,349,803 =============== Accrued expenses $ 238,803 Accounts payable 3,161,320 Notes payable 3,498,537 --------------- Total liabilities 6,898,660 =============== Net acquisition cost 15,451,143 Less warrants issued to seller 680,058 Less notes payable to sellers 11,687,867 --------------- Cash paid to seller at closing 3,083,218 Less cash acquired 426,929 --------------- Net cash used in acquisition $ 2,656,289 ===============
See accompanying notes to consolidated financial statements F-8 49 KELLSTROM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Kellstrom Industries, Inc.'s (the "Company") principal business is the purchasing, overhauling (through subcontractors), reselling and leasing of aircraft, avionics and aircraft rotables, and engines and engine parts. The Company is also an international after-market reseller of turbo-jet engines and turbo-jet engine parts for helicopters and large cargo 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 whole engines and on an allocated cost basis for dismantled engines and aircraft and bulk inventory purchases. Inventories are made up primarily of new, refurbished and as removed engines, engine parts, rotables and expendables. INVESTMENT IN SECURITIES Investment in securities at December 31, 1997 consists 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 50 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 equipment under operating leases 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. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. 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. 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 35 years. Amortization expense of goodwill was $2.2 million, $1.1 million and $0.3 million for the years ended December 31, 1998, 1997 and 1996, 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 $3.8 million and $1.6 million at December 31, 1998 and 1997, 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 $1.4 million, $0.8 million, and $30,000 for the years ended December 31, 1998, 1997 and 1996, 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, 1998 and 1997. The fair value of the senior subordinated debt and convertible subordinated debt is 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, 1998. Investment securities available for sale are recorded at fair value based on quoted market prices. F-10 51 COMMITMENTS AND CONTINGENCIES During 1998, the Company entered into agreements to purchase two aircraft engines at a total purchase price of $9.8 million. The Company is committed to purchasing the engines upon successful completion of certain inspections. At December 31, 1998, the purchases had not yet been consummated. 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 Effective December 31, 1997, 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 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 diluted EPS was 10,086,875 and 15,060,512 for the year ended December 31, 1998, 7,266,534 and 9,394,439 for the year ended December 31, 1997, and 2,943,902 and 4,759,890 for the year ended December 31, 1996. 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 Long-lived assets, including intangible assets, used in the Company's operations are 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. STOCK-BASED COMPENSATION Stock-based compensation is recognized 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 is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. For disclosure purposes, pro forma net income and pro forma earnings per share are provided as if the fair value based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation" had been applied. ACCOUNTING CHANGES Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income." Comprehensive income presents a measure of all changes in shareholders' equity except for changes resulting from transactions with shareholders in their capacity as shareholders. The Company's total comprehensive income presently consists of net income and unrealized gain/(loss) on investment securities. The statement also requires the separate presentation of the accumulated balance of comprehensive income other than net earnings in the Consolidated Balance Sheets. F-11 52 Effective December 31, 1998, the Company adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about a company's operating segments and related disclosures about its products, services, geographic areas of operations and major customers. Adoption of this statement did not impact the Company's results of operations or financial position. The "Segment Reporting" note provides further information. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 outlines the accounting treatment for certain costs related to the development or purchase of software to be used internally and requires that costs incurred during the preliminary project and post-implementation/operation stages be expensed, and costs incurred during the application development stage be capitalized and amortized over the estimated useful life of the software. Adoption of this statement is not expected to have a material impact on the Company's results of operations or financial position. In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, requires that all costs of start-up activities, including organization costs, be expensed as incurred. Adoption of this statement is not expected to have material impact on the Company's results of operations or financial position. In June 1998, the Financial Accounting Standards Board issued FAS No.133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivatives to be recognized at fair value as either assets or liabilities on the balance sheet. Any gain or loss resulting from changes in such fair value is required to be recognized in earnings to the extent the derivatives are not effective as hedges. This statement is effective for fiscal years beginning after June 15, 1999, and is effective for interim periods in the initial year of adoption. Adoption of this statement is not expected to have material impact on the Company's results of operations or financial position. RECLASSIFICATIONS Certain 1997 financial statement amounts have been reclassified to conform with the 1998 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") for $25.1 million in cash and warrants to purchase an aggregate of 500,000 shares of the Company's common stock, exercisable at $9.25 per share, expiring on January 15, 1999. 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 $2.7 million in cash, a promissory note in the aggregate principal amount of $9.0 million, which matured and was fully repaid on September 17, 1997, two promissory notes in the aggregate principal amount of $2.7 million, which matured and were fully repaid on January 15, 1998, 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 of which $1.7 million was earned during 1998. F-12 53 On April 1, 1998, the Company through a wholly-owned subsidiary completed the acquisition of substantially all of the assets and assumed certain liabilities of Integrated Technology Corp. ("ITC") for $20.5 million in cash plus up to $10 million cash consideration which may be paid in the form of an earn-out payable over three years based on certain specified criteria, of which $3.3 million was earned during 1998. In addition, the Company received a three-year option to purchase a 49% interest in a related FAA-approved overhaul facility. On June 17, 1998, the Company completed the acquisition of the outstanding capital stock of Aerocar Aviation Corp. ("Aerocar Aviation") and Aerocar Parts, Inc. ("Aerocar Parts," and together with Aerocar Aviation, "Aerocar") for $42.3 million in cash, warrants to purchase an aggregate of 250,000 shares of the Company's common stock, exercisable at $26.00 per share, expiring on June 17, 2001 plus an additional $5.0 million payable within a two-year period after closing, either in cash, or at the option of the Company, in shares of common stock having an equivalent value as of the date of acquisition. On December 31, 1998, the Company acquired all of the outstanding capital stock of Solair, Inc. ("Solair"), a wholly-owned subsidiary of Banner Aerospace, Inc. for $57.4 million in cash and a warrant to purchase 300,000 shares of common stock at an exercise price of $27.50 per share, expiring on December 31, 2002. Each of the companies acquired are in the business of purchasing, overhauling (through subcontractors), reselling or leasing of aircraft, avionics and aircraft rotables, or engines and engine parts. Each of these acquisitions were accounted for using the purchase method of accounting for business combinations and accordingly, the consolidated financial statements reflect the results of operations of the acquired businesses from the dates of acquisition. Unaudited pro forma consolidated statements of earnings have been provided in Note 19(b) to report the results of operations for the years ended December 31, 1998 and 1997 as though the acquisitions had occurred at the beginning of the period being reported. 3. INVENTORIES At December 31, 1998 and 1997, inventories consists of the following: 1998 1997 ---- ---- Engine parts $ 99,325,400 $ 32,475,972 Whole engines 9,260,316 3,489,404 Avionics and aircraft rotables 41,371,604 -- ------------------ ------------------ $ 149,957,320 $ 35,965,376 ================== ================== 4. EQUIPMENT UNDER OPERATING LEASES, NET At December 31, 1998 and 1997, equipment under operating leases, primarily aircraft and engines, consists of the following:
1998 1997 ----- ---- Equipment under operating leases $ 153,365,577 $ 42,766,620 Accumulated depreciation (12,841,280) (2,834,232) ------------------ ------------------ 140,524,297 $ 39,932,388 Equipment under short-term operating leases 77,201,289 20,881,713 ------------------ ------------------ Equipment under long-term operating leases $ 63,323,008 $ 19,050,675 ================== ==================
Equipment under long-term operating leases represents equipment under lease agreements with an original term greater than one year. F-13 54 5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment at December 31, 1998 and 1997 consists of the following: 1998 1997 ---- ---- Land $ 2,140,140 $ 2,133,642 Building and Improvements 11,316,046 1,824,552 Machinery and Equipment 3,089,800 1,496,438 Furniture and Fixtures 3,213,401 545,486 ------------------ ------------------ 19,759,387 6,000,118 Accumulated Depreciation (3,004,202) (1,157,450) ------------------ ------------------ 16,755,185 4,842,668 Construction in Progress -- 184,428 ------------------ ------------------ $ 16,755,185 $ 5,027,096 ================== ================== 6. 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 was 309,643 shares, representing approximately 3.7% of the then current outstanding shares. During the year ended December 31, 1998, the Company sold all the remaining shares of its investment in Rada for $812,553 and recorded a realized loss of $119,472. At December 31, 1997, the cost, gross unrealized holding losses and fair value for investment in securities available for sale are as follows: Gross Unrealized Cost Holding Losses Fair Value ------------------ ------------------- ------------------ Rada common stock $932,025 $506,266 $425,759 ================== =================== ================== Reclassification adjustments related to the investment in Rada included in comprehensive income for the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ---- ---- ---- Unrealized holding gains (losses) arising during the year $ 386,795 $ (973,851) $ 429,533 Plus: reclassification adjustment for losses included in net income 119,472 38,051 -- ================== ================== ================== Net unrealized gains (losses) on securities $ 506,267 $ (935,800) $ 429,533 ================== ================== ==================
F-14 55 7. ACCRUED EXPENSES Accrued expenses at December 31, 1998 and 1997 consists of the following:
1998 1997 ---- ---- Employee bonuses $ 2,140,914 $ 1,033,580 Acquisition costs and earn-out payments 6,978,417 -- Accrued interest 1,760,926 1,359,508 Customer deposits 6,659,814 870,300 Commissions 1,103,562 -- Deferred income 1,598,721 821,062 Other 5,473,164 912,513 ------------------ ------------------ $ 25,715,518 $ 4,996,963 ================== ==================
8. LONG-TERM DEBT Long-term debt at December 31, 1998 and 1997 consists of the following:
1998 1997 -------- ------- Senior subordinated debt due 2002 - 2004 at 11.75% $ 11,250,000 $ 11,250,000 Mortgage note payable monthly due 2005 at 10.49% -- 1,079,787 senior secured revolving credit facility expiring 2003 at 7.75% in 1998 and 8.25% in 1997 83,949,415 4,070,603 Notes payable due 1999 - 2000 at 8.25% 4,455,388 2,688,410 ------------------ ------------------ Total long-term debt obligations 99,654,803 19,088,800 Less short-term notes payable (2,317,982) (6,759,013) Less current installments on long-term debt -- (1,079,787) ================== ================== Long-term debt less current installments $97,336,821 $11,250,000 ================== ==================
During 1997, the Company made an advance principal payment of $3.8 million on the senior subordinated debt, along with a prepayment penalty of 1%. The Company may, at its option, redeem up to an additional $750,000 (along with a prepayment penalty of 1%) of principal amount concurrently or within five days after the occurrence of any public offering of the Company's common stock as long as the principal balance is not reduced below $10.5 million. In December 1998, the Company entered into a five-year, $256.7 million syndicated credit facility consisting of a $250.0 million revolving credit facility and a letter of credit in the amount of up to $6.7 million, with an option by the Company to increase the revolving credit facility by an additional $50.0 million, subject to approval from the agent bank and the satisfaction of certain conditions, for a total of $306.7 million. The new credit facility replaced the Company's existing credit facilities. The prior credit facility consisted of a $100 million revolving loan agreement which expired in 2001 and which bore interest at 0.25% below the bank's prime rate, or at the Company's option, LIBOR plus 175-275 basis points. The new credit facility bears interest ranging from prime rate plus 0 to 50 basis points, or at the Company's option, LIBOR plus 150 to 250 basis points and is secured by substantially all of the Company's assets. The total amount available to the Company under the revolving credit facility is determined by applying certain advance rate factors to eligible receivables, inventories and equipment under operating leases. The letter of credit component of the $256.7 million syndicated credit facility was specifically committed to the permanent financing of the Company's new headquarters. The $6.7 million financing was completed by the Company in February 1999. No compensating balances are required under the revolving credit facility but the agreement contains restrictions on the Company's ability to pay dividends. At December 31, 1998, borrowings of $83.9 million were outstanding under the revolving credit facility and the Company had $22.9 million available under the agreement. Debt maturities for each of the five years subsequent to December 31, 1998 are as follows: 1999, $2,317,982; 2000, $2,137,406; 2001, $0; 2002, $5,000,000; 2003, $88,949,415; and thereafter $1,250,000. F-15 56 9. CONVERTIBLE SUBORDINATED NOTES During October 1997, the Company completed the offering and sale in a private placement transaction of $50.0 million of 5 3/4% Convertible Subordinated Notes (the "5 3/4% Notes") maturing in October 2002. In November 1997, the underwriters of the 5 3/4% Notes exercised their overallotment option for $4.0 million. 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 2000, 2001, and 2002 redeem all or any part of the 5 3/4% Notes at prices (expressed in percentages of the principal amount) of 102.30%, 101.15%, and 100%, respectively. Interest on the 5 3/4% Notes is payable semi-annually. During June 1998, the Company completed a public offering of $75.0 million of 5 1/2% Convertible Subordinated Notes (the "5 1/2% Notes") maturing in June 2003. In July 1998, the underwriters of the 5 1/2% Notes exercised their overallotment option for $11.3 million. The principal amount is convertible into shares of common stock at the option of the holders at a conversion price equal to $32.50, subject to adjustment in certain events. In addition, the Company may at any time on or after June 2000, 2001, and 2002 redeem all or any part of the 5 1/2% Notes at prices (expressed in percentages of the principal amount) of 102.30%, 101.15%, and 100%, respectively. Interest on the 5 1/2% Notes is payable semi-annually. 10. LEASES OPERATING LEASES AS LESSOR. One of the Company's product offerings is the leasing of aircraft and engines. These lease agreements have typical lease terms of 3 to 60 months and provide for a fixed time charge plus a usage charge based on flight hours and cycles. Contingent rentals included in income during 1998, 1997 and 1996 were $8.3 million, $2.5 million and $0.4 million, respectively. OPERATING LEASES AS LESSEE. 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. Total rent expense for all operating leases for the years ended December 31, 1998, 1997 and 1996 amounted to $0.6 million, $0.3 million and $70,000, respectively. LEASE PAYMENTS. At December 31, 1998, future minimum lease payments are as follows: Operating Leases -------------------------------------------- As Lessor As Lessee ------------------ ------------------ 1999 $ 25,262,641 $ 1,473,808 2000 12,890,650 655,640 2001 6,131,000 581,820 2002 1,111,000 439,987 2003 75,000 285,848 Thereafter -- 1,012,000 ================== ================== $ 45,470,291 $ 4,449,103 ================== ================== The amounts in the previous table are based upon the assumption that equipment under operating leases will remain on lease for the length of time specified by the respective lease agreements. This is not a projection of future lease revenue; no effect has been given to renewals, new business, cancellations, contingent rentals, sales of equipment under lease or future rate changes. F-16 57 11. INCOME TAXES Income tax expense for the years ended December 31, 1998, 1997 and 1996 is summarized as follows:
1998 1997 1996 ---- ---- ---- Current: Federal $ 8,795,142 $ 4,393,569 $ 1,299,550 State and local 1,161,253 602,959 150,412 ----------------- ----------------- ----------------- 9,956,395 4,996,528 1,449,962 Deferred 1,722,246 80,631 12,285 ----------------- ----------------- ----------------- Provision for income taxes $ 11,678,641 $5,077,159 $ 1,462,247 ================= ================= =================
The actual tax expense differs from the "expected" tax expense for the years ended December 31, 1998, 1997 and 1996 (computed by applying the U.S. federal corporate tax rate of 35% for the year ended December 31, 1998 and 34% for the years ended December 31, 1997 and 1996, to income before income taxes), as follows:
1998 1997 1996 ---- ---- ---- Computed "expected" tax expense $ 10,939,866 $ 4,630,691 $ 1,396,921 State income tax, net of federal benefit 845,960 573,245 98,411 Foreign sales corporation benefit (155,255) (123,771) -- Other 48,070 (3,006) (33,085) ----------------- ----------------- ----------------- Actual tax expense $ 11,678,641 $ 5,077,159 $ 1,462,247 ================= ================= =================
Total income tax expense for the years ended December 31, 1998, 1997 and 1996 was allocated as follows:
1998 1997 1996 ---- ---- ---- Income from continuing operations $11,678,641 $ 5,077,159 $ 1,462,247 Stockholders' equity, for unrealized gain/(loss) on investment securities 190,506 (346,817) 156,308 ----------------- ----------------- ----------------- $11,869,147 $4,730,342 $ 1,618,555 ================= ================= =================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
1998 1997 ---- ---- Deferred tax assets: Intangible assets $ -- $ 70,194 Accounts receivable, principally due to allowance for doubtful accounts 3,841,131 70,688 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 4,381,547 278,403 Unrealized losses on investment securities -- 190,508 Accrued liabilities, principally for financial reporting Purposes 602,990 95,039 Deferred rental and leasing revenue 599,520 -- State net operating losses 561,979 Other 13,810 1,477 ------------------ ------------------ Total gross deferred tax assets 10,000,977 706,309 Less valuation allowance -- -- ------------------ ------------------ Deferred tax assets 10,000,977 706,309
F-17 58
Deferred tax liabilities: Property, plant and equipment (2,465) (23,575) Equipment under operating leases (4,550,455) (226,672) Intangible assets (274,736) -- Other -- -- ------------------ ------------------ Deferred tax liabilities (4,827,656) (250,247) ------------------ ------------------ Net deferred tax assets $ 5,173,321 $ 456,062 ================== ==================
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. On December 31, 1998, the Company acquired all of the outstanding stock of Solair, Inc. The Company files a consolidated income tax return which will include Solair. Thus deferred taxes were calculated on a consolidated basis as of the acquisition date. Based on the potential of the combined enterprises' future taxable income and the applicable provisions of the tax law, the future tax benefits of Solair are expected to be realized within the consolidated group. Therefore, the Company, as a result of the acquisition, has recognized net deferred tax assets of $6,630,011 from Solair which are included in the consolidated net deferred tax assets position of $5,173,321. 12. 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. In June 1998, the Company completed a secondary public offering of 2,750,000 shares of common stock at $26.00 per share, resulting in net proceeds of $67.4 million. In July 1998, the Company's underwriters exercised their overallotment option to purchase an additional 412,500 shares of common stock at $26.00, resulting in additional net proceeds of $10.2 million. The Company had 11,762,015 and 7,879,356 shares of common stock outstanding at December 31, 1998 and 1997, respectively. In January 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 $80.00. 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 in January 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. F-18 59 During 1998 and 1997, the Board of Directors of the Company approved loans in the aggregate amount of $1.1 million and $0.5 million, respectively, to certain officers and directors of the Company for the purposes of purchasing shares of common stock. The loans will be full recourse, 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 average interest rate for these loans at December 31, 1998 and 1997 was 5.8% and 6.1%, respectively. Interest will be paid annually by officers and will accrue and be paid at maturity by directors. As of December 31, 1998 and 1997, the outstanding balance on the loans receivable was $1.4 million and $0.4 million, respectively. Upon consummation of the acquisitions of IASI, Aero Support, Aerocar and Solair, the Company issued warrants to purchase an aggregate of 1,300,000 shares of the Company's common stock at stated prices of $9.25-$27.50, expiring two to five years from the dates of issuance. The amounts recorded by the Company as a result of the issuance of the warrants was determined based on the fair value of the warrants on the closing date of the acquisitions. In February 1997 the Company called its publicly traded warrants pursuant to their terms. The Company received proceeds of $22,961,950 from the exercise of these warrants during the period from October 1996 to March 1997. The Company had 1,147,030 and 1,593,155 warrants outstanding at December 31, 1998 and 1997, respectively. Each warrant entitles the holder to the purchase of one share of the Company's common stock at an average stated price of $19.15 and $10.14 respectively. These warrants are exercisable at various times principally commencing in June 1995 and expiring on or before December 2001. The Company has reserved 5.0 million common shares for the exercise of these warrants. 13. 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 (the "1996 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 1996 Plan is currently 1,100,000. No option or SAR may be granted under the 1996 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 (the "1997 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 1997 Plan is currently 1,000,000. No option may be granted under the 1997 Plan after October 27, 2007, and no option may be outstanding for more than ten years after its grant. The 1998 Stock Option Plan (the "1998 Plan") which is subject to shareholder approval, provides for the granting of stock options to purchase shares of common stock at not less than the fair market value on the date of the option grant. The total number of shares with respect to which options may be granted under the 1998 Plan is 250,000. No option may be granted under the 1998 Plan after November 15, 2008, and no option may be outstanding for more than ten years after its grant. The Company intends to only grant options under the 1998 Plan to newly hired executives and employees as an inducement to enter into employment arrangements with the Company, and to outside members of the Board, in lieu of cash compensation, as an incentive for their service on the Board. F-19 60 In October 1998, the Company's Board of Directors approved the extention of the vesting schedule and repricing of all outstanding employee stock options with an exercise price above $10.125. Employees who accepted the Company's repricing offer were subject to, in general, a 50% extension to the vesting term for that option. All other terms of the existing options remained unchanged. As a result, 1,170,998 employee stock options were cancelled and reissued by the Company at the new exercise price of $10.125. The new exercise price was determined based on the closing market price of the Company's common stock on October 8, 1998. 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 Granted 1,819,412 15.33 Exercised (80,147) 7.46 Expired or Canceled (1,180,998) 21.47 ----------------- ---------------------- Outstanding at December 31, 1998 2,621,768 9.51 ================= ====================== At December 31, 1998: Exercisable options 749,241 7.32 Shares Available for Future Grant 250,000 --
The following table summarizes the status of stock options outstanding and exercisable as of December 31, 1998, by range of exercise price:
Remaining Weighted Contractual Average Weighted Range of Options Term Exercise Options Average Exercise Prices Outstanding (in years) Price Exercisable Exercise Price - --------------------- --------------- -------------- -------------- ------------------ ----------------- $5.00 - $8.00 550,935 7.4 $ 6.75 422,011 $6.48 $8.01 - $12.00 1,937,499 8.6 $ 9.43 327,230 $8.40 $12.01 - $20.00 33,334 9.3 $16.45 -- -- $20.01 - $25.75 100,000 9.5 $24.00 -- -- --------------- ------------------ 2,621,768 749,241 =============== ==================
F-20 61 The weighted average per share fair values of options granted under the Company's stock option plans during 1998, 1997 and 1996 were $18.13, $12.66 and $4.02, 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:
1998 1997 1996 ------------------ ---------------- ---------------- Net earnings: As reported $ 19,578,119 $ 8,542,519 $ 2,646,343 Pro forma 15,052,692 7,193,698 2,260,098 Earnings per share - basic: As reported 1.94 1.18 0.90 Pro forma 1.49 0.99 0.77 Earnings per share - diluted: As reported 1.53 0.95 0.56 Pro forma 1.02 0.77 0.47
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: dividend yield of 0% in 1998, 1997 and 1996; expected volatility of 59% in 1998 and 20% in 1997 and 1996; a risk-free interest rate of 5.35% in 1998 and 6.59% in 1997 and 1996; and an expected holding period of 10 years. Increased pro forma compensation expense in 1998 is the result of the additional options granted and further vesting of 1995, 1996 and 1997 grants during 1998. Pro forma expense for 1999 is expected to increase over 1998 for the same reasons. 14. EARNINGS PER SHARE Diluted earnings per share for the years ended December 31, 1998, 1997 and 1996 was calculated as follows:
1998 1997 1996 ------------------ ---------------- ---------------- Net income $ 19,578,119 $ 8,542,519 $ 2,646,343 Income adjustment relating to reduction of debt based on the if converted method 3,423,047 405,921 -- ================== ================ ================ Net income available to common and common equivalent shares 23,001,166 8,948,440 2,646,343 ================== ================ ================ Weighted average number of common shares outstanding - basic 10,086,875 7,266,534 2,943,902 Dilutive common stock equivalents from stock options and warrants based on the treasury stock method 3,542,904 1,712,196 1,815,988 Dilutive convertible subordinated notes based on the if converted method 1,430,733 415,709 -- ================== ================ ================ Weighted average number of common shares outstanding - diluted 15,060,512 9,394,439 4,759,890 ================== ================ ================
At December 31, 1997, options and warrants to purchase 726,000 shares of common stock were outstanding but were not included in the computation of diluted EPS because their exercise price was greater than the average market price of the common shares during the period. F-21 62 15. SEGMENT REPORTING The Company is organized based on the products that it offers. Under this organizational structure, the Company has three reportable segments: commercial engine, small engine and avionics and rotables. The commercial engine segment is involved in the business of purchasing, overhauling (through subcontractors), reselling and leasing of aircraft, and engines and engine parts for large turbo-fan engines manufactured by CFM International, General Electric, Pratt & Whitney and Rolls Royce. The small engine segment is an after-market reseller of turbojet engines and engine parts for helicopters and large transport aircraft. The segment'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. The Company entered the small engine segment in 1997 with the acquisition of Aero Support. The avionics and rotables segment is engaged in the sale of a wide variety of aircraft rotables and expendable components including flight data recorders, electrical and mechanical equipment and radar and navigation systems. The Company entered the avionics and rotables segment in 1998 with the acquisition of Solair. The Company's reportable segments are managed separately because each business requires different technology and marketing strategies. The Company does not allocate selling, general and administrative expenses, depreciation and amortization, interest expense or income taxes to its business segments. Rather, the Company evaluates performance of the business segments based on revenue and gross margins. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
1998 1997 1996 ------------------ ---------------- ---------------- REVENUES Commercial engine $155,863,349 $ 72,621,217 $24,921,587 Small engine 24,185,460 6,817,932 -- Avionics and rotables -- -- -- ------------------ ---------------- ---------------- Total revenue $180,048,809 $79,439,149 $24,921,587 ================== ================ ================ GROSS MARGIN Commercial engine $54,750,720 $ 25,003,200 $8,686,428 Small engine 8,388,648 3,040,961 -- Avionics and rotables -- -- -- ------------------ ---------------- ---------------- Total gross margin $63,139,368 $28,044,161 $8,686,428 ================== ================ ================ INVENTORIES AND EQUIPMENT UNDER LEASE Commercial engine $229,239,876 $67,428,059 $35,974,507 Small engine 19,870,137 8,469,705 -- Avionics and rotables 41,371,604 -- -- ------------------ ---------------- ---------------- Total inventories $290,481,617 $75,897,764 $35,974,507 ================== ================ ================ GEOGRAPHIC REVENUE INFORMATION Revenue from domestic customers 120,632,702 62,756,928 19,189,622 Revenue from international customers 59,416,107 16,682,221 5,731,965 ------------------ ---------------- ---------------- Total revenue $180,048,809 $79,439,149 $24,921,587 ================== ================ ================
F-22 63 For the years ended December 31, 1998, 1997 and 1996, the Company's five largest customers collectively accounted for approximately 42%, 38% and 55%, respectively, of the Company's consolidated revenues. 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. 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. 16. OTHER MATTERS The Company was named as a defendant in an action in the Supreme Court of the State of New York, County of New York, brought by an alleged beneficiary of the Estate of the late Mr. Joram Rosenfeld (a former Co-Chairman of the Company) and the Executor of the Estate of Mr. Rosenfeld. The Complaint alleged, INTER ALIA, that the Company breached a purported agreement to provide Rosenfeld with options to purchase 345,000 shares of the Company's common stock under the Company's 1996 Stock Option Plan, several months before his death. The complaint further alleged that the Company aided and abetted and/or participated in breaches of fiduciary duty that Yoav Stern, the Company's Chairman of the Board, and Zivi Nedivi, the Company's President and Chief Executive Officer, owed to Rosenfeld as co-members of two private Delaware limited liability companies. The Company believes that the claims asserted against it are totally without merit and has moved for summary judgement dismissing the claims against it on the grounds that the uncontradicted evidence shows that the claims have no basis. At December 31, 1998 there were no other 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 up to five years. The employment agreement provides that such officers may earn bonuses, based on the Company achieving certain 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. In February 1998, the Company established a defined contribution savings plan that covers substantially all eligible employees. Company contributions to the plan are based on employee contributions and the level of company match. Company contributions to the plan totaled approximately $32,000 in 1998. 17. 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. In March 1997, the Company engaged Helix Management Company II, LLC ("Helix"), a company owned by Yoav Stern, Chairman of the Company's Board of Directors, and Zivi Nedivi, President, Chief Executive Officer and a Director of the Company, 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, renewable for additional 12 month terms (as amended, the "Helix Engagement Agreement"). On March 24, 1999, the Company entered into a termination agreement with Helix, pursuant to which the Company agreed to terminate the Helix Engagement Agreement. The "Subsequent Events" note provides further information. Under the terms of the agreement, Helix received a monthly retainer of $25,000. In addition, under the terms of the agreement, a success fee was to be paid by the Company on a per transaction basis, based upon the aggregate consideration in connection with the applicable transaction. Originally, the agreement provided for such fee to be determined on a per transaction basis, not to fall below 2% of the aggregate consideration. In August 1998, the agreement was amended to provide for such fee to be determined as follows: for transactions with aggregate consideration of less than $50 million, 5.0% of the first $5 million, 2.5% of the next $10 million, plus 0.75% of any consideration in excess of $15 million; and for transactions with aggregate consideration of $50 million or more (up to $1,000 million), 1.5% of the first $50 million, 0.75% of the next $200 million, plus 0.5% of any consideration in excess of $250 million. During the years ended December 31, 1998 and 1997, the Company paid $2.0 million and $0.5 million, respectively, and issued warrants for the purchase of an aggregate 14,750 shares of the Company's common stock at exercise prices between $19.00 and $27.50 per share, expiring in three to five years, to Helix relating to such agreement. In addition, at December 31, 1998, the Company has accrued $0.8 million payable to Helix relating to such agreement. F-23 64 18. SUBSEQUENT EVENTS On March 30, 1999, the Company entered into a Termination Agreement (the "Helix Termination Agreement") with Helix, pursuant to which the Company agreed to terminate the Helix Engagement Agreement dated as of March 28, 1997. Under the terms of the Helix Termination Agreement, the Company will only be required to pay Helix success fees on those transactions procured by Helix which have either been consummated or signed prior to the date of termination. Helix has waived all other fees which it is entitled to under the terms of the Helix Engagement Agreement, including monthly retainer fees on account of the ninety day period following termination and success fees on account of transactions procured by Helix which are undertaken by the Company within one year of termination. Helix has also agreed that it will, for no additional consideration, provide the Company such assistance (including access to its members and employees and copies of its records and files) as is necessary to assure an orderly transition in the services provided by Helix. On March 27, 1999, the Company entered into a definitive agreement to acquire privately held Certified Aircraft Parts, Inc. ("Certified") for approximately $16 million in cash. Certified is a provider of parts, after-market support and logistics for the Lockheed Martin C-130/L100 Hercules aircraft and will complement the activities of the Company's small engine segment, which is involved in supplying inventory management for C-130 engines. The transaction is expected to close by the end of April 1999 and is subject to certain customary closing conditions. 19. SUPPLEMENTAL FINANCIAL DATA (A) QUARTERLY DATA - UNAUDITED
Quarters ------------------------------------------------------------- FIRST SECOND THIRD FOURTH ----------- -------------- -------------- --------------- Total revenues: 1998 $29,090,571 $38,063,117 $52,806,517 $60,088,604 1997 16,466,073 17,949,910 20,352,441 24,670,725 Earnings from continuing operations: 1998 $2,941,610 $3,681,064 $6,203,317 $6,752,128 1997 1,659,368 1,941,214 2,326,652 2,615,285 Net earnings: 1998 $2,941,610 $3,681,064 $6,203,317 $6,752,128 1997 1,659,368 1,941,214 2,326,652 2,615,285 Earnings from continuing operations per common share - diluted: 1998 $0.29 $0.34 $0.42 $0.45 1997 0.21 0.22 0.25 0.27 Net earnings per common share - diluted: 1998 $0.29 $0.34 $0.42 $0.45 1997 0.21 0.22 0.25 0.27
(B) PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED F-24 65 The following unaudited pro forma consolidated statements of earnings for the years ended December 31, 1998 and 1997 are based on historical financial statements of the Company and have been adjusted to reflect the acquisitions of Aero Support, ITC, Aerocar, and Solair as though the companies had combined at the beginning of the periods being reported. The pro forma consolidated financial information does not purport to be indicative of results that would have occurred had the acquisitions been in effect for the period presented, nor does it purport to be indicative of the results that will be obtained in the future. The pro forma consolidated financial information is based on certain assumptions and adjustments described in the notes hereto and should be read in conjunction therewith. The pro forma consolidated statements of earnings for the years ended December 31, 1998 and 1997 reflect the effect of the Company's secondary public offering of common stock and convertible subordinated notes as though they had occurred at the beginning of the periods being reported. F-25 66 KELLSTROM INDUSTRIES, INC. PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Years ended December 31, ------------------------------- 1998 1997 ------------- ------------ Sales of aircraft and engine parts, net $ 230,047,078 $ 199,661,381 Rental revenues 35,139,470 19,427,808 ------------- ------------- Total revenues 265,186,548 219,089,189 Cost of goods sold (161,522,112) (139,958,940) Inventory write-down (see below) (5,628,643) (14,027,176) Depreciation of equipment under operating leases (17,735,353) (7,511,290) Selling, general and administrative expenses (37,208,774) (35,077,609) Depreciation and amortization (4,137,877) (2,842,637) ------------- ------------- Total operating expenses (226,232,759) (199,417,652) Operating income 38,953,789 19,671,537 Interest expense, net of interest income (16,032,522) (15,365,956) Expenses related to sale of business -- 321,461 ------------- ------------- Income before income taxes 22,921,267 4,627,042 Income taxes (8,571,665) (1,721,228) ------------- ------------- Net income $ 14,349,602 $ 2,905,814 ============= ============= Earnings per common share - basic $ 1.24 $ 0.28 ============= ============= Earnings per common share - diluted $ 0.87 $ 0.23 ============= ============= Weighted average number of common shares outstanding - basic 11,550,779 10,429,034 ============= ============= Weighted average number of common shares outstanding - diluted 16,524,416 12,556,939 ============= =============
Solair's historical results for the years ended December 31, 1998 and March 31, 1998 reflect charges to income of $5.6 million and $14.0 million, respectively, for the write-down of inventory. If these charges were excluded from the pro forma statements of earnings, net income and earnings per share on a basic and diluted basis would be $17.9 million, $1.55 and $1.08, respectively and $11.7 million, $1.12 and $0.93, respectively for the years ended December 31, 1998 and 1997, respectively. Unaudited - See accompanying notes to pro forma consolidated statements of earnings. F-26 67 KELLSTROM INDUSTRIES, INC. PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS Year Ended December 31, 1998 (Unaudited)
HISTORICAL --------------------------------------------------------- KELLSTROM ITC AEROCAR SOLAIR ------------- ------------- ------------- ------------- Sales of aircraft and engine parts, net $ 148,901,686 $ 8,036,576 $ 3,458,512 $ 69,650,304 Rental revenues 31,147,123 538,306 3,454,041 -- ------------- ------------- ------------- ------------- Total revenues 180,048,809 8,574,882 6,912,553 69,650,304 Cost of goods sold (100,221,300) (4,997,742) (1,724,577) (54,578,493) Inventory write-down -- -- -- (5,628,643) Depreciation of equipment under operating leases (16,688,141) (289,317) (757,895) -- Selling, general and administrative expenses (19,051,869) (640,591) (1,443,646) (16,787,829) Depreciation and amortization (3,057,847) (3,498) -- (480,545) ------------- ------------- ------------- ------------- Total operating expenses (139,019,157) (5,931,148) (3,926,118) (77,475,510) Operating income 41,029,652 2,643,734 2,986,435 (7,825,206) Interest expense, net of interest income (9,772,892) (160,492) (87,257) (5,289,158) ------------- ------------- ------------- ------------- Income before income taxes 31,256,760 2,483,242 2,899,178 (13,114,364) Income taxes (11,678,641) -- -- ------------- ------------- ------------- ------------- Net income $ 19,578,119 $ 2,483,242 $ 2,899,178 $ (13,114,364) ============= ============= ============= ============= Earnings per common share - basic $ 1.94 ============= Earnings per common share - diluted $ 1.53 ============= Weighted average number of common shares outstanding - basic 10,086,875 ============= Weighted average number of common shares outstanding - diluted 15,060,512 =============
PRO FORMA PRO FORMA PRO FORMA PRO FORMA ADJUSTMENTS(A) ADJUSTMENTS(B) ADJUSTMENTS(C) COMBINED ------------------------------------------------------------------ Sales of aircraft and engine parts, net $ -- $ 230,047,078 Rental revenues -- 35,139,470 --------------- --------------- --------------- --------------- Total revenues -- -- -- 265,186,548 Cost of goods sold -- (161,522,112) Inventory write-down (5,628,643) Depreciation of equipment under operating leases (17,735,353) Selling, general and administrative expenses 43,161 132,000 540,000 (37,208,774) Depreciation and amortization (52,963) (431,194) (111,830) (4,137,877) --------------- --------------- --------------- --------------- Total operating expenses (9,802) (299,194) 428,170 (226,232,759) Operating income (9,802) (299,194) 428,170 38,953,789 Interest expense, net of interest income 160,492 219,633 5,479,680 (16,032,522) (532,331) (2,061,530) (3,988,667) --------------- --------------- --------------- --------------- Income before income taxes (381,642) (2,141,091) 1,919,183 22,921,267 Income taxes (785,233) (283,248) 4,175,458 (8,571,664) --------------- --------------- --------------- --------------- Net income $ (1,166,874) $ (2,424,339) $ 6,094,641 $ 14,349,603 =============== =============== =============== =============== Earnings per common share - basic $ 1.24 =============== Earnings per common share - diluted $ 0.87 =============== Weighted average number of common shares outstanding - basic 11,550,779 =============== Weighted average number of common shares outstanding - diluted 16,524,416 ===============
Unaudited - See accompanying notes to pro forma consolidated statement of earnings. F-27 68 KELLSTROM INDUSTRIES, INC. Notes to Pro Forma Consolidated Statement of Earnings (Unaudited) (A) For the purpose of presenting the pro forma consolidated statement of earnings, the following adjustments have been made for the ITC acquisition:
Year Ended December 31, 1998 ----------------- Increase (decrease) in income: Reduction in selling, general and administrative expense due to elimination of pension expense 43,161 Amortization of goodwill and non-compete agreement related to ITC acquisition (52,963) Reduction in interest expense due to pay-off of debt on ITC line of credit 160,492 Interest expense on acquisition debt and debt incurred to repay existing ITC line of credit (532,331) ------------ (381,642) Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (785,233) ------------ Net adjustment $ (1,166,874) ============
(B) For the purpose of presenting the pro forma consolidated statement of earnings, the following adjustments have been made for the Aerocar Aviation and Aerocar Parts acquisitions:
Year ended December 31, 1998 ----------------- Increase (decrease) in income: Elimination of Aerocar Aviation and Aerocar Parts officer's salary and bonus $ 132,000 Amortization of goodwill related to Aerocar Aviation and Aerocar Parts acquisitions (431,194) Reduction in interest expense due to pay-off of debt on Aerocar Aviation and Aerocar Parts line of credit 219,633 Interest expense on acquisition debt and debt incurred to repay existing Aerocar Aviation and Aerocar Parts line of credit (2,061,530) ------------ Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (2,141,091) (283,248) Net adjustments ------------ $ (2,424,339) ============
(C) For the purpose of presenting the pro forma consolidated statement of earnings, the statement of operations of Solair for the twelve months ended December 31, 1998 has been used and the following adjustments have been made for the Solair acquisition:
Year ended December 31, 1998 ----------------- Increase (decrease) in income: Reduction in selling, general and administrative expenses for elimination of Banner management fees 540,000 Amortization of goodwill related to Solair acquisition (111,830) Reduction in interest expense due to pay-off of Solair debt 5,479,680 Increase in interest expense from acquisition debt (3,988,667) ------------ 1,919,183 Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes 4,175,458 ------------ Net adjustment $ 6,094,641 ============
F-28 69 KELLSTROM INDUSTRIES, INC. PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS Year Ended December 31, 1997 (Unaudited)
HISTORICAL ------------------------------------------------------------------------------- KELLSTROM AERO SUPPORT ITC AEROCAR SOLAIR ------------- ------------ ------------- ------------- ------------- Sales of aircraft and engine parts, net $ 71,534,539 $ 20,041,644 $ 28,214,141 $ 31,693,131 $ 75,295,858 Rental revenues 7,904,610 -- 738,636 10,784,562 -- ------------- ------------ ------------ ------------- ------------- Total revenues 79,439,149 20,041,644 28,952,777 42,477,693 75,295,858 Cost of goods sold (46,800,589) (13,162,382) (17,034,996) (11,957,687) (61,052,592) Inventory write-down -- -- -- -- (14,027,176) Depreciation of equipment under operating leases (4,594,399) -- (449,673) (3,025,095) -- Selling, general and administrative expenses (8,877,598) (3,690,856) (5,615,848) (4,600,069) (15,707,692) Depreciation and amortization (1,555,673) (68,583) (12,758) (31,592) (365,767) ------------- ------------ ------------ ------------- ------------- Total operating expenses (61,828,259) (16,921,821) (23,113,275) (19,614,443) (91,153,227) Operating income 17,610,890 3,119,823 5,839,502 22,863,250 (15,857,369) Interest expense, net of interest income (3,991,212) (197,011) (481,812) (92,108) (3,697,510) Expenses related to sale of business -- -- ------------- ------------ ------------ ------------- ------------- Income before income taxes 13,619,678 2,922,812 5,357,690 22,771,142 (19,554,879) Income taxes (5,077,159) (196,401) -- -- -- ============= ============ ============ ============= ============= Net income $ 8,542,519 $ 2,726,411 $ 5,357,690 $ 22,771,142 $ (19,554,879) ============= ============ ============ ============= ============= Earnings per common share - basic $ 1.18 ============= Earnings per common share - diluted $ 0.95 ============= Weighted average number of common shares outstanding - basic 7,266,534 ============= Weighted average number of common shares outstanding - diluted 9,394,439 =============
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA ADJUSTMENTS(A) ADJUSTMENTS(B) ADJUSTMENTS(C) ADJUSTMENTS(D) COMBINED ----------------------------------------------------------------------------------------- Sales of aircraft and engine parts, net $ (6,817,932) $ -- $ (20,300,000) -- $ 199,661,381 Rental revenues -- -- -- -- 19,427,808 -------------- -------------- -------------- ----------- -------------- Total revenues (6,817,932) -- (20,300,000) -- 219,089,189 Cost of goods sold 4,161,267 -- 4,286,710 -- (139,958,940) 1,601,329 Inventory write-down -- -- -- -- (14,027,176) Depreciation of equipment under operating leases -- -- 557,877 -- (7,511,290) Selling, general and administrative expenses 856,045 152,272 (938,259) 540,000 (35,077,609) 2,804,396 Depreciation and amortization 16,500 (111,830) (2,842,637) (659,517) (211,853) 158,436 -------------- -------------- -------------- ----------- -------------- Total operating expenses $ 4,532,731 $ (59,581) $ 8,312,053 $ 428,170 $ (199,417,652) Operating income (2,285,201) (59,581) (11,987,947) 428,170 19,671,537 Interest expense, net of interest income 197,011 (2,129,325) (4,123,059) 3,726,362 (15,365,956) (1,070,437) 481,812 (3,988,667) Expenses related to sale of business 321,461 321,461 -------------- -------------- -------------- ----------- -------------- Income before income taxes (3,158,627) (1,707,094) (15,789,545) 165,865 4,627,042 Income taxes 284,308 (1,360,873) (2,602,608) 7,231,505 (1,721,228) -------------- -------------- -------------- ----------- -------------- Net income $ (2,874,319) $ (3,067,967) $ (18,392,153) 7,397,370 2,905,814 ============== ============== ============== =========== ============== Earnings per common share - basic $ 0.28 ============== Earnings per common share - diluted $ 0.23 ============== Weighted average number of common shares outstanding - basic 10,429,034 ============== Weighted average number of common shares outstanding - diluted 12,556,939 ==============
Unaudited - See accompanying notes to pro forma consolidated statement of earnings. F-29 70 KELLSTROM INDUSTRIES, INC. Notes to Pro Forma Consolidated Statement of Earnings (Unaudited) (A) For the purpose of presenting the pro forma consolidated statement of earnings, the following adjustments have been made for the Aero support acquisition:
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 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-complete 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 (1,070,437) ------------- (3,158,627) Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes 284,308 ------------- Net adjustment $ (2,874,319) =============
(B) For the purpose of presenting the pro forma consolidated statement of earnings, the following adjustments have been made for the ITC acquisition:
Year Ended December 31, 1997 ----------------- Increase (decrease) in income: Amortization of goodwill and non-compete agreement related to ITC acquisition $ (211,853) Reduction in selling, general and administrative expense due to elimination of pension expense 152,272 Reduction in interest expense due to pay-off of debt on ITC line of credit 481,812 Interest expense on acquisition debt and debt incurred on ITC's line of credit (2,129,325) ------------ (1,707,094) Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (1,360,873) ------------ Net adjustment $ (3,067,967) ============
(C) For the purpose of presenting the pro forma consolidated statement of earnings, the following adjustments have been made for the Aerocar Aviation and Aerocar Parts acquisitions:
Year Ended December 31, 1997 ----------------- Increase (decrease) in income: Reversal of Aerocar Aviation revenues for sales to Kellstrom Industries, Inc. $ (20,300,000) Reversal in cost of goods sold for sales to Kellstrom Industries, Inc. 4,286,710 Reduction in cost of goods sold for sale of equipment previously owned by Aerocar Aviation 1,601,329 Reduction in depreciation expense from sales to Kellstrom Industries, Inc. 557,877 Amortization of goodwill and non-compete related to Aerocar Aviation and Aerocar Parts acquisition (938,259) Elimination of Aerocar Aviation and Aerocar Parts officer's salary and bonus 2,804,396 Increase in interest expense from acquisition debt (4,123,059) Reduction in interest expense due to pay-off of debt on Aerocar Aviation and Aerocar Parts line of credit 321,461 ------------- (15,789,545) Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (2,602,608) ------------- Net adjustments $ (18,392,153) =============
(D) For the purpose of presenting the pro forma consolidated statement of earnings, the statement of operations of Solair for the year ended March 31, 1998 has been used and the following adjustments have been made for the Solair acquisition:
Year Ended December 31, 1997 ----------------- Increase (decrease) in income: Reduction in selling, general and administrative expenses for elimination of Banner management fees 540,000 Amortization of goodwill related to Solair acquisition (111,830) Reduction in interest expense due to pay-off of Solair debt 3,726,362 Increase in interest expense from acquisition debt (3,988,667) ----------- 165,865 Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes 7,231,505 ----------- Net adjustment $ 7,397,370 ===========
F-30 EX-4.6 2 INDENTURE OF TRUST 2/1/99 - NORWEST BANK MINNESOTA 1 EXHIBIT 4.6 INDENTURE OF TRUST DATED AS OF FEBRUARY 1, 1999 BETWEEN KELLSTROM INDUSTRIES, INC. AND NORWEST BANK MINNESOTA, N.A. AS TRUSTEE $6,670,000 KELLSTROM INDUSTRIES, INC. TAXABLE VARIABLE RATE DEMAND NOTES, SERIES 1999 2 TABLE OF CONTENTS
SECTION PAGE - ------- ---- ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION............................................................. 3 Section 1.01. Definitions........................................................................ 3 Section 1.02. Rules of Construction.............................................................. 9 ARTICLE II THE NOTES........................................................................................ 10 Section 2.01. Issuance of Notes; Form; Dating.................................................... 10 Section 2.02. Interest on the Notes.............................................................. 12 Section 2.03. Execution and Authentication....................................................... 13 Section 2.04. Note Register...................................................................... 14 Section 2.05. Registration and Exchange of Notes; Persons Treated as Owners; Book-Entry System............................................................................. 14 Section 2.06. Mutilated, Lost, Stolen, Destroyed or Undelivered Notes............................ 17 Section 2.07. Cancellation of Notes.............................................................. 18 Section 2.08. Temporary Notes.................................................................... 18 ARTICLE III REDEMPTION, PURCHASE AND REMARKETING OF NOTES................................................... 19 Section 3.01. Redemption of Notes................................................................ 19 Section 3.02. Redemption Date.................................................................... 20 Section 3.03. Selection of Notes To Be Redeemed.................................................. 20 Section 3.04. Notice to Trustee; Notice of Redemption............................................ 21 Section 3.05. Payment of Notes Called for Redemption............................................. 22 Section 3.06. Notes Redeemed in Part............................................................. 22 Section 3.07. Purchase of Notes.................................................................. 22 Section 3.08. Remarketing of Purchased Notes..................................................... 24 ARTICLE IV PAYMENT OF NOTES AND CREATION OF FUNDS........................................................... 28 Section 4.01. Payment of Notes................................................................... 28 Section 4.02. Creation of Note Fund.............................................................. 28 Section 4.03. Payments Into Note Fund............................................................ 28 Section 4.04. Use of Moneys in Note Fund......................................................... 29 Section 4.05. Custody of Note Fund............................................................... 29 Section 4.06. Creation of Construction Fund...................................................... 29 Section 4.07. Deposits into Construction Fund; Cost of the Project............................... 29 Section 4.08. Payments from Construction Fund.................................................... 30 Section 4.09. Disposition of Balance in Construction Fund........................................ 32 Section 4.10. Trustee's Reliance on Bank......................................................... 32 Section 4.11. Moneys To Be Held in Trust......................................................... 32 Section 4.12. Payment to Borrower From Note Fund or Construction Fund............................ 33 Section 4.13. Investment of Moneys............................................................... 33 ARTICLE V LETTER OF CREDIT.................................................................................. 36 Section 5.01. Requirements for Letter of Credit.................................................. 36 Section 5.02. Draws on Letter of Credit; Extensions.............................................. 36 Section 5.03. Substitute Letter of Credit........................................................ 37 Section 5.04. Enforcement of the Letter of Credit................................................ 38
-i- 3 ARTICLE VI GENERAL COVENANTS, REPRESENTATIONS AND WARRANTIES................................................ 39 Section 6.01. Payment of Notes................................................................... 39 Section 6.02. Covenants, Representations and Warranties of Borrower.............................. 39 Section 6.03. Notice of Litigation............................................................... 40 Section 6.04. Financing and Continuation Statements.............................................. 40 Section 6.05. Further Assurances................................................................. 40 ARTICLE VII DISCHARGE OF INDENTURE.......................................................................... 41 Section 7.01. Notes Deemed Paid; Discharge of Indenture.......................................... 41 Section 7.02. Application of Trust Money......................................................... 42 ARTICLE VIII DEFAULTS AND REMEDIES.......................................................................... 43 Section 8.01. Events of Default.................................................................. 43 Section 8.02. Acceleration and Duty to Draw on Letter of Credit.................................. 43 Section 8.03. Disposition of Amounts Drawn on Letter of Credit; Assignment of Rights to Contest.................................................... 44 Section 8.04. Other Remedies; Rights of Noteholders.............................................. 44 Section 8.05. Right of Noteholders to Direct Proceedings......................................... 45 Section 8.06. Application of Moneys.............................................................. 45 Section 8.07. Remedies Vested in Trustee......................................................... 47 Section 8.08. Limitations on Suits............................................................... 47 Section 8.09. Termination of Proceedings......................................................... 48 Section 8.10. Waivers of Events of Default....................................................... 48 Section 8.11. Notice of Defaults; Opportunity of Borrower to Cure Defaults....................... 48 Section 8.12. Unconditional Right to Receive Principal and Interest.............................. 49 Section 8.13. Notes Outstanding.................................................................. 49 Section 8.14. Letter of Credit Bank Deemed Owner................................................. 49 Section 8.15. Subrogation Rights of the Bank..................................................... 50 ARTICLE IX TRUSTEE, FISCAL AGENT, PLACEMENT AGENT AND REMARKETING AGENT .................................... 51 Section 9.01. Duties of Trustee.................................................................. 51 Section 9.02. Rights of Trustee.................................................................. 52 Section 9.03. Individual Rights of Trustee, Etc................................................. 53 Section 9.04. Trustee's Disclaimer............................................................... 53 Section 9.05. Notice of Defaults................................................................. 53 Section 9.06. Compensation and Indemnification of Trustee........................................ 54 Section 9.07. Eligibility of Trustee............................................................. 54 Section 9.08. Replacement of Trustee............................................................. 55 Section 9.09. Fiscal Agent....................................................................... 55 Section 9.10. Qualifications of Fiscal Agent; Resignation; Removal............................... 56 Section 9.11. Duties of Placement Agent.......................................................... 57 Section 9.12. [Reserved]......................................................................... 57 Section 9.13. Duties of Remarketing Agent........................................................ 57 Section 9.14. Eligibility of Remarketing Agent; Replacement...................................... 57 Section 9.15. Successor Trustee, Remarketing Agent or Fiscal Agent by Merger..................... 58 Section 9.16. Appointment of Co-Trustee.......................................................... 59 Section 9.17. Several Capacities................................................................. 59 ARTICLE X AMENDMENTS OF AND SUPPLEMENTS TO INDENTURE........................................................ 60 Section 10.01. Without Consent of Noteholders..................................................... 60 Section 10.02. With Consent of Noteholders........................................................ 61 Section 10.03. Effect of Consents................................................................. 61 Section 10.04. Notation on or Exchange of Notes................................................... 61
-ii- 4 Section 10.05. Signing by Trustee of Amendments and Supplements................................... 61 Section 10.06. Bank, Fiscal Agent and Remarketing Agent Consents Required......................... 62 Section 10.07. Notice to Noteholders.............................................................. 62 Section 10.08. Opinion of Counsel Required........................................................ 62 ARTICLE XI MISCELLANEOUS ................................................................................... 63 Section 11.01. Notices............................................................................ 63 Section 11.02. Noteholders' Consents.............................................................. 65 Section 11.03. Notices to Rating Agency........................................................... 65 Section 11.04. Limitation of Rights............................................................... 66 Section 11.05. Severability....................................................................... 66 Section 11.06. Payments Due on Non-Business Days.................................................. 66 Section 11.07. Governing Law...................................................................... 66 Section 11.08. Counterparts....................................................................... 66 Section 11.09. References to the Bank............................................................. 66 EXHIBIT A FORM OF NOTE EXHIBIT B NOTICE OF MANDATORY PURCHASE EXHIBIT C REQUEST FOR DISBURSEMENT AND CERTIFICATION
-iii- 5 INDENTURE OF TRUST THIS INDENTURE OF TRUST dated as of February 1, 1999 between KELLSTROM INDUSTRIES, INC., a Delaware corporation (the "Borrower"), and NORWEST BANK MINNESOTA, N.A., a national banking association organized and existing under the laws of the United States of America and having its principal office in Minneapolis, Minnesota (the "Trustee"), as trustee and as Fiscal Agent (hereinafter defined) for the Notes (hereinafter defined); W I T N E S S E T H: WHEREAS, the Borrower has determined to issue and sell its interest bearing taxable variable rate demand notes in substantially the form of EXHIBIT A attached hereto (individually, the "Note" and collectively, the "Notes") in the aggregate principal amount of Six Million Six Hundred Seventy Thousand Dollars ($6,670,000) and to use the proceeds from such issuance and sale (i) to finance, in whole or in part, the cost of acquiring, constructing and equipping a headquarters facility for the Borrower in Sunrise, Florida (the "Project"), including reimbursing the Borrower for any of such costs paid by it prior to the issuance of the Notes, and (ii) to pay the costs of issuance of the Notes and other related costs; WHEREAS, the payment when due of the principal of, interest on and Purchase Price (hereinafter defined) of the Notes will be supported, to the extent provided therein, by the Letter of Credit (hereinafter defined) issued in favor of the Trustee by the Bank (hereinafter defined) in an initial stated amount equal to the principal amount of Notes issued hereunder plus 35 days' interest on such amount computed at the Maximum Rate (hereinafter defined), on the basis of actual number of days elapsed in a year of 365 days, all pursuant to and as more fully set forth in the Reimbursement Agreement (hereinafter defined); and WHEREAS, the Borrower has requested that the Trustee act (i) hereunder for the benefit of the Noteholders (hereinafter defined) to perform certain services in connection with the issuance, authentication and delivery of, the registration, transfer and exchange of, and the payment of principal, interest and purchase price with respect to the Notes issued hereunder and (ii) as the beneficiary of the Letter of Credit for the benefit of the Noteholders, and the Trustee is willing to accept such appointments and perform such services on the terms and subject to the conditions set forth herein; and WHEREAS, the Borrower has requested that NationsBank, N.A. act as its agent hereunder to perform certain services in connection with the placement of the Notes upon issuance thereof, and NationsBank, N.A. is willing to accept such appointment and perform such services on the terms and subject to the conditions set forth herein and in the Placement Agreement (hereinafter defined); and WHEREAS, the Borrower has requested that NationsBank, N.A. act as its agent hereunder to perform certain services in connection with the remarketing of Notes tendered for purchase and the determination of the interest rates with respect to the Notes, and NationsBank, 6 N.A. is willing to accept such appointment and perform such services on the terms and subject to the conditions set forth herein and in the Remarketing Agreement (hereinafter defined); and WHEREAS, the Borrower and the Trustee desire to set forth certain of the terms and conditions with respect to the issuance of the Notes; NOW, THEREFORE, KNOW ALL BY THESE PRESENTS, THIS INDENTURE WITNESSETH: That the Borrower, in consideration of the premises and of the acceptance by the Trustee of the trusts hereby created, and of the purchase and acceptance of the Notes by the holders thereof, and of the sum of TEN DOLLARS ($10.00), lawful money of the United States of America, to it paid by the Trustee, at or before the execution and delivery of these presents, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, in order to secure (i) the payment of the principal and purchase price of, and the interest on, the Notes and all other amounts payable by the Borrower pursuant to the terms of the Notes and/or this Indenture according to their tenor and effect and to ensure the performance and observance by the Borrower of all the agreements expressed or implied herein and in the Notes, and (ii) the payment of all amounts due and owing the Bank under and pursuant to the Reimbursement Agreement, has given, granted, assigned and pledged and does by these presents give, grant, assign and pledge to the Trustee and to its successors in the trusts hereby created, and to them and their assigns forever: GRANTING CLAUSE To secure first, the payment of the Notes, and second, the payment and performance of the Borrower's obligations to the Bank under the Reimbursement Agreement, the Borrower (i) assigns and pledges to the Trustee and the Bank and (ii) grants to the Trustee a first priority security interest in, and to the Bank a second priority security interest in, all right, title and interest of the Borrower in and to: I. This Indenture, including any right to delivery of the Letter of Credit, any right to bring actions and proceedings under this Indenture or for the enforcement of this Indenture and to do all things that the Borrower is entitled to do under this Indenture; and II. All moneys and securities held from time to time by the Trustee under this Indenture, first, for the equal and proportionate benefit of all holders of the Notes without priority or distinction as to lien or otherwise of any Notes over any other Notes, and second, for the benefit of the Bank to secure the payment and performance of the Borrower's obligations to the Bank under the Reimbursement Agreement, except as otherwise provided in this Indenture; and -2- 7 III. Any and all real or personal property of every nature now and from time to time hereafter by delivery or by writing of any kind conveyed, mortgaged, pledged, assigned or transferred, as and for additional security hereunder by the Borrower or by anyone on its behalf or with its written consent to the Trustee which is hereby authorized to receive any and all such property at any and all times and to hold and apply the same subject to the terms hereof (items I, II and III being referred to collectively herein as the "Trust Estate"). ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Section 1.01. DEFINITIONS. For all purposes of this Indenture, unless the context or use clearly indicates another or different meaning or intent, the following terms shall have the following meanings: "AUTHORIZED DENOMINATIONS" means, with respect to all Notes, $100,000 and any integral multiple of $5,000 in excess thereof. "AVAILABLE MONEYS" means moneys which are (a) continuously on deposit with the Trustee in trust for the benefit of the Noteholders in a separate and segregated account in which only Available Moneys are held and which are (b) proceeds of (i) the Notes received contemporaneously with and directly from the issuance and sale of the Notes, (ii) payments made by the Borrower or any Guarantor if at the time of the deposit of such payments and for a period of at least 366 days thereafter no Bankruptcy Filing has occurred, (iii) a draw by the Trustee on the Letter of Credit, or (iv) income derived from the investment of the foregoing. "BANK" means the issuer of the Letter of Credit, initially NationsBank, N.A., and upon the issuance and delivery of a Substitute Letter of Credit, shall mean the issuer of such Substitute Letter of Credit. "BANK NOTES" means any Notes purchased with proceeds from a draw under the Letter of Credit and held pursuant to the terms of the Reimbursement Agreement and this Indenture. In addition, Notes that are registered in the name of the Borrower and pledged to the Bank shall constitute Bank Notes. "BANKRUPTCY COUNSEL" means any counsel nationally recognized in bankruptcy matters which is independent of the Borrower and is reasonably acceptable to the Bank and the Remarketing Agent. "BANKRUPTCY FILING" means the filing of a petition by or against the Borrower or any Guarantor as a debtor under the United States Bankruptcy Code or similar bankruptcy or insolvency act. If the petition has been dismissed and the dismissal is final and not subject to appeal at the relevant time, the filing shall not be considered to have occurred. -3- 8 "BENEFICIAL OWNER" is defined in Section 2.05(c). "BORROWER" means Kellstrom Industries, Inc., a Delaware corporation, or any successor or successors to the Borrower's obligations under this Indenture. "BORROWER NOTES" means any Notes (other than Bank Notes) of which the Borrower, or any affiliate or subsidiary thereof, is the registered holder or Beneficial Owner. "BORROWER REPRESENTATIVE" means a person at the time designated to act on behalf of the Borrower by a written instrument furnished to the Trustee and the Fiscal Agent containing the specimen signature of such person and signed on behalf of the Borrower by its President or any Vice President, or, in the case of a Person other than a corporation, the person or persons having comparable positions or roles. The certificate may designate an alternate or alternates. "BUSINESS DAY" means any day other than (a) a Saturday or Sunday, (b) a day on which commercial banks in New York, New York or the city or cities in which the corporate trust office of the Trustee or the Fiscal Agent, the primary office of the Remarketing Agent or the paying office of the Bank are located are authorized or required by law or executive order to close, or (c) a day on which the New York Stock Exchange or DTC is closed. For purposes of this definition, "paying office of the Bank" means the Bank office responsible for making payments under any Letter of Credit. "CEDE & CO." means Cede & Co., the nominee of DTC or any successor nominee of DTC with respect to the Notes. "CONSTRUCTION FUND" means the fund by that name created by Section 4.06. "COST OF THE PROJECT" means the costs of the Project, as described in Section 4.07. "DTC" means The Depository Trust Company, a limited purpose company organized under the laws of the State of New York, and its successors and assigns. "DTC PARTICIPANT" or "DTC PARTICIPANTS" means securities brokers and dealers, banks, trust companies and clearing corporations which have access, as participants or otherwise (directly or indirectly) to the DTC system. "EVENT OF DEFAULT" is defined in Section 8.01. "FISCAL AGENT" means the agent appointed from time to time pursuant to Section 9.09. "GUARANTOR" means any guarantor of any of the payment obligations of the Borrower under any of the Transaction Documents. "INDENTURE" means this Indenture of Trust between the Borrower and the Trustee, as amended or supplemented from time to time in accordance with its terms. -4- 9 "INTEREST PAYMENT DATE" means the first day of each month. "INVESTMENT SECURITIES" means those securities enumerated in Section 4.13 as permitted investments for the proceeds of the Notes. "LAND" means the 11.75 acre parcel of real estate in Sunrise, Florida on which the Project is located. "LETTER OF CREDIT" means an irrevocable direct-pay letter of credit having the characteristics of a "credit" or "letter of credit" set forth in Section 5-103 of the Uniform Commercial Code of the State of Florida (or in the case of a Substitute Letter of Credit, Section 5-103 of the Uniform Commercial Code of the state under whose laws such Substitute Letter of Credit is governed) except that a letter of credit (a) may not be revocable and (b) may only be issued by (i) a national bank, (ii) any banking institution organized under the laws of any state, territory or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar officials or (iii) a branch or agency of a foreign bank, provided that the nature and extent of federal and/or state regulation and the supervision of the particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction and which meets the requirements of Section 5.01. Initially, the term "Letter of Credit" shall mean the irrevocable, direct-pay letter of credit issued by the Bank to the Trustee in accordance with Section 5.01, including any permitted supplements or amendments thereto and any renewals or extensions thereof, and, upon the expiration or termination of the Letter of Credit and the issuance and delivery of a Substitute Letter of Credit meeting the requirements set forth in this paragraph and in Section 5.01 hereof, "Letter of Credit" shall mean such Substitute Letter of Credit. "LETTER OF CREDIT DOCUMENTS" means the Reimbursement Agreement, the Letter of Credit and all other documents evidencing, securing or otherwise relating to the Obligations (including the mortgage evidencing the Bank's lien on the Project and the guaranty of the Guarantors) collectively or individually, as appropriate, each as amended, substituted, replaced, modified and extended from time to time. "MANDATORY REPURCHASE DATE" means, with respect to any Notes, the date on which such Notes are required to be purchased pursuant to Section 3.07(a). "MAXIMUM RATE" means the lesser of (a) the highest interest rate which may be borne by the Notes under State law or (b) twelve percent (12%) per year. "NOTE" or "NOTES" means the notes issued pursuant to this Indenture in substantially the form of EXHIBIT A attached hereto. "NOTE DOCUMENTS" means this Indenture, the Notes, the Placement Agreement and the Remarketing Agreement, collectively or individually, as appropriate, each as amended, modified and extended from time to time. -5- 10 "NOTE FUND" means the fund by that name created by Section 4.02. "NOTICE OF MANDATORY REPURCHASE" means that notice required to be prepared by the Trustee and given by the Fiscal Agent pursuant to Section 3.07, the form of which is attached hereto as EXHIBIT B. "OBLIGATIONS" means, at any time, the sum of (i) the maximum amount which is, or at any time thereafter may become, available to be drawn under the Letter of Credit, assuming compliance with all requirements for drawings thereunder, PLUS (ii) the aggregate amount of all drawings under the Letter of Credit honored by the Bank but not theretofore reimbursed, PLUS (iii) any interest, fees or other obligations or amounts owing by the Borrower to the Bank under the Reimbursement Agreement, the other Letter of Credit Documents, or the other Transaction Documents. "OPINION OF COUNSEL" means a written opinion of counsel who is reasonably acceptable to the Trustee, the Remarketing Agent and the Bank. The counsel may be an employee of or counsel to the Trustee, the Remarketing Agent or the Borrower. "OPTIONAL TENDER DATE" is defined in Section 3.07(b)(i). "OUTSTANDING" when used with reference to Notes, or "Notes Outstanding" means all Notes which have been authenticated and delivered by the Fiscal Agent under this Indenture, except the following: (a) Notes canceled or purchased by or delivered to the Fiscal Agent for cancellation pursuant to the provisions of this Indenture. Except as otherwise provided in Section 3.08, Notes purchased by the Borrower pursuant to optional tender or mandatory repurchase under Section 3.07 (including Bank Notes) shall continue to be Outstanding until the holder of such Notes directs the Fiscal Agent to cancel them; (b) Notes that have become due (at maturity or on redemption, acceleration or otherwise) and for the payment, including interest accrued to the due date, of which sufficient moneys are held by the Fiscal Agent; and (c) Notes in lieu of which others have been authenticated under Section 2.05 (relating to registration and exchange of Notes) or Section 2.06 (relating to mutilated, lost, stolen, destroyed or undelivered Notes). "OWNER", "OWNER", "NOTEHOLDER", "NOTEHOLDER", "HOLDER", "HOLDER" or words of similar import mean: (a) in the event that the book-entry system of evidence and transfer of ownership in the Notes is employed pursuant to Section 2.05(c), Cede & Co., as nominee for DTC, or its nominee, and (b) in all other cases, the registered owner or owners of any Note fully registered as shown on the register maintained by the Fiscal Agent. "PERSON" means (a) any individual, (b) any corporation, partnership, joint venture, association, joint-stock company, business trust or unincorporated organization, limited liability -6- 11 company, or grouping of any such entities, in each case formed or organized under the laws of the United States of America, any state thereof or the District of Columbia or (c) the United States of America or any state thereof, or any political subdivision of either thereof, or any agency, authority or other instrumentality of any of the foregoing. "PLACEMENT AGENT" means NationsBank, N.A., the placement agent under the Placement Agreement with respect to the initial placement of the Notes. "PLACEMENT AGREEMENT" means the Placement Agreement, dated as of February 1, 1999, by and between the Borrower and the Placement Agent. "PRIVATE PLACEMENT MEMORANDUM" means the Private Placement Memorandum dated February 16, 1999 relating to the sale of the Notes by the Placement Agent and the Remarketing Agent. "PROJECT" means a headquarters facility for the Borrower located on the Land. "RATING AGENCY" means, if the Notes are rated, Moody's Investors Service, Inc., if such agency's ratings are in effect with respect to the Notes, Standard & Poor's, a division of The McGraw-Hill Companies, Inc., if such agency's ratings are in effect with respect to the Notes, and Fitch IBCA, Inc. if such agency's ratings are in effect with respect to the Notes, and their respective successors and assigns. If any such entity ceases to act as a securities rating agency, the Borrower may, with the approval of the Remarketing Agent and the Bank, appoint any nationally recognized securities rating agency as a replacement. "RECORD DATE" means the Fiscal Agent's close of business on the Business Day next preceding each Interest Payment Date. "REIMBURSEMENT AGREEMENT" means the agreement between the Borrower and the Bank pursuant to which the Letter of Credit is issued by the Bank for the account of the Borrower and delivered to the Trustee, and the Borrower acknowledges its obligation to reimburse the Bank for payments made under the Letter of Credit, and includes any and all modifications, alterations, amendments and supplements thereto. Initially, the Reimbursement Agreement means the Letter of Credit Reimbursement Agreement, dated as of February 1, 1999, between the Borrower and the Bank. "REMARKETING AGENT" means initially NationsBank, N.A., and any successor agent or agents appointed from time to time pursuant to Section 9.14. "REMARKETING AGREEMENT" means (a) initially the Remarketing and Interest Services Agreement between the Remarketing Agent and the Borrower, dated as of February 1, 1999, and any and all modifications, alterations, amendments and supplements thereto and (b) any agreement between the Borrower and any successor remarketing agent appointed pursuant to Section 9.14. "REMARKETING PROCEEDS" is defined in Section 3.08(b). -7- 12 "REQUEST FOR DISBURSEMENT" means any requisition submitted in accordance with Section 4.08 and substantially in the form of EXHIBIT C attached hereto. "RESPONSIBLE OFFICER" means, when used with respect to the Trustee, any agent or officer within the Corporate Trust Department (or any successor group of the Trustee) including any vice president, assistant vice president, assistant secretary or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such agents or officers, respectively, or to whom any corporate trust matter is referred at the Trustee's address set forth in Section 11.01 because of his knowledge of and familiarity with the particular subject. "STATE" means the State of Florida. "SUBSTITUTE LETTER OF CREDIT" is defined in Section 5.03. "TRANSACTION DOCUMENTS" means, collectively, the Note Documents and the Letter of Credit Documents. "TRUSTEE" means the entity identified as such in the heading of this Indenture and such entity's successors under this Indenture, and any separate or co-trustee at the time serving as such under this Indenture. "U.S. GOVERNMENT OBLIGATIONS" means (a) direct obligations of the United States for which its full faith and credit are pledged for the full and timely payment thereof, (b) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States for the full and timely payment thereof or (c) securities or receipts evidencing ownership interests in obligations or specified portions (such as principal or interest) of obligations described in (a) or (b). "WEEKLY RATE" means with respect to the Notes the variable interest rate on the Notes established weekly in accordance with Section 2.02. "WEEKLY RATE PERIOD" means each period during which a Weekly Rate is in effect. Section 1.02. RULES OF CONSTRUCTION. Unless the context otherwise requires, (a) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles applied on a consistent basis; (b) references to Articles and Sections are to the Articles and Sections of this Indenture; (c) terms defined elsewhere in this Indenture shall have the meanings ascribed to them therein; -8- 13 (d) words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders; (e) headings used in this Indenture are for convenience of reference only and shall not define or limit the provisions hereof; (f) each reference herein or in the Notes to a percentage of Notes required for notices, consents or for any other reason shall be deemed to refer to Notes then Outstanding; and (g) all references herein to time shall be Eastern Time unless otherwise expressly stated. [End of Article I] -9- 14 ARTICLE II THE NOTES Section 2.01. ISSUANCE OF NOTES; FORM; DATING. (a) AUTHORIZATION. The Borrower hereby authorizes and creates under this Indenture an issue of Notes, to be designated "Kellstrom Industries, Inc. Taxable Variable Rate Demand Notes, Series 1999." The total principal amount of Notes that may be issued and outstanding hereunder shall be $6,670,000, except as provided in Section 2.06 with respect to replacement of mutilated, lost, stolen, destroyed or undelivered Notes. The Notes shall be issuable only as fully registered notes without coupons in Authorized Denominations only, and in substantially the form of EXHIBIT A to this Indenture, with appropriate variations, omissions, insertions, notations, legends or endorsements required by law or usage or permitted or required by this Indenture. The Notes may be in printed or typewritten form. No Notes may be issued under the provisions of this Indenture except in accordance with this Article. (b) DETAILS OF NOTES. Each Note shall be dated the date of its original authentication and delivery hereunder and all Notes shall mature, subject to prior redemption, on February 1, 2029. Interest on the Notes shall be computed from the Interest Payment Date next preceding the date of authentication thereof, unless such authentication date (i) is prior to the first Interest Payment Date following the initial delivery of the Notes, in which case interest shall be computed from such initial delivery date, (ii) is after a Record Date and before the subsequent Interest Payment Date, in which case interest shall be computed from the subsequent Interest Payment Date, or (iii) is an Interest Payment Date, in which case interest shall be computed from such authentication date; provided, that if interest on the Notes is in default, Notes shall bear interest from the last date to which interest has been paid. The principal of and redemption or purchase price of the Notes shall be payable in lawful currency of the United States of America at the principal corporate trust office of the Fiscal Agent (except as otherwise provided in Section 2.05) upon presentation and surrender of the Notes. Payments of interest on the Notes will be mailed to the persons in whose names the Notes are registered on the register of the Fiscal Agent at the close of business on the Record Date next preceding each Interest Payment Date; provided that, any Holder of a Note or Notes in an aggregate principal amount of not less than $500,000 may, by prior written instructions filed with the Fiscal Agent not later than three (3) Business Days prior to the Interest Payment Date (which instructions shall remain in effect until revoked by subsequent written instructions), instruct that interest payments for any period be made by wire transfer to an account in the continental United States or other means acceptable to the Fiscal Agent. Notes will be numbered from 1 upward as determined by the Fiscal Agent and will contain the designation "R." -10- 15 (c) ISSUANCE AND DELIVERY. Upon the execution and delivery of this Indenture and receipt by the Trustee of the following items, the Fiscal Agent shall authenticate and deliver Notes in an aggregate principal amount of $6,670,000 in accordance with the authorization described in (iv) below: (i) a copy, certified by the Secretary or the Assistant Secretary of the Borrower, of the resolution of the Borrower authorizing (a) the execution and delivery of the Transaction Documents to which the Borrower is a party; (b) the execution, delivery and issuance of the Notes in the aggregate principal amount of $6,670,000; and (c) the use by the Placement Agent and the Remarketing Agent of the Private Placement Memorandum in connection with the initial placement and remarketing, respectively, of the Notes; (ii) original executed counterparts of this Indenture, the Reimbursement Agreement, the Placement Agreement and the Remarketing Agreement; (iii) the original, executed Letter of Credit from the Bank; (iv) an authorization and request from the Borrower to the Fiscal Agent to authenticate and deliver $6,670,000 in aggregate principal amount of the Notes in specified Authorized Denominations to the initial purchaser(s) or DTC or its nominee on behalf of such purchaser(s) upon receipt by the Trustee on behalf of the Borrower of the sum specified therein; (v) one or more Opinions of Counsel to the Borrower, addressed to the Trustee, the Fiscal Agent, the Bank, the Placement Agent and the Remarketing Agent, stating among other things, that (A) the Borrower is duly organized, validly existing and in good standing under the laws of the state of its creation and is authorized to transact business in the State, (B) the issuance of the Notes and the execution and delivery of the other Transaction Documents to which the Borrower is a party have been duly authorized by the Borrower, (C) the Notes and the other Transaction Documents to which the Borrower is a party have been duly executed and delivered by the Borrower, and (D) the Notes and the other Transaction Documents to which the Borrower is a party are the valid, legal and binding obligations of the Borrower enforceable in accordance with their terms subject to customary equity and bankruptcy exceptions, and otherwise in form and substance satisfactory to the Trustee, the Fiscal Agent, the Bank, the Placement Agent and the Remarketing Agent; (vi) an Opinion of Counsel to the Bank addressed to the Trustee, the Fiscal Agent, the Borrower, the Placement Agent and the Remarketing Agent, or upon which the Trustee, the Fiscal Agent, the Borrower, the Placement Agent and the Remarketing Agent may rely, stating, among other things, that the Letter of Credit has been duly authorized, executed and delivered by the Bank, constitutes the valid and binding obligation of the Bank and is enforceable in accordance with its terms subject to customary equity and bankruptcy exceptions and otherwise in form and substance satisfactory to the Trustee, the Fiscal Agent, the Placement Agent and the Remarketing Agent; (vii) an Opinion of Counsel to the Placement Agent and the Remarketing Agent addressed to the Placement Agent, the Remarketing Agent, the Bank, the Trustee, the Fiscal Agent and the Borrower, stating, among other things, that (A) no registration of the -11- 16 Notes is required under the Securities Act of 1933, as amended, and no qualification of this Indenture is required under the Trust Indenture Act of 1939, as amended, and (B) the Note Documents have been duly authorized, executed and delivered by, and are the valid legal and binding obligations of, the Placement Agent and the Remarketing Agent, to the extent parties thereto, enforceable in accordance with their terms subject to customary equity and bankruptcy exceptions and otherwise in form and substance satisfactory to the Placement Agent, the Remarketing Agent, the Bank, the Trustee, the Fiscal Agent and the Borrower; and (viii) such other documentation, certificates and assurances as may be reasonably required by the Bank, the Trustee, the Fiscal Agent, the Placement Agent or the Remarketing Agent or their respective counsel. (d) NOTE PROCEEDS. All proceeds from the sale of the Notes issued hereunder (net of the placement fee and other costs of issuance payable by the Borrower in connection therewith that may be retained by the Placement Agent from the purchase price otherwise paid to the Trustee on behalf of the Borrower to purchase the Notes on their date of issuance) shall be deposited in the Construction Fund on their date of issuance. Section 2.02. INTEREST ON THE NOTES. The Notes shall bear interest as provided in Section 2.01(b) until paid in full. Interest accrued on the Notes shall be paid on each Interest Payment Date, commencing on March 1, 1999. The Notes shall bear interest at the rate determined by the Placement Agent on or before their date of issuance as necessary to sell all of the Notes at par and to apply from their date of issuance until and including the next succeeding Wednesday and thereafter at the Weekly Rate determined by the Remarketing Agent in the manner set forth below; provided that no Weekly Rate shall exceed the Maximum Rate. The amount of interest payable on any Interest Payment Date (a) shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, whichever may be applicable, and (b) shall be the amount of interest accrued thereon from the preceding Interest Payment Date (or such other date as described in Section 2.01(b)) to, but excluding, the Interest Payment Date on which interest is being paid. During each Weekly Rate Period, the Notes shall bear interest at the Weekly Rate, determined by the Remarketing Agent initially no later than the first day of each Weekly Rate Period and thereafter no later than Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day) of each week during such Weekly Rate Period. The Weekly Rate shall be the minimum rate of interest which the Remarketing Agent determines, in its sole discretion based upon market conditions, would be necessary to sell the Notes on such date of determination in a secondary market sale at the principal amount thereof, plus, if such sale would not be on an Interest Payment Date, accrued interest. If the Remarketing Agent has not determined a Weekly Rate for any week, the Weekly Rate shall be the same as the Weekly Rate for the immediately preceding week. If for any reason, the Weekly Rate cannot otherwise be determined for any week as hereinbefore provided, the Weekly Rate for such week shall be a rate per annum equal to 100% of the rate published in the then most recent edition of THE BOND BUYER for 30 day prime taxable commercial paper or, if -12- 17 THE BOND BUYER no longer publishes such information, such other publication or provider of such information as the Remarketing Agent may select. The first Weekly Rate determined for each Weekly Rate Period shall apply to the period commencing on the first day of such Weekly Rate Period and ending on the next succeeding Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day). Thereafter, each Weekly Rate shall apply to the period commencing on Thursday (or if the date of determination is not a Wednesday, on the next following Business Day) and ending on the next succeeding date of determination. Promptly following the determination of each Weekly Rate, the Remarketing Agent shall give written notice, which may be delivered by telecopy, to the Borrower, the Trustee and the Fiscal Agent. Upon the request of any Noteholder, the Remarketing Agent shall notify any such Noteholder of each change in the Weekly Rate by first class mail. The failure to give any such notice shall not affect the change in the Weekly Rate. The Remarketing Agent shall also notify the Trustee (who shall notify the Fiscal Agent) and, upon request, the Borrower, in each case in writing (which may be in telecopy form) or by telephone, promptly confirmed in writing, by 4:00 p.m. on the last Wednesday of each month (or if such Wednesday is not a Business Day, on the next succeeding Business Day) of the Weekly Rate set for each week in such month, and principal amount of Notes bearing interest at the Weekly Rate during each week. Using the Weekly Rates supplied by the Remarketing Agent, the Fiscal Agent shall calculate the amount of interest payable on the Notes and notify the Trustee, the Borrower and the Bank of such amount and the Trustee will verify such calculation. The establishment of the Weekly Rates as provided in this Indenture shall be conclusive and binding on the Borrower, the Bank, the Trustee, the Fiscal Agent, the Remarketing Agent and the Noteholders, absent manifest error. The calculation and verification of interest payable on the Notes as provided in this Indenture shall be conclusive and binding on the Borrower, the Bank, the Trustee, the Remarketing Agent, the Fiscal Agent and the Noteholders. Section 2.03. EXECUTION AND AUTHENTICATION. The Notes shall be signed on behalf of the Borrower with the manual or facsimile signature of the President or any Vice President and attested by the manual or facsimile signature of the Borrower's Secretary or Assistant Secretary, and the corporate seal of the Borrower shall be impressed or imprinted on the Notes by facsimile or otherwise. If any officer of the Borrower whose signature is on a Note no longer holds that office at the time the Fiscal Agent authenticates the Note, the Note shall nevertheless be valid. Also, if a person signing a Note is the proper officer on the actual date of execution, the Note shall be valid even if that person is not the proper officer on the nominal date of action. A Note shall not be valid for any purpose under this Indenture unless and until the Fiscal Agent manually signs the certificate of authentication on the Note, and such signature shall be conclusive evidence that the Note has been authenticated under this Indenture. -13- 18 Section 2.04. NOTE REGISTER. The Fiscal Agent shall keep a register of Notes and of their transfer and exchange. Notes not held under a book-entry system must be presented at the principal corporate trust office of the Fiscal Agent for registration, transfer and exchange, and Notes may be presented at that office for payment. Notes not held under a book-entry system and optionally tendered by their holders must be delivered as specified in Section 3.07(b). Section 2.05. REGISTRATION AND EXCHANGE OF NOTES; PERSONS TREATED AS OWNERS; BOOK-ENTRY SYSTEM. (a) Notes may be transferred only on the register maintained by the Fiscal Agent. Upon surrender for transfer of any Note to the Fiscal Agent, duly endorsed for transfer or accompanied by an assignment duly executed by the holder or the holder's attorney duly authorized in writing and in either case, with an appropriate guarantee of signature conforming to the requirements of EXHIBIT A hereto, the Fiscal Agent shall authenticate a new Note or Notes in an equal aggregate principal amount and registered in the name of the transferee. Notes may be exchanged for an equal aggregate principal amount of Notes of different Authorized Denominations. The Fiscal Agent shall authenticate and deliver Notes that the Noteholder making the exchange is entitled to receive, bearing numbers not then Outstanding. Except in connection with the optional tender of Notes pursuant to Section 3.07(b) and the delivery thereof pursuant to Section 3.08, the Fiscal Agent shall not be required to transfer or exchange any Note during the period beginning 15 days before the mailing of notice calling the Note or any portion of the Note for redemption and ending on the redemption date. Notes subject to redemption or mandatory repurchase may be transferred or exchanged only if the Fiscal Agent provides the new holder thereof with a copy of the notice of redemption or mandatory repurchase, as the case may be. The holder of a Note as shown on the register of the Fiscal Agent shall be the absolute owner of the Note for all purposes, and payment of principal, interest or purchase price shall be made only to or upon the written order of such holder or the holder's legal representative; provided that interest shall be paid to the Person shown on the register as a holder of a Note on the applicable Record Date. (b) The Fiscal Agent may require the payment by a Noteholder requesting exchange or registration of transfer of any tax or other governmental charge required to be paid in respect of the exchange or registration of transfer but shall not impose any other charge. (c) The Fiscal Agent or the Remarketing Agent may make appropriate arrangements for the Notes to be issued or held by means of a book-entry system administered by DTC with no physical distribution of Notes made to the public. The Notes will initially be issued by means of a book-entry system administered by DTC with no physical distribution of Notes made to the public. References in this Section 2.05(c) to a Note or the Notes shall be construed to mean the Note or the Notes which are held under the book-entry system. In such event, one Note of each maturity shall be issued to DTC and immobilized in its custody. A book-entry system shall be employed, evidencing ownership of the Notes in Authorized Denominations, with transfers of -14- 19 beneficial ownership effected on the records of DTC and the DTC Participants pursuant to rules and procedures established by DTC. Each DTC Participant shall be credited in the records of DTC with the amount of such DTC Participant's interest in the Notes. Beneficial ownership interests in the Notes may be purchased by or through DTC Participants. The holders of these beneficial ownership interests are hereinafter referred to as the "Beneficial Owners". The Beneficial Owners shall not receive Notes representing their beneficial ownership interests. The ownership interests of each Beneficial Owner shall be recorded through the records of the DTC Participant from which such Beneficial Owner purchased its Notes. Transfers of ownership interests in the Notes shall be accomplished by book entries made by DTC and, in turn, by DTC Participants acting on behalf of Beneficial Owners. SO LONG AS CEDE & CO., AS NOMINEE FOR DTC, IS THE REGISTERED OWNER OF THE NOTES, THE TRUSTEE AND THE FISCAL AGENT SHALL TREAT CEDE & CO. AS THE ONLY HOLDER OF THE NOTES FOR ALL PURPOSES UNDER THIS INDENTURE, INCLUDING RECEIPT OF ALL PRINCIPAL AND PURCHASE PRICE OF AND INTEREST ON THE NOTES, RECEIPT OF NOTICES (EXCEPT AS SET FORTH IN SECTION 3.04), VOTING AND REQUESTING OR DIRECTING THE TRUSTEE OR FISCAL AGENT TO TAKE OR NOT TO TAKE, OR CONSENTING TO, CERTAIN ACTIONS UNDER THIS INDENTURE. Payments of principal, interest and purchase price with respect to the Notes, so long as DTC or its nominee, Cede & Co., is the only owner of the Notes, shall be paid by the Fiscal Agent directly to DTC or its nominee, Cede & Co. by wire transfer as provided in the Letter of Representations dated February 1, 1999, from the Borrower to DTC (the "Letter of Representations"). DTC shall remit such payments to DTC Participants, and such payments thereafter shall be paid by DTC Participants to the Beneficial Owners. The Borrower, the Fiscal Agent, the Remarketing Agent and the Trustee shall not be responsible or liable for payment by DTC or DTC Participants, for sending transaction statements or for maintaining, supervising or reviewing records maintained by DTC or DTC Participants. In the event that (i) DTC determines not to continue to act as securities depository for the Notes or (ii) the Borrower or the Remarketing Agent determines that the continuation of the book-entry system of evidence and transfer of ownership of the Notes would adversely affect their interests or the interests of the Beneficial Owners of the Notes, the Borrower shall, at its own discretion or at the request of the Remarketing Agent, discontinue the book-entry system with DTC. If the Remarketing Agent fails to identify another qualified securities depository to replace DTC, the Remarketing Agent shall cause the Fiscal Agent to authenticate and deliver replacement Notes in the form of fully registered Notes to each Beneficial Owner. THE BORROWER, THE BANK, THE REMARKETING AGENT, THE FISCAL AGENT AND THE TRUSTEE SHALL NOT HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO ANY DTC PARTICIPANT OR ANY BENEFICIAL OWNER WITH RESPECT TO (I) THE NOTES; (II) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; (III) THE PAYMENT BY DTC OR ANY DTC -15- 20 PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OF AND INTEREST ON THE NOTES; (IV) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY DTC PARTICIPANT OF ANY NOTICE DUE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THIS INDENTURE TO BE GIVEN TO BENEFICIAL OWNERS; (V) THE SELECTION OF BENEFICIAL OWNERS TO RECEIVE PAYMENTS IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE NOTES; OR (VI) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC, OR ITS NOMINEE, CEDE & CO., AS OWNER. (d) The Fiscal Agent or the Remarketing Agent shall not be limited to utilizing a book-entry system maintained by DTC but may enter into a custody agreement with any bank or trust company serving as custodian (which may be the Fiscal Agent serving in the capacity of custodian) to provide for a book-entry or similar method for the registration and registration of transfer of all or a portion of the Notes. SO LONG AS A BOOK-ENTRY SYSTEM OF EVIDENCE OF TRANSFER OF OWNERSHIP OF ALL THE NOTES IS MAINTAINED IN ACCORDANCE HEREWITH, THE PROVISIONS OF THIS INDENTURE RELATING TO THE DELIVERY OF PHYSICAL NOTE CERTIFICATES SHALL BE DEEMED TO GIVE FULL EFFECT TO SUCH BOOK-ENTRY SYSTEM. In the event the Notes are held under a book-entry system, the securities depository shall provide the Trustee, upon request of the Trustee, the names, addresses and principal amount of the holders of beneficial interests in the Notes. In the event DTC only provides the Trustee with the names of the DTC Participants, the Trustee shall use all reasonable efforts to obtain the names, addresses and principal amount of the holders of beneficial interests in the Notes from DTC or the DTC Participants. Subject to the provisions of Section 8.14 of this Indenture, such beneficial holders shall be treated in all respects as the holders of the Notes for purposes of Article VIII of this Indenture, and the Trustee shall send notices to such beneficial owners as required in Article VIII of this Indenture. Section 2.06. MUTILATED, LOST, STOLEN, DESTROYED OR UNDELIVERED NOTES. (a) If any Note is mutilated, lost, stolen or destroyed, the Fiscal Agent shall authenticate a new Note of the same denomination for any mutilated, lost, stolen or destroyed Note if there shall first be delivered by the Noteholder to the Fiscal Agent at its principal corporate trust office (i) in the case of any mutilated Note, such mutilated Note, and (ii) in the case of any lost, stolen or destroyed Note, evidence of such loss, theft or destruction reasonably satisfactory to the Fiscal Agent, the Bank, the Trustee and the Borrower, together with an indemnity from the Noteholder, reasonably satisfactory to the Fiscal Agent. If the Note has matured and if the evidence and indemnity described above have been provided by the Noteholder, instead of issuing a duplicate Note, the Fiscal Agent, with the consent of the Borrower, shall pay the Note without requiring surrender of the Note and make such requirements as the Fiscal Agent deems fit for its protection, including a lost instrument Note. The Fiscal Agent may charge the Noteholder its reasonable fees and expenses in this connection. -16- 21 (b) In the event that any Note purchased pursuant to an optional tender or mandatory repurchase is not delivered by the holder thereof on the date such Note is purchased, the Borrower shall execute (if necessary) and the Fiscal Agent shall authenticate and deliver a new Note of like aggregate principal amount as the Note purchased, which Note shall, for all purposes of this Indenture, be deemed to evidence the same debt as the Note purchased and shall be remarketed, delivered and registered in accordance with Section 3.08(d) hereof. If any Note is purchased by the Fiscal Agent with Available Moneys provided by the Borrower and sufficient for such purchase, the Fiscal Agent, upon request of the Borrower, shall authenticate a new Note in any Authorized Denomination specified by the Borrower, registered as the Borrower may direct and deliver it to the Borrower, or to its order, whether or not such Note is ever delivered. If any Note is purchased with funds obtained by a drawing on the Letter of Credit, the Fiscal Agent shall comply with the provisions of Section 3.08(d)(ii). (c) Every new Note issued pursuant to this Section 2.06 shall (i) constitute an additional contractual obligation of the Borrower regardless of whether, in the case of (a) above, the mutilated, lost, stolen or destroyed Note and, in the case of (b) above, the Note purchased shall be enforceable at any time by anyone, and (ii) be entitled to all of the benefits of this Indenture equally and proportionately with any and all other Notes issued and Outstanding hereunder. (d) All Notes shall be held and owned on the express condition that the foregoing provisions of this Section 2.06 are exclusive with respect to the replacement or payment of mutilated, lost, stolen or destroyed Notes and the replacement of any Note purchased pursuant to an optional tender or mandatory repurchase and, to the extent permitted by law, and shall preclude any and all other rights and remedies with respect to the replacement or payment of negotiable instruments or other investment securities without their surrender, notwithstanding any law or statute to the contrary now existing or enacted hereafter. Section 2.07. CANCELLATION OF NOTES. All Notes paid, redeemed or purchased, either at or before maturity, shall be delivered to the Fiscal Agent when such payment, redemption or purchase is made, and except as otherwise provided herein shall be canceled. Whenever a Note is delivered to the Fiscal Agent for cancellation (upon payment, redemption, defeasance or otherwise), or for transfer, exchange or replacement pursuant to Section 2.05 or 2.06, the Fiscal Agent shall safeguard such Note for such period of time as may be required by applicable governmental regulations and shall thereafter promptly cancel the Note and supply evidence of such cancellation to any party so requesting. Section 2.08. TEMPORARY NOTES. Until definitive Notes are ready for delivery, the Borrower may execute and the Fiscal Agent shall authenticate temporary Notes substantially in the form of the definitive Notes, with appropriate variations. The Borrower shall, without unreasonable delay, prepare and the Fiscal Agent shall authenticate definitive Notes in exchange for the temporary Notes. Such exchange shall be made by the Fiscal Agent without charge to the Noteholders. Temporary Notes shall not otherwise be eligible for transfer or exchange under Section 2.05. [End of Article II] -17- 22 ARTICLE III REDEMPTION, PURCHASE AND REMARKETING OF NOTES Section 3.01. REDEMPTION OF NOTES. (a) OPTIONAL REDEMPTION. The Notes may be redeemed by the Borrower in whole on any Business Day, or in part on any Interest Payment Date, or if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, at a redemption price equal to the principal thereof, plus accrued interest to, but not including, the redemption date; provided that any such redemption in part shall be in a minimum principal amount of $100,000 or a whole multiple of $5,000 in excess thereof. (b) MANDATORY SINKING FUND REDEMPTION. The Notes are not subject to mandatory sinking fund redemption prior to maturity; provided, however, that pursuant to the terms of the Reimbursement Agreement, the Bank may direct the Borrower to exercise its right of optional redemption of the Notes in part from time to time on the dates specified in the Reimbursement Agreement. (c) MANDATORY REDEMPTION UPON DEMAND BY BANK. The Notes are subject to mandatory redemption at a redemption price equal to the principal amount thereof plus accrued interest to, but not including, the redemption date in whole or in part, without premium, at the earliest date for which notice of redemption can be given upon receipt by the Trustee of written notice from the Bank requesting such redemption, specifying the principal amount of the Notes to be redeemed (if less than all of the Notes Outstanding are to be redeemed) and stating that (i) an "event of default" under and as defined in the Reimbursement Agreement has occurred and is continuing, or (ii) it holds as the registered or beneficial owner Notes purchased by the Bank in accordance with Section 3.07, 3.01(e) or 8.03(a) and not remarketed; provided, however, only Notes so held by the Bank shall be subject to mandatory redemption pursuant to this subsection (ii). (d) MANDATORY REDEMPTION ON EXPIRATION OR TERMINATION OF LETTER OF CREDIT WITHOUT EXTENSION OR PROVIDING A SUBSTITUTE LETTER OF CREDIT. The Notes are subject to mandatory redemption at a redemption price equal to the principal amount thereof plus accrued interest to, but not including, the redemption date, in whole, without premium, on the Interest Payment Date which next precedes by at least fourteen (14) days the stated expiration or termination date of the Letter of Credit or, if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, unless by the 20th day prior to such Interest Payment Date the Borrower provides to the Trustee, and the Trustee has accepted, (i) evidence that such Letter of Credit has been extended or (ii) a Substitute Letter of Credit to be effective on or prior to such Interest Payment Date, in which event a mandatory repurchase shall occur in accordance with the terms of subsection 3.07(a)(i) hereof. (e) PURCHASE IN LIEU OF REDEMPTION. When Notes are subject to redemption pursuant to subsections (c) or (d) in this Section 3.01, Notes paid by the Borrower or paid from a draw or claim under the Letter of Credit or otherwise paid by or on behalf of the Bank shall be deemed to -18- 23 have been purchased in lieu of redemption on the applicable redemption date at a purchase price equal to the principal amount thereof, plus accrued interest thereon to, but not including, the date of such purchase, if the Trustee has received a written request on or before said purchase date from the Borrower or the Bank, as the case may be, specifying that the moneys provided or to be provided by such party shall be used to purchase Notes in lieu of redemption. No purchase of Notes by the Borrower or the Bank pursuant to this Indenture or advance or use of any moneys to effectuate any such purchase shall be deemed to be a payment or redemption of the Notes or any portion thereof, and such purchase shall not operate to extinguish or discharge the indebtedness evidenced by such Notes. No Notes purchased pursuant to this subsection (e) shall be required to be remarketed by the Remarketing Agent pursuant to Section 3.08, unless the Remarketing Agent specifically agrees to undertake such remarketing. Any purchase by the Borrower pursuant to this Section 3.01(e) must be made with Available Moneys. Section 3.02. REDEMPTION DATE. The redemption date of Notes to be redeemed pursuant to any optional redemption provisions in Section 3.01(a) shall be a date permitted by such clause and specified by the Borrower in the notice delivered pursuant to Section 3.04. The redemption date for mandatory redemptions shall be as specified in Section 3.01(c) or (d), as the case may be, or determined by the Trustee consistently with the provisions thereof. Section 3.03. SELECTION OF NOTES TO BE REDEEMED. If fewer than all the Notes are to be redeemed, the Fiscal Agent shall select the Notes to be redeemed from among the Outstanding Notes, as set forth below, by lot or such other method as it deems in its sole discretion to be fair and appropriate, except that Bank Notes will be selected for redemption prior to any other Notes. The Fiscal Agent shall make the selection from Notes not previously called for redemption. The Fiscal Agent shall treat each holder of Notes as the owner of one Note for purposes of selection for redemption, and shall select Notes for redemption by lot (a) from among the holders of less than $1,000,000 in aggregate principal amount, provided that if there are no such holders, or if, after selection from among such holders such selection has not resulted in redemption of a sufficient amount of Notes, then (b) from among the holders of $1,000,000 or more in aggregate principal amount of Notes. The Fiscal Agent shall, on or before the day on which notice of redemption is mailed to the holders, give telephonic notice to the Remarketing Agent of the Notes selected for redemption and the name of the holder or holders thereof. No portion of a Note may be redeemed that would result in a Note which is smaller than the minimum Authorized Denomination. For this purpose, the Fiscal Agent shall consider each Note in a denomination larger than the minimum Authorized Denomination to be separate Notes each in the minimum Authorized Denomination. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. Notwithstanding the foregoing, for so long as a book-entry system of evidence of transfer of ownership is in effect with respect to all the Notes, any selection of Notes to be redeemed shall be made in accordance with the securities depository's rules and procedures as then in effect. Notwithstanding anything to the contrary in this Indenture, there shall be no redemption of less than all of the Notes if there has occurred and be continuing an Event of Default. -19- 24 Section 3.04. NOTICE TO TRUSTEE; NOTICE OF REDEMPTION. (a) If the Borrower wishes that any Notes be redeemed pursuant to any optional redemption provisions in Sections 3.01(a) hereof, the Borrower shall notify the Trustee, the Fiscal Agent, the Bank and the Remarketing Agent in writing of the applicable provision, the redemption date, the principal amount of Notes to be redeemed and other necessary particulars. The Borrower shall give such notices at least 45 days before the redemption date. (b) The Trustee shall prepare and the Fiscal Agent shall send notice of each redemption to each Noteholder whose Notes are being redeemed, the Borrower, the Remarketing Agent and the Bank by first-class mail at least 30 days but not more than 60 days before each redemption, except for any mandatory redemption pursuant to Section 3.01(d) in which case such notice shall be given at least 15 but not more than 19 days before such redemption and except as otherwise provided in Section 3.08(a)(i). The notice shall identify the Notes or portions thereof to be redeemed and shall state (i) the type of redemption and the redemption date, (ii) the redemption price, (iii) that the Notes called for redemption must be surrendered to collect the redemption price, (iv) the address at which the Notes must be surrendered, (v) that if on the redemption date the Note Fund contains moneys sufficient to pay the redemption price, interest on the Notes called for redemption will cease to accrue on the redemption date, (vi) the CUSIP number of the Notes and (vii) any condition to the redemption. A copy of each notice of redemption shall also be sent by the Fiscal Agent by certified or registered mail to each securities depository (each, a "Depository") registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, two Business Days prior to mailing notice to Noteholders and to two national information services which disseminate redemption notices and to each registered owner of $1,000,000 or more of Notes on the same date notices are mailed to other Noteholders, provided that the Fiscal Agent may, in its discretion, provide for overnight, telecopied or other form of notice to a Depository acceptable to or requested by such Depository. Notwithstanding the foregoing, in the event that the Depository for the Notes is DTC, the Trustee shall follow the procedure for redemption and notice as set forth in DTC's operational arrangements, as in effect at the time. With respect to any Notes to be redeemed which have not been presented for redemption within 60 days after the redemption date, the Trustee, at the expense of the Borrower, shall prepare and the Fiscal Agent shall give a second notice of redemption to the holder of any such Notes which have not been presented for redemption, by first-class mail, within 30 days after the end of such 60 day period. Failure by the Fiscal Agent to give any notice of redemption or any defect in such notice as to any particular Notes shall not affect the validity of the call for redemption of any Notes in respect of which no such failure or defect has occurred. Any notice mailed as provided in this Indenture shall be conclusively presumed to have been given whether or not actually received by any holder. Section 3.05. PAYMENT OF NOTES CALLED FOR REDEMPTION. On or before the date fixed for redemption, the Trustee shall cause to be transferred from the Note Fund to the Fiscal Agent -20- 25 pursuant to Section 4.01 moneys sufficient to pay the redemption price, together with accrued interest to the redemption date of the Notes called for redemption. Upon surrender to the Fiscal Agent, Notes called for redemption shall be paid as provided in this Article at the redemption price provided for in this Article. On the date fixed for redemption, notice having been given in the manner and under the conditions hereinabove provided, the Notes or portions thereof called for redemption shall be due and payable at the redemption price provided therefor, plus accrued interest to, but not including, such date. On such redemption date, if moneys sufficient to pay the redemption price of the Notes to be redeemed, plus accrued interest thereon to, but not including, the date fixed for redemption, are held by the Fiscal Agent, interest on the Notes called for redemption shall cease to accrue; such Notes shall cease to be entitled to any benefits or security under this Indenture or to be deemed Outstanding; and the holders of such Notes shall have no rights in respect thereof except to receive payment of the redemption price thereof, plus accrued interest to, but not including, the date of redemption. Section 3.06. NOTES REDEEMED IN PART. Upon surrender of a Note redeemed in part, the Fiscal Agent shall authenticate for the holder a new Note or Notes in Authorized Denominations equal in aggregate principal amount to the unredeemed portion of the Note surrendered. Section 3.07. PURCHASE OF NOTES. (a) MANDATORY REPURCHASE OF NOTES; NOTICE. Except as provided in Section 3.07(e), Notes are subject to mandatory repurchase as follows: (i) on the effective date of any Substitute Letter of Credit delivered pursuant to Section 5.03, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; and (ii) on any Interest Payment Date selected by the Borrower in a written notice to the Trustee delivered at least 30 days prior to such date, or if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; provided that any such mandatory repurchase, except as provided in Section 9.14 hereof, shall be subject to the prior written consent of the Bank. The Trustee will prepare and the Fiscal Agent will send to the holders of Notes subject to mandatory repurchase and to the Remarketing Agent, the Bank and the Borrower a Notice of Mandatory Repurchase at least 15 days but not more than 60 days before the Mandatory Repurchase Date. Any Notice of Mandatory Repurchase will be given by first-class mail and will be substantially in the form attached hereto as EXHIBIT B. With respect to any Notes to be purchased which have not been presented for purchase within 60 days after the Mandatory Repurchase Date, the Trustee, at the expense of the Borrower, shall cause the Fiscal Agent to prepare and send a second notice of purchase to the holder of any such Notes which have not been presented for purchase, by first-class mail, within 30 days of the end of such 60 day period. -21- 26 (b) OPTIONAL TENDER OF NOTES. (i) Except as provided in Section 3.07(e), the holder (or while the Notes are held pursuant to a book-entry system, the Beneficial Owner) of any Note (other than a Bank Note or Borrower Note) may elect to tender such Note (or portion thereof, provided that each of the portion to be purchased and the portion to be retained is in an Authorized Denomination) for purchase at a purchase price equal to 100% of the principal amount of such Note (or portion thereof), plus accrued and unpaid interest thereon to but not including the date of purchase, on any Business Day (the "Optional Tender Date"), but only upon (A) receipt by the Remarketing Agent by not later than 11:00 a.m. at least seven calendar days or five Business Days, whichever may be earlier, but not more than 30 days, prior to such Optional Tender Date of telephonic (followed, if requested by the Remarketing Agent, by written or facsimile confirmation delivered to the Remarketing Agent no later than the close of business on the next succeeding Business Day) or other written notice from the holder (or while the Notes are held pursuant to a book-entry system, the DTC Participant through whom such Beneficial Owner holds such Note) stating (1) the principal amount of the Note (or portion thereof) to be tendered, (2) the Note number or other identification satisfactory to the Remarketing Agent, and (3) the Optional Tender Date on which such Note will be tendered; and (B) if the Notes are not being held under a book-entry system, delivery of such Note (with an appropriate instrument of transfer duly executed in blank) to the Fiscal Agent by 10:00 a.m. on such Optional Tender Date. (ii) Any notice of optional tender for purchase delivered pursuant to subpart (i) above shall be irrevocable and shall be binding on the holder or Beneficial Owner giving or delivering such notice and on any transferee of such holder or Beneficial Owner. (iii) Upon receipt by the Remarketing Agent of a notice of optional tender for purchase pursuant to subpart (i) above, the Remarketing Agent shall give prompt telephonic notice thereof including, in particular, notice of the information described in subsections 3.07(b)(i) (1) and (3) above, to the Trustee and the Fiscal Agent. (c) PAYMENT FOR PURCHASED NOTES. To the extent that sufficient moneys are available therefor by 1:45 p.m. on the Optional Tender Date or the Mandatory Repurchase Date or other day on which Notes have been successfully remarketed, as applicable (the "Purchase Date") pursuant to Sections 3.08 and 5.02, upon surrender to the Fiscal Agent of Notes optionally tendered or called for mandatory repurchase as provided herein, the purchase price therefor (as provided in this Section) shall be paid in immediately available funds by the Fiscal Agent or the Remarketing Agent not later than the close of business on the Purchase Date. From and after the Purchase Date or, if later, the date on which such moneys are made available to the Remarketing Agent or the Fiscal Agent, as applicable, interest accruing on such Notes shall cease to be payable to the prior holder thereof, such Notes shall cease to be entitled to the benefits or security of this Indenture and to such extent the prior holder shall have recourse solely to the funds held -22- 27 by the Trustee, the Fiscal Agent or the Remarketing Agent for the purchase of such Notes as provided in Section 4.11. (d) NOTES PURCHASED IN PART. Upon surrender of a Note purchased in part and receipt by the Fiscal Agent thereof, the Fiscal Agent shall authenticate and deliver to the surrendering holder a new Note or Notes in Authorized Denominations equal in aggregate principal amount to the unpurchased portion of the Note surrendered. (e) LIMITATIONS ON TENDERS. (i) The holders or Beneficial Owners shall not have the right or be required, as the case may be, to tender any Note for purchase on an Optional Tender Date or a Mandatory Repurchase Date (other than a mandatory tender in lieu of redemption at the direction of the Bank pursuant to Section 3.01(e) or a mandatory tender for purchase at the direction of the Bank after acceleration of the Notes pursuant to Section 8.03(a)) if on such date, following the occurrence of an Event of Default, the Trustee has declared the principal of and interest on the Notes to be immediately due and payable pursuant to Section 8.02. (ii) Holders or Beneficial Owners of Notes called for redemption or mandatory repurchase shall not have the right (without the prior consent of the Remarketing Agent) to tender such Notes for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after the 10th day prior to the date fixed for redemption or mandatory repurchase. Notwithstanding the foregoing, holders or Beneficial Owners of Notes called for redemption shall not have the right in any event to tender such Notes for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after the second day prior to the date fixed for redemption. Section 3.08. REMARKETING OF PURCHASED NOTES. (a) NOTES TO BE REMARKETED. Notes purchased pursuant to optional tender or mandatory repurchase shall be remarketed by the Remarketing Agent as provided in this Section except as follows: (i) Notes purchased pursuant to an optional tender or a mandatory repurchase and as to which the Remarketing Agent has received a notice of redemption may be remarketed before the date fixed for redemption only if the purchaser receives prior to purchasing such Note a notice that such Note is subject to redemption on the date fixed for redemption, notwithstanding the fact that such notice of redemption may be sent to such purchaser after the time period mentioned in Section 3.04(b). (ii) Borrower Notes shall only be remarketed at the direction of the Borrower. (iii) The Remarketing Agent shall not be required to offer Notes for sale under this Section (A) during the continuance of an Event of Default, or (B) as otherwise provided in the Remarketing Agreement. -23- 28 (iv) Notes purchased pursuant to an optional tender and as to which the Remarketing Agent has received a Notice of Mandatory Repurchase may be remarketed before the Mandatory Repurchase Date only if the purchaser receives a copy of the Notice of Mandatory Repurchase prior to purchasing such Note. (v) The Remarketing Agent shall not knowingly remarket any Notes to the Borrower or any subsidiary or affiliate of the Borrower pursuant to this Section 3.08 unless either (A) the entire purchase price is paid from Available Moneys or (B) prior to such sale, the Trustee and the Fiscal Agent receive a written opinion of Bankruptcy Counsel to the effect that such purchase would not result in a preferential payment pursuant to the provisions of Section 547 of the Bankruptcy Code, 11 U.S.C. Section 101, ET SEQ. (b) REMARKETING EFFORT. Except as provided in subsection (a) above or except to the extent the Borrower directs the Remarketing Agent not to do so, the Remarketing Agent shall (i) use reasonable best efforts to remarket on or prior to any scheduled purchase date all Notes tendered or to be purchased pursuant to Section 3.07 (a "Scheduled Purchase Date"), and (ii) to the extent such Notes are not remarketed on the Scheduled Purchase Date, continue to use reasonable best efforts to remarket such Notes, upon the terms and subject to the conditions of the Remarketing Agreement, for purchase on a Business Day after such Scheduled Purchase Date (an "Unscheduled Purchase Date"). As early as practicable but not later than 9:00 a.m. on each Scheduled Purchase Date and each Unscheduled Purchase Date, the Remarketing Agent shall notify the Fiscal Agent by telephone of (A) the amount of funds it has received from the remarketing of such Notes (the "Remarketing Proceeds"), and (B) if the Notes are not held pursuant to a book-entry system, the information to enable the Fiscal Agent to prepare new Note certificates with respect to Notes which were remarketed. If the Remarketing Agent has received Remarketing Proceeds with respect to all of the Notes to be remarketed on a Scheduled Purchase Date, it shall transfer such Remarketing Proceeds to the owners tendering such Notes for purchase as provided in subsection (c) below. If the Remarketing Agent has not received Remarketing Proceeds with respect to all of such Notes to be remarketed on a Scheduled Purchase Date or has received Remarketing Proceeds with respect to all or a portion of Notes remarketed on an Unscheduled Purchase Date, it shall transfer to the Trustee for redelivery to the Fiscal Agent the Remarketing Proceeds which the Remarketing Agent has received as provided in subsection (c) below. The Fiscal Agent shall immediately notify the Trustee and promptly thereafter notify the Borrower by telephone of the amount of such Remarketing Proceeds and the Trustee shall, if required, take action as set forth in Section 5.02(a). If the Fiscal Agent fails to receive the notice described in the first sentence of this paragraph from the Remarketing Agent by 9:00 a.m. on any Scheduled Purchase Date, the Fiscal Agent shall contact the Remarketing Agent by telephone to confirm the information required to be provided in such notice. Upon such confirmation by the Fiscal Agent, the Fiscal Agent shall notify the Trustee in the manner set forth above, and the Trustee shall, if required, take action as set forth in Section 5.02(a). -24- 29 (c) REMARKETING PROCEEDS. If the Remarketing Agent has received from the purchasers thereof Remarketing Proceeds for the remarketing of all Notes to be remarketed on a Scheduled Purchase Date, the Remarketing Agent shall promptly forward such Remarketing Proceeds by wire transfer (or in such other manner as is acceptable to the Remarketing Agent) to the owners tendering such Notes for purchase. Except as otherwise provided below with respect to Bank Notes, until such transfer, all such Remarketing Proceeds shall be deposited in a separate, segregated account of the Remarketing Agent for application in accordance with the provisions of this Section 3.08, and until so applied shall be held uninvested in trust for the benefit of the holders tendering such Notes for purchase. If the Remarketing Agent has not received Remarketing Proceeds with respect to all of the Notes to be remarketed on a Scheduled Purchase Date or has received Remarketing Proceeds from the remarketing of all or a portion of the Notes to be remarketed on an Unscheduled Purchase Date, the Remarketing Agent will promptly forward all of the Remarketing Proceeds which it has received, if any, by wire transfer (or in such other manner as is acceptable to the Remarketing Agent and the Trustee) to the Trustee for delivery to the Fiscal Agent for payment to the owners tendering such Notes for purchase or for payment to the Bank in the case of Bank Notes. Except as otherwise provided below with respect to Bank Notes, upon receipt by the Trustee and the Fiscal Agent, all such Remarketing Proceeds shall be deposited in a separate, segregated account of the Note Fund for application in accordance with the provisions of this Section 3.08 and Article IV hereof and, until so applied, shall be held in trust for the benefit of the owners tendering such Notes for purchase. (d) DELIVERY OF PURCHASED NOTES. Notes purchased pursuant to Section 3.07 shall be delivered as follows: (i) Notes (other than Bank Notes) purchased with Remarketing Proceeds shall be delivered to the purchasers thereof upon receipt of payment therefor. Prior to such delivery, the Fiscal Agent shall provide for registration of transfer to the Holders, as provided in a written notice from the Remarketing Agent; and (ii) All Bank Notes shall be registered in the name of the Borrower, subject to a pledge to the Bank and shall be held by the Fiscal Agent pursuant to the Reimbursement Agreement. Upon receipt of Remarketing Proceeds in respect of the sale of Bank Notes, the Fiscal Agent shall notify the Bank and the Borrower of such receipt. Upon receipt of notice by the Fiscal Agent from the Bank by telephone, telecopy or telex, promptly confirmed in writing, that the Notes have ceased to be Bank Notes and that the amount of the Letter of Credit has been reinstated as provided therein, the Fiscal Agent shall remit the Remarketing Proceeds as directed by the Bank and release the Bank Notes and deliver them to the purchasers thereof in accordance with Section (d)(i) above. The Fiscal Agent shall hold such Remarketing Proceeds in a segregated account in trust for the benefit of the Bank except that if the Letter of Credit is not reinstated as provided in the Letter of Credit, then the Fiscal Agent shall hold such funds for the benefit of, and return them as soon as possible to, the Persons who provided such Remarketing Proceeds as specified in a notice from the Remarketing Agent to the Fiscal Agent. [End of Article III] -25- 30 ARTICLE IV PAYMENT OF NOTES AND CREATION OF FUNDS Section 4.01. PAYMENT OF NOTES. The Trustee shall direct the Fiscal Agent to make payments when due of principal of and interest on the Notes, and the Fiscal Agent or the Remarketing Agent, as applicable, shall make payments of the purchase price of Notes purchased pursuant to an optional tender or a mandatory repurchase: (a) FIRST, (but only with respect to payments of purchase price) from Remarketing Proceeds under Section 3.08, excluding any remarketing to the Borrower, any subsidiary or affiliate thereof or any Guarantor; (b) SECOND, from moneys drawn by the Trustee under the Letter of Credit and deposited in the Note Fund; (c) THIRD, from any moneys which constitute Available Moneys in the Construction Fund directed to be paid into the Note Fund in accordance with the provisions of Section 4.09; (d) FOURTH, from any other Available Moneys held by the Trustee in the Note Fund; and (e) LAST, from any other moneys available to the Fiscal Agent or the Trustee. Notwithstanding the foregoing, however, payments of purchase price of, principal of, and interest on Borrower Notes and Bank Notes shall be paid only from the first and last categories of moneys. The proceeds of investments of any moneys in any of these categories may be used to the same extent as the moneys invested could be used. Section 4.02. CREATION OF NOTE FUND. There is hereby created by the Borrower and ordered established with the Trustee a trust fund to be designated "Kellstrom Industries, Inc. Taxable Variable Rate Demand Notes, Series 1999 Note Fund". The money and securities in the Note Fund shall be held in trust by the Trustee and applied as herein provided and, until such application, the money and securities in such fund shall be subject to a first priority lien and charge in favor of the Noteholders, and a second priority lien and charge in favor of the Bank, each as described in the Granting Clauses hereto. Section 4.03. PAYMENTS INTO NOTE FUND. Subject to the provisions of Section 5.02(b), there shall be deposited into the Note Fund, as and when received, (a) all proceeds of drawings under the Letter of Credit received by the Trustee and (b) all other moneys received by the Trustee from the Borrower hereunder which are required, or which are accompanied by directions that such moneys are, to be paid into the Note Fund, including, without limitation, moneys transferred to the Note Fund pursuant to Sections 3.08(c), 4.08 and 4.09. No other funds (other than investment proceeds from moneys deposited therein) shall be deposited or commingled with the Note Fund. To the extent that moneys described above would not constitute Available Moneys at the time of such deposit, the Trustee shall create -26- 31 separate subaccounts in the Note Fund in which moneys described above shall be held until such moneys constitute Available Moneys. The Trustee shall create a separate subaccount in the Note Fund for and shall not commingle moneys described in Section 4.01(b) with any other moneys hereunder. The Trustee shall create a separate subaccount in the Note Fund for and shall not commingle moneys described in Section 4.01(c) with any other moneys hereunder. Section 4.04. USE OF MONEYS IN NOTE FUND. Moneys in the Note Fund shall be used solely for the payment of the principal of and interest on the Notes as the same become due and payable whether at maturity, upon redemption or otherwise and for the purchase price of the Notes as the same shall become due, and the Trustee shall transfer to the Fiscal Agent sufficient funds therefrom to accomplish such payment in accordance with the provisions of the Notes and this Indenture; provided, however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Borrower does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Note Fund (other than Remarketing Proceeds derived from the sale of any Notes that are not Bank Notes or proceeds from a drawing on the Letter of Credit required to pay principal, interest or purchase price of the Notes) in accordance with written instructions given from time to time to the Trustee by the Bank. Section 4.05. CUSTODY OF NOTE FUND. The Note Fund shall be held in the custody of the Trustee but in the name of the Borrower. The Borrower hereby authorizes and directs (a) the Trustee to withdraw sufficient funds from the Note Fund to pay the principal of, interest on and the purchase price of the Notes as the same become due and payable, and to withdraw from the Note Fund funds sufficient to pay any other amounts payable therefrom as the same become due and payable, and (b) the Fiscal Agent to use such funds transferred to it to make such payments, which authorization and direction the Trustee and the Fiscal Agent hereby accept; provided, however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Borrower does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Note Fund other than (i) Remarketing Proceeds to be paid to former holders derived from the sale of any Notes that are not Bank Notes, or (ii) proceeds from a drawing on the Letter of Credit required to pay principal, interest or purchase price of the Notes, in accordance with written instructions given from time to time to the Trustee by the Bank. Section 4.06. CREATION OF CONSTRUCTION FUND. There is hereby created by the Borrower and ordered established with the Trustee a trust fund to be designated "Kellstrom Industries, Inc. Taxable Variable Rate Demand Revenue Notes, Series 1999 Construction Fund". The money and securities in the Construction Fund shall be held in trust by the Trustee and applied as provided herein and, until such application, the money and securities in such fund shall be subject to a first priority lien and charge in favor of the Noteholders and a second priority lien and charge in favor of the Bank, each as described in the Granting Clauses hereto. Section 4.07. DEPOSITS INTO CONSTRUCTION FUND; COST OF THE PROJECT. All proceeds from the sale of the Notes (net of any placement fee and other costs of issuance specified by the Borrower in the authorization and request delivered to the Fiscal Agent pursuant to Section 2.01(c)(iv)) shall be deposited into the Construction Fund to be applied by the Trustee -27- 32 and the Borrower in the manner hereinafter provided for payment of the Cost of the Project. The Cost of the Project shall include the following: (a) The cost of the Land and the sitework related to the Land; (b) The cost of labor, materials, machinery and equipment as payable to contractors, builders and materialmen in connection with the construction and equipping of the Project; (c) Governmental charges levied or assessed during construction on the Project, or on any property acquired therefor, and premiums on insurance in connection with the Project during construction; (d) Expenses necessary or incident to determining the feasibility or practicability of completing the Project, the fees and expenses of appraisers, architects, engineers and management consultants for making studies, surveys and estimates of costs and of revenues and other estimates, and fees and expenses of architects and engineers for preparation of plans, drawings and specifications and supervision of construction, as well as for the performance of all other duties of architects and engineers in relation to the construction of the Project or the issuance of the Notes; (e) Expenses of administration, management, supervision, operation and inspection properly chargeable to the Project, legal expenses and fees of the Borrower in connection with the Project and the issuance and sale of the Notes, legal expenses and fees, fees and expenses of the Trustee and the Fiscal Agent, Letter of Credit fees, fees and expenses of the Placement Agent and the Remarketing Agent in arranging for the placement and remarketing of the Notes, management fees, interest expense and financing charges, cost of audits, cost of preparing, issuing and selling the Notes, abstracts and reports on titles to real estate, title insurance premiums, recording fees and taxes, and all other items of expense, including those of the Borrower, not elsewhere specified in this section incident to the acquisition, construction and equipping of the Project; (f) Any other cost relating to the acquisition, construction and equipping of the Project approved by the Bank; (g) Reimbursement to the Borrower for any costs described above paid by it, whether before or after the execution of this Indenture; and (h) Reimbursement to the Bank for amounts drawn on the Letter of Credit to pay interest on the Notes during construction of the Project. -28- 33 Section 4.08. PAYMENTS FROM CONSTRUCTION FUND. Except as provided in Section 4.09, the Trustee shall use moneys in the Construction Fund solely to pay the Cost of the Project. Disbursements from the Construction Fund shall be made not more frequently than once each calendar month. Before each payment shall be made from the Construction Fund, there shall be filed with the Trustee: (a) A Request for Disbursement, signed by a Borrower Representative and approved by the Bank, stating: (i) the name of the Person to whom the payment is due; (ii) the amount to be paid; (iii) the purpose in reasonable detail for which the obligation to be paid was incurred; and (iv) the proposed date upon which such disbursement is to be made. (b) A certificate attached to the Request for Disbursement, signed by a Borrower Representative, stating that: (i) there has been received no notice (A) of any lien, right to lien or attachment upon, or claim affecting the right to receive payment of, any of the moneys payable under such Request for Disbursement to any of the persons, firms or corporations named therein, and (B) that any materials, supplies or equipment covered by such Request for Disbursement are subject to any lien, attachment, claim or security interest, or if any notice of any such lien, attachment, claim or security interest has been received, such lien, attachment, claim or security interest has been released or discharged or will be released or discharged upon payment of the Request for Disbursement; (ii) such Request for Disbursement contains no items representing payment on account of any percentage entitled to be retained at the date of the certificate; (iii) the obligation stated on the Request for Disbursement has been incurred in or about the issuance of the Notes or the acquisition, construction or equipping of the Project, each item is a proper charge against the Construction Fund and the obligation has not been the basis for a prior Request for Disbursement that has been paid; and (iv) as of the date of such certificate no event or condition has happened or existed or is happening or exists that constitutes, or that with notice or lapse of time or both, would constitute, an Event of Default, or if such an event or condition has happened or existed, or is happening or exists, specifying the nature and period of such event or condition and what action the Borrower has taken, is taking or proposes to take with respect thereto. (c) An invoice, bill or other appropriate evidence of the obligation described in the Request for Disbursement. -29- 34 The Trustee may transfer moneys from the Construction Fund to the Note Fund or to the Bank and apply such moneys to pay Letter of Credit fees or to reimburse the Bank for amounts drawn under the Letter of Credit to pay interest on the Notes during construction of the Project, when due, without the need for submission of a Request for Disbursement or other documents. Upon receipt of the above, the Trustee shall within three Business Days make payment from the Construction Fund in accordance with such Request for Disbursement; provided, however, that if such certificate states that any Event of Default exists, the Borrower shall not be entitled to request or receive any further disbursements until such time as the deficiency has been cured to the satisfaction of the Bank. All such payments shall be made by check or draft payable either (i) directly to the Person to be paid, (ii) to both the Borrower and such Person or (iii) upon receipt of evidence that the Borrower has previously paid such amount, to the Borrower. Anything to the contrary herein notwithstanding, the Trustee may pay Requests for Disbursements executed only by the Bank (so long as it has not failed to honor a validly drawn draft under the Letter of Credit) if the Bank certifies to the Trustee that the Bank alone is entitled to direct the disbursement of moneys in the Construction Fund due to a default by the Borrower under, or the occurrence of other circumstances provided for in, the Letter of Credit Documents. Section 4.09. DISPOSITION OF BALANCE IN CONSTRUCTION FUND. When the Project is completed and all Costs of the Project have been paid, a certificate of the Borrower to that effect signed by a Borrower Representative shall be delivered to the Trustee. Any amounts thereafter remaining in the Construction Fund shall be held in the Construction Fund as collateral for the payment of the Notes. Such remaining amounts may be transferred from the Construction Fund (i) to the Note Fund at the direction of the Borrower to be used to effect the optional redemption of Notes to the maximum extent possible or (ii) to or otherwise on behalf of the Borrower upon the instructions of the Bank to be used by the Borrower only for such purposes as permitted by the Bank. Section 4.10. TRUSTEE'S RELIANCE ON BANK. So long as no Event of Default under Section 8.01(a) or (b) has occurred and is continuing, the Trustee may conclusively rely on directions from the Bank in approving or disapproving any Request for Disbursement submitted hereunder, and may waive any requirement of this Article pertaining to the Construction Fund and moneys therein at the direction of the Bank. Any approval, disapproval or waiver by the Trustee, based upon such directions, shall be no basis for and shall give no rise to any liability to the Borrower, the Noteholders or any other Person on the part of the Trustee. Section 4.11. MONEYS TO BE HELD IN TRUST. All money that the Trustee has withdrawn from the Note Fund or has received from any other source and set aside or transferred to the Fiscal Agent for the purpose of paying any of the Notes, either at the maturity thereof or by purchase (other than as provided in Section 3.08) or call for redemption or for the purpose of paying any interest on the Notes, shall be held in trust for the respective Holders. Moneys received by the Remarketing Agent, the Fiscal Agent or the Trustee from the sale of a Note under Section 3.08 or from the purchase of any Note shall be held segregated from other funds held by the Remarketing Agent, the Fiscal Agent or the Trustee in trust for the benefit of the Person from -30- 35 whom such Note was purchased and shall not be invested while so held. Any moneys deposited with the Trustee, the Fiscal Agent or the Remarketing Agent pursuant to the terms of this Indenture for the payment of principal or purchase price of Notes, or the payment of interest on Notes, that remains unclaimed by the Holders of the Notes on the date fixed for the payment, redemption or purchase of such Notes, shall be transferred to the appropriate governmental authorities of the states upon the expiration of the escheat period in accordance with the escheat laws applicable to each of the Holders of the Notes, and upon such transfer, the Trustee, the Fiscal Agent and the Remarketing Agent shall have no responsibility with respect to such money. Section 4.12. PAYMENT TO BORROWER FROM NOTE FUND OR CONSTRUCTION FUND. Any amounts remaining in the Note Fund or Construction Fund after payment in full of the principal of and interest on the Outstanding Notes, the fees, charges and expenses of the Trustee, the Fiscal Agent, the Remarketing Agent and the Bank (including without limitation the fees and expenses of their respective counsel) and all other amounts required to be paid hereunder and under the Letter of Credit Documents shall be paid promptly to the Borrower; provided the Trustee has received written confirmation from each of the Remarketing Agent and the Bank that all of their fees, charges and expenses have been paid in full. Section 4.13. INVESTMENT OF MONEYS. To the extent permitted by law and except as otherwise provided herein, the Trustee or the Fiscal Agent, as the case may be, shall invest and reinvest moneys held by it representing proceeds of drawings under the Letter of Credit and moneys on deposit in the Note Fund as directed in writing by a Borrower Representative containing the written consent of the Bank only in U. S. Government Obligations (or in a mutual fund composed solely of U. S. Government Obligations which at the time of any such investment has a securities rating from each Rating Agency equal to or higher than the then current rating on the Notes), maturing at such times as such amounts shall be needed for the purposes thereof. Unclaimed moneys held by the Trustee, the Fiscal Agent or the Remarketing Agent under Section 4.11 shall be held uninvested by the Trustee, the Fiscal Agent or the Remarketing Agent, as the case may be. Moneys held by the Trustee in the Construction Fund shall be invested and reinvested by the Trustee in any of the following on which neither the Borrower nor any of its subsidiaries or affiliates nor any Guarantor is the obligor, as directed in writing by a Borrower Representative containing the written consent of the Bank: (i) U. S. Government Obligations; (ii) obligations of the Federal Intermediate Credit Banks, Federal Home Loan Banks, National Bank for Cooperatives, Federal Land Banks, The Governmental National Mortgage Association or The Federal National Mortgage Association; (iii) certificates of deposit of banks or trust companies (including the Trustee and the Bank) organized under the laws of the United States or any state thereof, but only if such bank or trust company has a minimum combined capital and surplus not less than $20,000,000; -31- 36 (iv) commercial paper or finance company paper which is rated not less than P-1, A-1 or F-1, or their equivalent, by a Rating Agency; (v) any repurchase agreement secured by any one or more of the securities described in (i) through (iv), inclusive, above; (vi) obligations issued by any state of the United States, any territory of the United States or any political subdivision of either, the interest on which is excludable from the gross income of the owner thereof for federal income tax purposes, and which obligations are rated by a Rating Agency (A) in either of its two highest long-term debt categories, or (B) not less than either P-1, A-1, or F-1 or their equivalent; (vii) banker's acceptances, Eurodollar deposits, certificates of deposit or interest accruing demand deposits of banks or trust companies (including the Trustee and the Bank) organized under the laws of the United States or Canada or any state or province thereof, or domestic branches of foreign banks, having a capital and surplus of $25,000,000 or more; (viii) any money market fund or mutual fund (including any such fund for which the Trustee in its individual capacity, the Bank or any of their affiliates is investment manager or advisor) investing in obligations described in clauses (i) through (vii), inclusive, above; (ix) an investment agreement with a financial institution which has a bond rating of not less than "A" or its equivalent, by a Rating Agency, with the proceeds of the Notes invested therein collateralized by securities of such type and maturities acceptable to the Bank; and (x) any other investment permitted by the Bank. To the extent that the Trustee or the Fiscal Agent, as the case may be, has not received written directions from the Borrower regarding investment of moneys, the Trustee or the Fiscal Agent, as the case may be, shall, until such directions are received, invest such moneys pursuant to standing written instructions of the Borrower that have been approved by the Bank and are delivered to the Trustee or the Fiscal Agent, as the case may be, by the Borrower upon the original issuance of the Notes, as such instructions may be amended from time to time by the Borrower with the consent of the Bank. The Trustee or the Fiscal Agent, as applicable, may purchase or sell investments permitted by this Article through itself or any subsidiary or affiliate as principal or agent. Investments will be made so as to mature or be subject to redemption at the option of the holder on or before the date or dates that the Trustee or the Fiscal Agent, as applicable, or the Borrower, as appropriate, anticipates that moneys from the investments will be required. Investments shall be registered in the name of the Trustee or the Fiscal Agent, as applicable, or its nominee and held by or under the control of the Trustee or the Fiscal Agent, as applicable. The Trustee or the Fiscal Agent, as applicable, shall sell and reduce to cash a sufficient amount of investments whenever the cash held by the Trustee or the Fiscal Agent, as applicable, is insufficient for its purposes, regardless of the loss on liquidation. -32- 37 All such investments shall be held by or under the control of the Trustee or the Fiscal Agent, as applicable, and while so held shall be deemed a part of the particular fund in which held. The interest accruing thereon and any profit realized from such investments shall be credited to such fund, and any loss resulting from such investments shall be charged to such fund. The Trustee and the Fiscal Agent shall not be responsible for any losses on investments made in accordance with this section or the tax consequences thereof. [End of Article IV] -33- 38 ARTICLE V LETTER OF CREDIT Section 5.01. REQUIREMENTS FOR LETTER OF CREDIT. In order to support its obligations to make payments under the Notes, the Borrower hereby agrees (a) upon the initial authentication and delivery of the Notes, to deliver to the Trustee the Letter of Credit, issued by the Bank in favor of the Trustee and for the benefit of the holders of the Notes (other than Bank Notes and Borrower Notes), and (b) to ensure that so long as any Notes remain Outstanding, a Letter of Credit shall be in effect with respect to such Notes with terms substantially conforming to those of the original Letter of Credit. Section 5.02. DRAWS ON LETTER OF CREDIT; EXTENSIONS. (a) The Trustee shall make timely draws in accordance with the Letter of Credit such that timely payment under Section 4.01 is made without resort to the sources of payment described in Section 4.01(c) or (d). Such draws shall be in amounts equal to (i) the purchase price payable with respect to the Notes (excluding Bank Notes and Borrower Notes which are not entitled to any benefit of the Letter of Credit), less the amounts, if any, available under Section 4.01(a), or (ii) the total principal and interest due on the Notes (excluding Bank Notes and Borrower Notes which are not entitled to any benefit of the Letter of Credit). If any such draws are made on a Mandatory Repurchase Date in connection with the delivery of a Substitute Letter of Credit such draws shall be made under the existing Letter of Credit and not on the Substitute Letter of Credit. In the event the Trustee uses Available Moneys (other than Available Moneys arising from a draw under the Letter of Credit) for the payment of principal of or interest on the Notes as the same become due and payable whether at maturity, upon redemption or otherwise or for purchase price of the Notes when due, the Trustee shall, within 10 days after such payment, give notice thereof to the Bank in accordance with the terms of the Letter of Credit. The notice from the Trustee to the Bank shall be in the form attached to the Letter of Credit. The Trustee agrees to make such draws so as to be able to obtain and to transfer to the Fiscal Agent by 1:45 p.m. to the extent funds have been received from the Bank on the payment or purchase date, as the case may be, such funds to the extent necessary to permit the Fiscal Agent to make such payment when due in accordance with this Indenture and the Notes. (b) In drawing on the Letter of Credit, the Trustee shall be acting on behalf of the Noteholders by facilitating payment of the Notes and not on behalf of the Borrower and shall not be subject to the control of the Borrower. Proceeds of draws on the Letter of Credit shall be segregated from, and not commingled with, other moneys held by the Trustee and shall be paid to the Fiscal Agent, who shall hold such moneys segregated from, and not commingled with, other moneys held by the Fiscal Agent. If the Trustee is also acting as Fiscal Agent, such moneys shall be held in the Note Fund. (c) The Trustee shall advise the Borrower by telecopy or telex on the date of each draw on the Letter of Credit of the amount and date of such draw and of the reason for such draw. -34- 39 (d) For extensions of the term of the Letter of Credit, the Trustee shall, at the direction of a Borrower Representative, but only if required to evidence an extension of the term of the Letter of Credit, surrender the Letter of Credit to the Bank in exchange for a new letter of credit of the Bank or the Letter of Credit with notations thereon, as the Bank may so elect, conforming in all material respects to the Letter of Credit except that the expiration date shall be extended. Any such extension shall be for a period of at least one year or, if less, until the fifteenth day following the maturity date of the Notes. (e) No draws shall be made by the Trustee under the Letter of Credit for Bank Notes or Borrower Notes. Section 5.03. SUBSTITUTE LETTER OF CREDIT. (a) Upon at least 35 days' prior written notice to the Trustee, the Fiscal Agent and the Remarketing Agent, the Borrower may provide for the delivery to the Trustee of a substitute Letter of Credit complying with the provisions of this Indenture (the "Substitute Letter of Credit"), which shall be effective upon acceptance by the Trustee. Any Substitute Letter of Credit shall have a stated expiration date of at least one year following the effective date thereof and at least 15 days following an Interest Payment Date. (b) On or before the date of delivery of any Substitute Letter of Credit to the Trustee, as a condition to the acceptance by the Trustee of such Substitute Letter of Credit, the Borrower shall furnish to the Trustee: (i) An Opinion of Counsel addressed to the Trustee to the effect that (A) the Substitute Letter of Credit is the valid and binding obligation of the issuer thereof enforceable against such issuer in accordance with its terms except insofar as its enforceability may be limited by any insolvency or similar proceedings applicable to the issuer or by proceedings affecting generally the rights of the issuer's creditors or by general equitable principles; (B) payments of principal, interest or purchase price on the Notes from the proceeds of a draw on the Substitute Letter of Credit will not constitute avoidable preferences under any applicable bankruptcy, reorganization, insolvency or other similar laws; (C) the Substitute Letter of Credit does not constitute a separate security requiring registration under any applicable federal or state securities laws; and (D) the delivery and acceptance of the Substitute Letter of Credit are authorized under the Indenture. In the case of a Substitute Letter of Credit, issued by a branch or agency of a foreign commercial bank, there shall also be delivered an Opinion of Counsel from a firm licensed to practice law in the jurisdiction in which the head office of such bank is located, addressed to the Trustee to the effect that the Substitute Letter of Credit is the valid and binding obligation of such bank, enforceable against such bank in accordance with its terms, subject to the limitations referred to in Section 5.03(b)(i)(A) above; (ii) written evidence satisfactory to the Trustee that the issuer of the Substitute Letter of Credit meets the requirements for an issuer of a Letter of Credit in Article I hereof; -35- 40 (iii) written confirmation from the Remarketing Agent (or any successor Remarketing Agent which has been appointed to serve as the Remarketing Agent on the effective date of the Substitute Letter of Credit) that it has agreed to remarket the Notes on or after the date of the delivery of the Substitute Letter of Credit; and (iv) if the Notes will be rated following acceptance by the Trustee of such Substitute Letter of Credit, a letter from each Rating Agency setting forth such rating(s). The Trustee shall accept any such Substitute Letter of Credit only in accordance with the terms, and upon satisfaction of the conditions, contained in this Section and any other applicable provisions of this Indenture. Notwithstanding anything to the contrary herein, any Substitute Letter of Credit shall become effective on a Business Day. Acceptance of the Substitute Letter of Credit shall result in the occurrence of a Mandatory Repurchase Date, and the Trustee shall not terminate or surrender the Letter of Credit until the Trustee has made such drawings thereunder, if any, as shall be required under the Indenture to provide for payment of the purchase price of the Notes, and has received the proceeds of such drawing from the Bank. (c) Not more than 60 days and not less than 15 days prior to the effective date of the Substitute Letter of Credit, the Fiscal Agent shall, in addition to the notice required by Section 11.01(b), send by registered or certified mail to the Remarketing Agent and each holder of the Notes, notice of the issuance of the Substitute Letter of Credit, which notice shall include (i) the identity of the issuer thereof, (ii) the date the Substitute Letter of Credit will be effective, and (iii) notice pursuant to Section 3.07 that the Notes are subject to mandatory repurchase pursuant to Section 3.07. Section 5.04. ENFORCEMENT OF THE LETTER OF CREDIT. The Trustee shall hold and maintain the Letter of Credit for the benefit of the Owners of the Notes until the Letter of Credit terminates or expires in accordance with its terms. When the Letter of Credit terminates or expires in accordance with its terms, the Trustee shall immediately surrender it to the Bank. The Trustee hereby agrees that, except in the case of a redemption in part pursuant to Article III hereof or any other reduction in the principal amount of Notes Outstanding, it will not under any circumstances request that the Bank reduce the amount of the Letter of Credit. If at any time, all Notes shall cease to be Outstanding, the Trustee shall surrender the Letter of Credit to the Bank in accordance with the terms thereof, together with written confirmation from the Trustee to the Bank stating that the Letter of Credit is being delivered to the Bank for cancellation and that the Trustee relinquishes its right to make any further draws thereunder. If at any time, the Bank fails to honor a draft presented under the Letter of Credit, in conformity with the terms thereof, the Trustee shall give immediate telephonic notice thereof to the Remarketing Agent, the Fiscal Agent and the Borrower. [End of Article V] -36- 41 ARTICLE VI GENERAL COVENANTS, REPRESENTATIONS AND WARRANTIES Section 6.01. PAYMENT OF NOTES. The Borrower shall promptly pay, or cause to be paid, the principal of (whether at maturity, by acceleration, call for redemption or otherwise) and interest on and purchase price of every Note issued under this Indenture to the Fiscal Agent for payment to the owners of the Notes, on the dates and in the manner provided herein according to the true intent and meaning thereof. Section 6.02. COVENANTS. REPRESENTATIONS AND WARRANTIES OF BORROWER. (a) COMPLIANCE WITH TERMS. The Borrower shall observe and perform all covenants, conditions and agreements required on its part to be observed and performed in this Indenture, the Reimbursement Agreement, the Placement Agreement, the Remarketing Agreement and in each Note executed, authenticated and delivered hereunder, in all other documents related hereto, and under any laws or regulations related to the issuance of the Notes. (b) INCORPORATION BY REFERENCE. The Borrower represents and warrants that each of the Borrower's representations and warranties contained in the Reimbursement Agreement, the Placement Agreement and the Remarketing Agreement are true and correct in all material respects on and as of the date hereof and are hereby made to the Trustee as if set forth herein. (c) DUE AUTHORIZATION. The Borrower (i) has the requisite corporate power and authority to execute, deliver and perform this Indenture and each of the other Transaction Documents to which it is a party and to incur and perform the obligations herein and therein provided for, and (ii) is duly authorized under all applicable provisions of law, and has taken all necessary corporate action on its part required, to execute, deliver and perform this Indenture and each of the other Transaction Documents to which it is a party. (d) NO CONFLICTS. Neither the execution and delivery of the Transaction Documents to which the Borrower is a party, nor the consummation of the transactions contemplated therein, nor performance of and compliance with the terms and provision thereof will (i) violate or conflict with any provision of the articles of incorporation or by laws of the Borrower, (ii) to the Borrower's knowledge, violate, contravene or materially conflict with any law, regulation, order, writ, judgment, injunction, decree or permit applicable to the Borrower, (iii) violate, contravene or materially conflict with any contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, deed of trust, contract or other agreement or instrument to which the Borrower is a party or by which the Borrower may be bound, or (iv) to the Borrower's knowledge, result in or require the creation of any lien, security interest or other charge or encumbrance (other than those contemplated in or in connection with the Transaction Documents) upon or with respect to any material asset of the Borrower. (e) CONSENTS. No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection -37- 42 with the execution, delivery or performance of this Indenture or any of the other Transaction Documents. (f) ENFORCEABLE OBLIGATIONS. This Indenture and the other Transaction Documents to which the Borrower is a party have been duly executed and delivered and constitute legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as may be limited by bankruptcy or insolvency laws or similar laws affecting creditors' rights generally. Section 6.03. NOTICE OF LITIGATION. The Borrower shall promptly inform the Trustee, the Bank, the Fiscal Agent, the Placement Agent and the Remarketing Agent of (a) any litigation pending or to its knowledge threatened, to which the Borrower is or may be a party and that has not been previously disclosed to the Trustee, the Bank, the Fiscal Agent, the Placement Agent and the Remarketing Agent, the adverse determination of which might materially prejudice the payment of the Notes or the performance of its obligations hereunder, and (b) any materially adverse developments in any such litigation previously disclosed to the Trustee, the Bank, the Fiscal Agent, the Placement Agent and the Remarketing Agent. Section 6.04. FINANCING AND CONTINUATION STATEMENTS. Financing statements with respect to the Trust Estate and meeting the requirements of the Uniform Commercial Code of the State shall be filed by the Borrower in all offices in the State where such filing is necessary to perfect the security interest in the Trust Estate created by this Indenture. Whenever in the opinion of the Trustee or the Bank (but without obligation on either or both of them to make such a determination) such action is necessary to preserve such security interest or the priority thereof and upon the written direction of either of them to do so, the Borrower shall file additional financing or continuation statements in all such offices. During the sixth month period immediately preceding February 1, 2004 and February 1 of each fifth year thereafter, upon the written direction of the Trustee or the Bank to do so, the Borrower shall deliver or cause to be delivered to the Trustee and the Bank an opinion of counsel, addressed to the Trustee and the Bank, or other evidence reasonably satisfactory to each of them, stating that no further filing of any instrument is necessary to preserve, perfect or protect the priority of the security interest in the Trust Estate created hereby at such time or during the five year period immediately succeeding such June 1, as the case may be, or, if any such filing is necessary, setting forth the requirements with respect thereto, in which case the Borrower shall cause such requirements to be met. The expenses, including reasonable attorney's fees, of all such filings and opinions shall be paid by the Borrower. Section 6.05. FURTHER ASSURANCES. The Borrower shall execute and deliver such supplemental agreements and such further instruments and do such further acts, as the Trustee may reasonably require to carry out the purposes of this Indenture. [End of Article VI] -38- 43 ARTICLE VII DISCHARGE OF INDENTURE Section 7.01. NOTES DEEMED PAID; DISCHARGE OF INDENTURE. All Notes shall be deemed paid for all purposes of this Indenture when (a) payment of the greater of the principal of and the maximum amount of interest that may become due on the Notes to the due date of such principal and interest (whether at maturity, upon redemption, acceleration or otherwise) or the payment of the purchase price of any Note that may be optionally tendered by the owner either (i) has been made in accordance with the terms of Section 3.05 or Section 3.07(c) or (ii) has been provided for by depositing with the Trustee (A) moneys sufficient to make such payment, which moneys must constitute Available Moneys and/or (B) noncallable U.S. Government Obligations maturing as to principal and interest in such amounts and at such times as will ensure the availability of sufficient moneys to make such payment without regard to the reinvestment thereof, provided that (i) such U.S. Government Obligations must be purchased from Available Moneys and (ii) the Trustee has received written evidence from each Rating Agency that as a result of such action, their rating on the Notes will not be lowered or eliminated; and (b) all compensation and expenses of the Trustee and the Fiscal Agent (as well as the fees and expenses of their counsel) pertaining to each Note in respect of which such payment or deposit is made have been paid or provided for to their respective satisfaction. When a Note is deemed paid, it shall no longer be secured by or entitled to the benefits of this Indenture, except for payment from moneys or U.S. Government Obligations under subsection (a) above and except that it may be optionally tendered if and as provided in Section 3.07(b) and it may be transferred, exchanged, registered, discharged from registration or replaced as provided in Article II. Notwithstanding the foregoing, no deposit under subsection (a) above made for the purpose of paying the redemption price of a Note (as opposed to the final payment thereof upon maturity) will be deemed a payment of a Note as aforesaid until (x) notice of redemption of the Note is given in accordance with Article III or, if the Note is not to be redeemed within the next 60 days, until the Borrower has given the Trustee and the Fiscal Agent, in form satisfactory to the Trustee, irrevocable instructions to notify, as soon as practicable, the holder of the Note, in accordance with Article III, that the deposit required by subsection (a) above has been made with the Trustee and that the Note is deemed to be paid under this Article and stating the redemption date upon which moneys are to be available for the payment of the principal of the Note or (y) the maturity of the Note. Additionally, and while the deposit under subsection (a) above made for the purpose of paying the final payment of a Note upon its maturity shall be deemed a payment of such Note as aforesaid, the Trustee shall mail notice to the Owner of such Note, as soon as practicable stating that the deposit required by subsection (a) above has been made with the Trustee and that the Note is deemed to be paid under this Article. When all Outstanding Notes are deemed paid under the foregoing provisions of this Section and other sums due under this Indenture and the Reimbursement Agreement are paid in full, the Trustee shall, upon request, acknowledge the discharge of the Borrower's obligations under this Indenture except for obligations relating to optional tender as provided in Section 3.07(b), obligations under Article II in respect of the transfer, exchange, registration, discharge from registration and replacement of Notes, and obligations under Section 9.06 hereof with -39- 44 respect to the Trustee's compensation and indemnification, and the Trustee without request or further direction shall surrender the Letter of Credit to the Bank, in accordance with the terms of the Letter of Credit and the provisions of Section 5.04 hereof. Notes delivered to the Fiscal Agent for payment shall be canceled by the Fiscal Agent pursuant to Section 2.07. The Trustee may request and shall be fully protected in relying upon a certificate of an independent certified public accountant to the effect that a deposit will be sufficient to defease the Notes as provided in this Section 7.01. Upon receipt of any amount pursuant to this Article VII, the Trustee shall give written notice thereof, which notice shall include, without limitation, the amount of such deposit and any instructions given to the Trustee pursuant thereto, to the Remarketing Agent by first-class mail, postage prepaid. Section 7.02. APPLICATION OF TRUST MONEY. The Trustee and the Fiscal Agent shall hold in trust money or U.S. Government Obligations deposited with them pursuant to the preceding Section and shall apply the deposited money and the money from the U.S. Government Obligations in accordance with this Indenture only to the payment of principal of and interest on, or purchase price of, the Notes. [End of Article VII] -40- 45 ARTICLE VIII DEFAULTS AND REMEDIES Section 8.01. EVENTS OF DEFAULT. Each of the following events shall be an Event of Default: (a) Default in the due and punctual payment of any interest on any Note; (b) Default in the due and punctual payment of the principal or purchase price of any Note (whether at maturity, by acceleration or redemption, upon purchase or otherwise); (c) Default in the observance or performance of any other of the covenants, conditions or agreements on the part of the Borrower under this Indenture with such default continuing for a period of thirty (30) consecutive days (or such further time as may be granted in writing by the Trustee, with notice to the Bank) after receipt by the Borrower Representative of a written notice from the Trustee or the Bank specifying such default and requiring the same to be remedied; or (d) Receipt by the Trustee of written notice from the Bank that an Event of Default has occurred under the Reimbursement Agreement accompanied by a demand by the Bank that the Trustee declare the Notes to be immediately due and payable. For purposes of this Section 8.01, the Trustee shall not be deemed to have knowledge of an Event of Default hereunder unless a Responsible Officer in the corporate trust department of the Trustee has actual knowledge thereof or unless written notice of any event which is an Event of Default is received by the Trustee and such notice references this Indenture or the Notes. Section 8.02. ACCELERATION AND DUTY TO DRAW ON LETTER OF CREDIT. (a) Upon the occurrence of an Event of Default under Section 8.01(a), (b) or (d) hereof, the Trustee shall, by notice to the holders, the Bank, the Remarketing Agent and the Borrower, declare the entire unpaid principal of and interest on the Notes immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Notes shall forthwith become immediately due and payable. Upon the occurrence and continuance of any other Event of Default, the Trustee may, and if requested by the holders of not less than a majority in aggregate principal amount of Notes then Outstanding shall, by notice to the holders, the Bank, the Remarketing Agent and the Borrower, declare the entire unpaid principal of and interest on the Notes immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Notes shall forthwith become due and payable. Upon any such declaration, the Borrower shall forthwith cause the Trustee to pay to the holders of the Notes from the Trust Estate the entire unpaid principal of and accrued interest on the Notes. In the event the Trustee fails to accelerate as required by this Section 8.02(a), the owners of a majority in aggregate principal amount of Notes Outstanding shall have the right to take such actions. -41- 46 (b) Upon the acceleration of the maturity of the Notes, by declaration or otherwise, the Trustee shall immediately draw upon the Letter of Credit for the aggregate unpaid principal amount of the Notes and interest accrued thereon which shall be applied immediately as set forth in Section 8.03. Upon such acceleration, interest on the Notes shall cease to accrue as of the date of declaration of such acceleration. Section 8.03. DISPOSITION OF AMOUNTS DRAWN ON LETTER OF CREDIT; ASSIGNMENT OF RIGHTS TO CONTEST. (a) All amounts drawn on the Letter of Credit by the Trustee in accordance with Section 8.02(b) shall be held in the Note Fund (and invested in accordance with Section 4.13), and shall be applied immediately to the payment of principal of and interest accrued on the Notes unless, prior to or with the proceeds of the draw on the Letter of Credit, the Trustee receives written instructions from the Bank to use such proceeds to purchase all Notes. If such instructions are received by the Trustee, such draw proceeds shall be immediately applied to the purchase of the Notes, the acceleration of the Notes shall be canceled, the Notes shall become Bank Notes, and the Notes shall be registered in the name of the Borrower and pledged under the Reimbursement Agreement as additional security for repayment of the Borrower's obligations under the Reimbursement Agreement. Thereafter, such Notes shall not be remarketed by the Remarketing Agent unless the Letter of Credit is reinstated or a Substitute Letter of Credit is delivered pursuant to Section 5.03. (b) The Trustee hereby assigns to the Bank all its rights to contest or otherwise dispute in the Trustee's name, place and stead and at the Bank's sole election and cost any claim of preferential transfer made by a bankruptcy trustee, debtor-in-possession or other similar official with respect to any amount paid to the Trustee by or on behalf of the Borrower to be applied to principal of or interest on or purchase price of the Notes, to the extent of payments made to the Trustee pursuant to a drawing under the Letter of Credit. The Trustee shall cooperate with and assist the Bank in any such contest or dispute as the Bank may reasonably request; provided, however, that the Bank shall reimburse the Trustee for the reasonable costs incurred in connection with providing such cooperation and assistance. The Trustee shall give the Bank prompt notice of any claim of preferential transfer of which the Trustee has knowledge. The foregoing assignment shall not be deemed to confer upon the Bank any right to contest or otherwise dispute any claim of preferential transfer with respect to any amount as to which there has been no drawing under the Letter of Credit. The assignment set forth above shall in no event be effective until the Bank has first furnished to the Trustee an agreement to indemnify the Trustee and the holders of the Notes against any claim, liability or damage which they might suffer by reason of any such contest or dispute. Section 8.04. OTHER REMEDIES; RIGHTS OF NOTEHOLDERS. Upon the occurrence of an Event of Default, the Trustee, subject to the terms of this Indenture, may proceed to protect and enforce its rights and the rights of the Noteholders by mandamus or other suit, action or proceeding, at law or in equity, including but not limited to an action for specific performance of any agreement herein contained or making a demand for payment from the Borrower and taking action pursuant to any other document to which the Trustee is a party. -42- 47 Upon the occurrence of an Event of Default and subject to Section 8.14, if requested to do so by the holders of not less than a majority in aggregate principal amount of Notes Outstanding and if indemnified as provided in Section 9.01(d), the Trustee, subject to the terms of this Indenture, shall exercise such one or more of the rights and powers conferred by this Article as the Trustee, upon being advised by counsel, shall deem most expedient in the interests of the Noteholders. No remedy conferred by this Indenture upon or reserved to the Trustee or to the Noteholders is intended to be exclusive of any other remedy, but each such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the Noteholders hereunder or now or hereafter existing at law or in equity. No delay or failure to exercise any right or power accruing upon any default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or Event of Default or acquiescence therein, and every such right and power may be exercised from time to time and as often as may be deemed necessary. No waiver of any default or Event of Default hereunder, whether by the Trustee pursuant to Section 8.10 or by the Noteholders, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon. Section 8.05. RIGHT OF NOTEHOLDERS TO DIRECT PROCEEDINGS. Notwithstanding anything in this Indenture to the contrary, but subject to Section 8.14, the holders of a majority in aggregate principal amount of Notes Outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Indenture or for the appointment of a receiver or any other proceedings hereunder; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of this Indenture. Section 8.06. APPLICATION OF MONEYS. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this Article shall, after payment of the costs and expenses of the proceedings resulting in the collection of such moneys and of the expenses, liabilities and advances incurred or made by the Trustee, be deposited in the Note Fund; provided, however, that no proceeds from any draw on the Letter of Credit shall be used for any purpose other than payment of the principal of and interest on the Notes or the purchase price thereof. All moneys in the Note Fund shall be applied as follows: (a) Unless the principal of all Notes has become or has been declared due and payable: First, to the payment to the persons entitled thereto of all installments of interest then due on the Notes, in the order of the maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference except as provided in Section 8.13, and as to any difference in the respective rates of interest specified in the Notes; -43- 48 Second, to the payment to the persons entitled thereto of the unpaid principal of any of the Notes which has become due (other than Notes called for redemption for the payment of which moneys are held pursuant to the provisions of this Indenture), in the order of their due dates, with interest on such Notes at the respective rates specified therein from the respective dates upon which they become due and, if the amount available shall not be sufficient to pay in full Notes due on any particular date, together with such interest, then first to the payment of such interest ratably, according to the amount of such interest due on such date, and then to the amount of such principal, ratably, according to the amount of such principal due on such date, to the persons entitled thereto, without any discrimination or preference, except as provided in Section 8.13, and as to any difference in the respective rates of interest specified in the Notes; and Third, to the extent permitted by law, to the payment to the persons entitled thereto of the unpaid interest on overdue installments of interest ratably, according to the amounts of such interest due on such date, without any discrimination or preference, except as provided in Section 8.13, and as to any difference in the respective rates of interest specified in the Notes. (b) If the principal of all Notes have become due or have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Notes, including to the extent permitted by law, interest on overdue installments of interest, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Note over any other Note, ratably according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or privilege, except as provided in Section 8.13. (c) If the principal of all Notes have been declared due and payable, and if such declaration is thereafter rescinded and annulled under the provisions of this Article, then, subject to the provisions of Section 8.06(b) in the event that the principal of all Notes later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of Section 8.06(a). (d) All amounts received from a draw upon the Letter of Credit shall be applied exclusively to the payment of the principal of and interest on the Notes or the purchase price thereof. Whenever moneys are to be applied pursuant to the provisions of this Section, such moneys shall be applied at such times and from time to time as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such moneys, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable or as required by Section 8.03(a)) upon which such application is to be made. The Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to -44- 49 make payment to the holder of any Note until such Note is presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Whenever all principal of and interest on all Notes have been paid under the provisions of this Section and all expenses and charges of the Trustee have been paid, and all obligations of the Borrower to the Bank pursuant to the Reimbursement Agreement shall have been paid in full, the balance remaining in the Note Fund shall be paid to the Borrower as provided in Section 4.12. Section 8.07. REMEDIES VESTED IN TRUSTEE. All rights of action (including the right to file proof of claims) under this Indenture or under any of the Notes may be enforced by the Trustee without the possession of any of the Notes or the production thereof in any trial or other proceeding relating thereto and any such suit or proceeding instituted by the Trustee may be brought in its name, as Trustee, without the necessity of joining as plaintiffs or defendants any holders of the Notes, and any recovery of judgment shall be for the equal benefit of the holders of the Outstanding Notes. Section 8.08. LIMITATIONS ON SUITS. Except to enforce the rights given under Sections 8.02(a), 8.05 and 8.12, no holder of any Note shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of this Indenture or for the execution of any trust thereof or any other remedy hereunder, unless (a) a default has occurred of which the Trustee has been notified as provided in Section 9.05, or of which by such Section it is deemed to have notice, (b) such default has become an Event of Default and the holders of at least a majority in aggregate principal amount of Notes Outstanding have made written request to the Trustee and have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name, (c) such holders have offered to the Trustee indemnity as provided in Section 9.01(d), (d) the Trustee for 60 days after such notice fails or refuses to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its own name or in the name of such holders, (e) no direction inconsistent with such request has been given to the Trustee during such 60 day period by the holders of a majority in aggregate principal amount of Notes Outstanding, and (f) notice of such action, suit or proceeding is given to the Trustee; it being understood and intended that no one or more holders of the Notes shall have any right in any manner whatsoever to affect, disturb or prejudice this Indenture by its, his or their action or to enforce any right hereunder except in the manner herein provided, and that all proceedings at law or in equity shall be instituted and maintained in the manner herein provided and for the equal benefit of the holders of all Notes Outstanding. The notification, request and offer of indemnity set forth in the preceding paragraph, at the option of the Trustee, shall be conditions precedent to the execution of the powers and trusts in this Indenture and to any action or cause of action for the enforcement of this Indenture or for any other remedy hereunder. Section 8.09. TERMINATION OF PROCEEDINGS. In case the Trustee has proceeded to enforce any right under this Indenture by the appointment of a receiver, by entry or otherwise, and such proceedings have been discontinued or abandoned for any reason, or have been determined adversely, then and in every such case the Borrower, the Noteholders, the Bank and the Trustee -45- 50 shall be restored to their former positions and rights hereunder, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken. Section 8.10. WAIVERS OF EVENTS OF DEFAULT. The Trustee, with the written consent of the Bank, may waive any Event of Default hereunder and its consequences and rescind any declaration of maturity of principal of and interest on the Notes, and shall do so, with the written consent of the Bank, upon the written request of the holders of (a) a majority in aggregate principal amount of Notes Outstanding in respect of which default in the payment of principal and/or interest exists, or (b) a majority in aggregate principal amount of Notes Outstanding in the case of any other default; provided, however, that: (i) there shall not be waived without the consent of the holders of all Notes then Outstanding: (A) any default in the payment of the principal of any Outstanding Notes when due (whether at maturity or by mandatory or optional redemption); or (B) any default in the payment when due of the interest on any such Notes unless, in either case, prior to such waiver or rescission (1) there have been paid or provided for all arrears of interest at the rate borne by the Notes on overdue installments of principal, all arrears of payments of principal and interest when due and all expenses of the Trustee and the Bank in connection with such default, and (2) in case of any such waiver or rescission, or in case of the discontinuance, abandonment or adverse determination of any proceeding taken by the Trustee on account of any such default, the Trustee, the Bank and the Noteholders shall be restored to their respective former positions and rights hereunder; (ii) no acceleration of maturity under Section 8.02 made at the request of the holders of not less than a majority in aggregate principal amount of Notes Outstanding shall be rescinded unless requested by the holders of a majority in aggregate principal amount of Notes Outstanding; and (iii) unless the Trustee has been notified by the Bank in writing that the Letter of Credit is reinstated in full as to principal and interest and that the Bank has rescinded or withdrawn the written notice referred to in Section 8.01(d), there shall be no waiver or rescission so long as the Letter of Credit is in effect. No such waiver or rescission shall extend to any subsequent or other default or impair any right consequent thereon. Section 8.11. NOTICE OF DEFAULTS; OPPORTUNITY OF BORROWER TO CURE DEFAULTS. Notwithstanding anything in this Indenture to the contrary, no default specified in Section 8.01(c) on the part of the Borrower shall constitute an Event of Default until (a) notice of such default shall be given (i) by the Trustee to the Borrower and the Bank, or (ii) by the holders of not less than a majority in aggregate principal amount of Notes Outstanding to the Trustee, the Borrower and the Bank, and (b)the Borrower has had 30 days after such notice to correct such default or cause such default to be corrected, and shall not have corrected such default or caused such default to be corrected within such period; provided, however, if any default specified in Section 8.01(c) shall be such that it cannot be corrected within such period, it shall not constitute an Event of Default if corrective action is instituted by the Borrower within such period and -46- 51 diligently pursued until such default is corrected; provided, further, that the period for corrective action shall not in any event extend more than 180 days after such notice to correct such default. With regard to any alleged default concerning which notice is given to the Bank, the Bank may, but is under no obligation to, perform any covenant, condition or agreement the nonperformance of which is alleged in such notice to constitute a default, in the name and stead of the Borrower with full power to do any and all things and acts to the same extent that the Borrower could do and perform any such things and acts with power of substitution. Section 8.12. UNCONDITIONAL RIGHT TO RECEIVE PRINCIPAL AND INTEREST. Notwithstanding the terms of Section 8.08, any Noteholder may enforce, by action at law, payment of the principal or purchase price of and interest on any Note at and after the maturity thereof, or on the date fixed for redemption or purchase or (subject to the provisions of Section 8.02) on the same being declared due prior to maturity as herein provided, or the obligation of the Borrower to pay the principal or purchase price of and interest on each of the Notes issued hereunder to the respective holders thereof at the time, place, from the source and in the manner herein and in the Notes expressed. Section 8.13. NOTES OUTSTANDING. Notwithstanding anything else in this Article to the contrary, but subject to Section 8.14, Borrower Notes shall not be deemed to be Outstanding for purposes of this Article and the Borrower as holder thereof shall not be entitled to any rights or payments therefor pursuant to Sections 8.05, 8.06, 8.08, 8.10 and 8.12. Section 8.14. LETTER OF CREDIT BANK DEEMED OWNER. For all purposes of this Article VIII (other than receipt of payments), the Bank shall, so long as the Bank shall not have dishonored any draw under the Letter of Credit strictly complying with the terms thereof (other than for a reason permitted by the Letter of Credit or pursuant to any administrative or judicial order, ruling, finding or decision), be deemed the holder and registered owner of all Notes. As such, the Bank may take all actions permitted by this Article VIII to be taken by the Trustee or the holders or registered owners of the Notes, to the exclusion of the Trustee or the actual holders and registered owners of the Notes; the purpose of this Section 8.14 being to permit the Bank to direct the taking of actions and enforcement of remedies permitted by this Article VIII so long as the Bank shall not have dishonored any draw under the Letter of Credit complying with the terms thereof (other than for a reason permitted by the Letter of Credit or pursuant to any administrative or judicial order, ruling, rule, finding or decision). -47- 52 Section 8.15. SUBROGATION RIGHTS OF THE BANK. (a) Notwithstanding anything else contained herein, whenever the Trustee shall make any payment to any Noteholder with funds drawn under Letter of Credit pursuant hereto, the Trustee shall make such payments as agent for the Bank and not as agent for the Borrower, and the Bank and its assigns shall thereafter, to the extent of the amount so paid, be subrogated to the rights thereon of the Noteholders to whom such payment was made, and the Trustee shall, in the event of the payment of principal, keep a written record of such payments. When a Noteholder has been paid the entire principal of and interest on his Note with funds drawn under the Letter of Credit, such Note shall be surrendered to the Trustee as agent for the Bank, in lieu of cancellation thereof, and such Note shall be transferred and delivered to the Bank or as the Bank shall direct. (b) In the event the Bank makes any payment with respect to the payment of the principal or purchase price of or interest on any Note to the Trustee under the Letter of Credit, the Bank shall be subrogated to the rights possessed under the Indenture by the Trustee, the Borrower and the owners of such Notes so paid, and the Bank shall be subrogated to the rights of the Borrower and the Trustee under any other document, instrument or agreement securing repayment of the principal or purchase price of and interest on the Notes. For purposes of the Bank's subrogation rights hereunder, (i) any reference in the Indenture to the Noteholders shall include the Bank, which shall be entitled to be treated as if the Bank were a registered owner of Notes in the principal amount of any principal payment made by the Bank under the Letter of Credit, (ii) any portion of any Note as to which the principal or purchase price is paid with money collected pursuant to the Letter of Credit shall be deemed to be outstanding under the Indenture and the principal amount of such Note, together with interest due and unpaid thereon, which have been paid by the Bank pursuant to the Letter of Credit shall be deemed to be held by and owing to the Bank, and (iii) the Bank may exercise any and all rights and benefits it would have under the Indenture as a Holder of Notes to the extent of the principal amount of Notes owned or deemed to be owned by the Bank and any and all interest so due and unpaid thereon; provided that such Bank Notes (A) shall not be taken into account in determining any deficiency for which a claim or draw is to be made under the Letter of Credit, and (B) shall be subordinated in right of payment as of any Interest Payment Date or upon the redemption or acceleration of the Notes. Subrogation rights granted to the Bank hereunder are not intended to be exclusive of any other rights or remedies available to the Bank, and such subrogation rights shall be cumulative and shall be in addition to every right or remedy given hereunder or under any other instrument or agreement with respect to reimbursement of money paid by the Bank pursuant to the Letter of Credit, and every other right or remedy now or hereafter existing at law or in equity or by statute. [End of Article VIII] -48- 53 ARTICLE IX TRUSTEE, FISCAL AGENT, PLACEMENT AGENT AND REMARKETING AGENT Section 9.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (ii) in the absence of bad faith, negligence or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether they conform to the requirements of this Indenture. (c) The Trustee shall not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this subsection does not limit the effect of (b) above; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05. (d) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity reasonably satisfactory to it against any loss, liability or expense, but (i) the Trustee may not require indemnity as a condition to declaring the principal of and interest on the Notes to be due immediately under Section 8.02 and (ii) the Trustee may not require indemnity as a condition to drawing on the Letter of Credit or to taking any action under the Letter of Credit. The Trustee shall not be required to give any bond or surety in respect of the execution of the trust created hereby or the powers granted hereunder. The permissive right of the Trustee to do things enumerated under this Indenture shall not be construed as a duty of the Trustee. -49- 54 (e) The Trustee shall not be liable for interest on any cash held by it except as the Trustee may agree with the Borrower in writing. (f) The Trustee may conclusively rely on a Borrower Representative's certificate as to whether a Bankruptcy Filing has occurred. (g) The Trustee shall strictly comply with the terms of the Letter of Credit. (h) The Trustee shall maintain adequate records pertaining to the funds held by the Trustee, the investment thereof and the disbursement therefrom; notwithstanding anything to the contrary in this Indenture or the Notes, the Trustee shall not be required to advance its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. (i) Every provision of this Indenture that in any way relates to the Trustee is subject to all the foregoing paragraphs of this Section. (j) The Trustee shall not in any event be responsible for ensuring that the rate of interest due and payable on the Notes under this Indenture does not exceed the highest legal rate of interest permissible under federal or state law applicable thereto. Section 9.02. RIGHTS OF TRUSTEE. (a) Subject to the foregoing Section, including, but not limited to, Sections 9.01(b)(ii) and 9.01(c), the Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. Any action taken by the Trustee pursuant to this Indenture upon the request or authority or consent of any Person, who at the time of making such request or authority or consent is the owner of any Note, shall be conclusive and binding upon all future owners of any Note issued in replacement thereof. (b) Before the Trustee acts or refrains from acting, it may require a certificate of an appropriate officer or officers of the Borrower or an Opinion of Counsel stating that (i) the person making such certificate or opinion has read such covenant or condition, (ii) the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. The Trustee shall not be liable for any loss or damage or action it takes or omits to take in good faith in reliance on the certificate or Opinion of Counsel. (c) The Trustee may execute any of the trusts or powers hereunder and perform any of its duties through agents, attorneys or employees or co-trustees and shall not be responsible for the misconduct or negligence of any agent, attorney, employee or co-trustee appointed with due care. -50- 55 Section 9.03. INDIVIDUAL RIGHTS OF TRUSTEE, ETC. The Trustee in its individual or any other capacity may become the owner, custodian or pledgee of Notes and may otherwise deal with the Bank or with the Borrower or its affiliates with the same rights it would have if it were not Trustee. The Fiscal Agent may do the same with like rights. Section 9.04. TRUSTEE'S DISCLAIMER. Subject to Sections 9.01(b) and 9.01(c): (a) the Trustee (i) makes no representation as to the validity or adequacy of this Indenture or the Notes, and (ii) shall not be responsible for any statement in the Notes or for the perfection of any lien created by this Indenture or otherwise as security for the Notes; (b) the Trustee may construe any of the provisions of this Indenture insofar as the same may appear to be ambiguous or inconsistent with any other provision hereof, and any construction of any such provisions hereof by the Trustee in good faith shall be binding upon the Noteholders, the Borrower and the Remarketing Agent; (c) the Trustee shall not be responsible for the application of any of the proceeds of the Notes or any other moneys deposited with it and paid out, withdrawn or transferred hereunder if such application, payment, withdrawal or transfer shall be made in accordance with the provisions of this Indenture; (d) except as to a determination whether the Borrower has delivered the opinion of counsel or provided other satisfactory evidence to the Trustee that the Borrower has satisfied the filing requirements set forth in the next to last sentence of Section 6.04, the Trustee shall not be under any obligation to see to the recording or filing of this Indenture, any financing statements or any other instrument or otherwise to the giving to any person of notice of the provisions hereof or thereof; (e) the Trustee shall not be under any obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the Borrower, or to report, or make or file claims or proof of loss for, any loss or damage insured against or which may occur, or to keep itself informed or advised as to the payment of any taxes or assessments, or to require any such payment to be made; and (f) the Trustee shall not be personally liable for any claims by or on behalf of any Person, arising from the conduct or management of, or from any work or thing done on, the Project, and shall have no affirmative duty with respect to compliance of the Project under state or federal laws pertaining to the transport, storage, treatment or disposal of pollutants, contaminants, waste or hazardous materials, or regulations, permits or licenses issued under such laws or otherwise. Section 9.05. NOTICE OF DEFAULTS. The Trustee shall not have notice, or be deemed to have notice, of any default or Event of Default under this Indenture, other than an Event of Default under Section 8.01(a), (b) or (d), unless specifically notified in writing at such address as set forth in Section 11.01 hereof of such default or Event of Default by Noteholders having, in -51- 56 the aggregate, not less than 25% in principal amount of the Notes Outstanding, by the Fiscal Agent, by the Bank, by the Remarketing Agent or by the Borrower. If an event occurs which with the giving of notice or lapse of time or both would be an Event of Default, and if the Event of Default is continuing and if the Trustee has notice thereof as herein provided, the Trustee shall mail to each Noteholder, the Remarketing Agent and the Bank notice of the Event of Default upon its having notice of such occurrence. Except in the case of a default in payment or purchase of any Notes, the Trustee may withhold the notice if and so long as it determines that withholding the notice is in the interests of Noteholders; provided, that in any event such notice shall not be withheld from the Bank or the Remarketing Agent. Section 9.06. COMPENSATION AND INDEMNIFICATION OF TRUSTEE. For acting as trustee under this Indenture, the Trustee shall be entitled to compensation by the Borrower (which shall not be limited by any statute regulating the compensation of a trustee of an express trust) of reasonable fees for the Trustee's services and reimbursement of advances, counsel fees and other expenses reasonably and necessarily made or incurred by the Trustee in connection with its services under this Indenture. The Trustee shall be indemnified by the Borrower for, and shall be held harmless against, any loss, liability or expense incurred without negligence, willful misconduct or bad faith on the Trustee's part, arising directly or indirectly out of or in connection with the acceptance or administration of the trust created by this Indenture, including the costs and expenses (including counsel fees) of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. Section 9.07. ELIGIBILITY OF TRUSTEE. This Indenture shall always have a Trustee that meets the qualifications set forth in this Section 9.07. Each Trustee shall: (i) be acceptable to the Bank and the Remarketing Agent, (ii) be a corporation or national banking association duly organized under the laws of the United States of America or any state or territory thereof, doing business and having an office in such location as shall be approved by the Remarketing Agent, (iii) have together with its affiliates (herein defined) a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition, (iv) have senior long-term debt securities or outstanding bank deposit obligations, as appropriate, rated "Baa3/P3" or better by Moody's Investors Service, Inc., "BBB-/A3" or better by Standard & Poor's Ratings Services, a Division of The McGraw-Hill Companies, Inc. or "BBB-/F3" or better by Fitch IBCA, Inc., or be a direct or indirect subsidiary of a bank or bank holding company which has senior long-term debt securities or outstanding bank deposit obligations, as appropriate, rated "Baa3/P3" or better by Moody's Investors Service, Inc., "BBB-/A3" or better by Standard & Poor's Ratings Services, a Division of The McGraw-Hill Companies, Inc. or "BBB-/F3" or better by Fitch IBCA, Inc., or otherwise be acceptable to any Rating Agency then rating the Notes, and (v) be authorized by law to perform all the duties imposed upon it by this Indenture. For purposes of this Section, the term "affiliate" of the Trustee shall mean any Person which, directly or indirectly, controls or is controlled by or is under common control with the Trustee. -52- 57 Section 9.08. REPLACEMENT OF TRUSTEE. The Trustee may resign and be discharged of the trust created by this Indenture by notifying the Bank, the Fiscal Agent, the Remarketing Agent and the Borrower; provided, however, that no such resignation shall become effective until the appointment of a successor Trustee, as hereinafter provided. The holders of not less than a majority in principal amount of the Notes Outstanding may remove the Trustee by notifying the removed Trustee and may appoint a successor Trustee with the Bank's and, so long as no Event of Default has occurred, the Borrower's prior written consent; provided, however, that no such removal shall become effective until the appointment of a successor Trustee, as hereinafter provided. The Borrower shall remove the Trustee at the request of the Bank or if the Trustee is prohibited from acting by law or by regulation, rule or order of any court or administrative body having jurisdiction over the Trustee; provided, however, that no such removal shall become effective until the appointment of a successor Trustee, as hereinafter provided. Upon the removal or replacement of the Trustee for any reason, the Borrower shall give written notice thereof to the Remarketing Agent, the Fiscal Agent and the Bank by first-class mail, postage prepaid. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Borrower, with the prior written consent of the Bank, shall promptly appoint a successor Trustee. Notice of such appointment shall be given by the Borrower to the Remarketing Agent and the Fiscal Agent in writing by first-class mail. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Bank, the Borrower, the Fiscal Agent and the Remarketing Agent. Immediately thereafter, the retiring Trustee shall transfer all property held by it as Trustee hereunder to the successor Trustee, the resignation or removal of the retiring Trustee shall then (but only then) become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall notify the holders of the Notes of its acceptance of the trusts hereunder by first-class mail promptly following such acceptance. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Bank, the Borrower or the holders of a majority in principal amount of the Notes Outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.07, any Noteholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. -53- 58 Section 9.09. FISCAL AGENT. The Borrower shall, with the prior approval of the Bank and the Remarketing Agent, appoint the Fiscal Agent for the Notes subject to the conditions set forth in Section 9.10. Norwest Bank Minnesota, N.A., Minneapolis, Minnesota shall be the initial Fiscal Agent and by executing this Indenture as Trustee also signifies its acceptance of the duties and obligations imposed upon it hereunder as Fiscal Agent. Any successor Fiscal Agent shall signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument of acceptance delivered to the Borrower, the Bank and the Trustee under which such Fiscal Agent will agree, particularly: (a) to carry out all of its duties set forth herein; (b) to hold all sums held by it pursuant to the Indenture in a segregated account for the payment of the principal of or interest on Notes in trust for the benefit of the Noteholders until such sums shall be paid to such Noteholders or otherwise disposed of as herein provided; (c) to hold all Notes delivered to it pursuant to this Indenture, as agent and bailee of, and in escrow for the benefit of, the respective holders which have so delivered such Notes until moneys representing the purchase price of such Notes have been delivered to or for the account of or to the order of such holders; and (d) to keep such books and records as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Trustee, the Remarketing Agent, the Bank and the Borrower at all reasonable times. Section 9.10. QUALIFICATIONS OF FISCAL AGENT; RESIGNATION; REMOVAL. The Fiscal Agent shall meet the qualifications of the Trustee set forth in Section 9.07. For acting under this Indenture, the Fiscal Agent shall be entitled to compensation by the Borrower of reasonable fees for the Fiscal Agent's services and reimbursement of advances, counsel fees and other expenses reasonably and necessarily made or incurred by the Fiscal Agent in connection with its services under this Indenture. The Fiscal Agent shall be indemnified by the Borrower for, and shall be held harmless against, any loss, liability or expense directly or indirectly incurred without negligence, willful misconduct or bad faith on the Fiscal Agent's part, arising directly or indirectly out of or in connection with its duties under this Indenture, including the costs and expenses (including counsel fees) of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Fiscal Agent may at any time resign and be discharged of the duties and obligations created by this Indenture by giving at least 60 days' prior written notice to the Bank, the Borrower, the Remarketing Agent and the Trustee. The Fiscal Agent may be removed at any time at the written direction of the Bank, and so long as no Event of Default has occurred and is continuing, the Borrower, by an instrument filed with the Fiscal Agent, the Bank, the Remarketing Agent and the Trustee. Except as provided below, no resignation or removal will be effective until the successor has delivered an acceptance of its appointment to the Trustee. In the event of the resignation or removal of the Fiscal Agent, the Fiscal Agent shall pay over, assign and deliver any property held by it in such capacity hereunder to its successor or, if there be no successor, to the Trustee. In the event that the Borrower shall fail to appoint a Fiscal Agent hereunder, or in the event that the Fiscal Agent shall resign or be removed, or be dissolved, or if the property or affairs of the Fiscal Agent shall be taken under the control of any state or federal court or administrative body because of bankruptcy or insolvency, or for any other reason, and the -54- 59 Borrower shall not have appointed its successor as Fiscal Agent, the Trustee shall IPSO FACTO be deemed to be the Fiscal Agent for all purposes of this Indenture until the appointment by the Borrower of a successor Fiscal Agent. Section 9.11. DUTIES OF PLACEMENT AGENT. The Placement Agent shall, in accordance with the Placement Agreement, use its reasonable best efforts to place the Notes with the initial purchasers thereof on their date of issuance. The Placement Agent may for its own account or as broker or agent for others deal in Notes and may do anything any other Noteholder may do to the same extent as if the Placement Agent were not serving as such. Section 9.12. [Reserved] Section 9.13. DUTIES OF REMARKETING AGENT. (a) The Remarketing Agent shall, in accordance with the Remarketing Agreement and as provided in this Indenture, establish the Weekly Rates on the Notes, remarket the Notes and perform the other duties provided for it to be done hereunder. The Remarketing Agent may for its own account or as broker or agent for others deal in Notes and may do anything any other Noteholder may do to the same extent as if the Remarketing Agent were not serving as such. The Remarketing Agent has no duty to act hereunder to the extent the Remarketing Agent is not required to perform its obligations under the Remarketing Agreement. (b) The Remarketing Agent may execute and perform any of its duties hereunder through agents, attorneys or co-remarketing agents and shall not be responsible for the misconduct or negligence of any agent, attorney or co-remarketing agent appointed with due care. Section 9.14. ELIGIBILITY OF REMARKETING AGENT; REPLACEMENT. The Remarketing Agent shall be a member of the National Association of Securities Dealers, Inc. having excess net capital (as defined in Rule l5c-3 of the Securities Exchange Act of 1934, as amended) of at least $25,000,000 or, in the alternative, a national banking association having a combined capital stock, surplus and undivided profits of at least $100,000,000, and, if the Notes are rated by a Rating Agency, the Remarketing Agent must be rated at least "Baa3/P3" by Moody's Investors Service, Inc., "BBB-/A3" by Standard & Poor's Rating Services, a Division of The McGraw-Hill Companies, Inc., or "BBB-/F3" by Fitch IBCA, Inc. or otherwise be acceptable to the Rating Agency then rating the Notes. NationsBank, N.A. is hereby appointed as the initial Remarketing Agent and is herein referred to as the "Remarketing Agent." Any Remarketing Agent shall accept its appointment hereunder in writing. The Remarketing Agent may resign by notifying the Borrower, the Trustee, the Fiscal Agent and the Bank at least 45 days before the effective date of the resignation. The Bank or the Borrower (but only with the Bank's prior written consent) may at any time remove the Remarketing Agent and appoint a successor by notifying the Remarketing Agent, the Fiscal Agent, the Bank and the Trustee at least 30 days prior to the effective date of -55- 60 such removal. Notwithstanding anything herein to the contrary and subject to satisfying the requirements of Section 5.03 with respect to the Substitute Letter of Credit, the Borrower may simultaneously remove the Remarketing Agent and the Bank by notifying the Remarketing Agent, the Bank, the Fiscal Agent and the Trustee. Upon the receipt or giving, as the case may be, of notice of the resignation or the removal of the Remarketing Agent, the Borrower, but only with the prior written consent of the Bank, shall proceed to appoint a successor by notifying the Remarketing Agent, the Bank, the Fiscal Agent and the Trustee. If the Remarketing Agent resigns or is removed pursuant to the terms of this Indenture and, after 45 days in the case of giving notice of resignation or 30 days in the case of receiving notice of removal, the Borrower has failed to appoint a successor Remarketing Agent in accordance with the terms of this Section 9.14, the Borrower shall immediately give notice thereof to the Trustee and shall direct the Trustee to give notice to the holders of the Notes of a mandatory repurchase of such Notes pursuant to Section 3.07(a)(ii) hereof. Such mandatory repurchase shall take place on the first Interest Payment Date to occur following such Notice of Mandatory Repurchase by the Trustee (or if such date is not a Business Day, on the next succeeding Business Day), unless such Mandatory Repurchase Date is a date less than 15 days after such Notice of Mandatory Repurchase is given, in which case such mandatory repurchase shall occur on the next succeeding Interest Payment Date (or, if such date is not a Business Day, on the next succeeding Business Day). Notwithstanding the foregoing, no such resignation or removal shall be effective until either (i) the successor Remarketing Agent has delivered an acceptance of its appointment to the Trustee, or (ii) the Mandatory Repurchase Date described above. Notwithstanding the foregoing, with prior written notice to (but without the consent of) the Borrower, the Trustee, the Fiscal Agent, the Bank and the Noteholders, the Remarketing Agent may assign or transfer any or all of its rights and obligations hereunder and under the Remarketing Agreement to any wholly-owned subsidiary or affiliate of the Remarketing Agent so long as such subsidiary or affiliate meets the qualifications for a Remarketing Agent set forth herein and is otherwise permitted to perform such obligations under all applicable federal and state banking and securities laws, rules and regulations. Section 9.15. SUCCESSOR TRUSTEE, REMARKETING AGENT OR FISCAL AGENT BY MERGER. If the Trustee, the Remarketing Agent or the Fiscal Agent consolidates with, merges or converts into, or transfers all or substantially all its assets (or, in the case of a bank or trust company, its corporate trust assets) to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee, Remarketing Agent or Fiscal Agent, provided that such corporation or national banking association shall otherwise be eligible to serve in such capacity under this Indenture. Section 9.16. APPOINTMENT OF CO-TRUSTEE. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction (including particularly the law of the State) denying or restricting the right of banking corporations or associations to transact business as trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture, and in particular in case of the enforcement thereof upon a default or an Event of Default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, -56- 61 in trust, as herein granted, or take any action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co-trustee. The following provisions of this Section are adapted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co-trustee but only to the extent necessary to enable such separate or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them; provided, however, that no co-trustee shall be liable by reason of any act or omission of any other such co-trustee. Should any instrument in writing from the Borrower be required by the separate or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Borrower. In case any separate or co-trustee or a successor to either shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new co-trustee or successor to such separate or co-trustee. Section 9.17 SEVERAL CAPACITIES. Anything in this Indenture to the contrary notwithstanding, the same entity may serve hereunder as the Trustee, the Bank, the Fiscal Agent and the Remarketing Agent and in any other combination of such capacities, to the extent permitted by law; provided, however, that in no event shall the same entity serve hereunder as the Trustee and the Bank. [End of Article IX] -57- 62 ARTICLE X AMENDMENTS OF AND SUPPLEMENTS TO INDENTURE Section 10.01. WITHOUT CONSENT OF NOTEHOLDERS. The Borrower and the Trustee may amend or supplement this Indenture or the Notes without prior notice to or consent of any Noteholder: (a) to cure any ambiguity, inconsistency or formal defect or omission; (b) to grant to the Trustee for the benefit of the Noteholders additional rights, remedies, powers or authority; (c) to subject to this Indenture additional collateral or to add other agreements of the Borrower; (d) to modify this Indenture or the Notes to permit qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute at the time in effect; to permit the qualification of the Notes for sale under the securities laws of any state of the United States; or to prevent the application of the Investment Company Act of 1940, as amended, to any of the transactions contemplated by, or any of the parties to, this Indenture or the Notes; (e) to provide for uncertificated Notes or to make any change necessary to give effect to a custody agreement pursuant to Section 2.05(d); (f) to evidence the succession of a new Trustee or the appointment by the Trustee of a co-trustee; (g) to make any change not materially adversely affecting any Noteholder's rights requested by the Rating Agency in order (i) to obtain a rating from the Rating Agency after the initial issuance of the Notes if the Notes are initially issued without a rating equivalent to the rating assigned to other securities supported by a Letter of Credit of the Bank, or (ii) to maintain any rating on the Notes; (h) to make any change not materially adversely affecting any Noteholder's rights to provide for or to implement the provisions of a Letter of Credit; (i) to make any other change to provide for or to implement the provisions of a Letter of Credit only if such Letter of Credit and the changes to this Indenture become effective on a Mandatory Repurchase Date; (j) to make any change to be effective on any Mandatory Repurchase Date provided that such change has been disclosed to all owners of Notes who purchase on such date; (k) to make any change that does not materially adversely affect the rights of any Noteholder; or -58- 63 (l) to add to this Indenture the obligation of the Trustee or the Borrower to disclose such information regarding the Notes, the Project, the Trustee, the Borrower or the Bank as shall be required or recommended to be disclosed in accordance with applicable regulations or guidelines established by, among others, the Securities and Exchange Commission. Section 10.02. WITH CONSENT OF NOTEHOLDERS. If an amendment of or supplement to this Indenture or the Notes without any consent of Noteholders is not permitted by the preceding Section, the Borrower and the Trustee may enter into such amendment or supplement without prior notice to any Noteholders but with the consent of the holders of at least a majority in principal amount of the Notes Outstanding. However, without the consent of all Noteholders affected, no amendment or supplement may (a) extend the maturity of the principal of, or interest on, any Note, (b) reduce the principal amount of, or rate of interest on, any Note or change the terms of any redemption, (c) effect a privilege or priority of any Note or Notes over any other Note or Notes (except as provided herein), (d) reduce the percentage of the principal amount of the Notes required for consent to such amendment or supplement, (e) eliminate the holders' rights to optionally tender the Notes, (f) extend the due date for the purchase of Notes optionally tendered by the holders thereof or reduce the purchase price of such Notes, (g) create a lien ranking prior to or on a parity with the lien of this Indenture on the property described in the Granting Clause of this Indenture, or (h) deprive any Noteholder of the lien created by this Indenture on such property. In addition, if moneys or U. S. Government Obligations have been deposited or set aside with the Trustee pursuant to Article VII for the payment of Notes and those Notes shall not have in fact been actually paid in full, no amendment to the provisions of that Article shall be made without the consent of the holder of each of those Notes affected. Section 10.03. EFFECT OF CONSENTS. After an amendment or supplement becomes effective, it shall bind every Noteholder unless it makes a change described in any of the lettered clauses of the preceding Section. In such case, the amendment or supplement shall bind each Noteholder who consented to it and each subsequent holder of a Note or portion of a Note evidencing the same debt as the consenting holder's Note. Section 10.04. NOTATION ON OR EXCHANGE OF NOTES. If an amendment or supplement changes the terms of a Note, the Trustee may require the holder to deliver it to the Fiscal Agent. The Fiscal Agent may place an appropriate notation on the Note regarding the changed terms and return it to the holder. Alternatively, if the Trustee and the Borrower determine, the Borrower in exchange for the Note shall issue and the Fiscal Agent or the Trustee shall authenticate a new Note that reflects the changed terms. In either event, the cost of placing such notation on the Note(s) shall be borne by the Borrower. Section 10.05. SIGNING BY TRUSTEE OF AMENDMENTS AND SUPPLEMENTS. The Trustee shall sign any amendment or supplement to this Indenture or the Notes authorized by this Article if the amendment or supplement, in the judgment of the Trustee, does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing an amendment or supplement, the Trustee shall be entitled to receive and (subject to Section 9.01) shall be fully protected in relying on an Opinion of Counsel stating that such -59- 64 amendment or supplement is authorized by this Indenture and is duly authorized, executed and delivered and enforceable in accordance with its terms. Section 10.06. BANK, FISCAL AGENT AND REMARKETING AGENT CONSENTS REQUIRED. Notwithstanding the other provisions of this Article X, an amendment or supplement to this Indenture or the Notes shall not become effective unless the Remarketing Agent (but only to the extent that such amendment or supplement affects the rights, duties or obligations of the Remarketing Agent hereunder), the Fiscal Agent (but only to the extent that such amendment or supplement affects the rights, duties or obligations of the Fiscal Agent hereunder) and the Bank deliver to the Trustee their written consents to the amendment or supplement. In any event, no amendment or supplement hereto shall become effective until the Remarketing Agent and the Fiscal Agent acknowledge receipt of a copy of such supplement or amendment. Section 10.07. NOTICE TO NOTEHOLDERS. The Trustee shall cause notice of the execution of a supplemental Indenture to be mailed promptly by first-class mail to each Noteholder at the holder's registered address. The notice shall state briefly the nature of the supplemental Indenture and that copies thereof are on file with the Trustee for inspection by all Noteholders. Section 10.08. OPINION OF COUNSEL REQUIRED. An amendment or supplement to this Indenture shall not become effective unless the Trustee has received an Opinion of Counsel to the Borrower addressed to the Trustee, the Fiscal Agent, the Bank, the Borrower and the Remarketing Agent to the effect that such amendment or supplement is authorized by this Indenture. [End of Article X] -60- 65 ARTICLE XI MISCELLANEOUS Section 11.01 NOTICES. (a) Any notice, request, direction, designation, consent, acknowledgment, certification, appointment, waiver or other communication required or permitted by this Indenture or the Notes must be in writing except as expressly provided otherwise in this Indenture or the Notes. (b) Except as otherwise provided herein, any notice or other communication required or permitted by this Indenture shall be sufficiently given and deemed given when (i) delivered by hand, (ii) sent by a nationally recognized overnight courier, (iii) mailed by first-class mail, postage prepaid, or, (iv) unless specifically prohibited under the terms of the Indenture, by telecopy under the provisions of this Indenture, addressed as follows: (1) If to the Borrower: Kellstrom Industries, Inc. 1100 International Parkway Sunrise, Florida 33323 Attn: Michael W. Wallace, Chief Financial Officer Facsimile Number: (954) 845-0428 with a copy to: Akerman, Senterfitt & Eidson, P.A. 255 S. Orange Avenue Orlando, Florida 32802 Attn: T. Dean Dickson, Esq. Facsimile Number: (407) 843-6610 (2) If to the Trustee or the Fiscal Agent: Norwest Bank Minnesota, N.A. Norwest Center 6th Street and Marquette Avenue Minneapolis, Minnesota 55479-0069 Attn: Corporate Trust Department Facsimile Number: (612) 667-9825 (3) If to the Remarketing Agent: NationsBank, N.A. BankAmerica Corporate Center 100 North Tryon Street NC1-007-06-06 Charlotte, North Carolina 28255 Attn: Credit Enhanced Product Trading Facsimile: (704) 335-2291 -61- 66 with copies to: NationsBank, N.A. Atlanta Plaza Building GA1-006-09-13 600 Peachtree Street, N.E., 9th Floor Atlanta, Georgia 30308 Attn: Corporate Taxable Finance Facsimile Number: (404) 607-6484 and Mays & Valentine, L.L.P. NationsBank Center 1111 East Main Street Richmond, Virginia 23219 Attn: William R. Derry, Jr., Esq. Facsimile Number: (804) 697-1339 (4) If to the Bank: NationsBank, N.A. 600 Peachtree Street,, 13th Floor Atlanta, Georgia 30308 Attn: Robert Walker Facsimile Number: (404) 607-6281 with a copy to: English, McCaughan & O'Bryan, P.A. 100 N.E. 3rd Avenue Fort Lauderdale, Florida 33301 Attn: Judith L. Keiser, Esquire Facsimile Number: (954) 763-2439 -62- 67 Notice to the Trustee and other information necessary to draw on the Letter of Credit shall be sent by telephone (promptly confirmed by telecopy), telecopy or as may be otherwise designated in writing by the Trustee. Any addressee may designate additional or different addresses or telecopy numbers for purposes of this Section. A copy of any notice to any party given hereunder (with the exception of notices required for drawings under any Letter of Credit) shall be provided to the Remarketing Agent and the Bank in the manner such notice is otherwise given. The beneficial owner of $1,000,000 or more of Notes may, by written notice to the Trustee and the Fiscal Agent, request that all notices given with respect to such Notes be given to the registered owner thereof and to a second address provided in such written notice to the Trustee and the Fiscal Agent. Upon receipt of such notice described in the preceding sentence, the Trustee and the Fiscal Agent, as applicable, shall send all notices relating to the relevant Notes to the registered owner and the second address so designated. Section 11.02. NOTEHOLDERS' CONSENTS. Any consent or other instrument required by this Indenture to be signed by Noteholders may be in any number of concurrent documents and may be signed by a Noteholder or by the holder's agent appointed in writing. Proof of the execution of such instrument or of the instrument appointing an agent and of the ownership of Notes, if made in the following manner, shall be conclusive for any purposes of this Indenture with regard to any action taken by the Trustee under the instrument: (a) The fact and date of a person's signing an instrument may be proved by the certificate of any officer in any jurisdiction who by law has power to take acknowledgments within that jurisdiction that the person signing the writing acknowledged before the officer the execution of the writing, or by an affidavit of any witness to the signing. (b) The fact of ownership of Notes, the amount or amounts, numbers and other identification of such Notes and the date of holding shall be proved by the registration books kept pursuant to this Indenture. In determining whether the holders of the required principal amount of Notes Outstanding have taken any action under this Indenture, Notes owned by the Borrower or any subsidiary or affiliate of the Borrower shall be disregarded and deemed not to be Outstanding; provided, however, that Bank Notes will not be disregarded and shall be deemed to be Outstanding for such purpose. In determining whether the Trustee shall be protected in relying on any such action, only Notes which the Trustee knows to be so owned shall be disregarded. Section 11.03. NOTICES TO RATING AGENCY. The Trustee shall notify each Rating Agency in writing of the occurrence of any of the following events prior (to the extent possible) to the occurrence thereof: (a) any change in the identity of the Trustee, the Fiscal Agent or the Remarketing Agent; (b) any amendment or modification of or change to this Indenture, the Reimbursement Agreement (to the extent the Trustee has notice thereof) or the Letter of Credit; (c) the expiration, substitution or termination of the Letter of Credit, or any extension thereof; -63- 68 (d) the payment in full of the principal of and interest on the Notes; and (e) the delivery of any written opinion of Bankruptcy Counsel required to be delivered under the terms of this Indenture. Section 11.04. LIMITATION OF RIGHTS. Nothing expressed or implied in this Indenture or the Notes shall give any person other than the Trustee, the Bank, the Fiscal Agent, the Borrower, the Remarketing Agent and the Noteholders any right, remedy or claim under or with respect to this Indenture. Section 11.05. SEVERABILITY. If any provision of this Indenture shall be determined to be unenforceable by a court of law, such holding shall not affect any other provision of this Indenture; provided, no holding or invalidity shall require the Trustee to make any payment from any source except those pledged hereunder. Section 11.06. PAYMENTS DUE ON NON-BUSINESS DAYS. If a payment date is not a Business Day at the place of payment, then payment shall be made at that place on the next succeeding Business Day, with the same force and effect as if made on the payment date, and, in the case of any such payment, no interest shall accrue for the intervening period. Section 11.07. GOVERNING LAW. This Indenture and the authority of the Borrower to issue the Notes shall be governed by and construed in accordance with the laws of the State. Section 11.08. COUNTERPARTS. This Indenture may be signed in several counterparts, each of which shall be an original and all of which together shall constitute the same instrument. Section 11.09. REFERENCES TO THE BANK. The Bank has no rights to enforce any provision of this Indenture during any period in which it has dishonored a draw under any Letter of Credit presented in strict compliance with the terms thereof (other than for a reason permitted by the Letter of Credit or pursuant to any administrative or judicial order, ruling, rule, finding or decision). [End of Article XI] -64- 69 IN WITNESS WHEREOF, the Borrower and the Trustee have caused this Indenture to be executed in their respective names by their respective duly authorized officers, all as of the date first above written. KELLSTROM INDUSTRIES, INC. By: ------------------------------------- Title: [Signatures continue on next page.] -65- 70 [Counterpart signature page to Indenture of Trust dated as of February 1, 1999 between Kellstrom Industries, Inc. and Norwest Bank Minnesota, N.A.] NORWEST BANK MINNESOTA, N.A. By: ----------------------------------- Title: -66- 71 EXHIBIT A FORM OF NOTE Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the issuer or its agent for registration of transfer, exchange, or payment, and any certificate is registered in the name of Cede & Co., or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. REGISTERED REGISTERED - ---------- ---------- No. R-___ $ UNITED STATES OF AMERICA STATE OF FLORIDA KELLSTROM INDUSTRIES, INC. TAXABLE VARIABLE RATE DEMAND NOTES SERIES 1999
INTEREST RATE MATURITY DATE ISSUE DATE CUSIP ------------- ------------- ---------- ----- As Described February 1, 2029 February 22, 1999 [488035 AD8]
REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: Kellstrom Industries, Inc., a Delaware corporation (the "Borrower"), for value received, hereby promises to pay, as hereinafter provided, to the registered owner, or registered assigns or legal representative, upon presentation and surrender hereof at the principal corporate trust office of Norwest Bank Minnesota, N.A., or its successor in trust (the "Fiscal Agent"), or by wire transfer, as provided in the Indenture, as hereinafter defined, the principal sum set forth above on the Maturity Date set forth above, subject to the prior mandatory or optional redemption of this Note as hereinafter A-1 72 provided, and to pay interest thereon at the Interest Rate, as hereinafter described, payable in arrears on the Interest Payment Date, as hereinafter defined, until payment in full and, to the extent permitted by law, interest on overdue installments of such interest, from the Interest Payment Date next preceding the date on which this Note is authenticated, unless this Note is (a) authenticated before the first Interest Payment Date following the initial delivery of the Notes, in which case it shall bear interest from the date of such initial delivery, (b) authenticated after a Record Date and before the subsequent Interest Payment Date, in which case interest shall be computed from the subsequent Interest Payment Date, or (c) authenticated upon an Interest Payment Date, in which case it shall bear interest from such Interest Payment Date (unless interest on this Note is in default at the time of authentication, in which case this Note shall bear interest from the date to which interest has been paid). Except as otherwise provided in the Indenture, interest hereon shall be paid to the person in whose name this Note is registered at the close of business on the Record Date, as hereinafter defined, by check or draft mailed to such person at his address as it appears on the register maintained by the Fiscal Agent, or by wire transfer for holders of an aggregate principal amount of at least $500,000, at the request of such holders, as provided in the Indenture. Principal of and interest on or the purchase price of this Note are payable in lawful money of the United States of America at the principal corporate trust office of the Fiscal Agent upon presentation and surrender of this Note. If any payment hereon is due on a day which is not a Business Day, payment shall be made on the next succeeding Business Day with the same force and effect as if made on the day such payment was due and, in the case of any such payment, no interest shall accrue for the intervening period. THE NOTE IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY, BANKAMERICA CORPORATION OR ANY OF ITS AFFILIATED BANKS (INCLUDING THE BANK), IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, AND IS SUBJECT TO INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. ALTHOUGH NOT GUARANTEED BY THE BANK, PAYMENTS OF PRINCIPAL OF AND INTEREST ON THE NOTE (AND IF REMARKETING PROCEEDS ARE NOT AVAILABLE, THE PURCHASE PRICE OF THE NOTE) WILL BE MADE FROM DRAWINGS UNDER THE LETTER OF CREDIT ISSUED BY THE BANK. THE FAILURE OF THE BANK TO HONOR ANY DRAWING UNDER THE LETTER OF CREDIT WILL NOT GIVE RISE TO ANY CLAIMS OTHER THAN AGAINST THE BANK. This Note is one of an issue of $6,670,000 in aggregate principal amount of Kellstrom Industries, Inc. Taxable Variable Rate Demand Notes, Series 1999 (the "Notes"), of like date and tenor, except as to number and principal amount, authorized and issued pursuant to the Indenture of Trust dated as of February 1, 1999 (the "Indenture") between the Borrower and Norwest Bank Minnesota, N.A., as trustee (the "Trustee"), to finance, in whole or in part, the cost of the acquisition, construction and equipping of a headquarters facility for the Borrower in Sunrise, Florida (the "Project"), including reimbursing the Borrower for any of such costs paid by it prior to the issuance of the Notes, and to pay certain costs of issuing the Notes and other related costs. Pursuant to the Indenture, the Borrower has caused NationsBank, N.A. (the "Bank") to issue its irrevocable Letter of Credit dated the date of the issuance of the Notes (the "Letter of Credit") in favor of the Trustee, in an amount sufficient to pay the outstanding principal amount of and unpaid interest on or purchase price of the Notes, but not to exceed A-2 73 $6,746,751, pursuant to a Letter of Credit Reimbursement Agreement dated as of February 1, 1999 (the "Reimbursement Agreement"), between the Bank and the Borrower, which Letter of Credit has been issued in favor of the Trustee and which initially expires (subject to early termination or extension as provided in the Reimbursement Agreement and the Indenture) on February 22, 2002. Substitute letters of credit may be delivered in accordance with the Indenture. The Trustee will draw on the Letter of Credit from time to time to pay the principal of, interest on and purchase price of the Notes. Reference is hereby made to the Indenture, the Letter of Credit and the Reimbursement Agreement and to all amendments thereof and supplements thereto for a description of the provisions, among others, with respect to the nature and extent of the security, the default provisions, the rights, duties and obligations of the Borrower and the Trustee or the rights of the holders of the Notes and the terms upon which the Notes are issued and secured. The Notes are issuable as fully registered Notes in denominations of $100,000 or any integral multiple of $5,000 in excess thereof (the "Authorized Denominations"). This Note, upon surrender hereof at the principal office of the Fiscal Agent with a written instrument of transfer satisfactory to the Fiscal Agent executed by the holder hereof or his attorney duly authorized in writing, may, at the option of the holder hereof, be exchanged for an equal aggregate principal amount of Notes of the same aggregate principal amount and tenor as the Notes being exchanged and of any Authorized Denomination. This Note is transferable as provided in the Indenture, subject to certain limitations therein contained, only upon the register of the Fiscal Agent, and only upon surrender of this Note for transfer to the Fiscal Agent accompanied by a written instrument of transfer (in substantially the form of the assignment attached hereto) duly executed by the holder hereof or his duly authorized attorney. Thereupon, one or more new Notes of any Authorized Denomination or Denominations and in the same aggregate principal amount and tenor as the Note surrendered will be issued to the designated transferee or transferees. The person in whose name this Note is registered shall be deemed and regarded as the absolute owner hereof for any purpose, as provided in the Indenture. The Fiscal Agent or NationsBank, N.A., as Remarketing Agent (together with its successors, the "Remarketing Agent") may make appropriate arrangements for the Notes (or any portion thereof) to be issued or held by means of a book-entry system administered by The Depository Trust Company ("DTC") with no physical distribution of Notes made to the public (other than those Notes, if any, not held under such book-entry system). References in the remainder of this paragraph and in the next five succeeding paragraphs to a Note or the Notes shall be construed to mean the Note or Notes held under the book-entry system. In such event, one Note for each maturity will be issued to DTC, and immobilized in its custody. A book-entry system will be employed, evidencing ownership of the Notes in Authorized Denominations, with transfers of beneficial ownership effected on the records of DTC and the DTC Participants pursuant to rules and procedures established by DTC. Each DTC Participant will be credited in the records of DTC with the amount of such DTC Participant's interest in the Notes. Beneficial ownership interests in the Notes may be purchased by or through DTC Participants. The holders of such beneficial ownership interests are hereinafter referred to as the "Beneficial Owners." The Beneficial Owners will not receive A-3 74 Notes representing their beneficial ownership interests. The ownership interests of each Beneficial Owner will be recorded through the records of the DTC Participant from which such Beneficial Owner purchased its Notes. Transfers of ownership interests in the Notes will be accomplished by book entries made by DTC and, in turn, by DTC Participants acting on behalf of Beneficial Owners. SO LONG AS CEDE CO., AS NOMINEE FOR DTC, IS THE REGISTERED OWNER OF THE NOTES, THE TRUSTEE AND THE FISCAL AGENT SHALL TREAT CEDE & CO. AS THE ONLY HOLDER OF THE NOTES FOR ALL PURPOSES UNDER THE INDENTURE, INCLUDING RECEIPT OF ALL PRINCIPAL OF AND INTEREST ON THE NOTES, RECEIPT OF NOTICES, VOTING AND REQUESTING OR DIRECTING THE TRUSTEE TO TAKE OR NOT TO TAKE, OR CONSENTING TO, CERTAIN ACTIONS UNDER THE INDENTURE. Payments of principal, interest and purchase price with respect to the Notes, so long as DTC is the only owner of the Notes, will be paid by the Fiscal Agent directly to DTC or its nominee, Cede & Co. as provided in the Blanket Letter of Representation from the Borrower to DTC (the "Letter of Representation"). DTC will remit such payments to DTC Participants, and such payments thereafter will be paid by DTC Participants to the Beneficial Owners. The Borrower, the Fiscal Agent and the Trustee shall not be responsible or liable for payment by DTC or DTC Participants, for sending transaction statements or for maintaining, supervising or reviewing records maintained by DTC or DTC Participants. In the event that (a) DTC determines not to continue to act as securities depository for the Notes or (b) the Borrower or the Remarketing Agent determines that the continuation of the book-entry system of evidence and transfer of ownership of the Notes would adversely affect their interests or the interests of the Beneficial Owners of the Notes, the Borrower shall discontinue the book-entry system with DTC. If the Remarketing Agent fails to identify another qualified securities depository to replace DTC, the Remarketing Agent will cause the Fiscal Agent to authenticate and deliver replacement Notes in the form of fully registered Notes to each Beneficial Owner. THE BORROWER, THE BANK, THE FISCAL AGENT, THE REMARKETING AGENT AND THE TRUSTEE SHALL NOT HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO ANY DTC PARTICIPANT OR ANY BENEFICIAL OWNER WITH RESPECT TO (A) THE NOTES; (B) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; (C) THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OF AND INTEREST ON THE NOTES; (D)THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY DTC PARTICIPANT OF ANY NOTICE DUE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE TO BE GIVEN TO BENEFICIAL OWNERS; (E) THE SELECTION OF BENEFICIAL OWNERS TO RECEIVE PAYMENTS IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE NOTES; OR (F) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC, OR ITS NOMINEE, CEDE & CO., AS OWNER. In the event that a book-entry system of evidence and transfer of ownership of the Notes is discontinued pursuant to the provisions of the Indenture, the Notes shall be delivered solely as A-4 75 fully registered Notes without coupons in the Authorized Denominations, shall be lettered "R" and numbered separately from "1" upward, and shall be payable, executed, authenticated, registered, exchanged and canceled pursuant to the provisions hereof and of the Indenture. All references herein to time shall be Eastern Time unless otherwise expressly stated herein. Except as otherwise specifically provided herein, all capitalized words and terms shall have the same meaning when used herein as set forth in the Indenture. 1. INTEREST RATE ON NOTES. The Notes shall bear interest as provided herein from the Issue Date referenced above until paid in full. Interest accrued on the Notes shall be paid on each Interest Payment Date, commencing on March 1, 1999. The Notes shall bear interest at the rate determined by NationsBank, N.A., as Placement Agent, on or before the Issue Date as necessary to sell all of the Notes at par and to apply until and including the next succeeding Wednesday and thereafter at the Weekly Rate determined by the Remarketing Agent in the manner set forth below; provided that no Weekly Rate shall exceed the Maximum Rate. The amount of interest payable on any Interest Payment Date (a) shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, whichever may be applicable, and (b) shall be the amount of interest accrued thereon from the preceding Interest Payment Date (or such other date as described above) to, but excluding, the Interest Payment Date on which interest is being paid. During each Weekly Rate Period, the Notes shall bear interest at the Weekly Rate, determined by the Remarketing Agent initially no later than the first day of each Weekly Rate Period and thereafter no later than Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day) of each week during such Weekly Rate Period. The Weekly Rate shall be the minimum rate of interest which the Remarketing Agent determines, in its sole discretion based upon market conditions, would be necessary to sell the Notes on such date of determination in a secondary market sale at the principal amount thereof, plus, if such sale would not be on an Interest Payment Date, accrued interest. If the Remarketing Agent has not determined a Weekly Rate for any week, the Weekly Rate shall be the same as the Weekly Rate for the immediately preceding week. If for any reason, the Weekly Rate cannot otherwise be determined for any week as hereinbefore provided, the Weekly Rate for such week shall be a rate per annum equal to 100% of the rate published in the then most recent edition of THE BOND BUYER for 30 day prime taxable commercial paper or, if THE BOND BUYER no longer publishes such information, such other publication or provider of such information as the Remarketing Agent may select. The first Weekly Rate determined for each Weekly Rate Period shall apply to the period commencing on the first day of such Weekly Rate Period and ending on the next succeeding Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day). Thereafter, each Weekly Rate shall apply to the period commencing on Thursday (or if the date A-5 76 of determination is not a Wednesday, on the next following Business Day) and ending on the next succeeding date of determination. "Interest Payment Date" means the first day of each month commencing March 1, 1999. "Maximum Rate" means the lesser of (a) the highest interest rate which may be borne by the Notes under Florida law or (b) twelve percent (12%) per year. "Record Date" means the Fiscal Agent's close of business on the Business Day next preceding each Interest Payment Date. The Remarketing Agent's determination of the Weekly Rates shall be conclusive and binding on the Noteholders, the Remarketing Agent, the Trustee, the Fiscal Agent, the Bank and the Borrower, absent manifest error. 2. REDEMPTION OF NOTES. (a) OPTIONAL REDEMPTION. The Notes may be redeemed by the Borrower, in whole on any Business Day, or in part on any Interest Payment Date, or if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, at a redemption price equal to the principal thereof, plus accrued interest to, but not including, the redemption date; provided that any such redemption in part shall be in a minimum principal amount of $100,000 or a whole multiple of $5,000 in excess thereof. (b) MANDATORY REDEMPTION. (i) The Notes are not subject to mandatory sinking fund redemption prior to their scheduled maturity; provided, however, that pursuant to the terms of the Reimbursement Agreement, the Bank may direct the Borrower to exercise its right of optional redemption of the Notes in part from time to time on the dates specified in the Reimbursement Agreement. (ii) The Notes are subject to mandatory redemption at a redemption price equal to the principal amount thereof plus accrued interest to, but not including, the redemption date in whole or in part, without premium, at the earliest date for which notice of redemption can be given upon receipt by the Trustee of written notice from the Bank requesting such redemption, specifying the principal amount of the Notes to be redeemed (if less than all of the Notes Outstanding are to be redeemed) and stating that (A) an event of default under and as defined in the Reimbursement Agreement has occurred and is continuing, or (B) it holds as the registered or beneficial owner Notes purchased by the Bank in accordance with Section 3.07 or 3.01(e) or 8.03(a) of the Indenture and not remarketed; provided, however, only Notes so held by the Bank shall be subject to mandatory redemption pursuant to this subsection (B). (iii) The Notes are subject to mandatory redemption at a redemption price equal to the principal amount thereof plus accrued interest to, but not including, the redemption date, A-6 77 in whole, without premium, on the Interest Payment Date which next precedes by at least fourteen (14) days the stated expiration or termination date of the Letter of Credit or, if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, unless by the 20th day prior to such Interest Payment Date the Borrower provides to the Trustee, and the Trustee has accepted, (A) evidence that such Letter of Credit has been extended or (B) a Substitute Letter of Credit to be effective on or prior to such Interest Payment Date, in which event a mandatory repurchase shall occur in accordance with the terms of subsection 3(b)(i) below. (iv) When Notes are subject to mandatory redemption pursuant to subsections (ii) or (iii) of 2(b), Notes paid by the Borrower or paid from a draw or claim under the Letter of Credit or otherwise paid by or on behalf of the Bank shall be deemed to have been purchased in lieu of redemption on the applicable redemption date at a purchase price equal to the principal amount thereof, plus interest accrued thereon to, but not including, the date of such purchase, if the Trustee has received a written request on or before said purchase date from the Borrower or the Bank, as the case may be, specifying that the moneys provided or to be provided by such party shall be used to purchase Notes in lieu of redemption. No purchase of Notes by the Borrower or the Bank pursuant to the Indenture or advance or use of any moneys to effectuate any such purchase shall be deemed to be a payment or redemption of the Notes or any portion thereof, and such purchase shall not operate to extinguish or discharge the indebtedness evidence by such Notes. No Notes purchased pursuant to this subsection (iv) shall be required to be remarketed by the Remarketing Agent pursuant to the Indenture, unless the Remarketing Agent specifically agrees to undertake such remarketing. (d) NOTICE OF REDEMPTION; EFFECT. (i) The Trustee will prepare and the Fiscal Agent will send notice of each redemption to each Noteholder whose Notes are being redeemed, the Borrower, the Remarketing Agent and the Bank by first-class mail at least 30 days but not more than 60 days before each redemption, except for any mandatory redemption pursuant to subsection 2(b)(iii) in which case such notice shall be given at least 15 but not more than 19 days before such redemption. Failure by the Fiscal Agent to give any notice of redemption or any defect in such notice as to any particular Notes will not affect the validity of the call for redemption of any Notes in respect of which no such failure or defect has occurred. The notice shall identify the Notes or portions thereof to be redeemed and set forth certain other information relevant to such redemption, including the redemption date and redemption price. (ii) On the date fixed for redemption, notice having been given in the manner and under the conditions provided in the Indenture, the Notes or portions thereof called for redemption shall be due and payable at the redemption price provided therefor, plus accrued interest to, but not including, such date. On such redemption date, if moneys sufficient to pay the redemption price of the Notes to be redeemed, plus accrued interest A-7 78 thereon to, but not including, the date fixed for redemption, are held by the Fiscal Agent, interest on the Notes called for redemption shall cease to accrue; such Notes shall cease to be entitled to any benefits or security under the Indenture or to be deemed Outstanding; and the holders of such Notes shall have no rights in respect thereof except to receive payment of the redemption price thereof, plus accrued interest to, but not including, the date fixed for redemption. (e) SELECTION OF NOTES TO BE REDEEMED. If fewer than all the Notes are to be redeemed, the Fiscal Agent shall select the Notes to be redeemed from among the Outstanding Notes, as set forth below, by lot or such other method as it deems in its sole discretion to be fair and appropriate, except that Bank Notes will be selected for redemption prior to any other Notes. The Fiscal Agent shall make the selection from Notes not previously called for redemption. The Fiscal Agent shall treat each holder of Notes as the owner of one Note for purposes of selection for redemption, and shall select Notes for redemption by lot (i) from among the holders of less than $1,000,000 in aggregate principal amount, provided that if there are no such holders, or if, after selection from among such holders such selection has not resulted in redemption of a sufficient amount of Notes, then (ii) from among the holders of $1,000,000 or more in aggregate principal amount of Notes. No portion of a Note may be redeemed that would result in a Note which is smaller than the minimum Authorized Denomination. For this purpose, the Fiscal Agent will consider each Note in a denomination larger than the minimum Authorized Denomination to be separate Notes each in the minimum Authorized Denomination. Upon surrender of a Note redeemed in part, the Fiscal Agent will authenticate for the surrendering holder a new Note or Notes equal in principal amount to the unredeemed portion of the Note surrendered. 3. PURCHASE OF NOTES. (a) OPTIONAL TENDER OF NOTES. (i) Except as provided in Section 3(e) below, the holder (or while the Notes are held pursuant to a book-entry system, the Beneficial Owner) of any Note (other than a Bank Note or Borrower Note) may elect to tender such Note (or portion thereof, provided that each of the portion to be purchased and the portion to be retained is in an Authorized Denomination) for purchase at a purchase price equal to 100% of the principal amount of such Note (or portion thereof), plus accrued and unpaid interest thereon to, but not including, the date of purchase, on any Business Day (the "Optional Tender Date"), but only upon (A) receipt by the Remarketing Agent by not later than 11:00 a.m. at least seven calendar days or five Business Days, whichever may be earlier, but not more than 30 days, prior to such Optional Tender Date of telephonic (followed, if requested by the Remarketing Agent, by written or facsimile confirmation delivered to the Remarketing Agent no later than the close of business on the next succeeding Business Day) or other written notice stating (x) the principal amount of the Note (or portion thereof) to be tendered, (y) the Note number or other identification satisfactory to the Remarketing Agent, and (z) the Optional Tender Date on which such Note will be tendered; and (B) if the Notes are not being held under a book-entry system, delivery of such Note (with an A-8 79 appropriate instrument of transfer duly executed in blank) to the Fiscal Agent by 10:00 a.m. on such Optional Tender Date. (ii) Any notice of optional tender for purchase shall be irrevocable and shall be binding on the holder giving or delivering such notice and on any transferee of such holder. (b) MANDATORY REPURCHASE OF NOTES; NOTICE. Except as provided in Section 3(e) below, Notes are subject to mandatory repurchase as follows: (i) on the effective date of any Substitute Letter of Credit delivered pursuant to the Indenture, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; and (ii) on any Interest Payment Date selected by the Borrower in a written notice to the Trustee delivered at least 30 days prior to such date, or if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; provided that, except as otherwise provided in the Indenture, any such mandatory repurchase shall be subject to the prior written consent of the Bank. The Trustee will prepare and the Fiscal Agent will send to the holders of Notes subject to mandatory repurchase and to the Remarketing Agent, the Bank and the Borrower, a Notice of Mandatory Repurchase at least 15 days but not more than 60 days before the Mandatory Repurchase Date. (c) PAYMENT FOR PURCHASED NOTES. To the extent that sufficient moneys are available therefor by 1:45 p.m. on the Optional Tender Date or the Mandatory Repurchase Date or other day on which Notes have been successfully remarketed, as applicable (the "Purchase Date"), upon surrender to the Fiscal Agent of Notes optionally tendered or called for mandatory repurchase as provided herein, the purchase price therefor (as provided in this Section) shall be paid in immediately available funds by the Fiscal Agent or the Remarketing Agent not later than the close of business on the Purchase Date. From and after the Purchase Date or, if later, the date on which such moneys are made available to the Remarketing Agent or the Fiscal Agent, as applicable, interest accruing on such Notes shall cease to be payable to the prior holder thereof, such Notes shall cease to be entitled to the benefits or security of this Indenture and to such extent the prior holder has recourse solely to the funds held by the Trustee, the Fiscal Agent or the Remarketing Agent for the purchase of such Notes as provided in the Indenture. (d) REMARKETING OF PURCHASED NOTES. (i) Remarketing Effort. Except as provided in the Indenture, the Remarketing Agent will (A) use reasonable best efforts to remarket on or prior to any scheduled purchase date all Notes tendered or purchased pursuant to the Indenture (a "Scheduled Purchase Date"), and (B) to the extent such Notes are not remarketed on the Scheduled Purchase Date, A-9 80 continue to use reasonable best efforts to remarket such Notes, upon the terms and subject to the conditions of the Indenture and the Remarketing Agreement, for purchase on a Business Day after such Scheduled Purchase Date (an "Unscheduled Purchase Date"). (ii) REMARKETING PROCEEDS. If the Remarketing Agent has received from the purchasers thereof Remarketing Proceeds for the remarketing of all Notes to be remarketed on a Scheduled Purchase Date, the Remarketing Agent shall promptly forward such Remarketing Proceeds by wire transfer (or in such other manner as is acceptable to the Remarketing Agent) to the owners tendering such Notes for purchase. Except as otherwise provided below with respect to Bank Notes, until such transfer, all such Remarketing Proceeds shall be deposited in a separate, segregated account and until applied toward payment of the purchase price of Notes so remarketed, shall be held uninvested in trust for the benefit of the holders tendering such Notes for purchase. If the Remarketing Agent has not received Remarketing Proceeds with respect to all of the Notes to be remarketed on a Scheduled Purchase Date or has received Remarketing Proceeds from the remarketing of all or a portion of the Notes to be remarketed on an Unscheduled Purchased Date, the Remarketing Agent will promptly forward all of the Remarketing Proceeds which it has received, if any, by wire transfer (or in such other manner as is acceptable to the Remarketing Agent and the Trustee) to the Trustee for delivery to the Fiscal Agent for payment to the owners tendering such Notes for purchase or for payment to the Bank in the case of Bank Notes. Except as otherwise provided below with respect to Bank Notes, upon receipt by the Trustee and the Fiscal Agent, all such Remarketing Proceeds shall be deposited in a separate, segregated account and, until applied toward payment of the purchase price of Notes so remarketed, shall be held in trust for the benefit of the owners tendering such Notes for purchase. (iii) Delivery of Purchased Notes. Notes purchased with Remarketing Proceeds (other than Bank Notes) shall be delivered to the purchasers thereof upon receipt of payment therefor. Prior to such delivery the Fiscal Agent shall provide for registration of transfer to the Holders, as provided in a written notice from the Remarketing Agent. (e) LIMITATIONS ON TENDERS. (i) The holders of the Notes shall not have the right or be required, as the case may be, to tender any Note for purchase on an Optional Tender Date or a Mandatory Repurchase Date (other than a mandatory tender in lieu of redemption at the direction of the Bank pursuant to subsection 2(b)(iv) above or a mandatory tender for purchase at the direction of the Bank after acceleration of the Notes pursuant to the terms of the Indenture) if on such date, following the occurrence of an Event of Default, the Trustee has declared the principal of and interest on the Notes to be immediately due and payable as provided in the Indenture. (ii) Holders of Notes called for redemption or mandatory repurchase shall not have the right (without the prior consent of the Remarketing Agent) to tender such Notes for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after A-10 81 the tenth (10th) day prior to the date fixed for redemption or mandatory repurchase. Notwithstanding the foregoing, holders of Notes called for redemption shall not have the right in any event to tender such Notes for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after the second (2nd) day prior to the date fixed for redemption. 4. MISCELLANEOUS. Upon the occurrence of certain events, and on the conditions, in the manner and with the effect set forth in the Indenture, the principal of all Notes then Outstanding under the Indenture may become or may be declared due and payable before the stated maturity thereof, together with interest accrued thereon. The Indenture directs the Trustee to declare an acceleration upon notice by the Bank of the occurrence and continuance of an event of default under the Reimbursement Agreement, and upon the occurrence of certain other Events of Default under the Indenture. The Trustee has the right to accelerate the outstanding balance due under the Indenture and the principal of the Notes in certain events only with the Bank's consent, all as provided in more detail in the Indenture to which reference is hereby made. The owner of this Note has no right to enforce the provisions of the Indenture or to institute action to enforce the covenants therein, or to take any action with respect to any Event of Default under the Indenture, or to institute, appear in or defend any suit or other proceeding with respect thereto, except as provided in the Indenture and except that any registered owner may institute action to enforce the payment of the principal of or interest on his Note. Modifications or alterations of the Indenture may be made only to the extent and in the circumstances permitted by the Indenture. Executed counterparts of the Indenture are on file at the principal corporate trust office of the Trustee. The holder of this Note, by acceptance hereof, consents to all of the terms and provisions of the Indenture. It is hereby certified that all acts, conditions and things required to happen, exist and be performed under the laws of the State of Florida, and under the Indenture precedent to and in the issuance of this Note have happened, exist and have been performed as so required, and that the issuance, authentication and delivery of this Note have been duly authorized by the Borrower. Unless the Certificate of Authentication hereon has been executed by the Fiscal Agent by manual signature of one of its authorized signers, this Note shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. [Signatures on following page.] A-11 82 IN WITNESS WHEREOF, Kellstrom Industries, Inc. has caused this Note to be executed in its name and on its behalf by the manual or facsimile signature of its President or Vice President or other authorized officer and its corporate seal to be impressed or imprinted hereon and attested by the manual or facsimile signature of its Secretary or Assistant Secretary, all as of the Issue Date set forth above. KELLSTROM INDUSTRIES, INC. By: -------------------------------------- Title: -------------------------------- (CORPORATE SEAL) ATTEST: - ------------------------------- Secretary A-12 83 CERTIFICATE OF AUTHENTICATION This Note is one of the Notes issued under the provisions of the within-mentioned Indenture. NORWEST BANK MINNESOTA, N.A. By: -------------------------------------- Authorized Representative Date of Authentication: - ---------------------------- A-13 84 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto __________________________________________________________________________ (Please print or type the name and address, including the zip code of the transferee, and the Federal Taxpayer Identification or Social Security Number) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints _________________________ Attorney to transfer the within Note on the books kept for registration and transfer thereof, with full power of substitution in the premises. Dated: ------------------ By: ------------------------------- NOTICE: The signature of the Registered Owner above must correspond with the name of the Registered Owner as it appears on the registration books maintained by the Fiscal Agent. Signature Guaranteed By: ----------------------------- NOTICE: Signature(s) must be guaranteed by a member firm of the STAMP, SEMP or MSP signature guaranty medallion program. A-14 EX-10.10 3 EMPLOYMENT AGREEMENT - 3/30/99 ZIVI NEDIVI 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of March 30, 1999 (the "Effective Date") between Kellstrom Industries, Inc., a Delaware corporation (the "Company"), and Zivi R. Nedivi, an individual resident of the State of Florida (the "Employee"). RECITALS The Employee has, as the President of East Shore Ventures, Inc. ("East Shore"), served as the Chief Executive Officer of the Company and has been responsible for the overall direction of the operations and administration of the business of the Company. The Company and East Shore have agreed to terminate the Management Agreement pursuant to which the Employee has provided such services. The Company desires to employ the Employee to continue to provide such services on substantially the same terms on which such services were provided to the Company under the Management Agreement, and the Employee is willing to accept such employment by the Company on such terms, subject to the terms and conditions set forth in this Agreement. TERMS OF AGREEMENT In consideration of the above recitals and the mutual promises herein contained, the Company and the Employee hereby agree as follows: 1. DEFINITIONS. (a) The "Board" shall mean the Board of Directors of the Company. (b) The "Employment Period" shall mean the period commencing on the Effective Date and ending on December 31, 2004, unless this Agreement shall be terminated prior thereto by either party in accordance with the terms of this Agreement. (c) The "Executive Committee" shall mean the Executive Committee of the Board of Directors of the Company. (d) "GAAP" shall mean generally accepted accounting principles as in effect in the United States from time to time. (e) The "Restricted Period" shall mean (i) if the Employee terminates this Agreement for "good reason" (as defined in Section 5(f)) or is terminated "involuntarily" (as defined in Section 5(e)), then the Restricted Period shall mean the Employment Period, and (ii) if the Employee shall terminate this Agreement other than for good reason, or is terminated other than involuntarily, then the Restricted Period shall mean the period including the Employment Period and the three years following the Employment Period. 2 2. EMPLOYMENT PERIOD. The Company hereby agrees to employ the Employee, and the Employee hereby agrees to be employed by the Company, during the Employment Period, subject to the terms and conditions provided herein. This Agreement shall terminate at the end of the Employment Period, unless the Agreement shall be terminated by either party prior thereto in accordance with the terms of this Agreement. 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. During the Employment Period, the Employee shall serve as President and Chief Executive Officer of the Company. The Employee shall be responsible for the overall direction of the operations and administration of the business of the Company and shall have such powers and duties as provided for a president and chief executive officer of the Company under the Company's Bylaws and under the General Corporation Law of the State of Delaware, and such other incidental powers and duties as may be assigned to him from time to time by the Board. (b) LOCATION. The principal place of employment of the Employee shall be the principal offices of the Company in Sunrise, Florida. (c) COMPENSATION. (i) BASE SALARY. The Employee's annual salary (the "Salary") as of the Effective Date shall be $480,000 per annum and such Salary shall apply for the duration of the Employee's employment hereunder unless and until such Salary shall be increased by the Board. During the Employment Period, the Salary may be reviewed and changed by the Board in its sole discretion; PROVIDED, HOWEVER, that the Company shall in no event pay the Employee a Salary of less than $480,000 per annum during the Employment Period. Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices. (ii) ANNUAL COMPANY BONUS. For each calendar year commencing with the year ending December 31, 1999, at the end of which year the Employee is employed by the Company: (A) if the Company has Net Income (as hereinafter defined) for such year in an amount equal to the Company's target net income as determined in the sole discre tion of the Board (or the Executive Committee) for such year (the "Target"), the Employee shall be entitled to a bonus in an amount equal to the Salary of the Employee as of December 31 of such year (the "Target Bonus"); (B) if the Company has Net Income for such year in an amount which exceeds the Target but is less than 150% of the Target, the Employee shall be entitled to a bonus calculated as follows: B = Target Bonus + [Target Bonus x (NI - T)] T 2 3 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 in an amount which equals or exceeds 150% of the Target for such year, the Employee shall be entitled to a bonus of 150% of the Target Bonus; (D) if the Company has Net Income for such year in an amount which is less than 50% of the Target for such year, the Employee shall not be entitled to a bonus; or (E) if the Company has Net Income for such year in an amount which equals or exceeds 50% of the Target for such year but is less than the Target for such year, the Employee shall be entitled to a bonus calculated as follows: B = Target Bonus - [Target Bonus 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) WITHHOLDING, ETC. The payment of any Salary and bonus to the Employee shall be subject to all applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans. (d) BENEFITS. In addition to the compensation payable to the Employee as set forth in Section 3(c) above, during the Employment Period, the Employee shall be eligible to participate in all incentive, savings, pension, welfare (including, without limitation, medical, dental, disability and salary continuance insurance) plans, practices, policies and programs applicable on or after the Effective Date to other executives of the Company. The Employee shall be given credit for any period of time for which he has provided services to the Company (including, without limitation, for the period of time for which he has provided services to the Company as an employee of East Shore) toward all employee benefit plans, practices, policies and programs maintained by the Company. In addition, the Company shall, for the entire period commencing on the Effective Date and ending 3 4 on December 31, 2004 (the "Remaining Policy Period"), continue to pay the premiums on the life insurance policy on the life of the Employee in the amount of $4,000,000 previously obtained by the Company and transferred to the Employee pursuant to the terms of the Management Agreement (the "Life Insurance Policy"), and shall continue to reimburse the Employee for any Federal, state or local income taxes payable by the Employee as a result of the payment by the Company of such premiums on the Employee's behalf. In the event that this Agreement is terminated (other than for cause (as hereinafter defined)) prior to December 31, 2004, the Company shall pay to the Employee a lump sum payment equal to the aggregate unpaid premium payments payable under the Life Insurance Policy through the end of the Remaining Policy Period, and any Federal, state or local income taxes payable by the Employee as a result of the receipt of such payment. (e) RELOCATION EXPENSES. If the Employee is relocated during the Employment Period, the Employee shall be entitled to be reimbursed for relocation expenses in an amount not greater than $10,000 in the case of any move within the United States or $20,000 in the case of any move outside of the United States. (f) OTHER BUSINESS EXPENSES. During the Employment Period, the Employee shall be entitled to receive prompt reimbursement from the Company for all reasonable business expenses incurred by the Employee, itemized in accordance with the Company's existing policies, practices and procedures. (g) FRINGE BENEFITS. During the Employment Period, the Employee shall be entitled in addition to any other benefits required to be provided to him under the terms of this Agreement to all fringe benefits applicable on or after the date hereof to other executives of the Company. (h) 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 date hereof to executives of the Company, PROVIDED, HOWEVER, that the Employee shall be entitled to a minimum of three weeks of paid vacation per calendar year and all holidays that are prescribed by the Company's policies and practices. If this Agreement is in effect for a portion of any calendar year, the minimum three weeks shall be prorated for the period of such year in which the Employee served pursuant to this Agreement (PROVIDED, HOWEVER, that the Employee shall be given credit for the period of time for which he has provided services to the Company (including, without limitation, for the period of time for which he had provided services to the Company as an employee of East Shore). Vacation accrued but unused at the end of a calendar year may be carried over into the following calendar year or years; PROVIDED, HOWEVER, that such accrued but unused vacation cannot be carried over for more than two years. All earned, unused and accrued vacation shall be paid to the Employee upon the expiration or termination of this Agreement. (i) OFFICE AND SUPPORT STAFF. During the Employment Period, the Employee shall be entitled to an appropriate office or offices and with furnishings and other appointments and with a secretary and other support staff as are usual and customary for a president and chief executive officer of a corporation of comparable size to the Company. 4 5 (j) AUTOMOBILE. During the Employment Period, the Company shall make available to the Employee an automobile and shall pay for all expenses related thereto including, without limitation, gas, maintenance and insurance. 4. EMPLOYEE'S OBLIGATIONS AND REPRESENTATIONS. (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 time and attention during normal business hours to the business and affairs of the Company and to perform faithfully and efficiently the responsibilities assigned to the Employee from time to time by the Board. During the Employment Period it shall not be a violation of this Agreement for the Employee to serve on corporate, civic or charitable boards, deliver lectures, fulfill speaking engagements or teach at educational institutions or manage personal investments, so long as such activities do not significantly interfere with the performance of his duties and responsibilities hereunder on behalf of 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 to the Company the services required of him hereunder during the Employment Period. 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. (a) MUTUAL AGREEMENT. During the Employment Period, this Agreement may be terminated at any time by mutual agreement between the Company and the Employee on terms to be negotiated at the time of such termination. Any such termination by mutual agreement shall be set forth in a written document signed by the Company and the Employee. In the event of a termination by mutual agreement, the Company's obligation to the Employee under this Agreement shall be determined by such mutual agreement. (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 (i) those obligations accrued, earned or vested by the Employee as of the date of his death, (ii) that portion of any bonus determined pursuant to Section 3(c)(ii) of this Agreement in respect of a prior calendar year that had been deferred, which amount shall be paid to the Employee as soon as practicable, and (iii) with respect to the calendar year in which the Employee's death occurs, in the event that a bonus would have been payable to the Employee pursuant to Section 3(b)(ii) of this Agreement in respect of such calendar year had the Employee not died, the Employee shall be entitled to receive a prorated amount of such bonus based on a fraction, the numerator of which is the number of days in the calendar year in which the Employee died that the Employee provided 5 6 services to the Company and the denominator of which is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which the Employee dies. 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 executives of the Company based on the terms of the benefit plans referenced in Section 3(d) 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 60th 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 three 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 60 day notice period. For purposes of this Agreement, "disability" shall mean a physical or mental condition which, three months after its commencement, is determined to be total and permanent by a physician selected by the Company and which prevents the Employee from performing his duties hereunder. The Employee shall be entitled to all compensation and benefits provided for under this Agreement during the three month waiting period for the disability determination and during the 60 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 (i) those obligations accrued, earned or vested by the Employee as of the date of the termination, (ii) that portion of any bonus determined pursuant to Section 3(c)(ii) of this Agreement in respect of a prior calendar year that had been deferred, which amount shall be paid to the Employee as soon as practicable, and (iii) with respect to the calendar year in which this Agreement is terminated, in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(ii) of this Agreement in respect of such calendar year had this Agreement not terminated, the Employee shall be entitled to a pro-rated amount of such bonus based on a fraction the numerator of which is the number of days in the calendar year in which this Agreement was terminated that the Employee provided services to the Company and which were prior to the period of the Employee's disability and the denominator of which is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which this Agreement is terminated. In the event the Employee becomes disabled but returns to active service under this Agreement prior to the expiration of the three-month waiting period, or prior to the expiration of the 60-day notice of intent to terminate period, the Employee shall be entitled to the full amount of any bonus payable pursuant to Section 3(c)(ii) of this Agreement in respect of the year in which he became disabled without regard to the period of absence due to the disability. 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 executives of the Company based on the terms of 6 7 the benefit plans referenced in Section 3(d) of this Agreement as in effect on the date the Employee's disability commenced. (d) CAUSE. During the Employment Period, the Company may terminate the Employee's employment for "cause" (as defined below), as determined by the Board (or the Executive Committee). For purposes of this Agreement, "cause" shall mean: (i) an act or acts of personal dishonesty undertaken by the Employee at the expense of or against the interests of the Company; (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; (iii) any direct or indirect disclosure of any confidential information or other special knowledge of the finances, business or other affairs of the Company; (iv) the conviction of the Employee of a felony; or (v) the conviction of the Employee of a serious misdemeanor involving illegal use, possession or sale of drugs, larceny, crimes of violence or sex offenses. 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 termination of employment. 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. Notwithstanding anything herein to the contrary, the Company shall have the right, at any time upon notice to the Employee, to terminate the Employee's employment. 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, the Employee shall be deemed to have been "terminated involuntarily" (such termination being referred to herein as an ("involuntary termination") and the Company shall pay to the Employee the following amounts: (i) to the extent not theretofore paid, the Company shall pay the Salary through the date of such involuntary termination as well as that portion of any bonus determined pursuant to Section 3(c)(ii) of this Agreement in respect of a prior calendar year which had been deferred; (ii) the Company shall pay the Employee on the date of such involuntary termination an amount equal to two years of the Salary, plus the amount of the bonus paid to the Employee pursuant to Section 3(c)(ii) of this Agreement on account of each of the two calendar years preceding the year in which such involuntary termination occurs; 7 8 (iii) with respect to the year in which such involuntary termination occurs, in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(ii) of this Agreement in respect of such year had this Agreement not been terminated, the Employee shall be entitled to receive a pro-rated amount of such bonus based on a fraction in which the numerator is the number of days in the calendar year in which this Agreement terminated that the Employee provided services to the Company and the denominator is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which this Agreement is involuntarily terminated; and (iv) the Company shall pay in one cash lump sum any vacation days accrued but unused as of the date of the Employee's 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 the Employee's position as set forth in Section 3(a) of this Agreement or any action by the Company which results in a material diminution in such position, or in the authority, duties or responsibilities of the Employee, 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(a) through 3(j) of this Agreement regarding the Employee's Salary, compensation, benefits, expenses, fringe benefits, vacation or office staff 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; (iii) the Company's requiring the Employee to be based at any office or location other than the location set forth in Section 3(b) of this Agreement, except for travel reasonably required in the performance of his responsibilities; or (iv) any failure by the Company to comply with and satisfy the terms of Section 10 of this Agreement with respect to successors. In the event that the Employee terminates his employment for good reason as defined in this Section 5(f), it shall be deemed 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)(iv) of this Agreement as if the Employee's employment had been involuntarily terminated. (g) VOLUNTARY TERMINATION OR RETIREMENT. If the Employee shall elect to voluntarily terminate his services under this Agreement (other than for "good reason" as defined in Section 5(f) above) or to retire during the Employment Period, this Agreement shall terminate 8 9 automatically and the Company shall have no further obligations to the Employee under this Agreement, other than those obligations accrued, earned or vested as of the date of the termination or retirement. In the event of voluntary termination or early retirement (prior to the Employee's 65 birthday), the Employee shall be entitled to receive a pro-rated amount of any bonus payable in respect of the year of voluntary termination or early retirement. If the Employee retires upon the expiration of this Agreement at the end of the Employment Period, and in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(ii) of this Agreement in respect of such calendar year had this Agreement not terminated, the Employee shall be entitled to receive a pro-rated amount of such bonus based on a fraction in which the numerator is the number of days in the calendar year in which the Employee was terminated that he provided services to the Company and the denominator is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which this Agreement is terminated. (h) NOTICE OF TERMINATION. Any termination by the Company for any reason or by the Employee for any reason shall be communicated by such party in a written notice to the other party 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 of termination. (i) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, 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 this Agreement shall be payable in accordance with such plan, policy, practice or program. (j) 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 or others. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. In connection with any contest by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement in which the Employee is ultimately successful, the Company agrees to pay, to the full extent permitted by law, all reasonable legal fees and expenses, as incurred by the Employee and others which the Employee may reasonably incur as a result of any such contest. 6. 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 the Employment Period and which shall not 9 10 be or become public knowledge (other than by acts by the Employee 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 the 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 6, any payments or other benefits promised under this Agreement shall be forfeited. In addition, 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. 7. NON-COMPETITION. The Employee agrees that during the Restricted Period, he will not, without the prior consent of the Board, directly or indirectly, alone or as a partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or shareholder of, or lender to, any company or business, anywhere within the continental United States, Israel, Ireland or any other country in which the Company has operations, engage or participate or make any financial investments in or become employed by or render advisory of other services to or for any person, firm or corporation, or in connection with any business activity, other than that of the Company and its subsidiaries, directly or indirectly in competition with any of the business operations or activities of the Company and its subsidiaries as of the date in question or, if later, as of the date of termination of this Agreement, whether such companies are presently existing or hereafter acquired. 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, so 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. 8. RESTRICTION ON SOLICITATION. The Employee agrees that during the Employment Period and for three (3) years thereafter he will not: (a) 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 or; (b) directly or indirectly approach any such employee for these purposes; (c) 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 (d) 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 or any of its subsidiaries shall be, a customer of the Company or any of its subsidiaries, 10 11 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; provided that if the Employee terminates this Agreement for good reason or in the event of an involuntary termination by the Company, then this subsection (d) shall not apply. 9. REMEDIES. The Employee hereby acknowledges that in the event of a breach or threatened breach by him of the provisions of Sections 6, 7 or 8 of this Agreement, the Company would suffer irreparable harm for which there would be no adequate remedy at law. Accordingly, the Employee agrees that in such event, in addition to any other remedies which the Company may have in law or in equity for money damages or other relief, the Company shall be entitled to temporary and/or injunctive relief, without the necessity of proving damages, to enforce the provisions hereof. 10. SUCCESSORS. This Agreement is personal to the Employee and may not, without the prior written consent of the Company, be assigned by the Employee other then by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the legal representatives of the Employee. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as defined herein and any successor to its business and/or assets as aforesaid which assumes this Agreement by operation of law or otherwise. 11. 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 binding arbitration. Any request for such arbitration shall be served on the other party by written notice. The parties shall agree upon and select an arbitrator within 20 days after written demand is made by either party for such arbitration. The arbitrator shall set a time for hearing within 60 days of his/her selection. Each party shall have an opportunity to present evidence on the issues in dispute before the arbitrator and each party may be represented by legal counsel if either so desires. The decision of the arbitrator shall be rendered in writing to both parties within 30 days of the close of the hearing. The decision of the arbitrator shall be final and binding upon both parties. Any legal fees, expenses or other costs incurred by the Company and the Employee in connection with such arbitration shall be borne by the Company. The parties agree that to the extent not inconsistent with the foregoing provisions of this Section 11, the then current rules of the American Arbitration Association shall apply. 12. INDEMNIFICATION. (a) If the Employee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and the Employee had no reasonable 11 12 cause to believe that his conduct was unlawful or detrimental to the Company, the Company shall indemnify and hold harmless the Employee and his legal representatives from and against any and all claims, losses, liabilities, damages, costs, demands, causes of action (whether legal, equitable, administrative, civil or criminal), judgments, settlements (subject to the last sentence of paragraph (c) hereof), fines, court costs, and other expenses of any kind or nature whatsoever, including, without limitation, attorneys' fees and disbursements (collectively, "Losses"), which may be threatened against, incurred or suffered by the Employee or his legal representatives in connection with, relating to or arising out of, directly or indirectly, the Employee's performance, duties and responsibilities to, for and on behalf of, the Company, including, without limitation, (i) this Agreement and all actions or omissions taken hereunder and (ii) any acts, omissions or alleged acts or omissions arising out of the Employee's activities on behalf of the Company or in furtherance of the interests of the Company. (b) EXCEPTION. Notwithstanding anything contained herein or in the By-Laws of the Company, the Company shall have no obligations to indemnify the Employee if the Loss incurred by the Employee (i) arises out of an action brought directly by the Company against the Employee or (ii) arises, directly or indirectly, as a result of this Agreement being terminated for cause (as is defined herein). (c) NOTIFICATION OF CLAIM. Promptly after receipt by the Company of notice of any claim against the Employee pursuant to which the Employee is entitled to indemnification, the Company shall have the right to assume the defense of such claim, including the employment of counsel of its choice. Although the Employee shall have the right to employ his own counsel, the fees and expenses of such counsel shall be at the expense of the Employee. The Company shall not be liable for any settlement of any claim or action effected without its written consent, PROVIDED, HOWEVER, that such consent was not unreasonably withheld. (d) PAYMENT OF INDEMNITY AMOUNTS. The Company agrees to pay all amounts payable in respect of Losses immediately upon its receipt of a statement with respect thereto rendered by the Employee, together with appropriate supporting documentation thereof. It is the express intention of the parties hereto that all such amounts shall be paid by the Company on or before the date payment thereof is due, and that the Employee shall not be required at any time to bear any costs or expenses on account of Losses. 13. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (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. 12 13 (c) All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been 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. 1100 International Parkway Sunrise, Florida 33323 Attn: Chairman Telecopier: (954) 858-2449 If to the Employee, to: Mr. Zivi R. Nedivi c/o Kellstrom Industries, Inc. 1100 International Parkway Sunrise, Florida 33323 Telecopier: (954) 858-2449 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) 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. (f) This Agreement embodies the entire agreement between the Company and the Employee and supersedes all prior agreements and understandings, oral or written, with respect to the subject matter hereof including, without limitation, the Management Agreement. (g) 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. 13 14 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. KELLSTROM INDUSTRIES, INC. By:__________________________________________ Michael W. Wallace Chief Financial Officer EMPLOYEE --------------------------------------------- Zivi R. Nedivi 14 EX-10.11 4 EMPLOYMENT AGREEMENT - 3/30/99 YOAV STERN 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of March 30, 1999 (the "Effective Date"), between Kellstrom Industries, Inc., a Delaware corporation (the "Company"), and Yoav Stern, an individual resident of the State of California (the "Employee"). RECITALS The Employee has, as the Managing Member of Helix Management Company II, LLC ("Helix"), provided mergers and acquisitions and financial advisory services to the Company and assisted the Company in analyzing, structuring, negotiating and effecting a number of significant transactions. The Company and Helix have agreed to terminate the agreement with Helix pursuant to which the Employee has provided such services. The Company desires to employ the Employee to continue to provide such services and to lead the Company's strategic development efforts, and the Employee is willing to accept such employment and to provide such services, on the terms and conditions set forth in this Agreement. TERMS OF AGREEMENT In consideration of the above recitals and the mutual promises herein contained, the Company and the Employee hereby agree as follows: 1. DEFINITIONS. (a) The "Board" shall mean the Board of Directors of the Company. (b) The "Employment Period" shall mean the period commencing on the Effective Date and ending on December 31, 2004, unless this Agreement shall be terminated prior thereto by either party in accordance with the terms of this Agreement. (c) The "Executive Committee" shall mean the Executive Committee of the Board of Directors of the Company. (d) "GAAP" shall mean generally accepted accounting principles as in effect in the United States from time to time. (e) The "Restricted Period" shall mean (i) if the Employee terminates this Agreement for "good reason" (as defined in Section 5(f)) or is terminated "involuntarily" (as defined in Section 5(e)), then the Restricted Period shall mean the Employment Period, and (ii) if the Employee shall terminate this Agreement other than for good reason, or is terminated other than involuntarily, then the Restricted Period shall mean the period including the Employment Period and the three years following the Employment Period. 2 2. EMPLOYMENT PERIOD. The Company hereby agrees to employ the Employee, and the Employee hereby agrees to be employed by the Company, during the Employment Period, subject to the terms and conditions provided herein. This Agreement shall terminate at the end of the Employment Period, unless the Agreement shall be terminated by either party prior thereto in accordance with the terms of this Agreement. 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. During the Employment Period, the Employee shall serve as Chairman of the Company. The Employee shall generally be responsible for the development and implementation of the strategic plans for the growth and development of the Company's business and operations, including overseeing all aspects of the Company's mergers and acquisitions activities (including, without limitation, analyzing, structuring, negotiating and effecting acquisitions and integrating newly acquired businesses with the business and operations of the Company), the evaluation and implementation of strategic financing alternatives, the development and maintenance of the Company's relationships with the investment banking and financial community, and the coordination of investor relations, and such other areas as may otherwise be assigned to him by the Board (or the Executive Committee) from time to time. (b) LOCATION. The principal place of employment of the Employee shall be in San Francisco, California, PROVIDED, HOWEVER, that the Employee will be required to spend a substantial portion of his time in New York, New York and Sunrise, Florida, when, as and to the extent necessary or advisable to fulfill his obligations hereunder. (c) COMPENSATION. (i) BASE SALARY. The Employee's annual salary (the "Salary") as of the Effective Date shall be $480,000 per annum and such Salary shall apply for the duration of the Employee's employment hereunder unless and until such Salary shall be increased by the Board. During the Employment Period, the Salary may be reviewed and changed by the Board in its sole discretion; PROVIDED, HOWEVER, that the Company shall in no event pay the Employee a Salary of less than $480,000 per annum during the Employment Period. Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices. (ii) ANNUAL COMPANY BONUS. For each calendar year commencing with the year ending December 31, 1999, at the end of which year the Employee is employed by the Company: (A) if the Company has Net Income (as hereinafter defined) for such year in an amount equal to the Company's target net income as determined in the sole discre tion of the Board (or the Executive Committee) for such year (the "Target"), the Employee shall be entitled to a bonus in an amount equal to the Salary of the Employee as of December 31 of such year (the "Target Bonus"); 2 3 (B) if the Company has Net Income (as hereinafter defined) for such year in an amount which exceeds the Target but is less than 150% of the Target for such year, the Employee shall be entitled to a bonus calculated as follows: B = Target Bonus + [Target Bonus 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 in an amount which equals or exceeds 150% of the Target for such year, the Employee shall be entitled to a bonus of 150% of the Target Bonus; (D) if the Company has Net Income for such year in an amount which is less than 50% of the Target for such year, the Employee shall not be entitled to a bonus; (E) if the Company has Net Income for such year in an amount which equals or exceeds 50% of the Target for such year but is less than the Target for such year, the Employee shall be entitled to a bonus calculated as follows: B = Target Bonus - [Target Bonus 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) WITHHOLDING, ETC. The payment of any Salary and bonus to the Employee shall be subject to all applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans. (d) BENEFITS. In addition to the compensation payable to the Employee as set forth in Section 3(c) above, during the Employment Period, the Employee shall be eligible to participate in all incentive, savings, pension, welfare (including, without limitation, medical, dental, disability and salary continuance insurance) plans, practices, policies and programs applicable on or after the 3 4 Effective Date to other executives of the Company. The Employee shall be given credit for any period of time for which he has provided services to the Company (including, without limitation, for the period of time for which he has provided services to the Company as the managing member of Helix) toward all employee benefit plans, practices, policies and programs maintained by the Company. In addition, the Company shall, for the entire period commencing on the Effective Date and ending on December 31, 2004 (the "Remaining Policy Period"), continue to pay the premiums on the life insurance policy on the life of the Employee in the amount of $4,000,000 previously obtained by the Company and transferred to the Employee pursuant to the terms of the Helix Agreement (the "Life Insurance Policy"), and shall continue to reimburse the Employee for any Federal, state or local income taxes payable by the Employee as a result of the payment by the Company of such premiums on the Employee's behalf. In the event that this Agreement is terminated (other than for cause (as hereinafter defined)) prior to December 31, 2004, the Company shall pay to the Employee a lump sum payment equal to the aggregate unpaid premium payments payable under the Life Insurance Policy through the end of the Remaining Policy Period, and any Federal, state or local income taxes payable by the Employee as a result of the receipt of such payment. (e) RELOCATION EXPENSES. If the Employee is relocated during the Employment Period, the Employee shall be entitled to be reimbursed for relocation expenses in an amount not greater than $10,000 in the case of any move within the United States or $20,000 in the case of any move outside of the United States. (f) OTHER BUSINESS EXPENSES. During the Employment Period, the Employee shall be entitled to receive prompt reimbursement from the Company for all reasonable business expenses incurred by the Employee, itemized in accordance with the Company's existing policies, practices and procedures. (g) FRINGE BENEFITS. During the Employment Period, the Employee shall be entitled in addition to any other benefits required to be provided to him under the terms of this Agreement to all fringe benefits applicable on or after the date hereof to other executives of the Company. (h) 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 date hereof to executives of the Company, PROVIDED, HOWEVER, that the Employee shall be entitled to a minimum of three weeks of paid vacation per calendar year and all holidays that are prescribed by the Company's policies and practices. If this Agreement is in effect for a portion of any calendar year, the minimum three weeks shall be prorated for the period of such year in which the Employee served pursuant to this Agreement, PROVIDED, HOWEVER, that the Employee shall be given credit for the period of time that he has provided services to the Company (including, without limitation, for the period of time for which he had provided services to the Company as the managing member of Helix). Vacation accrued but unused at the end of a calendar year may be carried over into the following calendar year or years; PROVIDED, HOWEVER, that such accrued but unused vacation cannot be carried over for more than two years. All earned, unused and accrued vacation shall be paid to the Employee upon the expiration or termination of this Agreement. 4 5 (i) OFFICE AND SUPPORT STAFF. During the Employment Period, the Employee shall be entitled to an appropriate office or offices in San Francisco, California and with furnishings and other appointments and with a secretary and other support staff as are usual and customary for a president and chief executive officer of a corporation of comparable size to the Company. (j) AUTOMOBILE. During the Employment Period, the Company shall make available to the Employee an automobile and shall pay for all expenses related thereto including, without limitation, gas, maintenance and insurance. 4. EMPLOYEE'S OBLIGATIONS AND REPRESENTATIONS. (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 time and attention during normal business hours to the business and affairs of the Company and to perform faithfully and efficiently the responsibilities assigned to the Employee from time to time by the Board. During the Employment Period it shall not be a violation of this Agreement for the Employee to serve on corporate, civil or charitable boards, deliver lectures, fulfill speaking engagements or teach at educational institutions or manage personal investments, so long as such activities and businesses do not significantly interfere with the performance of his duties and responsibilities hereunder on behalf of 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 to the Company the services required of him hereunder during the Employment Period. 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. (a) MUTUAL AGREEMENT. During the Employment Period, this Agreement may be terminated at any time by mutual agreement between the Company and the Employee on terms to be negotiated at the time of such termination. Any such termination by mutual agreement shall be set forth in a written document signed by the Company and the Employee. In the event of a termination by mutual agreement, the Company's obligation to the Employee under this Agreement shall be determined by such mutual agreement. (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 (i) those obligations accrued, earned or vested by the Employee as of the date of his death, (ii) that portion of any bonus determined pursuant to Section 3(c)(ii) of this Agreement in respect of a 5 6 prior calendar year that had been deferred, which amount shall be paid to the Employee as soon as practicable, and (iii) with respect to the calendar year in which the Employee's death occurs, in the event that a bonus would have been payable to the Employee pursuant to Section 3(b)(ii) of this Agreement in respect of such calendar year had the Employee not died, the Employee shall be entitled to receive a prorated amount of such bonus based on a fraction, the numerator of which is the number of days in the calendar year in which the Employee died that the Employee provided services to the Company and the denominator of which is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which the Employee dies. 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 executives of the Company based on the terms of the benefit plans referenced in Section 3(d) 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 60th 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 three 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 60 day notice period. For purposes of this Agreement, "disability" shall mean a physical or mental condition which, three months after its commencement, is determined to be total and permanent by a physician selected by the Company and which prevents the Employee from performing his duties hereunder. The Employee shall be entitled to all compensation and benefits provided for under this Agreement during the three month waiting period for the disability determination and during the 60 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 (i) those obligations accrued, earned or vested by the Employee as of the date of the termination, (ii) that portion of any bonus determined pursuant to Section 3(c)(ii) of this Agreement in respect of a prior calendar year that had been deferred, which amount shall be paid to the Employee as soon as practicable, and (iii) with respect to the calendar year in which this Agreement is terminated, in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(ii) of this Agreement in respect of such calendar year had this Agreement not terminated, the Employee shall be entitled to a pro-rated amount of such bonus based on a fraction the numerator of which is the number of days in the calendar year in which this Agreement was terminated that the Employee provided services to the Company and which were prior to the period of the Employee's disability and the denominator of which is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which this Agreement is terminated. In the event the Employee becomes disabled but returns to active service under this Agreement prior to the expiration of the three-month waiting period, or prior to the expiration of the 60-day notice of intent to terminate period, the 6 7 Employee shall be entitled to the full amount of any bonus payable pursuant to Section 3(c)(ii) of this Agreement in respect of the year in which he became disabled without regard to the period of absence due to the disability. 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 executives of the Company based on the terms of the benefit plans referenced in Section 3(d) of this Agreement as in effect on the date the Employee's disability commenced. (d) CAUSE. During the Employment Period, the Company may terminate the Employee's employment for "cause" (as defined below), as determined by the Board (or the Executive Committee). For purposes of this Agreement, "cause" shall mean: (i) an act or acts of personal dishonesty undertaken by the Employee at the expense of or against the interests of the Company; (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; (iii) any direct or indirect disclosure of any confidential information or other special knowledge of the finances, business or other affairs of the Company; (iv) the conviction of the Employee of a felony; or (v) the conviction of the Employee of a serious misdemeanor involving illegal use, possession or sale of drugs, larceny, crimes of violence or sex offenses. 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 termination of employment. 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. Notwithstanding anything herein to the contrary, the Company shall have the right, at any time upon notice to the Employee, to terminate the Employee's employment. 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, the Employee shall be deemed to have been "terminated involuntarily" (such termination being referred to herein as an "involuntary termination") and the Company shall pay to the Employee the following amounts: (i) to the extent not theretofore paid, the Company shall pay the Salary through the date of such involuntary termination as well as that portion of any bonus determined pursuant to Section 3(c)(ii) of this Agreement in respect of a prior calendar year which had been deferred; 7 8 (ii) the Company shall pay the Employee on the date of such involuntary termination an amount equal to two years of the Salary, plus the amount of the bonus paid to the Employee pursuant to Section 3(c)(ii) of this Agreement on account of each of the two calendar years preceding the year in which such involuntary termination occurs; (iii) with respect to the year in which such involuntary termination occurs, in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(ii) of this Agreement in respect of such year had this Agreement not been terminated, the Employee shall be entitled to receive a pro-rated amount of such bonus based on a fraction in which the numerator is the number of days in the calendar year in which this Agreement terminated that the Employee provided services to the Company and the denominator is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which this Agreement is involuntarily terminated; and (iv) the Company shall pay in one cash lump sum any vacation days accrued but unused as of the date of the Employee's 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 the Employee's position as set forth in Section 3(a) of this Agreement or any action by the Company which results in a material diminution in such position, or in the authority, duties or responsibilities of the Employee, 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(a) through 3(j) of this Agreement regarding the Employee's Salary, compensation, benefits, expenses, fringe benefits, vacation or office staff 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; (iii) the Company's requiring the Employee to be based at any office or location other than the location set forth as his principal place of employment in Section 3(b) of this Agreement, except for travel reasonably required in the performance of his responsibilities; or (iv) any failure by the Company to comply with and satisfy the terms of Section 10 of this Agreement with respect to successors. In the event that the Employee terminates his employment for good reason as defined in this Section 5(f), it shall be deemed an "involuntary termination" as set forth in Section 5(e) above and the 8 9 Employee shall be entitled to all payments and obligations set forth in Sections 5(e)(i) through 5(e)(iv) of this Agreement as if the Employee's employment had been involuntarily terminated. (g) VOLUNTARY TERMINATION OR RETIREMENT. If the Employee shall elect to voluntarily terminate his services under this Agreement (other than for "good reason" as defined in Section 5(f) above) or to retire during the Employment 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 as of the date of the termination or retirement. In the event of voluntary termination or early retirement (prior to the Employee's 65 birthday), the Employee shall be entitled to receive a pro-rated amount of any bonus payable in respect of the year of voluntary termination or early retirement. If the Employee retires upon the expiration of this Agreement at the end of the Employment Period, and in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(ii) of this Agreement in respect of such calendar year had this Agreement not terminated, the Employee shall be entitled to receive a pro-rated amount of such bonus based on a fraction in which the numerator is the number of days in the calendar year in which the Employee was terminated that he provided services to the Company and the denominator is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which this Agreement is terminated. (h) NOTICE OF TERMINATION. Any termination by the Company for any reason or by the Employee for any reason shall be communicated by such party in a written notice to the other party 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 of termination. (i) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, 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 this Agreement shall be payable in accordance with such plan, policy, practice or program. (j) 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 or others. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. In connection with any contest by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement in which the Employee is ultimately successful, the Company agrees to pay, to the full extent permitted by law, all reasonable legal fees and expenses, as incurred by the Employee and others which the Employee may reasonably incur as a result of any such contest. 9 10 6. 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 the Employment Period and which shall not be or become public knowledge (other than by acts by the Employee 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 the 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 6, any payments or other benefits promised under this Agreement shall be forfeited. In addition, 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. 7. NON-COMPETITION. The Employee agrees that during the Restricted Period, he will not, without the prior consent of the Board, directly or indirectly, alone or as a partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or shareholder of, or lender to, any company or business, anywhere within the continental United States, Israel, Ireland or any other country in which the Company has operations, engage or participate or make any financial investments in or become employed by or render advisory of other services to or for any person, firm or corporation, or in connection with any business activity, other than that of the Company and its subsidiaries, directly or indirectly in competition with any of the business operations or activities of the Company and its subsidiaries as of the date in question or, if later, as of the date of termination of this Agreement, whether such companies are presently existing or hereafter acquired. 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, so 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. 8. RESTRICTION ON SOLICITATION. The Employee agrees that during the Employment Period and for three (3) years thereafter he will not: (a) 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 or; (b) directly or indirectly approach any such employee for these purposes; 10 11 (c) 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 (d) 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 or any of its subsidiaries shall be, a customer of the Company or 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; provided that if the Employee terminates this Agreement for good reason or in the event of an involuntary termination by the Company, then this subsection (d) shall not apply. 9. REMEDIES. The Employee hereby acknowledges that in the event of a breach or threatened breach by him of the provisions of Sections 6, 7 or 8 of this Agreement, the Company would suffer irreparable harm for which there would be no adequate remedy at law. Accordingly, the Employee agrees that in such event, in addition to any other remedies which the Company may have in law or in equity for money damages or other relief, the Company shall be entitled to temporary and/or injunctive relief, without the necessity of proving damages, to enforce the provisions hereof. 10. SUCCESSORS. This Agreement is personal to the Employee and may not, without the prior written consent of the Company, be assigned by the Employee other then by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the legal representatives of the Employee. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as defined herein and any successor to its business and/or assets as aforesaid which assumes this Agreement by operation of law or otherwise. 11. 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 binding arbitration. Any request for such arbitration shall be served on the other party by written notice. The parties shall agree upon and select an arbitrator within 20 days after written demand is made by either party for such arbitration. The arbitrator shall set a time for hearing within 60 days of his/her selection. Each party shall have an opportunity to present evidence on the issues in dispute before the arbitrator and each party may be represented by legal counsel if either so desires. The decision of the arbitrator shall be rendered in writing to both parties within 30 days of the close of the hearing. The decision of the arbitrator shall be final and binding upon both parties. Any legal fees, expenses or other costs incurred by the Company and the Employee in connection with such arbitration shall be borne by 11 12 the Company. The parties agree that to the extent not inconsistent with the foregoing provisions of this Section 11, the then current rules of the American Arbitration Association shall apply. 12. INDEMNIFICATION. (a) If the Employee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and the Employee had no reasonable cause to believe that his conduct was unlawful or detrimental to the Company, the Company shall indemnify and hold harmless the Employee and his legal representatives from and against any and all claims, losses, liabilities, damages, costs, demands, causes of action (whether legal, equitable, administrative, civil or criminal), judgments, settlements (subject to the last sentence of paragraph (c) hereof), fines, court costs, and other expenses of any kind or nature whatsoever, including, without limitation, attorneys' fees and disbursements (collectively, "Losses"), which may be threatened against, incurred or suffered by the Employee or his legal representatives in connection with, relating to or arising out of, directly or indirectly, the Employee's performance, duties and responsibilities to, for and on behalf of, the Company, including, without limitation, (i) this Agreement and all actions or omissions taken hereunder and (ii) any acts, omissions or alleged acts or omissions arising out of the Employee's activities on behalf of the Company or in furtherance of the interests of the Company. (b) EXCEPTION. Notwithstanding anything contained herein or in the By-Laws of the Company, the Company shall have no obligations to indemnify the Employee if the Loss incurred by the Employee (i) arises out of an action brought directly by the Company against the Employee or (ii) arises, directly or indirectly, as a result of this Agreement being terminated for cause (as defined herein). (c) NOTIFICATION OF CLAIM. Promptly after receipt by the Company of notice of any claim against the Employee pursuant to which the Employee is entitled to indemnification, the Company shall have the right to assume the defense of such claim, including the employment of counsel of its choice. Although the Employee shall have the right to employ his own counsel, the fees and expenses of such counsel shall be at the expense of the Employee. The Company shall not be liable for any settlement of any claim or action effected without its written consent, PROVIDED, HOWEVER, that such consent was not unreasonably withheld. (d) PAYMENT OF INDEMNITY AMOUNTS. The Company agrees to pay all amounts payable in respect of Losses immediately upon its receipt of a statement with respect thereto rendered by the Employee, together with appropriate supporting documentation thereof. It is the express intention of the parties hereto that all such amounts shall be paid by the Company on or before the date payment thereof is due, and that the Employee shall not be required at any time to bear any costs or expenses on account of Losses. 12 13 13. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (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 shall be deemed to have been 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. 1100 International Parkway Sunrise, Florida 33323 Attn: President Telecopier: (954) 858-2449 If to the Employee, to: Mr. Yoav Stern 98 Battery Street, Suite 600 San Francisco, California 94111 Telecopier: (415) 956-9951 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) 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. (f) This Agreement embodies the entire agreement between the Company and the Employee and supersedes all prior agreements and understandings, oral or written, with respect to the subject matter hereof. (g) 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. 13 14 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. KELLSTROM INDUSTRIES, INC. By:__________________________________________ Michael W. Wallace Chief Financial Officer EMPLOYEE --------------------------------------------- Yoav Stern 14 EX-10.21 5 AMENDED LOAN & SECURITY AGREEMENT - 12/14/98 1 EXHIBIT 10.21 ================================================================================ AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Dated as of December 14, 1998 Among KELLSTROM INDUSTRIES, INC. and CERTAIN SUBSIDIARIES NAMED HEREIN (collectively, the Borrowers) and THE FINANCIAL INSTITUTIONS PARTY HERETO FROM TIME TO TIME (the Lenders) and NATIONSBANK, N.A. (the Agent) and NATIONSBANC MONTGOMERY SECURITIES LLC (the Syndication Agent) ================================================================================ 2 TABLE OF CONTENTS(1)
PAGE ---- ARTICLE 1 DEFINITIONS 1 SECTION 1.1. DEFINITIONS................................................................................. 1 SECTION 1.2. GENERAL..................................................................................... 34 ARTICLE 2 REVOLVING CREDIT FACILITY SECTION 2.1. REVOLVING CREDIT LOANS...................................................................... 34 SECTION 2.2. MANNER OF BORROWING REVOLVING CREDIT LOANS.................................................. 34 SECTION 2.3. REPAYMENT OF REVOLVING CREDIT LOANS......................................................... 36 SECTION 2.4. REVOLVING CREDIT NOTES...................................................................... 37 SECTION 2.5. EXTENSION OF REVOLVING CREDIT FACILITY...................................................... 37 ARTICLE 3 LETTER OF CREDIT FACILITY SECTION 3.1. AGREEMENT TO ISSUE.......................................................................... 37 SECTION 3.2. AMOUNTS..................................................................................... 38 SECTION 3.3. CONDITIONS................................................................................. 38 SECTION 3.4. ISSUANCE OF LETTERS OF CREDIT............................................................... 38 SECTION 3.5. DUTIES OF NATIONSBANK....................................................................... 39 SECTION 3.6. PAYMENT OF REIMBURSEMENT OBLIGATIONS........................................................ 39 SECTION 3.7. PARTICIPATIONS.............................................................................. 40 SECTION 3.8. INDEMNIFICATION, EXONERATION................................................................ 41 SECTION 3.9. SUPPORTING LETTER OF CREDIT; CASH COLLATERAL................................................ 43
- ---------- 1 This Table of Contents is included for reference purposes only and does not constitute part of the Amended and Restated Loan and Security Agreement. -i- 3 ARTICLE 4 GENERAL LOAN PROVISIONS SECTION 4.1. INTEREST.................................................................................... 44 SECTION 4.2. CERTAIN FEES................................................................................ 45 SECTION 4.3. MANNER OF PAYMENT........................................................................... 46 SECTION 4.4. GENERAL..................................................................................... 47 SECTION 4.5. LOAN ACCOUNTS; STATEMENTS OF ACCOUNT........................................................ 47 SECTION 4.6. TERMINATION OF AGREEMENT.................................................................... 48 SECTION 4.7. MAKING OF LOANS............................................................................. 48 SECTION 4.8. SETTLEMENT AMONG LENDERS.................................................................... 50 SECTION 4.9. MANDATORY PREPAYMENTS....................................................................... 54 SECTION 4.10. PAYMENTS NOT AT END OF INTEREST PERIOD; FAILURE TO BORROW.................................. 54 SECTION 4.11. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS.................................... 55 SECTION 4.12. NOTICE OF CONVERSION OR CONTINUATION....................................................... 55 SECTION 4.13. CONVERSION OR CONTINUATION................................................................. 55 SECTION 4.14. DURATION OF INTEREST PERIODS; MAXIMUM NUMBER OF EURODOLLAR RATE LOANS; MINIMUM INCREMENTS................................................................................. 55 SECTION 4.15. CHANGED CIRCUMSTANCES...................................................................... 56 SECTION 4.16. CASH COLLATERAL ACCOUNT.................................................................... 58 SECTION 4.17. BORROWERS' REPRESENTATIVE.................................................................. 58 SECTION 4.18. JOINT AND SEVERAL LIABILITY................................................................ 59 SECTION 4.19. OBLIGATIONS ABSOLUTE....................................................................... 59 SECTION 4.20. WAIVER OF SURETYSHIP DEFENSES.............................................................. 60 SECTION 4.21. WITHHOLDING TAXES.......................................................................... 60 SECTION 4.22. DESIGNATED SENIOR INDEBTEDNESS............................................................. 61 ARTICLE 5 CONDITIONS PRECEDENT SECTION 5.1. CONDITIONS PRECEDENT TO LOANS AND LETTERS OF CREDIT......................................... 61 SECTION 5.2. ALL LOANS; LETTERS OF CREDIT................................................................ 66 SECTION 5.3. CONDITIONS AS COVENANTS..................................................................... 66 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BORROWER SECTION 6.1. REPRESENTATIONS AND WARRANTIES.............................................................. 66 SECTION 6.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC............................................. 77
-ii- 4 ARTICLE 7 SECURITY INTEREST SECTION 7.1. SECURITY INTEREST........................................................................... 77 SECTION 7.2. CONTINUED PRIORITY OF SECURITY INTEREST..................................................... 78 ARTICLE 8 COLLATERAL COVENANTS SECTION 8.1. COLLECTION OF RECEIVABLES................................................................... 79 SECTION 8.2. VERIFICATION AND NOTIFICATION............................................................... 80 SECTION 8.3. DISPUTES, RETURNS AND ADJUSTMENTS........................................................... 80 SECTION 8.4. INVOICES AND LEASE AGREEMENTS............................................................... 81 SECTION 8.5. DELIVERY OF INSTRUMENTS, CHATTEL PAPER AND MORTGAGE SUPPLEMENTS............................. 81 SECTION 8.6. SALES AND LEASES OF INVENTORY............................................................... 82 SECTION 8.7. OWNERSHIP AND DEFENSE OF TITLE.............................................................. 82 SECTION 8.8. INSURANCE................................................................................... 82 SECTION 8.9. LOCATION OF OFFICES AND COLLATERAL.......................................................... 83 SECTION 8.10. RECORDS RELATING TO COLLATERAL............................................................. 83 SECTION 8.11. INSPECTION................................................................................. 84 SECTION 8.12. INFORMATION AND REPORTS.................................................................... 84 SECTION 8.13. POWER OF ATTORNEY.......................................................................... 86 SECTION 8.14. ADDITIONAL REAL ESTATE AND LEASES.......................................................... 87 SECTION 8.15. ASSIGNMENT OF CLAIMS ACT................................................................... 87 SECTION 8.16. VRDN MORTGAGE.............................................................................. 87 ARTICLE 9 AFFIRMATIVE COVENANTS SECTION 9.1. PRESERVATION OF CORPORATE EXISTENCE AND SIMILAR MATTERS..................................... 88 SECTION 9.2. COMPLIANCE WITH APPLICABLE LAW.............................................................. 88 SECTION 9.3. MAINTENANCE OF PROPERTY..................................................................... 88 SECTION 9.4. CONDUCT OF BUSINESS......................................................................... 88 SECTION 9.5. INSURANCE................................................................................... 88 SECTION 9.6. PAYMENT OF TAXES AND CLAIMS................................................................. 88 SECTION 9.7. ACCOUNTING METHODS AND FINANCIAL RECORDS.................................................... 89 SECTION 9.8. USE OF PROCEEDS............................................................................. 89 SECTION 9.9. HAZARDOUS WASTE AND SUBSTANCES; ENVIRONMENTAL REQUIREMENTS.................................. 89 SECTION 9.10. YEAR 2000 COMPLIANCE....................................................................... 90 SECTION 9.11. ADDITIONAL BORROWERS....................................................................... 90 SECTION 9.12. SUBSIDIARY GUARANTORS...................................................................... 90
-iii- 5 ARTICLE 10 INFORMATION SECTION 10.1. FINANCIAL STATEMENTS....................................................................... 92 SECTION 10.2. ACCOUNTANTS' CERTIFICATE................................................................... 93 SECTION 10.3. OFFICER'S CERTIFICATE...................................................................... 93 SECTION 10.4. COPIES OF OTHER REPORTS.................................................................... 93 SECTION 10.5. NOTICE OF LITIGATION AND OTHER MATTERS..................................................... 94 SECTION 10.6. ERISA...................................................................................... 94 SECTION 10.7. ACCURACY OF INFORMATION.................................................................... 95 SECTION 10.8. REVISIONS OR UPDATES TO SCHEDULES.......................................................... 95 SECTION 10.9. SUBORDINATED INDEBTEDNESS CERTIFICATE...................................................... 95 ARTICLE 11 NEGATIVE COVENANTS SECTION 11.1. FINANCIAL RATIOS........................................................................... 95 SECTION 11.2. INDEBTEDNESS FOR MONEY BORROWED............................................................ 96 SECTION 11.3. GUARANTIES................................................................................. 96 SECTION 11.4. INVESTMENTS................................................................................ 96 SECTION 11.5. CAPITAL EXPENDITURES....................................................................... 97 SECTION 11.6. RESTRICTED DIVIDEND PAYMENTS AND PURCHASES, ETC............................................ 97 SECTION 11.7. MERGER, CONSOLIDATION AND SALE OF ASSETS................................................... 97 SECTION 11.8. TRANSACTIONS WITH AFFILIATES............................................................... 97 SECTION 11.9. LIENS...................................................................................... 97 SECTION 11.10. CAPITALIZED LEASE OBLIGATIONS.............................................................. 97 SECTION 11.11. OPERATING LEASES........................................................................... 97 SECTION 11.12. REAL ESTATE LEASES......................................................................... 97 SECTION 11.13. PLANS...................................................................................... 97 SECTION 11.14. SALES AND LEASEBACKS....................................................................... 97 SECTION 11.15. AMENDMENTS OF OTHER AGREEMENTS............................................................. 98 SECTION 11.16. MINIMUM AVAILABILITY....................................................................... 98 SECTION 11.17. FISCAL YEAR................................................................................ 98 SECTION 11.18. INSURANCE; PROHIBITED COUNTRIES............................................................ 98 SECTION 11.19. INTEREST RATE PROTECTION AGREEMENTS........................................................ 98
-iv- 6 ARTICLE 12 DEFAULT SECTION 12.1. EVENTS OF DEFAULT.......................................................................... 98 SECTION 12.2. REMEDIES................................................................................... 101 SECTION 12.3. APPLICATION OF PROCEEDS.................................................................... 105 SECTION 12.4. POWER OF ATTORNEY.......................................................................... 105 SECTION 12.5. MISCELLANEOUS PROVISIONS CONCERNING REMEDIES............................................... 106 ARTICLE 13 ASSIGNMENTS SECTION 13.1. SUCCESSORS AND ASSIGNS; PARTICIPATIONS..................................................... 107 SECTION 13.2. REPRESENTATION OF LENDERS.................................................................. 110 ARTICLE 14 AGENT SECTION 14.1. APPOINTMENT OF AGENT....................................................................... 110 SECTION 14.2. DELEGATION OF DUTIES....................................................................... 110 SECTION 14.3. EXCULPATORY PROVISIONS..................................................................... 110 SECTION 14.4. RELIANCE BY AGENT.......................................................................... 111 SECTION 14.5. NOTICE OF DEFAULT.......................................................................... 111 SECTION 14.6. NON-RELIANCE ON AGENT AND OTHER LENDERS.................................................... 111 SECTION 14.7. INDEMNIFICATION............................................................................ 112 SECTION 14.8. AGENT IN ITS INDIVIDUAL CAPACITY........................................................... 112 SECTION 14.9. SUCCESSOR AGENT............................................................................ 112 SECTION 14.10. NOTICES FROM AGENT TO LENDERS............................................................. 112 SECTION 14.11. SYNDICATION AGENT......................................................................... 113 ARTICLE 15 MISCELLANEOUS SECTION 15.1. NOTICES.................................................................................... 113 SECTION 15.2. EXPENSES................................................................................... 114 SECTION 15.3. STAMP AND OTHER TAXES...................................................................... 115 SECTION 15.4. SETOFF..................................................................................... 115 SECTION 15.5. LITIGATION................................................................................. 116 SECTION 15.6. WAIVER OF RIGHTS........................................................................... 116 SECTION 15.7. CONSENT TO ADVERTISING AND PUBLICITY....................................................... 117
-v- 7 SECTION 15.8. REVERSAL OF PAYMENTS....................................................................... 117 SECTION 15.9. INJUNCTIVE RELIEF.......................................................................... 117 SECTION 15.10. ACCOUNTING MATTERS........................................................................ 117 SECTION 15.11. AMENDMENTS................................................................................ 117 SECTION 15.12. ASSIGNMENT................................................................................ 119 SECTION 15.13. PERFORMANCE OF BORROWERS' DUTIES.......................................................... 119 SECTION 15.14. INDEMNIFICATION........................................................................... 120 SECTION 15.15. ALL POWERS COUPLED WITH INTEREST.......................................................... 120 SECTION 15.16. SURVIVAL.................................................................................. 120 SECTION 15.17. TITLES AND CAPTIONS....................................................................... 121 SECTION 15.18. SEVERABILITY OF PROVISIONS................................................................ 121 SECTION 15.19. GOVERNING LAW............................................................................. 121 SECTION 15.20. COUNTERPARTS.............................................................................. 121 SECTION 15.21. REPRODUCTION OF DOCUMENTS................................................................. 121 SECTION 15.22. TERM OF AGREEMENT......................................................................... 121 SECTION 15.23. PRO-RATA PARTICIPATION.................................................................... 121 SECTION 15.24. FINAL AGREEMENT........................................................................... 122 SECTION 15.25. WAIVER OF CONSEQUENTIAL DAMAGES, ETC...................................................... 122
-vi- 8 ANNEXES, EXHIBITS AND SCHEDULES ANNEX I PERFORMANCE PRICING MATRIX ANNEX II COMMITMENTS EXHIBIT A FORM OF REVOLVING CREDIT NOTE EXHIBIT B FORM OF BORROWING BASE CERTIFICATE EXHIBIT C FORM OF OPINION OF COUNSEL FOR BORROWERS EXHIBIT D FORM OF ASSIGNMENT AND ACCEPTANCE EXHIBIT E FORM OF SETTLEMENT REPORT EXHIBIT F FORM OF JOINDER AGREEMENT Schedule 1.1A Permitted Investments Schedule 1.1B Permitted Liens Schedule 6.1(a) Organization Schedule 6.1(b) Capitalization Schedule 6.1(d) Subsidiaries; Ownership of Stock Schedule 6.1(f) Compliance with Laws Schedule 6.1(g) Principal Business Schedule 6.1(h) Governmental Approvals Schedule 6.1(i) Title to Properties Schedule 6.1(j) Liens Schedule 6.1(k) Indebtedness and Guaranties Schedule 6.1(l) Litigation Schedule 6.1(m) Tax Matters Schedule 6.1(q) ERISA Schedule 6.1(u) Location of Offices and Receivables Schedule 6.1(v) Location of Inventory Schedule 6.1(w) Equipment Schedule 6.1(x) Real Estate Schedule 6.1(y) Corporate and Fictitious Names Schedule 6.1(bb) Employee Relations Schedule 6.1(cc) Proprietary Rights Schedule 6.1(dd) Trade Names Schedule 6.1(ee) Bank Accounts Schedule 9.8 Use of Proceeds -vii- 9 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Dated as of December 14, 1998 KELLSTROM INDUSTRIES, INC., a Delaware corporation ("Kellstrom"), KELLSTROM COMMERCIAL AIRCRAFT, INC., a Delaware corporation ("Kellcad"), AERO SUPPORT HOLDINGS, INC., a Delaware corporation ("Aero Support"), INTEGRATED TECHNOLOGY HOLDINGS CORP., a Delaware corporation ("ITC"), AEROCAR AVIATION CORP., a Florida corporation ("Aerocar Aviation"), AEROCAR PARTS, INC., a Florida corporation ("Aerocar Parts") (each a "Borrower" and collectively, the "Borrowers"), the financial institutions party to this Agreement from time to time (the "Lenders"), NATIONSBANK, N.A., a national banking association, as agent for the Lenders (the "Agent"), and NationsBanc Montgomery Securities LLC, as syndication agent (the "Syndication Agent"), agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.. DEFINITIONS. For the purposes of this Agreement: "ACCOUNT DEBTOR" means a Person who is obligated on a Receivable. "ACQUIRE" or "ACQUISITION", as applied to any Business Unit or Investment, means the acquiring or acquisition of such Business Unit or Investment by purchase, exchange, issuance of stock or other securities, or by merger, reorganization or any other method. "ADJUSTED NET WORTH" means the Consolidated Net Worth of the Borrowers and their Consolidated Subsidiaries less the amount included therein for any amounts due from Affiliates. "AFFILIATE" means, with respect to a Person, (a) any partner, officer, shareholder (if holding more than 10% of the outstanding shares of capital stock of such Person), director, employee or managing agent of such Person, (b) any other Person (other than a Subsidiary) that, (i) directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such given Person, (ii) directly or indirectly beneficially owns or holds 10% or more of any class of voting stock or partnership or other voting interest of such Person or any Subsidiary of such Person, or (iii) 10% or more of the voting stock or partnership or other voting interest of which is directly or indirectly beneficially owned or held by such Person or a Subsidiary of such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or partnership or other voting interest, by contract or otherwise. 10 "AGENCY ACCOUNT" means an account of a Borrower maintained by it with a Clearing Bank pursuant to an Agency Account Agreement. "AGENCY ACCOUNT AGREEMENT" means an agreement among a Borrower, the Agent and a Clearing Bank, in form and substance satisfactory to the Agent, concerning the collection of payments which represent the proceeds of Receivables or of any other Collateral. "AGENT" means NationsBank, N.A., a national banking association, and any successor agent appointed pursuant to SECTION 14.9 hereof. "AGENT'S OFFICE" means the office of the Agent specified in or determined in accordance with the provisions of SECTION 15.1. "AGREEMENT" means and includes this Agreement, including all Schedules, Exhibits and other attachments hereto, and all amendments, modifications and supplements hereto and thereto. "AGREEMENT DATE" means the date as of which this Agreement is dated. "AIRFRAME AND ENGINE MORTGAGE" means, collectively, those certain Airframe and Engine Mortgages and Security Agreements pursuant to which each Borrower or Trust grant a Security Interest in all of its Airframe Inventory and Engine Inventory to the Agent for the benefit of the Secured Parties. "AIRFRAME INVENTORY" means Inventory owned directly or beneficially by a Borrower or Trust consisting of an airframe (excluding all engines), but including any and all appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment of with nature, so long as they are incorporated or installed in or attached to the airframe. "APPLICABLE LAW" means all applicable provisions of constitutions, statutes, rules, regulations and orders of all governmental bodies and of all orders and decrees of all courts and arbitrators, including, without limitation, Environmental Laws. "APPLICABLE MARGIN" means, as to Prime Rate Revolving Credit Loans, 0%, and as to Eurodollar Rate Revolving Credit Loans, 2.0%, in each case as adjusted in accordance with the pricing matrix set forth on ANNEX I attached hereto based upon the ratio of Consolidated Funded Indebtedness of the Borrowers and their Consolidated Subsidiaries as of the date of determination to Consolidated EBITDA of the Borrowers and their Consolidated Subsidiaries for the immediately preceding four-quarter period. Adjustments to the Applicable Margin shall be effective as of (i) the first day of the calendar month after the Agent's receipt of the Borrowers' audited financial statements as of each fiscal year end in conformance with SECTION 10.1(A), together with the accountant's certificate described in SECTION 10.2 setting forth the calculations necessary to determine the ratio referred to above, and (ii) the first day of the calendar month after the Agent's receipt of the Borrowers' financial statements as of the last day of each subsequent fiscal quarter in conformance with SECTION 10.1(B), together with the officer's certificate described in SECTION 10.3 setting forth the calculations necessary to determine the ratio referred to above, with the first such adjustment taking place on the first day of the calendar month following the Agent's receipt of the financial information required for the quarter ending March 31, 1999. In the event Borrowers fail to timely provide the financial statements and certificates referred to above, and without prejudice to any additional rights under ARTICLE 12, the maximum Applicable Margin -2- 11 shall apply to all Eurodollar Rate Loans and Prime Rate Loans until the first day of the calendar month after the Agent's receipt of such financial statements and certificates. "ASSET DISPOSITION" means the disposition of any asset of any Borrower or any of its Subsidiaries, other than sales and leases of Inventory in the ordinary course of business. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance in the form attached hereto as EXHIBIT D assigning all or a portion of a Lender's interests, rights and obligations under this Agreement pursuant to SECTION 13.1. "AVAILABILITY" means at any time (a) the Borrowing Base at such time MINUS (b) the aggregate principal amount of Revolving Credit Loans outstanding at such time. "BANKING RELATIONSHIP" means obligations of any Borrower relating to or arising out of (a) checking and operating account relationships between such Borrower and any Lender (or any Affiliate of a Lender) and (b) Interest Rate Protection Agreements with any Lender (or any Affiliate of a Lender). "BASED" means, with respect to any Account Debtor, that such Account Debtor's principal place of business, chief executive office, or principal operations are located in such geographic location. "BENEFIT PLAN" means an "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) in respect of which a Borrower or any Related Company is, or within the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA, including such plans as may be established after the Agreement Date. "BORROWING" means a borrowing of Revolving Credit Loans bearing interest at the same rate, made by all Lenders on the same date and, in the case of Eurodollar Rate Loans, having a single Interest Period, and the continuation or conversion of an existing Loan or Loans in whole or in part. "BORROWER" means any of Kellstrom, Kellcad, Aero Support, ITC, Aerocar Aviation, Aerocar Parts, and each other Subsidiary of Kellstrom, Kellcad, Aero Support, ITC or Aerocar Parts that becomes a Borrower pursuant to SECTION 9.11, and "BORROWERS" means all of such entities collectively. "BORROWING BASE" means at any time an amount equal to the lesser of: (a) the Revolving Credit Facility MINUS the sum of (i) the Letter of Credit Reserve, PLUS (ii) the aggregate amount of the Environmental Compliance Reserves, PLUS (iii) such other reserves as the Agent in its reasonable judgment may establish from time to time in accordance with customary asset-based lending practices, and -3- 12 (b) an amount equal to (i) 85% of the face value of the Eligible Domestic Receivables due and owing to the Borrowers at such time, PLUS (ii) the lesser of (A) 75% of the face value of the Eligible Foreign Receivables due and owing to the Borrowers at such time, AND (B) $4,000,000, PLUS (iii) 65% of the Net Book Value of the Eligible Domestic Leased Engine Inventory of the Borrowers at such time, PLUS (iv) 65% of the Net Book Value of the Eligible Foreign Leased Engine Inventory of the Borrowers at such time; provided, however, that Loans and Letters of Credit outstanding against Eligible Foreign Leased Airframe Inventory plus Loans and Letters of Credit outstanding against Eligible Foreign Leased Engine Inventory shall at no time exceed $50,000,000 in the aggregate, PLUS (v) the lesser of (A) 65% of the Net Book Value of the Eligible Leased Airframe Inventory of the Borrowers at such time, AND (B) $20,000,000, PLUS (vi) 50% of the Net Book Value of the Eligible Inventoried Engine and Parts Inventory of the Borrowers at such time, MINUS (vii) the sum of (A) the Letter of Credit Reserve, PLUS (B) the aggregate amount of the Environmental Compliance Reserves, PLUS (C) such other reserves as the Agent in its reasonable judgment may establish from time to time in accordance with customary asset-based lending practices. The advance rate against Eligible Domestic Leased Engine Inventory and Eligible Foreign Leased Engine Inventory shall be adjusted by the Agent every year after the Agent's receipt of appraisals showing the Fair Market Value of such Inventory, which appraisals shall be conducted pursuant to and in accordance with SECTION 8.12(F). Such adjustments, if necessary, shall take place on the first day of the first month following the Agent's receipt of such appraisals. The adjusted advance rate shall be the lesser of (a) 65%, or (b) the percentage obtained by dividing (i) 65% of the Fair Market Value of such Inventory by (ii) the Net Book Value of such Inventory. -4- 13 The advance rate against all Inventory consisting of whole aircraft shall be adjusted by the Agent every year after the Agent's receipt of appraisals showing the Fair Market Value of each engine, the airframe, and the aircraft as a whole, which appraisals shall be conducted pursuant to and in accordance with SECTION 8.12(F). Such adjustments, if necessary, shall take place within 10 days of the Agent's receipt of such appraisals. The adjusted advance rate shall be the lesser of (a) 65%, or (b) the percentage obtained by dividing (i) 65% of the Fair Market Value of the whole aircraft (being the sum of the Fair Market Value of the airframe and each engine) by (ii) the Net Book Value of the whole aircraft, subject, however, to the following: (A) each time an appraisal is conducted, whether it is the annual appraisal or an appraisal conducted in accordance with SECTION 8.12(F) as a condition to any whole aircraft being deemed Eligible Leased Airframe Inventory, the Agent shall calculate the sum of 65% of the most current Fair Market Value of each item of Eligible Leased Airframe Inventory (the "Aggregate Margined Airframe FMV"), and (B) at any time the Aggregate Margined Airframe FMV equals or exceeds $20,000,000, the adjusted advance rate for each additional whole aircraft to be added to the Borrowing Base shall be the lesser of (a) 65%, or (b) the percentage obtained by dividing (i) 65% of the Fair Market Value of each engine appraised as part of such aircraft by (ii) the Net Book Value of the whole aircraft. The advance rate against Eligible Inventoried Engine and Parts Inventory shall be adjusted by the Agent every year after the Agent's receipt of appraisals showing the Orderly Liquidation Value of such Inventory, which appraisals shall be conducted pursuant to and in accordance with SECTION 8.12(F). Such adjustments, if necessary, shall take place within 10 days of the Agent's receipt of such appraisals. The adjusted advance rate shall be the lesser of (a) 65%, or (b) the percentage obtained by dividing (i) 75% of the Orderly Liquidation Value of such Inventory by (ii) the Net Book Value of such Inventory. "BORROWING BASE CERTIFICATE" means a certificate in the form attached hereto as EXHIBIT B. "BUSINESS DAY" means (a) any day other than a Saturday, Sunday or other day on which banks in Atlanta, Georgia are authorized or required to close and (b) in respect of any determination with respect to a Eurodollar Rate Loan, any day referred to in clause (a) that is also a day on which tradings are conducted in the London interbank eurodollar market. "BUSINESS UNIT" means the assets constituting all or part of the business, or a division or operating unit thereof, of any Person. "CAPITAL EXPENDITURES" means, with respect to any Person, all expenditures made and liabilities incurred for the acquisition of assets (other than Permitted Acquisitions) which are not, in accordance with GAAP, treated as expense items for such Person in the year made or incurred or as a prepaid expense applicable to a future year or years, excluding, however, Airframe Inventory or Engine Inventory. "CAPITALIZED LEASE" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "CAPITALIZED LEASE OBLIGATION" means Indebtedness represented by obligations under a Capitalized Lease, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. -5- 14 "CASH COLLATERAL" means collateral consisting of cash or Cash Equivalents on which the Agent, for the benefit of the Secured Parties, has a first priority Lien. "CASH COLLATERAL ACCOUNT" means a special interest-bearing deposit account consisting of cash maintained at the principal office of the Agent and under the sole dominion and control of the Agent, for the benefit of the Lenders, established pursuant to the provisions of SECTION 4.16(A) for the purposes set forth therein. "CASH EQUIVALENTS" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (b) commercial paper maturing no more than one year from the date issued and, at the time of acquisition thereof, having a rating of at least A-1 from Standard & Poor's Corporation or at least P1 from Moody's Investors Service, Inc.; (c) certificates of deposit or bankers' acceptances issued in Dollar denominations and maturing within one year from the date of issuance thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $100,000,000 and, unless issued by the Agent or a Lender, not subject to set-off or offset rights in favor of such bank arising from any banking relationship with such bank; and (d) repurchase agreements in form and substance and for amounts satisfactory to the Agent. "CHATTEL PAPER" means all chattel paper as such term is defined in the Uniform Commercial Code, including, without limitation, the original of each Lease Agreement. "CLEARING BANK" means NationsBank and any other banking institution with which an Agency Account has been established pursuant to an Agency Account Agreement. "COLLATERAL" means and includes, collectively, all of the collateral referred to in each of the Security Documents and all of each Borrower's and Trust's right, title and interest in and to each of the following, wherever located and whether now or hereafter existing or now owned or hereafter acquired or arising: (a) all Receivables, (b) all Inventory, (c) all Equipment, (d) all Contract Rights, (e) all General Intangibles, (f) all Real Estate, (g) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or -6- 15 (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other property, (h) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements, and other agreements and property which secure or relate to any Receivable or other Collateral, or are acquired for the purpose of securing and enforcing any item thereof, (i) all documents of title, policies and certificates of insurance, securities, chattel paper and other documents and instruments evidencing or pertaining to any and all items of Collateral, (j) all files, correspondence, computer programs, tapes, discs and related data processing software which contain information identifying or pertaining to any of the Receivables or any Account Debtor, or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, (k) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a certificate of deposit that is an instrument under the UCC, (l) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts, (m)(i) any investment account maintained by or on behalf of a Borrower or Trust with the Agent or any Lender or any Affiliate of the Agent or any Lender, (ii) any agreement governing such account, (iii) all cash, money, notes, securities, instruments, goods, accounts, documents, chattel paper, general intangibles and other property now or hereafter held by the Agent or any Lender or any Affiliate of the Agent or any Lender on behalf of a Borrower or Trust in connection with such investment account or deposited by a Borrower or Trust or on a Borrower's or Trust's behalf to such investment account or otherwise credited thereto for a Borrower's or Trust's benefit, or distributable to a Borrower or Trust from such investment account, together with all contracts for the sale or purchase of the foregoing, (iv) all of each Borrower's or Trust's right, title and interest with respect to the deposit, investment, allocation, disposition, distribution or withdrawal of the foregoing, (v) all of each Borrower's or Trust's right, title and interest with respect to the making of amendments, modifications or additions of or to the terms and conditions under which the investment account or investments maintained therein is to be maintained by a Borrower, Trust, the Agent, any Lender or any Affiliate of the Agent or any Lender on a Borrower's or Trust's behalf, and (vi) all of each Borrower's or Trust's books, records and receipts pertaining to or confirming any of the foregoing, (n) all cash deposited with the Agent or any Lender or any Affiliate of the Agent or any Lender or which the Agent, for the benefit of the Secured Parties, or any Lender or such -7- 16 Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Security Documents or any agreement relating to any Letters of Credit, and (o) any and all products and proceeds of the foregoing (including, but not limited to, any claim to any item referred to in this definition, and any claim against any third party for loss of, damage to or destruction of any or all of, the Collateral or for proceeds payable under, or unearned premiums with respect to, policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. "COMMITMENT" means, as to each Lender, the amount set forth opposite such Lender's name on ANNEX II hereof, representing such Lender's obligation, upon and subject to the terms and conditions of this Agreement (including the applicable provisions of SECTION 13.1), to make Revolving Credit Loans and to purchase participations in Letters of Credit or, from and after the date hereof, in the Register (as defined in SECTION 13.1) representing such Lender's obligation to make Revolving Credit Loans and to purchase participations in Letters of Credit. "COMMITMENT PERCENTAGE" means, as to any Lender, the percentage of the Total Commitment obtained by dividing such Lender's Commitment by the Total Commitment. "CONSOLIDATED", when used with reference to EBITDA, Fixed Charges, Funded Indebtedness, Indebtedness, Interest Expense, Liabilities, Net Income, Net Worth, or any of the other financial terms used herein, shall mean the sum of the EBITDA, Fixed Charges, Funded Indebtedness, Indebtedness, Interest Expense, Liabilities, Net Incomes, Net Worths, and other financial terms used herein, as the case may be, of the Borrowers and their Consolidated Subsidiaries, as consolidated after the elimination of intercompany items and, in the case of Net Income and Net Worth, after appropriate deductions for any minority interests in any Subsidiaries, and, when used with reference to such accounts of any other Person, shall mean the sum of such accounts of such Person and its consolidated Subsidiaries as so modified. "CONSOLIDATED SUBSIDIARIES" means, as to the Borrowers, the Subsidiaries of the Borrowers whose accounts are at the time in question, in accordance with GAAP and pursuant to the written consent of the Required Lenders, which consent may be withheld in their absolute discretion conditioned upon, INTER ALIA, the execution and delivery of guaranties, security agreements, mortgages and other documents required by the Required Lenders in their absolute discretion, consolidated with those of the Borrowers. "CONTAMINANT" means any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste. "CONTRACT RIGHTS" means any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper. "CONVERTIBLE SUBORDINATED NOTES" means those certain $54,000,000 5.75% Convertible Subordinated Notes due 2002, as more particularly described in that certain Indenture dated as of October 10, 1997, by and between Kellstrom and First Union National Bank, as trustee, and those certain $86,250,000 5.5% Convertible Subordinated Notes due 2003, as more particularly described in that -8- 17 certain Indenture dated as of June 17, 1998, by and between Kellstrom and First Union National Bank, as trustee. "COPYRIGHTS" means and includes, in each case whether now existing or hereafter arising, all of each Borrower's right, title and interest in and to (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations and copyright applications; (b) all renewals of any of the foregoing; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world. "DEFAULT" means any of the events specified in SECTION 12.1 which with the passage of time or giving of notice or both would constitute an Event of Default. "DEFAULT MARGIN" means 2%. "DISBURSEMENT ACCOUNT" means one or more accounts maintained by and in the name of a Borrower with a Disbursing Bank for the purposes of disbursing Revolving Credit Loan proceeds and amounts deposited thereto. "DISBURSING BANK" means any commercial bank with which a Disbursement Account is maintained after the Effective Date. "DOLLAR" and "$" mean freely transferable United States dollars. "EBITDA" means Net Income before provision for interest expense, income tax expense, depreciation expense and amortization expense. "ERISA" means the Employee Retirement Income Security Act of 1974, as in effect from time to time. "EFFECTIVE DATE" means the later of: (a) the Agreement Date, and (b) the first date on which all of the conditions set forth in ARTICLE 5 shall have been fulfilled. "EFFECTIVE INTEREST RATE" means the rate of interest per annum on the Revolving Credit Loans in effect from time to time pursuant to the provisions of SECTIONS 4.1(A) and (B). "ELIGIBLE ASSIGNEE" means (i) a commercial bank, commercial finance company or other asset-based lender, having total assets in excess of $1,000,000,000; (ii) any Lender listed on the signature pages of this Agreement; (iii) any Affiliate of a Lender; and (iv) if an Event of Default exists, any Person reasonably acceptable to the Agent; PROVIDED in each case that the representation contained in SECTION 13.2 hereof shall be applicable with respect to such institution or Lender. "ELIGIBLE DOMESTIC LEASED ENGINE INVENTORY" means Engine Inventory which the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Inventory meets the definition of Eligible Inventory, (b) such Inventory is subject to an Eligible Lease Agreement with an Account Debtor Based in the United States, (c) the Agent has received certificates executed by independent aircraft insurance brokers as to the Borrower's compliance as to such Inventory with the -9- 18 insurance provisions of SECTION 8.8 and with the insurance provisions of the Airframe and Engine Mortgage, (d) the Agent has received evidence satisfactory to the Agent in its absolute discretion that the Mortgage Supplement for such Inventory has been duly filed with the FAA, together with such legal opinions with respect to the FAA filing as the Agent desires in its reasonable discretion, (e) such Inventory is airworthy in accordance with the FAA's standards, (f) such Inventory is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien, and (g) if the Agent so elects in its absolute discretion, the original term of the Lease Agreement to which such Inventory is subject is not more than 36 months. "ELIGIBLE DOMESTIC RECEIVABLE" means a Receivable that consists of the unpaid portion of the obligation stated on an invoice issued to an Account Debtor with respect to Inventory sold and shipped or services performed for such Account Debtor, or the actual amount then due and payable under a Lease Agreement for Airframe Inventory or Engine Inventory leased to such Account Debtor in the ordinary course of business, in each case net of any security deposits, maintenance reserves, credits, potential offsets or rebates owed by any Borrower (or Trust) to the Account Debtor and net of any commissions payable by any Borrower (or Trust) to third parties, and that the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Receivable meets the definition of Eligible Receivable, (b) such Receivable is owing by an Account Debtor Based in the United States, (c) if such Receivable is a Lease Receivable, such Receivable shall comply with each of the following criteria: (i) the Mortgage Supplement for the Airframe Inventory or Engine Inventory subject to the Lease Agreement is in due form for filing with the FAA, has been duly filed with the FAA, and the Agent has received such legal opinions with respect to the FAA filing as the Agent desires in its reasonable discretion, (ii) the Airframe Inventory or Engine Inventory subject to the Lease Agreement giving rise to such Receivable is owned by a Borrower or Trust and is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien, and (iii) such Receivable arises from an Eligible Lease Agreement. "ELIGIBLE FOREIGN LEASED AIRFRAME INVENTORY" means Airframe Inventory which the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Inventory meets the definition of Eligible Leased Airframe Inventory, and (b) such Airframe Inventory is subject to a Lease Agreement with an Account Debtor Based outside of the United States. "ELIGIBLE FOREIGN LEASED ENGINE INVENTORY" means Engine Inventory which the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Inventory meets the definition of Eligible Inventory, (b) such Inventory is subject to an Eligible Lease Agreement with an Account Debtor Based outside of the United States, (c) the Agent has received certificates executed by independent aircraft insurance brokers as to the Borrower's compliance as to such Inventory with the insurance provisions of SECTION 8.8 and with the insurance provisions of the Airframe and Engine Mortgage, (d) the Agent has received evidence satisfactory to the Agent in its absolute discretion that the Mortgage Supplement for such Inventory has been duly filed with the FAA, together with such legal opinions with respect to the FAA filing as the Agent desires in its reasonable discretion, (e) such Inventory is airworthy in accordance with the FAA's standards, (f) to the extent commercially reasonable in the absolute discretion of the Agent, such Inventory is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien, (g) if such Inventory is subject to a Lease Agreement with an Account Debtor Based in Mexico or in any South American country other than Colombia, the Net Book Value of such Inventory, when aggregated with the Net Book Value of all other Foreign Leased Engine Inventory leased to that particular Account Debtor or leased to all Account Debtors Based in that same country, does not exceed 20% of the Net Book Value of all Foreign Leased Engine Inventory, (h) if such Inventory is subject to a Lease -10- 19 Agreement with an Account Debtor Based in Colombia, the Net Book Value of such Inventory, when aggregated with the Net Book Value of all other Foreign Leased Engine Inventory leased to that particular Account Debtor or leased to all Account Debtors Based in Colombia, does not exceed 30% of the Net Book Value of all Foreign Leased Engine Inventory, (i) if such Inventory is subject to a Lease Agreement with an Account Debtor Based in Canada or in any European country, the Net Book Value of such Inventory, when aggregated with the Net Book Value of all other Foreign Leased Engine Inventory leased to that particular Account Debtor or leased to all Account Debtors Based in that same country, does not exceed 30% of the Net Book Value of all Foreign Leased Engine Inventory, (j) if such Inventory is subject to a Lease Agreement with an Account Debtor Based outside of North America, South America and Europe, the Net Book Value of such Inventory, when aggregated with the Net Book Value of all other Foreign Leased Engine Inventory leased to that particular Account Debtor or leased to all Account Debtors Based in that same country, does not exceed 10% of the Net Book Value of all Foreign Leased Engine Inventory, (k) if such Inventory is subject to a Lease Agreement with an Account Debtor Based in Mexico or any South American country, the Net Book Value of such Inventory, when aggregated with the Net Book Value of all other Foreign Leased Engine Inventory leased to that particular Account Debtor or leased to all Account Debtors Based in South America and Mexico, does not exceed 50% of the Net Book Value of all Foreign Leased Engine Inventory, (l) if such Inventory is subject to a Lease Agreement with an Account Debtor Based in any continent other than Europe, South America or North America, the Net Book Value of such Inventory, when aggregated with the Net Book Value of all other Foreign Leased Engine Inventory leased to that particular Account Debtor or leased to Account Debtors Based in any such continent, does not exceed 20% of the Net Book Value of all Foreign Leased Engine Inventory, and (m) if the Agent so elects in its absolute discretion, the original term of the Lease Agreement to which such Inventory is subject is not more than 36 months. "ELIGIBLE FOREIGN RECEIVABLE" means a Receivable that consists of the unpaid portion of the obligation stated on an invoice issued to an Account Debtor with respect to Inventory sold and shipped or services performed for such Account Debtor, or the actual amount then due and payable under a Lease Agreement for Airframe Inventory or Engine Inventory leased to such Account Debtor in the ordinary course of business, in each case net of any security deposits, maintenance reserves, credits, potential offsets or rebates owed by any Borrower (or Trust) to the Account Debtor and net of any commissions payable by any Borrower (or Trust) to third parties, and that the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Receivable meets the definition of Eligible Receivable, (b) such Receivable is owing by an Account Debtor Based outside of the United States, and (c) if such Receivable is a Lease Receivable, such Receivable shall comply with each of the following criteria: (i) the Mortgage Supplement for the Airframe Inventory or Engine Inventory subject to the Lease Agreement is in due form for recordation by the FAA, has been duly filed for recordation by the FAA, and the Agent has received such legal opinions with respect to the FAA filing as the Agent desires in its reasonable discretion, (ii) the Airframe Inventory or Engine Inventory subject to the Lease Agreement giving rise to such Receivable is owned by a Borrower or Trust and to the extent commercially reasonable in the absolute discretion of the Agent, such Inventory is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien, and (iii) such Receivable arises from an Eligible Lease Agreement. "ELIGIBLE INVENTORIED ENGINE AND PARTS INVENTORY" means Airframe Inventory, Engine Inventory or Parts Inventory which the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Inventory meets the definition of Eligible Inventory, (b) such Inventory is located at one of the locations listed on SCHEDULE 6.1(v), or, if not located at one of the locations listed on SCHEDULE 6.1(v), is in transit between such locations, or is in transit to or from or is being serviced at an FAA-certified repair station located in the United States, (c) such Inventory is not subject to a Lease -11- 20 Agreement, (d) the Agent shall have received certificates executed by independent aircraft insurance brokers as to the Borrower's compliance with the insurance provisions of SECTION 8.8 as to such Inventory, (e) with respect to Airframe Inventory and Engine Inventory, the Agent has received evidence satisfactory to the Agent in its sole discretion that the Mortgage Supplement for such Inventory has been duly filed with the FAA, together with such legal opinions with respect to the FAA filing as the Agent desires in its reasonable discretion, and (f) such Inventory is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien. "ELIGIBLE INVENTORY" means Inventory which the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Inventory consists of finished goods or raw materials and not work-in-process, (b) such Inventory is in good condition and meets in all material respects all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over such goods, their use, lease or sale, (c) such Inventory is currently either usable, leaseable or salable, at prices approximating at least cost, in the normal course of the applicable Borrower's business, (d) such Inventory is not obsolete, (e) such Inventory is owned by a Borrower or by the Trust, (f) no Borrower is in breach of any representation or warranty, covenant or other agreement contained in the Loan Documents with respect to such Inventory, (g) if such Inventory is located in a warehouse or other facility leased by a Borrower, the lessor has delivered to the Agent, on behalf of the Lenders, a waiver and consent in form and substance satisfactory to the Agent, (h) the appraisal requirements set forth in SECTION 8.12(f) have been complied with as to such Inventory, (i) such Inventory is in compliance with all applicable FAA standards, and Borrowers maintain all documentation necessary to establish traceability of such Inventory, and (j) such Inventory is not determined by the Agent, on behalf of the Lenders, in its reasonable discretion to be ineligible for any other reason. "ELIGIBLE LEASE AGREEMENT" means a Lease Agreement with respect to which each of the following is true, as determined by the Agent in its absolute discretion: (a) if a chattel paper original of the Lease Agreement exists, the Agent has received such chattel paper original, certified as such by the Borrower, (b) the Borrower has received the funds required under the Lease Agreement to be deposited as of such date by the Account Debtor for maintenance reserves and security deposits, (c) no default or event of default exists under the Lease Agreement, (d) the Lease Agreement is in the form required under SECTION 8.4 hereof, (e) the Lease Agreement has been duly authorized, executed and delivered by the Account Debtor and the Borrower and, if applicable, the Trust, (f) the Airframe 21 Inventory or Engine Inventory subject to the Lease Agreement is owned by a Borrower or Trust, and the Borrower or Trust has taken all steps commercially customary in the jurisdiction where the Inventory is being used to protect its interest in such Airframe Inventory or Engine Inventory, (g) if the Account Debtor obligated under the Lease Agreement has had a letter of credit issued for the benefit of the Borrower (or Trust) securing any payments due under the Lease Agreement, such letter of credit has been duly assigned to the Agent for the benefit of the Secured Parties, (h) the Lease Agreement provides for return of the Inventory (or a satisfactory substitute therefor) subject to the Lease Agreement upon termination of the Lease Agreement, (i) the Lease Agreement contains provisions permitting the Borrower or Trust to repossess the Inventory upon the occurrence of a default or event of default, (j) the Lease Agreement provides that it is assignable by the Borrower or Trust without the Account Debtor's consent, and (k) the Agent has received a Notice of Assignment with respect to such Lease Agreement, fully executed by the Borrower (or Trust) and the Account Debtor. "ELIGIBLE LEASED AIRFRAME INVENTORY" means Airframe Inventory which the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Inventory meets the definition of Eligible Inventory, (b) such Inventory is subject to an Eligible Lease Agreement, (c) such Inventory is FAA-registered, (d) the Agent has received certificates executed by independent aircraft insurance brokers as to the Borrower's compliance as to such Inventory with the insurance provisions of SECTION 8.8 and the insurance provisions of the Airframe and Engine Mortgage, (e) the Agent has received evidence satisfactory to the Agent in its absolute discretion that the Mortgage Supplement for such Inventory has been duly filed with the FAA, together with such legal opinions with respect to the FAA filing as the Agent desires in its reasonable discretion, (f) such Inventory is airworthy in accordance with FAA's standards, (g) each engine in the Airframe Inventory is owned by a Borrower or by the Trust, (h) the Agent has received an appraisal, in form and substance satisfactory to the Agent, with respect to the Airframe Inventory from an independent appraiser selected by the Agent, and (i) such Airframe Inventory is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien. "ELIGIBLE RECEIVABLE" means a Receivable that consists of the unpaid portion of the obligation stated on the invoice issued to an Account Debtor with respect to Inventory sold and shipped to or services performed for such Account Debtor, or the actual amount then due and payable under a Lease Agreement for Airframe Inventory or Engine Inventory leased to such Account Debtor in the ordinary course of business, net of any credits, potential offsets or rebates owed by any Borrower (or Trust) to the Account Debtor and net of any commissions payable by any Borrower (or Trust) to third parties, and that the Agent, in its absolute discretion, determines to meet all of the following requirements: (a) such Receivable is owned by a Borrower or by the Trust and represents a complete bona fide transaction which requires no further act under any circumstances on the part of such Borrower (or Trust) to make such Receivable payable by the Account Debtor, (b) for Receivables other than Lease Receivables, the due date for such Receivable shall not be more than 60 days from the date of the original invoice for the goods the sale of which gave rise to such Receivable, (c) for Lease Receivables, the due dates for each scheduled payment under the Lease Agreement shall be every 30 days, -13- 22 (d) for Receivables other than Lease Receivables, no more than 90 days have elapsed from the date of the original invoice, (e) for Lease Receivables, such Receivable shall not be past due, unless the applicable cure period for payment of such Receivable shall not have expired, (f) for Receivables other than Lease Receivables, the goods the sale of which gave rise to such Receivable were shipped or delivered to the Account Debtor on an absolute sale basis and not on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a sale or return basis, or on the basis of any other similar understanding and no material part of such goods has been returned or rejected, (g) if such Receivable is evidenced by Chattel Paper or an instrument, such Chattel Paper or instrument has been collaterally assigned to the Agent, for the benefit of itself as agent and the Secured Parties, pursuant to an assignment in form and substance satisfactory to the Agent and the original of such Chattel Paper or instrument has been delivered to the Agent, (h) the Account Debtor with respect to such Receivable is not insolvent or the subject of any bankruptcy or insolvency proceedings of any kind or of any other proceeding or action, threatened (to any Borrower's knowledge) or pending, which might, in the Agent's reasonable judgment, have a materially adverse effect on such Account Debtor, and is not, in the reasonable discretion of the Agent, deemed ineligible for credit or other reasons, (i) such Receivable is not owing by an Account Debtor having 50% or more in face value of its then-existing accounts owing to the Borrowers (or Trust) which do not meet the requirements of CLAUSES (D) and (E), above, (j) such Receivable is not owing by an Account Debtor whose then-existing Receivables owing to the Borrowers (and Trust) exceed in face amount 20% of the sum of all Eligible Domestic Receivables plus all Eligible Foreign Receivables, (k) if such Receivable arises from the performance of services, such services have been fully rendered and do not relate to any warranty claim or obligation, (l) such Receivable is a valid, legally enforceable obligation of the Account Debtor with respect thereto and is not subject to any present or contingent (and no facts exist which are the basis for any future) offset, deduction or counterclaim, dispute or other defense on the part of such Account Debtor, (m) such Receivable is subject to the Security Interest, which is perfected as to such Receivable, and is subject to no other Lien whatsoever, (n) such Receivable is evidenced by an invoice or other documentation in form reasonably acceptable to the Agent, (o) if such Receivable is subject to the Assignment of Claims Act of 1940, as amended from time to time, or any Applicable Law now or hereafter existing similar in effect thereto, if Agent so requires, all procedures shall have been complied with such that such -14- 23 Receivable shall have been duly and validly assigned to the Agent, for the benefit of the Secured Parties, (p) such Receivable is not subject to any prohibition against its assignment or requiring notice of or consent to such assignment, unless all such required notices have been given, all such required consents have been received and all other procedures have been complied with such that such Receivable shall have been duly and validly assigned to the Agent, for the benefit of the Secured Parties, (q) the goods giving rise to such Receivable were not, at the time of the sale or lease thereof (and, in the case of Lease Receivables, such goods are not), subject to any Lien, except the Security Interest and Permitted Liens, (r) no Borrower (or Trust) is in breach of any representation or warranty with respect to the goods the sale or lease of which gave rise to such Receivable nor in breach of any representation or warranty, covenant or other agreement contained in the Loan Documents with respect to such Receivable, (s) such Receivable does not arise out of any transaction with any Subsidiary or Affiliate of any Borrower, (t) no bond or other undertaking by a guarantor or surety has been obtained, supporting such Receivable and the Account Debtor's obligations in respect thereof, other than any Guaranty given by a parent company of such Account Debtor, (u) such Receivable does not arise out of finance or similar charges by any Borrower (or Trust) or other fees for the time value of money, and (v) the Account Debtor with respect to such Receivable is not located in any state or jurisdiction denying creditors access to its courts in the absence of qualification to transact business in such state or jurisdiction or the filing of a Notice of Business Activities Report or other similar filing, unless the applicable Borrower (or Trust) has either qualified as a foreign corporation authorized to transact business in such state or jurisdiction or has filed a Notice of Business Activities Report or similar filing with the applicable state or jurisdiction agency for the then current year. "ENGINE INVENTORY" means Inventory owned by a Borrower or Trust consisting of whole aircraft engines which have not been broken down into their component parts. "ENVIRONMENTAL COMPLIANCE RESERVES" means reserves for the cost of Remedial Action by the Borrowers determined by the Agent from time to time in its reasonable discretion based upon the reports delivered pursuant to SECTION 9.9(B) and such other advice, analysis and engineering studies as it deems appropriate. "ENVIRONMENTAL INDEMNITY AGREEMENT" means the Environmental Indemnity Agreement, dated as of the Effective Date, among the Borrowers and the Agent, for the ratable benefit of the Secured Parties, pursuant to which the Borrowers jointly and severally agree to indemnify the Agent and the Secured Parties for certain matters related to the Environmental Laws, as amended, modified or supplemented from time to time. -15- 24 "ENVIRONMENTAL LAWS" means all federal, state, local and foreign laws now or hereafter in effect relating to pollution or protection of the environment, including laws relating to emissions, discharges, Releases or threatened Releases of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, removal, transport, or handling of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, notices or demand letters issued, entered, promulgated or approved thereunder; such laws and regulations include but are not limited to the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ., as amended; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 6901 ET SEQ., as amended; the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ., as amended; the Clean Air Act, 46 U.S.C. Section 7401 ET SEQ., as amended; and all federal, state, local and foreign lien and environmental cleanup programs. "ENVIRONMENTAL LIEN" means a Lien in favor of any governmental entity for (a) any liability under Environmental Laws or (b) damages arising from, or costs incurred by such governmental entity in response to, a Release or threatened Release of Contaminant into the environment. "EQUIPMENT" means and includes all machinery, apparatus, equipment, motor vehicles, tractors, trailers, rolling stock, fittings, fixtures and other tangible personal property (other than Inventory) of every kind and description used in the Borrowers' business operations or owned by a Borrower or in which a Borrower has an interest, and all parts, accessories and special tools and all increases and accessions thereto and substitutions and replacements therefor. "EQUITABLE SUBORDINATED LOAN" means the subordinated loan in the original principal amount of $15,000,000 (with an outstanding balance as of the Effective Date of $11,250,000) extended by The Equitable Life Assurance Society of the United States to Kellstrom, evidenced by the Securities Purchase Agreement dated as of January 15, 1997 between Kellstrom and The Equitable Life Assurance Society of the United States, as amended to the date hereof. "EURODOLLAR RATE" means, with respect to any Eurodollar Rate Loan for the Interest Period applicable thereto, a simple per annum interest rate determined pursuant to the following formula: Eurodollar Rate = Interbank Offered Rate ---------------------------------- 1 - Eurodollar Reserve Percentage The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. "EURODOLLAR RATE LOAN" or "EURODOLLAR RATE REVOLVING CREDIT LOAN" means a Loan bearing interest at a simple per annum rate of interest equal to the Eurodollar Rate plus the Applicable Margin. "EURODOLLAR RESERVE PERCENTAGE" means that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System, as such regulation may be amended from time to time, or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in -16- 25 Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Rate Loans is determined), whether or not any Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Rate Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to any Lender. "EVENT OF DEFAULT" means any of the events specified in SECTION 12.1, PROVIDED that any requirement for notice or lapse of time or any other condition has been satisfied, and any cure periods therefor have expired. "FAA" means the United States Federal Aviation Administration, and any instrumentality of the United States succeeding to this function. "FAIR MARKET VALUE" means the fair market value of Inventory, as reflected by appraisals conducted pursuant to SECTION 8.12(f). "FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve system arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of Atlanta, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by NationsBank from three federal funds brokers of recognized standing selected by NationsBank. "FEE LETTER" has the meaning given to such term in SECTION 4.2(a). "FINANCIAL OFFICER" means the Chief Financial Officer, Treasurer or Controller of Kellstrom. "FINANCING STATEMENTS" means any and all Uniform Commercial Code financing statements (or other similar documents), in form and substance satisfactory to the Agent, executed and delivered by the Borrowers and the Trust to the Agent, naming the Agent, for the benefit of the Secured Parties, as secured party and the Borrowers and the Trust as debtor, in connection with this Agreement. "FIXED CHARGES" means, for any period, (a) Interest Expense, plus (b) payments of principal actually made with respect to Indebtedness for Money Borrowed (other than payments under the Loans), including payments with respect to Capitalized Leases, plus (c) earn-out payments to the shareholders of Business Units acquired by a Borrower. "FOREIGN LEASED ENGINE INVENTORY" means Engine Inventory subject to a Lease Agreement with an Account Debtor Based outside of the United States. "FUNDED INDEBTEDNESS" means (a) all Indebtedness under this Agreement and (b) all other Indebtedness for Money Borrowed, including all Subordinated Indebtedness. "GAAP" means generally accepted accounting principles as in effect in the United States as consistently applied and maintained throughout the period indicated and, when used with reference to the Borrowers or any Subsidiary of the Borrowers, consistent with the prior financial -17- 26 practice of the Borrowers, as reflected on the financial statements referred to in SECTION 6.1(O); PROVIDED, HOWEVER, that, in the event that changes shall be mandated by the Financial Accounting Standards Board or any similar accounting authority of comparable standing, or shall be recommended by the Borrowers' independent public accountants, such changes shall be included in GAAP as applicable to the Borrowers only from and after such date as the Borrowers, the Required Lenders and the Agent shall have amended this Agreement to the extent necessary to reflect any such changes in the financial covenants set forth in ARTICLE 11. "GENERAL INTANGIBLES" means all of the Borrowers' now owned or hereafter acquired general intangibles, choses in action and causes of action and all other intangible personal property of the Borrowers of every kind and nature (other than Receivables), including, without limitation, all Proprietary Rights, corporate or other business records, inventions, designs, blueprints, plans, specifications, goodwill, computer software, customer lists, registrations, licenses, franchises, tax refund claims, reversions or any rights thereto and any other amounts payable to any Borrower from any Plan or other employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, all assignable warranty claims under any purchase agreements to which any Borrower or Trust is a party, business interruption insurance and proceeds thereof, property, casualty or any similar type of insurance and any proceeds thereof, proceeds of insurance covering the lives of key employees on which any Borrower is beneficiary and any letter of credit, guarantee, claim, security interest or other security held by or granted to any Borrower to secure payment by an Account Debtor of any of the Receivables. "GOVERNMENTAL APPROVALS" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all governmental bodies, whether federal, state, local or foreign national or provincial and all agencies thereof. "GUARANTY", "GUARANTEED" or to "GUARANTEE" as applied to any obligation of another Person shall mean and include (a) a guaranty (other than by endorsement of negotiable instruments for collection in the ordinary course of business), directly or indirectly, in any manner, of any part or all of such obligation of such other Person, and (b) an agreement, direct or indirect, contingent or otherwise, and whether or not constituting a guaranty, the practical effect of which is to assure the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation of such other Person whether by (i) the purchase of securities or obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property or the purchase or sale of services primarily for the purpose of enabling the Guarantor with respect to such obligation to make any payment or performance (or payment of damages in the event of nonperformance) of or on account of any part or all of such obligation, or to assure the owner of such obligation against loss, (iii) the supplying of funds to or in any other manner investing in the Guarantor with respect to such obligation, (iv) repayment of amounts drawn down by beneficiaries of letters of credit, or (v) the supplying of funds to or investing in a Person on account of all or any part of such Person's obligation under a Guaranty of any obligation or indemnifying or holding harmless, in any way, such Person against any part or all of such obligation. "INDEBTEDNESS" of any Person means, without duplication, all Liabilities of such Person, and to the extent not otherwise included in Liabilities, the following: (a) all obligations for Money Borrowed or for the deferred purchase price of property or services, (b) all obligations (including, during the noncancellable term of any lease in the nature of a title retention agreement, all future payment obligations under such lease discounted to their present value in accordance with GAAP) secured by any Lien to which any property or asset owned or held by such Person is subject, whether or not the obligation secured thereby shall have been assumed by such Person, (c) all obligations of other Persons which such Person has Guaranteed, including, but not limited to, all obligations of such Person -18- 27 consisting of recourse liability with respect to accounts receivable sold or otherwise disposed of by such Person, (d) all obligations of such Person in respect of Interest Rate Protection Agreements, and (e) in the case of the Borrowers (without duplication) all obligations under the Revolving Credit Loans. "INDEMNIFICATION AGREEMENT" means the Indemnification Agreement, dated as of the Effective Date, between the Borrowers and the Agent, for the ratable benefit of the Secured Parties, pursuant to which the Borrowers jointly and severally agree to indemnify the Agent and the Secured Parties for certain matters related to Florida documentary stamp taxes, as amended, modified or supplemented from time to time. "INITIAL LOANS" means the Revolving Credit Loans made to the Borrowers on the Effective Date pursuant to the Initial Notice of Borrowing. "INITIAL NOTICE OF BORROWING" means the Notice of Borrowing given by Kellstrom with respect to the Initial Loans which shall also specify the method of disbursement. "INTERBANK OFFERED RATE" means, with respect to any Eurodollar Rate Loan for the Interest Period applicable thereto, the average (rounded upward to the nearest one-sixteenth (1/16) of one percent) per annum rate of interest determined by the Agent (each such determination to be conclusive and binding absent manifest error) as of two Business Days prior to the first day of such Interest Period as the effective rate at which deposits in immediately available funds in Dollars are being offered or quoted to major banks in the interbank market for Eurodollar deposits for a term comparable to such Interest Period and in the amount of such Eurodollar Rate Loan. Such rate may be determined by the Agent from any interest rate reporting service of recognized standing that the Agent shall select. "INTEREST EXPENSE" means interest on Indebtedness during the period for which computation is being made, excluding (a) the amortization of fees and costs incurred with respect to the closing of loans which have been capitalized as transaction costs, and (b) interest paid in kind. "INTEREST PAYMENT DATE" means the first day of each calendar month commencing on January 1, 1999 and continuing thereafter until the Secured Obligations have been irrevocably paid in full. "INTEREST PERIOD" means with respect to each Eurodollar Rate Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Rate Loan and ending one, two, three, or six months thereafter, as the Borrowers may elect in the applicable Notice of Borrowing or Notice of Conversion or Continuation; PROVIDED, that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall, subject to the provisions of CLAUSE (iii) below, be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to CLAUSE (iii) below, end on the last Business Day of a calendar month; -19- 28 (iii) any Interest Period that would otherwise end after the Termination Date shall end on the Termination Date; and (iv) notwithstanding CLAUSE (III) above, no Interest Period shall have a duration of less than one month and if any applicable Interest Period would be for a shorter period, such Interest Period shall not be available hereunder. "INTEREST RATE PROTECTION AGREEMENT" shall mean an interest rate swap, cap or collar agreement or similar arrangement between any Person and a financial institution providing for the transfer or mitigation of interest risks either generally or under specific contingencies. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended from time to time. "INVENTORY" means all inventory as such term is defined in the Uniform Commercial Code, regardless of whether such inventory is classified as inventory or equipment on any Borrower's books, and shall include, without limitation, () all goods intended for sale or lease by the Borrowers, or for display or demonstration, () all work in process, () all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in the Borrowers' business, () all Airframe Inventory, Engine Inventory and Parts Inventory, and () all documents evidencing and general intangibles relating to any of the foregoing. "INVESTMENT" means, with respect to any Person: () the acquisition or ownership by such Person of any share of capital stock, evidence of Indebtedness or other security issued by any other Person, () any loan, advance or extension of credit to, or contribution to the capital of, any other Person, excluding advances to employees in the ordinary course of business for business expenses, () any Guaranty of the obligations of any other Person, () any other investment (other than the Acquisition of a Business Unit) in any other Person, and () any commitment or option to make any of the investments listed in CLAUSES (A) through (D) above. "IRS" means the Internal Revenue Service. "KELLSTROM INTERNATIONAL" means Kellstrom International Sales Corporation, a corporation incorporated under the laws of the United States Virgin Islands. "LEASE AGREEMENT" means a lease agreement between a Borrower or the Trust, as owner and lessor of Airframe Inventory or Engine Inventory, and the Account Debtor leasing such Airframe Inventory or Engine Inventory. "LEASE RECEIVABLE" means a Receivable arising from a Lease Agreement and consisting of the then-current lease payment due under the Lease Agreement. "LENDER" means at any time any financial institution party to this agreement at such time, including any such Person becoming a party hereto pursuant to the provisions of ARTICLE 13, and its successors and assigns, and "LENDERS" means at any time all of the financial institutions party to this Agreement at such time, including any such Persons becoming parties hereto pursuant to the provisions of ARTICLE 13, and their successors and assigns. -20- 29 "LETTER OF CREDIT" means any letter of credit issued by NationsBank for the account of the Borrowers pursuant to ARTICLE 3, excluding, however, the VRDN Letter of Credit. "LETTER OF CREDIT AMOUNT" means, with respect to any Letter of Credit, the aggregate maximum amount at any time available for drawing under such Letter of Credit. "LETTER OF CREDIT FACILITY" means the amount of $40,000,000. "LETTER OF CREDIT OBLIGATIONS" means, at any time, the sum of (a) the Reimbursement Obligations of the Borrowers at such time, PLUS (b) the aggregate Letter of Credit Amount of Letters of Credit outstanding at such time, PLUS (c) the aggregate Letter of Credit Amount of Letters of Credit the issuance of which has been authorized by the Agent and NationsBank pursuant to SECTION 3.4(b) but that have not yet been issued, in each case as determined by the Agent. "LETTER OF CREDIT RESERVE" means, at any time, the aggregate Letter of Credit Obligations at such time, other than Letter of Credit Obligations that are fully secured by Cash Collateral. "LIABILITIES" of any Person means all items (except for items of capital stock, additional paid-in capital or retained earnings, or of general contingency or deferred tax reserves) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Liabilities are to be determined. "LIEN" as applied to the property of any Person means: () any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, lease constituting a Capitalized Lease Obligation, conditional sale or other title retention agreement, or other security interest, security title or encumbrance of any kind in respect of any property of such Person, or upon the income or profits therefrom, () any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person, () any Indebtedness which is unpaid more than 30 days after the same shall have become due and payable (subject to applicable cure periods) and which if unpaid might by law (including, but not limited to, bankruptcy and insolvency laws), or otherwise, be given any priority whatsoever over the claims of general unsecured creditors of such Person, and () the filing of, or any agreement to give, any financing statement under the Uniform Commercial Code or its equivalent in any jurisdiction, excluding informational financing statements relating to property leased by the Borrower. "LOAN" means any Revolving Credit Loan, as well as all such loans collectively, as the context requires. "LOAN ACCOUNT" and "LOAN ACCOUNTS" shall have the meanings ascribed thereto in SECTION 4.5. "LOAN DOCUMENTS" means collectively this Agreement, the Notes, the Security Documents, the VRDN Documents, and each other instrument, agreement or document executed by any Obligor in connection with this Agreement whether prior to, on or after the Effective Date and each other instrument, agreement or document referred to herein or contemplated hereby. "LOCKBOX" means each post office box specified in a Lockbox Agreement. -21- 30 "LOCKBOX AGREEMENT" means each agreement between a Borrower and a Clearing Bank concerning the establishment of a Lockbox for the collection of Receivables. "MARGIN STOCK" means margin stock as defined in Section 221.1(h) of Regulation U, as the same may be amended or supplemented from time to time. "MATERIALLY ADVERSE EFFECT" means any act, omission, situation, circumstance, event or undertaking which would, singly or in any combination with one or more other acts, omissions, situations, circumstances, events or undertakings have, or reasonably be expected by the Agent to have, a materially adverse effect upon (a) the business, assets, properties, liabilities, condition (financial or otherwise), results of operations or business prospects of the Borrowers and their Subsidiaries taken as a whole, (b) the value of the Collateral or the Real Estate, (c) the Security Interest or the priority of the Security Interest, (d) the respective ability of any Obligor or any of their Subsidiaries to perform any obligations under this Agreement or any other Loan Document to which it is a party, or (e) the legality, validity, binding effect, enforceability or admissibility into evidence of any Loan Document or the ability of the Agent or any Lender to enforce any rights or remedies under or in connection with any Loan Document. "MINIMUM COMMITMENT" means $10,000,000 with respect to each Lender other than those Lenders with a Commitment on the Effective Date of less than $10,000,000, in which case the Minimum Commitment for each such Lender shall be all of such Lender's Commitment. "MONEY BORROWED" means, as applied to Indebtedness, (a) Indebtedness for money borrowed, (b) Indebtedness, whether or not in any such case the same was for money borrowed, (i) represented by notes payable, and drafts accepted, that represent extensions of credit, (ii) constituting obligations evidenced by bonds, debentures, notes or similar instruments, or (iii) upon which interest charges are customarily paid or that was issued or assumed as full or partial payment for property (other than trade credit that is incurred in the ordinary course of business), (c) Indebtedness that constitutes a Capitalized Lease Obligation, and (d) Indebtedness that is such by virtue of CLAUSE (C) of the definition thereof, but only to the extent that the obligations Guaranteed are obligations that would constitute Indebtedness for Money Borrowed. "MORTGAGE SUPPLEMENT" means a supplement to the Airframe and Engine Mortgage pursuant to which each Borrower and the Trust grants the Security Interest in Airframe Inventory, Engine Inventory and Lease Agreements acquired by a Borrower or the Trust or entered into by a Borrower or the Trust on the Effective Date and from time to time after the Effective Date. "MORTGAGES" means and includes any and all of the mortgages, deeds of trust, deeds to secure debt, assignments and other instruments executed and delivered by the Borrowers to or for the benefit of the Agent by which the Agent, on behalf of the Secured Parties, acquires a Lien on the Borrowers' Real Estate, and all amendments, modifications and supplements thereto. "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which a Borrower or a Related Company is required to contribute or has contributed within the immediately preceding six years. "NATIONSBANK" means NationsBank, N.A., and its successors and assigns. -22- 31 "NET AMOUNT" means, with respect to any Investments made by any Person, the gross amount of all such Investments MINUS the aggregate amount of all cash received and the fair value, at the time of receipt by such Person, of all property received as payments of principal or premiums, returns of capital, liquidating dividends or distributions, proceeds of sale or other dispositions with respect to such Investments. "NET BOOK VALUE" means, with respect to the Inventory or other assets of any Person, the gross value of such Inventory or other assets less accumulated depreciation determined in accordance with GAAP and as reflected on the books and records of the Person owning such Inventory or other assets. "NET INCOME" means, as applied to any Person, the net income (or net loss) of such Person for the period in question after giving effect to deduction of or provision for all operating expenses, all taxes and reserves (including reserves for deferred taxes) and all other proper deductions, all determined in accordance with GAAP, provided that there shall be excluded: (a) the net income (or net loss) of any Person accrued prior to the date it becomes a Subsidiary of, or is merged into or consolidated with, the Person whose Net Income is being determined or a Subsidiary of such Person, (b) the net income (or net loss) of any Person in which the Person whose Net Income is being determined or any Subsidiary of such Person has an ownership interest, except, in the case of net income, to the extent that any such income has actually been received by such Person or such Subsidiary in the form of cash dividends or similar distributions, (c) any restoration of any contingency reserve, except to the extent that provision for such reserve was made out of income during such period, (d) any net gains or losses on the sale or other disposition, not in the ordinary course of business, of Investments, Business Units and other capital assets, provided that there shall also be excluded any related charges for taxes thereon, (e) any net gain arising from the collection of the proceeds of any insurance policy, (f) any write-up of any asset, and (g) any other extraordinary item. "NET OUTSTANDINGS" of any Lender means, at any time, the sum of (a) all amounts paid by such Lender (other than pursuant to SECTION 14.7) to the Agent in respect of Revolving Credit Loans or otherwise under this Agreement, MINUS (b) all amounts paid by the Agent to such Lender which are received by the Agent and which, pursuant to this Agreement, are paid over to such Lender for application in reduction of the outstanding principal balance of the Revolving Credit Loans. "NET PROCEEDS" means proceeds received by any Borrower or the Trust in cash from any Asset Disposition (including, without limitation, payments under notes or other debt securities received in connection with any Asset Disposition), net of: (a) the transaction costs of such sale, lease, transfer or other disposition; (b) any tax liability arising from such transaction; and (c) amounts applied to repayment of Indebtedness (other than the Secured Obligations) secured by a Lien on the asset or property disposed. "NET WORTH" means, with respect to any Person, such Person's total shareholder's equity (including capital stock, additional paid-in capital and retained earnings, after deducting treasury stock) which would appear as such on a balance sheet of such Person prepared in accordance with GAAP. "NON-RATABLE LOAN" means a Revolving Credit Loan made by NationsBank in accordance with the provisions of SECTION 4.8(B). "NOTE" means any of the Revolving Credit Notes and "NOTES" means more than one such Note. -23- 32 "NOTICE OF ASSIGNMENT" means a notice of assignment and estoppel certificate in form and substance satisfactory to the Agent in its absolute discretion pursuant to which, among other things, the Borrowers (or Trust) and the Agent provide notice to and seek acknowledgement from the Account Debtor under a Lease Agreement that such Lease Agreement has been collaterally assigned to the Agent for the benefit of the Secured Parties. "NOTICE OF BORROWING" means a written notice, or telephonic notice followed by a confirming same-day written notice, requesting a Borrowing of either a Prime Rate Revolving Credit Loan or a Eurodollar Revolving Credit Loan, which is given by telex or facsimile transmission in accordance with the applicable provisions of SECTION 2.2 and which specifies (i) the amount of the requested Borrowing, (ii) the date of the requested Borrowing, and (iii) if the requested Borrowing is of a Eurodollar Rate Revolving Credit Loan, the duration of the applicable Interest Period. "NOTICE OF CONVERSION OR CONTINUATION" has the meaning specified in SECTION 4.12. "OBLIGOR" means any Borrower, any Subsidiary Guarantor, the Trust and any other Person liable with respect to the Secured Obligations, whether as maker, endorser, guarantor, pledgor or otherwise, and whether such liability is direct, indirect, primary or secondary, and "OBLIGORS" means all of such Persons collectively. "OPERATING LEASE" means any lease (other than a lease constituting a Capitalized Lease Obligation) of real or personal property. "ORDERLY LIQUIDATION VALUE" means the orderly liquidation value of Inventory, as reflected by appraisals conducted pursuant to SECTION 8.12(f). "PBGC" means the Pension Benefit Guaranty Corporation and any successor agency. "PARTS INVENTORY" means airframe or engine parts or components held for sale by a Borrower with respect to which each of the following is true, as determined by the Agent in its absolute discretion: (a) such Inventory has been labeled for sale and is segregated by Inventory type, and (b) such Inventory is not rejected inventory, repairable Parts Inventory, or nonrepairable Parts Inventory. "PATENTS" means and includes, in each case whether now existing or hereafter arising, all of the Borrowers' right, title and interest in and to () any and all patents and patent applications, () inventions and improvements described and claimed therein, (c) reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (d) income, royalties, damages, claims and payments now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past and future infringements thereof, (e) rights to sue for past, present and future infringements thereof, and (f) all rights corresponding to any of the foregoing throughout the world. "PERMITTED ACQUISITIONS" means Acquisitions of Persons or Business Units in the business related to the businesses of the Borrowers provided (a) no Default or Event of Default exists before or after giving effect to such Acquisition, (b) the Borrowers are in compliance with the covenants set forth in SECTIONS 11.1, 11.2, 11.10 and 11.11 on a pro forma basis after giving effect to such Acquisition, (c) simultaneously with the consummation of such Acquisition, the Borrowers deliver to the Agent a certificate of the Financial Officer (i) setting forth the calculations required to establish the -24- 33 Borrowers' pro forma compliance with the requirements of SECTIONS 11.1, 11.2, 11.10 and 11.11 as of the date of the consummation of such Acquisition, and (ii) stating that no Default or Event of Default exists before or after giving effect to such Acquisition, (d) immediately after giving effect to the consummation of such Acquisition (including any Loans made hereunder to finance any portion of such Acquisition), Availability must be greater than $25,000,000, (e) Availability must remain above $20,000,000 for each of the 90 days after the date on which such Acquisition is consummated, (f) the purchase price for such Acquisition must not exceed $30,000,000, (g) the purchase price for all such Acquisitions consummated during any fiscal year must not exceed $40,000,000, and (h) the Borrowers shall, in the case of all Inventory (including engines, aircraft and airframes, and parts) that is purchased through a single Acquisition and that has a book value of $20,000,000 or more, or that is purchased through a series of Acquisitions and that has a book value of $30,000,000 or more in the aggregate, deliver to the Agent an appraisal, in form and substance satisfactory to the Agent and from an independent appraiser acceptable to the Agent, within 90 days after the consummation of such Acquisition. "PERMITTED AIRCRAFT PURCHASE MONEY INDEBTEDNESS" means Purchase Money Indebtedness of the Borrowers incurred after the Agreement Date for the purpose of acquiring aircraft to be used in a Borrower's inventory (a) which is secured by a Purchase Money Lien, (b) the aggregate principal amount of which does not exceed an amount equal to the lesser of (i) the cost (including the principal amount of such Indebtedness, whether or not assumed) of the aircraft subject to such Lien, and (ii) the fair value of such aircraft at the time of its acquisition, and (c) which, when aggregated with the principal amount of all other such Permitted Aircraft Purchase Money Indebtedness of the Borrowers at the time outstanding, does not exceed $50,000,000. For the purposes of this definition, no Purchase Money Indebtedness shall be considered Permitted Aircraft Purchase Money Indebtedness unless the Lenders have been provided with the opportunity to finance the Borrower's acquisition of the aircraft and the Required Lenders have declined to do so, and no additional Permitted Aircraft Purchase Money Indebtedness shall be permitted to be incurred by any Borrower during the occurrence or continuation of a Default or Event of Default. Also for the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of Capitalized Leases shall be computed as a Capitalized Lease Obligation. "PERMITTED INVESTMENTS" means Investments of the Borrowers in: (a) negotiable certificates of deposit and time deposits issued by NationsBank or by any United States bank or trust company having capital, surplus and undivided profits in excess of $100,000,000, (b) any direct obligation of the United States of America or any agency or instrumentality thereof which has a remaining maturity at the time of purchase of not more than one year and repurchase agreements relating to the same, (c) sales of inventory on credit in the ordinary course of business, (d) shares of capital stock, evidence of Indebtedness or other security acquired by the Borrowers in consideration for or as evidence of past-due or restructured Receivables in an aggregate face amount of such Receivables at any time not to exceed $1,000,000, (e) Guaranties permitted pursuant to SECTION 11.3, (f) those items described on SCHEDULE 1.1A - PERMITTED INVESTMENTS, (g) other Investments not in excess of $500,000 individually or $1,000,000 in the aggregate in any fiscal year of the Borrowers, and (h) Investments by the Borrowers in Permitted Acquisitions; provided, however, in no event shall the Borrowers' Investments in Kellstrom International exceed $50,000 in the aggregate. "PERMITTED LIENS" means: (a) Liens securing taxes, assessments and other governmental charges or levies (excluding any Lien imposed pursuant to any of the provisions of ERISA) or the claims of materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, but (i) in all cases only if payment shall not at the time be required to be made in accordance with SECTION 9.6, and (ii) in the case of warehousemen or landlords, only if such liens are junior to the Security Interest in any of the Collateral, (b) Liens consisting of deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers' compensation, unemployment insurance or similar legislation or under payment or performance bonds, (c) Liens constituting Permitted Encumbrances, as defined in the Mortgages, as well as other Liens on the Real Estate constituting encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property, which do not materially detract from the value of such property or impair the use thereof in the business of the Borrowers or their Subsidiaries, (d) Purchase Money Liens, (e) Liens shown on SCHEDULE 1.1B PERMITTED LIENS, and (f) Liens of the Agent, for the benefit of the Secured Parties, arising under this Agreement and the other Loan Documents. -25- 34 "PERMITTED PURCHASE MONEY INDEBTEDNESS" means Purchase Money Indebtedness of the Borrowers incurred after the Agreement Date for the purpose of acquiring an asset or assets other than Inventory (a) which is secured by a Purchase Money Lien, (b) the aggregate principal amount of which does not exceed an amount equal to the lesser of (i) the cost (including the principal amount of such Indebtedness, whether or not assumed) of the property (other than Inventory) subject to such Lien, and (ii) the fair value of such property (other than Inventory) at the time of its acquisition, and (c) which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations of the Borrowers at the time outstanding (excluding Permitted Aircraft Purchase Money Indebtedness), does not exceed $5,000,000. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of Capitalized Leases shall be computed as a Capitalized Lease Obligation. "PERSON" means an individual, limited liability company, corporation, partnership, association, trust or unincorporated organization, joint venture or other entity or a government or any agency or political subdivision thereof. "PLAN" means any employee benefit plan as defined in Section 3(3) of ERISA in respect of which a Borrower or any Related Company is, or within the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA. "PLEDGE AGREEMENT" means the Stock Pledge Agreement, dated as of the Effective Date, between Kellstrom and the Agent, for the ratable benefit of the Secured Parties, pursuant to which Kellstrom pledges to the Agent, for the benefit of the Secured Parties, all of the capital stock of each domestic Subsidiary of Kellstrom and 65% of the voting stock and 100% of the non-voting stock of each foreign Subsidiary of Kellstrom, as amended, modified or supplemented from time to time. "PRIME RATE" means on any day the interest rate per annum equal to the rate of interest publicly announced by the Agent at its head office in Atlanta, Georgia as its "prime" rate, as in effect on the last Business Day of the calendar month immediately preceding the month in which such day falls. The Agent lends at rates above and below the Prime Rate. "PRIME RATE LOAN" or "PRIME RATE REVOLVING CREDIT LOAN" means a Loan bearing interest at a simple per annum rate of interest equal to the Prime Rate PLUS the Applicable Margin. "PROHIBITED COUNTRY" means Afghanistan, Angola, Burundi, Cambodia, Congo, Cuba, Ethiopia, Haiti, Iraq, Lebanon, Liberia, Libya, Mozambique, Rwanda, Somalia, any part of the former Soviet Union other than Russia, Sudan, or any part of the former republic of Yugoslavia, or any other -26- 35 country with whom the United States does not then have full diplomatic relations or with respect to which an FAA "no fly" ruling is in effect. "PROJECTIONS" means the forecasted (a) balance sheets, (b) income statements and (c) cash flow statements of the Borrowers and their Consolidated Subsidiaries prepared in accordance with GAAP, together with appropriate supporting details and a statement of underlying assumptions, which shall be prepared for purposes of SECTIONS 5.1(a) and 6.1(o)(ii) for the Borrowers' 1999 through 2003 fiscal years on an annual basis, and which shall be prepared for purposes of SECTION 10.1(d) for a one-year period on a quarterly basis. "PROPORTIONATE SHARE" or "RATABLE", as applied to a Lender, means such Lender's share of an amount in Dollars or other property at the time of determination equal to (i) the Commitment Percentage of such Lender, or (ii) if the Commitments are terminated, the percentage of the total principal amount of Loans (plus Letter of Credit Obligations) outstanding at such time obtained by dividing the principal amount of the Loans (plus Letter of Credit Obligations) then owing to such Lender by the total principal amount of all Loans (plus Letter of Credit Obligations) then owing to all Lenders. "PROPRIETARY RIGHTS" means all of the Borrowers' now owned and hereafter arising or acquired: Patents, Copyrights, Trademarks, including, without limitation, those Proprietary Rights set forth on SCHEDULE 6.1(cc) hereto, and all other rights under any of the foregoing, all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing, and all rights to sue for past, present and future infringement of any of the foregoing. "PURCHASE MONEY INDEBTEDNESS" means (a) Indebtedness created to secure the payment of all or any part of the purchase price of any property, (b) any Indebtedness incurred at the time of the acquisition of any property for the purpose of financing all or any part of the purchase price thereof, and (c) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time of any such renewal, extension or refinancing. "PURCHASE MONEY LIEN" means any Lien securing Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the property the purchase price of which was financed through the incurrence of the Permitted Purchase Money Indebtedness or Permitted Aircraft Purchase Money Indebtedness secured by such Lien. "REAL ESTATE" means all of the Borrowers' now or hereafter owned or leased estates in real property, including, without limitation, all fees, leaseholds and future interests, together with all of the Borrowers' now or hereafter owned or leased interests in the improvements and emblements thereon, the fixtures attached thereto and the easements appurtenant thereto, including, without limitation the real property described on SCHEDULE 6.1(x). "RECEIVABLES" means and includes, as to each Borrower, (a) any and all rights to the payment of money or other forms of consideration of any kind (whether classified under the Uniform Commercial Code as accounts, contract rights, chattel paper, general intangibles, or otherwise) including, but not limited to, accounts receivable, letters of credit and the right to receive payment thereunder, chattel paper and the right to receive payment thereunder (including the right to receive payment under any Lease Agreement), tax refunds, insurance proceeds, Contract Rights, notes, drafts, instruments, documents, acceptances, and all other debts, obligations and liabilities in whatever form from any Person, (b) all guarantees, security and Liens for payment thereof, (c) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be -27- 36 represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (d) all proceeds of any of the foregoing. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System (or any successor). "REIMBURSEMENT AGREEMENT" means, with respect to a Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single document or several documents) as NationsBank may employ in the ordinary course of business for its own account, with such modifications thereto as may be agreed upon by NationsBank and the Borrowers, provided that such application and agreement and any modifications thereto are not inconsistent with the terms of this Agreement. "REIMBURSEMENT OBLIGATIONS" means the reimbursement or repayment obligations of the Borrowers to NationsBank with respect to Letters of Credit pursuant to SECTION 3.6 or pursuant to a Reimbursement Agreement with respect to amounts that have been drawn under Letters of Credit. "RELATED COMPANY" means any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as any Borrower; (ii) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with any Borrower; or (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as any Borrower, any corporation described in CLAUSE (i) above or any partnership, trade or business described in CLAUSE (ii) above. "RELEASE" means release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any property, including the movement of Contaminants through or in the air, soil, surface water or groundwater. "REMEDIAL ACTION" means actions required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "REPORTABLE EVENT" has the meaning set forth in Section 4043(b) of ERISA, but shall not include a Reportable Event as to which the provision for 30 days notice to the PBGC is waived under applicable regulations. "REQUIRED LENDERS" means, at any time, any combination of Lenders whose Commitment Percentages at such time aggregate in excess of 50%; provided, however, that if any Lender shall have failed to fund its Proportionate Share of any Loan in accordance with the terms of this Agreement, then, for so long as such failure continues, the term "Required Lenders" shall mean Lenders (excluding such Lender whose failure to fund its Proportionate Share of any Loan has not been cured) whose Commitment Percentages (computed after excluding the defaulting Lender's Commitment from the Total Commitment) at such time aggregate in excess of 50%; provided further, however, that if the Commitments have been terminated, the term "Required Lenders" shall mean Lenders (excluding each Lender whose failure to fund its Proportionate Share of any Loan has not been cured) holding Loans (plus -28- 37 Letter of Credit Obligations) representing in excess of 50% of the aggregate principal amount of Loans and Letter of Credit Obligations (excluding the Loans and Letter of Credit Obligations owing to the defaulting Lender) outstanding at such time. "RESTRICTED DIVIDEND PAYMENT" means any dividend, distribution or payment on or with respect to (a) any shares of a Person's capital stock (other than dividends payable solely in shares of its capital stock) or (b) any partnership or other ownership interest in a Person, excluding, however, any such dividend, distribution or payment to any Borrower by any Subsidiary of such Borrower. "RESTRICTED PAYMENT" means (a) any redemption or prepayment or other retirement, prior to the stated maturity thereof or prior to the due date of any regularly scheduled installment or amortization payment with respect thereto, of any Indebtedness for Money Borrowed, (b) any redemption, retirement or payment with respect to the Subordinated Indebtedness other than in accordance with any subordination agreement or provisions applicable thereto, (c) the payment by any Person of the principal amount of or interest on any Indebtedness (other than trade debt) owing to a shareholder, partner or equity holder of such Person or to any Affiliate of any such shareholder, partner or equity holder, and (d) the payment of any management, consulting or similar fee by any Person to any Affiliate of such Person; provided that the foregoing shall not prohibit any redemption or retirement of the Convertible Subordinated Notes in connection with the conversion of such Convertible Subordinated Notes to equity in accordance with the terms thereof and any mandatory redemption of the Equitable Subordinated Loan required by Section 4.1 or 4.5 of the Securities Purchase Agreement relating to the Equitable Subordinated Loan. "RESTRICTED PURCHASE" means any payment on account of the purchase, redemption or other acquisition or retirement by a Person of any (a) shares of such Person's capital stock (except shares acquired on the conversion thereof into other shares of capital stock of such Person), (b) partnership interest in such Person, if such Person is a partnership, or (c) membership interest in such Person, if such Person is a limited liability company. "REVOLVING CREDIT FACILITY" means the principal amount of $250,000,000 or such lesser or greater amount as shall be agreed upon from time to time in writing by the Agent, the Lenders and the Borrowers; provided, however, at the request of the Borrowers, but subject to the Agent's approval in its sole discretion and further subject to the Agent's ability to obtain additional commitments based on existing market conditions, including the payment by the Borrowers of reasonable fees, the "Revolving Credit Facility" may be increased to $300,000,000 as long as the average monthly outstanding principal balance under the Revolving Credit Facility has equaled or exceeded $150,000,000 for the immediately preceding three consecutive months and no Event of Default exists; provided further, however, that the Borrowers shall execute and deliver such promissory notes, agreements, certificates and legal opinions in connection with such increase as may be requested by the Agent. "REVOLVING CREDIT LOANS" means loans made to the Borrowers pursuant to SECTION 2.1. "REVOLVING CREDIT NOTE" means each Revolving Credit Note made by the Borrowers payable to the order of a Lender evidencing the joint and several obligation of the Borrowers to pay the aggregate unpaid principal amount of the Revolving Credit Loans made to them by such Lender (and any promissory note or notes that may be issued from time to time in substitution, renewal, extension, replacement or exchange therefor whether payable to such Lender or to a different Lender in connection with a Person becoming a Lender after the Effective Date or otherwise) substantially in the form of -29- 38 EXHIBIT A hereto, with all blanks properly completed, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or refinanced. "SCHEDULE OF EQUIPMENT" means a schedule delivered by the Borrowers to the Agent pursuant to the provisions of SECTION 8.12(c). "SCHEDULE OF INVENTORY" means a schedule delivered by the Borrowers to the Agent pursuant to the provisions of SECTION 8.12(b). "SCHEDULE OF RECEIVABLES" means a schedule delivered by the Borrowers to the Agent pursuant to the provisions of SECTION 8.12(a). "SECURED OBLIGATIONS" means, in each case whether now in existence or hereafter arising, (a) the principal of, and interest and premium, if any, on, the Loans, and any fees payable in connection with the Loans, (b) the Reimbursement Obligations and all other obligations of the Borrowers to the Agent or any Lender arising in connection with the issuance of Letters of Credit, (c) all reimbursement and other obligations of any Borrower to NationsBank, the Agent and the Lenders arising in connection with the VRDN Documents, and (d) all indebtedness, liabilities, obligations, covenants and duties of the Borrowers to the Agent or to the Lenders (or any Affiliate of any Lender) of every kind, nature and description arising under or in respect of this Agreement, the Notes or any of the other Loan Documents or the Banking Relationship, whether direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note, and whether or not for the payment of money, including without limitation, fees required to be paid pursuant to ARTICLE 4 and expenses required to be paid or reimbursed pursuant to SECTION 15.2. "SECURED PARTIES" means, collectively, the Agent, the Syndication Agent, the Lenders, and each Affiliate of each of the foregoing. "SEC" means the Securities and Exchange Commission or any successor commission. "SECURITY DOCUMENTS" means each of the following: (a) the Mortgages, (b) the Airframe and Engine Mortgage, (c) the Mortgage Supplements, (d) the Financing Statements, (e) the Pledge Agreement, -30- 39 (f) the Trust Guaranty, (g) the Trademark Assignment, and (h) each other writing executed and delivered by any Obligor securing any of the Secured Obligations. "SECURITY INTEREST" means the Liens of the Agent, for the benefit of the Secured Parties, on and in the Collateral effected hereby or by any of the Security Documents or pursuant to the terms hereof or thereof. "SETTLEMENT DATE" means each Business Day after the Effective Date selected by the Agent in its sole discretion subject to and in accordance with the provisions of SECTION 4.8(B) as of which a Settlement Report is delivered by the Agent and on which settlement is to be made among the Lenders in accordance with the provisions of SECTION 4.8. "SETTLEMENT REPORT" means each report, substantially in the form attached hereto as EXHIBIT E, prepared by the Agent and delivered to each Lender and setting forth, among other things, as of the Settlement Date indicated thereon and as of the next preceding Settlement Date, the aggregate principal balance of all Revolving Credit Loans outstanding, each Lender's Commitment Percentage thereof, each Lender's Net Outstandings and all Non-Ratable Loans made, and all payments of principal, interest and fees received by the Agent from the Borrowers during the period beginning on such next preceding Settlement Date and ending on such Settlement Date. "SUBORDINATED INDEBTEDNESS" means (a) the Indebtedness of the Borrowers evidenced by the Convertible Subordinated Notes, including all principal, interest and premium, if any, thereon, (b) the Equitable Subordinated Loan, including all principal, interest and premium, if any, thereon, and (c) any other Indebtedness for Money Borrowed of the Borrowers which is subordinated to the Secured Obligations on terms and conditions acceptable to the Agent and the Lenders in their sole discretion. "SUBSIDIARY" (a) when used to determine the relationship of a Person to another Person, means a Person of which an aggregate of 50% or more of the stock of any class or classes or 50% or more of other ownership interests is owned of record or beneficially by such other Person, or by one or more Subsidiaries of such other Person, or by such other Person and one or more Subsidiaries of such Person, (i) if the holders of such stock, or other ownership interests, (A) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or other individuals performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency, or (B) are entitled, as such holders, to vote for the election of a majority of the directors (or individuals performing similar functions) of such Person, whether or not the right so to vote exists by reason of the happening of a contingency, or (ii) in the case of such other ownership interests, if such ownership interests constitute a majority voting interest, and -31- 40 (b) when used with respect to a Plan, ERISA or a provision of the Internal Revenue Code pertaining to employee benefit plans, also means any corporation, trade or business (whether or not incorporated) which is under common control with any Borrower and is treated as a single employer with such Borrower under Section 414(b) or (c) of the Internal Revenue Code and the regulations thereunder. "SUBSIDIARY GUARANTOR" has the meaning specified in SECTION 9.12. "SUBSIDIARY GUARANTY" has the meaning specified in SECTION 9.12. "SUPPORTING LETTER OF CREDIT" has the meaning specified in SECTION 3.9. "TERMINATION DATE" means (a) December 14, 2003 or such later date as to which the same may be extended pursuant to the provisions of SECTION 2.5, (b) such earlier date as the Secured Obligations shall have been accelerated pursuant to the provisions of SECTION 12.2, (c) such earlier date as all Secured Obligations shall have been irrevocably paid in full and the Revolving Credit Facility shall have been terminated, (d) such earlier date that is 180 days prior to the stated maturity date of the next to mature of any of the Convertible Subordinated Notes, unless prior to the date that is 180 days prior to the stated maturity of the next to mature of any of Convertible Subordinated Notes, either (i) such Convertible Subordinated Notes have been converted to equity, or (ii) Kellstrom has secured a binding commitment letter satisfactory to the Required Lenders in their absolute discretion pursuant to which a Person satisfactory to the Required Lenders agrees to refinance the next to mature of any of the Convertible Subordinated Notes on or prior to their stated maturity date. "TERMINATION EVENT" means (a) a Reportable Event, or (b) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (c) the institution of proceedings to terminate a Plan by the PBGC under Section 4042 of ERISA, or the appointment of a trustee to administer any Plan. "TOTAL COMMITMENT" means the sum of the Commitments. "TRADEMARK ASSIGNMENT" means the Conditional Assignment and Trademark Security Agreement, dated on or about the Effective Date, by the Borrowers to the Agent for the benefit of the Secured Parties, as the same may be amended, modified or supplemented from time to time. "TRADEMARKS" means and includes in each case whether now existing or hereafter arising, all of the Borrowers' right, title and interest in and to (a) trademarks (including service marks), trade names and trade styles and the registrations and applications for registration thereof and the goodwill of the business symbolized by the trademarks, (b) licenses of the foregoing, whether as licensee or licensor, (c) renewals thereof, (d) income, royalties, damages and payments now or hereafter due and/or payable with respect thereto, including, without limitation, damages, claims and payments for past and future infringements thereof, (e) rights to sue for past, present and future infringements thereof, including the right to settle suits involving claims and demands for royalties owing, and (f) all rights corresponding to any of the foregoing throughout the world. "TRUST" means that certain trust formed pursuant to that certain Amended and Restated Trust Agreement 019, dated as of March 26, 1990, and any other trust formed for the purpose of holding title to Aircraft Inventory or Engine Inventory. -32- 41 "TRUST GUARANTY" has the meaning specified in SECTION 9.12. "TYPE" when used in respect of any Loan or Borrowing, shall refer to the rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. "UNFUNDED CAPITAL EXPENDITURES" means Capital Expenditures which are paid for by a Person other than with the proceeds of Indebtedness for Money Borrowed (other than the Loans) incurred to finance such Capital Expenditures and other than those represented by Capitalized Lease Obligations. "UNFUNDED VESTED ACCRUED BENEFITS" means with respect to any Plan at any time, the amount (if any) by which (a) the present value of all vested nonforfeitable benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan. "UNIFORM COMMERCIAL CODE" or "UCC" means the Uniform Commercial Code as in effect from time to time in the State of Georgia. "VRDN ASSIGNMENT" means the Collateral Assignment of Agreements Affecting Real Estate, to be executed by Kellstrom in favor of NationsBank in connection with the VRDN Letter of Credit. "VRDN DOCUMENTS" means collectively the VRDN Assignment, the VRDN Guaranty, the VRDN Letter of Credit, the VRDN Mortgage, the VRDN Reimbursement Agreement, and each other instrument, agreement or document executed by the Borrowers or any Subsidiary of the Borrowers in connection with the VRDN Letter of Credit, whether on or after the Effective Date. "VRDN GUARANTY" means the Corporate Guaranty Agreement to be executed by Kellcad, Aero Support, ITC, Aerocar Aviation, and Aerocar Parts in favor of NationsBank in connection with the VRDN Letter of Credit. "VRDN LETTER OF CREDIT" means the Irrevocable Letter of Credit proposed to be issued by NationsBank, for the account of Kellstrom, in favor of Norwest Bank Minnesota, N.A., as Trustee, in the face amount of up to $6,750,000. "VRDN MORTGAGE" means the Mortgage, Assignment of Rents and Security Agreement to be executed by Kellstrom in favor of NationsBank in connection with the VRDN Letter of Credit. "VRDN REAL ESTATE" means Kellstrom's owned real property located at 14000 N.W. 4th Street, Sunrise, Florida. "VRDN REIMBURSEMENT AGREEMENT" means the Letter of Credit Reimbursement Agreement to be executed by Kellstrom and NationsBank in connection with the VRDN Letter of Credit. "WHOLLY-OWNED SUBSIDIARY", when used to determine the relationship of a Subsidiary to a Person, means a Subsidiary all of the issued and outstanding shares (other than directors' qualifying shares) of the capital stock of which shall at the time be owned by such Person or one or more of such Person's Wholly-Owned Subsidiaries or by such Person and one or more of such Person's Wholly-Owned Subsidiaries. -33- 42 SECTION 1.2. GENERAL. All terms of an accounting nature not specifically defined herein shall have the meaning ascribed thereto by GAAP. The terms accounts, chattel paper, contract rights, documents, equipment, instruments, general intangibles and inventory, as and when used in this Agreement or the Security Documents, shall have the meanings given those terms in the Uniform Commercial Code. Unless otherwise specified, a reference in this Agreement to a particular section or subsection is a reference to that section or subsection of this Agreement, and the words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision, section or subsection of this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Words denoting individuals include corporations and vice versa. References to any legislation or statute or code, or to any provisions of any legislation or statute or code, shall include any modification or reenactment of, or any legislative, statutory or code provision substituted for, such legislation, statute or code or provision thereof. References to any document or agreement (including this Agreement) shall include references to such document or agreement as amended, novated, supplemented, modified or replaced from time to time, so long as and to the extent that such amendment, novation, supplement, modification or replacement is either not prohibited by the terms of this Agreement or is consented to by the Required Lenders and the Agent. References to any Person include its successor or permitted substitutes and assigns. ARTICLE 2 REVOLVING CREDIT FACILITY SECTION 2.1. REVOLVING CREDIT LOANS. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, each Lender agrees, severally, but not jointly, to make Revolving Credit Loans to the Borrowers from time to time from the Effective Date to but not including the Termination Date, as requested or deemed requested by the Borrowers in accordance with the terms of SECTION 2.2, in amounts equal to such Lender's Commitment Percentage of each such Loan requested or deemed requested hereunder up to an aggregate amount at any one time outstanding equal to such Lender's Commitment Percentage of the Borrowing Base; provided, however, that the aggregate principal amount of all outstanding Revolving Credit Loans (after giving effect to the Loans requested) shall not exceed the Borrowing Base. It is expressly understood and agreed that the Lenders may and at present intend to use the Borrowing Base as a maximum ceiling on Revolving Credit Loans to the Borrowers; PROVIDED, HOWEVER, that it is agreed that should the Revolving Credit Loans exceed the ceiling so determined or any other limitation set forth in this Agreement, such Revolving Credit Loans shall nevertheless constitute Secured Obligations and, as such, shall be entitled to all benefits thereof and security therefor. The principal amount of any Revolving Credit Loan which is repaid pursuant to SECTION 2.3(c) may be reborrowed by the Borrowers, subject to the terms and conditions of this Agreement, in accordance with the terms of this SECTION 2.1. The Agent's and each Lender's books and records reflecting the date and the amount of each Revolving Credit Loan and each repayment of principal thereof shall constitute PRIMA FACIE evidence of the accuracy of the information contained therein, subject to the provisions of SECTION 4.8. -34- 43 SECTION 2.2. MANNER OF BORROWING REVOLVING CREDIT LOANS. Borrowings under the Revolving Credit Facility shall be made as follows: (a) REQUESTS FOR BORROWING. (i) PRIME RATE REVOLVING CREDIT LOANS. A request for the Borrowing of a Prime Rate Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (A) with respect to the initial Borrowing to be made on the Effective Date, the Borrowers shall give the Agent an Initial Notice of Borrowing at least two Business Days prior to the proposed date of the Borrowing, and, as to subsequent Prime Rate Revolving Credit Loans, the Borrowers shall give the Agent a Notice of Borrowing before 11:00 a.m. (Atlanta time) on the proposed Borrowing date, all of which notices shall be irrevocable, (B) whenever a check or other item is presented to a Disbursing Bank for payment against a Disbursement Account in an amount greater than the then available balance in such account, such Disbursing Bank shall, and is hereby irrevocably authorized by the Borrowers to, give the Agent notice thereof, which notice shall be deemed to be an irrevocable request for a Prime Rate Revolving Credit Loan on the date of such notice in an amount equal to the excess of such check or other item over such available balance, (C) unless payment is otherwise made by the Borrowers, the becoming due of any amount required to be paid under this Agreement or any of the Notes as interest shall be deemed to be an irrevocable request for a Prime Rate Revolving Credit Loan on the due date in the amount required to pay such interest, (D) unless payment is otherwise made by the Borrowers, the becoming due of any other Secured Obligation shall be deemed to be an irrevocable request for a Prime Rate Revolving Credit Loan on the due date in the amount then so due, and such request shall be irrevocable, and (E) the receipt by the Agent of notification from NationsBank to the effect that a drawing has been made under a Letter of Credit and that the Borrowers have failed to reimburse NationsBank therefor in accordance with the terms of the Letter of Credit, the Reimbursement Agreement and ARTICLE 3, shall be deemed to be an irrevocable request for a Prime Rate Revolving Credit Loan on the date such notification is received in the amount of such drawing which is so unreimbursed. (ii) EURODOLLAR RATE REVOLVING CREDIT LOANS. The Borrowers may request a Eurodollar Rate Loan under the Revolving Credit Facility by giving the Agent a Notice of Borrowing (which notice shall be irrevocable) not later than 11:00 a.m. (Atlanta time) on the date three Business Days before the day on which the requested Eurodollar Rate Revolving Credit Loan is to be made; provided the Borrowers shall not be permitted to request, and the Lenders shall not be required to make, Eurodollar Rate Revolving Credit Loans at any time during the existence of an Event of Default. -35- 44 (iii) NOTIFICATION OF LENDERS. In the case of each Eurodollar Rate Revolving Credit Loan and, unless the Agent has elected periodic settlements pursuant to SECTION 4.8, in the case of each Prime Rate Revolving Credit Loan, the Agent shall promptly notify the Lenders of any Notice of Borrowing given or deemed given pursuant to this SECTION 2.2(a) by 12:00 noon (Atlanta time) on the proposed Borrowing date (in the case of Prime Rate Revolving Credit Loans) or by 3:00 p.m. (Atlanta time) three Business Days before the proposed Borrowing date (in the case of Eurodollar Rate Revolving Credit Loans). Not later than 1:30 p.m. on the proposed Borrowing date, each Lender will make available to the Agent, for the account of the Borrowers, at the Agent's Office in funds immediately available to the Agent, an amount equal to such Lender's Commitment Percentage of such Prime Rate Revolving Credit Loan or Eurodollar Rate Revolving Credit Loan, as the case may be. (b) DISBURSEMENT OF LOANS. Each Borrower hereby irrevocably authorizes the Agent to disburse the proceeds of each Borrowing requested, or deemed to be requested, pursuant to this SECTION 2.2 as follows: (i) the proceeds of each Borrowing requested under SECTION 2.2(a)(i)(a) (other than the Borrowing of the Initial Loans), 2.2(a)(i)(b) or 2.2(a)(ii) shall be disbursed by the Agent in Dollars in immediately available funds by wire transfer to a Disbursement Account or, in the absence of a Disbursement Account, by wire transfer to such other account as may be agreed upon by the Borrowers and the Agent from time to time, and the proceeds of the Initial Loans under SECTION 2.2(a)(i)(a) shall be disbursed in accordance with the Initial Notice of Borrowing; (ii) the proceeds of each Borrowing deemed requested under SECTION 2.2(a)(i)(c) or (d) shall be disbursed by the Agent by way of direct payment of the relevant interest or Secured Obligation; and (iii) the proceeds of each Borrowing deemed requested under SECTION 2.2(a)(i)(e) shall be disbursed by the Agent directly to NationsBank on behalf of the Borrower. SECTION 2.. REPAYMENT OF REVOLVING CREDIT LOANS. The Revolving Credit Loans will be repaid as follows: (a) Whether or not any Default or Event of Default has occurred, the outstanding principal amount of all the Revolving Credit Loans is due and payable, and shall be repaid by the Borrowers in full, not later than the Termination Date; (b) If at any time the aggregate outstanding unpaid principal amount of the Revolving Credit Loans exceeds the Borrowing Base in effect at such time, the Borrowers shall repay the Revolving Credit Loans in an amount sufficient to reduce the aggregate unpaid principal amount of such Revolving Credit Loans by an amount equal to such excess, together with accrued and unpaid interest on the amount so repaid to the date of repayment; (c) Each Borrower hereby instructs the Agent to repay the Revolving Credit Loans outstanding on any day in an amount equal to the amount, if any, received by the Agent on such day pursuant to SECTION 8.1(b); PROVIDED that payments received in excess of outstanding -36- 45 Revolving Credit Loans or payments received on account of Eurodollar Rate Loans which would otherwise result in prepayment of such Loans prior to the end of the Interest Period applicable thereto may, upon the instruction of the Borrowers to the Agent not later than 1:00 p.m. (Atlanta time) on any Business Day, be applied to the Cash Collateral Account; and (d) Each Eurodollar Rate Loan is due and payable on the last day of the Interest Period applicable thereto, except to the extent converted or continued in accordance with SECTIONS 4.12 and 4.13. Repayments pursuant to SECTION 2.3(b) or (c) shall be applied first to the Prime Rate Revolving Credit Loans and then, subject to the provisions of SECTION 2.3(c), to Eurodollar Rate Revolving Credit Loans. SECTION 2.4. REVOLVING CREDIT NOTES. Each Lender's Revolving Credit Loans and the joint and several obligation of the Borrowers to repay such Revolving Credit Loans shall also be evidenced by a Revolving Credit Note payable to the order of such Lender. Each Revolving Credit Note shall be dated the Effective Date (or the later "effective date" under any Assignment and Acceptance) and be duly and validly executed and delivered by the Borrowers. SECTION 2.5. EXTENSION OF REVOLVING CREDIT FACILITY. Upon the request of the Borrowers, the Lenders may, in their sole discretion, effective as of any anniversary of the Effective Date, agree to extend the Revolving Credit Facility for a period of time beyond the then effective Termination Date. Each such extension shall be effected by the Borrowers' and Lenders' execution and delivery of a written agreement evidencing such extension. ARTICLE 3 LETTER OF CREDIT FACILITY SECTION 3.1. AGREEMENT TO ISSUE. (a) Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, NationsBank agrees to issue for the account of the Borrowers one or more Letters of Credit in accordance with this ARTICLE 3, from time to time during the period commencing on the Effective Date and ending on the Termination Date. (b) Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, the VRDN Documents, NationsBank agrees to issue the VRDN Letter of Credit; provided that, NationsBank shall have no obligation to issue the VRDN Letter of Credit unless (i) the underlying bond to be secured by the VRDN Letter of Credit is issued on terms acceptable to the Agent contemporaneous with the issuance of the VRDN Letter of Credit on or before March 5, 1999, (ii) all of the VRDN Documents are satisfactory to NationsBank in its sole discretion, (iii) all conditions precedent to the issuance of the VRDN Letter of Credit, whether set forth in this Agreement or in the VRDN Documents, shall have been satisfied or waived, and (iv) all other matters with respect to the VRDN Documents and the VRDN Real Estate are satisfactory to NationsBank in its sole discretion, including without limitation all matters relating to Environmental Laws. -37- 46 SECTION 3.2. AMOUNTS. NationsBank shall not have any obligation to issue any Letter of Credit at any time: (a) if, after giving effect to the issuance of the requested Letter of Credit, (i) the aggregate Letter of Credit Obligations of the Borrowers would exceed the Letter of Credit Facility then in effect or (ii) the aggregate principal amount of the Revolving Credit Loans outstanding would exceed the Borrowing Base (after reduction for the Letter of Credit Reserve in respect of such Letter of Credit); or (b) which has a term longer than one calendar year or an expiration date after the last Business Day that is more than 15 days prior to the Termination Date. SECTION 3.3. CONDITIONS. The obligation of NationsBank to issue the VRDN Letter of Credit and any Letter of Credit is subject to the satisfaction of the conditions precedent contained in ARTICLE 5. In addition, the obligation of NationsBank to issue any Letter of Credit is subject to the satisfaction of the following additional conditions precedent in a manner satisfactory to the Agent and NationsBank: (a) the Borrowers shall have delivered to NationsBank and the Agent at such times and in such manner as NationsBank or the Agent may prescribe an application in form and substance satisfactory to NationsBank and the Agent for the issuance of the Letter of Credit, a Reimbursement Agreement and such other documents as may be required pursuant to the terms thereof, and the form and terms of the proposed Letter of Credit shall be satisfactory to NationsBank and the Agent; and (b) as of the date of issuance, no order of any court, arbitrator or governmental authority having jurisdiction or authority over NationsBank shall purport by its terms to enjoin or restrain banks generally from issuing letters of credit of the type and in the amount of the proposed Letter of Credit, and no law, rule or regulation applicable to banks generally and no request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over banks generally shall prohibit, or request that NationsBank refrain from, the issuance of letters of credit generally or the issuance of such Letter of Credit. SECTION 3.4. ISSUANCE OF LETTERS OF CREDIT. (a) REQUEST FOR ISSUANCE. The Borrowers shall give NationsBank and the Agent written notice of the Borrowers' request for the issuance of a Letter of Credit no later than six Business Days prior to the proposed date of issuance of the Letter of Credit. Such notice shall be irrevocable and shall specify the original face amount of the Letter of Credit requested, the effective date (which date shall be a Business Day) of issuance of such requested Letter of Credit, whether such Letter of Credit may be drawn in a single or in multiple draws, the date on which such requested Letter of Credit is to expire (which date shall be a Business Day earlier than the Business Day 15 days prior to the Termination Date), the purpose for which such Letter of Credit is to be issued and the beneficiary of the requested Letter of Credit. The Borrowers shall attach to such notice the form of the Letter of Credit that the Borrowers request to be issued. (b) RESPONSIBILITIES OF THE AGENT; ISSUANCE. The Agent shall determine, as of the Business Day immediately preceding the requested effective date of issuance of the Letter of Credit set forth in the notice from the Borrowers pursuant to SECTION 3.4(a), the amount of the unused Letter of Credit Facility and the Borrowing Base. If (i) the form of the Letter of Credit delivered by the Borrowers to the Agent is acceptable to NationsBank and the Agent in their sole discretion, (ii) the Agent has not received notice of a Default or an Event of Default from the Required Lenders specifically stating that the Required Lenders do not intend to fund their ratable portion of the Loans, (iii) the undrawn face amount of the requested Letter of Credit is less than or equal to the lesser of (A) the unused Letter of Credit Facility and (B) the unused Borrowing Base, and (iv) the Agent has received a certificate from the Borrowers stating that the applicable conditions set forth in ARTICLE 5 have been satisfied, then NationsBank will cause the Letter of Credit to be issued. -38- 47 (c) NOTICE OF ISSUANCE. Promptly after the issuance of any Letter of Credit, NationsBank shall give the Agent written or facsimile notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of such Letter of Credit, and the Agent shall give each Lender written or facsimile notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of such Letter of Credit. (d) NO EXTENSION OR AMENDMENT. No Letter of Credit shall be extended or amended unless the requirements of this SECTION 3.4 are met as though a new Letter of Credit were being requested and issued. SECTION 3.5. DUTIES OF NATIONSBANK. Any action taken or omitted to be taken by NationsBank under or in connection with any Letter of Credit or the VRDN Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not result in any liability of NationsBank to any Lender or relieve any Lender of its obligations hereunder to NationsBank. In determining whether to pay under any Letter of Credit or the VRDN Letter of Credit, NationsBank shall have no obligation to any Lender other than to confirm that any documents required to be delivered under such Letter of Credit or the VRDN Letter of Credit in connection with such drawing have been presented and appear on their face to comply with the requirements of such Letter of Credit or the VRDN Letter of Credit. SECTION 3.6. PAYMENT OF REIMBURSEMENT OBLIGATIONS. (a) PAYMENT TO ISSUER. Notwithstanding any provisions to the contrary in any Reimbursement Agreement, the Borrowers jointly and severally agree to reimburse NationsBank for any drawings (whether partial or full) under each Letter of Credit issued by NationsBank and agree to pay to NationsBank the amount of all other Reimbursement Obligations and other amounts payable to NationsBank under or in connection with such Letter of Credit immediately when due, irrespective of any claim, set-off, defense or other right which any Borrower may have at any time against NationsBank or any other Person. Notwithstanding any provisions to the contrary in the VRDN Reimbursement Agreement, Kellstrom agrees to reimburse NationsBank for any drawings (whether partial or full) under the VRDN Letter of Credit and agrees to pay to NationsBank the amount of all reimbursement obligations and other amounts payable to NationsBank under or in connection with the VRDN Letter of Credit immediately when due, irrespective of any claim, set-off, defense or other right which Kellstrom may have at any time against NationsBank or any other Person; provided the foregoing shall not constitute a waiver of any rights of the Borrowers for purposes other than this Agreement. -39- 48 (b) RECOVERY OR AVOIDANCE OF PAYMENTS. In the event any payment by or on behalf of any Borrower with respect to any Letter of Credit (or any Reimbursement Obligation relating thereto) or the VRDN Letter of Credit (or any reimbursement or other obligation relating thereto) received by NationsBank, or by the Agent and distributed by the Agent to the Lenders on account of their respective participations therein, is thereafter set aside, avoided or recovered from NationsBank or the Agent in connection with any receivership, liquidation or bankruptcy proceeding, the Lenders shall, upon demand by the Agent, pay to the Agent, for the account of the Agent or NationsBank, their respective Commitment Percentages of such amount set aside, avoided or recovered together with interest at the rate required to be paid by the Agent upon the amount required to be repaid by it. SECTION 3.7. PARTICIPATIONS. (a) PURCHASE OF PARTICIPATIONS. Immediately upon issuance by NationsBank of the VRDN Letter of Credit or any Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased and received without recourse or warranty an undivided interest and participation (i) in such VRDN Letter of Credit or such Letter of Credit, equal to such Lender's Commitment Percentage of the face amount thereof (including, without limitation, all obligations of the Borrowers with respect thereto, other than amounts owing to NationsBank under SECTION 4.2(d), and any security therefor or guaranty pertaining thereto), and (ii) in the case of the VRDN Letter of Credit, in each of the VRDN Documents delivered to NationsBank in connection with the issuance thereof. (b) SHARING OF LETTER OF CREDIT PAYMENTS. In the event that NationsBank makes a payment under the VRDN Letter of Credit or any Letter of Credit and NationsBank shall not have been repaid such amount pursuant to SECTION 3.6, then NationsBank shall be deemed to have made a Non-Ratable Loan in the amount of such payment, and notwithstanding the occurrence or continuance of a Default or Event of Default at the time of such payment, such Non-Ratable Loan shall be subject to the provisions of SECTION 4.8 and the absolute obligations of the Lenders to pay for their respective participation interests therein. (c) SHARING OF REIMBURSEMENT OBLIGATION PAYMENTS. Whenever NationsBank receives a payment from or on behalf of the Borrowers on account of a Reimbursement Obligation (or any reimbursement or other obligation with respect to the VRDN Letter of Credit) as to which the Agent has previously received for the account of NationsBank payment from a Lender pursuant to this SECTION 3.7, NationsBank shall promptly pay to the Agent, for the benefit of such Lender, such Lender's Commitment Percentage of the amount of such payment from the Borrowers in Dollars. Each such payment shall be made by NationsBank on the Business Day on which NationsBank receives immediately available funds pursuant to the immediately preceding sentence, if received prior to 11:00 a.m. (Atlanta time) on such Business Day and otherwise on the next succeeding Business Day. (d) DOCUMENTATION. Upon the request of any Lender, the Agent shall furnish to such Lender copies of any VRDN Document, Letter of Credit, Reimbursement Agreement or application for any Letter of Credit and such other documentation as may reasonably be requested by such Lender. (e) OBLIGATIONS IRREVOCABLE. The obligations of each Lender to make payments to the Agent with respect to the VRDN Letter of Credit and any Letter of Credit and their -40- 49 participations therein pursuant to the provisions of SECTION 4.8 hereof or otherwise and the obligations of the Borrowers to make payments to NationsBank or to the Agent, for the account of Lenders, shall be irrevocable, shall not be subject to any qualification or exception whatsoever (except with respect to the Agent's gross negligence or willful misconduct) and shall be made in accordance with the terms and conditions of this Agreement (assuming, in the case of the obligations of the Lenders to make such payments, that the Letter of Credit has been issued in accordance with SECTION 3.4), including, without limitation, any of the following circumstances: (i) Any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) The existence of any claim, set-off, defense or other right which any Borrower may have at any time against a beneficiary named in the VRDN Letter of Credit or a Letter of Credit or any transferee of the VRDN Letter of Credit or any Letter of Credit (or any Person for whom any such transferee may be acting), any Lender, NationsBank or any other Person, whether in connection with this Agreement, the VRDN Letter of Credit or any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between any Borrower or any other Person and the beneficiary named in the VRDN Letter of Credit or any Letter of Credit); (iii) Any draft, certificate or any other document presented under the VRDN Letter of Credit or any Letter of Credit upon which payment has been made in good faith and according to its terms proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) The surrender or impairment of any Collateral or any other security for the Secured Obligations or the performance or observance of any of the terms of any of the Loan Documents; (v) The occurrence of any Default or Event of Default; or (vi) The Agent's failure to deliver to any Lender the notice provided for in SECTION 3.4(c). SECTION 3.8. INDEMNIFICATION, EXONERATION. (a) INDEMNIFICATION. In addition to amounts payable as elsewhere provided in this ARTICLE 3, the Borrowers jointly and severally agree to protect, indemnify, pay and save the Lenders and the Agent harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which any Lender or the Agent may incur or be subject to as a consequence, directly or indirectly, of (i) the issuance of the VRDN Letter of Credit or any Letter of Credit, other than as a result of its gross negligence or willful misconduct, as determined by a court of competent jurisdiction, or (ii) the failure of NationsBank to honor a drawing under the VRDN Letter of Credit or any Letter of Credit as a result of any act or omission, whether rightful or -41- 50 wrongful, of any present or future DE JURE or DE FACTO governmental authority (all such acts or omissions being hereinafter referred to collectively as "Government Acts"). (b) ASSUMPTION OF RISK BY THE BORROWERS. As among the Borrowers, the Lenders and the Agent, the Borrowers assume all risks of the acts and omissions of, or misuse of the VRDN Letter of Credit or any of the Letters of Credit by, the respective beneficiaries thereof. In furtherance and not in limitation of the foregoing, subject to the provisions of the applications for the issuance of the VRDN Letter of Credit and Letters of Credit, the Lenders and the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any Person in connection with the application for and issuance of and presentation of drafts with respect to the VRDN Letter of Credit or any of the Letters of Credit, even if it should prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign the VRDN Letter of Credit or any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of the VRDN Letter of Credit or any Letter of Credit to comply duly with conditions required in order to draw upon the VRDN Letter of Credit or such Letter of Credit (provided that the Borrowers reserve all of their rights and remedies against NationsBank as issuer of the VRDN Letter of Credit and the other Letters of Credit for improper payment made by NationsBank); (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under the VRDN Letter of Credit or any Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of the VRDN Letter of Credit or any Letter of Credit of the proceeds of any drawing under the VRDN Letter of Credit or such Letter of Credit; or (viii) any consequences arising from causes beyond the reasonable control of the Lenders or the Agent, including, without limitation, any Government Acts. None of the foregoing shall affect, impair or prevent the vesting of any of the Agent's rights or powers under this SECTION 3.8. (c) EXONERATION. In furtherance and extension, and not in limitation, of the specific provisions set forth above, any action taken or omitted by the Agent, NationsBank or any Lender -42- 51 under or in connection with the VRDN Letter of Credit or any of the Letters of Credit or any related certificates, if taken or omitted in good faith, shall not result in any liability of any Lender or the Agent to the Borrowers or relieve the Borrowers of any of their obligations hereunder to any such Person. SECTION 3.9. SUPPORTING LETTER OF CREDIT; CASH COLLATERAL. If, notwithstanding the provisions of SECTION 3.2(b), the VRDN Letter of Credit or any Letter of Credit is outstanding on the Termination Date, then on or prior to such Termination Date, or in any case upon the occurrence of an Event of Default, the Borrowers shall, promptly on demand by the Agent, deposit with the Agent, for the ratable benefit of the Lenders, with respect to the VRDN Letter of Credit and each Letter of Credit then outstanding, as the Agent shall specify, either (a) a standby letter of credit (a "Supporting Letter of Credit") in form and substance satisfactory to the Agent, issued by an issuer reasonably satisfactory to the Agent in an amount equal to the greatest amount for which each such letter of credit may be drawn, under which Supporting Letter of Credit the Agent is entitled to draw amounts necessary to reimburse the Agent and the Lenders for payments made by the Agent and the Lenders under each such letter of credit or under any reimbursement or guaranty agreement with respect thereto, or (b) Cash Collateral in an amount necessary to reimburse the Agent and the Lenders for payments made by the Agent and the Lenders under each such letter of credit or under any reimbursement or guaranty agreement with respect thereto. Such Supporting Letter of Credit or Cash Collateral shall be held by the Agent for the benefit of the Lenders, as security for, and to provide for the payment of, the Reimbursement Obligations and all reimbursement and other obligations with respect to the VRDN Letter of Credit. In addition, the Agent may at any time after the Termination Date apply any or all of such Cash Collateral to the payment of any or all of the Secured Obligations then due and payable. At the Borrowers' request, but subject to the Agent's reasonable approval, the Agent shall invest any Cash Collateral consisting of cash or any proceeds of Cash Collateral consisting of cash in Cash Equivalents, and any commissions, expenses and penalties incurred by the Agent in connection with any investment and redemption of such Cash Collateral shall be Secured Obligations hereunder secured by the Collateral, shall bear interest at the rates provided herein for the Loans and shall be charged to the Borrowers' Loan Accounts, or, at the Agent's option, shall be paid out of the proceeds of any earnings received by the Agent from the investment of such Cash Collateral as provided herein or out of such cash itself. The Agent makes no representation or warranty as to, and shall not be responsible for, the rate of return, if any, earned on any Cash Collateral. Any earnings on Cash Collateral shall be held as additional Cash Collateral on the terms set forth in this SECTION 3.9. -43- 52 ARTICLE 4 GENERAL LOAN PROVISIONS SECTION 4.1. INTEREST. (a) PRIME RATE LOANS. Subject to the provisions of SECTION 4.1(d), the Borrowers will pay interest on the unpaid principal amount of each Prime Rate Loan, for each day from the day such Loan is made until such Loan is paid (whether at maturity, by reason of acceleration, or otherwise) or is converted to a Loan of a different Type, at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Prime Rate, payable monthly in arrears as it accrues on each Interest Payment Date. As of the close of business on the last day of the calendar month preceding the Effective Date the Prime Rate was 7.75%, and consequently the initial rate of interest for all Loans made on the Effective Date shall be 7.75%, subject to adjustment after the Effective Date as set forth herein. (b) EURODOLLAR RATE LOANS. Subject to the provisions of SECTION 4.1(d), the Borrowers will pay interest on the unpaid principal amount of each Eurodollar Rate Loan for the applicable Interest Period at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Eurodollar Rate, payable in arrears as it accrues on each Interest Payment Date, and when such Eurodollar Rate Loan is due (whether at maturity, by reason of acceleration or otherwise). (c) OTHER SECURED OBLIGATIONS. The Borrowers will, to the extent permitted by Applicable Law, pay interest on the unpaid principal amount of any Secured Obligation that is due and payable, other than the Loans, in accordance with SECTIONS 4.1(a) or (d), as applicable, as if such Secured Obligation were a Prime Rate Revolving Credit Loan. (d) DEFAULT RATE. If there shall occur and be continuing an Event of Default, at the election of the Required Lenders, the unpaid principal amount of the Loans and other Secured Obligations shall no longer bear interest in accordance with the terms of SECTION 4.1(a), (b) or (c), but shall bear interest for each day from the date of such Event of Default until such Event of Default shall have been cured or waived at a rate per annum equal to the sum of (i) the Default Margin and (ii) the rate otherwise applicable to such Loan or other Secured Obligation, payable on demand. The interest rate provided for in the preceding sentence shall, to the extent permitted by Applicable Law, apply to and accrue on the amount of any judgment entered with respect to any Secured Obligation and shall continue to accrue at such rate during any proceeding described in SECTION 12.1(g) or (h). (e) CALCULATION OF INTEREST. The interest rates provided for in SECTIONS 4.1(a), (b), (c) and (d) shall be computed on the basis of a year of 360 days and the actual number of days elapsed. (f) MAXIMUM RATE. It is not intended by the Lenders, and nothing contained in this Agreement or the Notes shall be deemed, to establish or require the payment of a rate of interest in excess of the maximum rate permitted by Applicable Law (the "Maximum Rate"). If, in any month, the Effective Interest Rate, absent such limitation, would have exceeded the Maximum Rate, then the Effective Interest Rate for that month shall be the Maximum Rate, and, if in future months, the Effective Interest Rate would otherwise be less than the Maximum Rate, then the Effective Interest Rate shall remain at the Maximum Rate until such time as the amount of -44- 53 interest paid hereunder equals the amount of interest which would have been paid if the same had not been limited by the Maximum Rate. In the event, upon payment in full of the Secured Obligations, the total amount of interest paid or accrued under the terms of this Agreement is less than the total amount of interest which would have been paid or accrued if the Effective Interest Rate had at all times been in effect, then the Borrowers shall, to the extent permitted by Applicable Law, pay to the Agent for the account of the Lenders an amount equal to the excess, if any, of (i) the lesser of (A) the amount of interest which would have been charged if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued had the Effective Interest Rate, at all times, been in effect and (ii) the amount of interest actually paid or accrued under this Agreement. In the event the Lenders receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall be applied to the reduction of the principal balance of the Secured Obligations, and if no such principal is then outstanding, such excess or part thereof remaining shall be paid to the Borrowers. SECTION 4.2. CERTAIN FEES. (a) CLOSING FEES. As additional consideration for the extensions of credit provided for hereunder, in addition to any interest due under this Agreement, on the Effective Date, the Borrowers shall pay to the Agent (for its own account except as otherwise agreed in writing between the Agent and the Lenders) a closing fee as set forth in that certain letter agreement, dated as of October 26, 1998, between the Borrowers and the Agent (the "Fee Letter"). The closing fee provided for in the Fee Letter shall compensate the Agent for the internal costs associated with the origination, structuring, processing, approving and closing of the transactions contemplated by this Agreement, but not including any out-of-pocket expenses for which the Borrowers have agreed to reimburse the Agent and the other Lenders, including, without limitation, the Agent's reasonable out-of-pocket expenses incurred in connection with its due diligence examination of the Borrowers and the closing of the transactions contemplated by this Agreement. Such closing fee shall be fully earned on the Effective Date and shall not be subject to refund or rebate. (b) AGENT FEE. For administration and other services performed by the Agent in connection with its continuing administration of this Agreement, the Borrowers shall pay to the Agent, for its own account, and not for the account of the Lenders, an annual fee as set forth in the Fee Letter, payable on the Effective Date and each anniversary thereof so long as any Loan or Letter of Credit that is not collateralized by cash or by a Supporting Letter of Credit acceptable to the Agent remains outstanding or the Revolving Credit Facility shall not have been terminated. The fee payable pursuant to the Fee Letter and this SECTION 4.2(b) shall be fully earned by the Agent on the date payment thereof is due and shall not be subject to refund or rebate. Payment of such fee shall not limit the Borrowers' obligations to reimburse the Agent for its out-of-pocket expenses as set forth in SECTION 15.2. (c) UNUSED LINE FEE. In connection with and as consideration for the holding available for the use of the Borrowers hereunder the full amount of the Revolving Credit Facility, the Borrowers will pay a fee to the Agent, for the ratable benefit of the Lenders, for each day from the Effective Date until the Termination Date, in an amount equal to 1/2% per annum of the unused portion of the Revolving Credit Facility for such day, if the average outstandings for Revolving Credit Loans for such month are less than $125,000,000, and in an amount equal to 3/8% per annum of the unused portion of the Revolving Credit Facility for such day, if the average outstandings for Revolving Credit Loans for such month are greater than or -45- 54 equal to $125,000,000. Such fee shall be payable monthly in arrears on each Interest Payment Date and shall be fully earned when due and payable and shall not be subject to refund or rebate. Such fee is not, and shall not be deemed to be, interest or a charge for the use of money. Such fee shall be calculated based on a year of 360 days and the actual number of days elapsed. (d) LETTER OF CREDIT FEES. (i) The Borrowers agree to pay to the Agent, for the ratable benefit of the Lenders, Letter of Credit fees equal to (a) 1.25% per annum, based on the average daily aggregate Letter of Credit Amount of all documentary Letters of Credit from time to time outstanding during the term of this Agreement, and (b) the Eurodollar Rate Margin then applicable to Revolving Credit Loans (as set forth in the definition of "Applicable Margin"), based on the average daily aggregate Letter of Credit Amount of all standby Letters of Credit from time to time outstanding during the term of this Agreement. Such fees shall be payable to the Agent for the ratable benefit of the Lenders in accordance with their respective Commitment Percentages monthly in arrears and shall be calculated based on a year of 360 days and the actual number of days elapsed. (ii) The Borrowers agree to pay to the Agent, for the account of the Agent, and not for the account of the Lenders, (a) a facing fee of .25% of the face amount of each Letter of Credit issued by the Agent, such fee being due and payable upon issuance of each Letter of Credit, and (b) the standard fees and charges of the Agent for issuing, administering, amending, renewing, paying and canceling Letters of Credit, as and when assessed. (iii) In connection with the VRDN Letter of Credit, the parties hereto agree that (a) an annual fee of 1% per annum of the stated amount of the VRDN Letter of Credit shall be shared by the Lenders on a ratable basis, and (b) all other fees and charges payable under the VRDN Reimbursement Agreement, including, without limitation, all administration fees payable by Kellstrom, shall be for the account of NationsBank and not for the account of the other Lenders. (e) COLLECTION FEE. During the period from and including the Effective Date to and including the Termination Date, the Borrowers will pay to the Agent for its own account, and not for the account of the Lenders, on the first day of each month, an amount of interest computed at the Effective Interest Rate applicable to Prime Rate Revolving Credit Loans on each remittance (other than a remittance received via wire transfer, automated clearinghouse transfer or otherwise in immediately available funds) received by the Agent against Receivables during the preceding month, from the close of business on the date of receipt of each such remittance until the close of business on the first Business Day following the receipt of the remittance, as compensation for delays in the collection and clearance of checks and other remittances. (f) GENERAL. All fees shall be fully earned by the identified recipient thereof when due and payable and, except as otherwise set forth herein or required by Applicable Law, shall not be subject to refund or rebate. All fees provided for in this SECTION 4.2 are for compensation for services and are not, and shall not be deemed to be, interest or a charge for the use of money. -46- 55 SECTION 4.3. MANNER OF PAYMENT. (a) Except as otherwise expressly provided in SECTION 8.1(b), each payment (including prepayments) by the Borrowers on account of the principal of or interest on the Loans or of any other amounts payable to the Lenders under this Agreement or any Note shall be made not later than 12:00 noon (Atlanta time) on the date specified for payment under this Agreement to the Agent, for the account of the Lenders, at the Agent's Office, in Dollars, in immediately available funds and shall be made without any setoff, counterclaim or deduction whatsoever. Any payment received after such time but before 1:00 p.m. (Atlanta time) on such day shall be deemed a payment on such date for the purposes of SECTION 12.1, but for all other purposes shall be deemed to have been made on the next succeeding Business Day. (b) The Borrowers hereby irrevocably authorize each Lender and each Affiliate of such Lender and each participant herein to charge any account of the Borrowers maintained with such Lender or such Affiliate or participant with such amounts as may be necessary from time to time to pay any Secured Obligations (whether or not owed to such Lender, Affiliate or participant) which are not paid when due, subject to any applicable cure period. (c) Each Lender hereby severally (but not jointly) represents that, under applicable law and treaties in effect on the date of this Agreement, no United States federal taxes will be required to be withheld by the Agent or the Borrowers with respect to any payments to be made to such Lender in respect of this Agreement. Each Lender that itself is not incorporated under the laws of the United States or a state thereof agrees severally (but not jointly) that, prior to the Effective Date and the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form delivered by it to the Borrowers and the Agent, it will deliver to the Borrowers and the Agent two duly completed copies of either United States Internal Revenue Service Form W8, 1001 or 4224, or successor applicable form, certifying in each case that such Lender is entitled to receive all payments under this Agreement and the Notes payable to it without deduction or withholding of any United States federal income taxes SECTION 4.4. GENERAL. If any payment under this Agreement or any Note shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day and such extension of time shall in such case be included in computing interest, if any, in accordance with such payment. SECTION 4.5. LOAN ACCOUNTS; STATEMENTS OF ACCOUNT. (a) Each Lender shall open and maintain on its books a loan account in the Borrowers' name (each, a "Loan Account" and collectively, the "Loan Accounts"). Each such Loan Account shall show as debits thereto each Loan made under this Agreement by such Lender to the Borrowers and as credits thereto all payments received by such Lender and applied to principal of such Loan, so that the balance of the loan account at all times reflects the principal amount due such Lender from the Borrowers. (b) The Agent shall maintain on its books a control account for the Borrowers in which shall be recorded (i) the amount of each disbursement made hereunder, (ii) the amount of any principal or interest due or to become due from the Borrowers hereunder, and (iii) the amount of any sum received by the Agent hereunder from the Borrowers and each Lender's ratable share therein. -47- 56 (c) The entries made in the accounts pursuant to SUBSECTIONS (a) and (b) shall be PRIMA FACIE evidence, in the absence of manifest error, of the existence and amounts of the obligations of the Borrowers therein recorded and in case of discrepancy between such accounts, in the absence of manifest error, the accounts maintained pursuant to SUBSECTION (b) shall be controlling. (d) The Agent will account separately to Kellstrom monthly with a statement of Loans, charges and payments made to and by the Borrowers pursuant to this Agreement, and such accounts rendered by the Agent shall be deemed final, binding and conclusive, save for manifest error, unless the Agent is notified by the Borrowers in writing to the contrary within 30 days of the date the account to Kellstrom was so rendered. Such notice by the Borrowers shall be deemed an objection to only those items specifically objected to therein. Failure of the Agent to render such account shall in no way affect the rights of the Agent or of the Lenders hereunder. SECTION 4.6. TERMINATION OF AGREEMENT. The Borrowers shall have the right, at any time, to terminate this Agreement upon not less than 60 days prior written notice to the Agent of their intention to terminate this Agreement, which notice shall specify the effective date of such termination. Upon receipt of such notice, the Agent shall promptly notify each Lender thereof. On the date specified in such notice, such termination shall be effected, PROVIDED, that the Borrowers shall, on or prior to such date, pay to the Agent, for the account of the Lenders, in same day funds, an amount equal to all Secured Obligations then outstanding, including, without limitation, all (i) accrued interest thereon, (ii) all accrued fees provided for hereunder, (iii) any amounts payable to the Lenders pursuant to this ARTICLE 4 or SECTIONS 15.2, 15.3, 15.14 and 15.23, and (iv) all amounts due and payable under the Fee Letter. In addition thereto, the Borrowers shall deliver to the Agent (y) an indemnity or Cash Collateral in form and substance acceptable to the Agent with respect to any checks or other instruments received by the Agent and credited to the Borrowers in calculating the payoff amount, and (z) in respect of the VRDN Letter of Credit and each outstanding Letter of Credit, either the Supporting Letter of Credit or the Cash Collateral as provided in SECTION 3.9. Following a notice of termination as provided for in this SECTION 4.6 and upon payment in full of the amounts specified in this SECTION 4.6, this Agreement shall be terminated and the Agent, the Lenders and the Borrowers shall have no further obligations to any other party hereto except for the indemnification obligations pursuant to SECTIONS 14.7 and 15.14 hereof. SECTION 4.7. MAKING OF LOANS. (a) NATURE OF OBLIGATIONS OF LENDERS TO MAKE LOANS. The obligations of the Lenders under this Agreement to make the Loans are several and are not joint or joint and several. (b) ASSUMPTION BY AGENT. Subject to the provisions of SECTION 4.8 and notwithstanding the occurrence or continuance of a Default or Event of Default or other failure of any condition to the making of Loans hereunder subsequent to the Loans to be made on the Effective Date, unless the Agent shall have received notice from the Required Lenders in accordance with the provisions of SECTION 4.7(c) prior to a proposed borrowing date that the Lenders will not make available to the Agent such Lenders' ratable portion of the amount to be borrowed on such date, the Agent may assume that the Lenders will make such portion available to the Agent in accordance with SECTION 2.2(a), and the Agent may, in reliance upon such assumption, make available to the Borrowers on such date a corresponding amount. If and to the extent any Lender shall not make such ratable portion available to the Agent, such Lender and the Borrowers severally agree to repay to the Agent forthwith on demand such corresponding -48- 57 amount, together with interest thereon for each day from the date such amount is made available to the Borrowers until the date such amount is repaid to the Agent at the Effective Interest Rate or, if lower, subject to SECTION 4.1(e), the Maximum Rate. If such Lender shall repay to the Agent such corresponding amount, the amount so repaid shall constitute such Lender's Commitment Percentage of the Loan made on such borrowing date for purposes of this Agreement. The failure of any Lender to make its Commitment Percentage of any Loan available shall not (without regard to whether the Borrowers shall have returned the amount thereof to the Agent in accordance with this SECTION 4.7) relieve it or any other Lender of its obligation, if any, hereunder to make its Commitment Percentage of such Loan available on such borrowing date, but no Lender shall be responsible for the failure of any other Lender to make its Commitment Percentage of such Loan available on the borrowing date. (c) DELEGATION OF AUTHORITY TO AGENT. Without limiting the generality of SECTION 14.1, each Lender expressly authorizes the Agent to determine on behalf of such Lender (i) the creation or elimination of any reserves (other than the Letter of Credit Reserve) against the Revolving Credit Facility and the Borrowing Base and (ii) whether or not Inventory or Receivables shall be deemed to constitute Eligible Domestic Receivables, Eligible Foreign Receivables, Eligible Domestic Leased Engine Inventory, Eligible Foreign Leased Engine Inventory, Eligible Leased Airframe Inventory or Eligible Inventoried Engine and Parts Inventory. Such authorization may be withdrawn by the Required Lenders by giving the Agent written notice of such withdrawal signed by the Required Lenders; PROVIDED, HOWEVER, that unless otherwise agreed by the Agent such withdrawal of authorization shall not become effective until the thirtieth Business Day after receipt of such notice by the Agent. Thereafter, the Required Lenders shall jointly instruct the Agent in writing regarding such matters with such frequency as the Required Lenders shall jointly determine. Unless and until the Agent shall have received written notice from the Required Lenders as to the existence of a Default, an Event of Default or some other circumstance which would relieve the Lenders of their respective obligations to make Loans hereunder, which notice shall be in writing and shall be signed by the Required Lenders and shall expressly state that the Required Lenders do not intend to make available to the Agent such Lenders' ratable share of Loans made after the effective date of such notice, the Agent shall be entitled to continue to make the assumptions described in SECTION 4.7(b). After receipt of the notice described in the preceding sentence, which shall become effective on the third Business Day after receipt of such notice by the Agent unless otherwise agreed by the Agent, the Agent shall be entitled to make the assumptions described in SECTION 4.7(b) as to any Loans as to which it has not received a written notice to the contrary prior to 11:00 a.m. (Atlanta time) on the Business Day next preceding the day on which the Loan is to be made. The Agent shall not be required to make any Loan as to which it shall have received notice by a Lender of such Lender's intention not to make its ratable portion of such Loan available to the Agent. Any withdrawal of authorization under this SECTION 4.7(c) shall not affect the validity of any Loans made prior to the effectiveness thereof. (d) OVERADVANCES. Notwithstanding anything to the contrary contained elsewhere in this SECTION 4.7 or this Agreement or the other Loan Documents, and whether or not a Default or Event of Default exists at the time, unless otherwise notified by the Required Lenders in accordance with SECTION 4.7(c), the Agent may in its discretion require all Lenders to honor requests or deemed requests by the Borrower for Revolving Credit Loans at a time that an Overadvance exists or which would result in an Overadvance and each Lender shall be obligated to continue to make its Proportionate Share of Revolving Credit Loans, up to a maximum amount outstanding equal to its Commitment to make Revolving Credit Loans, so long as (i) such Overadvance is not known by the -49- 58 Agent to exceed the amount of minimum Availability then required under SECTION 11.16, (ii) such Overadvance is not outstanding for more than 30 consecutive days, and (iii) no more than 1 previous Overadvance has been permitted hereunder during such fiscal year. "Overadvance" shall mean, as of any date of determination, the amount, if any, by which (1) the outstanding principal balance of Revolving Credit Loans exceeds (2) the amount determined under CLAUSE (b) of the definition of "Borrowing Base" minus the minimum Availability required at such time pursuant to SECTION 11.16. (e) REPLACEMENT OF CERTAIN LENDERS. If a Lender (the "Affected Lender") shall have failed to fund its Proportionate Share of any Loan requested (or deemed requested) by the Borrowers which such Lender is obligated to fund under the terms of this Agreement and which failure has not been cured, then, in any such case and in addition to any other rights and remedies that the Agent, any other Lender or the Borrowers may have against such Affected Lender, the Agent may make written demand on such Affected Lender (with a copy to the Borrowers) for the Affected Lender to assign, and such Affected Lender shall assign pursuant to one or more duly executed Assignment and Acceptances within 5 Business Days after the date of such demand, to one or more Lenders willing to accept such assignment or assignments, or to one or more Eligible Assignees designated by the Agent, all of such Affected Lender's rights and obligations under this Agreement (including its Commitments and all Loans owing to it) in accordance with ARTICLE 13. The Agent is hereby irrevocably authorized to execute one or more Assignment and Acceptances as attorney-in-fact for any Affected Lender which fails or refuses to execute and deliver the same within 5 Business Days after the date of such demand. The Affected Lender shall be entitled to receive, in cash and concurrently with the execution and delivery of each such Assignment and Acceptance, all amounts owed to the Affected Lender hereunder or under any other Loan Document, including the aggregate outstanding principal amount of the Loans owed to such Lender, together with accrued interest thereon through the date of such assignment. Upon the replacement of any Affected Lender pursuant to this SECTION 4.7(e), such Affected Lender shall cease to have any participation in, entitlement to, or other right to share in the Security Interest or any other Lien of the Agent in any Collateral, such Affected Lender shall have no further obligation to make Loans or purchase participations in Letters of Credit, and such Affected Lender shall have no further liability to the Agent, any Lender or any other Person under any of the Loan Documents (except as provided in SECTION 14.7 and elsewhere in this Agreement as to events or transactions which occur prior to the replacement of such Affected Lender). SECTION 4.8. SETTLEMENT AMONG LENDERS. (a) REVOLVING CREDIT LOANS. It is agreed that each Lender's Net Outstandings are intended by the Lenders to be equal at all times to such Lender's Commitment Percentage of the aggregate principal amount of all Revolving Credit Loans outstanding. Notwithstanding such agreement, the several and not joint obligation of each Lender to fund Revolving Credit Loans made in accordance with the terms of this Agreement ratably in accordance with such Lender's Commitment Percentage and each Lender's right to receive its ratable share of principal payments on Revolving Credit Loans in accordance with its Commitment Percentage, the Lenders agree that in order to facilitate the administration of this Agreement and the Loan Documents that settlement among them may take place on a periodic basis in accordance with the provisions of this SECTION 4.8. (b) SETTLEMENT PROCEDURES AS TO REVOLVING CREDIT LOANS. To the extent and in the manner hereinafter provided in this SECTION 4.8, settlement among the Lenders as to Revolving -50- 59 Credit Loans may occur periodically on Settlement Dates determined from time to time by the Agent, which may occur before or after the occurrence or during the continuance of a Default or Event of Default and whether or not all of the conditions set forth in SECTION 5.2 have been met. On each Settlement Date payments shall be made by or to NationsBank and the other Lenders in the manner provided in this SECTION 4.8 in accordance with the Settlement Report delivered by the Agent pursuant to the provisions of this SECTION 4.8 in respect of such Settlement Date so that as of each Settlement Date, and after giving effect to the transactions to take place on such Settlement Date, each Lender's Net Outstandings shall equal such Lender's Commitment Percentage of the Revolving Credit Loans outstanding. (i) SELECTION OF SETTLEMENT DATES. If the Agent elects, in its discretion, but subject to the consent of NationsBank, to settle accounts among the Lenders with respect to principal amounts of Revolving Credit Loans less frequently than each Business Day, then the Agent shall designate periodic Settlement Dates which may occur on any Business Day after the Effective Date; PROVIDED, HOWEVER, that the Agent shall designate as a Settlement Date any Business Day which is an Interest Payment Date; and PROVIDED FURTHER, that a Settlement Date shall occur at least once during each seven-day period. The Agent shall designate a Settlement Date by delivering to each Lender a Settlement Report not later than 12:00 noon (Atlanta time) on the proposed Settlement Date, which Settlement Report will be in the form of EXHIBIT E hereto and shall be with respect to the period beginning on the next preceding Settlement Date and ending on such designated Settlement Date. (ii) NON-RATABLE LOANS AND PAYMENTS. Between Settlement Dates, the Agent shall request and NationsBank may (but shall not be obligated to) advance to the Borrowers out of NationsBank's own funds, the entire principal amount of any Revolving Credit Loan requested or deemed requested pursuant to SECTION 2.2(a) (any such Revolving Credit Loan being referred to as a "Non-Ratable Loan"). The making of each Non-Ratable Loan by NationsBank shall be deemed to be a purchase by NationsBank of a 100% participation in each other Lender's Commitment Percentage of the amount of such Non-Ratable Loan. All payments of principal, interest and any other amount with respect to such Non-Ratable Loan shall be payable to and received by the Agent for the account of NationsBank. Upon demand by NationsBank, with notice thereof to the Agent, each other Lender shall pay to NationsBank, as the repurchase of such participation, an amount equal to 100% of such Lender's Commitment Percentage of the principal amount of such Non-Ratable Loan. Any payments received by the Agent between Settlement Dates which in accordance with the terms of this Agreement are to be applied to the reduction of the outstanding principal balance of Revolving Credit Loans shall be paid over to and retained by NationsBank for such application, and such payment to and retention by NationsBank shall be deemed, to the extent of each other Lender's Commitment Percentage of such payment, to be a purchase by each such other Lender of a participation in the Revolving Credit Loans (including the repurchase of participations in Non-Ratable Loans) held by NationsBank. Upon demand by another Lender, with notice thereof to the Agent, NationsBank shall pay to the Agent, for the account of such other Lender, as a repurchase of such participation, an amount equal to such other Lender's Commitment Percentage of any such amounts (after application thereof to the repurchase of any participations of NationsBank in such other Lender's Commitment Percentage of any Non-Ratable Loans) paid only to NationsBank by the Agent. -51- 60 (iii) NET DECREASE IN OUTSTANDINGS. If on any Settlement Date the increase, if any, in the dollar amount of any Lender's Net Outstandings which is required to comply with the first sentence of SECTION 4.8(a) is less than such Lender's Commitment Percentage of amounts received by the Agent but paid only to NationsBank since the next preceding Settlement Date, such Lender and the Agent, in their respective records, shall apply such Lender's Commitment Percentage of such amounts to the increase in such Lender's Net Outstandings, and NationsBank shall pay to the Agent, for the account of such Lender, the excess allocable to such Lender. (iv) NET INCREASE IN OUTSTANDINGS. If on any Settlement Date the increase, if any, in the dollar amount of any Lender's Net Outstandings which is required to comply with the first sentence of SECTION 4.8(a) exceeds such Lender's Commitment Percentage of amounts received by the Agent but paid only to NationsBank since the next preceding Settlement Date, such Lender and the Agent, in their respective records, shall apply such Lender's Commitment Percentage of such amounts to the increase in such Lender's Net Outstandings, and such Lender shall pay to the Agent, for the account of NationsBank, any excess. (v) NO CHANGE IN OUTSTANDINGS. If a Settlement Report indicates that no Revolving Credit Loans have been made during the period since the next preceding Settlement Date, then such Lender's Commitment Percentage of any amounts received by the Agent but paid only to NationsBank shall be paid by NationsBank to the Agent, for the account of such Lender. If a Settlement Report indicates that the increase in the dollar amount of a Lender's Net Outstandings which is required to comply with the first sentence of SECTION 4.8(a) is exactly equal to such Lender's Commitment Percentage of amounts received by the Agent but paid only to NationsBank since the next preceding Settlement Date, such Lender and the Agent, in their respective records, shall apply such Lender's Commitment Percentage of such amounts to the increase in such Lender's Net Outstandings. (vi) RETURN OF PAYMENTS. If any amounts received by NationsBank in respect of the Secured Obligations are later required to be returned or repaid by NationsBank to the Borrowers or their respective representatives or successors in interest, whether by court order, settlement or otherwise, in excess of the NationsBank's Commitment Percentage of all such amounts required to be returned by all Lenders, each other Lender shall, upon demand by NationsBank with notice to the Agent, pay to the Agent for the account of NationsBank, an amount equal to the excess of such Lender's Commitment Percentage of all such amounts required to be returned by all Lenders over the amount, if any, returned directly by such Lender. (vii) PAYMENTS TO AGENT, LENDERS. (A) Payment by any Lender to the Agent shall be made not later than 1:00 p.m. (Atlanta time) on the Business Day such payment is due, PROVIDED that if such payment is due on demand by another Lender, such demand is made on the paying Lender not later than 10:00 a.m. (Atlanta time) on such Business Day. Payment by the Agent to any Lender shall be made by wire transfer, promptly following the Agent's receipt of funds for the account of such Lender -52- 61 and in the type of funds received by the Agent, PROVIDED that if the Agent receives such funds at or prior to 1:00 p.m. (Atlanta time), the Agent shall pay such funds to such Lender by 2:00 p.m. (Atlanta time) on such Business Day. If a demand for payment is made after the applicable time set forth above, the payment due shall be made by 2:00 p.m. (Atlanta time) on the first Business Day following the date of such demand. (B) If a Lender shall, at any time, fail to make any payment to the Agent required hereunder, the Agent may, but shall not be required to, retain payments that would otherwise be made to such Lender hereunder and apply such payments to such Lender's defaulted obligations hereunder, at such time, and in such order, as the Agent may elect in its sole discretion. (C) With respect to the payment of any funds under this SECTION 4.8(b), whether from the Agent to a Lender or from a Lender to the Agent, the party failing to make full payment when due pursuant to the terms hereof shall, upon demand by the other party, pay such amount together with interest on such amount at the Federal Funds Effective Rate. (c) SETTLEMENT OF OTHER SECURED OBLIGATIONS. All other amounts received by the Agent on account of, or applied by the Agent to the payment of, any Secured Obligation owed to the Lenders (including, without limitation, fees payable to the Lenders pursuant to SECTIONS 4.2(C) and (D) and proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default) that are received by the Agent on or prior to 1:00 p.m. (Atlanta time) on a Business Day will be paid by the Agent to each Lender on the same Business Day, and any such amounts that are received by the Agent after 1:00 p.m. (Atlanta time) will be paid by the Agent to each Lender on the following Business Day. Unless otherwise stated herein, the Agent shall distribute fees payable to the Lenders pursuant to SECTIONS 4.2(c) and (d) ratably to the Lenders based on each Lender's Commitment Percentage and shall distribute proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default ratably to the Lenders based on the amount of the Secured Obligations then owing to each Lender. (e) ALLOCATION OF PAYMENTS FROM BORROWERS. All monies to be applied to the Secured Obligations, whether such monies represent voluntary payments by the Borrowers or are received pursuant to demand for payment or realized from any disposition of Collateral, shall be allocated among the Agent and such of the Lenders and other holders of the Secured Obligations as are entitled thereto (and, with respect to monies allocated to the Lenders, on a Ratable basis unless otherwise provided in this SECTION 4.8(e): (i) first, to NationsBank to pay principal and accrued interest on any portion of any Non-Ratable Loan which NationsBank may have advanced on behalf of any Lender (other than itself) and for which NationsBank has not been reimbursed by such Lender or the Borrowers; (ii) second, to the Agent to pay the amount of expenses that have not been reimbursed to the Agent by the Borrowers or the Lenders, together with interest accrued thereon; (iii) third, to the Agent and the Syndication Agent to pay any indemnified amount that has not been paid to the Agent by the Borrowers or the Lenders, together with interest accrued thereon; (iv) fourth, to the Agent to pay any fees due and payable to the Agent under this Agreement; (v) fifth, to the Lenders for any indemnified amount that they have paid to the Agent and for any expenses that they have reimbursed to the Agent; (vi) sixth, to the Lenders in payment of the unpaid principal and accrued interest in respect of the Loans and -53- 62 any other Secured Obligations arising under the Loan Documents then outstanding and held by any Lender to be shared among Lenders on a Ratable basis, or on such other basis as may be agreed upon in writing by all of the Lenders (which agreement or agreements may be entered into without notice to or the consent or approval of the Borrowers), and (vii) seventh, to the Lenders and their Affiliates in payment of the unpaid amount of all Secured Obligations arising under or in respect of the Banking Relationship to be shared on a pro rata basis. The allocations set forth in this SECTION 4.8(e) are solely to determine the rights and priorities of the Agent and the Secured Parties as among themselves and may be changed by the Agent and the Secured Parties without notice or the consent of approval of the Borrowers or any other Person. Whenever allocation is made pursuant to this SECTION 4.8(e) to the holder of Secured Obligations in which another Lender acquires a participation, the monies received by such holder shall be shared as between such holder and such participants on a Ratable basis. SECTION 4.9. MANDATORY PREPAYMENTS. (a) PREPAYMENTS FROM ASSET DISPOSITIONS. Within 3 Business Days of receipt by any Borrower of the Net Proceeds of any Asset Disposition, the Borrowers shall apply such Net Proceeds in prepayment of the Loans as provided in SECTION 4.9(c). Concurrently with the making of any such payment, the Borrowers shall deliver to the Agent a certificate of the Financial Officer demonstrating the calculations of the amount required to be paid. (b) PREPAYMENTS FROM EQUITY OFFERINGS OR DEBT ISSUANCE. In the event that, at any time after the Effective Date, any Borrower issues capital stock or other securities or receives an additional capital contribution in respect of existing capital stock or other securities (excluding any such issuance to, or receipt from, another Borrower or a Consolidated Subsidiary of a Borrower), or issues any Subordinated Indebtedness, no later than the third Business Day following the date of receipt of the proceeds from such issuance, the Borrowers shall apply such proceeds, net of underwriting discounts and commissions and other reasonable costs, fees and expenses associated therewith, in prepayment of the Loans as provided in SECTION 4.9(c). (c) APPLICATION OF PROCEEDS OF PREPAYMENTS. All prepayments pursuant to this SECTION 4.9 shall be applied to the outstanding Revolving Credit Loans to the extent thereof, PROVIDED that payments shall be first applied to Prime Rate Loans to the extent thereof and then to Eurodollar Rate Loans and any payments received which would otherwise result in the prepayment of Eurodollar Rate Loans prior to the end of the Interest Period applicable thereto may, upon the request of the Borrowers, in the absence of an Event of Default, be applied to the Cash Collateral Account, with any excess to be deposited with the Agent to be held as Cash Collateral for the Secured Obligations and applied by the Agent from time to time to outstanding Revolving Credit Loans promptly upon the making of such Revolving Credit Loans or, after the Termination Date, to any of the Secured Obligations in such manner as the Agent shall determine in its sole discretion. SECTION 4.10. PAYMENTS NOT AT END OF INTEREST PERIOD; FAILURE TO BORROW. If for any reason any payment of principal with respect to any Eurodollar Rate Loan is made on any day prior to the last day of the Interest Period applicable to such Eurodollar Rate Loan or, after having given a Notice of Borrowing with respect to any Eurodollar Rate Revolving Credit Loan or a Notice of Conversion or Continuation with respect to any Loan to be continued as or converted into a Eurodollar Rate Loan, such Loan is not made or is not continued as or converted into a Eurodollar Rate Loan due to the Borrowers' failure to borrow or to fulfill the applicable conditions set forth in ARTICLE 5, the Borrowers shall pay to each -54- 63 Lender upon the request of the Agent or such Lender, in addition to any amounts that may be due under the Fee Letter, an amount sufficient to compensate the Agent and each Lender for any and all losses or expenses which the Agent and each Lender have sustained or incurred as a consequence thereof. The Borrowers shall pay such amount upon presentation by the Agent (or as to any Lender, by such Lender) of a statement setting forth the amount and the Agent's (or such Lender's) calculation thereof, which statement shall be deemed true and correct absent manifest error. SECTION 4.11. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS. Calculation of all amounts payable to the Lenders under this ARTICLE 4 shall be made as though each Lender had actually funded or committed to fund its Eurodollar Rate Loans through the purchase of an underlying deposit in an amount equal to the amount of such ratable share and having a maturity comparable to the relevant Interest Period for such Eurodollar Rate Loan; PROVIDED, HOWEVER, each Lender may fund its Eurodollar Rate Loans in any manner it deems fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this ARTICLE 4. SECTION 4.12. NOTICE OF CONVERSION OR CONTINUATION. Whenever the Borrowers desire, subject to the provisions of SECTION 4.13, to convert an outstanding Loan into a Loan or Loans of a different Type or to continue all or a portion of an outstanding Eurodollar Rate Loan for a subsequent Interest Period, the Borrowers shall notify the Agent by telephone or in writing by telex or facsimile transmission (which notice shall be irrevocable) not later than 11:00 a.m. (Atlanta time) on the date three Business Days before the day on which such proposed conversion or continuation is to be effective (and such effective date of any continuation shall be the last day of the Interest Period for the applicable Eurodollar Rate Loan), provided the Borrowers shall not be permitted to convert Loans into (or continue Loans as) Eurodollar Rate Loans at any time during the existence of an Event of Default. Each such notice (a "Notice of Conversion or Continuation") shall (i) identify the Loan to be converted or continued, the aggregate outstanding principal balance thereof and, if a Eurodollar Rate Loan, the last day of the Interest Period applicable to such Loan, (ii) specify the effective date of such conversion or continuation, (iii) specify the principal amount of such Loan to be converted or continued and, if converted, the Type or Types into which the same is to be converted, and (iv) the Interest Period to be applicable to the Eurodollar Rate Loan as converted or continued, and shall, if notice thereof was originally given by telephone, be immediately followed by a signed, written confirmation thereof by the Borrowers in a form acceptable to the Agent, PROVIDED that if such written confirmation differs in any respect from the action taken by the Lenders, the records of the Agent shall control absent manifest error. SECTION 4.13. CONVERSION OR CONTINUATION. Provided that no Event of Default shall have occurred and be continuing (but subject to the provisions of SECTIONS 4.12 and 4.15), the Borrowers may request that all or any part of any outstanding Loan be converted into a Loan or Loans of a different Type or be continued as a Loan or Loans of the same Type, in the same aggregate principal amount, on any Business Day (which, in the case of continuation of a Eurodollar Rate Loan, shall be the last day of the Interest Period applicable to such Loan), upon notice (which notice shall be irrevocable) given in accordance with SECTION 4.12. SECTION 4.14. DURATION OF INTEREST PERIODS; MAXIMUM NUMBER OF EURODOLLAR RATE LOANS; MINIMUM INCREMENTS. (a) Subject to the provision of the definition of "Interest Period", the duration of each Interest Period applicable to a Eurodollar Rate Loan shall be as specified in the applicable Notice of Borrowing or Notice of Conversion or Continuation. The Borrowers may elect a subsequent -55- 64 Interest Period to be applicable to any Eurodollar Rate Loan by giving a Notice of Conversion or Continuation with respect to such Loan in accordance with SECTION 4.12. (b) If the Agent does not receive a notice of election in accordance with SECTION 4.12 with respect to the continuation of a Eurodollar Rate Loan within the applicable time limits specified in said SECTION 4.12, or if, when such notice must be given, an Event of Default exists or such Type of Loan is not available, the Borrowers shall be deemed to have elected to convert such Eurodollar Rate Loan in whole into a Prime Rate Loan on the last day of the Interest Period therefor. (c) Notwithstanding the foregoing, the Borrowers may not select an Interest Period that would end, but for the provisions of the definition "Interest Period," after the Termination Date. (d) In no event shall there be more than 7 Eurodollar Rate Loans outstanding hereunder at any time. For the purpose of this SUBSECTION (d), each Eurodollar Rate Loan having a distinct Interest Period shall be deemed to be a separate Loan hereunder. (e) Each Eurodollar Rate Loan shall be in a minimum amount of $1,000,000, with Eurodollar Rate Loans in excess of such amount in integral multiples of $250,000. SECTION 4.15. CHANGED CIRCUMSTANCES. (a) If the introduction of or any change in or in the interpretation of (in each case, after the date hereof) any law or regulation makes it unlawful, or any Governmental Authority asserts, after the date hereof, that it is unlawful, for any Lender to perform its obligations hereunder to make Eurodollar Rate Loans or to fund or maintain Eurodollar Rate Loans hereunder, such Lender shall notify the Agent of such event and the Agent shall notify the Borrowers of such event, and the right of the Borrowers to select Eurodollar Rate Loans for any subsequent Interest Period or in connection with any subsequent conversion of any Loan shall be suspended until the Agent shall notify the Borrowers that the circumstances causing such suspension no longer exist, and the Borrowers shall forthwith prepay in full all Eurodollar Rate Loans then outstanding, and shall pay all interest accrued thereon through the date of such prepayment or conversion, unless the Borrowers, within three Business Days after such notice from the Agent, request the conversion of all Eurodollar Rate Loans then outstanding into Prime Rate Loans; PROVIDED, that if the date of such repayment or proposed conversion is not the last day of the Interest Period applicable to such Eurodollar Rate Loan, the Borrowers shall also pay any amount due pursuant to SECTION 4.10. (b) If the Agent shall, at least one Business Day before the date of any requested Loan or the effective date of any conversion or continuation of an existing Loan to be made or continued as or converted into a Eurodollar Rate Loan (each such requested Loan made and Loan to be converted or continued, a "Pending Loan"), notify the Borrowers that the Eurodollar Rate will not adequately reflect the cost to the Lenders of making or funding such Pending Loan as a Eurodollar Rate Loan or that the Interbank Offered Rate is not reasonably determinable, including from any interest rate reporting service of recognized standing, then the right of the Borrowers to select Eurodollar Rate Loans for such Pending Loan, any subsequent Loan or in connection with any subsequent conversion or continuation of any Loan shall be suspended until the Agent shall notify the Borrowers that the circumstances causing such suspension no longer exist, and each Pending -56- 65 Loan and each such subsequent Loan requested to be made, continued or converted shall be made or continued as or converted into a Prime Rate Loan. (c) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Reserve Percentage) in or in the interpretation of, in each case after the date hereof, any law or regulation (except to the extent such introduction, change or interpretation affects taxes measured by net income), or (ii) the compliance with a guideline or request (except to the extent such guideline or request affects taxes measured by net income) from any central bank or other governmental authority (whether nor not having the force of law) made after the date hereof, there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Loans (other than as separately provided for in SECTION 4.15(d)), then the Borrowers shall from time to time, within 30 days after demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost. (d) If (i) the adoption of or change in, after the date hereof, any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change, after the date hereof, in the interpretation or application thereof by any governmental authority charged with the interpretation or administration thereof, or (ii) compliance by such Lender with any guideline, request or directive, made or promulgated after the date hereof, of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on a Lender's capital as a consequence of its maintaining its Loans or commitment to make Loans hereunder to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy immediately before such adoption, change or compliance and assuming the full utilization of such Lender's capital immediately before such adoption, change or compliance) or if any change in law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law) subjects a Lender to any tax with respect to payments of principal or interest or any other amounts payable hereunder by the Borrowers or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of such Lender imposed by the United States of America or any political subdivision thereof), in each case by any amount deemed by such Lender to be material, then such Lender shall promptly after its determination of such occurrence notify the Borrowers and the Agent thereof. The Borrowers agree to pay to the Agent, for the account of such Lender, as an additional fee from time to time, within 30 days after demand by such Lender, such amount as such Lender certifies to be the amount that will compensate it for such reduction. (e) Before giving any notice pursuant to SECTION 4.15(a) or making any demand pursuant to SECTION 4.15(c) or (d), each Lender agrees to use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different lending office if the making of such a designation would avoid the need for such notice or demand, or reduce the amount of such increased cost or reduction in return and would not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. (f) A certificate of the Lender claiming compensation under SECTION 4.15(c) or (d) shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the -57- 66 occurrence giving rise to such compensation, the additional amount or amounts to be paid to it hereunder, and the method by which such amounts were determined. In determining such amount, a Lender may use any reasonable averaging and attribution methods. SECTION 4.16. CASH COLLATERAL ACCOUNT. The Borrowers shall establish a Cash Collateral Account in which to deposit Collateral consisting of cash or Cash Equivalents from time to time: (a) representing payments received pursuant to SECTIONS 2.3(c) and 4.9 in excess of then outstanding Revolving Credit Loans or on account of Eurodollar Rate Loans which would otherwise result in repayment of such Loans prior to the end of the Interest Period applicable thereto, (b) with respect to Letter of Credit Obligations and Kellstrom's obligations with respect to the VRDN Letter of Credit (i) at the request of the Agent upon the occurrence of an Event of Default, or (ii) for the purposes set forth in SECTION 4.6 in the event of termination of this Agreement, or (c) for any other purpose appropriate under this Agreement to provide security for the Secured Obligations. On the last day of the applicable Interest Period as to any amounts deposited to the Cash Collateral Account pursuant to CLAUSE (a) above or if a drawing under the VRDN Letter of Credit or a Letter of Credit occurs with respect to any amounts deposited to the Cash Collateral Account pursuant to CLAUSE (b) above, each Borrower hereby authorizes the Agent to use the monies deposited in the Cash Collateral Account to make payment to the payee with respect to such Loan or drawing. The Cash Collateral Account shall be in the name of the Agent and the Agent shall have sole dominion and control over, and sole access to, the Cash Collateral Account. Neither any Borrower nor any Person claiming on behalf of or through any Borrower shall have any right to withdraw any of the funds held in the Cash Collateral Account. Each Borrower agrees that it will not at any time (i) sell or otherwise dispose of any interest in the Cash Collateral Account or any funds held therein or (ii) create or permit to exist any Lien upon or with respect to the Cash Collateral Account or any funds held therein, except as provided in or contemplated by this Agreement. The Agent shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Agent accords other funds deposited with the Agent, it being understood that the Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any funds held in the Cash Collateral Account. Subject to the right of the Agent to withdraw funds from the Cash Collateral Account as provided herein, the Agent will, so long as no Default or Event of Default shall have occurred and be continuing, from time to time invest funds on deposit in the Cash Collateral Account, reinvest proceeds of any such investments which may mature or be sold, and invest interest or other income received from any such investments, in each case, in Cash Equivalents, as the Borrowers may direct prior to the occurrence of a Default or Event of Default and as the Agent may select after the occurrence and during the continuance of a Default or Event of Default. Such proceeds, interest and income which are not so invested or reinvested in Cash Equivalents shall be deposited and held by the Agent in the Cash Collateral Account. The Agent makes no representation or warranty as to, and shall not be responsible for, the rate of return, if any, earned in any Cash Collateral. Any earnings on Cash Collateral shall be held as additional Cash Collateral on the terms set forth in this SECTION 4.16. SECTION 4.17. BORROWERS' REPRESENTATIVE. Each of the Borrowers other than Kellstrom hereby appoints Kellstrom as, and Kellstrom shall act under this Agreement as, the representative of such other Borrowers for all purposes, including, without being limited to, requesting Borrowings and receiving account statements and other notices and communications to the Borrowers (or any of them) from the Agent or any Lender. The Agent and the Lenders may rely, and shall be fully protected in relying, on any Notice of Borrowing, Notice of Conversion or Continuation, disbursement instruction, report, information or any other notice or communication made or given by Kellstrom, whether in its own name, on behalf of any other Borrower or on behalf of "the Borrowers," and neither the Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of any other Borrowers as to -58- 67 the binding effect on it of any such Notice, instruction, report, information, other notice or communications, nor shall the joint and several character of the Borrowers' liability for the Secured Obligations be affected, PROVIDED that the provisions of this SECTION 4.17 shall not be construed so as to preclude any Borrower from directly requesting Borrowings or taking other actions permitted to be taken by "a Borrower" hereunder. The Agent and each Lender intend to maintain a single Loan Account in the name of "Kellstrom Industries, Inc." hereunder and each Borrower expressly agrees to such arrangement and confirms that such arrangement shall have no effect on the joint and several character of its liability for the Secured Obligations. SECTION 4.18. JOINT AND SEVERAL LIABILITY. (a) JOINT AND SEVERAL LIABILITY. The Secured Obligations shall constitute one joint and several direct and general obligation of all of the Borrowers. Notwithstanding anything to the contrary contained herein, each of the Borrowers shall be jointly and severally, with each other Borrower, directly and unconditionally liable to the Agent and the Lenders for all Secured Obligations and shall have the obligations of co-maker with respect to the Loans, the Notes and the Secured Obligations, it being agreed that the advances to each Borrower inure to the benefit of all Borrowers, and that the Agent and the Lenders are relying on the joint and several liability of the Borrowers as co-makers in extending the Loans hereunder. Each Borrower hereby unconditionally and irrevocably agrees that upon default in the payment when due (whether at stated maturity, by acceleration or otherwise) of any principal of, or interest on, any Loan or other Secured Obligation payable to the Agent or any Lender, it will forthwith pay the same, without notice or demand. (b) NO REDUCTION IN OBLIGATIONS. No payment or payments made by any of the Borrowers or any other Person or received or collected by the Agent or any Lender from any of the Borrowers or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Secured Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of each Borrower under this Agreement, which shall remain liable for the Secured Obligations until the Secured Obligations are paid in full and the Revolving Credit Facility is terminated. SECTION 4.19. OBLIGATIONS ABSOLUTE. Each Borrower agrees that the Secured Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Agent or any Lender with respect thereto. All Secured Obligations shall be conclusively presumed to have been created in reliance hereon. The liabilities under this Agreement shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any Loan Documents or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payments of, or in any other term of, all or any part of the Secured Obligations, or any other amendment or waiver thereof or any consent to departure therefrom, including, but not limited to, any increase in the Secured Obligations resulting from the extension of additional credit to any Borrower or otherwise; (c) any taking, exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; -59- 68 (d) any change, restructuring or termination of the corporate structure or existence of any Borrower; or (e) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Borrower. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must otherwise be returned by the Agent or any Lender upon the insolvency, bankruptcy or reorganization of any Borrower or otherwise, all as though such payment had not been made. SECTION 4.20. WAIVER OF SURETYSHIP DEFENSES. Each Borrower agrees that the joint and several liability of the Borrowers provided for in SECTION 4.18 shall not be impaired or affected by any modification, supplement, extension or amendment or any contract or agreement to which the other Borrowers may hereafter agree (other than an agreement signed by the Agent and the Lenders specifically releasing such liability), nor by any delay, extension of time, renewal, compromise or other indulgence granted by the Agent or any Lender with respect to any of the Secured Obligations, nor by any other agreements or arrangements whatever with the other Borrowers or with anyone else, each Borrower hereby waiving all notice of such delay, extension, release, substitution, renewal, compromise or other indulgence, and hereby consenting to be bound thereby as fully and effectually as if it had expressly agreed thereto in advance. The liability of each Borrower is direct and unconditional as to all of the Secured Obligations, and may be enforced without requiring the Agent or any Lender first to resort to any other right, remedy or security. Each Borrower hereby expressly waives promptness, diligence, notice of acceptance and any other notice (except to the extent expressly provided for herein or in another Loan Document) with respect to any of the Secured Obligations, the Notes, this Agreement or any other Loan Document and any requirement that the Agent or any Lender protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against any Borrower or any other Person or any collateral, including any rights any Borrower may otherwise have under O.C.G.A. Section 10-7-24 or any successor statute or any analogous statute in any jurisdiction under the laws of which any Borrower is incorporated or in which any Borrower conducts business. SECTION 4.21. WITHHOLDING TAXES. Except as otherwise required by Applicable Law, each payment by the Borrowers under this Agreement or the Notes or in respect of the VRDN Letter of Credit or the other Letters of Credit shall be made without setoff or counterclaim and without withholding for or on account of any present or future taxes imposed by or within the jurisdiction in which any Borrower is domiciled, any jurisdiction from which the Borrowers make any payment hereunder, or (in each case) any political subdivision or taxing authority thereof or therein (excluding any such tax imposed on the overall net income of the Agent or the Lenders). If any such withholding is so required, the Borrowers shall make the withholding, pay the amount withheld to the appropriate governmental authority before penalties attach thereto or interest accrues thereon, and forthwith pay such additional amount as may be necessary to ensure that the net amount actually received free and clear of such taxes (including such taxes on such additional amount) is equal to the amount which Agent or the Lenders would have received had such withholding not been made. If the Agent or the Lenders pay any amount in respect of any such taxes, penalties or interest, the Borrowers shall reimburse the Agent or the Lenders (as appropriate) for that payment on demand in the currency in which such payment was made. If a Borrower pays any such taxes, penalties or interest, it shall deliver official tax receipts evidencing that payment or certified copies thereof to the Agent on or before the thirtieth day after payment. -60- 69 SECTION 4.22. DESIGNATED SENIOR INDEBTEDNESS. The Borrowers and the Secured Parties hereby agree that the Secured Obligations constitute "Designated Senior Indebtedness" as defined in the Indentures relating to the Convertible Subordinated Notes and that the Secured Obligations constitute "Senior Debt" as defined in the Securities Purchase Agreement relating to the Equitable Subordinated Loan. ARTICLE 5 CONDITIONS PRECEDENT SECTION 5.1. CONDITIONS PRECEDENT TO LOANS AND LETTERS OF CREDIT. Notwithstanding any other provision of this Agreement, the initial Loans will not be made and no Letters of Credit will be issued, until the fulfillment of each of the following conditions prior to or contemporaneously with the making of the first to be made of such Loans or issuance of such Letters of Credit: (a) FINANCIAL CONDITION. The Borrowers shall have delivered to the Agent a fair saleable value balance sheet prepared and certified to by the Financial Officer in form and substance satisfactory to the Agent dated the Effective Date, and setting forth valuations of the assets and the Projections together with a certificate executed by the Financial Officer or the chief financial officer of each Borrower, in form and substance satisfactory to the Agent, certifying that as of the Effective Date, after giving effect to the extension of the initial Loans, and the payment of all fees and expenses in connection with such transactions, the fair saleable value of each Borrower's assets will exceed the amount required to pay its debts as they become absolute and matured (including contingent, subordinated, unmatured and unliquidated liabilities), that each Borrower is able and anticipates that it will be able to meet its debts as they mature and has adequate capital to conduct the business in which it is or proposes to be engaged, together with attachments demonstrating the basis of such conclusions. (b) FEES. The Borrowers shall have paid all of the fees payable on the Effective Date referred to herein. (c) SECURITY INTERESTS. The Agent shall have received satisfactory evidence that the Agent (for the benefit of the Secured Parties) has a valid and perfected first priority security interest as of such date in all of the Collateral, subject only to Permitted Liens. (d) CLOSING DOCUMENTS. The Agent shall have received each of the following documents, all of which shall be satisfactory in form and substance to the Agent and its counsel and to the Lenders: (i) certified copies of the articles or certificate of incorporation and bylaws of each Borrower as in effect on the Effective Date, (ii) certified copies of all corporate action, including shareholder approval, if necessary, taken by each Borrower to authorize the execution, delivery and performance of this Agreement, the Loan Documents, and the borrowings under this Agreement, (iii) certificates of incumbency and specimen signatures with respect to each of the officers of each Borrower authorized to execute and deliver this Agreement and -61- 70 the Loan Documents on behalf of each Borrower or other Person executing any document, certificate or instrument to be delivered in connection with this Agreement or the Loan Documents and, in the case of each Borrower, to request borrowings under this Agreement, (iv) a certificate evidencing the good standing of each Borrower in the jurisdiction of its incorporation and in each other jurisdiction in which it is required to be qualified as a foreign corporation to transact its business as presently conducted, (v) copies of all financial statements referred to in SECTION 6.1(o) and meeting the requirements thereof, (vi) a signed opinion of Akerman, Senterfitt & Eidson, P.A., counsel for the Borrowers and the Trust, substantially in the form of EXHIBIT C, and of such local counsel for the Borrowers and the Trust as may be required, opining as to such matters in connection with the transactions contemplated by this Agreement as the Agent or its counsel may reasonably request, (vii) an opinion of Lytle Soule & Curlee and Crowe & Dunlevy, each dated the Effective Date (which opinion may be delivered orally on the Effective Date and followed by a signed written opinion promptly thereafter) opining that (A) the Airframe and Engine Mortgage and the Mortgage Supplement are in due form for recordation by the FAA and have been duly filed for recordation with the FAA, (B) the Collateral described in the Airframe and Engine Mortgage and in the Mortgage Supplement is free and clear of all Liens other than the Security Interest, (C) the Security Interest in all Collateral that consists of Airframe Inventory registered in the United States is a perfected, first priority Security Interest, (D) the Security Interest in all Engine Inventory is a perfected, first priority Security Interest, (E) no filings or recordings (other than the above described filings with the FAA) are necessary to perfect the Security Interest in any jurisdiction within the United States, and (F) no authorization, approval, consent, license, or order of, registration with, or giving of notice to, the FAA Engines Registry is required for the valid authorization, delivery or performance of the Airframe and Engine Mortgage and any Mortgage Supplement except for such authorizations, approvals, consents, licenses, orders, registrations and notices as have been effected, (viii) the Financing Statements duly executed and delivered by the Borrowers and the Trust and acknowledgement copies evidencing the filing of such Financing Statements in each jurisdiction where such filing may be necessary or appropriate to perfect the Security Interest, (ix) the Airframe and Engine Mortgage and the Mortgage Supplement duly executed by each Borrower and the Trust, (x) a certification from the principal officers of the Borrowers as to such factual matters as shall be requested by the Agent, (xi) certificates or binders of insurance relating to each of the policies of insurance covering any of the Collateral, together with loss payable clauses which -62- 71 comply with the terms of SECTION 8.8, the Mortgages and the Airframe and Engine Mortgage, (xii) a certificate of the Financial Officer (or such other officer of Kellstrom as may be acceptable to the Agent) stating that, to the best of his knowledge and based on an examination sufficient to enable him to make an informed statement, (A) all of the representations and warranties made or deemed to be made under this Agreement are true and correct as of the Effective Date, after giving effect to the Loans to be made at such time and the application of the proceeds thereof, and (B) no Default or Event of Default exists, (xiii) a Borrowing Base Certificate, a Schedule of Inventory and a Schedule of Receivables, prepared as of a date not more than 5 days prior to the Effective Date, (xiv) solvency certificates, certificates of projection of income and cash flow, and such other certificates as the Agent may require to evidence each Borrower's solvency, (xv) copies of the Mortgages duly executed and delivered by the applicable Borrowers and evidencing the recording of each such instrument in the appropriate jurisdiction for the recording thereof on the Real Estate subject thereto, in order to create in favor of the Agent (for the benefit of the Secured Parties) a valid first Lien on and security title to the Real Estate described therein, or, at the option of the Agent, in proper form for recording in such jurisdiction, (xvi) one or more fully paid mortgagee title insurance policies or, at the option of the Agent, unconditional commitments for the issuance thereof with all requirements and conditions to the issuance of the final policy deleted or marked satisfied, issued by a title insurance company satisfactory to the Agent, each in an amount equal to not less than the fair market value of the Real Estate subject to the Mortgage insured thereby, insuring that such Mortgage creates a valid first Lien on, and security title to, all Real Estate described therein, with no survey exceptions and no other exceptions which the Agent shall not have approved in writing, (xvii) such materials and information concerning the Real Estate as the Agent may require, including, without limitation, (A) current and accurate surveys satisfactory to the Agent of all of the owned Real Estate, certified to the Agent and showing the location of the 100-year and 50-year flood plains thereon, (B) zoning letters as to the zoning status of all of the owned Real Estate, (C) certificates of occupancy covering all of the Real Estate, and (D) owner's affidavits as to such matters relating to the owned Real Estate as the Agent may request, (xviii) landlord's, warehouseman's or mortgagee's waiver and consent agreements duly executed on behalf of each landlord, warehouseman or mortgagee, as the case may be, of Real Estate and any other real property on which any Collateral is located, -63- 72 (xix) Agency Account Agreements, each duly executed by the applicable Borrowers and the Clearing Bank party thereto, (xx) the Initial Notice of Borrowing, duly executed by the chief financial officer of Kellstrom, (xxi) a report from a qualified engineering firm or other qualified consultant acceptable to the Agent with respect to an investigation and audit of all Real Estate, which shall be based on a thorough review of past and present uses, occupants, ownership and tenancy of the property and/or adjacent properties and/or upgradient properties regarding (A) subsurface ground water hazards, soils and/or test boring reports; (B) contact with local, state or federal agencies regarding known or suspected hazardous material contamination of the property or other properties in the area; (C) review of aerial photographs; (D) visual site inspection noting unregulated fills, storage tanks or areas, ground discoloration or soil odors; and (E) other investigative methods deemed necessary by the consultant or the Agent to enable the consultant to report that there is no apparent or likely contamination of the property or another property in the area, (xxii) if deemed reasonably necessary to further investigate suspected or likely contamination, supplemental environmental reports prepared by qualified consultants of the analysis of core drilling or ground water samples from the property, showing no contamination by hazardous materials, (xxiii) an appraisal of all owned Real Estate prepared by appraisers satisfactory to the Agent, establishing values at levels satisfactory to the Agent, (xxiv) a certified copy of the organizational trust agreement governing the Trust, together with such certifications from the trustee of the Trust with respect to the Loan Documents to which the Trust is a party as the Agent may request, (xxv) copies of each of the other Loan Documents duly executed by the parties thereto, together with evidence satisfactory to the Agent of the due authorization and binding effect of each such Loan Document on such party, and (xxvi) such other documents and instruments as the Agent or any Lender may reasonably request. -64- 73 (e) NOTES. Each Lender shall have received a Revolving Credit Note duly executed and delivered by the Borrowers, complying with the terms of SECTION 2.4. (f) SUBORDINATED INDEBTEDNESS. The Agent shall have received a certificate from the Financial Officer containing true and correct copies of (i) the Convertible Subordinated Notes and each other agreement executed in connection therewith and (ii) each agreement executed in connection with the Equitable Subordinated Loan, including the Securities Purchase Agreement described in the definition of "Equitable Subordinated Loan". The Agent shall have received an amendment executed and delivered by The Equitable Life Assurance Society of the United States and Kellstrom, amending the Securities Purchase Agreement described in the definition of "Equitable Subordinated Loan" to permit the financing contemplated by this Agreement, as well as any other consents required by the documents relating to the Subordinated Indebtedness. (g) PLEDGE AGREEMENT. The Agent shall have received the Pledge Agreement, in form and substance satisfactory to the Agent and the Lenders, duly executed and delivered by Kellstrom, together with stock transfer powers duly executed in blank by Kellstrom and stock certificates representing all of the stock subject to the Pledge Agreement. (h) OTHER SECURITY DOCUMENTS. The Agent shall have received each other Security Document, in form and substance satisfactory to the Agent and the Lenders, duly executed and delivered by the applicable Borrowers, including without limitation the Trademark Assignment. (i) INDEMNIFICATION AGREEMENTS. The Agent shall have received the Environmental Indemnity Agreement and the Indemnification Agreement, in form and substance satisfactory to the Agent and the Lenders, duly executed and delivered by the Borrowers. (j) AVAILABILITY. The Agent shall be provided with evidence satisfactory to it that, as of the Effective Date, after giving effect to the Initial Loans and the issuance of any Letters of Credit on the Effective Date, Availability is not less than $75,000,000. (k) NO INJUNCTIONS, ETC. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby, or which, in the Agent's or the Lenders' discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement. (l) MATERIAL ADVERSE CHANGE. As of the Effective Date, there shall not have occurred any change which is materially adverse, in the Agent's or the Lenders' discretion, to the assets, liabilities, businesses, operations, condition (financial or otherwise) or prospects of the Borrowers or their Subsidiaries from those presented by the financial statements described in SECTION 6.1(o). (m) RELEASE OF SECURITY INTERESTS. The Agent shall have received evidence satisfactory to it of the release and termination of all Liens other than Permitted Liens. (n) SYNDICATION MARKET. There shall not have occurred any change which is materially adverse in the market for syndicated bank credit facilities, or a material disruption of, -65- 74 or a material adverse change in, financial, banking or capital market conditions, in each case as determined by the Agent and the Syndication Agent in their sole discretion. SECTION 5.2. ALL LOANS; LETTERS OF CREDIT. At the time of making of each Loan, including the Initial Loans and all subsequent Loans, and the issuance of the VRDN Letter of Credit and each other Letter of Credit: (a) all of the representations and warranties made or deemed to be made under this Agreement (including the representation regarding Absence of Defaults contained in SECTION 6.1(r)) shall be true and correct in all material respects at such time both with and without giving effect to the Loan to be made at such time and the application of the proceeds thereof, (b) the corporate actions of the Borrowers (and any Subsidiary Guarantors) referred to in SECTION 5.1(d) shall remain in full force and effect and the incumbency of officers shall be as stated in the certificates of incumbency delivered pursuant to SECTION 5.1 or as subsequently modified and reflected in a certificate of incumbency delivered to the Agent, and (c) each request or deemed request for any Borrowing hereunder shall be deemed to be a certification by the Borrowers to the Agent and the Secured Parties as to the matters set forth in SECTION 5.2(A) and (B) and the Agent may, without waiving either condition, consider the conditions specified in SECTIONS 5.2(a) and (b) fulfilled and a representation by the Borrowers to such effect made, if no written notice to the contrary is received by the Agent prior to the making of the Loan then to be made. SECTION 5.3. CONDITIONS AS COVENANTS. In the event that the Lenders make the Initial Loans or any Letter of Credit is issued prior to the satisfaction of all conditions precedent set forth in SECTION 5.1, and such conditions are not waived in writing by the Required Lenders, the Borrowers shall nevertheless cause such condition or conditions to be satisfied within 30 days after the making of such Initial Loans or the issuance of any other Letter of Credit. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE BORROWERS SECTION 6.1. REPRESENTATIONS AND WARRANTIES. Each Borrower represents and warrants to the Agent and to the Lenders as follows: (a) ORGANIZATION; POWER; QUALIFICATION. Each Borrower and each of its Subsidiaries is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, having the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. The jurisdictions in which each Borrower and each of its Subsidiaries is qualified to do business as a foreign corporation are listed on SCHEDULE 6.1(a). The Trust is duly organized and validly existing under the laws of its jurisdiction of its formation, and has the power and legal authority to own or lease property and to carry on its business. -66- 75 (b) CAPITALIZATION. The outstanding capital stock of each Borrower has been duly and validly issued and is fully paid and nonassessable, and the number and owners of such shares of capital stock of each Borrower are set forth on SCHEDULE 6.1(b). Each issuance and sale of each Borrower's capital stock was made in accordance with applicable federal, state and foreign securities laws or pursuant to an exemption therefrom. Except as set forth on SCHEDULE 6.1(b), there are no shareholder agreements, options, subscription agreements or other agreements or understandings to which any Borrower is a party in effect with respect to the capital stock of such Borrower, including, without limitation, agreements providing for special voting requirements or arrangements for approval of corporate actions or other matters relating to corporate governance or restrictions on share transfer or providing for the issuance of any securities convertible into shares of the capital stock of such Borrower, any warrants or other rights to acquire any shares or securities convertible into such shares, or any agreement that obligates such Borrower, either by its terms of at the election of any other Person, to repurchase such shares under any circumstances. (c) SUBORDINATED INDEBTEDNESS. The issuance and sale of all instruments evidencing the Subordinated Indebtedness have been registered or qualified under applicable federal and state securities laws or pursuant to an exemption therefrom. Each document evidencing or relating to the Subordinated Indebtedness is the legally valid and binding obligation of the applicable Borrower enforceable against the Borrower in accordance with its terms (including those pertaining to subordination). The Borrowers have delivered to the Agent a complete and correct copy of all documents evidencing or relating to the Subordinated Indebtedness. (d) SUBSIDIARIES. SCHEDULE 6.1(d) correctly sets forth the name of each Subsidiary of each Borrower, its jurisdiction of incorporation, the name of its immediate parent or parents, and the percentage of its issued and outstanding securities owned by a Borrower or any other Subsidiary of a Borrower and indicating whether such Subsidiary is a Consolidated Subsidiary. Except as set forth on SCHEDULE 6.1(d), (i) no Subsidiary of a Borrower has issued any securities convertible into shares of such Subsidiary's capital stock or any options, warrants or other rights to acquire any shares or securities convertible into such shares, (ii) the outstanding stock and securities of each Borrower other than Kellstrom are owned by Kellstrom, free and clear of all Liens, warrants, options and rights of others of any kind whatsoever, and each Borrower other than Kellstrom is a Wholly-Owned Subsidiary of Kellstrom, and (iii) no Borrower has any Subsidiaries. The outstanding capital stock of each Subsidiary of each Borrower has been duly and validly issued and is fully paid and nonassessable by the issuer, and the number and owners of the shares of such capital stock are set forth on SCHEDULE 6.1(d). (e) AUTHORIZATION OF AGREEMENT, NOTES, LOAN DOCUMENTS AND BORROWING. Each Borrower has the right, power and authority to execute, deliver and perform this Agreement and each of the Loan Documents to which it is a party in accordance with their respective terms. This Agreement and each of the Loan Documents have been duly executed and delivered by the duly authorized officers of each Borrower party thereto and each is, or each when executed and delivered in accordance with this Agreement will be, a legal, valid and binding obligation of -67- 76 each Borrower party thereto, enforceable in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and equitable principles, regardless of whether such enforceability is considered in a proceeding at law or in equity. (f) COMPLIANCE OF AGREEMENT, NOTES, LOAN DOCUMENTS AND BORROWING WITH LAWS, ETC. Except as set forth on SCHEDULE 6.1(f), the execution, delivery and performance of this Agreement and each of the Loan Documents in accordance with their respective terms and the borrowings hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to any Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute a default under the articles or certificate of incorporation or by-laws of any Borrower or any of its Subsidiaries, (iii) conflict with, result in a breach of or constitute a default under any material provisions of any indenture, agreement or other instrument to which any Borrower or any of its Subsidiaries is a party or by which any Borrower or any of its Subsidiaries or any of a Borrower's or such Subsidiaries' property may be bound, including, without limitation, all documentation related to the Convertible Subordinated Notes and the Equitable Subordinated Loan, or any Governmental Approval relating to a Borrower or any of its Subsidiaries, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by any Borrower or any of its Subsidiaries other than the Security Interest. (g) BUSINESS. Each Borrower is engaged principally in the business set forth next to its name on SCHEDULE 6.1(g). (h) COMPLIANCE WITH LAW; GOVERNMENTAL APPROVALS. (i) Except as set forth in SCHEDULE 6.1(h), each Borrower and each of its Subsidiaries (A) has all Governmental Approvals, including permits relating to federal, state, local and foreign Environmental Laws, ordinances and regulations, required by any Applicable Law for it to conduct its business, each of which is in full force and effect, is final and not subject to review on appeal and is not the subject of any pending or, to the knowledge of any Borrower, threatened attack by direct or collateral proceeding, and (B) is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Laws relating to it, including, without being limited to, all Environmental Laws and all occupational health and safety laws applicable to any Borrower, any of its Subsidiaries or their respective properties, except for instances of noncompliance which would not, singly or in the aggregate, cause a Default or Event of Default or have a Materially Adverse Effect and in respect of which reserves in respect of such Borrower's or such Subsidiary's reasonably anticipated liability therefor have been established on the consolidated books of the Borrowers. (ii) Without limiting the generality of the above, except as disclosed on a report delivered pursuant to SECTION 5.1(d) or with respect to matters which could not reasonably be expected to have, singly or in the aggregate, a Materially Adverse Effect: (A) the operations of each Borrower and each of its Subsidiaries comply in all material respects with all applicable environmental, health and safety requirements of Applicable Law; (B) each Borrower and each of its Subsidiaries has obtained all environmental, health and safety permits necessary for its operation, and all such permits are in good standing and each Borrower and each of its Subsidiaries is in compliance in all material respects with all terms and conditions of such permits; (C) neither any Borrower nor any of its Subsidiaries nor any of their respective present or past property or operations are subject to any order from or agreement with any public authority or party respecting (x) any environmental, health or safety requirements of Applicable Law, (y) any Remedial Action, or (z) any liabilities and costs arising from -68- 77 the Release or threatened Release of a Contaminant into the environment; (D) none of the operations of any Borrower or of any of its Subsidiaries is subject to any judicial or administrative proceeding alleging a violation of any environmental, health or safety requirement of Applicable Law; (E) none of the present nor past operations of any Borrower or any of its Subsidiaries is the subject of any investigation by any public authority evaluating whether any Remedial Action is needed to respond to a Release or threatened Release of a Contaminant into the environment; (F) neither any Borrower nor any of its Subsidiaries has filed any notice under any requirement of Applicable Law indicating past or present treatment, storage or disposal of a hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent; (G) neither any Borrower nor any of its Subsidiaries has filed any notice under any requirement of Applicable Law reporting a Release of a Contaminant into the environment; (H) except in compliance in all material respects with applicable Environmental Laws, during the course of any Borrower's or any of its Subsidiaries' ownership of or operations on the Real Estate, there have been no (1) generation, treatment, recycling, storage or disposal of hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent, (2) use of underground storage tanks or surface impoundments, (3) use of asbestos-containing materials, or (4) use of polychlorinated biphenyls (PCB) used in hydraulic oils, electrical transformers or other equipment; (I) neither any Borrower nor any of its Subsidiaries has entered into any negotiations or agreements with any Person (including, without limitation, any prior owner of any of the Real Estate or other property of any Borrower or any of its Subsidiaries) relating to any Remedial Action or environmental related claim; (J) neither any Borrower nor any of its Subsidiaries has received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant into the environment; (K) neither any Borrower nor any of its Subsidiaries has any material contingent liability in connection with any Release or threatened Release of any Contaminant into the environment; (L) no Environmental Lien has attached to any of the Real Estate or other property of any Borrower or of any of its Subsidiaries; (M) the presence and condition of all asbestos-containing material which is on or part of the Real Estate (excluding any raw materials used in the manufacture of products or products themselves) do not violate in any material respect any currently applicable requirement of Applicable Law; and (N) neither any Borrower nor any of its Subsidiaries manufactures, distributes or sells, and has never manufactured, distributed or sold, products which contain asbestos-containing material. (iii) Each Borrower has notified the Agent of the receipt by it or any of its Subsidiaries of any notice of a material violation of any Environmental Laws and occupational health and safety laws applicable to such Borrower, Subsidiaries or any of their respective properties. (i) TITLE TO PROPERTIES. Except as set forth in SCHEDULE 6.1(i), each Borrower and each of its Subsidiaries has valid and legal title to or leasehold interest in all personal property, Real Estate owned and other assets used in its business, including, but not limited to, those reflected on the most recent balance sheets of the Borrowers delivered pursuant to SECTION 6.1(o). (j) LIENS. Except as set forth in SCHEDULE 6.1(j), none of the properties and assets of any Borrower or any of its Subsidiaries is subject to any Lien, except Permitted Liens. Other than the Financing Statements, the Airframe and Engine Mortgage and the Mortgage Supplements, no financing statement under the Uniform Commercial Code or similar laws of any jurisdiction, no filing with the FAA, and no other instrument evidencing a Lien which names any Borrower or any of its Subsidiaries as debtor has been filed (and has not been terminated) in any jurisdiction, and neither any Borrower nor any of its Subsidiaries has signed any such financing statement, FAA filing or other instrument or any security agreement authorizing any -69- 78 secured party thereunder to file any such financing statement or instrument, except to perfect those Liens listed on SCHEDULE 6.1(j). (k) INDEBTEDNESS AND GUARANTIES. SCHEDULE 6.1(k) is a complete and correct listing of all Indebtedness for Money Borrowed and Guaranties of each Borrower and its Subsidiaries. Each Borrower and its Subsidiaries has performed and is in compliance in all material respects with all of the terms of such Indebtedness and Guaranties and all instruments and agreements relating thereto, and no default or event of default, or event or condition which with notice or lapse of time or both would constitute such a default or event of default, exists with respect to any such Indebtedness or Guaranty. (l) LITIGATION. Except as set forth on SCHEDULE 6.1(L), there are no actions, suits or proceedings pending (nor, to the knowledge of any Borrower, are there any actions, suits or proceedings threatened, or any reasonable basis therefor) against or in any other way relating to or affecting any Borrower or any of its Subsidiaries or any of any Borrower's or any of its Subsidiaries' other properties in any court or before any arbitrator of any kind or before or by any governmental body, except actions, suits or proceedings of the character normally incident to the kind of business conducted by the Borrowers or any of its Subsidiaries which, if adversely determined, would not singly or in the aggregate have a Materially Adverse Effect, and there are no strikes or walkouts in progress, pending or, to the knowledge of any Borrower, threatened, relating to any labor contracts to which any Borrower or any of its Subsidiaries is a party, relating to any labor contracts being negotiated, or otherwise. (m) TAX RETURNS AND PAYMENTS. Except as set forth on SCHEDULE 6.1(m), all United States federal, state and local as well as foreign national, provincial and local and other tax returns of each Borrower and each of its Subsidiaries required by Applicable Law to be filed have been duly filed, and all United States federal, state and local and foreign national, provincial and local and other taxes, assessments and other governmental charges or levies upon each Borrower and each of its Subsidiaries and each Borrower's and any of its Subsidiaries' property, income, profits and assets which are due and payable have been paid, except any such nonpayment which is at the time permitted under SECTION 9.6. The charges, accruals and reserves on the books of each Borrower and each of its Subsidiaries in respect of United States federal, state and local and foreign national, provincial and local taxes for all fiscal years and portions thereof since the organization of each Borrower and each of its Subsidiaries are in the judgment of each Borrower adequate, and no Borrower knows of any reason to anticipate any additional assessments for any of such years which, singly or in the aggregate, might have a Materially Adverse Effect. (n) BURDENSOME PROVISIONS. Neither any Borrower nor any of its Subsidiaries is a party to any indenture, agreement, lease or other instrument, or subject to any charter or corporate restriction, Governmental Approval or Applicable Law compliance with the terms of which might have a Materially Adverse Effect. (o) FINANCIAL STATEMENTS. (i) The Borrowers have furnished to the Agent and the Lenders (A) copies of the annual audited consolidated balance sheet of Kellstrom and its Consolidated Subsidiaries as of December 31, 1997 and the related audited consolidated statements of operations, cash flows and shareholder's equity for the fiscal year ended on such date, -70- 79 reported on by KPMG Peat Marwick LLP and (B) copies of the unaudited consolidated balance sheet of Kellstrom and its Consolidated Subsidiaries as of October 31, 1998 and of the related statements of operations and cash flows for the 10-month period then ended. Such financial statements present fairly, in all material respects, as of their respective dates and in accordance with GAAP (subject to year-end adjustments and but for the omission of footnotes in the unaudited statements) the consolidated financial condition of Kellstrom and its Consolidated Subsidiaries as of such dates and the consolidated results of operations of Kellstrom and its Consolidated Subsidiaries for the periods ended on such dates. (ii) The Borrowers have furnished to the Agent and the Lenders copies of the Projections. The Projections have been be prepared by the Borrowers in light of the past operations of the business of the Borrowers and their Subsidiaries and represent as of the respective dates thereof the good faith opinion of the Borrowers and their senior management concerning the likely course of business of the Borrowers and their Subsidiaries. (iii) Except as disclosed or reflected in the financial statements described in CLAUSES (i) and (ii) above, no Borrower nor any of its Subsidiaries has any material liabilities, contingent or otherwise, and there were no material unrealized or anticipated losses of any Borrower or any of its Subsidiaries. (p) ADVERSE CHANGE. Since the date of the audited financial statements of the Borrowers delivered to the Agent pursuant to SECTION 6.1(o)(i), (i) no material adverse change has occurred in the business, assets, liabilities, financial condition, results of operations or business prospects of any Borrower or any of its Subsidiaries, and () no event has occurred or failed to occur which has had, or may have, singly or in the aggregate, a Materially Adverse Effect. (q) ERISA. (i) Neither any Borrower nor any Related Company maintains or contributes to any Benefit Plan other than those listed on SCHEDULE 6.1(q). (ii) No Benefit Plan has been terminated or partially terminated, and no Multiemployer Plan is insolvent or in reorganization, nor have any proceedings been instituted to terminate any Benefit Plan or to reorganize any Multiemployer Plan. (iii) Neither any Borrower nor any Related Company has withdrawn from any Benefit Plan or Multiemployer Plan, nor has a condition occurred which if continued would result in a withdrawal. (iv) Neither any Borrower nor any Related Company has incurred any withdrawal liability, including contingent withdrawal liability, to any Multiemployer Plan pursuant to Title IV of ERISA. (v) Neither any Borrower nor any Related Company has incurred any liability to the PBGC other than for required insurance premiums which have been paid when due. -71- 80 (vi) No Reportable Event has occurred with respect to a Plan. (vii) No Benefit Plan has an "accumulated funding deficiency" (whether or not waived) as defined in Section 302 of ERISA or in Section 412 of the Internal Revenue Code. (viii) Each Plan is in substantial compliance with ERISA, and neither any Borrower nor any Related Company has received any communication from a governmental agency asserting that a Plan is not in compliance with ERISA. (ix) Each Plan which is intended to be a qualified Plan has been determined by the IRS to be qualified under Section 401(a) of the Internal Revenue Code as currently in effect or will be submitted to the IRS for such determination prior to the end of the remedial amendment period under Section 401(b) of the Internal Revenue Code and the regulations promulgated thereunder and neither any Borrower nor any Related Company knows or has reason to know why each such Plan should not continue to be so qualified, and each trust related to such Plan that has been submitted to the IRS for determination of exempt status has been determined to be exempt from federal income tax under Section 501(a) of the Internal Revenue Code or will be submitted to the IRS for a determination of exempt status. (x) Except as provided on SCHEDULE 6.1(q), neither any Borrower nor any Related Company maintains or contributes to any employer welfare benefit plan within the meaning of Section 3(l) of ERISA which provides benefits to employees after termination of employment other than as required by Section 601 of ERISA. (xi) Schedule B to the most recent annual report filed with the IRS with respect to each Benefit Plan and furnished to the Agent is complete and accurate. Since the date of each such Schedule B, there has been no adverse change in funding status or financial condition of the Benefit Plan relating to such Schedule B. (xii) Neither any Borrower nor any Related Company has failed to make a required installment under Subsection (m) of Section 412 of the Internal Revenue Code or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment. (xiii) Neither any Borrower nor any Related Company is required to provide security to a Benefit Plan under Section 401(a)(29) of the Internal Revenue Code due to a Benefit Plan amendment that results in an increase in current liability for the plan year. (xiv) Neither any Borrower nor any Related Company, nor any other "party-in-interest" or "disqualified person" has engaged in a nonexempt "prohibited transaction," as such terms are defined in Section 4975 of the Internal Revenue Code and Section 406 of ERISA, in connection with any Plan or has taken or failed to take any action which would constitute or result in a Termination Event. (xv) Neither any Borrower nor any Related Company has failed to comply with the health care continuation coverage requirements of Section 4980B of the Internal -72- 81 Revenue Code in respect of employees and former employees of such Borrower or such Related Company and their dependents and beneficiaries which alone or in the aggregate would subject such Borrower or such Related Company to any material liability. (xvi) Neither any Borrower nor any Related Company has (i) failed to make a required contribution or payment to a Multiemployer Plan or (ii) made a complete or partial withdrawal under Sections 4203 or 4205 of ERISA from a Multiemployer Plan. Except as provided on SCHEDULE 6.1(q), to the best knowledge of each Borrower after due inquiry, neither any Borrower nor any Related Company shall have any obligation to (A) make contributions to any Multiemployer Plan on or after the Effective Date, or (B) pay withdrawal liability to any Multiemployer Plan in an amount in excess of a "de minimis amount" as such term is defined in Section 4209 of ERISA. (r) ABSENCE OF DEFAULTS. Neither any Borrower nor any of its Subsidiaries is in default under its articles or certificate of incorporation or by-laws and no event has occurred, which has not been remedied, cured or waived, (i) which constitutes a Default or an Event of Default, or (ii) which constitutes, or which with the passage of time or giving of notice or both would constitute, a default or event of default by any Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) or judgment, decree or order to which any Borrower or any of its Subsidiaries is a party or by which any Borrower, any of its Subsidiaries or any of their properties may be bound or which would require any Borrower or any of its Subsidiaries to make any payment under any such agreement, judgment, decree or order prior to the scheduled maturity date therefor, except, in the case only of any such agreement, for alleged defaults which are being contested in good faith by appropriate proceedings and with respect to which reserves in respect of any Borrower's or such Subsidiary's reasonably anticipated liability have been established on the books of such Borrower or Subsidiary. (s) ACCURACY AND COMPLETENESS OF INFORMATION. (i) All written information, reports and other papers and data produced by or on behalf of the Borrowers were, at the time the same were so furnished, complete and correct in all material respects. No fact is known to any Borrower which has had, or may in the future have, a Materially Adverse Effect which has not been set forth in the financial statements or disclosure delivered prior to the Effective Date, in each case referred to in SECTION 6.1(o), or in such written information, reports or other papers or data or otherwise disclosed in writing to the Agent and the Lenders prior to the Agreement Date. No document furnished or written statement made to the Agent or any Lender by any Borrower or any of its Subsidiaries in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contains or will contain any untrue statement of a fact material to the creditworthiness of any Borrower or any of its Subsidiaries or omits or will omit to state a material fact necessary in order to make the statements contained therein not misleading. (ii) No Borrower has any reason to believe that any document furnished or written statement made to the Agent or any Lender by any Person other than the Borrowers in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contained any incorrect statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. -73- 82 (t) SOLVENCY. In each case after giving effect to the Indebtedness represented by the Loans outstanding and to be incurred and the transactions contemplated by this Agreement, each Borrower and each of its Subsidiaries is solvent, having assets of a fair salable value which exceeds the amount required to pay its debts as they become absolute and matured (including contingent, subordinated, unmatured and unliquidated liabilities), and each Borrower and each of its Subsidiaries is able to and anticipates that it will be able to meet its debts as they mature and has adequate capital to conduct the business in which it is or proposes to be engaged. (u) RECEIVABLES. (i) STATUS. (A) Each Receivable reflected in the computations included in any Borrowing Base Certificate meets the criteria enumerated in the definition of Eligible Receivables, and each Lease Receivable reflected in the computations included in any Borrowing Base Certificate as an Eligible Domestic Receivable or an Eligible Foreign Receivable meets the criteria enumerated in the definition of Eligible Domestic Receivable or Eligible Foreign Receivable, as applicable, except in each case as disclosed in such Borrowing Base Certificate or as disclosed in a timely manner in a subsequent Borrowing Base Certificate or otherwise in writing to the Agent. (B) No Borrower has any knowledge of any fact or circumstance not disclosed to the Agent in a Borrowing Base Certificate or otherwise in writing which would impair the validity or collectibility of any Receivable of $100,000 or more or of Receivables which (regardless of the individual amount thereof) aggregate $500,000 or more. (C) Each Lease Agreement is substantially in the form of the lease agreements delivered to the Agent prior to the Agreement Date, or in such other form as shall have been approved by Agent in accordance with SECTION 8.4(b). Each Lease Agreement dated after the Effective Date has been executed in the manner set forth in SECTION 8.4(c). Other than as has been disclosed to the Agent in writing, no Lease Agreement is in default. (ii) CHIEF EXECUTIVE OFFICE. The chief executive office of each Borrower and the books and records relating to the Receivables are located at the address or addresses set forth on SCHEDULE 6.1(u); no Borrower has maintained its chief executive office or books and records relating to any Receivables at any other address at any time during the five years immediately preceding the Agreement Date except as disclosed on SCHEDULE 6.1(u). -74- 83 (v) INVENTORY. (i) SCHEDULE OF INVENTORY. All Inventory included in any Schedule of Inventory or Borrowing Base Certificate delivered to the Agent or any Lender pursuant to SECTION 8.12 meets the criteria enumerated in the definition of Eligible Inventory, and all Inventory classified on any Schedule of Inventory or Borrowing Base Certificate as Eligible Domestic Leased Engine Inventory, Eligible Foreign Leased Engine Inventory, Eligible Foreign Leased Airframe Inventory, Eligible Leased Airframe Inventory or Eligible Inventoried Engine and Parts Inventory meets all of the criteria set forth for such type of Inventory in its definition, except in each case as disclosed in such Schedule of Inventory or Borrowing Base Certificate or in a subsequent Schedule of Inventory or Borrowing Base Certificate, or as otherwise specifically disclosed in writing to the Agent. (ii) CONDITION. All Inventory is in good condition, meets all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over such goods, their use, sale or lease, and is currently either usable, leaseable or salable in the normal course of the applicable Borrower's business, except to the extent reserved against in the financial statements referred to in SECTION 6.1(o) or delivered pursuant to ARTICLE 10 or as disclosed on a Schedule of Inventory delivered to the Agent and the Lenders pursuant to SECTION 8.12(B). (iii) LOCATION. All Inventory other than Inventory subject to a Lease Agreement is located on the premises set forth on SCHEDULE 6.1(v), is Inventory in transit to one of such locations, or is Inventory in transit to or being maintained, serviced, repaired or overhauled at an FAA-certified repair station, except as otherwise disclosed in writing to the Agent; no Borrower has, in the last year, located such Inventory at premises other than those set forth on SCHEDULE 6.1(v), except for at such times as such Inventory was subject to a Lease Agreement or was off-site for maintenance, service, repair or overhaul. (w) EQUIPMENT. All Equipment is in good order and repair in all material respects and is located on the premises set forth on SCHEDULE 6.1(w) and has been so located at all times during the last year. (x) REAL PROPERTY. No Borrower owns any Real Estate or leases any Real Estate other than that described on SCHEDULE 6.1(x) and other than Real Estate acquired or leased after the Effective Date for which the Borrowers have complied with the requirements of SECTION 8.14. (y) CORPORATE AND FICTITIOUS NAMES. Except as otherwise disclosed on SCHEDULE 6.1(y), during the five-year period preceding the Agreement Date, no Borrower, nor any predecessor thereof nor any Subsidiary of any Borrower has been known as or used any corporate or fictitious name other than the corporate names of the Borrowers on the Effective Date. (z) FEDERAL RESERVE REGULATIONS. No Borrower nor any of its Subsidiaries is engaged and none will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each of -75- 84 the quoted terms is defined or used in Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of any of the Loans will be used for so purchasing or carrying margin stock or, in any event, for any purpose which violates, or which would be inconsistent with, the provisions of Regulations T, U or X of such Board of Governors. If requested by the Agent or any Lender, the Borrowers will furnish to the Agent and the Lenders a statement or statements in conformity with the requirements of said Regulations T, U or X to the foregoing effect. (aa) INVESTMENT COMPANY ACT. No Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). (bb) EMPLOYEE RELATIONS. Each Borrower has a stable work force in place and is not, except as set forth on SCHEDULE 6.1(bb), party to any collective bargaining agreement nor has any labor union been recognized as the representative of any Borrower's or any of its Subsidiaries' employees, and no Borrower knows of any pending or threatened strikes, work stoppage or other labor disputes involving any Borrower's or any of its Subsidiaries' employees. (cc) PROPRIETARY RIGHTS. SCHEDULE 6.1(cc) sets forth a correct and complete list of all of the Proprietary Rights. None of the Proprietary Rights is subject to any licensing agreement or similar arrangement except as set forth on SCHEDULE 6.1(cc) or as entered into in the sale or distribution of any Borrower's Inventory in the ordinary course of business. To the best of each Borrower's knowledge, none of the Proprietary Rights infringes on or conflicts with any other Person's property, and, to each Borrower's knowledge, no other Person's property infringes on or conflicts with the Proprietary Rights. The Proprietary Rights described on SCHEDULE 6.1(cc) constitute all of the property of such type necessary to the current and anticipated future conduct of each Borrower's business. (dd) TRADE NAMES. All trade names or styles under which any Borrower sells or leases Inventory or Equipment or creates Receivables or enters into Lease Agreements, or to which instruments in payment of Receivables are made payable, are listed on SCHEDULE 6.1(dd). (ee) BANK ACCOUNTS, LOCKBOXES, ETC. SCHEDULE 6.1(ee) is a complete and correct list of all checking accounts, deposit accounts, lockboxes and other bank accounts maintained by any Borrower. (ff) YEAR 2000 COMPLIANCE. Each Borrower (a) has initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by such Borrower or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (b) will by March 31, 1999 have developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (c) will implement that plan in accordance with that timetable. Based on the foregoing, each Borrower believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"). -76- 85 (gg) SUBORDINATED INDEBTEDNESS. The Secured Obligations (i) constitute "Senior Debt" as defined in the documents evidencing the Equitable Subordinated Loan, and (ii) constitute "Designated Senior Indebtedness" as defined in the Indentures relating to the Convertible Subordinated Notes. SECTION 6.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All representations and warranties set forth in this ARTICLE 6 and all statements contained in any certificate, financial statement, or other instrument delivered by or on behalf of any Borrower pursuant to or in connection with this Agreement or any of the Loan Documents (including, but not limited to, any such representation, warranty or statement made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Agreement Date, at and as of the Effective Date and at and as of the date of each Loan, except that representations and warranties which, by their terms are applicable only to one such date shall be deemed to be made only at and as of such date. All representations and warranties made or deemed to be made under this Agreement shall survive and not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Lender or any borrowing hereunder. ARTICLE 7 SECURITY INTEREST SECTION 7.1. SECURITY INTEREST. (a) To secure the payment, observance and performance of the Secured Obligations, each Borrower hereby mortgages, pledges and assigns all of its right, title and interest in and to the Collateral to the Agent, for the benefit of the Secured Parties, and grants to the Agent, for the benefit of the Secured Parties, a continuing security interest in, and a continuing Lien upon, all of its right, title and interest in and to the Collateral. (b) As additional security for all of the Secured Obligations, each Borrower grants to the Agent, each Lender and the Affiliates of the Lenders, for the benefit of the Secured Parties, a security interest in, and assigns to the Agent, for the benefit of the Secured Parties, all of such Borrower's right, title and interest in and to, any deposits or other sums at any time credited by or due from each Lender and each Affiliate of a Lender to such Borrower, or credited by or due from any participant of any Lender to such Borrower, with the same rights therein as if the deposits or other sums were credited by or due from such Lender. Each Borrower hereby authorizes each Lender and each Affiliate of such Lender and each participant to pay or deliver to the Agent, for the account of the Secured Parties, without any necessity on the Agent's or any Lender's part to resort to other security or sources of reimbursement for the Secured Obligations, at any time during the continuation of any Event of Default or in the event that the Agent, on behalf of the Secured Parties, should make demand for payment hereunder and without further notice to any Borrower (such notice being expressly waived), any of the aforesaid deposits (general or special, time or demand, provisional or final) or other sums for application to any Secured Obligation, irrespective of whether any demand has been made or whether such Secured Obligation is mature, and the rights given the Secured Parties and participants hereunder are -77- 86 cumulative with such Person's other rights and remedies, including other rights of set-off. The Agent will promptly notify Kellstrom of its receipt of any such funds for application to the Secured Obligations, but failure to do so will not affect the validity or enforceability thereof. The Agent may give notice of the above grant of a security interest in and assignment of the aforesaid deposits and other sums, and authorization to, and make any suitable arrangements with, any Lender, any such Affiliate of any Lender or participant for effectuation thereof, and each Borrower hereby irrevocably appoints the Agent as its attorney to collect any and all such deposits or other sums to the extent any such payment is not made to the Agent or any Lender by such Lender, Affiliate or participant. SECTION 7.2. CONTINUED PRIORITY OF SECURITY INTEREST. (a) The Security Interest granted by each Borrower (or Trust) shall at all times be valid, perfected and enforceable against each Borrower (or Trust) and all third parties in accordance with the terms of this Agreement, as security for the Secured Obligations, and the Collateral shall not at any time be subject to any Liens that are prior to, on a parity with or junior to the Security Interest, other than Permitted Liens. (b) Each Borrower (or Trust) shall, at its sole cost and expense, take all action that may be necessary or desirable, or that the Agent may reasonably request, so as at all times to maintain the validity, perfection, enforceability and rank of the Security Interest in the Collateral in conformity with the requirements of SECTION 7.2(a), or to enable the Agent and the Lenders to exercise or enforce their rights hereunder, including, but not limited to: (i) paying all taxes, assessments and other claims lawfully levied or assessed on any of the Collateral, except to the extent that such taxes, assessments and other claims constitute Permitted Liens, (ii) obtaining, after the Agreement Date, landlords' and mortgagees' releases, subordinations or waivers, and using all reasonable efforts to obtain mechanics' releases, subordinations or waivers, (iii) delivering to the Agent, for the benefit of the Secured Parties, any and all Chattel Paper, marked as the "chattel paper original", as well as the original of any letter of credit supporting the obligations evidenced by such Chattel Paper, (iv) delivering to the Agent, for the benefit of the Secured Parties, endorsed or accompanied by such instruments of assignment as the Agent may specify, and stamping or marking, in such manner as the Agent may specify, any and all instruments, letters and advices of guaranty and documents evidencing or forming a part of the Collateral, and (v) executing and delivering financing statements, Mortgage Supplements, pledges, designations, hypothecations, notices and assignments in each case in form and substance satisfactory to the Agent relating to the creation, validity, perfection, maintenance or continuation of the Security Interest under the Uniform Commercial Code or other Applicable Law. -78- 87 (c) The Agent is hereby authorized to file one or more financing or continuation statements or amendments thereto and Airframe and Engine Mortgages and Mortgage Supplements without the signature of or in the name of any Borrower or Trust for any purpose described in SECTION 7.2(b). The Agent will give the Borrowers notice of the filing of any such statements or amendments, which notice shall specify the locations where such statements or amendments were filed. A carbon, photographic, xerographic or other reproduction of this Agreement or of any of the Security Documents or of any financing statement filed in connection with this Agreement is sufficient as a financing statement. (d) Each Borrower shall mark its books and records as directed by the Agent and as may be necessary or appropriate to evidence, protect and perfect the Security Interest and shall cause its financial statements to reflect the Security Interest. ARTICLE 8 COLLATERAL COVENANTS Until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner provided in SECTION 15.11: SECTION 8.1. COLLECTION OF RECEIVABLES. (a) At the request of the Agent, each Borrower and the Trust shall cause all Lease Receivables to be delivered directly by the Account Debtors by wire transfer to an Agency Account and all monies, checks, notes, drafts and other payments relating to or constituting proceeds of all Receivables other than Lease Receivables to be forwarded to a Lockbox for deposit in an Agency Account in accordance with the procedures set out in the corresponding Agency Account Agreement. The Borrowers will promptly cause all monies, checks, notes, drafts and other payments relating to or constituting proceeds of Receivables other than Lease Receivables, of any other Collateral and of any trade accounts receivable that are not forwarded to a Lockbox to be transferred to or deposited in an Agency Account. In particular, each Borrower will: (i) advise each Account Debtor on trade accounts receivable to address all remittances with respect to amounts payable on account thereof to a specified Lockbox, (ii) advise each other Account Debtor that makes payment to such Borrower by wire transfer, automated clearinghouse transfer or similar means to make payment directly to an Agency Account, and (iii) stamp all invoices relating to trade accounts receivable with a legend satisfactory to the Agent indicating that payment is to be made to such Borrower via a specified Lockbox. (b) The Borrowers and the Agent shall cause all balances in each Agency Account to be transmitted daily by wire transfer, depository transfer check or other means in accordance -79- 88 with the procedures set forth in the corresponding Agency Account Agreement, to the Agent at the Agent's Office: (i) for application, on account of the Secured Obligations, as provided in SECTIONS 2.3(c), 12.2, and 12.3, such credits to be entered as of the Business Day they are received if they are received prior to 1:30 p.m. (Atlanta time) and to be conditioned upon final payment in cash or solvent credits of the items giving rise to them, and (ii) with respect to the balance, so long as no Default or Event of Default has occurred and is continuing, for transfer by wire transfer or depository transfer check to a Disbursement Account. (c) Any monies, checks, notes, drafts or other payments referred to in SUBSECTION (a) of this SECTION 8.1 which, notwithstanding the terms of such subsection, are received by or on behalf of a Borrower or Trust will be held in trust for the Agent and will be delivered to the Agent or a Clearing Bank, as promptly as possible, in the exact form received, together with any necessary endorsements for application by the Agent directly to the Secured Obligations or, if applicable, for deposit in the Agency Account maintained with a Clearing Bank and processing in accordance with the terms of the corresponding Agency Account Agreement. SECTION 8.2. VERIFICATION AND NOTIFICATION. The Agent shall have the right at any time and from time to time, (a) in the name of the Agent, the Lenders or in the name of any Borrower, to verify the validity, amount or any other matter relating to any Receivables by mail, telephone, telegraph or otherwise, (b) to review, audit and make extracts from all records and files related to any of the Receivables, and (c) to notify the Account Debtors under any Receivables of the assignment of such Receivables to the Agent, for the benefit of the Secured Parties, and to direct such Account Debtor to make payment of all amounts due or to become due thereunder directly to the Agent, for the account of the Lenders, and, upon such notification and at the expense of the Borrowers, to enforce collection of any such Receivables and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Borrowers might have done. SECTION 8.3. DISPUTES, RETURNS AND ADJUSTMENTS. (a) In the event any amounts due and owing under any Receivable for an amount in excess of $250,000 are in dispute between an Account Debtor and a Borrower or Trust, the Borrowers shall provide the Agent with prompt written notice thereof. (b) The Borrowers shall notify the Agent promptly of all returns and credits in excess of $250,000 in respect of any Receivable, which notice shall specify the Receivable affected. (c) The Borrowers may, in the ordinary course of business unless a Default or an Event of Default has occurred and is continuing, grant any extension of time for payment of any -80- 89 Receivable or compromise, compound or settle the same for less than the full amount thereof, or release wholly or partly any Person liable for the payment thereof, or allow any credit or discount whatsoever therein; PROVIDED that (i) no such action results in the reduction of more than $100,000 in the amount payable with respect to any Receivable or of more than $250,000 with respect to all Receivables in any fiscal year (in each case, excluding the allowance of credits or discounts generally available to Account Debtors in the ordinary course of the Borrowers' business and appropriate adjustments to the accounts of Account Debtors in the ordinary course of business), and (ii) the Agent is promptly notified of the amount of such adjustments and the Receivable(s) affected thereby. SECTION 8.4. INVOICES AND LEASE AGREEMENTS. (a) No Borrower will use any invoices other than invoices in the form delivered to the Agent prior to the Agreement Date without giving the Agent 30 days prior notice of the intended use of a different form of invoice together with a copy of such different form. (b) Without the Agent's approval, no Borrower or Trust will use a form of Lease Agreement that differs in any material respect from the forms of Lease Agreement delivered to the Agent prior to the Agreement Date. A Borrower's request for approval of a different form of Lease Agreement shall be accompanied by a copy of such different form for the review of the Agent and its counsel. (c) Each Borrower and Trust shall, prior to executing any Lease Agreement, mark in a plain, distinct, permanent and conspicuous manner that one single original Lease Agreement is the chattel paper original, and each Borrower (or Trust) shall cause all executed counterparts of such Lease Agreement to be marked as duplicate originals. (d) No Borrower or Trust shall terminate any Lease Agreement (other than because of a default by the Account Debtor under such Lease Agreement), or enter into any amendment, modification, or consent with respect to a Lease Agreement that materially affects any Borrower's or Trust's rights under such Lease Agreement, unless the Agent consents to such amendment, modification or consent. (e) Upon the request of the Agent, each Borrower shall deliver to the Agent, at the Borrowers' expense, copies of customers' invoices or the equivalent, original shipping and delivery receipts or other proof of delivery, customers' statements, customer address lists, the original copy of all documents, including, without limitation, repayment histories and present status reports, relating to Receivables and such other documents and information relating to the Receivables as the Agent shall specify. SECTION 8.5. DELIVERY OF INSTRUMENTS, CHATTEL PAPER AND MORTGAGE SUPPLEMENTS. In the event any Receivable is at any time evidenced by a promissory note, trade acceptance or any other instrument for the payment of money, the Borrowers will promptly thereafter deliver such instrument to the Agent, appropriately endorsed to the Agent, for the benefit of the Secured Parties. All Chattel Paper shall be marked as such by the Borrowers, and shall be promptly delivered to the Agent, along with the original of any letter of credit supporting the obligation evidenced by the Chattel Paper, duly assigned to the Agent for the benefit of the Secured Parties. Each time any Borrower or Trust acquires an interest in Engine Inventory (including Engine Inventory acquired by virtue of an Account Debtor returning to a Borrower an engine not previously owned by a Borrower in substitution for the engine originally subject -81- 90 to the Lease Agreement with such Account Debtor (an "Engine Exchange")), Airframe Inventory or a Lease Agreement, such Borrower or Trust shall execute and deliver to the Agent a Mortgage Supplement in the form attached to the Airframe and Engine Mortgage, granting to the Agent, for the benefit of the Secured Parties, a perfected, first-priority purchase money Security Interest in such Inventory, and a perfected, first-priority Security Interest in any Lease Agreement relating thereto (which Lease Agreement shall be filed for recording with the FAA by the Borrower), along with copies of the necessary FAA Application for Aircraft or Engine Registration and FAA bill of sale, if applicable, and, to the extent necessary, copies of Lien releases and lease terminations relating to any FAA filings against any such Inventory, together with such additional legal opinions and documents as the Agent might request. In the case of an Engine Exchange, the Agent shall execute a partial release of mortgage with respect to the Engine Inventory being exchanged by the Borrower, and the Borrower shall execute and deliver a Mortgage Supplement with respect to the Engine Inventory received by the Borrower in connection with the Engine Exchange, which Mortgage Supplement shall subject such Engine to the Security Interest and to no other Lien whatsoever. SECTION 8.6. SALES AND LEASES OF INVENTORY. All sales and leases of Inventory will be made in compliance with all requirements of Applicable Law. SECTION 8.7. OWNERSHIP AND DEFENSE OF TITLE. (a) Except for Permitted Liens, the Borrowers and the Trust shall at all times be the sole owners of each and every item of Collateral and shall not create any lien on, or sell, lease, exchange, assign, transfer, pledge, hypothecate, grant a security interest or security title in or otherwise dispose of, any of the Collateral or any interest therein, except for (i) sales and leases of Inventory in the ordinary course of business, for cash or on open account or on terms of payment ordinarily extended to its customers, (ii) Engine Exchanges, provided such new engine is not subject to any Lien other than Permitted Liens, and (iii) other dispositions that are expressly permitted under this Agreement. The inclusion of "proceeds" of the Collateral under the Security Interest shall not be deemed a consent by the Agent or the Lenders to any other sale or other disposition of any part or all of the Collateral. (b) Each Borrower shall, and shall cause the Trust to, defend its title or leasehold interest in and to, and the Security Interest in, the Collateral against the claims and demands of all Persons. SECTION 8.8. INSURANCE. (a) The Borrowers shall at all times maintain insurance (or cause insurance to be maintained) on the Inventory and Equipment against loss or damage by fire, theft (excluding theft by employees), burglary, pilferage, loss in transit and such other hazards as are specified in the Airframe and Engine Mortgage or as the Agent shall reasonably specify, in amounts not to exceed those obtainable at commercially reasonable rates and under policies issued by insurers acceptable to the Agent in the exercise of its reasonable judgment. All premiums on such insurance shall be paid by the Borrowers and copies of the policies delivered to the Agent. The Borrowers will not use or permit the Inventory or Equipment to be used in violation of Applicable Law or in any manner which might render inapplicable any insurance coverage. (b) All insurance policies required under SECTION 8.8(a) shall name the Agent, for the benefit of the Secured Parties, as an additional insured and shall contain loss payable clauses -82- 91 in the form submitted to the Borrowers by the Agent, or otherwise in form and substance satisfactory to the Agent, naming the Agent, for the benefit of the Secured Parties, as loss payee, as its interests may appear, and providing that (i) all proceeds thereunder shall be payable to the Agent, for the benefit of the Secured Parties, (ii) no such insurance shall be affected by any act or neglect of the insurer or owner of the property described in such policy, and (iii) such policy and loss payable clauses may be canceled, amended or terminated only upon at least 30 days prior written notice given to the Agent. (c) Any proceeds of insurance referred to in this SECTION 8.8 which are paid to the Agent, for the account of the Secured Parties, shall be, at the option of the Required Lenders in their sole discretion, either (i) applied to replace the damaged or destroyed property, or (ii) applied to the payment or prepayment of the Secured Obligations. SECTION 8.9. LOCATION OF OFFICES AND COLLATERAL. (a) No Borrower will change the location of its chief executive office or the place where it keeps its books and records relating to the Collateral or change its name, its identity or corporate structure without giving the Agent 60 days prior written notice thereof. (b) All Inventory, other than Inventory subject to a Lease Agreement, Inventory at an FAA-approved repair facility, and Inventory in transit to any such location, will at all times be kept by each Borrower at the locations set forth in SCHEDULE 6.1(v), and shall not, without the prior written consent of the Agent, be removed therefrom except pursuant to sales or leases of Inventory permitted under SECTION 8.7(a). In the event Inventory with an aggregate Net Book Value greater than $750,000 will be at a location other than one of the locations set forth in SCHEDULE 6.1(v) for more than a 30 day period, the Borrowers shall give the Agent prior written notice thereof, and the Agent shall have the right, at its option, to take such steps as it deems reasonably necessary to protect the Security Interest in such Inventory. (c) If any Inventory is in the possession or control of any of a Borrower's agents or processors, such Borrower shall notify such agents or processors of the Security Interest (and shall promptly provide copies of any such notice to the Agent and the Lenders) and, upon the occurrence of an Event of Default, shall instruct them (and cause them to acknowledge such instruction) to hold all such Inventory for the account of the Lenders, subject to the instructions of the Agent. SECTION 8.10. RECORDS RELATING TO COLLATERAL. (a) Each Borrower will at all times (i) keep complete and accurate records of Inventory on a basis consistent with past practices of such Borrower so as to permit comparison of Inventory records relating to different time periods, itemizing and describing the kind, type and quantity of -83- 92 Inventory and such Borrower's cost therefor and a current price list for such Inventory, and (ii) keep complete and accurate records of all other Collateral. (b) Each Borrower will provide the Agent and each Lender a listing of all Inventory (other than bulk inventory that is not costed or counted), wherever located, at least annually. SECTION 8.11. INSPECTION. The Agent and each Lender (by any of their officers, employees or agents) shall have the right, to the extent that the exercise of such right shall be within the control of the Borrowers, (a) with respect to the Agent, at any time or times, and with respect to any Lender, upon the occurrence of an Event of Default, to visit the properties of the Borrowers and their Subsidiaries, inspect the Collateral and the other assets of the Borrowers and their Subsidiaries, and inspect and make extracts from the books and records of the Borrowers and their Subsidiaries, including but not limited to management letters prepared by independent accountants, all during customary business hours at such premises; (b) at any time or times, to discuss the Borrowers' and its Subsidiaries' business, assets, liabilities, financial condition, results of operations and business prospects, insofar as the same are reasonably related to the rights of the Agent or the Lenders hereunder or under any of the Loan Documents, with the Borrowers' and its Subsidiaries' (i) principal officers, (ii) independent accountants, and (iii) any other Person (except that any such discussion with any third parties shall be conducted only in accordance with the Agent's or such Lender's standard operating procedures relating to the maintenance of the confidentiality of confidential information of borrowers); and (c) with respect to the Agent, at any time or times, and with respect to any Lender, upon the occurrence of an Event of Default, to verify the amount, quantity, value and condition of, or any other matter relating to, any of the Collateral and in this connection to review, audit and make extracts from all records and files related to any of the Collateral, including all maintenance records, flight records and mileage logs. In respect to any inspection of Airframe Inventory subject to a Lease Agreement, such inspection shall occur during regularly-scheduled maintenance of such Airframe Inventory, and shall not interfere with any Borrower's, Trust's, or Account Debtor's operations or maintenance, unless an Event of Default exists, in which case such inspection may occur at any time or times. Upon Agent's request, such Borrower or Trust shall promptly notify Agent of the maintenance operations then scheduled for each aircraft for the six-month period following such request. Neither the Agent nor any Lender shall have any duty to make any such inspection, and shall not incur any liability or obligation by reason of not making such inspection. The Borrowers will deliver to the Agent, for the benefit of the Secured Parties, any instrument necessary for the Agent to obtain records from any service bureau maintaining records on behalf of the Borrowers or any of its Subsidiaries (or any of them). -84- 93 SECTION 8.12. INFORMATION AND REPORTS. (a) SCHEDULE OF RECEIVABLES. The Borrowers shall deliver to the Agent and to each Lender on or before the Effective Date and not later than the 15th day of each calendar month thereafter a Schedule of Receivables which (i) shall be as of the last Business Day of the immediately preceding month, (ii) shall be reconciled to the Borrowing Base Certificate as of such last Business Day, (iii) shall show a separate detailed listing of each Lease Receivable, including the name and address of the Account Debtor with respect to such Lease Receivable, a statement of funds on deposit under each Lease Agreement for maintenance reserves and security deposits, a statement of the remaining term and the lease number of the Lease Agreement, and such other information as the Agent shall request, and (iv) shall set forth a detailed aged trial balance of all of the Borrowers' then existing Receivables, specifying the names, addresses and balance due for each Account Debtor obligated on a Receivable so listed. (b) SCHEDULE OF INVENTORY. The Borrowers shall deliver to the Agent and to each Lender on or before the Effective Date and not later than the 15th day of each calendar month thereafter a Schedule of Inventory as of the last Business Day of the immediately preceding calendar month, itemizing and describing the kind, type and quantity of the Borrowers' Inventory, the location thereof, whether such Inventory is subject to a Lease Agreement, the Net Book Value thereof, and such other detail as the Agent may require. With respect to each item of Engine Inventory and Airframe Inventory, the Schedule of Inventory shall show the make, model and serial number, the jurisdiction in which such Inventory is registered and, if registered with the FAA, the FAA registration number of such Inventory. If such Inventory is subject to a Lease Agreement, the Schedule of Inventory shall also reference the lease number of such Lease Agreement and, with respect to Engine Inventory, shall disclose the jurisdiction of registration of the airframe on which such Engine Inventory is installed, as well as the type and serial number of the airframe on which such Engine Inventory is installed. (c) SCHEDULE OF EQUIPMENT. The Borrowers shall deliver to the Agent upon the Agent's request, a Schedule of Equipment, describing each item of the Borrowers' Equipment and the location, cost and then current book value thereof. (d) BORROWING BASE CERTIFICATE. The Borrowers shall deliver to the Agent and to each Lender on or before the Effective Date and not later than 10 days after the end of each calendar month a Borrowing Base Certificate prepared as of the close of business on the last Business Day of the immediately preceding month; provided, however, at any time that Availability falls below $25,000,000, the Borrowers shall deliver a Borrowing Base Certificate once every two weeks, not later than 5 days after the end of each two-week period. (e) ACCOUNTS PAYABLE LISTINGS. The Borrowers shall deliver to the Agent, on or before the Effective Date and not later than 15 days after the end of each calendar month thereafter, a listing of all of the Borrowers' then existing trade payables as of the last Business Day of such month, specifying the name of and balance due to each trade creditor of the Borrowers. Upon the -86- 94 Agent's request, the Borrowers shall deliver to the Agent monthly detailed trade payable agings in form acceptable to the Agent. (f) APPRAISALS. The Borrowers shall deliver to the Agent on or before the Effective Date, prior to including any item of Airframe Inventory on the Borrowing Base, and not earlier than 15 days prior to each anniversary of the Effective Date (and not later than each anniversary of the Effective Date), appraisals of all aircraft owned by any Borrower or Trust, which appraisals shall set forth the Fair Market Value of the airframe, each engine and the aircraft as a whole. The Borrowers shall deliver to the Agent not earlier than 15 days prior to each anniversary of the Effective Date (and not later than each anniversary of the Effective Date) appraisals of all other Inventory owned by any Borrower or Trust, which appraisals shall set forth the Fair Market Value of all Inventory other than the Parts Inventory and the Orderly Liquidation Value of all Parts Inventory. Each appraisal shall be conducted at the Borrowers' expense by an appraiser satisfactory to the Agent in its reasonable discretion, and each appraisal shall be in form reasonably acceptable to the Agent. Advance rates against Eligible Domestic Leased Engine Inventory, Eligible Foreign Leased Engine Inventory, Eligible Leased Airframe Inventory and Eligible Inventoried Engine and Parts Inventory shall be adjusted each year by the Agent based on the appraisals in accordance with the definition of Borrowing Base, which adjustment shall take place within 10 days of the Agent's receipt of all such annual appraisals. (g) NOTICE OF DIMINUTION OF VALUE. The Borrowers shall give prompt notice to the Agent of any matter or event which has resulted in, or may result in, the diminution in excess of $200,000 in the value of any Collateral, except for any such diminution in the value of any Receivables or Inventory in the ordinary course of business which has been appropriately reserved against, as reflected in financial statements previously delivered to the Agent and the Lenders pursuant to ARTICLE 10. (h) ADDITIONAL INFORMATION. The Agent may in its discretion from time to time request that the Borrowers deliver the schedules, certificates, notices, and appraisals described in SECTIONS 8.12(a), (b), (c), (d), (e), (f) and (g) more or less often and on different schedules than specified in such Sections and the Borrowers will comply with such requests. The Borrowers will also furnish to the Agent and each Lender such other information with respect to the Collateral as the Agent or such Lender may from time to time reasonably request. SECTION 8.13. POWER OF ATTORNEY. Each Borrower hereby appoints the Agent as its attorney, with power (a) at any time or times, pursuant to the terms of the Lockbox Agreement, to endorse the name of such Borrower on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into the Agent's or any Lender's possession, (b) at any time or times, to sign the name of such Borrower on any drafts against customers related to letters of credit, on notices of assignment, financing statements, Mortgage Supplements and other public records relating to the perfection or priority of the Security Interest, and (c) effective at any time or times following the occurrence of a Default or Event of Default, or upon any Borrower's failure to do so within 5 Business Days of the Agent's request, to sign the name of such Borrower an any invoice or bill of lading relating to any Receivable, -86- 95 Inventory or other Collateral, on schedules and assignments of Receivables furnished to the Agent or any Lender by the Borrowers (or any of them), and on verifications of account and on notices to or from customers. SECTION 8.14. ADDITIONAL REAL ESTATE AND LEASES. (a) Promptly upon any Borrower's acquisition of any ownership or long-term leasehold interest in any Real Estate, the Borrowers shall deliver to the Agent, for the benefit of the Secured Parties, an executed Mortgage in form and substance satisfactory to the Agent, conveying to the Agent, for the benefit of the Secured Parties, a first priority Lien on such Real Estate, including, if requested by the Agent, on any long-term leasehold interest therein, subject only to such prior Liens as the Agent shall consent to in writing. If requested by the Agent, the Borrowers shall also deliver to the Agent at Borrowers' expense a mortgagee title insurance policy in favor of the Agent and the Lenders insuring such Mortgage to create and convey such Lien, subject only to such exceptions consented to by the Agent, and shall deliver to the Agent the other items set forth in SECTION 5.1(d)(xvii), (xxi), (xxii) and (xxiii) with respect to such Real Estate, all in form and substance satisfactory to the Agent. (b) Promptly upon any Borrower's entry into any lease of Real Estate (other than a lease conveying a long-term leasehold interest in Real Estate, which shall be subject to the provisions of CLAUSE (a) above), the Borrowers shall deliver to the Agent an executed landlord's waiver and consent with respect to such lease in form and substance satisfactory to the Agent. SECTION 8.15. ASSIGNMENT OF CLAIMS ACT. Upon the request of the Agent, the Borrowers (or any of them) shall execute any documents or instruments and shall take such steps or actions reasonably required by the Agent so that all monies due or to become due under any contract with the United States of America, the District of Columbia or any state, county, municipality or other domestic or foreign governmental entity, or any department, agency or instrumentality thereof, will be assigned to the Agent, for the benefit of the Secured Parties, and notice given thereof in accordance with the requirements of the Assignment of Claims Act of 1940, as amended, or any other laws, rules or regulations relating to the assignment of any such contract and monies due to or to become due. SECTION 8.16. VRDN MORTGAGE. In the event that, for any reason, the VRDN Letter of Credit has not been issued by NationsBank on or before March 5, 1999, Kellstrom shall, on or before March 15, 1999, deliver to the Agent, for the benefit of the Secured Parties, an executed Mortgage in form and substance satisfactory to the Agent, conveying to the Agent, for the benefit of the Secured Parties, a first priority Lien on the VRDN Real Estate, subject only to such prior Liens as the Agent shall consent to in writing. In connection therewith, Kellstrom shall also deliver to the Agent, at Kellstrom's expense, a mortgagee title insurance policy in favor of the Agent and the Lenders insuring such VRDN Mortgage to create and convey such Lien, subject only to such exceptions consented to by the Agent, and shall deliver to the Agent the other items set forth in SECTION 5.1(d)(xvii), (xxi), (xxii) and (xxiii) with respect to such VRDN Real Estate, all in form and substance satisfactory to the Agent. -87- 96 ARTICLE 9 AFFIRMATIVE COVENANTS Until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner provided for in SECTION 15.11, each Borrower will, and will cause each of its Subsidiaries to, and, with respect to SECTIONS 9.1 through 9.7, will cause the Trust to: SECTION 9.1. PRESERVATION OF CORPORATE EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its corporate existence (or existence as a trust), rights, franchises, licenses and privileges in the jurisdiction of its incorporation (or, with respect to the Trust, its formation) and qualify and remain qualified as a foreign corporation and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. SECTION 9.2. COMPLIANCE WITH APPLICABLE LAW. Comply in all material respects with all Applicable Law relating to such Borrower, such Subsidiary, or Trust except to the extent being contested in good faith by appropriate proceedings and for which reserves in respect of such Borrower's, such Subsidiary's or such Trust's reasonably anticipated liability therefor have been appropriately established. SECTION 9.3. MAINTENANCE OF PROPERTY. In addition to, and not in derogation of, the requirements of SECTION 8.7 and of the Security Documents, (a) protect and preserve all properties material to its business, including all Proprietary Rights, and maintain in good repair, working order and condition in all material respects, with reasonable allowance for wear and tear, all tangible properties, and (b) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties necessary for the conduct of its business, so that the business carried on in connection therewith may be properly and in accordance with past practices conducted at all times. SECTION 9.4. CONDUCT OF BUSINESS. At all times engage only in the business described in SECTION 6.1(g). SECTION 9.5. INSURANCE. Maintain, in addition to the coverage required by SECTION 8.8 and the Security Documents, insurance with responsible insurance companies against such risks and in such amounts as is customarily maintained by similar businesses or as may be required by Applicable Law, and from time to time deliver to the Agent or any Lender upon its request a detailed list of the insurance then in effect, stating the names of the insurance companies, the amounts and rates of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. SECTION 9.6. PAYMENT OF TAXES AND CLAIMS. Pay or discharge when due (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it, except that real property ad valorem taxes shall be deemed to have been so paid or discharged if the same are paid before they become delinquent, and -88- 97 (b) all lawful claims of materialmen, mechanics, carriers, warehousemen and landlords for labor, materials, supplies and rentals which, if unpaid, might become a Lien on any of its properties; except that this SECTION 9.6 shall not require the payment or discharge of any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings and for which reserves in respect of the reasonably anticipated liability therefor have been appropriately established. SECTION 9.7. ACCOUNTING METHODS AND FINANCIAL RECORDS. Maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete), as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP and, with respect to Kellstrom only, shall comply with all timeframes applicable to annual and quarterly financial reporting promulgated by the SEC. SECTION 9.8. USE OF PROCEEDS. (a) Use the proceeds of (i) the initial Revolving Credit Loan to pay amounts indicated on SCHEDULE 9.8 to the Persons indicated thereon, and (ii) all subsequent Loans only for working capital and general business purposes, Permitted Acquisitions and to pay Indebtedness under the VRDN Documents, and (b) not use any part of such proceeds to purchase or, to carry or reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulation G or U of the Board of Governors of the Federal Reserve System) or, in any event, for any purpose which would involve a violation of such Regulation G or U or of Regulation T or X of such Board of Governors, or for any purpose prohibited by law or by the terms and conditions of this Agreement. SECTION 9.9. HAZARDOUS WASTE AND SUBSTANCES; ENVIRONMENTAL REQUIREMENTS. (a) In addition to, and not in derogation of, the requirements of SECTION 9.2 and of the Security Documents, comply with all Environmental Laws and all Applicable Laws relating to occupational health and safety (except for instances of noncompliance that are being contested in good faith by appropriate proceedings if reserves in respect of such Borrower's or such Subsidiary's reasonably anticipated liability therefor have been appropriately established), promptly notify the Agent of its receipt of any notice of a violation of any such Environmental Laws or other such Applicable Laws, and indemnify and hold the Agent and the Lenders harmless from all loss, cost, damage, liability, claim and expense incurred by or imposed upon the Agent or any Lender on account of such Borrower's failure to perform its obligations under this SECTION 9.9. (b) Whenever such Borrower gives notice to the Agent pursuant to this SECTION 9.9 with respect to a matter that reasonably could be expected to result in liability to such Borrower or Subsidiary in excess of $500,000 in the aggregate, such Borrower shall, at the Agent's request -89- 98 and the Borrowers' expense (i) cause an independent environmental engineer acceptable to the Agent to conduct an assessment, including tests where necessary, of the site where the noncompliance or alleged noncompliance with Environmental Laws has occurred and prepare and deliver to the Agent a report setting forth the results of such assessment, a proposed plan to bring such Borrower or Subsidiary into compliance with such Environmental Laws (if such assessment indicates noncompliance) and an estimate of the costs thereof, and (ii) provide to the Agent a supplemental report of such engineer whenever the scope of the noncompliance, or the response thereto or the estimated costs thereof, shall materially adversely change. SECTION 9.10. YEAR 2000 COMPLIANCE. Promptly notify the Agent in the event such Borrower discovers or determines that any computer application (including those of its suppliers, vendors and customers) that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 compliant (as defined in SECTION 6.1(FF)). SECTION 9.11. ADDITIONAL BORROWERS. Upon Kellstrom's request and the approval of the Agent (such approval to be granted or denied in the Agent's sole discretion), cause any wholly-owned U.S. Subsidiary of any Borrower to become a party to this Agreement as a Borrower by: (a) causing such Subsidiary to execute a Joinder Agreement in substantially the same form as EXHIBIT F hereto, (b) causing such Subsidiary to execute a Note in favor of each Lender, and (c) delivering such other documentation as the Agent may reasonably request in connection with the foregoing, including, without limitation, appropriate UCC-1 financing statements (and lien searches), security agreements (and FAA lien searches), landlord waivers, certified resolutions and other organizational and authorizing documents of such Subsidiary and favorable opinions of counsel to such Subsidiary (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above), all in form, content and scope reasonably satisfactory to the Agent. SECTION 9.12. ADDITIONAL TRUSTS; SUBSIDIARY GUARANTORS. Upon the formation of a Trust by any Borrower, prior to permitting such trust to hold title to and ownership of any Airframe Inventory or Engine Inventory, and upon the formation or acquisition of any new direct or indirect Subsidiaries by any Borrower, if such Subsidiary is not made a Borrower pursuant to SECTION 9.11, then in each instance, within 10 days after such formation or acquisition, at its expense: (a) cause each such U.S. Subsidiary (each, a "Subsidiary Guarantor") to duly execute and deliver to the Agent a Guaranty, in form and substance satisfactory to the Agent, guaranteeing the payment in full of the Secured Obligations and the performance of all of the Borrowers' obligations under the Loan Documents (each a "Subsidiary Guaranty"), (b) cause each such U.S. Subsidiary to duly execute and deliver to the Agent, for the benefit of the Secured Parties, mortgages, pledges, assignments and other security agreements, as specified by and in form and substance consistent with this Agreement and otherwise reasonably satisfactory to the Agent, securing such Subsidiary's obligations under its Subsidiary Guaranty and constituting first priority Liens on all of such Subsidiary's assets (real and personal), subject only to Permitted Liens, (c) duly execute and deliver to the Agent, for the benefit of the Secured Parties, a stock pledge agreement and blank stock power, as specified by and in form and substance satisfactory to the Agent, securing the Secured Obligations and constituting a first priority Lien on, in the case of U.S. Subsidiaries, all of each such U.S. Subsidiary's capital stock, and in the -90- 99 case of foreign Subsidiaries, 65% of each such foreign Subsidiary's voting stock and 100% of such foreign Subsidiary's non-voting stock, subject only to Permitted Liens, (d) cause each such Trust to duly execute and deliver to the Agent a Guaranty, in form and substance satisfactory to the Agent, guaranteeing the payment in full of the Secured Obligations and the performance of all of the Borrowers' obligations under the Loan Documents (each a "Trust Guaranty"), (e) cause each such Trust to duly execute and deliver to the Agent, for the benefit of the Secured Parties, mortgages, pledges, assignments and other security agreements, as specified by and in form and substance consistent with this Agreement and otherwise reasonably satisfactory to the Agent, securing such Trust's obligations under its Trust Guaranty and constituting first priority Liens on all of such Trust's assets (real and personal), subject only to Permitted Liens, (f) cause the Borrower that is the owner participant of such Trust to duly execute and deliver a collateral assignment of its interest in the Trust, in form and substance satisfactory to the Agent, (g) take, and cause each Subsidiary Guarantor or such Trust to take, such action (including, without limitation, the recording of mortgages, the filing of Uniform Commercial Code financing statements, the filing of security agreements, and the delivery of original stock certificates) as may be reasonably necessary or advisable in the opinion of the Agent to vest in the Agent, for the benefit of the Secured Parties, valid and subsisting perfected Liens on the properties purported to be subject to the mortgages, pledges, assignments and security agreements delivered pursuant to this SECTION 9.12, enforceable against all third parties in accordance with their terms, subject only to Permitted Liens, (h) deliver to the Agent, upon the request of the Agent in its sole discretion, a signed copy of a favorable opinion of counsel for the Borrowers, such Subsidiary Guarantor or such Trust, addressed to the Agent and the other Lenders, acceptable to the Agent as to the matters contained in CLAUSES (a), (b), (c), (d), (e), (f) and (g) above, as applicable, as to such guaranties, mortgages, pledges, assignments and security agreements being legal, valid and binding obligations of each party thereto enforceable in accordance with their terms, and as to such other matters as the Agent may reasonably request, and (i) deliver to the Agent, upon the request of the Agent in its sole discretion, with respect to each parcel of real property owned or held by such Subsidiary Guarantor or such Trust, all items set forth in SECTION 5.1(d)(xvii), (xxi) and (xxii) with respect to such real property, together with such environmental audits of such real property as the Agent reasonably requests, all in form and substance reasonably satisfactory to the Agent. -91- 100 ARTICLE 10 INFORMATION Until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner set forth in SECTION 15.11, the Borrowers will furnish to the Agent and to each Lender at the offices then designated for such notices pursuant to SECTION 15.1: SECTION 10.1. FINANCIAL STATEMENTS. (a) AUDITED YEAR-END STATEMENTS. As soon as available, but in any event not later than 2 Business Days after the date that Kellstrom is required to file its 10K with the SEC for such year, copies of the consolidating and consolidated balance sheets of the Borrowers and their Consolidated Subsidiaries as at the end of such fiscal year and the related statements of operations, shareholders' equity and cash flows for such fiscal year, in each case setting forth in comparative form the figures for the previous fiscal year, reported on, as to such consolidated statements, without qualification by independent certified public accountants of nationally recognized standing; (b) MONTHLY FINANCIAL STATEMENTS. As soon as available after the end of each month, but in any event within 30 days after the end of each month, copies of the unaudited consolidated balance sheet of the Borrowers and their Consolidated Subsidiaries as at the end of such month and the related unaudited consolidated statements of operations for the Borrowers and their Consolidated Subsidiaries for such month and for the portion of the fiscal year through such month, certified by the Financial Officer as presenting fairly the financial condition and results of operations of the Borrowers and their Consolidated Subsidiaries (subject to normal year-end audit adjustments); (c) QUARTERLY STATEMENTS OF CASH FLOW. As soon as available after the end of each quarter, but in any event not later than 2 Business Days after the date that Kellstrom is required to file its 10Q with the SEC for such quarter, copies of the unaudited statements of cash flows of the Borrowers and their Consolidated Subsidiaries as at the end of such quarter and for the portion of the fiscal year through such quarter, certified by the Financial Officer as presenting fairly the financial condition and results of operations of the Borrowers and their Consolidated Subsidiaries (subject to normal year-end audit adjustments); (d) PROJECTIONS. Not later than 30 days prior to each anniversary of the Effective Date, the Projections; and (e) ANNUAL BUDGET. As soon as available, but in any event at least 15 days prior to the beginning of each fiscal year, an operating budget for the Borrowers and their Consolidated Subsidiaries for such fiscal year, in the form customarily prepared by management of the Borrowers consistent with past practice, together with a statement of the assumptions upon which such budget was prepared. All such financial statements referred to in CLAUSES (a), (b) and (c) shall be complete and correct in all material respects and prepared in accordance with GAAP (except, with respect to interim financial -92- 101 statements described in CLAUSES (b) and (c), for the omission of footnotes and for the effect of normal year-end audit adjustments) applied consistently throughout the periods reflected therein. SECTION 10.2. ACCOUNTANTS' CERTIFICATE. Together with the financial statements referred to in SECTION 10.1(a), the Borrowers shall deliver a certificate of such accountants addressed to the Agent (a) stating that in making the examination necessary for the certification of such financial statements, nothing has come to their attention to lead them to believe that any Default or Event of Default exists and, in particular, they have no knowledge of any Default or Event of Default or, if such is not the case, specifying such Default or Event of Default and its nature, and (b) having attached the calculations, prepared by the Borrowers and reviewed by such accountants, required to establish whether or not the Borrowers are in compliance with the covenants contained in SECTIONS 11.1, 11.2, 11.5, 11.10 and 11.11, as at the date of such financial statements. SECTION 10.3. OFFICER'S CERTIFICATE. At the time that the Borrowers furnish the financial statements pursuant to SECTION 10.1(b) for any month that is the last month of a fiscal quarter of the Borrowers, the Borrowers shall also furnish a certificate of the Financial Officer (a) setting forth as at the end of such fiscal quarter or fiscal year, as the case may be, the calculations required to establish whether or not the Borrowers were in compliance with the requirements of SECTIONS 11.1, 11.2, 11.5, 11.10 and 11.11, as at the end of each respective period, (b) stating that the information on the schedules to this Agreement are complete and accurate as of the date of such certificate or, if such is not the case, attaching to such certificate updated schedules, and (c) stating that, based on a reasonably diligent examination, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrowers with respect to such Default or Event of Default. SECTION 10.4. COPIES OF OTHER REPORTS. (a) Promptly upon receipt thereof, copies of all reports, if any, submitted to any Borrower or its Board of Directors by its independent public accountants, including, without limitation, any management report. (b) As soon as practicable, copies of all financial statements and reports that any Borrower shall send to its shareholders generally and of all registration statements and all regular or periodic reports which any Borrower shall file with the Securities and Exchange Commission or any successor commission. (c) As soon as reasonably practicable following each request, which request may be made at any time or times by the Agent, but which request may be made by a Lender only upon the occurrence of a Default or Event of Default, such forecasts, data, certificates, reports, -93- 102 statements, opinions of counsel, documents or further information regarding the business, assets, liabilities, financial condition, results of operations or business prospects of any Borrower or any of its Subsidiaries as the Agent or any Lender may reasonably request and that any Borrower has or (except in the case of legal opinions relating to the perfection or priority of the Security Interest) without unreasonable expense can obtain. The rights of the Agent and the Lenders under this SECTION 10.4 are in addition to and not in derogation of their rights under any other provision of this Agreement or of any other Loan Document. (d) If requested by the Agent or any Lender, statements in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U of the Board of Governors of the Federal Reserve System. SECTION 10.5. NOTICE OF LITIGATION AND OTHER MATTERS. Prompt notice of: (a) the commencement, to the extent any Borrower is aware of the same, of all proceedings and investigations by or before any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any other way relating to or affecting any Borrower, any of its Subsidiaries, any Trust, or any of any Borrower's or any of its Subsidiaries' properties, assets or businesses, which might, singly or in the aggregate, result in the occurrence of a Default or an Event of Default, or have a Materially Adverse Effect, (b) any amendment of the articles of incorporation or by-laws of any Borrower or any of its Subsidiaries or to the organizational or trust agreement applicable to the Trust, (c) any change in the business, assets, liabilities, financial condition, results of operations or business prospects of any Borrower or any of its Subsidiaries which has had or may have, singly or in the aggregate, a Materially Adverse Effect and any change in the executive officers of any Borrower or any of its Subsidiaries, and (d) any Default or Event of Default or any event which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by any Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) to which such Borrower or any of its Subsidiaries is a party or by which such Borrower, any of its Subsidiaries or any of their properties may be bound. SECTION 10.6. ERISA. As soon as possible and in any event within 30 days after any Borrower knows, or has reason to know, that: (a) any Termination Event with respect to a Plan has occurred or will occur, or (b) the aggregate present value of the Unfunded Vested Accrued Benefits under all Plans is equal to an amount in excess of $0, or (c) any Borrower or any of its Subsidiaries is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan required by reason of any Borrower's or such Subsidiary's complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer Plan, -94- 103 a certificate of the Financial Officer setting forth the details of such event and the action which is proposed to be taken with respect thereto, together with any notice or filing which may be required by the PBGC or other agency of the United States government with respect to such event. SECTION 10.7. ACCURACY OF INFORMATION. All written information, reports, statements and other papers and data furnished to the Agent or any Lender, whether pursuant to this ARTICLE 10 or any other provision of this Agreement or of any other Loan Document, shall be, at the time the same is so furnished, complete and correct in all material respects to the extent necessary to give the Agent and the Lenders materially true and accurate knowledge of the subject matter. SECTION 10.8. REVISIONS OR UPDATES TO SCHEDULES. Should any of the information or disclosures provided on any of the Schedules originally attached hereto become outdated or incorrect in any material respect, as part of the officer's certificate required pursuant to SECTION 10.3(b), such revisions or updates to such Schedule(s) as may be necessary or appropriate to update or correct such Schedule(s), PROVIDED that no such revisions or updates to any Schedule(s) shall be deemed to have amended, modified or superseded such Schedule(s) as originally attached hereto, or to have cured any breach of warranty or representation resulting from the inaccuracy or incompleteness of any such Schedule(s), unless and until the Required Lenders in their sole and absolute discretion, shall have accepted in writing such revisions or updates to such Schedule(s). SECTION 10.9. SUBORDINATED INDEBTEDNESS CERTIFICATE. Not less than five Business Days prior to any scheduled payment of any principal of, or interest or other amounts on, the Subordinated Indebtedness, and as a condition precedent to making such payment, the Borrowers shall furnish a certificate of the Financial Officer stating: (a) that no Default or Event of Default is in existence as of the date of the certificate or will be in existence as of the date of such payment, both with and without giving effect to the making of such payment, and (b) the amount of principal and interest to be paid. ARTICLE 11 NEGATIVE COVENANTS Until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner set forth in SECTION 15.11, the Borrowers will not directly or indirectly and, in the case of SECTIONS 11.2 through 11.18, will not permit any of their Subsidiaries to: SECTION 11.1. FINANCIAL RATIOS. (a) MINIMUM CONSOLIDATED ADJUSTED NET WORTH. Permit the Consolidated Adjusted Net Worth of the Borrowers and their Consolidated Subsidiaries (i) to be less than $130,000,000 as of the end of the Borrowers' 1998 fiscal year or (ii) for any fiscal year end thereafter, to be less than the Borrowers' actual Consolidated Adjusted Net Worth as of the immediately preceding fiscal year end plus $10,000,000. No secondary equity offering, debt -95- 104 offering, or conversion of the Convertible Subordinated Notes or other Subordinated Indebtedness to equity shall be included for purposes of determining whether annual step-ups in Consolidated Adjusted Net Worth have been achieved. (b) MAXIMUM CONSOLIDATED FUNDED INDEBTEDNESS TO CONSOLIDATED EBITDA RATIO. Permit the ratio of the Consolidated Funded Indebtedness of the Borrowers and their Consolidated Subsidiaries as of any fiscal quarter end, to the Consolidated EBITDA of the Borrowers and their Consolidated Subsidiaries (including for purposes of this calculation the pro forma EBITDA of any Person acquired by any Borrower in connection with a Permitted Acquisition, which pro forma EBITDA shall be taken from Kellstrom's filing with the SEC with respect to such Permitted Acquisition and approved by the Agent in its sole discretion) for the preceding four fiscal quarters, to be greater than 6.5 to 1. (c) MINIMUM CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the ratio of (i) the Consolidated EBITDA of the Borrowers and their Consolidated Subsidiaries, minus income taxes paid in cash, Unfunded Capital Expenditures and dividends, to (ii) the Consolidated Fixed Charges of the Borrowers and their Consolidated Subsidiaries, as of the end of any fiscal quarter of the Borrowers, measured for the immediately preceding four fiscal quarters, to be less than 1.5 to 1. (d) MINIMUM CONSOLIDATED NET INCOME. Permit the Consolidated Net Income of the Borrowers and their Consolidated Subsidiaries as of the end of any fiscal quarter of the Borrowers, measured for the immediately preceding four fiscal quarters, to be less than $5,000,000. SECTION 11.2. INDEBTEDNESS FOR MONEY BORROWED. Create, assume, or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding any Indebtedness for Money Borrowed, except that this SECTION 11.2 shall not apply to: (a) Indebtedness for Money Borrowed represented by the Loans and the Notes, (b) Indebtedness for Money Borrowed existing on the Effective Date and reflected on SCHEDULE 6.1(k) (excluding any such Indebtedness that is to be paid in full on the Effective Date), (c) Permitted Aircraft Purchase Money Indebtedness, (d) Permitted Purchase Money Indebtedness, and (e) the Subordinated Indebtedness. SECTION 11.3. GUARANTIES. Become or remain liable with respect to any Guaranty of any obligation of any other Person, other than (a) any Subsidiary Guaranty or Trust Guaranty under SECTION 9.12, (b) the VRDN Guaranty and (c) any Guaranty required under Section 10.11 of the Securities Purchase Agreement related to the Equitable Subordinated Loan. SECTION 11.4. INVESTMENTS. Acquire, after the Agreement Date, any Business Unit or Investment or, after such date, maintain any Investment, other than Permitted Investments. -96- 105 SECTION 11.5. CAPITAL EXPENDITURES. Make or incur any Capital Expenditures, except that the Borrowers and their Subsidiaries in the aggregate may make or incur Capital Expenditures in any fiscal year in an amount not to exceed, in the aggregate, $5,000,000. For purposes of calculating Capital Expenditures of the Borrowers and their Subsidiaries for the 1998 fiscal year, the costs and expenses actually incurred by Kellstrom in fiscal year 1998 in connection with the construction of its headquarters on the VRDN Real Estate shall be excluded from the calculation of Capital Expenditures. SECTION 11.6. RESTRICTED DIVIDEND PAYMENTS AND PURCHASES, ETC. Declare or make any Restricted Dividend Payment, Restricted Payment or Restricted Purchase; provided, however, Kellstrom may make the following payments: (a) payments of retainers and advisory fees to Helix Capital, and (b) payment of management fees to Zivi R. Nedivi or to any Person wholly owned by Zivi R. Nedivi, pursuant to the then-effective management agreement by and between Kellstrom and Zivi R. Nedivi. SECTION 11.7. MERGER, CONSOLIDATION AND SALE OF ASSETS. Merge or consolidate with any other Person or sell, lease or transfer or otherwise dispose of all or a substantial portion of its assets to any Person other than sales and leases of Inventory in the ordinary course of business. SECTION 11.8. TRANSACTIONS WITH AFFILIATES. Effect any transaction with any Affiliate on a basis less favorable to the Borrowers or such Subsidiary than would be the case if such transaction had been effected with a Person not an Affiliate. SECTION 11.9. LIENS. Create, assume or permit or suffer to exist or to be created or assumed any Lien on any of the Collateral or its other assets, other than Permitted Liens. SECTION 11.10. CAPITALIZED LEASE OBLIGATIONS. Incur or permit to exist any Capitalized Lease Obligation if such Capitalized Lease Obligation when added to existing Capitalized Lease Obligations and Permitted Purchase Money Indebtedness of the Borrowers and their Subsidiaries would exceed $5,000,000 in the aggregate. SECTION 11.11. OPERATING LEASES. Enter into any Operating Lease if the aggregate annual rental payable under all Operating Leases of the Borrowers and their Subsidiaries would exceed $800,000 in the aggregate at any time after the Effective Date. SECTION 11.12. REAL ESTATE LEASES. Enter into any real property lease, including a lease relating to the Real Estate occupied by the Borrowers or their Subsidiaries on the Effective Date, without the prior written consent of the Agent, on behalf of the Secured Parties, which consent shall not be unreasonably withheld. SECTION 11.13. PLANS. Permit any condition to exist in connection with any Plan which might constitute grounds for the PBGC to institute proceedings to have such Plan terminated or a trustee appointed to administer such Plan, and any other condition, event or transaction with respect to any Plan which could result in the incurrence by any Borrower or its Subsidiaries of any material liability, fine or penalty. SECTION 11.14. SALES AND LEASEBACKS. Enter into any arrangement with any Person providing for any Borrower's or its Subsidiaries' leasing from such Person any real or personal property which has been or is to be sold or transferred, directly or indirectly, by such Borrower or Subsidiaries to such Person. -97- 106 SECTION 11.15. AMENDMENTS OF OTHER AGREEMENTS. Amend in any way the (a) subordination provisions applicable to the Subordinated Indebtedness, (b) definition of "Change of Control" as defined in the Securities Purchase Agreement relating to the Equitable Subordinated Loan or "Change in Control" as defined in the Indentures relating to the Convertible Subordinated Notes, (c) definitions of "Senior Debt" in the documents evidencing the Equitable Subordinated Loan or "Designated Senior Indebtedness" as defined in the Indentures relating to the Convertible Subordinated Notes, or (d) interest rate (or formula pursuant to which such interest rate is determined) or principal amount or schedule of payments of principal and interest with respect to any Indebtedness (other than the Secured Obligations) other than to reduce the interest rate or extend the schedule of payments with respect thereto. SECTION 11.16. MINIMUM AVAILABILITY. Permit Availability to be less than $10,000,000 at any time. SECTION 11.17. FISCAL YEAR. Change the end of their fiscal year from December 31. SECTION 11.18. INSURANCE; PROHIBITED COUNTRIES. Permit any Inventory or any part thereof to be operated in or to any area excluded from coverage by any insurance required by the provisions of SECTION 8.8 or the insurance provisions of the Airframe and Engine Mortgage, or permit any Inventory or any part thereof to be operated in or to any Prohibited Country. SECTION 11.19. INTEREST RATE PROTECTION AGREEMENTS. Enter into any Interest Rate Protection Agreements other than for the purpose of managing existing or anticipated interest rate risks in connection with the Loans hereunder. ARTICLE 12 DEFAULT SECTION 12.1. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) DEFAULT IN PAYMENT. The Borrowers shall default in any payment of principal of or interest on any Loan or any Note when and as due (whether at maturity, by reason of acceleration or otherwise); provided, however, that if Borrowers are in compliance with the minimum Availability covenant set forth in SECTION 11.16, and making such payment of principal of or interest on such Loan or Note would not cause noncompliance with SECTION 11.16, then failure to make any such payment, other than any payment due upon the maturity (by reason of acceleration or otherwise) of the Loans, shall not be a default unless the Borrowers fail to make such payment within 2 Business Days following the date written notice of such failure has been given to Kellstrom by the Agent. (b) OTHER PAYMENT DEFAULT. The Borrowers shall default in the payment, as and when due, of principal of or interest on, any other Secured Obligation, and such default shall continue for more than 5 days after written notice has been given to Kellstrom by the Agent. -98- 107 (c) MISREPRESENTATION. Any representation or warranty made or deemed to be made by any Obligor under this Agreement or any Loan Document, or any amendment hereto or thereto, shall at any time prove to have been incorrect or misleading in any material respect when made. (d) DEFAULT IN PERFORMANCE. Any Borrower shall default in the performance or observance of any term, covenant, condition or agreement to be performed by the Borrowers (or any of them), contained in: (i) ARTICLES 7, 10 or 11 or SECTIONS 8.1, 8.2, 8.4, 8.5, 8.6, 8.7, 8.9, 8.10, 8.11, 8.12, 8.13, 9.1, 9.2, 9.6, 9.7, 9.8, 9.11 and 9.12 of this Agreement; (ii) SECTIONS 8.3, 8.8, 8.14, 8.15, 9.3, 9.4, 9.5, 9.9 or 9.10 and such default shall continue for a period of 10 days after the earlier of (A) the date on which an officer of any Borrower becomes aware of such default or (B) written notice thereof has been given to any Borrower by the Agent; or (iii) any other provision of this Agreement (other than as specifically provided for otherwise in this SECTION 12.1) and such default shall continue for a period of 30 days after the earlier of (A) the date on which an officer of any Borrower becomes aware of such default or (B) written notice thereof has been given to Kellstrom by the Agent. (e) INDEBTEDNESS CROSS-DEFAULT. (i) Any Borrower or any Subsidiary of any Borrower shall fail to pay when due and payable the principal of or interest on the Subordinated Indebtedness or any other Indebtedness for Money Borrowed (other than the Loans) in an amount in excess of $1,000,000, provided that the Borrowers' failure to make a payment of the principal of or interest on the Subordinated Indebtedness on account of the operation of the subordination provisions applicable thereto shall not be an Event of Default, or (ii) the maturity of any such Indebtedness described in clause (i) shall have (A) been accelerated in accordance with the provisions of any indenture, contract or instrument providing for the creation of or concerning such Indebtedness, or (B) been required to be prepaid prior to the stated maturity thereof, or (iii) any event shall have occurred and be continuing which would permit any holder or holders of such Indebtedness described in clause (i), any trustee or agent acting on behalf of such holder or holders or any other Person so to accelerate such maturity, and such Borrower or Subsidiary shall have failed to cure such default prior to the expiration of any applicable cure or grace period, or (iv) any default or event of default shall occur under the VRDN Documents and Kellstrom shall have failed to cure such default or event of default prior to the expiration of any applicable cure or grace period. (f) OTHER CROSS-DEFAULTS. Any Obligor shall default in the payment when due, or in the performance or observance, subject to applicable cure periods, of any obligation or condition -99- 108 of any agreement, contract or lease (other than this Agreement, the Security Documents or any such agreement, contract or lease relating to Indebtedness for Money Borrowed) if the existence of any such defaults, singly or in the aggregate, could in the reasonable judgment of the Agent have a Materially Adverse Effect; provided, however, that for the purposes of this provision where such a default could result only in a monetary loss, a Materially Adverse Effect shall not be deemed to have occurred unless the aggregate of such losses would exceed $1,000,000. (g) VOLUNTARY BANKRUPTCY PROCEEDING. Any Obligor shall (i) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing. (h) INVOLUNTARY BANKRUPTCY PROCEEDING. A case or other proceeding shall be commenced against any Obligor in any court of competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, or (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of such Obligor, or of all or any substantial part of the assets, domestic or foreign, of such Obligor, and such case or proceeding shall continue undismissed or unstayed for a period of 60 consecutive calendar days, or an order granting the relief requested in such case or proceeding against such Obligor (including, but not limited to, an order for relief under such federal bankruptcy laws), shall be entered. (i) FAILURE OF AGREEMENTS. Any Obligor shall challenge the validity and binding effect of any provision of any Loan Document after delivery thereof or shall state its intention to make such a challenge in writing, or any Loan Document, after delivery thereof hereunder, shall for any reason (except to the extent permitted by the terms thereof) cease to create a valid and perfected first priority Lien (except for Permitted Liens) on, or security interest in, any of the Collateral purported to be covered thereby. (j) JUDGMENT. A final, unappealable judgment or order for the payment of money in an amount which exceeds $250,000 shall be entered against any Obligor by any court and such judgment or order shall continue undischarged or unstayed for 30 days. (k) ATTACHMENT. A warrant or writ of attachment or execution or similar process which exceeds $250,000 in value shall be issued against any property of any Obligor, and such warrant or process shall continue undischarged or unstayed for 30 days. (l) LOAN DOCUMENTS. Any event of default under any Loan Document shall occur or any Obligor shall default in the performance or observance of any term, covenant, condition or agreement contained in, or the payment of any other sum covenanted to be paid by any Obligor, under, any Loan Document; PROVIDED, HOWEVER that no event of default under any Loan -100- 109 Document shall be deemed to have occurred until any notice required under such Loan Document has been given and any grace period granted under such Loan Document has expired. (m) ERISA. (i) Any Termination Event with respect to a Plan shall occur that, after taking into account the excess, if any, of (A) the fair market value of the assets of any other Plan with respect to which a Termination Event occurs on the same day (but only to the extent that such excess is the property of the Borrowers) over (B) the present value on such day of all vested nonforfeitable benefits under such other Plan, results in an Unfunded Vested Accrued Benefit in excess of $0, or (ii) any Plan shall incur an "accumulated funding deficiency" (as defined in Section 412 of the Internal Revenue Code or Section 302 of ERISA) for which a waiver has not been obtained in accordance with the applicable provisions of the Internal Revenue Code and ERISA, or (iii) any Borrower or any of its Subsidiaries is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from a Borrower's or any of its Subsidiaries complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer Plan. (n) CHANGE IN CONTROL. At any time after the Agreement Date, (i) a Person or "group" of Persons (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder), shall acquire, beneficially or of record, 25% or more of the outstanding voting stock (stock entitled to vote for election of directors excluding rights subject to a contingency) of Kellstrom, or (ii) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Board of Directors of any Borrower (together with any new directors whose election by the Board of Directors of such Borrower or whose nomination for election by the shareholders of such Borrower, as the case may be, was approved by a vote of a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of such Borrower, as the case may be, then in office, or (iii) a "Change in Control" as defined in the Indentures relating to the Convertible Subordinated Notes occurs, or (iv) a "Change of Control" as defined in the Securities Purchase Agreement relating to the Equitable Subordinated Loan occurs. (o) CHANGE IN MANAGEMENT. For any reason Zivi R. Nedivi is no longer actively involved in the day-to-day operations of the Borrowers, unless a replacement reasonably satisfactory to the Required Lenders is appointed within 90 days. (p) GENERAL INSECURITY. The occurrence of any act, omission, circumstance, event or condition or series of acts, omissions, circumstances, events or conditions which have or, in the Agent's or the Required Lenders' judgment, would have, either individually or in the aggregate, a Materially Adverse Effect. -101- 110 SECTION 12.1. REMEDIES. (a) AUTOMATIC ACCELERATION AND TERMINATION OF FACILITIES. Upon the occurrence of an Event of Default specified in SECTION 12.1(g) or (h), (i) the principal of and the interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Agent or the Lenders under this Agreement or any of the Loan Documents and all other Secured Obligations, shall thereupon become due and payable without presentment, demand, protest, or other notice of any kind, all of which are expressly waived, anything in this Agreement or any of the Loan Documents to the contrary notwithstanding, and (ii) the Revolving Credit Facility and the right of the Borrowers to request borrowings under this Agreement shall immediately terminate. (b) OTHER REMEDIES. If any Event of Default shall have occurred, and during the continuance of any such Event of Default, the Agent may, and at the direction of the Required Lenders in their sole and absolute discretion shall, do any of the following: (i) declare the principal of and interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Agent or the Lenders under this Agreement or any of the Loan Documents and all other Secured Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the Loan Documents to the contrary notwithstanding; (ii) terminate the Revolving Credit Facility and any other right of the Borrowers to request borrowings or Letters of Credit hereunder; (iii) notify, or request the Borrowers to notify, in writing or otherwise, any Account Debtor with respect to any one or more of the Receivables to make payment to the Agent, for the benefit of the Secured Parties, or any agent or designee of the Agent, at such address as may be specified by the Agent and if, notwithstanding the giving of any notice, any Account Debtor shall make payments to the Borrowers, the Borrowers shall hold all such payments they receive in trust for the Agent, for the account of the Lenders, without commingling the same with other funds or property of, or held by, the Borrowers, and shall deliver the same to the Agent or any such agent or designee of the Agent immediately upon receipt by the Borrowers in the identical form received, together with any necessary endorsements; (iv) settle or adjust disputes and claims directly with Account Debtors on Receivables for amounts and on terms which the Agent considers advisable and in all such cases only the net amounts received by the Agent, for the account of the Lenders, in payment of such amounts, after deductions of costs and attorneys' fees, shall constitute Collateral and the Borrowers shall have no further right to make any such settlements or adjustments or to accept any returns of merchandise; (v) enter upon any premises at which Inventory or Equipment may be located and, without resistance or interference by the Borrowers, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as the Agent shall choose, without being liable to the Borrowers on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Agent shall act reasonably and in good faith; -102- 111 (vi) require the Borrowers to and the Borrowers shall, without charge to the Agent or any Lender, assemble the Inventory and Equipment and maintain or deliver it into the possession of the Agent or any agent or representative of the Agent at such place or places as the Agent may designate and as are reasonably convenient to both the Agent and the Borrowers; (vii) at the expense of the Borrowers, cause any of the Inventory and Equipment to be placed in a public or field warehouse, and the Agent shall not be liable to the Borrowers on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Agent shall act reasonably and in good faith; (viii) without notice, demand or other process, and without payment of any rent or any other charge, enter any of the Borrowers' premises and, without breach of the peace, until the Agent, on behalf of the Lenders, completes the enforcement of its rights in the Collateral, take possession of such premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Borrowers' Equipment, for the purpose of (A) completing any work-in-process, preparing any Inventory for disposition and disposing thereof, and (B) collecting any Receivable, and the Agent for the benefit of the Secured Parties is hereby granted a license or sublicense and all other rights as may be necessary, appropriate or desirable to use the Proprietary Rights in connection with the foregoing, and the rights of the Borrowers under all licenses, sublicenses and franchise agreements shall inure to the Agent for the benefit of the Secured Parties (provided, however, that any use of any federally registered trademarks as to any goods shall be subject to the control as to the quality of such goods of the owner of such trademarks and the goodwill of the business symbolized thereby); (ix) exercise any and all of its rights under any and all of the Security Documents; (x) apply the funds in the Cash Collateral Account and any other Collateral consisting of cash to the payment of the Secured Obligations in any order in which the Agent, on behalf of the Lenders, may elect or use such cash in connection with the exercise of any of its other rights hereunder or under any of the Security Documents; (xi) establish or cause to be established one or more Lockboxes or other arrangement for the deposit of proceeds of Receivables, and, in such case, the Borrowers shall cause to be forwarded to the Agent at the Agent's Office, on a daily basis, copies of all checks and other items of payment and deposit slips related thereto deposited in such Lockboxes, together with collection reports in form and substance satisfactory to the Agent; and (xii) exercise all of the rights and remedies of a secured party under the Uniform Commercial Code and under any other Applicable Law, including, without limitation, the right, without notice except as specified below and with or without taking the possession thereof, to sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Agent, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Agent may deem commercially reasonable. The Borrowers agree that, to the extent notice of sale -103- 112 shall be required by law, at least 10 days notice to the Borrowers of the time and place of any public sale or the time after which any sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) ADDITIONAL LOUISIANA REMEDIES. Certain of the Collateral described in this Agreement is located in the State of Louisiana or may be subject to the laws of the State of Louisiana (provided, however, the parties by this Section in no way intend to derogate from the choice of law contained in SECTION 15.19 below). With respect to such Collateral, the following subsections (i) through (vii) shall apply. (i) CONFESSION OF JUDGMENT; EXECUTORY AND OTHER PROCESS. Each Borrower confesses judgment in favor of the Agent, for the benefit of itself as Agent and the Lenders, for the full amount of the Secured Obligations. Each Borrower agrees that, upon the occurrence and during the continuance of an Event of Default, the Agent may, without making further demand and without further notice or putting in default (which are hereby expressly waived), cause the Collateral, or any portion of it, to be seized and sold with or without appraisal (at Agent's option) by executory process issued by any competent court or enforce this Agreement in any other manner provided by law. The Agent may exercise the rights and remedies set forth in this paragraph in addition to (and whether or not) it also exercises its rights under any other provision of this Agreement or any other agreements between and among the Borrowers (or any of them), the Agent and the Lenders with respect to the Secured Obligations. If any proceedings (by executory process or otherwise) are commenced, all declarations of fact made by authentic act by a person declaring that he or she has personal knowledge of the facts shall constitute authentic evidence of the facts for all purposes. (ii) NO COURT HEARING. Each Borrower recognizes that the Agent shall have the right to cause the Collateral to be seized and sold by executory process without any prior court hearing at which such Borrower could appear and make objection. Each Borrower specifically waives any right that it may have to a court hearing prior to the seizure and sale of the Collateral. (iii) WAIVERS. Each Borrower expressly waives: (A) the benefit of appraisement, as provided in articles 2332, 2336, 2723 and 2724 of the Louisiana Code of Civil Procedure, and all other laws conferring the same; (B) the demand and three days' delay provided by articles 2331, 2639, 2721 and 2722 of the Louisiana Code of Civil Procedure and all other laws conferring the same; and (C) the notice of seizure as provided in articles 2293 and 2721 of the Louisiana Code of Civil Procedure. Each Borrower expressly agrees to the immediate seizure of the Collateral in the event of suit to enforce this Agreement. The Agent shall not be obligated to take advantage of the waiver of appraisal or any other waiver set forth herein but may at its option cause the Collateral to be appraised upon foreclosure in accordance with law and observe the statutory provisions referred to in this paragraph. -104- 113 (iv) KEEPER. Each Borrower and the Agent designate the Agent or any agent or nominee of the Agent as keeper of the Collateral and also authorize the Agent to name another keeper of the Collateral or any portion thereof at the time of seizure in any action for the recognition or enforcement of this Agreement, but the Agent shall not be required to seek the appointment of a keeper. This Agreement is made pursuant to La. R.S. 9: Section 5136 ET SEQ., the provisions of which shall govern the powers and duties of the keeper. The keeper shall be paid as compensation for its services an amount equal to $500 per day. All sums paid by the Agent as keeper's fees and related costs and expenses, with interest thereon at the default rate specified above in SECTION 4.1(d), shall be Secured Obligations secured by this Agreement. (v) SEARCH. If it becomes necessary for the Agent to search for all or any of the Collateral at the time of foreclosure, the Agent may do so and the Borrowers shall reimburse the Agent on demand for the expenses incurred by the Agent in doing so with interest at the default rate specified above in SECTION 4.1(D), and this amount shall be Secured Obligations secured by this Agreement. (vi) WAIVER OF EXEMPTIONS. Each Borrower waives in favor of the Agent all homestead exemptions and other exemptions from seizure to which it may be entitled. (vii) POWER OF ATTORNEY. The grant of authority contained in this SECTION 12.2(C) is intended by each Borrower to be an irrevocable power of attorney, coupled with an interest, as permitted by Louisiana law, including, but not limited to, the provisions of La. R.S. 9: Section 5388. SECTION 12.3. APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following an Event of Default shall be applied or paid over as follows: (a) FIRST: to the payment of all costs and expenses incurred in connection with such sale or other realization, including reasonable attorneys' fees, (b) SECOND: to the payment of the Secured Obligations (with the Borrowers remaining liable for any deficiency) in accordance with SECTION 4.8(e), and (c) THIRD: the balance (if any) of such proceeds shall be paid to the Borrowers, subject to any duty imposed by law, or otherwise to whomsoever shall be entitled thereto. THE BORROWERS SHALL REMAIN JOINTLY AND SEVERALLY LIABLE AND WILL PAY, ON DEMAND, ANY DEFICIENCY REMAINING IN RESPECT OF THE SECURED OBLIGATIONS, TOGETHER WITH INTEREST THEREON AT A RATE PER ANNUM EQUAL TO THE HIGHEST RATE THEN PAYABLE HEREUNDER ON SUCH SECURED OBLIGATIONS, WHICH INTEREST SHALL CONSTITUTE PART OF THE SECURED OBLIGATIONS. SECTION 12.4. POWER OF ATTORNEY. In addition to the authorizations granted to the Agent under SECTION 8.13 or under any other provision of this Agreement or of any other Loan Document, during the continuance of an Event of Default, each Borrower hereby irrevocably designates, makes, constitutes and appoints the Agent (and all Persons designated by the Agent from time to time) as such Borrower's true and lawful attorney, and agent in fact, and the Agent, or any agent of the Agent, may, without notice to -105- 114 any Borrower, and at such time or times as the Agent or any such agent in its sole discretion may determine, in the name of such Borrower, another Borrower, the Agent or the Lenders, (a) demand payment of the Receivables, (b) enforce payment of the Receivables by legal proceedings or otherwise, (c) exercise all of the Borrowers' rights and remedies with respect to the collection of Receivables, (d) settle, adjust, compromise, extend or renew any or all of the Receivables, (e) settle adjust or compromise any legal proceedings brought to collect the Receivables, (f) discharge and release the Receivables or any of them, (g) prepare, file and sign the name of any Borrower on any proof of claim in bankruptcy or any similar document against any Account Debtor, (h) prepare, file and sign the name of any Borrower on any notice of Lien, assignment or satisfaction of Lien, or similar document in connection with any of the Collateral, (i) endorse the name of any Borrower upon any chattel paper, document, instrument, notice, freight bill, bill of lading or similar document or agreement relating to the Receivables, the Inventory or any other Collateral, (j) use the stationery of any Borrower and sign the name of any Borrower to verifications of the Receivables and on any notice to the Account Debtors, (k) open the Borrowers' mail, (l) notify the post office authorities to change the address for delivery of the Borrowers' mail to an address designated by the Agent, and (m) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Receivables, Inventory or other Collateral to which any Borrower have access. SECTION 12.5. MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) RIGHTS CUMULATIVE. The rights and remedies of the Agent and the Lenders under this Agreement, the Notes and each of the Loan Documents shall be cumulative and not exclusive of any rights or remedies which it or they would otherwise have. In exercising such rights and remedies the Agent and the Lenders may be selective and no failure or delay by the Agent or any Lender in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. -106- 115 (b) WAIVER OF MARSHALING. Each Borrower hereby waives any right to require any marshaling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this ARTICLE 12 or elsewhere in this Agreement or in any of the other Loan Documents shall be construed as requiring or obligating the Agent, any Lender or any agent or designee of the Agent or any Lender to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any Receivable or any other Collateral or the monies due or to become due thereunder or in connection therewith, or to take any steps necessary to preserve any rights against prior parties, and the Agent, the Lenders and their agents or designees shall have no liability to the Borrowers (or any of them) for actions taken pursuant to this ARTICLE 12, any other provision of this Agreement or any of the other Loan Documents so long as the Agent or such Lender shall act reasonably and in good faith. (d) APPOINTMENT OF RECEIVER. In any action under this ARTICLE 12, the Agent shall be entitled during the continuance of an Event of Default to the appointment of a receiver, without notice of any kind whatsoever, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon such receiver. ARTICLE 13 ASSIGNMENTS SECTION 13.1. SUCCESSORS AND ASSIGNS; PARTICIPATIONS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrowers, the Lenders, the Agent, all future holders of the Notes, and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Each Lender may, with the consent of Kellstrom (which shall not be unreasonably withheld, and which shall not be required if an Event of Default exists or if the assignment is to an Affiliate of such Lender) and the Agent's consent (which consent shall not be unreasonably withheld and shall not be required if the assignment is to an Affiliate of such Lender), assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of the Loans at the time owing to it and the Notes held by it); PROVIDED, HOWEVER, that (i) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender that is subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall in no event be less than the Minimum Commitment, (iii) in the case of a partial assignment, the amount of the Commitment that is retained by the assigning Lender (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall in no event be less than the Minimum Commitment, (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register (as hereinafter defined) an Assignment and Acceptance, together with any Note or Notes subject to such assignment, (v) such assignment shall not, without the consent of the Borrowers, require any Borrower to file -107- 116 a registration statement with the SEC or apply to or qualify the Loans or the Notes under the blue sky laws of any state, (vi) the representation contained in SECTION 13.2 hereof shall be true with respect to any such proposed assignee, and (vii) the parties to such assignment shall deliver to the Agent a processing fee of $5,000. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (x) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (y) the Lender assignor thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement (except with respect to its obligations under SECTION 14.7). (c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Lender assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Lender assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers (or any of them) or the performance or observance by the Borrowers (or any of them) of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in SECTION 6.1(o) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Lender assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitment Percentage of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Agent and the Lenders may treat each person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Eligible Assignee together with any Note or Notes subject to such assignment, the fee described in CLAUSE (vii) of SECTION 13.1(b), and the written consent to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in the form of -108- 117 EXHIBIT D, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, (iii) give prompt notice thereof to the Lenders and the Borrowers, and (iv) promptly deliver a copy of such Assignment and Acceptance to the Borrowers. Within five Business Days after receipt of notice, the Borrowers shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note or Notes to the order of such Eligible Assignee in amounts equal to the Commitment Percentage assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and a new Note or Notes to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the assigned Notes delivered to the assignor Lender. Following the Agent's receipt of the new Note or Note, each surrendered Note or Notes shall be cancelled and returned to the Borrowers. (f) Each Lender may, without the consent of the Borrowers, sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its commitments hereunder and the Loans owing to it and the Notes held by it); PROVIDED, HOWEVER, that (i) each such participation shall be in an amount not less than the Minimum Commitment, (ii) such Lender's obligations under this Agreement (including, without limitation, its commitments hereunder) shall remain unchanged, (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) such Lender shall remain the holder of the Notes held by it for all purposes of this Agreement, (v) the Borrowers, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; PROVIDED, that such Lender may agree with any participant that such Lender will not, without such participant's consent, agree to or approve any waivers or amendments which would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the commitments of such participant, reduce the amount of any fees to which such participant is entitled, extend any scheduled payment date for principal or release Collateral securing the Loans (other than Collateral disposed of pursuant to SECTION 8.7 hereof or otherwise in accordance with the terms of this Agreement or the Security Documents), and (vi) any such disposition shall not, without the consent of the Borrowers, require any Borrower to file a registration statement with the SEC to apply to qualify the Loans or the Notes under the blue sky law of any state. Any Lender selling a participation to any bank or other entity that is not an Affiliate of such Lender shall give prompt notice thereof to the Borrowers. (g) Any Lender may, in connection with any assignment, proposed assignment, participation or proposed participation pursuant to this SECTION 13.1, disclose to the assignee, participant, proposed assignee or proposed participant, any information relating to the Borrowers and its Subsidiaries furnished to such Lender by or on behalf of the Borrowers; PROVIDED that, prior to any such disclosure, each such assignee, proposed assignee, participant or proposed participant shall agree with the Borrowers or such Lender (which in the case of an agreement with only such Lender, the Borrowers shall be recognized as a third party beneficiary thereof) to preserve the confidentiality of any confidential information relating to the Borrowers and its Subsidiaries received from such Lender. (h) Notwithstanding any other provision set forth in this Agreement, any Lender may at any time assign and pledge all or any portion of its Loans and its Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. -109- SECTION 13.2. REPRESENTATION OF LENDERS. Each Lender hereby represents that it will make each Loan hereunder as a commercial loan for its own account in the ordinary course of its business; PROVIDED, however, that subject to SECTION 13.1 hereof, the disposition of the Notes or other evidence of the Secured Obligations held by any Lender shall at all times be within its exclusive control. ARTICLE 14 AGENT SECTION 14.1. APPOINTMENT OF AGENT. Each of the Lenders hereby irrevocably designates and appoints NationsBank, N.A. as the Agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Agent, as the agent for such Lender to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and such other Loan Documents, including, without limitation, to make determinations as to the eligibility of Inventory and Receivables, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or such other Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Loan Documents or otherwise exist against the Agent. SECTION 14.2. DELEGATION OF DUTIES. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. SECTION 14.3. EXCULPATORY PROVISIONS. Neither the Agent nor any of its trustees, officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable to any Lender (or any Lender's participants) for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any Lender (or any Lender's participants) for any recitals, statements, representations or warranties made by the Borrowers or any of its Subsidiaries or any officer thereof contained in this Agreement or the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or the other Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or for any failure of the Borrowers or any of its Subsidiaries to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrowers or any of its Subsidiaries; provided, however, the Agent agrees to conduct 2 field examinations each fiscal year upon the request of the Required Lenders. -110- 118 SECTION 14.4. RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrowers or any of its Subsidiaries), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless such Note shall have been transferred in accordance with SECTION 13.1. The Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. SECTION 14.5. NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received notice from a Lender or the Borrowers referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; PROVIDED that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) continue making Revolving Credit Loans to the Borrowers on behalf of the Lenders in reliance on the provisions of SECTION 4.7 and take such other action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. SECTION 14.6. NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrowers and its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrowers and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrowers and its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder or by the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrowers and its Subsidiaries which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. -111- 119 SECTION 14.7. INDEMNIFICATION. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrowers and without limiting the obligation of the Borrowers to do so), ratably according to their respective Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct or resulting solely from transactions or occurrences that occur at a time after such Lender has assigned all of its interests, rights and obligations under this Agreement pursuant to SECTION 13.1 or, in the case of a Lender to which an assignment is made hereunder pursuant to SECTION 13.1, at a time before such assignment. The agreements in this subsection shall survive the payment of the Notes, the Secured Obligations and all other amounts payable hereunder and the termination of this Agreement. SECTION 14.8. AGENT IN ITS INDIVIDUAL CAPACITY. The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrowers and its Subsidiaries as if the Agent were not the Agent hereunder. With respect to its Commitment, the Loans made or renewed by it and any Note issued to it and any Letter of Credit issued by it, the Agent shall have and may exercise the same rights and powers under this Agreement and the other Loan Documents and is subject to the same obligations and liabilities as and to the extent set forth herein and in the other Loan Documents for any other Lender. The terms "Lenders" or "Required Lenders" or any other term shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity as a Lender or one of the Required Lenders. SECTION 14.9. SUCCESSOR AGENT. The Agent may resign as Agent upon 30 days written notice to the Lenders and the Borrowers; provided, however, that such resignation shall not take effect until a successor agent has been appointed. If the Agent shall resign as Agent under this Agreement, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders which successor agent shall be approved by the Borrowers (which approval shall not be unreasonably withheld and shall not be required if an Event of Default has occurred and is continuing), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. If the Required Lenders have failed to appoint a successor agent within 30 days after the resignation notice given by the Agent as provided above, then the Agent shall be entitled to appoint a successor agent from among the Lenders. After any Agent's resignation hereunder as Agent, the provisions of ARTICLE 14 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 14.10. NOTICES FROM AGENT TO LENDERS. The Agent shall promptly, upon the written request from any Lender, forward to each Lender copies of any written notices, reports or other information supplied to it by the Borrowers (but which the Borrowers are not required to supply directly to the Lenders). -112- 120 SECTION 14.11. SYNDICATION AGENT. Each of the parties to this Agreement acknowledges that, other than any rights and duties explicitly assigned to the Syndication Agent under this Agreement, the Syndication Agent does not have any obligations hereunder and shall not be responsible or accountable to any other party hereto for any action or failure to act hereunder. ARTICLE 15 MISCELLANEOUS SECTION 15.1. NOTICES. (a) METHOD OF COMMUNICATION. Except as specifically provided in this Agreement or in any of the Loan Documents, all notices and the communications hereunder and thereunder shall be in writing or by telephone, subsequently confirmed in writing. Notices in writing shall be delivered personally or sent by certified or registered mail, postage pre-paid, or by overnight courier, telex or facsimile transmission and shall be deemed received in the case of personal delivery, when delivered, in the case of mailing, when receipted for, in the case of overnight delivery, on the next Business Day after delivery to the courier, and in the case of telex and facsimile transmission, upon transmittal, provided that in the case of notices to the Agent, notice shall be deemed to have been given only when such notice is actually received by the Agent. A telephonic notice to the Agent, as understood by the Agent, will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice. (b) ADDRESSES FOR NOTICES. Notices to any party shall be sent to it at the following addresses, or any other address of which all the other parties are notified in writing If to the Borrowers: Kellstrom Industries, Inc. 14000 N.W. 4th Street Sunrise, Florida 33325 Attn.: Michael W. Wallace, CFO Facsimile No.: (954) 858-2449 with a courtesy copy to: Akerman, Senterfitt & Eidson, P.A. Suite 950 450 East Las Olas Boulevard Ft. Lauderdale, Florida 33301 Attn.: Bruce March, Esq. Facsimile No.: (954) 463-2224 If to the Agent: NationsBank, N.A. Business Credit Division 600 Peachtree Street 13th Floor Atlanta, Georgia 30308 Attn.: Robert J. Walker, VP Facsimile No.: 404-607-6281 -113- 121 with a courtesy copy to: Troutman Sanders LLP NationsBank Plaza Suite 5200 600 Peachtree Street Atlanta, Georgia 30308-2216 Attn: Christine N. Schneider, Esq. Facsimile No.: 404-885-3900 If to a Lender: At the address of such Lender set forth on the signature page hereof. (c) AGENT'S OFFICE. The Agent hereby designates its office located at 600 Peachtree Street, Atlanta, Georgia 30308, or any subsequent office which shall have been specified for such purpose by written notice to the Borrowers, as the office to which payments due are to be made and at which Loans will be disbursed. SECTION 15.2. EXPENSES. The Borrowers jointly and severally agree to pay or reimburse on demand all costs and expenses incurred by the Agent and the Syndication Agent, including, without limitation, the reasonable fees and disbursements of counsel, in connection with (a) the negotiation, preparation, execution, delivery, administration, enforcement and termination of this Agreement and each of the other Loan Documents, whenever the same shall be executed and delivered, including, without limitation (i) the out-of-pocket costs and expenses incurred in connection with the administration and interpretation of this Agreement and the other Loan Documents; (ii) the costs and expenses of appraisals of the Collateral; (iii) the costs and expenses of lien and title searches and title insurance; (iv) the costs and expenses of environmental reports with respect to the Real Estate; and (v) taxes, fees and other charges for recording the Mortgages, filing the Financing Statements and continuations and the costs and expenses of taking other actions to perfect, protect, and continue the Security Interests, including all filings with the FAA; (b) the preparation, execution and delivery of any waiver, amendment, supplement or consent by the Agent and the Lenders relating to this Agreement or any of the Loan Documents; (c) sums paid or incurred to pay any amount or take any action required of the Borrowers under the Loan Documents that the Borrowers fails to pay or take; (d) costs of inspections and verifications of the Collateral, including, without limitation, standard per diem fees charged by the Agent for travel, lodging, and meals for -114- 122 inspections of the Collateral and the Borrowers' operations and books and records by the Agent's employees or agents up to four times per year and whenever an Event of Default exists; (e) costs of inspections, verifications and field examinations of the Collateral incurred prior to the Effective Date; (f) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining each Disbursement Account, Agency Account and Lockbox; (g) costs and expenses of preserving and protecting the Collateral; and (h) consulting, after the occurrence of a Default, with one or more Persons, including appraisers, accountants and lawyers, concerning the value of any Collateral for the Secured Obligations or related to the nature, scope or value of any right or remedy of the Agent or any Lender hereunder or under any of the Loan Documents, including any review of factual matters in connection therewith, which expenses shall include the fees and disbursements of such Persons. The Borrowers jointly and severally agree to pay or reimburse on demand all costs and expenses incurred by the Agent and the Lenders, including, without limitation, the reasonable fees and disbursements of counsel, experts and other consultants to the Agent and any Lender, in connection with (a) any Default or Event of Default or any modification, amendment, waiver, restructuring or forbearance with respect to any of the Loan Documents in connection with such Default or Event of Default, and (b) any actions taken to obtain payment of the Secured Obligations, enforce the Security Interests, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents, or to prosecute or defend any claim in any way arising out of, related to or connected with, this Agreement or any of the Loan Documents. The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid by the Borrowers. Each Borrower hereby authorizes the Agent and the Lenders to debit such Borrower's Loan Accounts (by increasing the principal amount of the Revolving Credit Loan) in the amount of any such costs and expenses owed by the Borrowers when due. SECTION 15.3. STAMP AND OTHER TAXES. The Borrowers will pay any and all stamp, registration, recordation and similar taxes, fees or charges and shall indemnify the Agent and the Lenders against any and all liabilities with respect to or resulting from any delay in the payment or omission to pay any such taxes, fees or charges, which may be payable or determined to be payable in connection with the execution, delivery, performance or enforcement of this Agreement and any of the Loan Documents or the perfection of any rights or security interest thereunder, including, without limitation, the Security Interest. SECTION 15.4. SETOFF. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender, any participant with such Lender in the Loans and each Affiliate of each Lender are hereby authorized by each Borrower at any time or from time to time, without notice to any Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or -115- 123 owing by any Lender or any Affiliate of any Lender or any participant to or for the credit or the account of any Borrower against and on account of the Secured Obligations irrespective or whether or not (a) the Agent or such Lender shall have made any demand under this Agreement or any of the Loan Documents, or (b) the Agent or such Lender shall have declared any or all of the Secured Obligations to be due and payable as permitted by SECTION 12.2 and although such Secured Obligations shall be contingent or unmatured. SECTION 15.5. LITIGATION. THE BORROWERS, THE AGENT, THE SYNDICATION AGENT AND EACH LENDER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE BORROWERS (OR ANY OF THEM), THE AGENT, THE SYNDICATION AGENT AND SUCH LENDER ARISING OUT OF THIS AGREEMENT, THE COLLATERAL OR ANY ASSIGNMENT THEREOF OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE BORROWERS (OR ANY OF THEM) AND THE AGENT, THE SYNDICATION AGENT OR ANY LENDER OF ANY KIND OR NATURE. THE BORROWERS, THE AGENT, THE SYNDICATION AGENT AND THE LENDERS HEREBY AGREE THAT THE FEDERAL COURT OF THE NORTHERN DISTRICT OF GEORGIA OR, AT THE OPTION OF THE AGENT, THE SYNDICATION AGENT OR ANY LENDER, ANY COURT IN WHICH THE AGENT, THE SYNDICATION AGENT OR SUCH LENDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY, SHALL HAVE NONEXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE BORROWERS (OR ANY OF THEM) AND THE AGENT, THE SYNDICATION AGENT OR SUCH LENDER, PERTAINING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT OR THE LOAN DOCUMENTS OR TO ANY MATTER ARISING THEREFROM. EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE BORROWERS AT THE ADDRESS OF THE BORROWERS SET FORTH IN SECTION 15.1. SHOULD ANY BORROWER FAIL TO APPEAR OR ANSWER ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN 30 DAYS AFTER THE MAILING THEREOF, IT SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED AGAINST IT AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. THE NONEXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY APPROPRIATE JURISDICTION. SECTION 15.6. WAIVER OF RIGHTS. EACH BORROWER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVES ALL RIGHTS WHICH SUCH BORROWER HAS UNDER CHAPTER 14 OF TITLE 44 OF THE OFFICIAL CODE OF GEORGIA OR UNDER ANY SIMILAR PROVISION OF APPLICABLE LAW TO NOTICE AND TO A JUDICIAL HEARING PRIOR TO THE ISSUANCE OF A WRIT OF POSSESSION ENTITLING THE AGENT OR ANY -116- 124 LENDER, OR THE SUCCESSORS AND ASSIGNS OF THE AGENT, THE SYNDICATION AGENT OR SUCH LENDER TO POSSESSION OF THE COLLATERAL UPON AN EVENT OF DEFAULT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING AND WITHOUT LIMITING ANY OTHER RIGHT WHICH THE AGENT, THE SYNDICATION AGENT OR THE LENDERS MAY HAVE, EACH BORROWER CONSENTS THAT IF LENDER FILES A PETITION FOR AN IMMEDIATE WRIT OF POSSESSION IN COMPLIANCE WITH SECTIONS 44-14-261 AND 44-14-262 OF THE OFFICIAL CODE OF GEORGIA OR UNDER ANY SIMILAR PROVISION OF APPLICABLE LAW, AND THIS WAIVER OR A COPY HEREOF IS ALLEGED IN SUCH PETITION AND ATTACHED THERETO, THE COURT BEFORE WHICH SUCH PETITION IS FILED MAY DISPENSE WITH ALL RIGHTS AND PROCEDURES HEREIN WAIVED AND MAY ISSUE FORTHWITH AN IMMEDIATE WRIT OF POSSESSION IN ACCORDANCE WITH CHAPTER 14 OF TITLE 44 OF THE OFFICIAL CODE OF GEORGIA OR IN ACCORDANCE WITH ANY SIMILAR PROVISION OF APPLICABLE LAW, WITHOUT THE NECESSITY OF AN ACCOMPANYING BOND AS OTHERWISE REQUIRED BY SECTION 44-14-263 OF THE OFFICIAL CODE OF GEORGIA OR BY ANY SIMILAR PROVISION UNDER APPLICABLE LAW. EACH BORROWER HEREBY ACKNOWLEDGES THAT IT HAS READ AND FULLY UNDERSTANDS THE TERMS OF THIS WAIVER AND THE EFFECT HEREOF. SECTION 15.7. CONSENT TO ADVERTISING AND PUBLICITY. With the prior written consent of the Borrowers, which consent shall not be unreasonably withheld, the Agent, on behalf of the Lenders, may issue and disseminate to the public information describing the credit accommodation entered into pursuant to this Agreement, including the name and address of each Borrower, the amount, interest rate, maturity, collateral and a general description of the Borrowers' business. SECTION 15.8. REVERSAL OF PAYMENTS. The Agent and each Lender shall have the continuing and exclusive right to apply, reverse and re-apply any and all payments to any portion of the Secured Obligations in a manner consistent with the terms of this Agreement. To the extent any Borrower makes a payment or payments to the Agent, for the account of the Lenders, or any Lender receives any payment or proceeds of the Collateral for the Borrowers' benefit, which payment(s) or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Secured Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect, as if such payment or proceeds had not been received by the Agent or such Lender. SECTION 15.9. INJUNCTIVE RELIEF. Each Borrower recognizes that, in the event such Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to the Agent and the Lenders; therefore, each Borrower agrees that if any Event of Default shall have occurred and be continuing, the Agent and the Lenders, if the Agent or any Lender so requests, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damages. SECTION 15.10. ACCOUNTING MATTERS. All financial and accounting calculations, measurements and computations made for any purpose relating to this Agreement, including, without limitation, all computations utilized by the Borrowers to determine whether they are in compliance with any covenant contained herein, shall, unless this Agreement otherwise provides or unless Required Lenders shall otherwise consent in writing, be performed in accordance with GAAP. -117- 125 SECTION 15.11. AMENDMENTS. (a) Except as set forth in SUBSECTION (b) below, any term, covenant, agreement or condition of this Agreement or any of the Loan Documents may be amended or waived, and any departure therefrom may be consented to by the Required Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders and, in the case of an amendment (other than an amendment described in SECTION 15.11(d)), by the Borrowers, and in any such event, the failure to observe, perform or discharge any such term, covenant, agreement or condition (whether such amendment is executed or such waiver or consent is given before or after such failure) shall not be construed as a breach of such term, covenant, agreement or condition or as a Default or an Event of Default; PROVIDED that: (i) without the written consent of NationsBank, no amendment or waiver shall be made to any provision of ARTICLE 3 hereof or any of NationsBank's rights or obligations with respect to Letters of Credit, (ii) without the written consent of NationsBank, no amendment or waiver shall be made to any of NationsBank's rights or obligations with respect to Non-Ratable Loans, (iii) without the written consent of the Agent, no amendment or waiver shall be made to any provision of ARTICLE 14 as such provisions apply to the Agent or to any other provision of any Loan Document as such provisions relate to the rights and obligations of the Agent, and (iv) without the written consent of the Syndication Agent, no amendment or waiver shall be made to SECTION 14.11 or to any other provision of any Loan Document as such provisions relate to the rights and obligations of the Syndication Agent. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. In the event that any such waiver or amendment is requested by the Borrowers, the Agent and the Lenders may require and charge a fee in connection therewith and consideration thereof in such amount as shall be determined by the Agent and the Required Lenders in their discretion. (b) Except as otherwise set forth in this Agreement, without the prior unanimous written consent of the Lenders, (i) no amendment, consent or waiver shall affect the amount (except as provided in the definition of "Revolving Credit Facility") or extend the time of the obligation of the Lenders to make Loans or extend the originally scheduled time or times of payment of the principal of any Loan or alter the time or times of payment of interest on any Loan or the amount of the principal thereof or the rate of interest thereon or the amount of any commitment fee payable hereunder or permit any subordination of the principal or interest on such Loan, permit the subordination of the Security Interests in any material Collateral or amend the provisions of ARTICLE 12 or of this SECTION 15.11(b), -118- 126 (ii) no material Collateral shall be released by the Agent other than releases of Collateral in connection with the sale of any such Collateral in the ordinary course of a Borrower's business or as otherwise specifically permitted in this Agreement, (iii) no amendment shall be made to the definitions of "Commitment", "Commitment Percentage", "Eligible Assignee", "Proportionate", "Ratable", "Required Lenders" or "Secured Obligations", (iv) neither the Agent nor any Lender shall consent to any amendment to or waiver of the amortization, deferral or subordination provisions of the Subordinated Indebtedness or any other instrument or agreement evidencing or relating to obligations of the Borrowers that are expressly subordinate to any of the Secured Obligations if such amendment or waiver would be adverse to the Lenders in their capacities as Lenders hereunder; (v) no Borrower or Guarantor shall be released; (vi) no amendment shall be made or waiver or consent given that increases the advance rates set forth in the definition of "Borrowing Base" (other than the annual changes in advance rates based on the appraisals required under SECTION 8.12(f)); and (vii) no amendment shall be made or waiver or consent given that decreases the minimum Availability required under SECTION 11.16 to less than $5,000,000; PROVIDED, HOWEVER, that anything herein to the contrary notwithstanding, the Required Lenders shall have the right to waive any Default or Event of Default (unless such Default or Event of Default arises out of a provision of this Agreement which can only be amended with the unanimous consent of the Lenders) and the consequences hereunder of such Default or Event of Default and shall have the right to enter into an agreement with the Borrowers providing for the forbearance from the exercise of any remedies provided hereunder or under the other Loan Documents without waiving any Default or Event of Default. (c) The making of Loans hereunder by the Lenders during the existence of a Default or Event of Default shall not be deemed to constitute a waiver of such Default or Event of Default. (d) Notwithstanding any provision of this Agreement or any other Loan Document to the contrary, no consent, written or otherwise, of the Borrowers shall be necessary or required in connection with any amendment to ARTICLE 14 or SECTION 4.7, and any amendment to such provisions shall be effected solely by and among the Agent and the Lenders, provided that no such amendment shall impose any obligation on the Borrowers. SECTION 15.12. ASSIGNMENT. All the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights under this Agreement. -119- 127 SECTION 15.13. PERFORMANCE OF BORROWERS' DUTIES. (a) The Borrowers' obligations under this Agreement and each of the Loan Documents shall be performed by the Borrowers at their sole cost and expense. (b) If the Borrowers shall fail to do any act or thing which they have covenanted to do under this Agreement or any of the Loan Documents, the Agent, on behalf of the Lenders, may (but shall not be obligated to) do the same or cause it to be done either in the name of the Agent or the Lenders or in the name and on behalf of the Borrowers, and the Borrowers hereby irrevocably authorize the Agent so to act. SECTION 15.14. INDEMNIFICATION. The Borrowers jointly and severally agree to reimburse the Agent, the Syndication Agent and the Lenders and each of their Affiliates, agents, employees, officers, directors, Subsidiaries, successors and assigns (the "Indemnitees") for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold the Indemnitees harmless from and against all losses suffered by, any Indemnitee in connection with (i) the exercise by any Indemnitee of any right or remedy granted to it under this Agreement or any of the Loan Documents, (ii) any claim, and the prosecution or defense thereof, arising out of or in any way connected with this Agreement or any of the Loan Documents, including without limitation any claim relating to Environmental Laws, (iii) the collection or enforcement of the Secured Obligations or any of them, and (iv) any Acquisition or proposed Acquisition by the Borrowers or any of their Subsidiaries, other than such costs, expenses and liabilities arising out of such Indemnitee's gross negligence or willful misconduct. SECTION 15.15. ALL POWERS COUPLED WITH INTEREST. All powers of attorney and other authorizations granted to the Agent and the Lenders and any Persons designated by the Agent or the Lenders pursuant to any provisions of this Agreement or any of the Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Secured Obligations remain unpaid or unsatisfied. SECTION 15.16. SURVIVAL. Notwithstanding any termination of this Agreement, (a) until all Secured Obligations have been irrevocably paid in full or otherwise satisfied and all Commitments have been terminated, the Agent, for the benefit of the Secured Parties, shall retain its Security Interest and shall retain all rights under this Agreement and each of the Security Documents with respect to such Collateral as fully as though this Agreement had not been terminated, (b) the indemnities to which the Agent and the Lenders are entitled under the provisions of this ARTICLE 15 and any other provision of this Agreement and the Loan Documents shall continue in full force and effect and shall protect the Agent and the Lenders against events arising after such termination as well as before, and -120- 128 (c) in connection with the termination of this Agreement and the release and termination of the Security Interests, the Agent, on behalf of itself as agent and the Lenders, may require such assurances and indemnities as it shall reasonably deem necessary or appropriate to protect the Agent and the Lenders against loss on account of such release and termination, including, without limitation, with respect to credits previously applied to the Secured Obligations that may subsequently be reversed or revoked. SECTION 15.17. TITLES AND CAPTIONS. Titles and captions of Articles, Sections and subsections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 15.18. SEVERABILITY OF PROVISIONS. Any provision of this Agreement or any Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 15.19. GOVERNING LAW. This Agreement and the Notes shall be construed in accordance with and governed by the law of the State of Georgia. SECTION 15.20. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together shall constitute one and the same agreement. SECTION 15.21. REPRODUCTION OF DOCUMENTS. This Agreement, each of the Loan Documents and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by the Agent or any Lender, and (c) financial statements, certificates and other information previously or hereafter furnished to the Agent or any Lender, may be reproduced by the Agent or such Lender by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and such Person may destroy any original document so produced. Each party hereto stipulates that, to the extent permitted by Applicable Law, any such reproduction shall be as admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original shall be in existence and whether or not such reproduction was made by the Agent or such Lender in the regular course of business), and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 15.22. TERM OF AGREEMENT. This Agreement shall remain in effect from the Agreement Date through the Termination Date and thereafter until all Secured Obligations shall have been irrevocably paid and satisfied in full. No termination of this Agreement shall affect the rights and obligations of the parties hereto arising prior to such termination. SECTION 15.23. PRO-RATA PARTICIPATION. (a) Each Lender agrees that if, as a result of the exercise of a right of setoff, banker's lien or counterclaim or other similar right or the receipt of a secured claim it receives any payment in respect of the Secured Obligations, it shall promptly notify the Agent thereof (and the Agent -121- 129 shall promptly notify the other Lenders). If, as a result of such payment, such Lender receives a greater percentage of the Secured Obligations owed to it under this Agreement than the percentage received by any other Lender, such Lender shall purchase a participation (which it shall be deemed to have purchased simultaneously upon the receipt of such payment) in the Secured Obligations then held by such other Lenders so that all such recoveries of principal and interest with respect to all Secured Obligations owed to each Lender shall be pro rata on the basis of its respective amount of the Secured Obligations owed to all Lenders, PROVIDED that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered by or on behalf of the Borrowers from such Lender, such purchase shall be rescinded and the purchase price paid for such participation shall be returned to such Lender to the extent of such recovery, but without interest. (b) Each Lender which receives such a secured claim shall exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this SECTION 15.23 to share in the benefits of any recovery on such secured claim. (c) Each Borrower expressly consents to the foregoing arrangements and agrees that any holder of a participation in any Secured Obligation so purchased or otherwise acquired may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by such Borrower to such holder as fully as if such holder were a holder of such Secured Obligation in the amount of the participation held by such holder. SECTION 15.24. FINAL AGREEMENT. This Agreement and the other Loan Documents are intended by the parties hereto as the final, complete and exclusive expression of the agreement among them with respect to the subject matter hereof and thereof. This Agreement and the other Loan Documents supersede any and all prior oral or written agreements between the parties hereto relating to the subject matter hereof and thereof, it being understood that the Fee Letter (as described in SECTION 4.2(a)) shall survive the execution and delivery of this Agreement. SECTION 15.25. WAIVER OF CONSEQUENTIAL DAMAGES, ETC.. THE BORROWERS AGREE NOT TO ASSERT ANY CLAIM AGAINST THE AGENT, THE SYNDICATION AGENT, ANY LENDER, ANY OF THEIR AFFILIATES, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS AND AGENTS, ON ANY THEORY OF LIABILITY, FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE RELATING TO ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR IN ANY OTHER LOAN DOCUMENT OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE LOANS. [Signatures commence on next page.] -122- 130 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers in several counterparts all as of the day and year first written above. BORROWERS: Kellstrom Industries, Inc. By: ----------------------------------------- Michael W. Wallace Chief Financial Officer [CORPORATE SEAL] KELLSTROM COMMERCIAL AIRCRAFT, INC. By: ----------------------------------------- Michael W. Wallace Vice President [CORPORATE SEAL] AERO SUPPORT HOLDINGS, INC. By: ----------------------------------------- Michael W. Wallace Vice President [CORPORATE SEAL] 131 INTEGRATED TECHNOLOGY HOLDINGS CORP. By: ------------------------------------------------------- Michael W. Wallace Vice President [CORPORATE SEAL] AEROCAR AVIATION CORP. By: ------------------------------------------------------- Michael W. Wallace Vice President [CORPORATE SEAL] AEROCAR PARTS, INC. By: ------------------------------------------------------- Michael W. Wallace Vice President [CORPORATE SEAL] LENDERS: NATIONSBANK, N.A. By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 600 Peachtree Street, N.E. 13th Floor Atlanta, Georgia 30308 Attn.: Robert J. Walker, Business Credit Facsimile No.: 404-607-6281 132 UNION PLANTERS BANK, N.A. By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 1799 West Oakland Park Blvd., 3rd Floor Ft. Lauderdale, Florida 33311 Attn.: Mr. Tom Thureson Facsimile No.: 954-714-3142 BANK LEUMI Le-Israel B.M., Miami Agency By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 800 Brickell Avenue, 14th Floor Miami, Florida 33131 Attn.: Mr. Joseph F. Realini Facsimile No.: 305-377-6542 IBJ SCHRODER Business Credit Corporation By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 1100 Circle 75 Parkway, Suite 800 Atlanta, Georgia 30339 Attn.: Mr. Vernon Woods Facsimile No.: 770-933-1609 133 COMERICA BANK By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 100 N.E. 3rd Avenue, Suite 200 Ft. Lauderdale, Florida 33301 Attn.: Mr. Michael Orozco Facsimile No.: 954-468-0641 MELLON BANK, N.A. By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 1010 Huntcliff, Suite 1350 Atlanta, Georgia 30350 Attn.: Mr. Jack Guy Facsimile No.: 770-993-0327 FIRST UNION NATIONAL BANK By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: One First Union Center 301 South College Street, DC-4 Charlotte, North Carolina 28288-0479 Attn.: Terri Lins Facsimile No.: 704-374-2703 134 THE CIT GROUP/BUSINESS CREDIT, INC. By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 1200 Ashwood Parkway, Suite 150 Atlanta, Georgia 30338 Attn.: Ken Butler, VP Facsimile No.: 770-522-7673 GENERAL ELECTRIC CAPITAL CORPORATION By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 3379 Peachtree Road, N.E., Suite 600 Atlanta, Georgia 30326 Attn.: Elaine L. Moore, SVP Facsimile No.: 404-262-9032 NATIONAL BANK OF CANADA, Canadian chartered bank By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 5100 Town Center Circle, Suite 430 Boca Raton, Florida 33486 Attn.: Frank H. D'Alto, VP Facsimile No.: 561-367-1705 135 BANKATLANTIC, a Federal Savings Bank By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 1750 East Sunrise Boulevard Ft. Lauderdale, Florida 33304-3013 Attn.: Shawn J. Byrd, SVP Facsimile No.: 954-760-5554 NATIONAL CITY COMMERCIAL FINANCE, INC. By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 35 Technology Parkway South, Suite 170 Norcross, Georgia 30092 Attn.: Carrie C. Tate, VP Facsimile No.: 770-613-5349 PNC BANK, N.A. By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: One South Orange Avenue, Suite 500 Orlando, Florida 32801-2627 Attn.: Michael E. Picard, VP Facsimile No.: 407-206-7243 136 SOUTHTRUST BANK, NATIONAL ASSOCIATION By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 420 North 20th Street Birmingham, Alabama 35203 Attn.: Florida Corporate Banking Facsimile No.: 727-898-5319 SUNTRUST BANK, ATLANTA By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: Mail Code 075 25 Park Place, 26th Floor Atlanta, Georgia 30303 Attn.: Rainer C. Zeck, VP Facsimile No.: 404-575-2693 AGENT: NATIONSBANK, N.A. By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: 600 Peachtree Street, N.E. 13th Floor Atlanta, Georgia 30308 Attn.: Robert J. Walker, Business Credit Facsimile No.: 404-607-6281 137 SYNDICATION AGENT: NationsBanc Montgomery Securities LLC By: ------------------------------------------------------- Name: ------------------------------------------------ Title: ------------------------------------------------ Address: NationsBank Corporate Center, 7th Floor 100 North Tryon Street Charlotte, North Carolina 28255-0001 Attn.: Peter Hall Facsimile No.: 704-388-9941 138 ANNEX I PERFORMANCE PRICING MATRIX
- ----------------------------------------------------------------------------------------------------------------------- Ratio of Consolidated Funded Indebtedness to Consolidated EBITDA (trailing 12 months) Prime Rate Margin Eurodollar Rate Margin - ----------------------------------------------------------------------------------------------------------------------- Greater than 4 to 1 .50% 2.5% - ----------------------------------------------------------------------------------------------------------------------- Greater than 3.5 to 1 but less than or equal to 4.0 to 1 .25% 2.25% - ----------------------------------------------------------------------------------------------------------------------- Greater than 3.0 to 1 but less than or equal to 3.5 to 1 0% 2% - ----------------------------------------------------------------------------------------------------------------------- Greater than 2.5 to 1 but less than or equal to 3.0 to 1 0% 1.75% - ----------------------------------------------------------------------------------------------------------------------- less than or equal to 2.5 to 1 0% 1.5% - -----------------------------------------------------------------------------------------------------------------------
139 ANNEX II COMMITMENTS 1. Union Planters Bank, N.A. $ 10,710,808.18 2. Bank Leumi Le-Israel B.M., Miami Agency $ 7,789,678.68 3. IBJ Schroder Business Credit Corporation $ 7,789,678.68 4. Comerica Bank $ 24,342,745.86 5. Mellon Bank, N.A. $ 17,039,922.10 6. First Union National Bank $ 15,092,502.43 7. The CIT Group/Business Credit, Inc. $ 10,710,808.18 8. General Electric Capital Corporation $ 20,204,479.07 9. National Bank of Canada, a Canadian chartered bank $ 24,342,745.86 10. BankAtlantic, a Federal Savings Bank $ 17,039,922.10 11. National City Commercial Finance, Inc. $ 19,474,196.69 12. PNC Bank, N.A. $ 10,710,808.18 13. SouthTrust Bank, National Association $ 10,710,808.18 14. SunTrust Bank, Atlanta $ 15,092,502.43 15. NationsBank, N.A. $ 38,948,393.38 EX-10.22 6 FORM OF REVOLVING CREDIT 1 EXHIBIT 10.22 EXHIBIT A FORM OF REVOLVING CREDIT NOTE $ _______________ DATE: DECEMBER ____, 1998 FOR VALUE RECEIVED, on the Termination Date (as such term is defined in the Loan Agreement described below), KELLSTROM INDUSTRIES, INC., a Delaware corporation, KELLSTROM COMMERCIAL AIRCRAFT, INC., a Delaware corporation, AERO SUPPORT HOLDINGS, INC., a Delaware corporation, INTEGRATED TECHNOLOGY HOLDINGS CORP., a Delaware corporation, AEROCAR AVIATION CORP., a Florida corporation, and AEROCAR PARTS, INC., a Florida corporation (collectively, the "Borrowers"), promise to pay to the order of ______________________________________________ (hereinafter, together with any holder hereof, called "Holder") at the Atlanta, Georgia office of the Agent (as hereinafter defined), or at such other place as the Holder may designate in writing to the undersigned, the principal amount of ____________________________ ($___________) or so much thereof as has been advanced hereunder. The undersigned shall pay interest as provided in that certain Amended and Restated Loan and Security Agreement (as the same may be amended, modified or supplemented from time to time, the "Loan Agreement"), dated as of December ___, 1998, by and among the Borrowers, the financial institutions party thereto from time to time (the "Lenders"), NationsBank, N.A., as agent for the Lenders, and NationsBanc Montgomery Securities LLC, as syndication agent. It is contemplated that the principal sum evidenced by this Note may be reduced from time to time and that additional advances may be made from time to time, as provided in the Loan Agreement. This Note is subject to the terms and conditions of the Loan Agreement. This Note is entitled to the benefits of the Security Documents (as defined in the Loan Agreement). The Loan Agreement contains provisions for the acceleration of the maturity hereof upon the happening of certain stated events. No delay or failure on the part of the Holder in the exercise of any right or remedy hereunder, under the Loan Agreement or at law or in equity shall operate as a waiver thereof, and no single or partial exercise by the Holder of any right or remedy hereunder, under the Loan Agreement or at law or in equity shall preclude or estop another or further exercise thereof or the exercise of any other right or remedy. Principal and interest on this Note shall be payable and paid in lawful money of the United States of America. 2 The undersigned waive presentment, notice of dishonor and protest. Time is of the essence of this Note and, in case this Note is collected by law or through an attorney at law, or under advice therefrom, the undersigned agree to pay all costs of collection, including reasonable attorneys' fees if collected by or through an attorney. The provisions of this Note shall be construed and interpreted and all rights and obligations of the parties hereunder determined in accordance with the laws of the State of Georgia. The undersigned are jointly and severally liable for all obligations under this Note. IN WITNESS WHEREOF, each of the undersigned has caused this Note to be executed and sealed in its corporate name, by and through its duly authorized officers, as of the day and year first above written. KELLSTROM INDUSTRIES, INC By: -------------------------------- Name: --------------------------- Title: -------------------------- Attest: ---------------------------- Name: --------------------------- Title: -------------------------- [CORPORATE SEAL] KELLSTROM COMMERCIAL AIRCRAFT, INC. By: -------------------------------- Name: --------------------------- Title: -------------------------- Attest: ---------------------------- Name: --------------------------- Title: -------------------------- [CORPORATE SEAL] [Signatures continued on next page] 2 3 [Signatures continued from previous page] AERO SUPPORT HOLDINGS, INC. By: -------------------------------- Name: --------------------------- Title: -------------------------- Attest: ---------------------------- Name: --------------------------- Title: -------------------------- [CORPORATE SEAL] INTEGRATED TECHNOLOGY HOLDINGS CORP. By: -------------------------------- Name: --------------------------- Title: -------------------------- Attest: ---------------------------- Name: --------------------------- Title: -------------------------- [CORPORATE SEAL] AEROCAR AVIATION CORP. By: -------------------------------- Name: --------------------------- Title: -------------------------- Attest: ---------------------------- Name: --------------------------- Title: -------------------------- [CORPORATE SEAL] [Signatures continued on next page] 3 4 [Signatures continued from previous page] AEROCAR PARTS, INC. By: -------------------------------- Name: --------------------------- Title: -------------------------- Attest: ---------------------------- Name: --------------------------- Title: -------------------------- [CORPORATE SEAL] 4 5 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of December, 1998, before me, the undersigned, a Notary Public in and for the State of Georgia, County of _______________, personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the ____________________ of Kellstrom Industries, Inc., a Delaware corporation, who executed the foregoing Revolving Credit Note on behalf of such corporation and acknowledged to me that such corporation executed the foregoing pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of Georgia, County of Fulton. - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 6 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of December, 1998, before me, the undersigned, a Notary Public in and for the State of Georgia, County of ________________, personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the ____________________ of Kellstrom Commercial Aircraft, Inc., a Delaware corporation, who executed the foregoing Revolving Credit Note on behalf of such corporation and acknowledged to me that such corporation executed the foregoing pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of Georgia, County of Fulton. - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 7 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of December, 1998, before me, the undersigned, a Notary Public in and for the State of Georgia, County of ______________, personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the ____________________ of Aero Support Holdings, Inc., a Delaware corporation, who executed the foregoing Revolving Credit Note on behalf of such corporation and acknowledged to me that such corporation executed the foregoing pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of Georgia, County of Fulton. - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 8 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of December, 1998, before me, the undersigned, a Notary Public in and for the State of Georgia, County of ________________, personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the ____________________ of Integrated Technology Holdings Corp., a Delaware corporation, who executed the foregoing Revolving Credit Note on behalf of such corporation and acknowledged to me that such corporation executed the foregoing pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of Georgia, County of Fulton. - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 9 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of _________, 1998, before me, the undersigned, a Notary Public in and for the State of Georgia, County of _______________, personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the ____________________ of Aerocar Aviation Corp., a Florida corporation, who executed the foregoing Revolving Credit Note on behalf of such corporation and acknowledged to me that such corporation executed the foregoing pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of Georgia, County of Fulton. - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 10 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of December, 1998, before me, the undersigned, a Notary Public in and for the State of Georgia, County of ______________, personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the ____________________ of Aerocar Parts, Inc., a Florida corporation, who executed the foregoing Revolving Credit Note on behalf of such corporation and acknowledged to me that such corporation executed the foregoing pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of Georgia, County of Fulton. - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 11 AFFIDAVIT REGARDING DELIVERY I, ________________________________ hereby certify that I am a ___________________________ of _____________________ and that the foregoing was delivered to me as a representative of _______________________ in the State of _____________________, County of _________________. --------------------------------------- Signature of Officer of Agent or Lender On this the ____ day of December, 1998, before me, the undersigned, a Notary Public in and for the State of _________________, County of _________________________, _________________________________, personally known to me or proved to me on the basis of satisfactory evidence to be the _____________________ of ____________________________, a ________________________________________, who executed the foregoing affidavit on behalf of such ________________________________________ and acknowledged to me that such ________________________________________ executed the foregoing pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of ____________________, County of ___________________________ . - ---------------------------------- Notary Signature EX-10.28 7 1996 STOCK OPTION PLAN AS AMENDED 1 EXHIBIT 10.28 KELLSTROM INDUSTRIES, INC. 1996 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN. The purpose of the Kellstrom Industries, Inc. 1996 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 July 10, 1996, by resolution of the Board, and was ratified by a majority vote of the stockholders of the Company at its 1996 Annual Meeting of Stockholders. The Plan was amended by the Board on October 8, 1998. 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 and stock appreciation rights ("SARs") may be granted under the Plan shall be 1,100,000, provided that 700,000 of such options and SARs may not be granted until at least 75% of the 4,600,000 outstanding Redeemable Common Stock Purchase Warrants which were issued to the public in the Company's 1994 initial public offering are exercised by the holders thereof or redeemed by the Company in accordance with the terms of such Warrants, subject to adjustment as provided in Section 14 hereof, 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; provided, however, that shares as to which an option has been surrendered in connection with the exercise of a related SAR will not again be available for subsequent option or SAR grants under the Plan. (c) Stock issuable upon exercise of an option or SAR 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 or SAR 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, 2 grant options to purchase shares of Common Stock, grant SARs and issue shares upon exercise of such options and SARS, as provided in the Plan. The Board shall have authority, subject to the express provisions of the Plan, to construe the respective option and SAR 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 and SAR 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 or SAR 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. SARs and 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 or SAR, 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: 2 3 (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 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 and SAR shall be evidenced by an agreement (the "Agreement") duly executed on behalf of the Company and by the grantee to whom such option or SAR 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 or SAR shall be granted within the meaning of the Plan and no purported grant of any option or SAR shall be effective until the Agreement shall have been duly executed on behalf of the Company and the optionee. More than one option and SAR 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. 3 4 (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 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 provide din subparagraph (a) above. Upon such exercise, delivery of a certificate for paid-up non-assessable shares shall be made at the principal office of 4 5 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 AND SARS. Each option and SAR granted under the Plan shall, subject to Section 11(b) and Section 13 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 or SAR 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 or SAR 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. The exercise of an option shall result in the cancellation of the SAR to which it relates with respect to the same number of shares of Common Stock as to which the option was exercised. 11. TERM OF OPTIONS AND SARS; 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 or SAR 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 or SAR 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 or SAR 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 or SAR shall terminate twelve months after the date such grantee ceases to perform services for the Company, or on the date on which the option or SAR expires by its terms, whichever occurs first. (v) In the event of the death of any grantee, any option or SAR granted to such grantee shall terminate twelve months after the date of death, or on the date on which the option or SAR expires by its terms, whichever occurs first. 5 6 (b) EXERCISABILITY. (i) Except as provided below, an option or SAR 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 or SAR 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 or SAR 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 or SAR 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 or SAR by bequest or inheritance or by reason of the death of such grantee. 12. OPTIONS NOT TRANSFERABLE. The right of any grantee to exercise any option or SAR 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 or SAR shall be exercisable during the lifetime of such grantee only by him. Any option or SAR 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 or SAR. 13. TERMS AND CONDITIONS OF SARS. (a) An SAR may be granted separately or in connection with an option (either at the time of grant or at any time during the term of the option). (b) The exercise of an SAR granted in connection with an option shall result in the cancellation of the option to which it relates with respect to the same number of shares of Common Stock as to which the SAR was exercised. (c) An SAR granted in connection with an option shall be exercisable or transferable only to the extent that such related option is exercisable or transferable. (d) Upon the exercise of an SAR related to an option, the holder will be entitled to receive payment of an amount determined by multiplying: 6 7 (i) the difference obtained by subtracting the purchase price of a share of Common Stock specified in the related option from the fair market value of a share of Common Stock on the date of exercise of such SAR (as determined by the Board in accordance with Section 8 hereof), by (ii) the number of shares as to which such SAR is exercised. (e) An SAR granted without relationship to an option shall be exercisable as determined by the Board, but in no event after ten years from the date of grant. (f) An SAR granted without relationship to an option will entitle the holder, upon exercise of the SAR, to receive payment of an amount determined by multiplying: (i) the difference obtained by subtracting the fair market value of a share of Common Stock on the date the SAR was granted from the fair market value of a share of Common Stock on the date of exercise of such SAR (as determined by the Board in accordance with Section 8 hereof), by (ii) the number of shares as to which such SAR is exercised. (g) Notwithstanding subsections (d) and (f) above, the Board may limit the amount payable upon exercise of an SAR. Any such limitation shall be determined as of the date of grant and noted on the instrument evidencing the SAR granted. (h) At the discretion of the Board, payment of the amount determined under subsections (d) and (f) above may be made either in whole shares of Common Stock valued at their fair market value on the date of exercise of the SAR (as determined by the Board in accordance with Section 8 hereof), or solely in cash, or in a combination of cash and shares. If the Board decides to make full payment in shares of Common Stock and the amount payable results in a fractional share, payment for the fractional share shall be made in cash. (i) Neither an SAR nor an option granted in connection with an SAR granted to a person subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") may be exercised before six months after the date of grant. 14. 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 and SARs may be granted under the Plan and as to which outstanding options and SARs 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 7 8 adjustment in outstanding options and SARs shall be made without change in the total price applicable to the unexercised portion of such options and SARs 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 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 Change in Control, or the Board may cancel all outstanding options and SARs 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 Change in Control, less the exercise price therefor. Upon receipt of such consideration, the options and SARs 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. Notwithstanding anything to the contrary contained in this Plan or the option agreements executed in connection herewith, upon any Change in Control under subsection (a), (b) or (c) of the following paragraph, all outstanding options and SARs shall immediately become exercisable. Upon any Change in Control under subsection (d) of the following paragraph, the Board shall have the power and right, in its sole discretion, to accelerate the exercisability of any outstanding options or SARs. Upon any acceleration pursuant to this paragraph, 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. For purposes hereof, a "Change in Control" shall mean: (a) (i) a reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which persons who were the stockholders of the Company immediately prior to such reorganization, merger or consolidation or other transaction do not, immediately thereafter, own more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or (ii) a liquidation or dissolution of the Company or (iii) the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company; or (b) the acquisition by 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 combined voting power entitled to vote generally in the election of directors, of additional voting power in one or more transactions, or series of transactions, such that following such transaction or transactions, such person or group and affiliates beneficially 8 9 own fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors; or (c) individuals who, as of the date hereof, constitute the Company's Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (d) the acquisition (other than from the Company or its subsidiaries) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, (excluding, for this purpose, the Company or its subsidiaries, or any employee benefit plan of the Company or its subsidiaries) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 19% or more of either the then outstanding shares of the Company's Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors. 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 or SAR, but in the event any adjustment hereunder in the number of shares covered by the option or SAR shall cause such number to include a fraction of a share, such fraction shall be adjusted to the nearest smaller whole number of shares. 15. NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in the Plan or in any option or SAR 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 or SAR. 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). 9 10 16. WITHHOLDING. The Company's obligation to deliver shares upon the exercise of any non-qualified option or SAR 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 or SAR 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 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. 17. RESTRICTIONS ON ISSUANCE OF SHARES. (a) Notwithstanding the provisions of Section 9 hereof, the Company may delay the issuance of shares covered by the exercise of an option or SAR 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 or SAR 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 and SARs 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. 18. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT REGISTRATION. Unless the shares to be issued upon exercise of an option or SAR 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 or SAR 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 or SAR 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 10 11 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 or SAR 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. 19. 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. 20. MODIFICATION OF OUTSTANDING OPTIONS AND SARS. Subject to limitations contained herein, the Board may authorize the amendment of any outstanding option or SAR 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. 21. APPROVAL OF STOCKHOLDERS. The Plan was approved by a majority vote of the stockholders of the Company voting in person or by proxy at the Company's 1996 Annual Meeting of Stockholders. The Plan became effective on July 10, 1996 by resolution of the Board. The Plan was amended by the Board on October 8, 1998. 22. TERMINATION AND AMENDMENT OF PLAN. Unless sooner terminated as herein provided, the Plan shall terminate on July 9, 2006. 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 and SARs may be granted or change the designation of the class of persons eligible to receive options and SARs under the Plan, and (ii) anysuch 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 or SAR theretofore granted to him or her. 11 12 23. LIMITATION OF RIGHTS IN THE UNDERLYING SHARES. A holder of an option or SAR shall not be deemed for any purpose to be a stockholder of the Company with respect to such option or SAR except to the extent that such option or SAR shall have been exercised with respect thereto and, in addition, a stock certificate shall have been issued theretofore and delivered to the holder. 24. 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 or SAR, to the address as appearing on the records of the Company. 12 EX-10.29 8 1997 STOCK OPTION PLAN AS AMENDED 1 EXHIBIT 10.29 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, and was amended by the Board on each of April 9, 1998 and October 8, 1998. The Plan was ratified 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 One Million (1,000,000), 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. 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 2 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 (the "Committee"), consisting of two or more members of the Board. If a Committee is so appointed, all references to the Board in Sections 3, 4, 8, 9 and 10 hereof shall mean and relate to such Committee, unless the context otherwise requires. The membership of the Committee shall be constituted so as to comply at all times with the then applicable requirements for an "outside director" under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder and as a "Non-Employee Director" under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall serve at the pleasure of the Board and shall have the powers designated herein and such other powers as the Board may from time to time confer upon it. 4. TYPE OF OPTIONS. Options granted pursuant to the Plan shall be authorized by action of the Board and may be designated as either incentive stock options meeting the requirements of Section 422 of 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. 2 3 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 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; and (ii) The incentive stock option shall have a term expiring not more than five (5) years from the date of the granting thereof. (c) In determining the fair market value under this Section 6, the provisions of Section 9(c) hereof shall apply. 7. LIMITATION ON GRANT. Notwithstanding any other provision of this Plan, and in addition to any other requirements of this Plan, the aggregate number of shares of Common Stock subject to options granted to any one optionee under the Plan may not exceed 500,000 during any calendar year, subject to adjustment as provided in Section 14 hereof. 3 4 8. 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 deemed 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. 9. 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, provided, however, in no event shall such price be less than the fair market value of the Common Stock (as determined in accordance with clause (c) below) subject to such options on the day of the grant. (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 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 4 5 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. 10. 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 9(c) 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. 11. EXERCISE OF OPTIONS. Each option granted under the Plan shall, subject to Section 12(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. 5 6 12. TERM OF OPTIONS; EXERCISABILITY. (a) TERM. (i) Each option shall expire automatically and without notice 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 12, 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 resignation by grantee, dismissal for cause or a breach of any employment agreement by grantee, 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 and subject to Section 12(a) hereof, 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 vested and is in effect on the date such grantee ceases to perform services for the Company or one of its subsidiaries. (ii) Options 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 for a period of 12 months from the date such grantee ceases to perform services for the Company only with respect to the number of shares subject to the options which have vested as of the date the grantee ceases to perform services for the Company, and may be exercised by a legal representative on behalf of the grantee; 6 7 (iii) In the event of the death of any grantee, the options granted to such grantee shall be exercisable only with respect to the shares subject to the options which have vested on the date of death, and may be exercised by the estate of such grantee, or by any person or persons who acquired the right to exercise such options by bequest or inheritance or by reason of the death of such grantee. (iv) Notwithstanding the foregoing, the Board may provide, in its discretion, that a grantee may exercise an option, in whole or in part, at any time subsequent to termination of employment or service with the Company and prior to termination of the option pursuant to Section 12(a), either subject to or without regard to any vesting or other limitation on exercise imposed hereunder. 13. 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. 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. 14. 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. Notwithstanding any provisions of the prior paragraph of this Section 14 to the contrary, unless otherwise determined by the Board in its sole discretion, in the case of any 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 Change in Control, or the 7 8 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 and no disposition of the shares acquired upon such exercise been made prior to such 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 9(c) hereof. Notwithstanding anything to the contrary contained in this Plan or the option agreements executed in connection herewith, upon any Change in Control under subsection (a), (b) or (c) of the following paragraph, all outstanding options shall immediately become exercisable. Upon any Change in Control under subsection (d) of the following paragraph, the Board shall have the power and right, in its sole discretion, to accelerate the exercisability of any outstanding options. Upon any acceleration pursuant to this paragraph, 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. For purposes hereof, a "Change in Control" shall mean: (a) (i) a reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which persons who were the stockholders of the Company immediately prior to such reorganization, merger or consolidation or other transaction do not, immediately thereafter, own more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or (ii) a liquidation or dissolution of the Company or (iii) the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company; or (b) the acquisition by 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 combined voting power entitled to vote generally in the election of directors, of additional voting power 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 combined voting power entitled to vote generally in the election of directors; or (c) individuals who, as of the date hereof, constitute the Company's Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then 8 9 comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (d) the acquisition (other than from the Company or its subsidiaries) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, (excluding, for this purpose, the Company or its subsidiaries, or any employee benefit plan of the Company or its subsidiaries) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 19% or more of either the then outstanding shares of the Company's Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors. 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. 15. 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). 16. 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 9 10 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 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. 17. RESTRICTIONS ON ISSUANCE OF SHARES. (a) Notwithstanding the provisions of Section 10 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. 18. 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 10 11 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. 19. INTERPRETATION. (a) As it is the intent of the Company that the Plan comply in all respects with Rule 16b-3 promulgated under the Exchange Act and Section 162(m) of the Code, any ambiguities or inconsistencies in construction of the Plan shall be interpreted to give effect to such intention, and if any provision of the Plan is found not to be in compliance with Rule 16b-3 or Section 162(m), such provision shall be deemed null and void to the extent required to permit the Plan to comply with Rule 16b-3 and Section 162(m). The Committee or the Board may from time to time adopt rules and regulations under, and amend, the Plan in furtherance of the intent of the foregoing. (b) The Plan shall be administered and interpreted so that all incentive stock options granted under the Plan will qualify as incentive stock options under Section 422 of Code. If any provision of the Plan should be held invalid for the granting of incentive stock options or illegal for any reason, such determination shall not affect the remaining provisions hereof, but instead the Plan shall be construed and enforced as if such provision had never been included in the Plan. (c) This Plan shall be governed by the laws of the State of Delaware. (d) Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan. (e) Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. 11 12 20. 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. 21. 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. 22. APPROVAL OF STOCKHOLDERS. The Plan was approved 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 Plan was amended by the Board on each of April 9, 1998 and October 8, 1998. 23. 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 modification or amendment of the Plan shall be subject to the approval of the Company's stockholders if such stockholder approval is necessary to comply with federal or state law (including without limitation Rule 162(m) of the Code and Rule 16b-3 of the Exchange Act) or applicable stock exchange or automated quotation system on which the Common Stock may then be listed. Except to the extent provided in Sections 12 and 14 hereof, 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. 24. 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. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 14 hereof. 25. NOTICES. Any communication or notice required or permitted to be given under the Plan shall be in 12 13 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. 13 EX-10.30 9 1998 STOCK OPTION PLAN 1 EXHIBIT 10.30 KELLSTROM INDUSTRIES, INC. 1998 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN. The purpose of the Kellstrom Industries, Inc. 1998 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 November 15, 1998, by resolution of the Board. 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 Two Hundred Fifty Thousand (250,000), 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. 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 2 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 (the "Committee"), consisting of two or more members of the Board. If a Committee is so appointed, all references to the Board in Sections 3, 4, 7, 8 and 9 hereof shall mean and relate to such Committee, unless the context otherwise requires. The membership of the Committee shall be constituted so as to comply at all times with the then applicable requirements for an "outside director" under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder and as a "Non-Employee Director" under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall serve at the pleasure of the Board and shall have the powers designated herein and such other powers as the Board may from time to time confer upon it. 4. TYPE OF OPTIONS. Options granted pursuant to the Plan shall be authorized by action of the Board and shall be non-qualified options which are not intended to meet the requirements of Section 422 of the Code. 5. ELIGIBILITY. 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. LIMITATION ON GRANT. Notwithstanding any other provision of this Plan, and in addition to any other requirements of this Plan, the aggregate number of shares of Common Stock subject to options granted to any one optionee under the Plan may not exceed 30,000 during any calendar year, subject to adjustment as provided in Section 13 hereof. 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. No option shall be granted within the meaning of the Plan and no purported grant of any 2 3 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 shall be as determined by the Board, provided, however, in no event shall such price be less than the fair market value of the Common Stock (as determined in accordance with clause (b) below) subject to such options on the day of the grant. (b) 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 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. 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(b) hereof. 3 4 (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. 11. TERM OF OPTIONS; EXERCISABILITY. (a) TERM. (i) Each option shall expire automatically and without notice not more than ten (10) years from the date of the granting thereof, except for any 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 resignation by grantee, dismissal for cause or a breach of any employment agreement by grantee, 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 4 5 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 and subject to Section 11(a) hereof, 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 vested and is in effect on the date such grantee ceases to perform services for the Company or one of its subsidiaries. (ii) Options 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 for a period of 12 months from the date such grantee ceases to perform services for the Company only with respect to the number of shares subject to the options which have vested as of the date the grantee ceases to perform services for the Company, and may be exercised by a legal representative on behalf of the grantee; (iii) In the event of the death of any grantee, the options granted to such grantee shall be exercisable only with respect to the shares subject to the options which have vested on the date of death, and may be exercised by the estate of such grantee, or by any person or persons who acquired the right to exercise such options by bequest or inheritance or by reason of the death of such grantee. (iv) Notwithstanding the foregoing, the Board may provide, in its discretion, that a grantee may exercise an option, in whole or in part, at any time subsequent to termination of employment or service with the Company and prior to termination of the option pursuant to Section 11(a), either subject to or without regard to any vesting or other limitation on exercise imposed hereunder. 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. 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, 5 6 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. Notwithstanding any provisions of the prior paragraph of this Section 13 to the contrary, unless otherwise determined by the Board in its sole discretion, in the case of any 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 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 and no disposition of the shares acquired upon such exercise been made prior to such 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(b) hereof. Notwithstanding anything to the contrary contained in this Plan or the option agreements executed in connection herewith, upon any Change in Control under subsection (a), (b) or (c) of the following paragraph, all outstanding options shall immediately become exercisable. Upon any Change in Control under subsection (d) of the following paragraph, the Board shall have the power and right, in its sole discretion, to accelerate the exercisability of any outstanding options. For purposes hereof, a "Change in Control" shall mean: (a) (i) a reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which persons who were the stockholders of the Company immediately prior to such reorganization, merger or consolidation or other transaction do not, immediately thereafter, own more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or (ii) a liquidation or dissolution of the Company or (iii) the sale, 6 7 lease, exchange or other disposition of all or substantially all of the assets of the Company; or (b) the acquisition by 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 combined voting power entitled to vote generally in the election of directors, of additional voting power 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 combined voting power entitled to vote generally in the election of directors; or (c) individuals who, as of the date hereof, constitute the Company's Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (d) the acquisition (other than from the Company or its subsidiaries) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, (excluding, for this purpose, the Company or its subsidiaries, or any employee benefit plan of the Company or its subsidiaries) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 19% or more of either the then outstanding shares of the Company's Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors. 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, 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, 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. 7 8 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 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 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 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. 8 9 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. 18. INTERPRETATION. (a) As it is the intent of the Company that the Plan comply in all respects with Rule 16b- 3 promulgated under the Exchange Act, any ambiguities or inconsistencies in construction of the Plan shall be interpreted to give effect to such intention, and if any provision of the Plan is found not to be in compliance with Rule 16b-3, such provision shall be deemed null and void to the extent required to permit the Plan to comply with Rule 16b-3. The Committee or the Board may from time to time adopt rules and regulations under, and amend, the Plan in furtherance of the intent of the foregoing. (b) If any provision of the Plan should be held illegal for any reason, such determination shall not affect the remaining provisions hereof, but instead the Plan shall be construed and enforced as if such provision had never been included in the Plan. (c) This Plan shall be governed by the laws of the State of Delaware. 9 10 (d) Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan. (e) Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. 19. 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. 20. 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. 21. TERMINATION AND AMENDMENT OF PLAN. Unless sooner terminated as herein provided, the Plan shall terminate on November 15, 2008. The Board may at any time terminate the Plan or make such modification or amendment thereof as it deems advisable; provided, however, that any modification or amendment of the Plan shall be subject to the approval of the Company's stockholders if such stockholder approval is necessary to comply with federal or state law (including without limitation Rule 16b-3 of the Exchange Act) or applicable stock exchange or automated quotation system on which the Common Stock may then be listed. Except to the extent provided in Sections 11 and 13 hereof, 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. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 13 hereof. 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. 10 EX-10.38 10 EMPLOYMENT AGREEMENT 2/27/98 - GIDEON VAISMAN 1 EXHIBIT 10.38 EMPLOYMENT AGREEMENT This Employment Agreement (this "AGREEMENT") is entered into as of February 27, 1998, between Integrated Technology Holdings Corp., a Delaware corporation, having its principal place of business at 14000 Northwest 4th Street, Sunrise, Florida 33325 (the "COMPANY"), and Gideon Vaisman, an individual residing at 22 Woodland Drive, Tenafly, New Jersey 07670 (the "EMPLOYEE"). W I T N E S S E T H: WHEREAS, Integrated Technology Corp. ("ITC"), a New Jersey corporation, and the Employee, the owner of all the outstanding capital stock of ITC, on the one hand, and Kellstrom Industries, Inc., a Delaware corporation, having its principal place of business at 14000 Northwest 4th Street, Sunrise, Florida 33325 ("KELLSTROM"), and the Company, a wholly-owned subsidiary of Kellstrom, on the other hand, have entered into a Purchase Agreement, dated as of the date hereof (the "PURCHASE AGREEMENT"), pursuant to which Kellstrom has agreed to acquire, through the Company, substantially all of the assets of ITC; WHEREAS, the Employee is a principal executive of ITC with unique and special skills, and as a material inducement to Kellstrom to enter into the Purchase Agreement, the Employee has agreed to be employed by the Company pursuant to 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 "BOARD" shall mean the Board of Directors of the Company. (b) The "EFFECTIVE DATE" shall mean the date that the transactions contemplated by the Purchase Agreement are consummated, it being understood and agreed that this Agreement and all of the obligations of each of the parties hereto shall terminate and be of no force or effect in the event that such transactions are not consummated. (c) The "EMPLOYMENT PERIOD" shall mean the period commencing on the Effective Date and ending on the third anniversary of the Effective Date. (d) The "EXECUTIVE COMMITTEE" shall mean the Executive Committee of the Board of Directors of Kellstrom. (e) "GAAP" shall mean generally accepted accounting principles in the United States as in effect from time to time. 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 2 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 earlier terminated under Section 5 below. 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. During the Employment Period the Employee shall serve as a Senior Vice President of the Company. The Employee shall perform such duties as the Board or Chief Executive Officer of the Company shall from time to time determine, consistent with his position as a Senior Vice President. In the performance of his duties, the Employee shall comply with the stated policies of the Company. (b) RELOCATION. The principal place of employment of the Employee initially shall be at 776 Grand Avenue, Ridgefield, New Jersey. The Company may relocate all or part of its operations to a location outside of New Jersey following the Closing of the Purchase Agreement, in which case, it shall provide the Principal during the term of the Employment Agreement (including any renewals thereof) with a New Jersey office and support personnel commensurate with his operational needs. (c) COMPENSATION. (i) BASE SALARY. The Employee's annual salary (the "SALARY") shall be at the rate of $200,000 per annum, payable twice monthly, for the duration of the Employee's employment hereunder. During the Employment Period, the Employee's Salary may be reviewed and changed by the Board of Directors at its sole discretion; however, the Company shall not pay the Employee a Salary less than such amount during the Employment Period. (ii) ANNUAL COMPANY BONUS. Subject to paragraph (F) below, for each calendar year commencing with the year ending December 31, 1998, during which the Employee is employed by the Company: (A) if Kellstrom has Net Income (as hereinafter defined) for such year of an amount equal to Kellstrom's target net income as determined in the sole discretion of the Board of Directors of Kellstrom (or the Executive Committee) for such year (the "TARGET"), the Employee shall be entitled to a bonus in the amount equal to $100,000. (B) if Kellstrom 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 = $100,000 + [$100,000 x (NI - T)] ---------- T 3 where: B = the bonus earned in such year. T = the Target for such year. NI = the actual Net Income of Kellstrom for such year as determined in accordance with GAAP. (C) if Kellstrom has Net Income for such year of 150% of the Target or more, the Employee shall be entitled to a bonus of $150,000. (D) if Kellstrom has Net Income for such year of less than 50% of the Target, the Employee shall not be entitled to a bonus. (E) if Kellstrom 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 = $100,000 - [$100,000 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 Kellstrom for such year as determined in accordance with GAAP. (F) for any calendar year regarding which the Employee is entitled to a Bonus under the foregoing provisions of this clause (ii) but during which year the Employee did not work the entire calendar year, the Employee shall be entitled to a Bonus equal to the product of the Bonus, as calculated under the foregoing provisions, multiplied by a fraction, the numerator of which is the number of months during such calendar year that the Employee was employed with the Company and the denominator of which is twelve. (d) STOCK OPTIONS. Under the terms of the Option Agreement, in the form attached hereto as EXHIBIT A, as soon as practicable following the Effective Date, the Company shall issue to the Employee options to purchase 150,000 shares of Kellstrom's common stock, which options shall be exercisable at a price equal to the average closing price of the Kellstrom common stock on 4 the five trading days prior to the date hereof and which shall vest with the Employee over three years in three equal annual installments. (e) BENEFITS. In addition to the compensation payable to the Employee as set forth in Section 3(c) above, during the Employment Period the Employee shall be eligible for similar health insurance, pension plan, incentive, stock option grants, savings, welfare (including without limitation medical and dental insurance) plans, practices, policies and programs on or after the Effective Date applicable generally to the executive vice presidents of Kellstrom. (f) 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 executive vice presidents of Kellstrom; PROVIDED that the Employee shall be entitled to a minimum of three (3) weeks of paid vacation per full calendar year (pro rated if the Employee serves for less than the full calendar year). (g) 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 six days paid sick leave per year. Unused sick leave days may not be carried over to the following calendar year or years. (h) AUTOMOBILE. During the Employment Period, the Company shall make available to the Employee the current Mercedes Benz 400 SEL automobile used by the Employee through the termination of the current lease agreement covering such automobile. Following the termination of such lease, during the Employment Period, the Company shall make available to the Employee an automobile similar to the automobiles currently made available to other executive vice presidents of Kellstrom, and the Company shall pay or reimburse the Employee for all expenses of insurance, maintenance and operation of such automobile. (i) EXPENSES. The Company shall pay or reimburse the Employee for reasonable expenses incurred or paid by him during the Employment Period in the performance of his services under this Agreement upon presentation of expense statements or such other supporting information as may be required for other officers of Kellstrom in accordance with Kellstrom's policy. 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. 5 (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. 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. (c) The Company shall indemnify and hold harmless the Employee from all claims, losses, liabilities, damages and causes of action relating to or arising out of the Employee's performance, duties and responsibilities to, for, or on behalf of the Company to the extent provided by the Company's certificate of incorporation and by-laws. (d) All transactions between the Company and FSI shall be approved by an officer of Kellstrom Industries, Inc. 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 Employee's legal representative shall be entitled to receive (i) the Employee's full Salary through the last day of the month in which his death occurs, payable as and when such Salary would otherwise have been payable to the Employee, (ii) an amount equal to the Employee's Annual Company Bonus, pro rated through the date of the Employee's death in accordance with Section 3(c)(ii)(F), payable when such bonus would otherwise have been paid to the Employee and (iii) the reimbursement of reasonable expenses incurred by the Employee prior to his death. (b) DISABILITY. If the Company, in consultation with an independent physician, 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 by an independent physician selected by the Company to be a total and permanent condition which substantially prevents Employee from performing the services to be provided by him hereunder. The 6 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, including, without limitation, an amount equal to the Employee's annual Company Bonus, pro rated through the date of termination in accordance with Section 3(c)(ii)(F), payable when such bonus would otherwise have been paid to the Employee. (c) CAUSE. During the Employment Period, the Company may terminate the Employee's employment for "cause" as defined below. For purposes of this 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 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 any of Section 4(b), 6, 7 or 8 of this Agreement; (iii) 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; or (iv) if (x) the PBT (as defined in APPENDIX X to SCHEDULE 2.03(A) of the Purchase Agreement) of the RR-JT8 Division in any Payment Year is less than 50% of the Target amount for such Payment Year. 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(c). 7 (d) 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 materially inconsistent 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 material diminution in such position, authority, duties or responsibilities, excluding for this purpose (x) any isolated, insubstantial and inadvertent action by the Company which is not taken in bad faith, (y) the relocation of the Business after the Closing Date and (z) any action by the Company or any circumstances which are remedied by the Company within sixty (60) days of receiving written notice thereof by the Employee particularly describing the actions or circumstances; or (ii) any failure by the Company to comply with any of the provisions of Sections 3(c) through 3(i) 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 any action of the Company or any circumstances which are remedied by the Company within sixty (60) days of receiving written notice thereof by the Employee particularly describing the actions or circumstances; or (iii) the Company requiring the Employee to be based at any office or location other than that described in Section 3(b) of this Agreement, except for travel reasonably required in the performance of Employee's responsibilities. In the event that the Employee terminates his employment for good reason as defined in this Section 5(d), the Company shall (i) pay the Employee's Salary through the remainder of the term of this Agreement, payable when the Salary would otherwise have been paid to the Employee; (ii) continue to pay the Employee an amount equal to the Employee's Annual Company Bonus under Section 3(c)(ii) above, through the remainder of the term of the Agreement, payable when such bonus would otherwise have been paid to the Employee; and (iii) to the extent permissible under Kellstrom's medical plans then in effect, continue to provide the Employee with medical insurance in effect at the time of the termination of the employment. (e) 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(d) above). 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 annual Company Bonus in respect of the year of termination in the event the Employee's employment is terminated pursuant to this Section 5(e). 8 (f) ADDITIONAL PAYMENTS UNDER PURCHASE AGREEMENT. Anything contained in this Agreement to the contrary notwithstanding, the termination of this Agreement for any reason, whether pursuant to the terms and conditions of this Agreement or otherwise, at law or in equity, prior to its expiration by its terms shall not affect the Employee's right to receive and retain all Additional Payments to which he is entitled under the Purchase Agreement, except to the extent specifically set forth therein. 6. CONFIDENTIALITY. (a) ACKNOWLEDGEMENT AND PURPOSES. The Employee acknowledges that, with respect to ITC, he has learned, developed and had access to, and with respect to the Company and Kellstrom during the Employment Period, he will learn, develop and have access to, Confidential Information relating to the business and affairs of the Company and Kellstrom. As used in this Agreement, "CONFIDENTIAL INFORMATION" shall mean all trade secrets and other confidential information concerning the business and affairs of ITC, the Company and Kellstrom including, without limitation, information regarding the operations, future plans, projected and historical sales, marketing, costs, production, growth and distribution, any customer lists, customer information, information relating to governmental relations, and information relating to the products or services, whether patentable or not, but shall not include information contained in books and records constituting "Excluded Assets," as defined in the Purchase Agreement. The Company, ITC and Kellstrom are engaged in a highly competitive business; their competitive position depends in great measure upon the ability to develop or acquire and maintain the confidentiality of Confidential Information; and they have expended and are likely to continue to expend considerable efforts and resources in the development or acquisition of Confidential Information. Based upon the foregoing, the Employee recognizes that the unauthorized disclosure of Confidential Information in violation of the terms hereof is likely to result in serious and irrevocable harm to the Company and Kellstrom. 9 (b) RESTRICTIONS ON THE USE OF CONFIDENTIAL INFORMATION. The Employee agrees and covenants as follows: (i) All documents and other materials made or compiled by or made available to the Employee prior to the date hereof by ITC or during the Employment Period by the Company and Kellstrom and any copies thereof, whether or not containing Confidential Information, are and shall be the property of the Company and Kellstrom, respectively and shall, at the request of the Company or Kellstrom, be delivered to the Company or Kellstrom by the Employee immediately upon the conclusion of his engagement as an Employee. Except as required in connection with the services to be performed hereunder, the Employee agrees not to remove from the Company's premises, without permission, any papers or drawings belonging to the Company, including those prepared or worked on by him. The Employee will treat as trade secrets all Confidential Information acquired by him prior to the date hereof with respect to ITC or during the Employment Period with respect to the Company and Kellstrom, and shall not at any time use any Confidential Information for his own benefit nor disclose it or any part of it to any other person, firm or corporation not connected with the Company (A) without the prior written consent of the Company or (B) unless such disclosure is required by law or in response to a legal order or (C) unless such Confidential Information has become generally available to the public other than through the breach the Employee of the terms hereof. (ii) All ideas, reports, and other creative works conceived by the Employee during the Employment Period and relating to Confidential Information, shall be disclosed to the Company and shall be the sole property of the Company. 7. NON-COMPETITION. The Employee agrees that during the Employment Period and for two (2) years after the Employment Period he will not, anywhere in the world, 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 or Kellstrom as of the date of termination of his employment, or of the Company, Kellstrom or ITC for any time prior thereto. Notwithstanding anything in this Agreement to the contrary, (a) in the event that it is finally determined under the procedure set forth in Section 2.03 of the Purchase Agreement, or agreed to by Kellstrom that Kellstrom is required to pay to Company the Additional Payments (as defined in Schedule 2.03 to the Purchase Agreement), and Kellstrom is in default of such payments, or (b) if Employee leaves the employ of the Company for good reason (as defined in Section 5(e) of this Agreement), the non-competition provisions set forth herein shall terminate. Nothing herein contained, however, shall restrict the Employee from: 10 (x) making any investments in any company (but without otherwise participating in the activities of such 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 Kellstrom and does not involve the record or beneficial ownership of more than 2% of the equity interests in such business or enterprise; (y) owning shares of capital stock of FSI, currently owned by the Employee, and serving as a director or as an officer of FSI so long as the Employee's acting as a shareholder, director and officer of FSI do not, together with any activities under clause (z) below, materially interfere with the Employee's duties and obligations under this Agreement and Employee shall not invest in any Debt Financing (as defined in the Purchase Agreement) or Equity or Equity Equivalent Securities (as defined in the Purchase Agreement) of FSI other than his ownership of shares of capital stock of FSI as of the date hereof, without the prior written consent of Kellstrom; and (z) owning an equity interest (without otherwise being materially involved so long as such non-material involvement, together with any activities under clause (y) above, does not materially interfere with the Principal's duties and obligations under this Agreement) in any entity which owns rights to the so-called "AirFoil Recast" technology so long as such entity is not utilizing the so-called "AirFoil Recast" technology in connection with the refurbishing or repair of jet, turbo prop or other aircraft engines or jet, turbo prop or other aircraft engine parts, or any other aircraft parts. Termination of this Agreement or the provisions of this Section 7 shall in no way affect or diminish the obligations of the Employee pursuant to the non-competition requirements contained in the Purchase Agreement. 8. RESTRICTION ON SOLICITATION. The Employee agrees that during the Employment Period and for two (2) years thereafter he will not: (i) directly or indirectly solicit, raid, entice or induce any employee of the Company or Kellstrom 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 Kellstrom; (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 11 (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 or Kellstrom shall be, a customer of the Company or Kellstrom to become a customer for the same or similar products which it purchased from the Company or Kellstrom, 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. 9. REMEDIES. The Employee hereby acknowledges that in the event of a breach or threatened breach by him of the provisions of Section 6, 7 or 8 of this Agreement, the Company or Kellstrom would suffer irreparable harm for which there would be no adequate remedy at law. Accordingly, the Employee agrees that in such event, in addition to any other remedies which the Company or Kellstrom may have in law or in equity for money damages or other relief, the Company or Kellstrom shall be entitled to temporary and/or injunctive relief, without the necessity of proving damages, to enforce the provisions hereof. 10. BOARD OF DIRECTORS. The Employee shall be elected as a member of the Board and to the executive committee of the Company, if any, during the term (including any renewals thereof) of this Agreement. All material decisions regarding the Business (as defined in the Purchase Agreement) of the Company, including the possible relocation of the Business following the Closing, shall be taken by the Board and executive committee of the Company thereof, if any. In addition, the parties anticipate, without intending to be legally bound hereby, that the Employee's counsel will be sought on all material business matters relating to the Business of the Company following the Closing (as defined in the Purchase Agreement). 11. SUCCESSORS. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee. The Company may assign its rights and obligations hereunder, provided that the Company will require the assignee to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such assignment had taken place. 12. 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 in New York, New York under the rules then obtaining of the American Arbitration Association in the State of New York. 12 13. 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 shall be deemed to have been 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: Integrated Technology Holdings Corp. 14000 Northwest 4th Street Sunrise, Florida 33325 Attn: Chief Executive Officer Telecopier: If to the Employee, to: Gideon Vaisman 22 Woodland Drive Tenafly, New Jersey 07670 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. 13 (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 to the subject matter hereof. (h) This Agreement has been duly authorized by all required action on behalf of the Company, is a valid and binding obligation of the Company, is enforceable against the Company in accordance with its terms, and does not violate the Company's Certificate of Incorporation, by-laws, or any material agreement to which the Company is a party or by which it may be bound, or any laws or regulations applicable to the Company. (i) 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. 14 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. INTEGRATED TECHNOLOGY HOLDINGS CORP. By: ------------------------------------ Zivi R. Nedivi President EMPLOYEE --------------------------------------- Gideon Vaisman The undersigned, Kellstrom Industries, Inc., hereby guarantees all payments and obligations of the Company and its assignees under this Agreement. Nothing herein shall constitute a waiver by Kellstrom Industries, Inc. of any defense that the Company may have as a result of a breach by the Employee of his obligations under this Agreement. KELLSTROM INDUSTRIES, INC. By: ------------------------------------ Zivi R. Nedivi President and Chief Executive Officer EX-10.43 11 WARRANT BETWEEN CO & HELIX MGT CO II 12/18/98 1 EXHIBIT 10.43 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH SECURITIES ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. KELLSTROM INDUSTRIES, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK No. 5,000 Shares FOR VALUE RECEIVED, Kellstrom Industries, Inc., a Delaware corporation (the "Company"), hereby certifies that Helix Management Company II LLC (the "Purchaser") or its permitted assigns, is entitled to purchase from the Company, at any time or from time to time commencing on the date hereof (the "Commencement Date") and prior to 5:00 P.M., New York City time, on June 17, 2001, Five Thousand (5,000) fully paid and non-assessable shares of the common stock, $.001 par value per share, of the Company for an aggregate purchase price of $130,000 (computed on the basis of $26.00 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, 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. 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 June 17, 2001. Exercise of this Warrant by the Holder shall be made by the surrender of this Warrant (with the subscription form at the end hereof, or a reasonable facsimile thereof, duly executed) at the address set forth in Subsection 11(a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part. 2 Payment for Warrant Shares shall be made by certified or official bank check payable to the order of the Company. 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 (a) issue a certificate or certificates in the name of 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 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 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 it 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, adjustment for which would be made pursuant to Subsection 3(a), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor and accrued after the date hereof 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 2 3 Warrant Price then in effect by a fraction, the numerator of which shall be the then current market price of the Common Stock (defined as the average for the thirty consecutive business days immediately prior to the record date of the daily closing price of the Common Stock as reported by the national securities exchange upon which the Common Stock is then listed or if not listed on any such exchange, the average of the closing prices as reported by 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 NASDAQ, or if not then publicly traded, the fair market price as determined by the Company's Board of Directors) 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, 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 Holder of the Warrants not less than 15 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (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 3 4 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 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 or 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) If at any time or from time to time the Company shall take any action affecting its Common Stock or any other capital stock of the Company, not otherwise described in any of the foregoing subsections of this Section 3, then, if the failure to make any adjustment would in the reasonable opinion of the Board of Directors of the Company have a materially adverse effect upon the rights of the Holder of the Warrant, the number of shares of Common Stock or other stock comprising a Warrant Share, or the Per Share Warrant Price, shall be adjusted in such manner and at such time as the Board of Directors of the Company may in good faith determined to be equitable under the circumstances. (h) 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, 4 5 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 and from time to time during the period beginning on the Commencement Date and ending on the second 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 "Registration Statement") under the Act (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 the Company 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 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 Holder's request, be included in such 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 Registration Statement 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 the Holder and such Holders to effect the proposed sale or other disposition. (b) The Company agrees that if the Company shall not have authorized the filing of a Registration Statement pursuant to Subsection 5(a) hereof within one (1) year after the Commencement Date, then at any time thereafter during the period ending on the second anniversary of the date the Warrants are exercised in full, if the Holder and/or the Holders of Warrants and/or Warrant Shares who or which shall hold not less than 50% of the aggregate number of Warrants and Warrant Shares outstanding at such time and not previously sold (the "Covered Warrant Shares") pursuant to this Section 5 shall request that the Company file a registration statement under the Act covering not less than 50% of the Covered Warrant Shares, 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 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 5 6 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 government 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(b) on one occasion only; provided that a request for registration shall not be deemed to constitute a registration pursuant to this Subsection 5(b) if: (i) the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied other than by reason of some act or omission by the Holder; (ii) the Company voluntarily takes any action that would result in the Holder not being able to sell such Warrant Shares covered thereby; (iii) the Holder determines not to proceed following any delay imposed hereunder by the Company; provided, HOWEVER, that prior to such delay, the Holder shall not have sold more than ninety percent (90%) of the Warrant Shares included in such registration; or (iv) other than by action of the Holder, such registration does not remain effective for ninety (90) days or more. Notwithstanding the foregoing, (a) if the Holder exercises its right to request that a registration statement be filed pursuant to this Subsection 5(b) 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 or (b) in lieu of causing a registration statement to be filed under this Section 5(b), the Company may elect, by providing written notice (the "Repurchase Notice") to the Holder or Holders requesting registration within ten (10) days of the Company's receiving such request, to repurchase from the requesting Holder or Holders either (x) the Warrants relating to the Warrant Shares requested to be registered, at a price per Warrant equal to the difference between the Market Price per share of the Common Stock (as defined below) and the Per Share Warrant Price or (y) if the Warrants relating to the Warrant Shares requested to be registered had already been exercised, such Warrant Shares at a price per Warrant Share equal to the Market Price per share of the Common Stock. As used in this Section 5(b), the "Market Price per share of the Common Stock" shall mean the average of the last sale price of the Common Stock, or if no last sale price is reported, the average of the asked and bid prices of the Common Stock, on the Nasdaq National Market or Nasdaq Small Cap Market, as applicable, for the 20 consecutive trading days ending on the day prior to the delivery by the Holder or Holders of the request for a registration statement pursuant to this Section 5(b). Any repurchase of the Warrants or the Warrant Shares under this Section 5(b) shall be made within 30 days of the delivery by the Company of the Repurchase Notice. (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 6 7 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 furnish to each Holder participating in an offering pursuant to a registration statement under this Section 5 and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountant's letter with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (e) The Company shall enter into an underwriting agreement with the managing underwriters selected by Holders holding 50% of the Covered Warrant Shares requested to be included in a registration statement filed pursuant to Section 5(b). Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type as used by the managing underwriters. (f) 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. (g) In connection with any public offering by the Company involving an underwriting of its securities effected pursuant to Section 5(a) 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 period of up to 180 days after the effective date of the registration statement by which such public offering is being effected (or such longer period as may be requested by any securities exchange upon which the Common Stock is then listed). 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 of the Company having similar registration rights as of the date thereof (collectively, the "Kellstrom Shareholders") exceeds the amount of securities that can be offered without adversely affecting the offering by the Company, then the Company may reduce the number of shares to be registered by 7 8 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. (h) 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 for any legal or other expenses reasonably incurred by such 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(h) 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, nor shall the Company be liable to any Holder Indemnitee of 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 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. (i) 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 8 9 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 upon 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. The indemnity agreement contained in this Subsection 5(i) 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, 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. (j) Promptly after receipt by an indemnified party under Subsections 5(h) or (i) 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 part 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, provide the an indemnified part 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 prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under Subsection 5(h) or (i), respectively, to the extent of such 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(h) or (i), respectively. (ii) The obligations of the Company and the Holders under Subsections 5(h) and (i), 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(h) and (i) shall include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. 9 10 (k) If the indemnification provided for in the preceding Subsections 5(h) or (i) 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 correct and prevent any statement or omission, and any other equitable considerations appropriate under the circumstances. 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. (l) 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 specific performance that a remedy at law would be adequate. (m) In connection with the Company's obligations to effect a registration under Section 5, the Company will: (i) cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc., and before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to counsel selected by Holder copies of all such documents proposed to be filed, which documents will be subject to their review and comments; (ii) cause the prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act; (iii) notify the Holder promptly (A) when the prospectus or any prospectus supplement or post-effective amendment has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective; (B) of any request by the Commission for any amendments or supplements to the registration statement or the prospectus or for additional information; (C) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for the purpose; (D) if, at any time prior to the closing contemplated by an underwriting agreement entered into in connection with such registration statement, that the representations and warranties of the Company contained in such agreement cease to be true and correct in any material respect; (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Warrant Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (F) of the happening of any event which makes any statement made in the registration statement, the prospectus of or any document incorporated therein by reference untrue in any material respect and which requires the making of any changes in the registration statement, the prospectus or any document incorporated therein by reference in order to make the statement therein not materially misleading; 10 11 (iv) make commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement; (v) if required, prepare a supplement or post-effective amendment to the registration statement, the related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Warrant Shares, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (vi) cause all Warrant Shares covered by the registration statement to be listed on each securities exchange on which identical securities issued by the Company are then listed if requested by the Holder or the managing underwriters, if any; (vii) provide and cause to be maintained a transfer agent and registrar for all Warrant Shares covered by such registration statement from and after a date not later than the effective date of such registration statement; (viii) use its best efforts to provide a CUSIP number for the Warrant Shares, not later than the effective date of the registration statement; (ix) make available for inspection, in connection with the preparation of a registration statement pursuant to this Agreement, by the Holder, and any attorney or accountant retained by the Holder, all financial and other records and pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, attorney or accountant in connection with such registration; PROVIDED, HOWEVER, that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such persons unless disclosure of such records, information or documents is required by court or administrative order; (x) if so required by the managing underwriter, not sell, make any short sale of, loan, grant any option for the purpose of, effect any public sale or distribution of or otherwise dispose of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the ten days prior to and the 90 days after any underwritten registration pursuant hereto has become effective, except as part of such underwritten registration and except pursuant to registrations on Form S-4 or S-8 or any successor or similar forms thereto, except that the Company may make grants of options under its stock option plans and may issue securities issuable upon the exercise or conversion of outstanding convertible securities, stock options and other options, warrants and rights of the Company; and (xi) otherwise use its best effort to comply with all applicable rules and regulations of the Commission and make available to its security holders as soon as reasonably practicable, an earnings statement which satisfies the provision of Section 11(a) of the Act. 11 12 (n) 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 without limitation as to volume. (o) The Company will use its reasonable best efforts to file with the Commission all information required to be filed under Section 13 or 15(d) of the 1934 Act. 6. LIMITED TRANSFERABILITY. This Warrant may not be offered, sold, transferred, assigned, hypothecated or otherwise disposed of by the Holder except pursuant to an effective registration statement under the Act and/or applicable state securities laws or an exemption from registration under the Act and such laws which, in the opinion of counsel for the Holder, which counsel and opinion are reasonably satisfactory to the Company, is available. 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 or her 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. SECURITIES ACT OF 1933 LEGEND. This Warrant, the Warrant Shares and any of the other securities issuable upon exercise of this Warrant have not been registered under the Act. Upon exercise of this Warrant, in part or in whole, the certificates representing the Warrant Shares and any of the other securities issuable upon exercise of this Warrant shall bear the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH SECURITIES ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. 8. 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. 9. 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. 12 13 10. INFORMATION TO HOLDER. The Company agrees that it shall 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. 11. 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: (a) if to the Company at 1100 International Parkway, Sunrise, Florida 33323, Attn: Chief Executive Officer, facsimile no. 954-858-2449, 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, facsimile no. 415-956-9951, or such other address as the Holder has designated in writing to the Company. 12. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 13. 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. Venue shall be in Broward County, Florida. IN WITNESS WHEREOF, Kellstrom Industries, Inc. has caused this Warrant to be signed by its Chief Financial Officer and its corporate seal to be hereunder affixed and attested by its Secretary as of the 18th day of December, 1998. KELLSTROM INDUSTRIES, INC. By: /s/ MICHAEL W. WALLACE ------------------------------------------- Michael W. Wallace, Chief Financial Officer ATTEST: - ------------------------- Secretary [Corporate Seal] 13 14 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 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 15 SUBSCRIPTION FORM (To be executed upon exercise of Warrant pursuant to Section 1) 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, 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 of 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 below. 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 EX-10.46 12 WARRANT DATED 3/23/99 - HELIX MGT CO II 1 EXHIBIT 10.46 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH SECURITIES ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. 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 Management Company II LLC (the "Purchaser") or its permitted assigns, is entitled to purchase from the Company, at any time or from time to time commencing on the date hereof (the "Commencement Date") and prior to 5:00 P.M., New York City time, on December 31, 2002, Two Thousand Two Hundred Fifty (2,250) fully paid and non-assessable shares of the common stock, $.001 par value per share, of the Company for an aggregate purchase price of $60,750 (computed on the basis of $27.50 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, 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 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 December 31, 2002. Exercise of this Warrant by the Holder shall be made by the surrender of this Warrant (with the subscription form at the end hereof, or a reasonable facsimile 2 thereof, duly executed) at the address set forth in Subsection 12(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 by certified or official bank check payable to the order of the Company. 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 (a) issue a certificate or certificates in the name of 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. (b) Notwithstanding Section 1(a), at any time prior to the Expiration Date of any Warrants, the Holder may, at its option, exchange such warrants, in whole or in part, (a "Warrant Exchange"), into the number of fully paid and non-assessable Warrant Shares determined in accordance with this Section 1(b), by surrendering the Warrant to the Company, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange (the "Exchange Date"). Certificates for the Warrant Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant of like tenor evidencing the balance of the Warrant Shares remaining subject to the Holder's Warrant, shall be issued as of the Exchange Date and delivered to the Holder within three days following the Exchange Date. In connection with any Warrant Exchange, the Holder's Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the nearest number of Warrant Shares) equal to (A) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Share Number") less (B) the number of Warrant Shares equal to the quotient obtained by dividing (i) the product of the Total Share Number and the existing Exercise Price per Warrant Share by (ii) the Market Price of a share of Common Stock. For purposes of this Section 1(b), "Market Price" shall have the meaning ascribed to such term in Section 3(i) 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 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, (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 of this Warrant authorized for listing on such exchange upon notice of issuance, and (c) if the 2 3 Common Stock is not listed on a national securities exchange, maintain the Common Stock listed on NASDAQ such that Warrant Shares are authorized for trading on NASDAQ. 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 it 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, adjustment for which would be made pursuant to Subsection 3(a), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor and accrued after the date hereof if the full amount thereof is equivalent to not more than an amount equal to 10% 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 of the Common Stock (defined as the average for the thirty consecutive business days immediately prior to the record date of the daily closing price of the Common Stock as reported by the national securities exchange upon which the Common Stock is then listed or if not listed on any such exchange, the average of the closing prices as reported by 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 NASDAQ, or if not then publicly traded, the fair market price as determined by the Company's Board of Directors) 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, cash or other 3 4 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 Holder of the Warrants not less than 15 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (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 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 4 5 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) If at any time or from time to time the Company shall take any action affecting its Common Stock or any other capital stock of the Company, not otherwise described in any of the foregoing subsections of this Section 3, then, if the failure to make any adjustment would in the reasonable opinion of the Board of Directors of the Company have a materially adverse effect upon the rights of the Holder of the Warrant, the number of shares of Common Stock or other stock comprising a Warrant Share, or the Per Share Warrant Price, shall be adjusted in such manner and at such time as the Board of Directors of the Company may in good faith determined to be equitable under the circumstances. (h) 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. (i) If at any time after the date of this Agreement, the Company shall issue or sell any share of Common Stock at a price per share of Common Stock that is lower than the Market Price per share of Common Stock in effect immediately prior to such sale or issuance, the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately after such sale or issuance, and the denominator of which shall be sum of (A) the number of shares of Common Stock outstanding immediately prior to such sale or issuance, plus (B) the number of shares of Common Stock which the aggregate consideration received by the Company for such sale or issuance would purchase at such Market Price per share of Common Stock. Such adjustment shall be made successively whenever such Common Stock are issued or sold and shall be effective immediately after such issuance or sale. This Section (i) does not apply to: (1) the conversion or exchange of other securities convertible or exchangeable for Common Stock; provided that the exercise price of such securities was not less than the Market Price of the Common Stock at the time of issuance of such security; (2) Common Stock issued upon the exercise of rights or Warrants; and (3) Common Stock issued in a bona fide public offering pursuant to a firm commitment underwriting. For purposes of this Section, (a) "Market Price" at any date shall be deemed to be the (x) last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed and admitted to trading quoted or by the Nasdaq Stock Market, National Market ("Nasdaq"), or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted by Nasdaq, the average closing bid price as furnished by the National Association of Securities Dealers, 5 6 Inc. ("NASD") through Nasdaq or a similar organization if Nasdaq is no longer reporting such information, of (y) if the Common Stock is not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company (A) taking into account the most recently completed arms-length transaction between the Company and a person other than an Affiliate of the Company the closing of which shall have occurred within the thirty-day period preceding the date the Market Price is determined, or (B) if no transaction shall have occurred during such thirty-day period, taking into account the fair market value of the security as determined by an Independent Financial Expert, and (b) "Independent Financial Expert" means a United States investment banking or valuation firm of national or regional standing in the United States (i) which does not, and whose directors, officers and employees or Affiliates do not have a direct or indirect material financial interest for its proprietary account in the Company or any of its Affiliates and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent with respect to the company and its Affiliates and qualified to perform the task of which it is to be engaged. 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 and from time to time during the period beginning on the Commencement Date and ending on the second 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 "Registration Statement") under the Act (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 the Company 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 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 Holder's request, be included in such 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 Registration Statement 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 6 7 of any governmental authority for the period necessary for the Holder and such Holders to effect the proposed sale or other disposition. (b) The Company agrees that if, at any time during the period commencing on the six (6) month anniversary of the Commencement Date and ending on the second anniversary of the date the Warrants are exercised in full, the Holder and/or the Holders of Warrants and/or Warrant Shares who or which shall hold not less than 50% of the aggregate number of Warrants and Warrant Shares outstanding at such time (the "Covered Warrant Shares") shall request that the Company file a registration statement under the Act covering not less than 50% of the Covered Warrant Shares, 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 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 government 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(b) on one occasion only; provided that a request for registration shall not be deemed to constitute a registration pursuant to this Subsection 5(b) if: (i) the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied other than by reason of some act or omission by the Holder; (ii) the Company voluntarily takes any action that would result in the Holder not being able to sell such Warrant Shares covered thereby; (iii) the Holder determines not to proceed following any delay imposed hereunder by the Company; PROVIDED, HOWEVER, that prior to such delay, the Holder shall not have sold more than ninety percent (90%) of the Warrant Shares included in such registration; or (iv) other than by action of the Holder, such registration does not remain effective for ninety (90) days or more. Notwithstanding the foregoing, (a) if the Holder exercises its right to request that a registration statement be filed pursuant to this Subsection 5(b) 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 or (b) in lieu of causing a registration statement to be filed under this Section 5(b), the Company may elect, by providing written notice (the "Repurchase Notice") to the Holder or Holders requesting registration within ten (10) days of the Company's receiving such request, to repurchase from the requesting Holder or Holders either (x) the Warrants relating to the Warrant Shares requested to be registered, at a price per Warrant equal to the difference between the Market Price per share of the Common Stock (as defined below) and the Per Share Warrant Price or (y) if the Warrants relating to the Warrant Shares requested to be registered had already been exercised, such Warrant Shares at a price per Warrant Share equal to the Market Price per share of the Common Stock. As used in this Section 5(b), the "Market Price per share of the Common Stock" shall mean 7 8 the average of the last sale price of the Common Stock, or if no last sale price is reported, the average of the asked and bid prices of the Common Stock, on the Nasdaq National Market or Nasdaq Small Cap Market, as applicable, for the 20 consecutive trading days ending on the day prior to the delivery by the Holder or Holders of the request for a registration statement pursuant to this Section 5(b). Any repurchase of the Warrants or the Warrant Shares under this Section 5(b) shall be made within 15 days of the delivery by the Company of the Repurchase Notice. (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 furnish to each Holder participating in an offering pursuant to a registration statement under this Section 5 and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountant's letter with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (e) The Company shall enter into an underwriting agreement with the managing underwriters selected by Holders holding 50% of the Covered Warrant Shares requested to be included in a registration statement filed pursuant to Section 5(b). Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type as used by the managing underwriters. (f) 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 8 9 underwriting discounts, applicable transfer taxes relating to the Warrant Shares and the fees and expenses of counsel for the Holders of the Warrant Shares. (g) In connection with any public offering by the Company involving an underwriting of its securities effected pursuant to Section 5(a) 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 period of up to 180 days after the effective date of the registration statement by which such public offering is being effected (or such longer period as may be requested by any securities exchange upon which the Common Stock is then listed). 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 of the Company having similar registration rights as of the date thereof (collectively, the "Kellstrom Shareholders") exceeds the amount of securities that can be offered without adversely affecting the offering by the Company, 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. (h) 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 for any legal or other expenses reasonably incurred by such 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(h) 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, nor shall the Company 9 10 be liable to any Holder Indemnitee of 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 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. (i) 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 upon 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. The indemnity agreement contained in this Subsection 5(i) 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, 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. (j) Promptly after receipt by an indemnified party under Subsections 5(h) or (i) 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 part so desires, jointly with any other indemnifying party similarly noticed, to assume and control the defense thereof with counsel 10 11 mutually satisfactory to the indemnified and indemnifying parties, provided that the 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 prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under Subsection 5(h) or (i), respectively, to the extent of such 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(h) or (i), respectively. (ii) The obligations of the Company and the Holders under Subsections 5(h) and (i), 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(h) and (i) shall include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. (k) If the indemnification provided for in the preceding Subsections 5(h) or (i) 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 correct and prevent any statement or omission, and any other equitable considerations appropriate under the circumstances; provided, however that in no case shall any Holder be required to contribute any amount in excess of the amount which such Holder would be required to pay if the indemnification provided in this Section were available. 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. (l) 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 specific performance that a remedy at law would be adequate. (m) In connection with the Company's obligations to effect a registration under Section 5, the Company will: 11 12 (i) cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc., and before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to counsel selected by Holder copies of all such documents proposed to be filed, which documents will be subject to their review and comments; (ii) cause the prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act; (iii) notify the Holder promptly (A) when the prospectus or any prospectus supplement or post-effective amendment has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective; (B) of any request by the Commission for any amendments or supplements to the registration statement or the prospectus or for additional information; (C) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for the purpose; (D) if, at any time prior to the closing contemplated by an underwriting agreement entered into in connection with such registration statement, that the representations and warranties of the Company contained in such agreement cease to be true and correct in any material respect; (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Warrant Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (F) of the happening of any event which makes any statement made in the registration statement, the prospectus of or any document incorporated therein by reference untrue in any material respect and which requires the making of any changes in the registration statement, the prospectus or any document incorporated therein by reference in order to make the statement therein not materially misleading; (iv) make commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement; (v) if required, prepare a supplement or post-effective amendment to the registration statement, the related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Warrant Shares, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (vi) cause all Warrant Shares covered by the registration statement to be listed on each securities exchange on which identical securities issued by the Company are then listed if requested by the Holder or the managing underwriters, if any; (vii) provide and cause to be maintained a transfer agent and registrar for all Warrant Shares covered by such registration statement from and after a date not later than the effective date of such registration statement; (viii) use its best efforts to provide a CUSIP number for the Warrant Shares, not later than the effective date of the registration statement; 12 13 (ix) make available for inspection, in connection with the preparation of a registration statement pursuant to this Agreement, by the Holder, and any attorney or accountant retained by the Holder, all financial and other records and pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, attorney or accountant in connection with such registration; PROVIDED, HOWEVER, that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such persons unless disclosure of such records, information or documents is required by court or administrative order; (x) if so required by the managing underwriter, not sell, make any short sale of, loan, grant any option for the purpose of, effect any public sale or distribution of or otherwise dispose of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the ten days prior to and the 90 days after any underwritten registration pursuant hereto has become effective, except as part of such underwritten registration and except pursuant to registrations on Form S-4 or S-8 or any successor or similar forms thereto, except that the Company may make grants of options under its stock option plans and may issue securities issuable upon the exercise or conversion of outstanding convertible securities, stock options and other options, warrants and rights of the Company; and (xi) otherwise use its best effort to comply with all applicable rules and regulations of the Commission and make available to its security holders as soon as reasonably practicable, an earnings statement which satisfies the provision of Section 11(a) of the Act. (n) 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 without limitation as to volume. (o) The Company will use its reasonable best efforts to file with the Commission all information required to be filed under Section 13 or 15(d) of the 1934 Act. 6. LIMITED TRANSFERABILITY. This Warrant may not be offered, sold, transferred, assigned, hypothecated or otherwise disposed of by the Holder except pursuant to an effective registration statement under the Act and/or applicable state securities laws or an exemption from registration under the Act and such laws which, in the opinion of counsel for the Holder, which counsel and opinion are reasonably satisfactory to the Company, is available. 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 or her 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. SECURITIES ACT OF 1933 LEGEND. This Warrant, the Warrant Shares and any of the other securities issuable upon exercise of this Warrant have not been registered under the Act. Upon 13 14 exercise of this Warrant, in part or in whole, the certificates representing the Warrant Shares and any of the other securities issuable upon exercise of this Warrant shall bear the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH SECURITIES ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. 8. 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. 9. 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. 10. INFORMATION TO HOLDER. The Company agrees that it shall 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. 11. HOLDER INFORMATION. For purposes of this Agreement, the parties hereby agree that the only written information pertaining to a Holder in a prospectus or registration statement shall be the Holders name and address and such other information as shall be required to be disclosed under applicable securities laws, rules or regulations, or the rules or regulations of any exchange on which shares of Common Stock shall then be traded. 12. 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: (a) if to the Company at 1100 International Parkway, Sunrise, Florida 33323, Att.: Chief Executive Officer, facsimile no. 954-858-2449, or such other address as the Company has designated in writing to the Holder, or 14 15 (b) if to the Holder at 98 Battery Park, Suite 600, San Francisco, California 94111, facsimile no. 415-956-9951, or such other address as the Holder has designated in writing to the Company. 13. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 14. 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. Venue shall be in Broward County, Florida. IN WITNESS WHEREOF, Kellstrom Industries, Inc. has caused this Warrant to be signed by its President and its corporate seal to be hereunder affixed and attested by its Chief Financial Officer as of the 23 day of March, 1999. KELLSTROM INDUSTRIES, INC. By: ______________________________________ Zivi R. Nedivi, President ATTEST: - -------------------------------- Secretary [Corporate Seal] 15 16 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 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: __________________________________ 16 17 SUBSCRIPTION FORM (To be executed upon exercise of Warrant pursuant to Section 1) 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, 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 of 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 below. 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. 17 EX-10.47 13 TERMINATION AGREEMENT - 3/30/99 EAST SHORE VENTURE 1 EXHIBIT 10.47 TERMINATION AGREEMENT This TERMINATION AGREEMENT (this "Termination Agreement") is entered into as of March 30, 1999 between East Shore Ventures, Inc., a Florida corporation ("East Shore"), and Kellstrom Industries, Inc., a Delaware corporation ("Kellstrom"). RECITALS East Shore and Kellstrom are parties to that certain Management Agreement dated as of January 1, 1997 (the "Management Agreement") pursuant to which East Shore has provided the Company, through the services of its President, Zivi R. Nedivi ("Nedivi"), with the management services necessary of the chief executive officer responsible for the overall direction of the operations and administration of the business of the Company. Kellstrom has decided that it is in its best interests to employ Nedivi directly to provide those services which have been provided by East Shore under the Management Agreement, and the parties desire to set forth the terms on which they have agreed to terminate the Management Agreement. TERMS OF AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereby agree as follows: 1. DEFINITIONS. All defined terms used herein without definition shall have the meanings ascribed to them in the Management Agreement. 2. TERMINATION OF MANAGEMENT AGREEMENT. Subject to the terms of this Termination Agreement, the parties mutually agree that the Management Agreement shall terminate effective as of the date first written above (the "Termination Date"). Except as expressly set forth herein, each of the provisions of the Management Agreement shall terminate and be of no further force and effect following the Termination Date. 3. PAYMENT OF PREVIOUSLY EARNED FEES. Notwithstanding anything to the contrary set forth herein, Kellstrom shall pay to East Shore the following fees and provide East Shore and Nedivi with the following benefits which are required to be provided to them under the terms of the Management Agreement: (a) Kellstrom shall pay to East Shore the unpaid portion of any Base Annual Fee required to be paid by it under Section 3(a) of the Management Agreement through the Termination Date. (b) Kellstrom shall reimburse East Shore in accordance with the terms of the Management Agreement for any reasonable and actual out-of-pocket expenses incurred by 2 it prior to the Termination Date in connection with the provision of services under the Management Agreement. (c) Kellstrom shall pay to East Shore any Federal, state and local payroll and related taxes required to be paid by it under Section 3(c) of the Management Agreement. (d) Kellstrom shall continue to provide to East Shore and Nedivi with any and all benefits required to be provided to them under the terms of the Management Agreement through the Termination Date. 4. SURVIVAL. East Shore and Kellstrom agree that notwithstanding anything to the contrary set forth herein, Sections 15, 16, 17 and 20 of the Management Agreement shall survive termination thereof and remain in full force and effect following the Termination Date. 5. RELEASE. Except as expressly provided for herein, Kellstrom and East Shore hereby release and forever discharge each other, including their respective officers, directors, shareholders, members, employees, representatives, agents, contractors, subsidiaries, affiliates, heirs, personal representatives, successors and assigns, from any and all manner of action and actions, cause and causes of action, suits, debts, sums of money, accounts, reckonings, covenants, warranties, obligations, agreements, contracts, promises, damages, claims and demands whatsoever, in law or in equity, which either party ever had, now has, or may have in the future, which any personal representative, successor, heir or assign of either party hereafter can, shall or may have against the other party (whether known or unknown as of the date hereof), accruing or arising, directly or indirectly, in whole or in part, for, upon or by reason of the obligations of either under the Engagement Agreement. 6. MISCELLANEOUS. (a) This Termination 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 Termination Agreement shall be settled by arbitration in accordance with the rules of the American Arbitration Association and judgment upon an award in connection therewith may be entered in any court of competent jurisdiction. (b) The captions of this Termination Agreement are not part of the provisions hereof and shall have no force or effect. (c) All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been 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: 2 3 If to Kellstrom, to: Kellstrom Industries, Inc. 1100 International Parkway Sunrise, Florida 33323 Attn: Yoav Stern, Chairman Telecopier: (954) 858-2449 If to East Shore, to: East Shore Ventures, Inc. 1100 International Parkway Sunrise, Florida 33323 Attn: Zivi R. Nedivi, President Telecopier: (954) 858-2449 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 Termination Agreement shall not affect the validity or enforceability of any other provision of this Termination Agreement. (e) No provision of this Termination 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 its rights hereunder shall, except as mentioned above, be deemed 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 Termination Agreement to be performed by such other party shall be deemed to be a waiver of a similar or dissimilar provision hereof of the same or any prior or subsequent time. (f) This Termination Agreement embodies the entire agreement between Kellstrom and East Shore and supersedes all prior agreements and understandings, oral or written, with respect to the subject matter hereof, including, without limitation, the Engagement Agreement. 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 Termination Agreement. (g) This Termination 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. 3 4 (h) All covenants, promises, conditions, representations and agreements herein contained shall be binding upon and apply and inure to the parties hereto and their respective heirs, executors, administrators, successors and assigns. [Signatures On Following Page] 4 5 IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first written above. KELLSTROM INDUSTRIES, INC. By:__________________________________________ Michael W. Wallace Chief Financial Officer EAST SHORE VENTURES, INC. By:__________________________________________ Zivi R. Nedivi President 5 EX-10.48 14 TERMINATION AGREEMENT - 3/30/99 HELIX MGT CO II 1 EXHIBIT 10.48 TERMINATION AGREEMENT This TERMINATION AGREEMENT (this "Termination Agreement") is entered into as of March 30, 1999 between Helix Management Company II, LLC, a California limited liability company ("Helix"), and Kellstrom Industries, Inc., a Delaware corporation ("Kellstrom"). RECITALS Helix and Kellstrom are parties to that certain Engagement Agreement dated as of March 28, 1997 (as amended, the "Engagement Agreement") pursuant to which Helix has served as Kellstrom's exclusive merger and acquisition and principal financial advisor, and has, among other things, assisted Kellstrom in evaluating, structuring, negotiating and completing a series of significant transactions which have been critical to the growth and development of Kellstrom. Kellstrom has decided that it is in the best interests of its shareholders to internalize the services which have been provided by Helix under the Engagement Agreement, and the parties desire to set forth the terms on which they have agreed to terminate the Engagement Agreement. TERMS OF AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereby agree as follows: 1. DEFINITIONS. All defined terms used herein without definition shall have the meanings ascribed to them in the Engagement Agreement. 2. TERMINATION OF ENGAGEMENT AGREEMENT. Subject to the terms of this Termination Agreement, the parties agree that the Engagement Agreement shall terminate effective as of the date first written above (the "Termination Date"). Except as expressly set forth herein, each of the provisions of the Engagement Agreement (including without limitation, Sections 2.3 and 2.8) shall terminate and be of no further force and effect following the Termination Date. 3. PAYMENT OF PREVIOUSLY EARNED FEES. Notwithstanding anything to the contrary set forth herein, Kellstrom shall pay to Helix the following fees which have previously been earned by it under the terms of the Engagement Agreement: (a) Kellstrom shall pay to Helix the unpaid portion of any monthly retainer required to be paid by it under Section 2.3.1 of the Engagement Agreement through the Termination Date, prorated for any partial month. (b) Kellstrom shall reimburse Helix in accordance with the terms of the Engagement Agreement for any reasonable and actual out-of-pocket expenses incurred by 2 it prior to the Termination Date in connection with the provision of services under the Engagement Agreement. (c) Kellstrom shall pay to Helix the balance of any success fees required to be paid by it under Section 2.3.3 of the Engagement Agreement on account of the acquisition of Aero Support USA, Inc. and Integrated Technology Corp., each of which were completed by Kellstrom on or prior to the Termination Date. (d) Kellstrom shall pay to Helix the success fees required to be paid by it under Section 2.3.3 of the Helix Agreement on account of the acquisition of Certified Aircraft Parts, Inc. which has been signed by Kellstrom prior to the Termination Date and in which Helix has provided significant assistance. 4. WAIVER OF FURTHER HELIX RIGHTS. Notwithstanding anything to the contrary set forth herein, Helix hereby agrees to waive the following rights which it has under the terms of the Engagement Agreement: (a) Helix hereby waives the right to receive at least ninety (90) days notice (the "Termination Notice Period") prior to the termination of the Engagement Agreement. (b) Helix hereby waives the right to receive the monthly retainer fee required to be paid to it under Section 2.3.1 of the Engagement Agreement during the Termination Notice Period. (c) Helix hereby waives the right to receive a success fee required to be paid to it under Section 2.3.3 of the Engagement Agreement on account of any Transaction undertaken by Kellstrom within one year following the Termination Date with a party introduced by or that was in contact with Helix within the term of the Engagement Agreement, except as expressly agreed to be paid under Section 3 above. 5. SURVIVAL. Helix and Kellstrom agree that notwithstanding anything to the contrary set forth herein, Sections 2.5 and 2.6 of the Engagement Agreement shall survive termination thereof and remain in full force and effect following the Termination Date. 6. TRANSITION. Helix agrees that it will, for no additional consideration, provide to Kellstrom following the Termination Date such assistance (including, without limitation, access to its employees and members and copies of its records and files) as shall be reasonably requested by Kellstrom in effecting an orderly transition in the services provided by Helix under the Engagement Agreement. 7. RELEASE. Except as expressly provided for herein, Kellstrom and Helix hereby release and forever discharge each other, including their respective officers, directors, shareholders, members, employees, representatives, agents, contractors, subsidiaries, affiliates, heirs, personal representatives, successors and assigns, from any and all manner of action and actions, cause and 2 3 causes of action, suits, debts, sums of money, accounts, reckonings, covenants, warranties, obligations, agreements, contracts, promises, damages, claims and demands whatsoever, in law or in equity, which either party ever had, now has, or may have in the future, which any personal representative, successor, heir or assign of either party hereafter can, shall or may have against the other party (whether known or unknown as of the date hereof), accruing or arising, directly or indirectly, in whole or in part, for, upon or by reason of the obligations of either under the Engagement Agreement. 8. MISCELLANEOUS. (a) This Termination 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 Termination Agreement shall be settled by arbitration in accordance with the rules of the American Arbitration Association and judgment upon an award in connection therewith may be entered in any court of competent jurisdiction. (b) The captions of this Termination Agreement are not part of the provisions hereof and shall have no force or effect. (c) All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been 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 Kellstrom, to: Kellstrom Industries, Inc. 1100 International Parkway Sunrise, Florida 33323 Attn: Michael W. Wallace, Chief Financial Officer Telecopier: (954) 858-2449 If to Helix, to: Helix Management Company II, LLC 98 Battery Street, Suite 600 San Francisco, CA 94111 Attention: Yoav Stern, Managing Member Telecopier: (415) 956-9951 or to such other address as either party shall have furnished to the other in accordance herewith. 3 4 (d) The invalidity or unenforceability of any provision of this Termination Agreement shall not affect the validity or enforceability of any other provision of this Termination Agreement. (e) No provision of this Termination 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 its rights hereunder shall, except as mentioned above, be deemed 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 Termination Agreement to be performed by such other party shall be deemed to be a waiver of a similar or dissimilar provision hereof of the same or any prior or subsequent time. (f) This Termination Agreement embodies the entire agreement between Kellstrom and Helix and supersedes all prior agreements and understandings, oral or written, with respect to the subject matter hereof, including, without limitation, the Engagement Agreement. 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 Termination Agreement. (g) This Termination 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. (h) All covenants, promises, conditions, representations and agreements herein contained shall be binding upon and apply and inure to the parties hereto and their respective heirs, executors, administrators, successors and assigns. [Signatures On Following Page] 4 5 IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first written above. KELLSTROM INDUSTRIES, INC. By:__________________________________________ Michael W. Wallace Chief Financial Officer HELIX MANAGEMENT COMPANY II, LLC By:__________________________________________ Yoav Stern Managing Member 5 EX-10.49 15 STOCK PURCHASE AGREEMTNE 3/27/99 1 EXHIBIT 10.49 ------------------------------------------------------- STOCK PURCHASE AGREEMENT among KELLSTROM INDUSTRIES, INC., CERTIFIED AIRCRAFT PARTS, INC., R. DEAN STICKLER and DONALD E. MARSHALL ------------- March 27, 1999 ------------------------------------------------------- 2 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") is entered into as of March 27, 1999 among Kellstrom Industries, Inc., a Delaware corporation ("Kellstrom"), Certified Aircraft Parts, Inc., a Florida corporation ("Certified"), R. Dean Stickler ("Stickler") and Donald E. Marshall ("Marshall"), each of whom is a resident of the State of Florida and who together constitute the sole shareholders of Certified (together the "Shareholders"). RECITALS Certified is engaged in the purchase, sale and support of aircraft parts and the provision of related services. Kellstrom desires to purchase, and the Shareholders desire to sell, all of the issued and outstanding shares of capital stock of Certified, on the terms and subject to the conditions contained in this Agreement. TERMS OF AGREEMENT In consideration of the mutual representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 DEFINED TERMS. As used herein, the following terms shall have the following meanings: "Acquisition" means the acquisition of the Shares (as hereinafter defined) by Kellstrom from the Shareholders. "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations promulgated under the Exchange Act (as hereinafter defined), as in effect on the date hereof. "Common Stock" means the shares of common stock, $5.00 par value per share, of Certified. "Contract" means any agreement, contract, lease, note, mortgage, indenture, loan agreement, franchise agreement, covenant, employment agreement, license agreement, instrument, purchase or sales order, commitment, undertaking or obligation, in each case, whether written or oral, express or implied. 3 "Designated Automobiles" means that certain 1998 BMW 7401L, vehicle identification number WBAGJ83234WDM16459, and that certain 1998 Chrysler Van, vehicle identification number K4GP54G3WB557836, owned by Certified. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Environmental Report" means that certain Environmental Report dated March 17, 1999 prepared by Kellstrom's Environmental Consultant (as hereinafter defined), and any further reports prepared by Kellstrom's Environmental Consultant based on any samples taken during the course of the preparation thereof. "Familial Affiliate" means (a) any descendent of a common grandparent of any officer, director or shareholder of Certified, (b) any spouse of any person covered by subsection (a) of this definition, and (c) any entity in which any person covered by subsections (a) or (b) of this definition owns or has any beneficial interest. "GAAP" means generally accepted accounting principles in effect in the United States of America from time to time. "Governmental Authority" means any nation or government, any state, regional, local or other political subdivision thereof, and any entity or official exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indebtedness" means any indebtedness for borrowed money (including, but not limited to, accrued but unpaid interest), whether owed to a bank or any other Person, remaining payments on capitalized equipment leases and remaining payments on covenants not to compete. "Independent Accountants" means a firm of independent certified public accountants of national reputation which has not performed services for Kellstrom, Certified or either of the Shareholders or any of their respective Affiliates during the preceding three (3) year period, which is selected by Kellstrom and the Shareholders (or if they cannot agree, by Kellstrom's Accountants and the Shareholders' Accountants). "Kellstrom's Environmental Consultant" means Miller Legg and Associates, Inc. 2 4 "Kellstrom's Accountants" means KPMG LLP. "Lease" means that certain Lease dated January 1, 1996 between the Partnership (as hereinafter defined) and Certified with respect to the Leased Premises (as hereinafter defined) located at 2870 Stirling Road, Hollywood, Florida 33020 (the "Property"), as amended by that certain Addendum to Lease dated January 1, 1996 and that certain Second Addendum to Lease dated December 17, 1997. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, but not limited to, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in connection with such mortgage, pledge, security interest, encumbrance, lien or charge). "Material Adverse Change (or Effect)," with respect to any Person, means a change (or effect) in condition (financial or otherwise), properties, assets, liabilities, rights, obligations, operations or business of such Person which change (or effect), individually or in the aggregate, is materially adverse to such condition (financial or otherwise), properties, assets, liabilities, rights, obligations, operations or business. "Modified GAAP" means GAAP which has been applied in the manner and with the modifications and adjustments consistently applied by Certified in the preparation of its audited financial statements, which manner, modifications and adjustments are set forth on SCHEDULE 1.1(A). "Partnership" means the Stickler and Marshall Partnership. "Permitted Liens" means (a) Liens arising by operation of law, including, without limitation, materialmen's, mechanics', workmen's and repairmen's Liens, in each case securing obligations of Certified (i) which are reflected on the Current Balance Sheet and not heretofore paid or discharged, (ii) incurred in the ordinary course of business consistent with past practice since the date of the Current Balance Sheet, or (iii) set forth on SCHEDULE 4.11(A) which were incurred in the ordinary course of business prior to the date of the Current Balance Sheet and, in accordance with GAAP consistently applied, were not required to be recorded therein; and (b) Liens for Taxes not yet due and payable. "Person" means an individual, partnership, corporation, business trust, joint stock company, estate, trust, unincorporated association, joint venture, Governmental Authority or other entity, of whatever nature. 3 5 "Post-Closing Period" means a Tax period beginning and ending after the Closing Date. "Pre-Closing Period" means a Tax period ending on or prior to the Closing Date. "SEC" means the United States Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shareholders' Environmental Consultant" means Nutting Environmental of Florida, Inc. "Shareholders' Accountants" means Grant Thornton LLP. "Shares" means all of the issued and outstanding shares of Common Stock. "Tax Return" means any return (including any information return), report, statement, schedule, notice, form or other document or information filed with or submitted to or required to be filed with or submitted to any Governmental Authority in connection with or with respect to the determination, assessment, collection or payment of any Taxes. "Taxes" means all taxes, including, but not limited to, income, excise, property, sales, franchise, intangible, withholding, social security and unemployment taxes, levies, assessments, tariffs, duties (including customs duties), deficiencies or other fees, imposed, assessed or collected by or under the authority of any Governmental Authority, or payable pursuant to any tax sharing agreement or other contract relating to the sharing or payment of any such tax, levy, assessment, tariff, duty (including customs duties), deficiency or other fee, and any related charge or amount, including, but not limited to, any fine, penalty, interest or additional tax. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificates, reports or other documents made or delivered pursuant hereto or thereto, unless the context otherwise requires. (b) All terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. 4 6 (c) All matters of an accounting nature in connection with this Agreement and the transactions contemplated hereby shall, except as expressly set forth herein, be determined in accordance with GAAP applied on a basis consistent with prior periods. (d) As used herein, the neuter gender shall also denote the masculine and feminine, and the masculine gender shall also denote the neuter and feminine, where the context so permits. (e) Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (f) Whenever this Agreement provides for a payment to be made by any party, such payment shall be made by wire transfer of immediately available United States funds. (g) Whenever Kellstrom shall be required to make a payment to the Shareholders under this Agreement, the Escrow Agreement (as defined below) or the Environmental Escrow Agreement (as defined below), Kellstrom shall make such payment to the Shareholders in proportion to the number of Shares owned by each Shareholder. (h) Any reference in this Agreement to the knowledge of a Person shall mean the actual knowledge of such Person or any then current officer or director of such Person, after diligent inquiry; provided, however, that such diligent inquiry shall not be deemed to require any Person to engage a third party professional or consultant to conduct such inquiry. ARTICLE II PURCHASE AND SALE OF SHARES 2.1 THE ACQUISITION. Subject to the terms and conditions of this Agreement, the Shareholders shall at the Closing (as defined below) sell, convey, transfer, assign and deliver to Kellstrom, and Kellstrom shall at the Closing purchase, acquire and accept from the Shareholders, the Shares, free and clear of any Liens (including, without limitation, any Liens disclosed herein or in any of the schedules attached hereto). 2.2 PURCHASE PRICE. The aggregate purchase price to be paid by Kellstrom to the Shareholders in exchange for the Shares (the "Purchase Price") shall be Sixteen Million Seventy Five Thousand Dollars ($16,075,000) MINUS the positive amount, if any, by which the Net Worth of Certified as of the time of the Closing is less than Six Million Nine Hundred Fifty Thousand Dollars ($6,950,000). As used throughout this document, "Net Worth" means the amount if any, by which the aggregate total assets of Certified exceeds the aggregate total liabilities of Certified, in each case, determined in accordance with Modified GAAP. 5 7 2.3 PAYMENT OF ESTIMATED PURCHASE PRICE. At least two days prior to the Closing Date, Kellstrom and the Shareholders shall estimate by mutual agreement the amount of the Purchase Price (the "Estimated Purchase Price"). The Estimated Purchase Price shall be calculated from the books and records of Certified, and the parties shall endeavor to cause the Estimated Purchase Price to accurately reflect the Net Worth of Certified as of the time of the Closing. At the Closing, Kellstrom shall pay the Estimated Purchase Price, as follows: (a) Kellstrom shall deliver to IBJ Whitehall Bank & Trust Company or such other third party as may be agreed upon by the parties (the "Escrow Agent") (i) the sum of Three Million Two Hundred Twenty Thousand Dollars ($3,220,000) (the "Escrowed Amount") to be held in accordance with the terms of Article IX and the Escrow Agreement (as hereinafter defined), and (ii) the sum of Seven Hundred Fifty Thousand Dollars ($750,000) (or such lesser amount as may be mutually agreed upon by the parties on or prior to the Closing Date) (the "Environmental Escrowed Amount") to be held in accordance with the terms of Article IX and the Environmental Escrow Agreement (as hereinafter defined); and (b) Kellstrom shall pay to the Shareholders the balance of the Estimated Purchase Price (the "Closing Date Payment"). 2.4 CLOSING DATE PAYMENT ADJUSTMENT. Within ninety (90) days following the Closing Date, Kellstrom shall cause Kellstrom's Accountants to prepare an audit of the financial statements of Certified for the portion of the fiscal year in which the Closing took place through and including the time of the Closing, and such financial statements shall be prepared in accordance with GAAP (the "Audited Closing Date Financial Statements"). The Shareholders shall be entitled to participate in the conduct of such audit. Upon completion of the audit, Kellstrom shall prepare and deliver to the Shareholders a certificate verified as to accuracy by its Chief Financial Officer (the "Actual Purchase Price Certificate") (a) attaching a copy of the Audited Closing Date Financial Statements, (b) attaching a copy of the unaudited, internally prepared balance sheet of Certified as of the time of the Closing (the "Adjusted Closing Date Balance Sheet"), which shall be based upon the balance sheet of Certified as of the time of the Closing included in the Audited Closing Date Financial Statements (the "Audited Closing Date Balance Sheet"), as adjusted by (i) applying Modified GAAP consistent with the methodology used in the preparation of the Current Balance Sheet (as hereinafter defined), (ii) reversing any reserve set forth on the Audited Closing Date Balance Sheet on account of any Remediation (as hereinafter defined) required to be paid for by the Shareholders under Section 6.23, (iii) writing down the book value of the inventory as reflected on the Audited Closing Date Balance Sheet by the book value of any inventory which was owned by Certified as of the date of the Current Balance Sheet but was not reflected on the Current Balance Sheet or was reflected on the Current Balance Sheet at zero value, and (iv) increasing the Net Worth of Certified as of the time of the Closing by the book value as of the time of the Closing of any Designated Automobiles which have been transferred to the Shareholders, and (c) setting forth the actual amount of the Purchase Price (which actual amount is referred to as the "Actual Purchase Price") and the method of calculation thereof in reasonable detail, which amount shall be determined based upon the Net Worth of Certified as of the time of the Closing as set forth in the Adjusted Closing Date Balance Sheet. Kellstrom shall pay any costs or expenses incurred by it in connection with the preparation of the 6 8 Audited Closing Date Financial Statements. If within twenty (20) business days after the Actual Purchase Price Certificate is delivered to the Shareholders, the Shareholders shall not have given written notice to Kellstrom setting forth in detail any objection to the Actual Purchase Price, then such determination of the Actual Purchase Price shall be final and binding on the parties hereto. If within such twenty (20) business day period following delivery of the Actual Purchase Price Certificate, the Shareholders shall give written notice to Kellstrom setting forth in reasonable detail any objection to such determination of the Actual Purchase Price, Kellstrom and the Shareholders shall endeavor to reach agreement within the twenty (20) business day period following the receipt by Kellstrom of the notice of objection. If the parties shall reach agreement on the objections of the Shareholders, then the Actual Purchase Price as adjusted by the parties shall become the Actual Purchase Price for purposes of this Agreement (except as otherwise specifically provided herein). If the parties are unable to reach agreement within such twenty (20) business day period, then (i) the matter shall be submitted as soon as practicable to the Independent Accountants for determination of the Actual Purchase Price, and (ii) to the extent that any portion of the Actual Purchase Price is undisputed by the parties, such undisputed portion shall be paid within ten (10) business days following the end of such period. If the parties shall submit the determination of the Actual Purchase Price to the Independent Accountants, then the determination of the Independent Accountants shall be final and binding on the parties and such amount shall become the Actual Purchase Price for purposes of the remainder of this Agreement (except as otherwise specifically provided herein). The parties (and their professional advisors) shall cooperate with one another in furtherance of determining the Actual Purchase Price, and the parties shall make their books and records and personnel reasonably available, and Kellstrom shall make the work papers utilized by Kellstrom's Accountants and shall make Kellstrom's Accountants reasonably available, in furtherance of making such determination. In connection with the resolution of any dispute, each party shall pay its own fees and expenses, including, without limitation, legal, accounting and consultant fees and expenses. If the Actual Purchase Price as determined by the Independent Accountants is greater than the Actual Purchase Price as set forth in the Actual Purchase Price Certificate by more than two percent (2%), then the cost and expense of the Independent Accountants shall be paid by Kellstrom. If the Actual Purchase Price as determined by the Independent Accountants is greater than the Actual Purchase Price as set forth in the Actual Purchase Price Certificate by two percent (2%) or less, or is less than the Actual Purchase Price as set forth in the Actual Purchase Price Certificate, then the cost and expense of the Independent Accountants shall be paid by the Shareholders. If the Estimated Purchase Price is greater than the Actual Purchase Price, then the Shareholders shall repay to Kellstrom within ten (10) business days following receipt of the Actual Purchase Price Certificate or, if disputed, within ten (10) business days following the earlier of the date on which the parties resolve the dispute or the date of determination of the Actual Purchase Price by the Independent Accountants, the difference between the Estimated Purchase Price and the Actual Purchase Price. If the Shareholders shall fail to pay such amount when due, then Kellstrom shall have the right (but not the obligation), in addition to any other remedies which it may have, to deem such amount to be Kellstrom Indemnifiable Damages in accordance with Article IX (provided that the Kellstrom Indemnification Threshold shall not be applicable to such amount and such amount shall not count against the Kellstrom Indemnification Cap). If the Actual Purchase Price is greater than the Estimated Purchase Price, then Kellstrom shall pay to the Shareholders within ten (10) business days following receipt of the Actual Purchase Price Certificate or, if disputed, within ten (10) business 7 9 days following the earlier of the date on which the parties resolve the dispute or the date of determination of the Actual Purchase Price by the Independent Accountants, the difference between the Actual Purchase Price and the Estimated Purchase Price. 2.5 THE CLOSING. Subject to the terms and conditions of this Agreement, the consummation of the Acquisition (the "Closing") shall take place as promptly as practicable (and in any event within five (5) business days) after satisfaction or waiver of the conditions set forth in Articles VII and VIII, at the offices of Akerman, Senterfitt & Eidson, P.A., Ft. Lauderdale, Florida, or such other time and place as the parties may otherwise agree (the "Closing Date"). ARTICLE III REPRESENTATIONS AND WARRANTIES OF KELLSTROM As a material inducement to the Shareholders to enter into this Agreement and to consummate the transactions contemplated hereby, Kellstrom makes the following representations and warranties to the Shareholders: 3.1 CORPORATE STATUS. Kellstrom is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to own or lease its properties and to carry on its business as now being conducted. 3.2 CORPORATE POWER AND AUTHORITY. Kellstrom has the corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. Kellstrom has taken all actions necessary to authorize the execution and delivery of this Agreement, the performance of its obligations hereunder and the consummation of the transactions contemplated hereby. 3.3 ENFORCEABILITY. This Agreement has been duly executed and delivered by Kellstrom and constitutes a legal, valid and binding obligation of Kellstrom, enforceable against Kellstrom in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity. 3.4 NO VIOLATION. Except as set forth in SCHEDULE 3.4, none of the execution or delivery of this Agreement by Kellstrom, the performance by Kellstrom of its obligations hereunder or the consummation by it of the transactions contemplated by this Agreement will (i) contravene any provision of the Restated Certificate of Incorporation or Bylaws of Kellstrom, each as amended to date, (ii) violate or conflict with any law, statute, ordinance, rule, regulation, decree, writ, injunction, judgment or order of any Governmental Authority or of any arbitration award which is either applicable to, binding upon or enforceable against Kellstrom, (iii) conflict with, result in any breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice 8 10 or both, constitute a default) under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any Contract which is applicable to, binding upon or enforceable against Kellstrom, (iv) result in or require the creation or imposition of any Lien upon or with respect to any of the property or assets of Kellstrom or (v) require the consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, any court or tribunal or any other Person, except any SEC and other filings required to be made by Kellstrom and any filings required to be made by the parties under the HSR Act, if any. 3.5 NO COMMISSIONS. Kellstrom has not incurred any obligation for any finder's or broker's or agent's fees or commissions or similar compensation in connection with the transactions contemplated hereby, other than fees which will be paid by, and are the sole obligation of, Kellstrom. 3.6 SECURITIES AND EXCHANGE COMMISSION FILINGS. Kellstrom has heretofore furnished or made available to Certified a true and complete copy of each Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K and definitive proxy statement filed by Kellstrom with the SEC since January 1, 1998. None of such documents as of the dates they were respectively filed with the SEC contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as heretofore disclosed in filings with the SEC, as otherwise publicly announced or as disclosed to Certified in writing, since December 31, 1997, Kellstrom has conducted its business only in the ordinary and usual course and there has not occurred any Material Adverse Change with respect to Kellstrom. 3.7 INVESTMENT INTENT. Kellstrom is an accredited investor (as defined in Regulation D promulgated under the Securities Act), and is a sophisticated investor which has such knowledge and experience in financial, business and aviation industry matters, that it is capable of evaluating the risk of acquiring the Shares. The Shares are being acquired by Kellstrom for its own account and without any view towards distribution, transfer or resale. Kellstrom acknowledges that the Shares are subject to various restrictions on resale under state and federal securities laws. 3.8 NO ADDITIONAL REPRESENTATIONS OR WARRANTIES. Kellstrom acknowledges that neither of the Shareholders, Certified nor any other Person has made any representation or warranty, express or implied, as to the accuracy or completeness of any information regarding Certified or either Shareholder, except as expressly set forth in this Agreement or the schedules attached hereto, or in any certificates, instruments or other documents delivered pursuant to the terms of this Agreement. 9 11 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CERTIFIED AND THE SHAREHOLDERS As a material inducement to Kellstrom to enter into this Agreement and to consummate the transactions contemplated hereby, Certified and the Shareholders, jointly and severally, make the following representations and warranties to Kellstrom: 4.1 CORPORATE STATUS. Certified is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida and has the requisite corporate power and authority to own or lease its properties and to carry on its business as now being conducted. Certified is legally qualified to transact business as a foreign corporation, and is in good standing as such, in those jurisdictions set forth on SCHEDULE 4.1, which jurisdictions represent all of the jurisdictions in which the nature of its properties and/or the conduct of its business requires such qualification. Certified has complied in all material respects with all of the requirements of any statute governing the use and registration of fictitious names, and has the legal right to use the names under which it operates its business. Except as set forth on SCHEDULE 4.1, (a) Certified has not changed its name or at any time used any assumed or fictitious name since the date of its organization, (b) Certified has not been the surviving entity in a merger or acquired any businesses since the date of its organization, and (c) Certified has not changed its principal place of business or chief executive office since December 31, 1991. There is no pending or threatened proceeding for the dissolution, liquidation, insolvency or rehabilitation of Certified. 4.2 POWER AND AUTHORITY. Certified has the corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. Certified has taken all action necessary to authorize the execution and delivery of this Agreement, the performance of its obligations hereunder and the consummation of the transactions contemplated hereby. The Shareholders are individual United States citizens residing in the State of Florida, and have the requisite competence and authority to execute and deliver this Agreement, to perform their obligations hereunder and to consummate the transactions contemplated hereby. 4.3 ENFORCEABILITY. This Agreement has been duly executed and delivered by Certified and each of the Shareholders, and constitutes the legal, valid and binding obligation of each of them, enforceable against each of them in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity. 4.4 CAPITALIZATION. Certified has (a) one hundred (100) shares of Common Stock authorized and no shares of any other class of capital stock authorized, (b) one hundred (100) shares of Common Stock issued and outstanding, and (c) no shares of Common Stock held in treasury. All of the Shares have been duly authorized and validly issued and are fully paid and non-assessable, 10 12 and were issued in compliance with all applicable state and federal securities laws, and none of the Shares were issued in violation of any preemptive rights or rights of first refusal. No preemptive rights or rights of first refusal exist with respect to the shares of capital stock of Certified, and no such rights arise by virtue of or in connection with the transactions contemplated hereby. There are no outstanding or authorized rights, options, warrants, convertible securities, subscription rights, conversion rights, exchange rights or other agreements or commitments of any kind that could require Certified to issue or sell any shares of its capital stock (or securities convertible into or exchangeable for shares of its capital stock). There are no outstanding stock appreciation, phantom stock, profit participation or other similar rights with respect to Certified. There are no proxies, voting rights or other agreements or understandings with respect to the voting or transfer of the capital stock of Certified. Certified is not obligated to redeem or otherwise acquire any of its outstanding shares of capital stock. 4.5 SHAREHOLDERS. SCHEDULE 4.5 sets forth the name, address and social security number of each shareholder of Certified and the number of Shares owned beneficially and of record by each such shareholder. Except as set forth on SCHEDULE 4.5, the Shareholders own beneficially and of record all of the issued and outstanding shares of capital stock of Certified, and the Shareholders own such shares free and clear of any Liens, claims or restrictions of any kind. 4.6 NO VIOLATION. Except as set forth in SCHEDULE 4.6, none of the execution or delivery of this Agreement by Certified or either of the Shareholders, the performance by any of them of their respective obligations hereunder or the consummation by any of them of the transactions contemplated by this Agreement will (i) contravene any provision of the Articles of Incorporation or Bylaws (or other organizational documents), as amended to date, of Certified, (ii) violate or conflict with any law, statute, ordinance, rule, regulation, decree, writ, injunction, judgment or order of any Governmental Authority or of any arbitration award which is either applicable to, binding upon or enforceable against Certified or either of the Shareholders, (iii) conflict with, result in any breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any Designated Contract (as hereinafter defined) or any Contract which is binding upon or enforceable against either of the Shareholders, (iv) result in or require the creation or imposition of any Lien upon or with respect to any of the property or assets of either Certified or the Shares or (v) require the consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, any court or tribunal or any other Person, except any SEC and other filings required to be made by Kellstrom and any filings required to be made by the parties under the HSR Act, if any. 4.7 RECORDS OF CERTIFIED. The copies of the Articles of Incorporation and Bylaws of Certified which were provided to Kellstrom are true, accurate and complete and reflect all amendments made through the date of this Agreement. The minute books for Certified made available to Kellstrom for review were correct and complete in all material respects as of the date of such review; no further entries have been made therein through the date of this Agreement; and the records contained in such minute books contain the true signatures of the persons purporting to have signed them, and each such minute book contains an accurate record of all material corporate 11 13 actions of the shareholders and directors (and any committees thereof) of Certified taken by written consent or at a meeting since the date of its organization. All material corporate actions taken by Certified have been duly authorized or ratified. The stock ledgers of Certified, as previously made available to Kellstrom, contain complete and accurate records of all issuances, transfers and cancellations of shares of the capital stock of Certified. 4.8 SUBSIDIARIES. Certified does not own, directly or indirectly, any outstanding voting securities of or other interests in, or control, any corporation, partnership, joint venture or other business entity. 4.9 FINANCIAL STATEMENTS. The Shareholders have delivered to Kellstrom the unaudited financial statements of Certified for the year ended July 31, 1996, including the notes thereto, reviewed by Seldine & Ingber (the "Unaudited Annual Financial Statements"), and the audited financial statements of Certified for the year ended July 31, 1997, including the notes thereto, audited by the Shareholders' Accountants (the "Audited Annual Financial Statements", and together with the Unaudited Annual Financial Statements, the "Annual Financial Statements"), and the unaudited financial statements of Certified for the five (5) month period ended December 31, 1998 (the "Interim Financial Statements", and together with the Annual Financial Statements, the "Financial Statements"), copies of which are attached to SCHEDULE 4.9 hereto. The balance sheet of Certified dated as of December 31, 1998 included in the Interim Financial Statements is referred to herein as the "Current Balance Sheet." Except as set forth on SCHEDULE 4.9, the Financial Statements fairly present in all material respects the financial position of Certified at each of the balance sheet dates and the results of operations for the periods covered thereby, and in the case of the Audited Annual Financial Statements, have been prepared in accordance with GAAP consistently applied throughout the periods indicated. There are no extraordinary items of income or expense during the periods covered by the Financial Statements, and the balance sheets included in the Financial Statements do not reflect any writeup or revaluation increasing the book value of any assets, except as specifically disclosed in the notes thereto or otherwise reflected therein. 4.10 CHANGES SINCE THE CURRENT BALANCE SHEET DATE. Except as set forth on SCHEDULE 4.10, since the date of the Current Balance Sheet, Certified has operated in the ordinary course of business consistent with past practice and has not (i) issued any capital stock or other securities; (ii) made any distribution of or with respect to its capital stock or other securities, or purchased or redeemed any of its securities; (iii) paid any bonus to or increased the rate of compensation of any of its officers or salaried employees (in the case of salaried employees, other than in the ordinary course of business consistent with past practice), or amended any other terms of employment of any officers or salaried employees (in the case of salaried employees, other than in the ordinary course of business consistent with past practice); (iv) sold, leased or transferred any of its properties or assets other than the sale of inventory in the ordinary course of business consistent with past practice; (v) made or obligated itself to make capital expenditures in excess of Fifty Thousand Dollars ($50,000) in the aggregate; (vi) made any payment in respect of its liabilities other than in the ordinary course of business consistent with past practice; (vii) incurred any obligations or liabilities (including any Indebtedness) or entered into any transaction or series of transactions involving in excess of Fifty Thousand Dollars ($50,000) in the aggregate out of the ordinary course 12 14 of business, except for this Agreement and the transactions contemplated hereby; (viii) suffered any theft, damage, destruction, casualty loss or extraordinary loss, whether or not covered by insurance and whether or not a timely claim was filed with respect thereto, in excess of Fifty Thousand Dollars ($50,000) in the aggregate; (ix) waived, canceled, compromised or released any rights having a value in excess of Fifty Thousand Dollars ($50,000) in the aggregate; (x) made or adopted any change in its accounting practice or policies; (xi) made any adjustment to its books or records other than in respect of the conduct of its business activities in the ordinary course consistent with past practice; (xii) entered into any transaction with any Affiliate or Familial Affiliate; (xiii) entered into any employment agreement; (xiv) terminated, amended or modified any Designated Contract; (xv) imposed any security interest or other Lien on any of its assets other than Permitted Liens; (xvi) delayed paying any accounts payable which are due and payable except to the extent being contested in good faith, other than in the ordinary course of business consistent with past practice; (xvii) made or pledged any charitable contributions in excess of Fifty Thousand Dollars ($50,000) in the aggregate; (xviii) entered into any other transaction or, to the knowledge of Certified or either of the Shareholders, been subject to any event specifically applicable to Certified and not generally to similarly situated companies, which has or may have a Material Adverse Effect on Certified; or (xix) agreed to do or authorized any of the foregoing. 4.11 LIABILITIES OF CERTIFIED. Certified does not have any liabilities or obligations, whether accrued, absolute, contingent or otherwise, except (a) to the extent reflected on the Current Balance Sheet and not heretofore paid or discharged, (b) liabilities incurred in the ordinary course of business consistent with past practice since the date of the Current Balance Sheet (none of which relates to breach of contract, breach of warranty, tort, infringement or violation of law, or which arose out of any action, suit, claim, governmental investigation or arbitration proceeding), (c) liabilities set forth on SCHEDULE 4.11(A) and (d) liabilities which were incurred in the ordinary course of business prior to the date of the Current Balance Sheet and which, in accordance with GAAP consistently applied, were not required to be recorded thereon (none of which relates to breach of contract, breach of warranty, tort, infringement or violation of law of which arose out of any action, suit, claim, governmental investigation or arbitration proceeding) and which in the aggregate would not have a Material Adverse Effect on Certified. SCHEDULE 4.11(B) contain a true and complete list of Indebtedness of Certified, including the name of the lender, pay-off amount, per diem interest and any prepayment penalties or premiums. 4.12 LITIGATION. Except as disclosed on SCHEDULE 4.12 hereto, there is no action, suit, or other legal or administrative proceeding or governmental investigation pending, or, to the knowledge of Certified or either of the Shareholders, threatened against or by Certified or any of Certified's properties or assets or the Shares or which relates to or questions the validity or enforceability of this Agreement or the transactions contemplated hereby, and to the knowledge of Certified and each of the Shareholders, there is no basis for any of the foregoing. There are no outstanding orders, decrees or stipulations issued by any Governmental Authority in any proceeding to which Certified is or was a party which have not been complied with in full by Certified or which continue to impose any obligations on Certified. 13 15 4.13 ENVIRONMENTAL MATTERS. (a) Except as set forth on SCHEDULE 4.13, each of the Companies (as defined in clause (g) below) is and has at all times been in full compliance with all Environmental Laws (as defined in clause (g) below) governing its business, operations, properties or assets, including, without limitation: (i) all requirements under Environmental Laws relating to the Discharge (as defined in clause (g) below) or Handling (as defined in clause (g) below) of Hazardous Substances (as defined in clause (g) below); (ii) all requirements under Environmental Laws relating to notice, record keeping or reporting; (iii) all requirements under Environmental Laws relating to obtaining or maintaining Licenses (as defined in clause (g) below) for the ownership and/or use of its properties or assets or the operation of its business as presently conducted, including Licenses relating to Hazardous Substances; and (iv) all applicable writs, orders, judgements, injunctions, governmental communications, decrees, informational requests or demands issued pursuant to, or arising under, any Environmental Laws. (b) Except as set forth in SCHEDULE 4.13, there are no (and there is no reasonable basis for any) non-compliance orders, warning letters, notices of violation (collectively "Notices"), claims, suits, actions, judgments, penalties, fines, or administrative or judicial investigations or proceedings (collectively "Proceedings") pending or, to the knowledge of Certified or either of the Shareholders, threatened against or involving any of the Companies or any of their respective businesses, operations, properties or assets, issued by any Governmental Authority or third party with respect to any Environmental Laws or Licenses issued to any of the Companies thereunder in connection with, related to or arising out of the ownership by any of the Companies of their respective properties or assets or the operation of their respective businesses, which have not been resolved to the satisfaction of the issuing Governmental Authority or third party in a manner that would not impose any obligation, burden or continuing liability on Kellstrom or any of the Companies in the event that the transactions contemplated by this Agreement are consummated, or which could have a Material Adverse Effect on Kellstrom or any of the Companies, including, without limitation: (i) Notices or Proceedings related to any of the Companies being a potentially responsible party or a possible potentially responsible party for a federal or state environmental cleanup site or for corrective action under any applicable Environmental Laws; (ii) Notices or Proceedings relating to any of the Companies being responsible to undertake any response, removal or remedial actions or clean-up actions under any applicable Environmental Law; or (iii) Notices or Proceedings related to any of the Companies being liable under any Environmental Laws for personal injury, property damage, natural resource damage, or clean up obligations. (c) Except as set forth on SCHEDULE 4.13, none of the Companies has Discharged, or allowed or arranged for any third party to Discharge, Hazardous Substances in violation of Environmental Laws, to, at or upon (i) any location other than a site lawfully permitted to receive such Hazardous Substances, (ii) any real property currently or previously owned or leased by any of the Companies, or (iii) any site which, pursuant to any Environmental Laws, (x) has been placed on the National Priorities List or its state equivalent, or (y) the Environmental Protection Agency or the relevant state agency or other Governmental Authority has notified any of the Companies that such Governmental Authority has proposed or is proposing to place on the National Priorities List 14 16 or its state equivalent. There has not occurred, nor is there presently occurring, a Discharge, or, to the knowledge of the Companies or either of the Shareholders, threatened Discharge, of any Hazardous Substance on, into or beneath the surface of, or adjacent to, any real property currently or previously owned or leased by any of the Companies in an amount requiring a notice or report to be made to a Governmental Authority or in violation other than of any applicable Environmental Laws. Except as set forth on SCHEDULE 4.13, there does not presently exist on any real property currently or previously owned or leased by any of the Companies any conditions or circumstances which require or may, in the future, require cleanup, removal or other remedial action or other response under applicable Environmental Laws, permits or licenses, to be undertaken by Certified or Kellstrom or that would subject Certified or Kellstrom to penalties, damages or injunctive relief. (d) SCHEDULE 4.13 identifies the operations and activities, and locations thereof, which have been conducted or are being conducted by any of the Companies on any real property currently or previously owned or leased by any of the Companies within the last ten (10) years which have involved the Handling or Discharge of Hazardous Substances. (e) None of the Companies use, nor has used, any Aboveground Storage Tanks (as defined in clause (g) below) or Underground Storage Tanks (as defined in clause (g) below), and there are not now nor have there ever been any Underground Storage Tanks beneath any real property currently or previously owned or leased by any of the Companies that are required to be registered under applicable Environmental Laws. (f) SCHEDULE 4.13 identifies (i) all environmental audits, assessments or occupational health studies undertaken by any of the Companies or any of their agents or undertaken by any Governmental Authority or any third party, in any case undertaken by or on behalf of Certified or either of the Shareholders within the last six years or which are otherwise known to and reasonably available to Certified or either of the Shareholders, relating to or affecting any of the Companies or any real property currently or previously owned or leased by any of the Companies; (ii) the results of any ground, water, soil, air or asbestos monitoring undertaken by any of the Companies or any of their agents or undertaken by any Governmental Authority or any third party, in any case undertaken by or on behalf of Certified or either of the Shareholders within the last six years or which are otherwise known to and reasonably available to Certified or either of the Shareholders, relating to or affecting any of the Companies or any real property currently or previously owned or leased by any of the Companies which indicate the presence of Hazardous Substances at levels requiring a notice or report to be made to a Governmental Authority or in violation of any applicable Environmental Laws; (iii) all material written communications between any of the Companies and any Governmental Authority during the last six years or which are otherwise known to and reasonably available to Certified or either of the Shareholders, arising under or related to Environmental Laws; and (iv) all outstanding citations issued under OSHA, or similar state or local statutes, laws, ordinances, codes, rules, regulations, orders, ruling, or decrees, relating to or affecting any of the Companies or any real property currently or previously owned or leased by any of the Companies. 15 17 (g) For purposes of this Section 4.13, the following terms shall have the meanings ascribed to them below: "Aboveground Storage Tank" shall have the meaning ascribed to such term in Section 6901 et seq., as amended, of RCRA, or any applicable state or local statute, law, ordinance, code, rule, regulation, order ruling, or decree governing Aboveground Storage Tanks. "Companies" means Certified and any Affiliates of Certified for whose acts or omissions Certified may be held liable under any Environmental Law. "Discharge" means any manner of spilling, leaking, dumping, discharging, releasing or emitting, as any of such terms may further be defined in any Environmental Law, into any medium including, without limitation, ground water, surface water, soil or air. "Environmental Laws" means all existing federal, state, regional or local statutes, laws, rules, regulations, codes, orders, plans, injunctions, decrees, rulings and ordinances, and changes or judicial or administrative interpretations thereof, or similar laws of foreign jurisdictions where any of the Companies conducts business, any of which govern (or purport to govern) or relate to pollution, protection of the environment, public health and safety, air emissions, water discharges, hazardous or toxic substances, solid or hazardous waste or occupational health and safety, as any of these terms are or may be defined in such statutes, laws, rules, regulations, codes, orders, plans, injunctions, decrees, rulings and ordinances, or changes or judicial or administrative interpretations thereof, including, without limitation: the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, 42 U.S.C. Section 9601, et seq. (collectively "CERCLA"); the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and subsequent Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. Section 6901 et seq. (collectively "RCRA"); the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section 1801, et seq.; the Clean Water Act, as amended, 33 U.S.C. Section 1311, et seq.; the Clean Air Act, as amended (42 U.S.C. Section 7401- 7642); the Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq.; the Federal Insecticide, Fungicide, and Rodenticide Act as amended, 7 U.S.C. Section 136-136y ("FIFRA"); the Emergency Planning and Community Right-to-Know Act of 1986 as amended, 42 U.S.C. Section 11001, et seq. (Title III of SARA) ("EPCRA"); and the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. Section 651, et seq. ("OSHA"). "Environmental Liabilities" means any and all expenses, losses, costs, deficiencies, liabilities and damages (including, without limitation, reasonable counsel and paralegal fees and expenses) of any kind, whether known or unknown, fixed or contingent, arising from or relating to any (i) violations of Environmental Laws by any of the Companies on or prior to the Closing Date, (ii) Existing Conditions (as hereinafter defined) and any other matters set forth on SCHEDULE 4.13, (iii) breach of any representation or warranty set forth in Section 4.13 or any covenant set forth in Section 6.23, (iv) release of Hazardous Substances in violation 16 18 of Environmental Laws on or from the Leased Premises on or prior to the Closing Date, (v) exposure of any Person to Hazardous Substances in violation of Environmental Laws by any of the Companies on or prior to the Closing Date, (vi) contamination of waste disposal facilities or waste disposal sites in violation of Environmental Laws by Hazardous Substances generated by any of the Companies on or prior to the Closing Date or (vii) death or bodily injuries to any person, destruction or damage to any real or personal property, or contamination of or adverse effects on the environment arising from or relating to any of the foregoing. "Handle" means any manner of generating, accumulating, storing, treating, disposing of, transporting, transferring, labeling, handling, manufacturing or using, as any of such terms may be defined in any Environmental Law, of any Hazardous Substances or Waste. "Hazardous Substances" shall mean any toxic or hazardous substance, material, or waste, and any other contaminant, pollutant or constituent thereof, whether liquid, solid, semi-solid, sludge and/or gaseous, including without limitation chemicals, compounds, by-products, pesticides, asbestos containing materials, petroleum or petroleum products, and polychlorinated biphenyls, the presence of which requires investigation or remediation under any Environmental Laws or which are or become regulated, listed or controlled by, under or pursuant to any Environmental Laws, including, without limitation, RCRA, CERCLA, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Clean Air Act, the Clean Water Act, FIFRA, EPCRA and OSHA, or any similar state statute, or regulations implementing such statutes, laws, ordinances, codes, rules, regulations, orders, rulings, or decrees, or which has been determined or interpreted by any Governmental Authority to be a hazardous or toxic substance regulated under any other statute, law, regulation, order, code, rule, order, or decree. "Licenses" means all licenses, certificates, permits, approvals and registrations required to comply with any Environmental Law. "Underground Storage Tank" shall have the meaning ascribed to such term in Section 6901 et seq., as amended, of RCRA, or any applicable state or local statute, law, ordinance, code, rule, regulation, order ruling, or decree governing Underground Storage Tanks. 4.14 REAL ESTATE. (a) Certified does not own and has never owned any real property or any interest therein. (b) SCHEDULE 4.14 sets forth a list of all leases, licenses or similar agreements of or relating to real property (collectively, "Leases") to which Certified is a party (copies of which have previously been furnished to Kellstrom), in each case setting forth the lessor and lessee thereof and the date and term of each of the Leases, and the street address of each property covered thereby 17 19 (the "Leased Premises"). In the case of the Lease which is denoted with an '*' on SCHEDULE 4.14, Certified has provided Kellstrom with a copy of such Lease which has not been fully executed by all of the parties thereto; PROVIDED, HOWEVER, that Certified and the Shareholders represent and warrant to Kellstrom that such copy conforms to the copy that has been fully executed by all of the parties thereto. Except as set forth in SCHEDULE 4.14, the Leases are in full force and effect and have not been amended. Except as set forth in SCHEDULE 4.14, (i) Certified is not in default or breach under any Lease, (ii) to the knowledge of Certified and the Shareholders, no other party thereto is in default or breach under any Lease, and (iii) no event has occurred which, with the passage of time or the giving of notice or both, would cause a breach by Certified of or default by Certified under any Lease or, to the knowledge of Certified or either of the Shareholders, would cause a breach by any other party or a default by any other party under any Lease, in any case which default or breach gives rise to, or with the passage of time or the giving of notice or both, would give rise to, any right of Certified or any other party thereto to terminate such Lease or which could have a Material Adverse Effect on Certified. With respect to each of the Leased Premises (i) Certified has valid leasehold interests in the Leased Premises, free and clear of any Liens or any covenants, easements or title defects created by or of which Certified or either Shareholder has knowledge, except Permitted Liens, and (ii) neither Certified nor either of the Shareholders has received notice of any condemnation proceeding with respect to any portion of any of the Leased Premises or any access thereto or any special assessment which may affect any of the Leased Premises. (c) SCHEDULE 4.14 contains a list of (i) the principal place of business and chief executive office of Certified, (ii) all other offices and places of business maintained by Certified and (iii) all other locations where the equipment, inventory, chattel paper and books and records of Certified are located. 4.15 GOOD TITLE TO AND CONDITION OF ASSETS. (a) SCHEDULE 4.15(a) contains a list as of the date of this Agreement of all inventory owned by Certified which is included in the inventory line item on Certified's financial statements (collectively, the "Designated Inventory"), setting forth for each such item of inventory, a description, the quantity and the value at which such item of inventory is carried on the books and records of Certified. All of the Designated Inventory is of a quality usable or salable in the ordinary course of business of Certified. All inventory owned by Certified which is obsolete or of below- standard quality has been written off, written down or adequately reserved against to its net realizable value on the books and records of Certified. All Designated Inventory has been recorded at the lower of cost or net realizable value on the books and records of Certified, and has been depreciated consistent with its economic life. Any inventory purchased by Certified on or after January 1, 1999 from the Shareholders or any Familial Affiliate or any privately held entity in which any such Person has or owns a beneficial interest was, taken as a whole, purchased on terms no less favorable to Certified than the terms on which such inventory could be purchased from an unaffiliated third party in an arms length transaction and are, taken as a whole, saleable by Certified in the ordinary course of business consistent with past practice. Except as set forth on SCHEDULE 4.15(A), Certified has good and marketable title to all of the Designated Inventory and all of its other inventory and Assets (as hereinafter defined), free and clear of any Liens or restrictions or use other 18 20 than Permitted Liens. For purposes of this Agreement, the term "Assets" means all of the properties and assets of Certified (other than the Leased Premises), whether personal or mixed, tangible or intangible, wherever located, reflected on the Current Balance Sheet or acquired in the ordinary course of business since such date. Except as set forth in SCHEDULE 4.15(a), Certified does not own any aircraft or aircraft engines. (b) SCHEDULE 4.15(b) contains a list as of the date of this Agreement of all inventory owned by third parties and held by Certified on a consignment basis (the "Consigned Inventory"), setting forth for each such item of inventory, a description, the quantity and the name, address and telephone number of the owner thereof. (c) The Fixed Assets (as hereinafter defined) necessary for the business or operations of Certified as currently conducted are in good operating condition and repair, normal wear and tear excepted. For purposes of this Agreement, the term "Fixed Assets" means all vehicles, machinery, equipment, tools, supplies, leasehold improvements, furniture and fixtures used by or located on the premises of Certified or set forth on the Current Balance Sheet or acquired by Certified since the date of the Current Balance Sheet. SCHEDULE 4.15(C) lists the vehicles owned, leased or used by Certified, setting forth the make, model, vehicle identification number, and year of manufacture, and for each vehicle, whether it is owned or leased, and if owned, the name of any lienholder and the amount of the lien, and if leased, the name of the lessor and the general terms of the lease. 4.16 COMPLIANCE WITH LAWS. (a) Certified is and has been in compliance with all laws, regulations and orders applicable to it, its properties and assets (in each case, owned or used by it now or in the past), and its business and operations (as conducted by it now and in the past). Certified has not been cited, fined or otherwise notified of any asserted past or present failure to comply with any laws, regulations or orders and no proceeding with respect to any such violation is pending or threatened. (b) Neither Certified nor any of its employees or agents has made any payment of funds in connection with the business of Certified which is prohibited by law, and no funds have been set aside to be used in connection with the business of Certified for any payment prohibited by law. (c) Certified is and at all times has been in full compliance with the terms and provisions of the Immigration Reform and Control Act of 1986, as amended (the "Immigration Act"). With respect to each Employee (as defined in 8 C.F.R. 274a.1(f)) of Certified for whom the compliance with the Immigration Act is required, Certified has on file a true, accurate and complete copy of (i) each Employee's Form I-9 (Employment Eligibility Verification Form) and (ii) all other records, documents or other papers prepared, procured and/or retained pursuant to the Immigration Act. Certified has not been cited, fined, served with a Notice of Intent to Fine or with a Cease and 19 21 Desist Order, nor has any action or administrative proceeding been initiated or, to the knowledge of Certified or either of the Shareholders, threatened against Certified, by the Immigration and Naturalization Service by reason of any actual or alleged failure to comply with the Immigration Act. (d) Certified is not subject to any contract or decree, or any injunction specifically applicable to it and not generally to similarly situated companies, which restricts the continued operation of Certified or the expansion thereof to other geographical areas, customers and suppliers or lines of business. 4.17 LABOR AND EMPLOYMENT MATTERS. SCHEDULE 4.17 sets forth the name, address, social security number and current rate of compensation of each of the employees of Certified as of the date of this Agreement. Certified is not a party to or bound by any collective bargaining agreement or any other agreement with a labor union, and there has been no effort by any labor union during the twenty-four (24) months prior to the date hereof to organize any employees of Certified into one or more collective bargaining units. There is no pending or, to the knowledge of Certified or either of the Shareholders, threatened labor dispute, strike or work stoppage which affects or which may affect the business of Certified or which may interfere with its continued operations. Neither Certified nor any agent, representative or employee of Certified has within the last twenty-four (24) months committed any unfair labor practice as defined in the National Labor Relations Act, as amended, and there is no pending or, to the knowledge of Certified or either of the Shareholders, threatened charge or complaint against Certified by or with the National Labor Relations Board or any representative thereof. There has been no strike, walkout or work stoppage or threat of union activity involving any of the employees of Certified during the twenty-four (24) months prior to the date hereof. Neither Certified nor either of the Shareholders has knowledge that any executive has, or that a material number of employees have, any plans to terminate his, her or their employment with Certified as a result of the Acquisition or otherwise. Certified has complied with applicable laws, rules and regulations relating to employment, civil rights and equal employment opportunities, including but not limited to, the Civil Rights Act of 1964, the Fair Labor Standards Act, the Americans with Disabilities Act, as amended, and the Immigration Reform and Control Act of 1986, as amended. 4.18 EMPLOYEE BENEFIT PLANS. (a) EMPLOYEE BENEFIT PLANS. SCHEDULE 4.18 contains a list setting forth each employee benefit plan or arrangement of Certified, including but not limited to employee pension benefit plans, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), multiemployer plans, as defined in Section 3(37) of ERISA, employee welfare benefit plans, as defined in Section 3(1) of ERISA, deferred compensation plans, stock option plans, bonus plans, stock purchase plans, hospitalization, disability and other insurance plans, severance or termination pay plans and policies, whether or not described in Section 3(3) of ERISA, in which employees, their spouses or dependents participate ("Employee Benefit Plans") (true and accurate copies of which, together with the most recent annual reports on Form 5500 and summary plan descriptions with respect thereto, were furnished to Kellstrom). 20 22 (b) COMPLIANCE WITH LAW. With respect to each Employee Benefit Plan, (i) each has been administered in compliance with its terms and with all applicable laws, including, but not limited to, ERISA and the Internal Revenue Code of 1986, as amended (the "Code"); (ii) no actions, suits, claims or disputes are pending or, to the knowledge of Certified or either of the Shareholders, threatened, except for claims for benefits in the normal course of the Plan; (iii) no audits, inquiries, reviews, proceedings, claims, or demands are pending with any governmental or regulatory agency; (iv) there are no facts which provide a reasonable basis for any liability in the event of any such investigation, claim, action, suit, audit, review, or other proceeding; (v) all material reports, returns, and similar documents required to be filed with any governmental agency or distributed to any plan participant have been duly or timely filed or distributed; and (vi) no "prohibited transaction" has occurred within the meaning of the applicable provisions of ERISA or the Code that would subject Certified to any liability. (c) QUALIFIED PLANS. With respect to each Employee Benefit Plan intended to qualify under Code Section 401(a) or 403(a), (i) the Internal Revenue Service has issued a favorable determination letter, true and correct copies of which have been furnished to Kellstrom, that such plans are qualified and exempt from federal income taxes; (ii) no such determination letter has been revoked nor has revocation been threatened, nor has any amendment or other action or omission occurred with respect to any such plan since the date of its most recent determination letter or application therefor in any respect which would adversely affect its qualification or materially increase its costs, except for plan changes required by the Small Business Job Protection Act of 1996 and the Tax Reform Act of 1997; (iii) no such plan has been amended in a manner that would require security to be provided in accordance with Section 401(a)(29) of the Code; (iv) no reportable event (within the meaning of Section 4043 of ERISA) has occurred, other than one for which the thirty (30) day notice requirement has been waived; (v) as of the Closing Date, the present value of all liabilities that would be "benefit liabilities" under Section 4001(a)(16) of ERISA if benefits described in Code Section 411(d)(6)(B) were included will not exceed the then current fair market value of the assets of such plan (determined using the actuarial assumptions used for the most recent actuarial valuation for such plan); (vi) all contributions to, and payments from and with respect to such plans, which may have been required to be made in accordance with such plans and, when applicable, Section 302 of ERISA or Section 412 of the Code, have been timely made; and (vii) all such contributions to the plans, and all payments under the plans (except those to be made from a trust qualified under Section 401(a) of the Code) and all payments with respect to the plans (including, without limitation, PBGC (as defined below) and insurance premiums) for any period ending before the Closing Date that are not yet, but will be, required to be made are properly accrued and reflected on the Current Balance Sheet. (d) MULTIEMPLOYER PLANS. None of the Employee Benefit Plans is a multiemployer plan, as described in Section 4001(a)(3) of ERISA. (e) WELFARE PLANS. (i) Certified is not obligated under any employee welfare benefit plan as described in Section 3(1) of ERISA ("Welfare Plan") to provide medical or death benefits with respect to any employee or former employee of Certified or its predecessors after termination of employment, except as required by applicable law; (ii) Certified has complied with 21 23 the notice and continuation coverage requirements of Section 4980B of the Code and the regulations thereunder with respect to each Welfare Plan that is, or was during any taxable year for which the statute of limitations on the assessment of federal income taxes remains, open, by consent or otherwise, a group health plan within the meaning of Section 5000(b)(1) of the Code; and (iii) there are no reserves, assets, surplus or prepaid premiums under any Welfare Plan which is an Employee Benefit Plan. The consummation of the transactions contemplated by this Agreement will not entitle any individual to severance pay, and will not accelerate the time of payment or vesting, or increase the amount of compensation, due to any individual under any Employee Benefit Plan. (f) CONTROLLED GROUP LIABILITY. Neither Certified nor any entity that would be aggregated with it under Code Section 414(b), (c), (m) or (o), (i) has ever terminated or withdrawn from any employee benefit plan under circumstances resulting (or expected to result) in liability to the Pension Benefit Guaranty Corporation ("PBGC"), the fund by which the employee benefit plan is funded, or any employee or beneficiary for whose benefit the plan is or was maintained (other than routine claims for benefits); (ii) has any assets subject to (or expected to be subject to) a lien for unpaid contributions to any employee benefit plan; (iii) has failed to pay premiums to the PBGC when due; (iv) is subject to (or expected to be subject to) an excise tax under Code Section 4971; (v) has engaged in any transaction which would give rise to liability under Section 4069 or Section 4212(c) of ERISA; or (vi) has violated Code Section 4980B or Section 601 through 608 of ERISA. (g) OTHER LIABILITIES. (i) None of the Employee Benefit Plans obligates Certified to pay separation, severance, termination or similar benefits solely as a result of any transaction contemplated by this Agreement or solely as a result of a "change of control" (as such term is defined in Section 280G of the Code); (ii) all required or discretionary (in accordance with historical practices) payments, premiums, contributions, reimbursements, or accruals for all periods ending prior to or as of the Closing Date shall have been made or properly accrued on the Current Balance Sheet or will be properly accrued on the books and records of Certified as of the Closing Date; and (iii) none of the Employee Benefit Plans has any unfunded liabilities which are not reflected on the Current Balance Sheet or the books and records of Certified. 4.19 TAX MATTERS. All Tax Returns required to be filed on or prior to the date hereof with respect to Certified or any of its income, properties, franchises or operations, have been timely filed where required to be filed, each such Tax Return has been prepared in compliance with all applicable laws and regulations, and all such Tax Returns are true and accurate in all respects. All Taxes due and payable by or with respect to Certified have been fully and timely paid or are accrued on the Current Balance Sheet and adequate reserves or accruals for Taxes have been provided in its books and records with respect to any period for which Tax Returns have not yet been filed or for which Taxes are not yet due and payable. Except as set forth on SCHEDULE 4.19: (i) with respect to each taxable period of Certified, either such taxable period has been audited by the relevant taxing authority or the time for assessing or collecting Taxes with respect to each such taxable period has closed and such taxable period is not subject to review by any relevant taxing authority; (ii) no deficiency or proposed adjustment which has not been settled or otherwise resolved for any amount of Taxes has been asserted or assessed by any taxing authority against Certified; (iii) Certified has not consented to extend the time in which any Taxes may be assessed or collected by any taxing 22 24 authority; (iv) Certified has not requested or been granted an extension of the time for filing any Tax Return to a date later than the Closing Date; (v) there is no action, suit, taxing authority proceeding, or audit or claim for refund now in progress, pending or threatened against or with respect to Certified regarding Taxes; (vi) Certified has not made an election or filed a consent under Section 341(f) of the Code (or any corresponding provision of state, local or foreign law) on or prior to the Closing Date; (vii) there are no Liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of Certified; (viii) Certified will not be required (A) as a result of a change in method of accounting for a taxable period ending on or prior to the Closing Date, to include any adjustment under Section 481(c) of the Code (or any corresponding provision of state, local or foreign law) in taxable income for any taxable period (or portion thereof) beginning after the Closing Date or (B) as a result of any "closing agreement," as described in Section 7121 of the Code (or any corresponding provision of state, local or foreign law), to include any item of income or exclude any item of deduction from any taxable period (or portion thereof) beginning after the Closing Date; (ix) Certified has not been a member of an affiliated group (as defined in Section 1504 of the Code) or filed or been included in a combined, consolidated or unitary income Tax Return; (x) Certified is not a party to or bound by any tax allocation or tax sharing agreement or has any current or potential contractual obligation to indemnify any other Person with respect to Taxes; (xi) there are no Taxes due or owing or which may become due or owing by Certified for or on account of any period for which Tax Returns have been filed, except as reflected on the Current Balance Sheet; (xii) Certified has not made any payments, nor will it become obligated (under any Contract entered into on or before the Closing Date) to make any payments, that will be non-deductible under Sections 162(m) or 280G of the Code (or any corresponding provision of state, local or foreign law); (xiii) Certified has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code (or any corresponding provisions of state, local or foreign law) during the applicable period specified in Section 897(c)(1)(a)(ii) of the Code (or any corresponding provision of state, local or foreign law); (xiv) no claim has ever been made by a taxing authority in a jurisdiction where Certified does not file Tax Returns that it is or may be subject to Taxes assessed by such jurisdiction; (xv) Certified has no permanent establishment in any foreign country, as defined in the relevant tax treaty between the United States of America and such foreign country; (xvi) true, correct and complete copies of (A) all income and sales Tax Returns filed by or with respect to Certified for the past three years and (B) any audit report issued within the last five years, have been furnished or made available to Kellstrom, and all material tax elections of Certified are clearly set forth on such Tax Returns; (xvii) Certified will not be subject to any Taxes for the period ending at the Closing Date or any period for which a Tax Return has not been filed imposed pursuant to Section 1374 or Section 1375 of the Code (or any corresponding provision of state, local or foreign law); (xviii) no sales or use tax, non-recurring intangible tax, documentary stamp tax or other excise tax (or comparable tax imposed by any Governmental Entity) will be payable by Kellstrom by virtue of the transactions contemplated by this Agreement; and (xix) no issue has been raised by any taxing authority in any examination which, by application of the same or similar principles, could reasonably be expected to result in a proposed deficiency for any subsequent taxable period. 4.20 INSURANCE. SCHEDULE 4.20 contains (i) a complete and correct list of all insurance policies covering Certified and its properties, assets and business (the "Insurance Policies") (copies of which have been provided to Kellstrom) designating the insurance company, type of insurance, 23 25 insured's name and policy number and (ii) a detailed description of each claim pending as of the date of this Agreement under any of the Insurance Policies for an amount in excess of Ten Thousand Dollars ($10,000) that relates to loss or damage to the properties, assets or business of Certified. Such Insurance Policies are in full force and effect, and all premiums due thereon have been paid. As of the Closing Date, each of the Insurance Policies will be in force and effect. Certified has complied with the provisions of the Insurance Policies. Certified has not failed to give, in a timely manner, any notice required under any of the Insurance Policies necessary to preserve its rights thereunder, and neither Certified nor either of the Shareholders has any knowledge of any uninsured claims or losses. 4.21 RECEIVABLES. All of the Receivables (as hereinafter defined) are valid and legally binding, represent bona fide transactions and arose in the ordinary course of business of Certified. All of the receivables are good and collectible receivables, and will be collected in full in accordance with the terms of such receivables (and in any event within twelve (12) months following the Closing), without setoff or counterclaims, subject to the allowance for doubtful accounts, if any, set forth on the Current Balance Sheet. For purposes of this Agreement, the term "Receivables" means all receivables of Certified, including all trade account receivables arising from the provision of services, sale of inventory, notes receivable and insurance proceeds receivable. SCHEDULE 4.21 contains a true, complete and correct list of all receivables of Certified as of the date hereof. 4.22 LICENSES, PERMITS AND APPROVALS. Certified possesses all licenses and required governmental or official approvals, permits or authorizations (collectively, the "Permits") for its businesses and operations, except where Certified's failure to possess a Permit would not have a Material Adverse Effect on Certified, and SCHEDULE 4.22 contains a true and complete list of all such Permits. All such Permits are valid and in full force and effect, and Certified is in full compliance with the respective requirements thereof, and no proceeding is pending or, to the knowledge of Certified or either of the Shareholders, threatened to revoke or amend any of them. 4.23 ADEQUACY OF THE ASSETS; RELATIONSHIPS WITH CUSTOMERS AND SUPPLIERS; AFFILIATED TRANSACTIONS. Except as set forth in SCHEDULE 4.23(a), the Inventory and other Assets and the Leased Premises constitute, in the aggregate, all of the assets and properties necessary for the conduct of the business of Certified in substantially the manner in which and to the extent to which such business is currently being conducted. No current supplier to Certified of items essential to the conduct of its business has threatened within the last twenty four (24) months to terminate such current supplier's business relationship with Certified for any reason. Except as set forth in SCHEDULE 4.23(b), Certified does not have any direct or indirect interest in any customer, supplier or competitor of Certified, or in any person from whom or to whom Certified leases real or personal property. Except as set forth in SCHEDULE 4.23(b), no officer, director, shareholder or other Affiliate of Certified or any Familial Affiliate, or any entity in which any such person owns any beneficial interest, is a party to any Contract or transaction with Certified or has any interest in any property used by Certified. Other than Pride Aircraft Parts Company, Inc. ("Pride") and Air Marshall, Inc. ("Air Marshall"), none of the entities listed on SCHEDULE 4.23(b) presently owns any aircraft parts or aircraft engine parts. 24 26 4.24 INTELLECTUAL PROPERTY. Certified owns or has the right to use all trademarks, service marks, trade names, copyrights, know-how, patents, trade secrets, proprietary computer software, data bases and compilations, licenses (including licenses for the use of computer software programs) and other intellectual property used by it in the conduct of its business as currently conducted (the "Intellectual Property"), and SCHEDULE 4.24 contains a true and complete list of the Intellectual Property. Certified has not granted any rights in any Intellectual Property to any third party. The business of Certified as presently conducted does not infringe or misappropriate any intellectual property rights held or asserted by any Person. No Person is infringing on the Intellectual Property owned by Certified. Except as set forth on SCHEDULE 4.24, no payments are required for the continued use of the Intellectual Property. None of the Intellectual Property owned by Certified and, to the knowledge of Certified and the Shareholders, none of the other Intellectual Property, has ever been declared invalid or unenforceable, or is the subject of any pending or, to the knowledge of Certified or either of the Shareholders, threatened action for opposition, cancellation, declaration, infringement, or invalidity, unenforceability or misappropriation or like claim, action or proceeding. 4.25 CONTRACTS. SCHEDULE 4.25 sets forth a list of each Contract to which Certified is a party or by which it or its properties and assets are bound that provides for aggregate payments of more than Fifty Thousand Dollars ($50,000) or has a duration of more than six months or which is material to its business, assets, prospects or properties, in any instance which is in effect on the date of this Agreement (the "Designated Contracts"). In the case of those Designated Contracts which are denoted with an "*" on SCHEDULE 4.25, Certified has provided Kellstrom with copies of such Designated Contracts which have not been fully executed by all of the parties thereto; PROVIDED, HOWEVER, that Certified and the Shareholders represent and warrant to Kellstrom that each such copy conforms to the copy that has been fully executed by the parties thereto. True and correct copies of each written Designated Contract have been provided to Kellstrom and true and correct summaries of each oral Designated Contract are set forth on SCHEDULE 4.25. The copy of each written Designated Contract and the summary of each oral Designated Contract furnished to Kellstrom is a true and complete copy or summary of all material terms, as the case may be, of the document it purports to represent and reflects all amendments thereto. Certified has complied with all of the covenants to be performed by it under, and has not violated any of the terms or conditions of, any of the Designated Contracts, and to the knowledge of Certified and each of the Shareholders, each of the other parties to the Designated Contracts has complied with all of the covenants to be performed by it under, and has not violated any of the terms or conditions of, any of the Designated Contracts. No party to any Designated Contract has made a claim for breach of, or indemnification under, or has delivered a notice of termination or default under, any Designated Contract. No event has occurred which constitutes, or after notice or the passage of time, or both, would constitute, a default by Certified under any Designated Contract, and, to the knowledge of Certified and each of the Shareholders, no such event has occurred which constitutes or would constitute a default by any other party. Certified is not subject to any liability or payment resulting from renegotiation of amounts paid to it or required to be paid to it under any Designated Contract. 4.26 ACCURACY OF INFORMATION FURNISHED BY CERTIFIED OR THE SHAREHOLDER. No representation or warranty made under this Agreement to Kellstrom contains any untrue statement of fact or omits to state any fact necessary to make the information contained therein not misleading 25 27 in light of the circumstances under which they were made. Certified and the Shareholders have provided Kellstrom with true, accurate and complete copies of all documents listed or described in the various Schedules attached hereto. 4.27 BANK ACCOUNTS. SCHEDULE 4.27 sets forth all accounts of Certified with any bank, broker or other depository institution, and the names of all persons authorized to withdraw funds from each such account. 4.28 NO COMMISSIONS. Neither Certified nor either of the Shareholders has incurred any obligation for any finder's or broker's or agent's fees or commissions or similar compensation in connection with the transactions contemplated hereby, other than the fee set forth in SCHEDULE 4.28, which shall be the sole responsibility of the Shareholders. 4.29 YEAR 2000 COMPLIANCE. All computer applications used by Certified are able to perform properly date-sensitive functions for all dates before and during the year 2000, except where such failure would not have a Material Adverse Effect on Certified. Neither Certified nor the Shareholders have knowledge that any of its suppliers or vendors use computer applications that will not be able to perform properly date-sensitive functions for any dates before or during the year 2000, except where such failure would not have a Material Adverse Effect on Certified. ARTICLE V CONDUCT OF BUSINESS PENDING THE ACQUISITION 5.1 CONDUCT OF BUSINESS BY CERTIFIED PENDING THE ACQUISITION. Certified and each of the Shareholders covenants and agrees that, between the date of this Agreement and the Closing Date, the business of Certified shall be conducted only in, and Certified shall not take any action except in, the ordinary course of business, consistent with past practice. Certified shall during such period use its best efforts to preserve intact its business organization, to keep available the services of its current officers, employees and consultants, and to preserve its present relationships with customers, suppliers and other Persons with which it has significant business relations. By way of amplification and not limitation, Certified shall not, between the date of this Agreement and the Closing Date, except as set forth in SCHEDULE 5.1, directly or indirectly, do or propose or agree to do any of the following without the prior written consent of Kellstrom: (a) amend or otherwise change its Articles of Incorporation or Bylaws or equivalent organizational documents; (b) (i) issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge or disposition of, or grant of an encumbrance on, any shares of its capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest, of it, or (ii) issue, sell, pledge, dispose of, encumber or lease, or authorize the issuance, sale, pledge, disposition or lease of, or grant of an 26 28 encumbrance on, any of its assets, tangible or intangible, except sales of inventory in the ordinary course of business, consistent with past practice, in transactions not exceeding One Hundred Thousand Dollars ($100,000) in the aggregate; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (including, without limitation, for cash or shares of stock, by merger, consolidation, or acquisition of stock or assets) any interest in any corporation, partnership or other business organization or division thereof, or make any investment either by purchase of stock or securities, contributions of capital or property transfer, or, except in the ordinary course of business, consistent with past practice, in transactions not exceeding One Hundred Thousand Dollars ($100,000) in the aggregate, purchase any property or assets of any other Person, (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances other than de minimus advances to employees, (iii) to the extent not prohibited by any other provision of this Section 5.1, enter into any Contract other than in the ordinary course of business, consistent with past practice, providing for a term of not more than six months and payments not exceeding Fifty Thousand Dollars ($50,000) in the aggregate over the term of such Contract, (iv) make capital expenditures exceeding Fifty Thousand Dollars ($50,000), or purchases of inventories exceeding Fifty Thousand Dollars ($50,000), in each case, in the aggregate, or (v) engage in any transaction with (A) any officer, director, shareholder or other Affiliate of Certified, (B) any Familial Affiliate, or (C) any entity in which any person covered by subsections (A) or (B) above owns or has any beneficial interest; (f) increase the compensation payable or to become payable to its officers or employees or, except as presently bound to do, grant any severance or termination pay to, or enter into any employment or severance agreement with, any of its directors, officers or other employees, or establish, adopt, enter into or amend or take any action to accelerate any rights or benefits which any collective bargaining, bonus, profit sharing, trust, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (g) take any action other than in the ordinary course of business and in a manner consistent with past practice with respect to accounting policies or procedures; (h) pay, discharge or satisfy any existing claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of due and payable liabilities reflected or reserved against in its financial statements, as appropriate, or 27 29 liabilities incurred after the date hereof in the ordinary course of business and consistent with past practice; (i) materially increase or decrease prices charged to its customers, or take any other action which might reasonably be expected to result in any material increase in the loss of customers through non-renewal or termination of contracts or other causes; or (j) agree, in writing or otherwise, to take or authorize any of the foregoing actions. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 FURTHER ASSURANCES; COMPLIANCE WITH COVENANTS. Each party shall execute and deliver such additional instruments and other documents and shall take such further actions as may be necessary or appropriate to effectuate, carry out and comply with all of the terms of this Agreement and the transactions contemplated hereby. The Shareholders shall cause Certified to use its best efforts to comply with all of the covenants of Certified under this Agreement. 6.2 COOPERATION. Each of the parties agrees to use its best efforts to cooperate with the others in the preparation and filing of all forms, notifications, reports and information, if any, required or deemed advisable pursuant to any law, rule or regulation (including, without limitation, any rules or regulations of any securities exchange upon which the securities of Kellstrom may be listed or traded) in connection with the transactions contemplated by this Agreement, and to use its best efforts to agree jointly on a method to overcome any objections by any Governmental Authority to any such transactions. 6.3 HSR ACT AND OTHER ACTIONS. Each of the parties hereto shall (i) make promptly (and in no event later than five (5) business days following the execution of this Agreement) its respective filings, if any, and thereafter make any other required submissions, under the HSR Act, with respect to the transactions contemplated hereby, and shall seek early termination of the applicable waiting period under the HSR Act, (ii) take all appropriate reasonable actions, and do, or cause to be done, all things necessary, proper or advisable under any applicable laws, rules and regulations and Contracts to consummate and make effective the transactions contemplated herein, including, without limitation, obtaining all licenses, permits, consents, approvals, authorizations, qualifications and orders of any Governmental Authority and parties to Contracts with Certified as are necessary for it to consummate the transactions contemplated hereby, (iii) make on a prompt and timely basis all governmental or regulatory notifications and filings required to be made by it to consummate and make effective the transactions contemplated hereby, (iv) defend all lawsuits or other legal proceedings brought against it which challenge this Agreement or the consummation of the transactions contemplated hereby, and (v) take all actions necessary or advisable to lift or rescind 28 30 any injunction or restraining order or other order adversely affecting its ability to consummate the transactions contemplated hereby. 6.4 ACCESS TO INFORMATION. From the date hereof to the Closing Date, Certified shall (and shall cause its directors, officers, employees, auditors, counsel and agents to) afford Kellstrom and Kellstrom's officers, employees, auditors, counsel and agents access during normal business hours to its properties, offices and other facilities, to its officers and employees and to all books and records, and shall furnish such persons with all financial, operating and other data and information as may be requested. The parties agree and acknowledge that all such information shall be and remain subject to that certain Confidentiality Agreement dated April 14, 1998 between Kellstrom and Geneva Corporate Finance, Inc. Notwithstanding anything to the contrary set forth herein, neither the due diligence investigation made by Kellstrom in connection with the Acquisition nor the information provided to or obtained by Kellstrom shall affect any representation or warranty contained in this Agreement. 6.5 NOTIFICATION OF CERTAIN MATTERS. Certified and the Shareholders shall give prompt notice to Kellstrom of the occurrence or non-occurrence of any event of which Certified or either of the Shareholders has knowledge which would likely cause any representation or warranty contained herein made by either of them to be materially untrue or inaccurate, or any covenant, condition, or agreement contained herein applicable to it not to be materially complied with or satisfied. Kellstrom shall give prompt notice to Certified and the Shareholders of the occurrence or non-occurrence of any event of which Kellstrom has knowledge which would likely cause any representation or warranty contained herein made by Kellstrom to be materially untrue or inaccurate, or any covenant, condition, or agreement contained herein applicable to it not to be materially complied with or satisfied. 6.6 RESTRICTIVE COVENANTS. In order to assure that Kellstrom will realize the benefits of the Acquisition, each of the Shareholders severally, but not jointly, agrees with Kellstrom that he will not: (i) for the period commencing on the Closing Date and ending on the third anniversary of the Closing Date, directly or indirectly, alone or as a partner, joint venturer (either expressly or as a participant in the profits under the terms of any lease arrangement), officer, director, employee, consultant, agent, independent contractor, lender or security holder of any company or business, engage in purchasing, refurbishing, overhauling, marketing, distributing, selling or leasing of (a) aircraft, (b) aircraft engines, (c) aircraft parts or (d) engine parts anywhere in the world; provided, however, that the beneficial ownership of less than five percent (5%) of the shares of stock of any other corporation having a class of equity securities actively traded on a natural securities exchange or over the counter market shall not be deemed in and of itself, to violate the prohibitions of this Section 6.6; 29 31 (ii) for the period commencing on the Closing Date and ending on the third anniversary of the Closing Date, directly or indirectly, employ any person, other than any child or the spouse of such Shareholder, who was employed by Kellstrom or Certified, or any of their respective Affiliates, subsidiaries, successors or assigns (collectively, the "Kellstrom Companies") at or within the then prior six (6) months, or in any manner seek to induce any such person to leave his or her employment; or (iii) at any time following the Closing Date, directly or indirectly, in any way utilize, disclose, copy, reproduce or retain in its possession any of the Kellstrom Companies' proprietary rights or records, including, but not limited to, any of their respective customer lists. Each of the Shareholders agrees and acknowledges that the restrictions contained in this Section 6.6 are reasonable in scope and duration and are necessary to protect the Kellstrom Companies after the Closing Date. If any provision of this Section 6.6 as applied to any party or to any circumstance is adjudged by a court to be invalid or unenforceable, the same will in no way affect any other circumstance or the validity or enforceability of this Agreement. If any such provision, or any part thereof, is held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision, and/or to delete specific words or phrases, and in its reduced form, such provision shall then be enforceable and shall be enforced. The parties agree and acknowledge that the breach of this Section 6.6 will cause irreparable damage to the Kellstrom Companies and upon breach of any provision of this Section 6.6, the Kellstrom Companies shall be entitled to injunctive relief, specific performance or other equitable relief without the need to post a bond or other security or prove special damages; PROVIDED, HOWEVER, that, this shall in no way limit any other remedies which the Kellstrom Companies may have (including, without limitation, the right to seek monetary damages). Kellstrom and the Shareholders hereby agree that Kellstrom may assign, without limitation, the foregoing restrictive covenants to any successor to or Affiliates of Kellstrom. 6.7 CONFIDENTIALITY; PUBLICITY. No party hereto or their respective Affiliates, employees, agents or representatives shall disclose to any third party the existence of this Agreement or the subject matter or terms hereof and no party hereto shall issue any press release or other public announcement related to this Agreement or the transactions contemplated hereby, in each such case, except (a) with the prior approval of the other parties, (b) if such party believes in good faith such disclosure to be required by law or by the terms of any listing agreement with or requirements of a securities exchange upon which its securities may be listed or traded or (c) if such disclosure relates to any legal proceeding between Kellstrom and Certified or the Shareholders arising out of this Agreement; PROVIDED, HOWEVER, that each party shall use commercially best efforts to coordinate with the other parties in making any public disclosure pursuant to clause (b) of this sentence. 30 32 6.8 NO OTHER DISCUSSIONS. From the date hereof until the Closing Date, neither Certified nor either of the Shareholders nor any of their respective Affiliates, employees, agents representatives shall (a) solicit, encourage, consider or accept any offer from any Person to acquire all or any portion of the assets (other than in the case of inventory, in the ordinary course of business consistent with past practice) of or any interest in Certified, (b) participate in any negotiations or discussions with any other Person concerning the sale of all or any portion of the assets (other than in the case of inventory, in the ordinary course of business consistent with past practice) of or any interest in Certified, (c) provide any non-public information about Certified (other than to Certified's lenders or advisors or Kellstrom and its agents and consultants as provided herein), (d) enter into any agreement or commitment (whether or not binding) with respect to any of the foregoing, or (e) otherwise cooperate in any way with, or assist, facilitate or encourage any effort by any other person seeking to acquire all or any portion of the assets (other than in the case of inventory, in the ordinary course of business consistent with past practice) of or any interest in Certified. Certified and the Shareholders shall immediately notify Kellstrom in writing of any such inquiry or proposal which any of Certified or the Shareholders may receive with respect to the foregoing transactions, including the terms and identity of the inquirer or offeror. 6.9 TRADING IN COMMON STOCK OF KELLSTROM. Except as otherwise expressly consented to by Kellstrom in writing, from the date of this Agreement until the Closing Date, neither Certified nor either of the Shareholders (nor any Affiliate thereof) will directly or indirectly purchase or sell (including short sales) any shares of common stock of Kellstrom or securities derivative therefrom in any transactions effected on the Nasdaq Stock Market or otherwise. 6.10 CERTAIN TAX MATTERS. (a) The books of Certified shall be closed as of the Closing Date and its income Tax liability for the period ending on the Closing Date shall be determined in accordance with Treasury Regulation Section 1.1502.76(b), and no election shall be made under subsection (2)(ii) thereof. The Shareholders shall duly prepare, or cause to be prepared, and file, or cause to be filed, on a timely basis, all Tax Returns for income Taxes due and owing by Certified for any Pre-Closing Period and shall in connection therewith pay any Taxes required to be paid thereunder in an amount which exceeds the amount reserved therefor on the Adjusted Closing Date Balance Sheet. The Shareholders shall provide such Tax Returns to Kellstrom for review at least sixty (60) days prior to their due date (including extensions where applicable). The Shareholders shall not file any amended Tax Returns for Certified without the prior written consent of Kellstrom, which will not be unreasonably withheld. Kellstrom shall not permit Certified to agree to any extension of the statute of limitations applicable to a review of the income Taxes payable by Certified on account of any Pre-Closing Period without the prior written consent of the Shareholders, which shall not be unreasonably withheld. Kellstrom shall pay to the Shareholders any Tax refunds received by Certified for income Taxes paid by Certified on account of any Pre-Closing Periods. (b) The Shareholders shall duly prepare, or cause to be prepared, and file, or cause to be filed, as of the Closing Date, a Tax Return for sales Tax due and owing to the State of Florida 31 33 by Certified for any Pre-Closing Period and Certified shall in connection therewith pay any Taxes required to be paid thereunder. 6.11 SHAREHOLDER VOTE. Each of the Shareholders, in executing this Agreement, consents as a shareholder of Certified to the Acquisition and the transactions contemplated hereby, and waives notice of any meeting in connection therewith, and hereby releases and waives all rights with respect to the Acquisition and the transactions contemplated hereby under the Articles of Incorporation and/or Bylaws of Certified, applicable state law, and any agreements relating to the sale, purchase or voting of any capital stock of the Certified. At Closing, the Shareholder and Certified agree that any and all agreements relating to the sale, purchase or voting of capital stock of Certified shall be, and hereby are, terminated. 6.12 DELIVERY OF SHARES, RELEASES AND LANDLORD'S WAIVER. At the Closing, the Shareholders shall deliver to Kellstrom (a) all certificates evidencing the Shares, duly endorsed for transfer to Kellstrom, free and clear of any Liens (including, without limitations, any Liens disclosed hereunder or on any Schedule hereto), (b) a release from each of the Shareholders in such form as is reasonably satisfactory to Kellstrom, releasing all claims of any nature against Certified, if any PROVIDED, HOWEVER, that such releases shall not cover any rights of the Shareholders against Kellstrom under this Agreement or any other agreement executed in connection herewith, (c) a release from the Partnership, in such form as is reasonably satisfactory to Kellstrom, releasing any and all claims which it may have under Section VI of that certain Addendum to Lease dated January 1, 1996 between the Partnership and Certified, and (d) a Landlord's Waiver and Agreement executed by the Partnership in the form attached hereto as EXHIBIT A, with such changes or modifications thereto as may be reasonably required by Kellstrom's lenders. 6.13 RESIGNATIONS. Each of the Shareholders shall resign from their respective positions as directors, officers and/or employees of Certified at the Closing. 6.14 PAYOFF AND ESTOPPEL LETTERS. Prior to the Closing, Certified shall request and deliver to Kellstrom payoff and estoppel letters from First Union National Bank and the holders of any Indebtedness of Certified designated by Kellstrom, which letters shall contain payoff amounts, per diem interest and wire transfer instructions. 6.15 CONSULTING AGREEMENTS AND EMPLOYMENT AGREEMENTS. Kellstrom and each of the Shareholders shall on the Closing Date enter into a consulting agreement in the form attached as EXHIBIT B hereto (the "Consulting Agreements"), and the Shareholders shall provide such assistance as may reasonably be requested by Kellstrom in causing each of the employees of Certified listed on SCHEDULE 6.15 to on the Closing Date enter into employment agreements with Kellstrom in the form attached as EXHIBIT C hereto (the "Employment Agreements"). 6.16 LEASE AMENDMENT. On the Closing Date, Certified shall and the Shareholders shall cause the Partnership to enter into that certain Amendment to Lease, Landlord's Consent and Tenant Acknowledgment in the form attached as EXHIBIT D hereto (the "Lease Amendment"), amending the Lease. 32 34 6.17 ESCROW AGREEMENT AND ENVIRONMENTAL ESCROW AGREEMENT. Prior to or at the Closing, Kellstrom, the Shareholders and the Escrow Agent shall enter into (i) an agreement (the "Escrow Agreement") in the form attached as EXHIBIT E hereto, providing for the retention of the Escrowed Amount by the Escrow Agent in accordance with the terms of Article IX and the terms thereof, and (ii) an agreement (the "Environmental Escrow Agreement") in the form attached as EXHIBIT F hereto, providing for the retention of the Environmental Escrowed Amount by the Escrow Agent in accordance with the terms of Article IX and the terms thereof. 6.18 POST-CLOSING ACCESS AND COOPERATION. Kellstrom shall for a period of seven (7) years from the date hereof preserve and keep any books and records of Certified which may be needed by the Shareholders in connection with the preparation of Tax Returns for, or the prosecution or defense of Tax audits relating to, Certified for any Pre-Closing Period. After the Closing, Kellstrom shall permit the Shareholders reasonable access to all books and records of Certified as may be necessary or advisable in connection with the preparation of Tax Returns for, or the prosecution or defense of Tax audits relating to, Certified or other third party claims or as may otherwise be reasonably requested by the Shareholders for a reasonable business purpose. 6.19 1998 FINANCIAL STATEMENTS. As soon as reasonably possible following the date hereof (but in no event less than five (5) business days prior to the Closing Date), the Shareholders shall deliver to Kellstrom the audited financial statements of Certified for the year ended July 31, 1998, including the notes thereto, audited by the Shareholders' Accountants and prepared in accordance with GAAP consistently applied (the "1998 Financial Statements"), which financial statements shall indicate that Certified's operating profits for the year ended July 31, 1998 were not less than the amount set forth in SCHEDULE 6.19. On the Closing Date, Certified and the Shareholders shall deliver to Kellstrom a certificate, dated as of such date and duly signed by Certified and each of the Shareholders (in the case of Certified by its President), in which Certified and the Shareholders, jointly and severally, shall represent and warrant to Kellstrom that, notwithstanding any fact or matter disclosed in SCHEDULE 4.9, (a) the 1998 Financial Statements fairly present in all material respects the financial position of Certified as of July 31, 1998 and the results of operations for the year ended July 31, 1998, and have been prepared in accordance with GAAP consistently applied, (b) there are no extraordinary items of income or expense during the period covered by the 1998 Financial Statements, and (c) the balance sheet included in the 1998 Financial Statements does not reflect any writeup or revaluation increasing the book value of any assets, except as may specifically be disclosed in the notes thereto or otherwise reflected therein. 6.20 PERSONAL GUARANTEES. Kellstrom shall use its best efforts to cause the release as of the Closing of all guarantees previously made by the Shareholders (or either of them) on behalf of Certified which are identified on SCHEDULE 6.20 (the "Shareholder Guarantees") and shall, if requested by the recipient of any such Shareholder Guarantee, provide a guarantee of Kellstrom in replacement of such Shareholder Guarantee. If Kellstrom is unable to obtain the release of any Shareholder Guarantees as of the Closing, Kellstrom shall indemnify and hold harmless the Shareholders with respect to any obligations of Certified arising after the Closing for which the Shareholders are responsible thereunder and Kellstrom hereby waives any right of set off which it 33 35 may have with respect thereto. If Kellstrom shall fail to pay any amount due under the previous sentence, then the Shareholders shall have the right (but not the obligation), in addition to any other remedies they may have, to deem such amount to be Shareholder Indemnifiable Damages in accordance with Article IX hereof (provided that the Shareholder Indemnification Threshold shall not be applicable to such amount and such amount shall not count against the Shareholder Indemnification Cap). 6.21 REPAYMENT OF INDEBTEDNESS TO FIRST UNION. Kellstrom shall on the Closing Date repay the Indebtedness owed by Certified to First Union National Bank under that certain First Amended and Restated Revolving Credit and Security Agreement dated December 13, 1996, as amended (the "First Union Loan"), in an amount not to exceed the maximum amount set forth therefor on SCHEDULE 4.11(B). 6.22 ACCOUNTS RECEIVABLE. Kellstrom shall cause Certified to use commercially reasonable efforts consistent with past practice to collect all accounts receivables reflected on the Adjusted Closing Date Balance Sheet. Any payments received by Certified from a customer following the Closing Date shall be applied to the unpaid invoices issued to such customer in the order in which such invoices were issued; PROVIDED, HOWEVER, that if any such customer shall dispute in writing all or a portion of an unpaid invoice (a copy of any correspondence relating to such dispute shall be provided to the Shareholders), then any payment thereafter received from such customer shall not be applied to the disputed invoice or portion thereof, but shall be applied to the balance of such invoice and then to the next invoice issued to such customer (in each case, until the dispute with such customer shall be resolved). 6.23 CERTAIN ENVIRONMENTAL MATTERS. (a) The Shareholders and Kellstrom each acknowledge receipt of the Environmental Report. The parties agree that the following actions shall be taken to remedy certain of the matters identified in the Environmental Report: (i) The Shareholders shall cause an environmental assessment to be performed at the Property to fully delineate the horizontal and vertical extent of impacts of chlorinated solvents and RCRA metals contamination (if any) to the ground water previously identified in the Environmental Report or chemical impacts to the soil and ground water, if any, identified in any subsequent environmental assessment activities conducted by Certified or the Shareholders (in the case of Certified, on or prior to the Closing Date) (collectively, the "Existing Conditions"), and shall prepare a report documenting any such delineated soil and ground water impacts in accordance with applicable Environmental Laws. (ii) Promptly after the date hereof, the Shareholders shall provide written notice to all applicable regulatory agencies (collectively, the "Regulatory Agencies") of the Existing Conditions at the Property. 34 36 (iii) The Shareholders shall cause all assessments, remedial and monitoring actions as required by the Regulatory Agencies to be performed to respond to the Existing Conditions until they shall have been corrected and are no longer in violation of the applicable cleanup criteria and the Shareholders shall have received written approval from the Regulatory Agencies that no further action is required for the Property. (iv) The Shareholders shall cause the following corrective actions to be undertaken at the Property: (A) the removal or sealing-off of each catch basin located within the Property's chemical operational areas, or such other reasonable actions as shall be necessary to prevent any chemical or stormwater runoff in such areas from reaching any such catch basin; (B) installation of secondary containment for all chemical/waste handling and storage areas; (C) installation of paving on all pervious surfaces located within the Property's operation area, after the completion of any assessment report and the remediation of soil contamination, if any, found on the Property; and (D) installation of proper identification signage for all chemical/waste storage areas and implementation of facility procedures and policies for continued compliance with Environmental Laws. (v) The Shareholders shall pay for any penalties arising out of Certified's past operations at the Property without the required air permits. (vi) Kellstrom shall (A) cause an air emissions evaluation of quantities of volatile organic compounds (VOCs) and hazardous air pollutants (HAPs) emitted by Certified's operations at the Property to be conducted and (B) apply for and obtain any federal, state and/or local permits, licenses and registrations which, based on such evaluation, are necessary for Certified's operations at the Property, provided that Kellstrom shall be responsible for any costs in excess of Seventy Five Thousand Dollars ($75,000) incurred in connection therewith. (vii) Kellstrom shall implement an Environmental Safety and Health Program which complies with the Occupational Safety and Health Administration's General Industry Standard, 29 CFR 1910, to document the procedures and policies facility-wide for the handling of chemicals and wastes, provided that Kellstrom shall be responsible for any costs in excess of Twenty Five Thousand Dollars ($25,000) incurred in connection therewith. (b) Promptly after the date hereof, the Shareholders shall undertake the actions set forth in items (i) through (v) of Section 6.23(a) above (collectively, the "Cleanup"). Any written contract entered into by the Shareholders with the Shareholders' Environmental Consultant or any other party in connection with the Cleanup (collectively, the "Shareholders' Environmental Advisors") shall be in writing and shall require that Kellstrom and Certified be named as additional insured parties under any policies of liability insurance maintained by such Shareholders' Environmental Advisor in connection with its operations, and the Shareholders shall use best efforts 35 37 to cause any such written contract to provide for the indemnification of Certified and Kellstrom to the same extent as the indemnification of the Shareholders. The Shareholders shall provide Kellstrom with copies of any correspondence with or reports from any of the Shareholders' Environmental Advisors and the Regulatory Agencies promptly upon the receipt thereof. Kellstrom shall provide the Shareholders and the Shareholders' Environmental Advisors with reasonable access to the Leased Premises in connection with the Cleanup. All activities related to assessment and Cleanup shall be scheduled and coordinated with Kellstrom in such a manner as to not unreasonably interfere with Kellstrom's or Certified's use of the Property. The Shareholders shall use their best efforts to cause the Cleanup to be conducted and completed as promptly as reasonably possible. (c) Promptly after the date hereof, Kellstrom shall undertake the actions set in items (vi) and (vii) of Section 6.23(a) above (collectively, the "Corrective Actions", and together with the Cleanup, the "Remediation"). Kellstrom shall use its best efforts to cause the Corrective Actions to be taken and completed as promptly as reasonably possible. (d) Any costs and expenses incurred by (i) the Shareholders in connection with the Remediation activities undertaken by it under Section 6.23(a)(i) through (v) above, (ii) Kellstrom in connection with the Remediation activities undertaken by it under Section 6.23(a)(vi) above in an amount not to exceed Seventy Five Thousand Dollars ($75,000), and (iii) Kellstrom in connection with the Remediation activities undertaken by it under Section 6.23(a)(vii) above in an amount not to exceed Twenty Five Thousand Dollars ($25,000), shall, upon the request of the party incurring such costs and expenses, be paid out of the Environmental Escrowed Amount, in accordance with the provisions of Section 9.8 of this Agreement and the provisions of the Environmental Escrow Agreement. 6.24 CERTAIN AUTOMOBILES. Notwithstanding Section 5.1 hereof, Certified may, prior to the Closing Date, transfer the Designated Automobiles to the Shareholders at no cost, and Certified may, prior to the Closing, transfer to any party any other automobile owned by Certified together with any outstanding obligations therefor, PROVIDED, HOWEVER, that for purposes of calculating the Actual Purchase Price, the Net Worth of Certified as of the time of the Closing shall be reduced by the net book value as of the Closing Date of any automobiles so transferred (other than the Designated Automobiles). 6.25 CONTRIBUTION OF PRIDE INVENTORY. At or prior to the Closing, the Shareholders shall cause Pride to contribute each item of inventory currently owned by Pride, as set forth in SCHEDULE 4.15(B) (the "Pride Inventory"), free and clear of any Liens or other restrictions, to Certified, at no cost to Certified. 6.26 CERTAIN INSURANCE MATTERS. The Shareholders shall, if and to the extent requested by Kellstrom, cause Q.C. Laboratories, Inc. ("Q.C. Laboratories") to continue to make available to Certified, for up to six (6) months after the Closing, coverage under any insurance policy or policies owned by Q.C. Laboratories and made available to Certified as of the date hereof, and Certified shall reimburse Q.C. Laboratories for Certified's pro-rata share of the cost to maintain such policy or policies. 36 38 ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF KELLSTROM The obligations of Kellstrom to effect the Acquisition shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, any or all of which may be waived in whole or in part in writing by Kellstrom: 7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH OBLIGATIONS. The representations and warranties of Certified and the Shareholders contained in this Agreement shall be true and correct at and as of the Closing Date with the same force and effect as though made at and as of that time except (i) for changes specifically permitted by or disclosed on any schedule to this Agreement, (ii) that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date, and (iii) for such changes which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on Certified. Certified and the Shareholders shall have performed and complied in all material respects with all of their respective obligations required by this Agreement to be performed or complied with at or prior to the Closing Date. Certified and the Shareholders shall have delivered to Kellstrom a certificate, dated as of the Closing Date, duly signed (in the case of Certified, by its President and Chief Financial Officer), certifying that such representations and warranties are true and correct except for such changes which, individually or in the aggregate, could not reasonably be expected to have Material Adverse Effect on Certified and that all such obligations have been complied with and performed in all material respects. 7.2 NO MATERIAL ADVERSE CHANGE OR DESTRUCTION OF PROPERTY. Between the date hereof and the Closing Date, (i) there shall have been no Material Adverse Change to Certified, and (ii) none of the properties or assets of Certified shall have been damaged by fire, flood, casualty, act of God or the public enemy or other cause, in any instance not covered by insurance, which damage may have a Material Adverse Effect on Certified, and there shall have been delivered to Kellstrom a certificate to that effect, dated the Closing Date and duly signed (in the case of Certified by its President and Chief Financial Officer) by or on behalf of Certified and the Shareholders. 7.3 CORPORATE CERTIFICATE. The Shareholders shall have delivered to Kellstrom (i) copies of the Articles of Incorporation and Bylaws of Certified as in effect immediately prior to the Closing Date, (ii) copies of resolutions adopted by the Board of Directors and the shareholders of Certified authorizing the transactions contemplated by this Agreement, and (iii) a certificate of good standing for Certified issued by the Secretary of State of the state of its incorporation as of a date not more than ten (10) business days prior to the Closing Date, certified in the case of subsections (i) and (ii) of this Section as of the Closing Date by the Secretary of Certified as being true, correct and complete. 7.4 CONSENTS. Kellstrom shall have received the consents to the transactions contemplated hereby and waivers of rights to terminate or modify any of their respective rights or obligations from any Person from whom such consent or waiver is required under any Contract set 37 39 forth on SCHEDULE 3.4, or under the HSR Act or other law, rule or regulation (except in the case of such other law, rule or regulation, where the failure to obtain such consent would not have a Material Adverse Effect on Certified or Kellstrom). 7.5 LICENSES. Kellstrom shall have received all material permits and licenses that are necessary to own and operate the business of Certified as currently being conducted. 7.6 NO ADVERSE LITIGATION. There shall not be pending any action or proceeding by or before any court or other governmental body which shall seek to restrain, prohibit, invalidate or collect damages which would if determined adversely to Certified or Kellstrom have a Material Adverse Effect on Certified. 7.7 HSR ACT WAITING PERIOD. Any applicable HSR Act waiting period shall have expired or been terminated. 7.8 RESIGNATIONS. The Shareholders shall have delivered the resignations referred to in Section 6.13 hereof. 7.9 DELIVERY OF SHARES AND MINUTE BOOKS. The Shareholders shall have delivered to Kellstrom (i) the original certificates evidencing the Shares, endorsed in blank and free and clear of any Liens (including without limitation, any Liens disclosed herein or in the schedules attached hereto), and (ii) the original corporate minute book and stock transfer ledger of Certified. 7.10 DELIVERY OF PAYOFF AND ESTOPPEL LETTERS. The Shareholders shall have delivered to Kellstrom the payoff and estoppel letters referred to in Section 6.14 hereof. 7.11 DELIVERY OF CONSULTING AGREEMENTS AND EMPLOYMENT AGREEMENTS. The Shareholders shall have executed and delivered to Kellstrom the Consulting Agreements and shall have delivered to Kellstrom the Employment Agreements executed by those Persons set forth on SCHEDULE 6.15. 7.12 DELIVERY OF LEASE AMENDMENT. The Shareholders shall have delivered to Kellstrom the Lease Amendment fully executed by Certified and the Partnership. 7.13 DELIVERY OF ESCROW AGREEMENT AND ENVIRONMENTAL ESCROW AGREEMENT. The Shareholders and the Escrow Agent shall have executed and delivered to Kellstrom the Escrow Agreement and the Environmental Escrow Agreement. 7.14 DELIVERY OF 1998 FINANCIAL STATEMENTS AND CERTIFICATE. The Shareholders shall have delivered to Kellstrom the 1998 Financial Statements, which financial statements shall indicate that Certified's operating profits for the year ended July 31, 1998 were not less than the amount set forth in SCHEDULE 6.19, and Certified and the Shareholders shall have executed and delivered the certificate referred to in Section 6.19 hereof. 38 40 7.15 CONTRIBUTION OF PRIDE INVENTORY. The Pride Inventory shall have been contributed to Certified pursuant to the terms of Section 6.25 hereof. 7.16 DELIVERY OF RELEASES AND LANDLORD'S WAIVER. The Shareholders shall have delivered to Kellstrom the releases and the Landlord's Waiver and Agreement referred to in Section 6.12 hereof. ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE SHAREHOLDERS The obligation of the Shareholders to effect the Acquisition shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, any or all of which may be waived in whole or in part in writing by the Shareholders: 8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH OBLIGATIONS. The representations and warranties of Kellstrom contained in this Agreement shall be true and correct in all material respects at and as of the Closing Date with the same force and effect as though made at and as of that time except (i) for changes specifically permitted by or disclosed pursuant to this Agreement, and (ii) that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date; PROVIDED, HOWEVER, that if any such representation or warranty is already qualified by materiality, for purposes of determining whether this condition has been satisfied, such representation or warranty as so qualified shall be true and correct in all respects. Kellstrom shall have performed and complied in all material respects with all of its obligations required by this Agreement to be performed or complied with by it at or prior to the Closing Date. Kellstrom shall have delivered to the Shareholders a certificate, dated as of the Closing Date, and signed by its President and Chief Financial Officer, certifying that such representations and warranties are true and correct in all material respects and that all such obligations have been complied with and performed in all material respects. 8.2 CORPORATE CERTIFICATE. Kellstrom shall have delivered to the Shareholders (i) copies of resolutions adopted by the Board of Directors of Kellstrom authorizing the transactions contemplated by this Agreement, and (ii) a certificate of good standing for Kellstrom issued by the Secretary of State of the state of its incorporation as of a date not more than ten (10) business days prior to the Closing Date, certified in the case of subsection (i) of this Section as of the Closing Date by the Secretary of Kellstrom as being true, correct and complete. 8.3 PURCHASE PRICE. Kellstrom shall have made the Closing Date Payment in respect of the Purchase Price. 39 41 8.4 NO ORDER OR INJUNCTION. No court of competent jurisdiction or other governmental body shall have issued or entered any order or injunction restraining or prohibiting the transactions contemplated hereby, which remains in effect at the time of Closing. 8.5 HSR ACT WAITING PERIOD. Any applicable HSR Act waiting period shall have expired or been terminated. 8.6 ESCROW AGREEMENT AND ENVIRONMENTAL ESCROW AGREEMENT. Kellstrom and the Escrow Agent shall have executed and delivered to the Shareholders the Escrow Agreement and the Environmental Escrow Agreement, and Kellstrom shall have delivered the Escrowed Amount and the Environmental Escrow Amount in accordance therewith. 8.7 DELIVERY OF CONSULTING AGREEMENTS. Kellstrom shall have delivered to the Shareholders the Consulting Agreements. 8.8 PAY OFF OF FIRST UNION LOAN. Kellstrom shall have repaid the First Union Loan. ARTICLE IX INDEMNIFICATION 9.1 AGREEMENT BY THE SHAREHOLDERS TO INDEMNIFY. The Shareholders jointly and severally (except that the Shareholders shall be severally, but not jointly, liable for any breach of Section 6.6) agree to indemnify and hold Kellstrom and each of the Kellstrom Companies and each of their respective officers, directors, employees, attorneys and Affiliates (each a "Kellstrom Indemnified Party" and collectively the "Kellstrom Indemnified Parties") harmless from and against the aggregate of all expenses, losses, costs, deficiencies, liabilities and damages (including, without limitation, reasonable counsel and paralegal fees and expenses) incurred or suffered by any of the Kellstrom Indemnified Parties arising out of or resulting from (i) any breach of a representation or warranty made by Certified or the Shareholders (or either of them) in or pursuant to this Agreement (including the schedules hereto and any certificates executed and delivered by Certified or the Shareholders (or either of them) pursuant to or in connection herewith), (ii) any breach of a covenant or agreement made by Certified or the Shareholders (or either of them) in or pursuant to this Agreement, (iii) any inaccuracy in any statement made by Certified or the Shareholders (or either of them) in any certificate executed and delivered by Certified or the Shareholders (or either of them) pursuant to or in connection with this Agreement, (iv) any liability of Certified or the Shareholders (or either of them) for income Taxes arising from or relating to any Pre-Closing Period (whether or not disclosed in this Agreement or disclosed, referenced or incorporated by reference in any of the schedules hereto) in an amount which exceeds the amount set forth or reserved therefor in the Adjusted Closing Date Balance Sheet, (v) any Environmental Liabilities (whether or not disclosed in this Agreement or disclosed, referenced or incorporated by reference in any of the schedules hereto) arising from or relating to any facts, circumstances or events occurring on or prior to the Closing Date with respect to Certified or its business or the Property, except for any Environmental 40 42 Liabilities arising from any change in any law, rule or regulation following the Closing Date, (vi) any claims of any third parties arising from or relating to any facts, circumstances or events occurring on or prior to the Closing Date with respect to Certified or its business other than those (a) arising from a change in any law, rule or regulation following the Closing Date, (b) set forth or reserved for on the Adjusted Closing Date Balance Sheet, or (c) expressly and specifically disclosed in this Agreement or any of the schedules hereto, and (vii) any claims, obligations or liabilities arising from or relating to the business and operations of QC Metallurgical, Inc. (collectively, "Kellstrom Indemnifiable Damages"). Notwithstanding the foregoing provisions or anything contained herein to the contrary, (a) no claim for Kellstrom Indemnifiable Damages shall be asserted by the Kellstrom Indemnified Parties until the aggregate of all Kellstrom Indemnifiable Damages exceeds Three Hundred Thousand Dollars ($300,000) (the "Kellstrom Indemnification Threshold"), at which time the Kellstrom Indemnified Parties shall only be entitled to the aggregate amount by which the Kellstrom Indemnifiable Damages exceeds the Kellstrom Indemnification Threshold, PROVIDED, HOWEVER, that the Kellstrom Indemnification Threshold shall not apply to (i) any Kellstrom Indemnifiable Damages arising under subsections (iv) or (vii) of this Section 9.1 above, (ii) a breach of any covenant or agreement of Shareholders contained in Article II, Section 6.6, Section 6.10 or Section 6.23 hereof, or (iii) any Kellstrom Indemnifiable Damages arising with subsection (v) of this Section 9.1 which constitute Remediation Costs, and (b) the total Kellstrom Indemnifiable Damages for which the Shareholders shall be liable hereunder shall not exceed an aggregate of Eight Million Dollars ($8,000,000) (the "Kellstrom Indemnification Cap"), PROVIDED, HOWEVER, that the Kellstrom Indemnification Cap shall not apply to and there shall be no limitation or restriction whatsoever on the liability of the Shareholders under this Article IX for Kellstrom Indemnifiable Damages with respect to or arising from any one or more of the following, and no Kellstrom Indemnifiable Damages arising therefrom shall be included in determining whether the Kellstrom Indemnification Cap has been met: (i) a breach of any one or more of the representations or warranties set forth in the first or last sentence of Section 4.1, or in Section 4.2, Section 4.3, Section 4.4, Section 4.5, Section 4.13 or the sixth sentence of Section 4.15(a), (ii) any Kellstrom Indemnifiable Damages arising under subsections (iv), (v) or (vii) of this Section 9.1 above, (iii) any act of fraud in connection with the execution, delivery or performance of this Agreement, including, without limitation, any fraudulent representation or warranty made in or pursuant to this Agreement, or (iv) a breach of any covenant or agreement contained in Article II or Section 6.6, Section 6.10 or Section 6.23 hereof. 9.2 AGREEMENT BY KELLSTROM TO INDEMNIFY. Kellstrom agrees to indemnify and hold the Shareholders and their respective heirs and personal representatives (each a "Shareholder Indemnified Party" and together the "Shareholder Indemnified Parties") harmless from and against the aggregate of all expenses, losses, costs, deficiencies, liabilities and damages (including, without limitation, reasonable counsel and paralegal fees and expenses) incurred or suffered by any of the Shareholder Indemnified Parties arising out of or resulting from (i) any breach of a representation or warranty made by Kellstrom in or pursuant to this Agreement (including the schedules hereto and any certificates executed and delivered by Kellstrom pursuant to or in connection herewith), (ii) any breach of a covenant or agreement made by Kellstrom in or pursuant to this Agreement, (iii) any inaccuracy in any statement made by Kellstrom in any certificate executed and delivered by Kellstrom pursuant to or in connection with this Agreement, (iv) any liability of Certified for income 41 43 Taxes arising from or relating to any Post-Closing Tax Period, and (v) any claims of any third parties arising from or relating to any facts, circumstances or events occurring after the Closing Date with respect to Certified or its business (collectively, "Shareholder Indemnifiable Damages"). Notwithstanding the foregoing provisions or anything contained herein to the contrary, (a) no claim for Shareholder Indemnifiable Damages shall be asserted by the Shareholder Indemnified Parties until the aggregate of all Shareholder Indemnifiable Damages exceeds Three Hundred Thousand Dollars ($300,000) (the "Shareholder Indemnification Threshold"), at which time the Shareholder Indemnified Parties shall only be entitled to the aggregate amount by which the Shareholder Indemnifiable Damages exceeds the Shareholder Indemnification Threshold, PROVIDED, HOWEVER, that, the Shareholder Indemnification Threshold shall not apply to (i) any Shareholder Indemnifiable Damages arising under subsection (iv) of this Section 9.2 above, (ii) a breach of any covenant or agreement by Kellstrom contained in Article II or Sections 6.10, 6.18, 6.20, 6.21 or 6.23 hereof, (iii) any obligation to the Shareholders or any Familial Affiliates reflected on the Adjusted Closing Date Balance Sheet, or (iv) any obligations to make payments under the Lease from and after the Closing Date, and (b) the total Shareholder Indemnifiable Damages for which Kellstrom shall be liable hereunder shall not exceed an aggregate of Eight Million Dollars ($8,000,000) (the "Shareholder Indemnification Cap"), PROVIDED, HOWEVER, that the Shareholder Indemnification Cap shall not apply to and there shall be no limitation or restriction whatsoever on the liability of Kellstrom under this Article IX for Shareholder Indemnifiable Damages with respect to or arising from any one or more of the following, and no Shareholder Indemnifiable Damages arising therefrom shall be included in determining whether the Shareholder Indemnification Cap has been met: (i) a breach of any one or more of the representations or warranties set forth in Section 3.1, Section 3.2 or Section 3.3, (ii) any Kellstrom Indemnifiable Damages arising under subsection (iv) of this Section 9.2 above, (iii) any act of fraud in connection with the execution, delivery or performance of this Agreement including, without limitation, any fraudulent representation or warranty made in or pursuant to this Agreement, (iv) a breach of any covenant or agreement contained in Article II or Sections 6.10, 6.18, 6.20, 6.21 or 6.22 hereof, (v) any obligation to the Shareholders or any Familial Affiliates reflected on the Adjusted Closing Date Balance Sheet, and (vi) any obligations to make payments under the Lease from and after the Closing Date. 9.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties and each of the indemnities set forth in subsections (i), (ii), (iii) and (vi) of the first sentence of Section 9.1 and subsections (i), (ii), (iii) and (v) of the first sentence of Section 9.2 made by the Shareholders or Kellstrom in this Agreement or pursuant hereto shall survive the closing of the transactions contemplated hereby for a period of two (2) years following the Closing Date; PROVIDED, HOWEVER, that (i) the representations and warranties set forth Section 3.1, and in Section 3.2 and Section 3.3, the first and last sentence of Section 4.1, and in Section 4.2, Section 4.3, Section 4.4, Section 4.5 and the sixth sentence of Section 4.15(a) and the indemnities set forth in subsections (vii) of the first sentence of Section 9.1 shall survive indefinitely, (ii) the representations and warranties set forth in Section 4.19 and the indemnities set forth in subsection (iv) of the first sentence of Section 9.1 and subsection (iv) of the first sentence of Section 9.2 shall expire thirty (30) days following the time the latest applicable statute of limitations expires for the enforcement by an applicable Governmental Authority or any other Person of any remedy with respect to a violation of or the subject matter covered by such representations and warranties and (iii) the representations 42 44 and warranties set forth in SECTION 4.13 and the indemnities set forth in subsection (v) of the first sentence of Section 9.1 shall survive the closing of the transactions contemplated hereby for a period of six (6) years following the Closing Date. No claim for the recovery of any Kellstrom Indemnifiable Damages or Shareholder Indemnifiable Damages with respect to any of the representations, warranties and indemnities set forth in this Agreement may be asserted by any of the Kellstrom Indemnified Parties or by the Shareholder Indemnified Parties after the survival period for such representations, warranties and indemnities shall expire in accordance with the terms of this Agreement; PROVIDED, HOWEVER, that claims for Kellstrom Indemnifiable Damages or Shareholder Indemnifiable Damages first asserted in writing within the applicable period shall not thereafter be barred. Notwithstanding any knowledge of facts determined or determinable by any party by investigation, each party shall have the right to fully rely on the representations, warranties, covenants, agreements and indemnities of the other parties contained in this Agreement or in any other documents or papers delivered in connection herewith. Each representation, warranty, covenant, agreement and indemnity of the parties contained in this Agreement is independent of each other representation, warranty, covenant, agreement and indemnity. 9.4 THIRD PARTY ACTIONS. (a) For the purpose of this Section 9.4, the term "Indemnifiable Damages" means Kellstrom Indemnifiable Damages or Shareholder Indemnifiable Damages, as the context requires, the term "Indemnified Party" means the Kellstrom Indemnified Parties or the Shareholder Indemnified Parties, as the context requires, and the term "Indemnifying Party" means the party (Kellstrom or the Shareholders) against whom a claim for Indemnifiable Damages is to be made. (b) If any claim or action shall be commenced or asserted against an Indemnified Party which, if successful, could give rise to Indemnifiable Damages, the Indemnified Party shall give the Indemnifying Party prompt written notice of such claim or action (provided that the failure to give such notice shall not relieve the Indemnifying Party of its indemnification obligations except where, and solely to the extent that, the failure to provide such notice actually and materially prejudices the rights of the Indemnifying Party). Upon receipt of written notice of any such claim or action, the Indemnifying Party shall have the option to assume the defense thereof by providing written notice of such election to the Indemnified Party within ten (10) business days after receipt of written notice of any such claim or action (an "Indemnification Notice"). If the Indemnifying Party shall elect to assume the defense of any claim or action by the delivery of an Indemnification Notice within such ten (10) business day period, then, subject to the terms set forth below, (i) the Indemnifying Party shall have the right to assume and control the defense of the claim or action , (ii) the Indemnified Party may at its own cost and expense participate in (but not control) the defense thereof, and (iii) the Indemnifying Party shall be fully responsible (with no reservation of rights) for all Indemnifiable Damages relating to the claim or action. If the Indemnifying Party states in an Indemnification Notice that it will not assume the defense of the claim or action, or if the Indemnifying Party fails to provide the Indemnified Party with an Indemnification Notice within such ten (10) business day period, then (i) the Indemnified Party shall have the right to assume and control the defense of the claim or action, (ii) the Indemnifying Party may at its own cost and expense participate in (but not control) the defense thereof, and (iii) the Indemnifying Party shall be 43 45 responsible for any Indemnifiable Damages (including, without limitation, the costs incurred by the Indemnified Party in the defense thereof) relating to the claim or action subject to and in accordance with the terms and conditions set forth in this Agreement. If the Indemnifying Party provides, within such ten (10) business day period, an Indemnification Notice stating that it shall assume the defense of the claim or action, then the Indemnifying Party shall, at its own cost and expense, diligently defend such claim or action, and the Indemnifying Party will not be liable to the Indemnified Party pursuant to the provisions of Sections 9.1 or 9.2 for any related counsel and paralegal fees and expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the defendants in any action include both the Indemnified Party and the Indemnifying Party and there is a conflict of interest as reasonably determined by counsel for the Indemnifying Party which would prevent such counsel from also representing the Indemnified Party, (ii) the Indemnifying Party shall not have employed counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of the commencement of the action, or shall have failed to diligently defend such action, or (iii) the Indemnifying Party has authorized the employment of counsel for the Indemnified Party at the expense of the Indemnifying Party. Notwithstanding anything to the contrary in this Section 9.4, the Indemnifying Party shall have no right to settle or compromise any action for which it has assumed the defense to the extent the settlement or compromise provides for any injunctive or other equitable relief against the Indemnified Party or otherwise provides for any continuing obligations of any nature against the Indemnified Party or loss of rights of the Indemnified Party, and nothing stated in this Section 9.4 shall otherwise affect the Indemnifying Party's obligation to pay the Indemnified Party all Indemnifiable Damages (other than such related counsel and paralegal fees and expenses) pursuant to Section 9.1 or Section 9.2. With respect to any such third party action, the parties agree to provide each other with all material information that they request relating to the handling of such matter. The parties shall reasonably cooperate with one another in furtherance of resolving any claims for which indemnification is sought hereunder. No Indemnified Party shall admit liability with respect to, or settle, compromise, pay or discharge, any Indemnifiable Claim without the prior written consent of the Indemnifying Party, so long as the Indemnifying Party is diligently defending same in accordance with this Section 9.4. An Indemnified Party shall not unreasonably withhold its consent to a settlement of a matter. 9.5 SET OFF AGAINST THE ESCROWED AMOUNT. As security for Kellstrom's rights under Section 9.1 hereof, at Closing Kellstrom shall deliver the Escrowed Amount to the Escrow Agent. The Shareholders acknowledge that for tax purposes Kellstrom shall be deemed the owner of the Escrowed Amount until disbursed in accordance with the provisions of the Escrow Agent, and each of Kellstrom and the Shareholders shall under the terms of the Escrow Agreement grant each other reciprocal security interests in and to the Escrowed Amount and all interest that may accrue on the Escrowed Amount. Any claims by Kellstrom for Kellstrom Indemnifiable Damages shall first be satisfied out of the Escrowed Amount before any payments shall be required to be made by the Shareholders. Kellstrom may claim against the Escrowed Amount any Indemnifiable Damages for which the Shareholders (or either of them) are responsible pursuant to this Agreement, subject, however, to the following terms and conditions: 44 46 (a) Kellstrom shall give written notice to the Escrow Agent and the Shareholders of any claim for Indemnifiable Damages or any other damages hereunder, which notice shall set forth (i) the amount of Indemnifiable Damages which Kellstrom claims to have sustained by reason thereof, and (ii) the basis of the claim therefor in reasonable particularity, including the Section of this Agreement (or other document or instrument) under which such claim arises; (b) The Escrow Agent shall deliver to Kellstrom the actual amount of Indemnifiable Damages sustained by Kellstrom on the later to occur of the expiration of ten (10) business days from the date of such notice (the "Notice of Contest Period") or, if such claim is contested, the date the dispute is resolved in favor of Kellstrom, and such amount, if any, shall be charged against and reduce the Escrowed Amount; and (c) If, prior to the expiration of the Notice of Contest Period, the Shareholders shall notify the Escrow Agent and Kellstrom in writing of an intention to dispute the claim and if such dispute is not resolved within ninety (90) days after expiration of such period, then Kellstrom may take any action or exercise any remedy available to it by appropriate legal proceedings to enforce its rights and remedies hereunder. 9.6 DELIVERY OF ESCROWED AMOUNT. The Escrow Agent shall deliver to the Shareholders no later than ten (10) business days following the two (2) year anniversary of the Closing Date any Escrowed Amount then held by it unless there then remains unresolved any claim for Kellstrom Indemnifiable Damages or other damages hereunder as to which written notice has been given, in which event the Escrow Agent shall deliver to the Shareholders any Escrowed Amount in excess of the maximum amount of Kellstrom Indemnifiable Damages at issue in connection with any then unresolved claim, and any Escrowed Amount remaining on deposit after such claim shall have been satisfied or resolved shall be returned to the Shareholders promptly after the time of satisfaction. 9.7 NO BAR; WAIVER. If the Escrowed Amount is insufficient to set off any claim for Kellstrom Indemnifiable Damages made hereunder (or has been delivered to the Shareholders prior to the making or resolution of such claim), then Kellstrom may take any action or exercise any remedy available to it by appropriate legal proceedings to collect the Kellstrom Indemnifiable Damages to which it may be entitled under Section 9.1, subject to the limitations contained in this Article IX. 9.8 SET OFF AGAINST THE ENVIRONMENTAL ESCROWED AMOUNT. (a) As security for the Shareholders' obligations and for Kellstrom's rights under Section 6.23 hereof, at Closing Kellstrom shall deliver the Environmental Escrowed Amount to the Escrow Agent. The Shareholders acknowledge that for tax purposes Kellstrom shall be deemed the owner of the Environmental Escrowed Amount until disbursed in accordance with the provisions of the Environmental Escrow Agreement, and each of Kellstrom and the Shareholders shall under the terms of the Environmental Escrow Agreement grant each other reciprocal security interests in and to the Environmental Escrowed Amount and all interest that may accrue on the Environmental Escrowed Amount. 45 47 (b) Subject to the terms of Section 6.23(d), either the Shareholders or Kellstrom may from time to time request that portions of the Environmental Escrowed Amount be disbursed to satisfy amounts paid or payable to conduct the Remediation activities to be undertaken by them under Section 6.23(a), (collectively, "Remediation Costs"). The Shareholders shall give written notice to Kellstrom, and Kellstrom shall give written notice to the Shareholders (in either case, an "Environmental Claim Notice"), of any Remediation Costs which the party providing such notice (the "Notifying Party") claims to have incurred, which notice shall include (i) the amount of Remediation Costs which the Notifying Party claims to have incurred, (ii) a description of the services or work performed or other claim which gave rise to such Remediation Costs, (iii) a copy of the invoice delivered to the Notifying Party, if applicable, for such Remediation Costs and (iv) a proposed form of joint instruction letter to be signed by authorized representatives of each of Kellstrom and the Shareholders, instructing the Escrow Agent to disburse that portion of the Environmental Escrowed Amount sufficient to satisfy the claimed Remediation Costs. Within fifteen (15) business days of receipt of an Environmental Claim Notice, the receiving party shall either (i) deliver to the Notifying Party the joint instruction letter included in the Environmental Claim Notice, signed by a person authorized to give disbursement instructions pursuant to the terms of the Environmental Escrow Agreement, or (ii) advise the Notifying Party in writing of any objection it may have to the Notifying Party's claim for recovery of Remediation Costs, in which case Kellstrom and the Shareholders shall endeavor to reach agreement within the twenty (20) business day period following such notice of objection. If the parties shall reach agreement within such twenty (20) day period, the parties shall, if appropriate, promptly execute and deliver to the Escrow Agent a joint instruction letter authorizing the disbursement of the mutually agreed upon amount of Remediation Costs incurred or suffered by the Notifying Party. If the parties are unable to reach agreement within such twenty (20) day period, then the Notifying Party may take any action or exercise any remedy available to it by appropriate legal proceedings to collect any Remediation Costs to which it may be entitled under this Agreement. The Escrow Agent shall deliver to the party specified in any joint instruction letter delivered pursuant hereto the amount of Remediation Costs no later than (10) business days from its receipt of any such joint instruction letter, and such amount shall be charged against and reduce the Environmental Escrowed Amount. (c) Within ten (10) business days following the completion of the Remediation, Kellstrom shall deliver to the Escrow Agent written instructions, authorizing the Escrow Agent to release to the Shareholders the balance, if any, of the Environmental Escrowed Amount, and all interest earned thereon; PROVIDED, HOWEVER, that if there then remains unresolved any claim by Kellstrom for disbursement of any portion of the Environmental Escrowed Amount as to which written notice has been given, then Kellstrom shall deliver to the Escrow Agent written instructions authorizing the Escrow Agent to release to the Shareholders any Environmental Escrowed Amount in excess of the maximum amount of costs and expenses at issue in connection with any then unresolved claim for Remediation Costs, and, after such claim shall have been satisfied or resolved, Kellstrom shall deliver to the Escrow Agent written instructions authorizing the Escrow Agent to release to the Shareholders any Environmental Escrowed Amount then remaining on deposit, and all interest thereon. 46 48 (d) If Kellstrom's Environmental Consultant and the Shareholders' Environmental Consultant shall at any time after the Regulatory Agencies' approval of the remediation plan mutually agree that the total amount of Remediation Costs likely to be incurred by the Shareholders and Kellstrom, together with the total amount of any Remediation Costs which shall at such time have been incurred but not yet paid out of the Environmental Escrowed Amount, is less than the portion of the Environmental Escrowed Amount then remaining, then Kellstrom shall deliver to the Escrow Agent written instructions authorizing the Escrow Agent to release to the Shareholders any such excess amount. (e) Notwithstanding anything to the contrary contained in this Agreement, if the Environmental Escrowed Amount is insufficient to set off any claim for Remediation Costs, then any unpaid Remediation Costs which Kellstrom shall be entitled to be paid shall be deemed Kellstrom Indemnifiable Damages, and Kellstrom may take any action or exercise any remedy available to it by appropriate legal proceedings to collect such Kellstrom Indemnifiable Damages to which it may be entitled under Section 9.1 (provided that the Kellstrom Indemnification Threshold shall not be applicable to any such amount and such amount shall not count against the Kellstrom Indemnification Cap). 9.9 ADJUSTMENT TO PURCHASE PRICE. All set offs, recoupments and payments for Indemnifiable Damages made pursuant to this Article shall be treated as adjustments to the Purchase Price. 9.10 WAIVER. The Shareholders hereby waive any right to contribution or any similar rights they may have against Certified as a result of their agreement to indemnify Kellstrom under this Article IX. 9.11 REDUCTION FOR TAX BENEFIT. To the extent that any Kellstrom Indemnified Party shall receive any tax benefit as a result of any Kellstrom Indemnifiable Damages, the amount payable by the Shareholders on account of such Kellstrom Indemnifiable Damages shall be reduced by the amount of the tax benefit actually received by the Kellstrom Indemnified Party (assuming the application of the highest marginal State and Federal tax rates applicable to the Kellstrom Indemnified Party in the year in which such tax benefit is received). To the extent that any Shareholder Indemnified Party shall receive any tax benefit as a result of any Shareholder Indemnifiable Damages, the amount payable by Kellstrom on account of such Shareholder Indemnifiable Damages shall be reduced by the amount of the tax benefit actually received by the Shareholder Indemnified Party (assuming the application of the highest marginal State and Federal tax rates applicable to the Shareholder Indemnified Party in the year in which such tax benefit is received). 9.12 REDUCTION FOR INSURANCE PROCEEDS. To the extent that any Kellstrom Indemnified Party shall receive payment under any insurance policies on account of damages which constitute Kellstrom Indemnifiable Damages which are payable to the Kellstrom Indemnified Party under the terms of Section 9.1, (a) if the Shareholders shall have paid the Kellstrom Indemnified Party under this Article IX on account of such Kellstrom Indemnifiable Damages, then such Kellstrom 47 49 Indemnified Party shall repay (or if it shall fail to repay, then Kellstrom shall pay) to the Shareholders the amount of such payment up to the amount actually received by the Kellstrom Indemnified Party under such insurance policies (net of any reasonable costs incurred by the Kellstrom Indemnified Party in collecting under such insurance policies), (b) if the Shareholders shall be required to pay (but shall not yet have paid) the Kellstrom Indemnified Party under this Article IX on account of such Kellstrom Indemnifiable Damages, then Kellstrom and the Kellstrom Indemnified Party shall credit to the Shareholders the amount of such payment up to the amount actually received by the Kellstrom Indemnified Party under such insurance policies (net of any reasonable costs incurred by the Kellstrom Indemnified Party in collecting under such insurance policies), and (c) any such amount repaid, paid or credited to the Shareholders shall not be deemed Kellstrom Indemnifiable Damages for purposes of calculating whether the Kellstrom Indemnification Threshold shall have been met, and shall not count against the Kellstrom Indemnification Cap for purposes of determining whether the Kellstrom Indemnification Cap shall have been met. To the extent that any Shareholder Indemnified Party shall receive payment under any insurance policies on account of damages which constitute Shareholder Indemnifiable Damages which are payable to the Shareholder Indemnified Party under the terms of Section 9.2, (x) if Kellstrom shall have paid the Shareholder Indemnified Party under this Article IX on account of such Shareholder Indemnifiable Damages, then such Shareholder Indemnified Party shall repay (or if it shall fail to repay, then the Shareholder shall pay) to Kellstrom the amount of such payment up to the amount actually received by the Shareholder Indemnified Party under such insurance policies (net of any costs incurred by the Shareholder Indemnified Party in collecting under such insurance policies), (y) if Kellstrom shall be required to pay (but shall not yet have paid) the Shareholder Indemnified Party under this Article IX on account of such Shareholder Indemnifiable Damages, then the Shareholder and the Shareholder Indemnified Party shall credit to Kellstrom the amount of such payment up to the amount actually received by the Shareholder Indemnified Party under such insurance policies (net of any costs incurred by the Shareholder Indemnified Party in collecting under such insurance policies), and (z) any such amount repaid, paid or credited to Kellstrom shall not be deemed Shareholder Indemnification Damages for purposes of calculating whether the Shareholder Indemnification Threshold shall have been met and shall not count against the Shareholder Indemnification Cap for purposes of determining whether the Shareholder Indemnification Cap shall have been met. Notwithstanding anything to the contrary set forth herein, no party required to make a payment under Sections 9.1 or 9.2 of this Agreement shall be permitted to delay making such payment when due on account of the availability of any insurance policies to the party to which such payment is to be made. Each party shall use its best efforts to avail itself of any insurance provisions which inure to such party's benefit in connection with any claims for which indemnification is sought hereunder. 9.13 EXCLUSIVE REMEDY. The remedies provided herein shall, notwithstanding any provisions contained herein to the contrary, be the sole remedies for Kellstrom Indemnifiable Damages and Shareholders Indemnifiable Damages, but shall not preclude any party from asserting any other rights or seeking any other remedies against each other for fraud or from seeking any equitable relief. 48 50 ARTICLE X TERMINATION 10.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual written consent of all of the parties; or (b) by Kellstrom in the event of a material breach by Certified or either of the Shareholders of any provision of this Agreement which material breach is not cured within thirty (30) days of the Shareholders' receipt of written notice thereof from Kellstrom or which breach by its nature cannot be cured prior to Closing; or (c) by the Shareholders in the event of a material breach by Kellstrom of any provision of this Agreement which material breach is not cured within thirty (30) days of Kellstrom's receipt of written notice thereof from the Shareholders or which breach by its nature cannot be cured prior to Closing; or (d) by any party in the event that the Closing shall not have occurred on or prior to May 15, 1999, PROVIDED, HOWEVER, that the failure of the Closing to occur by such date shall not have been the result of the failure of the party seeking to terminate this Agreement to perform or fulfill any of its obligations hereunder; and PROVIDED FURTHER that any party shall have the right to extend such date for up to an additional thirty (30) days upon written notice to the other parties in the event that the only then-unsatisfied condition to Closing is the expiration or termination of any applicable HSR Act waiting period as required pursuant to Sections 7.7 and 8.5. 10.2 EFFECT OF TERMINATION. In the event of termination of this Agreement pursuant to Section 10.1, this Agreement (other than the provisions of Section 6.7 and Articles IX and XI, which shall survive any expiration or termination of this Agreement) shall forthwith become void and of no further force and effect and the parties shall be released from any and all obligations and liabilities hereunder; PROVIDED, HOWEVER, that (a) nothing herein shall relieve any party from liability for fraud or any act in the nature of fraud committed in connection with any of its representations, warranties, covenants or agreements set forth in this Agreement, (b) nothing herein shall relieve any party from any liability for any breach or violation hereof, and (c) the Confidentiality Agreement shall survive any termination hereof. 49 51 ARTICLE XI GENERAL PROVISIONS 11.1 NOTICES. All notices, requests, demands, claims, and other communications hereunder shall be in writing and shall be delivered by certified or registered mail (first class postage pre-paid), guaranteed overnight delivery, or facsimile transmission if such transmission is confirmed by delivery by certified or registered mail (first class postage pre-paid) or guaranteed overnight delivery, to the following addresses and telecopy numbers (or to such other addresses or telecopy numbers which such party shall designate in writing to the other party): (a) IF TO KELLSTROM TO: Kellstrom Industries, Inc. 1100 International Parkway Sunrise, Florida 33323 Attn: Zivi R. Nedivi, President Telecopy: (954) 858-2449 WITH A COPY TO: Akerman, Senterfitt & Eidson, P.A. 450 East Las Olas Boulevard, Suite 950 Fort Lauderdale, Florida 33301 Attn: Bruce I. March, Esq. Telecopy: (954) 463-2224 (b) IF TO CERTIFIED (PRIOR TO CLOSING) AND/OR THE SHAREHOLDERS TO: 2870 Stirling Road Hollywood, Florida 33020-1199 Telecopy: (954) 925-0988 WITH A COPY TO: Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. Museum Tower 150 West Flagler Street Miami, Florida 33130 Attn: Teddy D. Klinghoffer, Esq. Telecopy: (305) 789-3395 50 52 Notice shall be deemed given on the date sent if sent by facsimile transmission and on the date delivered (or the date of refusal of delivery) if sent by overnight delivery or certified or registered mail. 11.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits and Schedules attached hereto) and the other documents delivered at the Closing pursuant hereto contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings (oral or written) between or among the parties with respect to such subject matter. The Exhibits and Schedules constitute a part hereof as though set forth in full above. 11.3 EXPENSES. Except as otherwise provided herein, the Shareholders shall pay their own and Certified's fees and expenses, including accounting and counsel fees, incurred in connection with this Agreement and the transactions contemplated hereby, and Kellstrom shall pay its own fees and expenses, including accounting and counsel fees, incurred in connection with this Agreement and the transactions contemplated hereby. Any HSR fees of, and any documentary stamp or intangible taxes imposed on, the parties hereto in connection with the transactions contemplated hereby shall be paid by Kellstrom. 11.4 AMENDMENT; WAIVER. This Agreement may not be modified, amended, supplemented, canceled or discharged, except by written instrument executed by all parties. No failure to exercise, and no delay in exercising, any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right, power or privilege hereunder preclude the exercise of any other right, power or privilege. No waiver of any breach of any provision shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision, nor shall any waiver be implied from any course of dealing between the parties. No extension of time for performance of any obligations or other acts hereunder or under any other agreement shall be deemed to be an extension of the time for performance of any other obligations or any other acts. Except as otherwise provided herein, the rights and remedies of the parties under this Agreement are in addition to all other rights and remedies, at law or equity, that they may have against each other. 11.5 BINDING EFFECT; ASSIGNMENT. The rights and obligations of this Agreement shall bind and inure to the benefit of the parties and their respective heirs, executors, personal representatives, trustees, guardians, attorneys-in-fact, successors and assigns. Nothing expressed or implied herein shall be construed to give any other person any legal or equitable rights hereunder. Except as expressly provided herein, no party may assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of the non-assigning or non- delegating parties; PROVIDED, HOWEVER, that notwithstanding anything to the contrary contained in this Agreement, Kellstrom may assign any or all of its rights and privileges under this Agreement to its lenders from time to time, without the consent of Certified or the Shareholders, provided that any such assignee shall take such assignment subject to all of the terms, conditions and limitations set forth in the Agreement. 51 53 11.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which taken together shall constitute one and the same instrument. 11.7 INTERPRETATION. Any reference made in this Agreement to an article, section, paragraph, clause, schedule or exhibit shall be deemed to be to the referenced article, section, paragraph, clause, schedule or exhibit of this Agreement unless otherwise indicated. The headings contained in this Agreement and on the Exhibits and Schedules hereto are for reference purposes only and shall in no way affect in any way the meaning or interpretation of this Agreement or the Exhibits or Schedules hereto. Time shall be of the essence in this Agreement. 11.8 SEVERABILITY. If any word, phrase, sentence, clause, section, subsection or provision of this Agreement as applied to any party or to any circumstance is adjudged by a court to be invalid or unenforceable, the same will in no way affect any other circumstance or the validity or enforceability of any other word, phrase, sentence, clause, section, subsection or provision of this Agreement. If any provision of this Agreement, or any part thereof, is held to be unenforceable because of the duration of such provision or the area covered thereby or otherwise, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision, and/or to delete specific words or phrases, and in its reduced form, such provision shall then be enforceable and shall be enforced. 11.9 GOVERNING LAW; JURISDICTION. This Agreement shall be construed in accordance with and governed for all purposes by the laws of the State of Florida applicable to contracts executed and to be wholly performed within such State. Any suit, action or proceeding against Kellstrom, Certified or the Shareholders (or either of them) arising out of, or with respect to, this Agreement or any judgment entered by any court in respect thereof shall be brought in the courts of Broward County, Florida or in the U.S. District Court for the Southern District of Florida and each party hereby irrevocably (a) accepts and consents to the exclusive personal jurisdiction of such courts for the purpose of any suit, action or proceeding (b) waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in such courts and (c) waives any claim that any suit, action or proceedings brought in such courts has been brought in an inconvenient forum. 11.10 ARM'S LENGTH NEGOTIATIONS. Each party hereto expressly agrees that (a) before executing this Agreement, it has fully informed itself of the terms, contents, conditions and effects of this Agreement; (b) it has relied solely and completely upon its own judgment in executing this Agreement; (c) it has had the opportunity to seek and has obtained the advice of counsel before executing this Agreement; (d) it has acted voluntarily and of its own free will in executing this Agreement; (e) it is not acting under duress, whether economic or physical, in executing this Agreement; and (f) this Agreement is the result of arm's length negotiations conducted by and among the parties and their respective counsel. 52 54 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. KELLSTROM INDUSTRIES, INC., a Delaware corporation By: _______________________________________ Zivi R. Nedivi President and Chief Executive Officer CERTIFIED AIRCRAFT PARTS, a Florida corporation By:_______________________________________ Donald E. Marshall President ------------------------------------------ R. DEAN STICKLER, individually ------------------------------------------ DONALD E. MARSHALL, individually 53 55 LIST OF EXHIBITS AND SCHEDULES Exhibit A Form of Landlord's Waiver and Agreement Exhibit B Form of Shareholder Consulting Agreements Exhibit C Employment Agreements Exhibit D Form of Lease Amendment Exhibit E Form of Escrow Agreement Exhibit F Environmental Escrow Agreement Schedule 1.1(a) Modified GAAP Schedule 3.4 Kellstrom Consents Schedule 4.1 Foreign Qualifications/Names Schedule 4.5 Shareholders Schedule 4.6 Violations Schedule 4.9 Financial Statements Schedule 4.10 Changes Since the Current Balance Sheet Date Schedule 4.11(a) Liabilities of Certified Schedule 4.11(b) Indebtedness Schedule 4.12 Litigation Schedule 4.13 Environmental Matters Schedule 4.14 Real Estate Schedule 4.15(a) Inventory Schedule 4.15(b) Consigned Inventory Schedule 4.15(c) Vehicles Schedule 4.17 Employees Schedule 4.18 Employee Benefit Plans Schedule 4.19 Tax Matters Schedule 4.20 Insurance Policies Schedule 4.21 Receivables Schedule 4.22 Permits Schedule 4.23(a) Adequacy of the Assets Schedule 4.23(b) Affiliated Transactions Schedule 4.24 Intellectual Property Schedule 4.25 Contracts Schedule 4.27 Bank Accounts Schedule 4.28 Commissions Schedule 5.1 Conduct of Business Pending the Acquisition Schedule 6.15 Certain Employees Schedule 6.19 1998 Financial Statements Schedule 6.20 Personal Guarantees Schedule 7.4 Consents Under Designated Contracts 54 EX-10.50 16 JOINDER AGREEMENT 1/15/99 1 EXHIBIT 10.50 JOINDER AGREEMENT THIS JOINDER AGREEMENT (the "AGREEMENT"), dated as of January 15, 1999, is by and between SOLAIR, INC., a Florida corporation (the "APPLICANT BORROWER"), KELLSTROM INDUSTRIES, INC., a Delaware corporation, as agent for the Borrowers ("KELLSTROM") , the financial institutions party from time to time to the below-referenced Loan Agreement, and NATIONSBANK, N.A., as agent for the Lenders (the "AGENT"), under that certain Amended and Restated Loan and Security Agreement (as amended and modified, the "LOAN AGREEMENT"), dated as of December 14, 1998, by and among Kellstrom and certain related borrowing entities (the "BORROWERS"), the Lenders and the Agent. All of the defined terms in the Loan Agreement are incorporated herein by reference. The Applicant Borrower has indicated its desire to become a Borrower pursuant to the terms of the Loan Agreement. Accordingly, the Applicant Borrower hereby agrees as follows with the Agent and the Lenders: 1. The Applicant Borrower hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Applicant Borrower will be deemed to be a party to the Loan Agreement and a "Borrower" for all purposes of the Loan Agreement and the other Loan Documents and a co-maker of each of the Notes, and shall have all of the obligations of a Borrower thereunder as if it had executed the Loan Agreement and the other Loan Documents. The Applicant Borrower hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Loan Agreement and in the Loan Documents which are binding upon the Borrowers, including, without limitation (a) all of the representations and warranties of the Borrowers set forth in Article 6 of the Loan Agreement, as supplemented from time to time in accordance with the terms thereof, and (b) all of the covenants set forth in Articles 7, 8, 9, 10 and 11 of the Loan Agreement. 2. Without limiting the generality of the foregoing terms of paragraph 1, the Applicant Borrower hereby grants to the Agent for the benefit of the Secured Parties a continuing security interest in, and a right of set off against, any and all right, title and interest of the Applicant Borrower in and to the Collateral (as such term is defined in Section 1.1 of the Loan Agreement) of the Applicant Borrower. 2 3. The Applicant Borrower acknowledges and confirms that it has received a copy of the Loan Agreement and the Schedules and Exhibits thereto. The Schedules to the Loan Agreement are amended to include the information shown on the attached SCHEDULE A. 4. Kellstrom confirms that all of the other Borrowers' obligations under the Loan Agreement are, and upon the Applicant Borrower becoming a Borrower shall continue to be, in full force and effect. Kellstrom further confirms that immediately upon the Applicant Borrower becoming a Borrower the term "Secured Obligations", as used in the Loan Agreement, shall include all Secured Obligations of such Applicant Borrower under the Loan Agreement and under each other Loan Document. 5. Each of Kellstrom and the Applicant Borrower agrees that at any time and from time to time, upon the written request of the Agent, it will execute and deliver such further documents and do such further acts and things as the Agent may reasonably request in order to effect the purposes of this Agreement. 6. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. 7. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Georgia. -2- 3 IN WITNESS WHEREOF, each of Kellstrom and the Applicant Borrower has caused this Agreement to be duly executed by its authorized officers, and the Agent has caused the same to be accepted by its authorized officer, as of the day and year first above written. Solair, Inc. By: ----------------------------------------- Name: ---------------------------------------- Title: -------------------------------------- KELLSTROM INDUSTRIES, INC., for itself and for the other Borrowers By: ----------------------------------------- Name: ---------------------------------------- Title: -------------------------------------- NATIONSBANK, N.A., as Agent for itself and for the other Lenders By: ----------------------------------------- Name: ---------------------------------------- Title: -------------------------------------- -3- 4 SCHEDULE A 5 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of _____________, 199_, before me, the undersigned, a Notary Public in and for the State of _______________, County of _____________, Michael W. Wallace personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the Vice President of Solair, Inc., a Florida corporation, who, being by me first duly sworn, stated that: 1. He executed the foregoing Joinder Agreement on behalf of Solair, Inc. pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of _______________, County of _____________; and 2. He has this day delivered the foregoing instrument to NationsBank, N.A., as agent for the Lenders, at Fulton County, Georgia. Signature of Borrower's Officer: By: ----------------------------- Michael W. Wallace Sworn to and subscribed before me this ___ day of _____________, 199_: - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 6 NOTARY JURAT FOR EXECUTION OF WRITTEN OBLIGATIONS TO PAY MONEY BY FLORIDA BORROWERS On this the ____ day of ____________, 199_, before me, the undersigned, a Notary Public in and for the State of _______________, County of _____________, Michael W. Wallace personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be the Chief Financial Officer of Kellstrom Industries, Inc., a Delaware corporation, who, being by me first duly sworn, stated that: 1. He executed the foregoing Joinder Agreement on behalf of Kellstrom Industries, Inc., as agent for the Borrowers, pursuant to its by-laws or a resolution of its board of directors, said execution taking place in the State of _______________, County of _____________; and 2. He has this day delivered the foregoing instrument to NationsBank, N.A., as agent for the Lenders, at Fulton County, Georgia. Signature of Borrower's Officer: By: ------------------------------ Michael W. Wallace Sworn to and subscribed before me this ___ day of _____________, 199_: - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] 7 AFFIDAVIT REGARDING DELIVERY On this the ____ day of ______________, 199_, before me, the undersigned, a Notary Public in and for the State of Georgia, County of Cobb, M. Steven Liff personally appeared, personally known to me or proved to me on the basis of satisfactory evidence to be a Vice President of NationsBank, N.A., who, being by me first duly sworn, stated that NationsBank, N.A. has received delivery of the foregoing Joinder Agreement in the State of Georgia, County of Fulton. ---------------------------------------- Signature of Officer of NationsBank, N.A. Sworn to and subscribed before me this ___ day of ________________, 1999: - ---------------------------------- Notary Signature My Commission Expires: - --------------------------------- [Affix Notarial Seal] EX-10.51 17 LETTER OF CREDIT REIMBURSEMENT AGREEMENT 2/1/99 1 EXHIBIT 10.51 LETTER OF CREDIT REIMBURSEMENT AGREEMENT DATED AS OF FEBRUARY 1, 1999 BETWEEN KELLSTROM INDUSTRIES, INC. AND NATIONSBANK, N.A. $6,670,000.00 KELLSTROM INDUSTRIES, INC. TAXABLE VARIABLE RATE DEMAND NOTES SERIES 1999 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS...................................................................................2 ARTICLE II REPRESENTATIONS BY COMPANY; CONDITIONS TO ISSUANCE OF LETTER OF CREDIT...................................................10 Section 2.01 Representations by Company............................................................10 Section 2.02 Letter of Credit Commitment...........................................................16 Section 2.03 Conditions Precedent to Issuance of the Letter of Credit..............................16 Section 2.04 Provisions Regarding Approval of Requisitions and Disbursements from Construction Fund.................................................19 Section 2.05 Foundation Survey.....................................................................21 Section 2.06 Cost-Breakdown Updates................................................................22 Section 2.07 Consent to Final Disbursement from the Construction Fund..............................22 Section 2.08 Capitalized Interest..................................................................22 ARTICLE III REIMBURSEMENT OBLIGATION; OTHER PAYMENTS; LETTER OF CREDIT FEES........................................................23 Section 3.01 Reimbursement and Other Payments......................................................23 Section 3.02 Fees..................................................................................25 Section 3.03 Supplemental Payments.................................................................26 Section 3.04 Computation of Interest: Form and Place of Payment...................................26 Section 3.05 Security for Reimbursement Obligations................................................27 Section 3.06 Acquisition of Notes..................................................................27 ARTICLE IV COVENANTS OF THE COMPANY; OTHER AGREEMENTS...................................................28 Section 4.01 Special Covenants of Company..........................................................28 Section 4.02 Continuous Obligations: Obligations Absolute.........................................30 Section 4.03 Transfer of Letter of Credit..........................................................30 Section 4.04 Reduction and Reinstatement of Stated Amount of Letter of Credit......................30 Section 4.05 Survival of Commitment................................................................30 Section 4.06 Termination of Loan Agreement.........................................................30 ARTICLE V DEFAULTS AND REMEDIES........................................................................31 Section 5.01 Events of Default.....................................................................31 Section 5.02 No Waiver: Remedies Cumulative.......................................................33 ARTICLE VI MISCELLANEOUS................................................................................34 Section 6.01 Right of Set-off......................................................................34 Section 6.02 Liabilities...........................................................................34 Section 6.03 Consent to Service of Process.........................................................35 Section 6.04 Estoppel Certificate..................................................................35 Section 6.05 Amendments............................................................................35
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Section 6.06 Successors............................................................................35 Section 6.07 Fees and Expenses: Expenses of Collection.............................................35 Section 6.08 Notices...............................................................................36 Section 6.09 Severability..........................................................................38 Section 6.10 Assignment............................................................................38 Section 6.11 Participations........................................................................38 Section 6.12 Counterparts..........................................................................38 Section 6.13 Rule of Construction..................................................................38 Section 6.14 Governing Law.........................................................................38 Section 6.15 Preamble: Preliminary Recitals........................................................38 Section 6.16 Indenture.............................................................................38 Section 6.17 Credit Institution Representation.....................................................38 Section 6.18 Consent to Jurisdiction: Waiver of Jury Trial.........................................38 SCHEDULE 3.01(a) OPTIONAL REDEMPTIONS.........................................................................42
4 THIS LETTER OF CREDIT REIMBURSEMENT AGREEMENT (the "AGREEMENT"), made as of the 1st day of February, 1999, between KELLSTROM INDUSTRIES, INC., a Delaware corporation (the "COMPANY"), and NATIONSBANK, N.A., a national banking association, having a designated place of business in Atlanta, Georgia (the "CREDIT Institution"); PREAMBLE: RECITALS: WHEREAS, pursuant to the terms and provisions of that certain Indenture of Trust, dated as of February 1, 1999 (the "INDENTURE"), by and between the Company and Norwest Bank Minnesota, N.A., as trustee (the "TRUSTEE"), the Company is issuing its Taxable Variable Rate Demand Notes, Series 1999, in the aggregate principal amount of Six Million Six Hundred Seventy Thousand Dollars ($6,670,000.00) (herein, the "NOTES"); and WHEREAS, the proceeds of the Notes will be used to finance the reimbursement to the Company of the construction and renovation of the Company's corporate headquarters located in Sunrise, Florida (herein, the "PROJECT"); and WHEREAS, the proceeds of the Notes will be deposited on the Date of Issuance (as hereinafter defined) in the Construction Fund created and established under the Indenture and held by the Trustee thereunder to be disbursed to the Company pursuant to the terms and provisions of the Indenture, this Agreement and the other Financing Documents (as hereinafter defined); and WHEREAS, the Company has agreed to pay the principal of or purchase price of the Notes and the interest thereon in accordance with the provisions of the Indenture; and WHEREAS, to enhance the marketability of the Notes and to pay the principal of or purchase price of the Notes and the interest thereon in accordance with the provisions of the Indenture, the Company has requested that the Credit Institution issue, in favor of the Trustee, its irrevocable direct pay letter of credit in the initial stated amount of $6,746,751.00 in the form attached hereto as Exhibit A (the "LETTER OF CREDIT"); and WHEREAS, the Company and the Credit Institution desire (a) to specify the conditions precedent to the issuance of the Letter of Credit by the Credit Institution and to obtain the Credit Institution's approval of disbursements of proceeds of the Notes for the benefit of the Company, and (b) to provide for the payment to the Credit Institution of certain fees for the Letter of Credit, the reimbursement by the Company of amounts paid by the Credit Institution under the Letter of Credit, the indemnity by the Company of the Credit Institution pursuant to the terms of this Agreement, the security to be provided by or on behalf of the Company to secure its performance under this Agreement, and certain other matters; NOW, THEREFORE, in consideration of the premises and the agreements contained in this Agreement, the Company and the Credit Institution agree as follows: 5 ARTICLE I DEFINITIONS The terms "Construction Fund," "Cost of the Project," "Fiscal Agent," "Maximum Rate," "Placement Agreement," "Remarketing Agent," "Remarketing Agreement," "Substitute Letter of Credit" and all other capitalized terms used and not defined herein shall have the meanings given thereto in the Indenture. As used in this Agreement, in addition to the terms previously defined herein or defined in Section 1.01 of the Indenture, the following terms shall have the meanings as provided in this Article I. Unless otherwise provided, each of the financial terms not specifically defined herein shall have the meaning given to it under Generally Accepted Accounting Principles applied on a consistent basis, and the computation of any such term is to be determined both as to classification of items and as to amounts in accordance with Generally Accepted Accounting Principles. Unless otherwise indicated, references to Articles or Sections refer to those in this Agreement. The Recitals are hereby incorporated herein by this reference. "A Drawing" shall mean a drawing made under the Letter of Credit by sight draft accompanied by a certificate in the form required thereunder to pay scheduled principal of and interest on the Notes or to pay the redemption price of the Notes due to an optional redemption of the Notes pursuant to the provisions of the Indenture. "Affiliate" shall mean, with respect to any Person, any other person (i) directly or indirectly controlling (including, but not limited to, all directors and officers of such person) controlled by, or under direct or indirect common control with, such Person or (ii) that directly or indirectly owns more than 5% of the voting securities of such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership or voting securities, by contract or otherwise. "Anniversary Date" shall mean the same day and month as the Date of Issuance occurring in any subsequent year. "Assignment Agreement" shall mean that certain Collateral Assignment of Agreements Affecting Real Estate dated as of February 1, 1999, by and between the Company and the Credit Institution by which the Company has, with the consent and acknowledgment of the parties to the contracts therein referred to, assigned and granted a security interest to the Credit Institution in all construction and architectural documents relating to the Project and in all permits and licenses relating to the Project, as the same may be amended, modified or supplemented from time to time in accordance with its terms. "B Drawing" shall mean a drawing made under the Letter of Credit by sight draft accompanied by a certificate in the form required thereunder to pay the purchase price of the Notes due to an optional tender for purchase or a mandatory tender for purchase directed by the Company pursuant to the provisions of the Indenture. "Bankruptcy Code" shall mean 11 U.S.C. Section 101 ET. SEQ., as amended. 6 "Business Day" shall have the same meaning as provided in the Letter of Credit. "Butters" shall mean Butters Construction & Development, Inc., a Florida corporation. "C Drawing" shall mean a drawing made under the Letter of Credit by sight draft accompanied by a certificate in the form required thereunder to pay the purchase price of the Notes due to a mandatory purchase of the Notes as a result of an event of default under the Indenture or as a result of the provision of a substitute Letter of Credit or to pay the redemption price of the Notes due to the expiration or termination of the Letter of Credit, all as provided pursuant to the provisions of the Indenture. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and all rules and regulations from time to time promulgated thereunder. "Collateral" shall mean all real and personal property of the Company and/or the Guarantors (to the extent described in the Corporate Guaranty) in which the Credit Institution has been granted a collateral assignment, lien or security interest pursuant to the terms and provisions of the Financing Documents. "Commitment Letter" shall mean the letter dated October 26, 1998, whereby the Credit Institution agreed to issue the Letter of Credit for the benefit of the Company, and the Company accepted such commitment. "Construction Contract" shall mean that standard form of agreement dated as of May 27, 1998 between the Company and Butters Construction & Development, Inc. ("BUTTERS"), as contractor, where the basis of payment is the cost of work plus a fee without a guaranteed maximum price, as the same may be amended, modified or supplemented from time to time in accordance with its terms. "Controlled Group" shall mean (i) the controlled group of corporations as defined in Section 1563 of the United States Internal Revenue Code of 1986, as amended, or (ii) the group of trades or businesses under common control as defined in Section 414 of the United States Internal Revenue Code of 1986, as amended, of which the Company is a part or may become a part. "Corporate Guaranty" shall mean that certain Guaranty Agreement of the Guarantors dated the Date of Issuance in favor of the Credit Institution, as the same may be amended, modified or supplemented from time to time in accordance with its terms. "Cost Certificate" shall have the meaning given in Section 2.03(l) hereof. "Cost of the Project" means the costs of the Project as described in Section 4.07 of the Indenture. 3 7 "Date of Issuance" shall mean the date on which the Letter of Credit is issued and becomes effective hereunder. "Default" shall mean any condition or event which with the giving of notice or lapse of time or both, would constitute an Event of Default hereunder. "Environmental Claim" shall mean any accusation, allegation, notice of violation, claim, demand, abatement order, or other order or direction (conditional or otherwise) by any Governmental Authority or any Person for any damage, including, without limitation, personal injury (including sickness, disease, or death), tangible or intangible property damage, contribution, indemnity, direct or consequential damages, damage to the environment, nuisance, pollution, contamination, or other adverse effects on the environment, or for fines, penalties, or restrictions, in each case relating to, resulting from, or in connection with Hazardous Materials and relating to the Company, or any property leased, owned, operated, or used by the Company. "Environmental Laws" shall mean any and all federal, state local, or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning, any Hazardous Materials or environmental protection or health and safety, as now or at any time hereafter be in effect, including without limitation: the Clean Water Act, also known as the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. Section 1251 ET SEQ.; the Clean Air Act ("CAA"), 42 U.S.C. Section 7401 ET SEQ.; the Federal Insecticide, Fungicide, and Rodenticide Act 66 ("FIFRA"), 7 U.S.C. Section 136 ET SEQ.; the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C. Section 1201 ET SEQ.; the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 ET SEQ.; the Superfund Amendment and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100 Stat. 1613; the Emergency Planning and Community Right to Know Act ("EPCRKA"), 42 U.S.C. Section 11001 ET SEQ.; the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 ET SEQ.; and the Occupational Safety and Health Act, as amended ("OSHA"), 29 U.S.C. Section 655 and Section 657; together, in each case, with any amendments and the regulations adopted and publications promulgated thereunder and all substitutions thereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, including any rules and regulations promulgated thereunder. "Event of Default" shall mean any of the Events of Default as defined in Section 5.01 hereof. "Financing Documents" shall mean the Notes, the Letter of Credit, this Agreement, the Loan Agreement, the Construction Contract, the Mortgage, the Corporate Guaranty, UCC financing statements, the Assignment Agreement, the Indenture, and any and all other agreements or other instruments now or hereafter executed and delivered by the Company, the Guarantors or any other person in connection with, or as security for the payment or performance of this Agreement or the Corporate Guaranty. 4 8 "Generally Accepted Accounting Principles" or "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants (or other governmental or regulatory agency, board, institute or body having jurisdiction on thereover), and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person or entity as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination. "Governmental Authority" shall mean any government (or any political subdivision or jurisdiction thereof), court, bureau, agency, department or other governmental subdivision having jurisdiction over the Company, any Affiliate or Subsidiary of the Company or any of their respective businesses, operations or properties. "Guarantors" shall mean collectively, Kellstrom Commercial Aircraft, Inc., a Delaware corporation, Aero Support Holdings, Inc., a Florida corporation, Integrated Technology Holdings Corp., a Delaware corporation, Aerocar Aviation Corp., a Florida corporation, Aerocar Parts, Inc., a Florida corporation, Solair, Inc., a Florida corporation, and any other Subsidiaries of the Company, either presently existing or acquired hereafter (with the exception of Kellstrom International Sales Corporation, so long as such corporation is a foreign sales corporation). "Guaranty" of any Person shall mean any contract, agreement or understanding of the Person pursuant to which the Person guarantees, or in effect guarantees, any Indebtedness of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, and including without limitation agreements: (i) to purchase the Indebtedness or the collateral for the Indebtedness, (ii) to provide funds (a) for the purchase or payment of the Indebtedness or (b) to maintain net worth or working capital or other balance sheet conditions, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of the Indebtedness of the ability of the Primary Obligor to make payment of the Indebtedness, and (iv) otherwise to assure the holder of the Indebtedness against loss. "Hazardous Materials" shall mean any flammable materials, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or similar materials defined as such in any Environmental Laws. "Hazardous Substance Agreement" shall mean that certain Hazardous Substance Certificate and Indemnification Agreement of even date herewith by the Company, the Guarantors, Kellstrom International Sales Corporation, a U.S. Virgin Islands corporation and the Bank. "Indebtedness" of any Person shall mean all indebtedness, obligations and liabilities of the Person, including without limitation: (i) all "liabilities" which would be reflected on a balance sheet of the Person prepared in accordance with GAAP, (ii) all obligations of the Person under any Guaranty, (iii) all obligations of the Person under any capital lease, (iv) all obligations, indebtedness and liabilities secured by any Lien or any security interest on any property or assets of the Person, and (v) all redeemable preferred stock of the Person valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends. 5 9 "Indenture" shall mean the Indenture of Trust, dated as of February 1, 1999, between the Company and the Trustee, as amended or supplemented from time to time in accordance with its terms. "Interest Requirement" shall mean an amount equal to the total interest accruing on outstanding Notes for a period of 35 days, calculated at an assumed rate equal to twelve percent (12%) per annum over a year of 365 or 366 days, as applicable. "Letter of Credit" shall mean the Letter of Credit issued by the Credit Institution to the Trustee pursuant to this Agreement in the form of Exhibit A attached hereto. "Lien" shall mean any lien, mortgage, security interest, tax lien, pledge, encumbrance, conditional sale or title retention arrangement, or any other interest in property designed to secure the repayment of Indebtedness, whether arising by agreement or under any statute or law or otherwise. "Loan Agreement" shall mean that certain $250,000,000.00 Amended and Restated Loan and Security Agreement, dated as of December 14, 1998, among the Company and certain subsidiaries named therein, the financial institutions party thereto from time to time, the Credit Institution for itself and as agent, and NationsBanc Montgomery Securities LLC, as the same may be amended, modified or supplemented from time to time in accordance with its terms. "Material Adverse Effect" shall mean any material adverse effect upon (a) the business, assets, properties, liabilities, condition (financial or otherwise), results of operations or business prospects of the Borrower and its Subsidiaries taken as a whole or the Guarantors, or other Person, (b) the value of the Collateral, (c) the Security Interest or the priority of the Security Interest, (d) the respective ability of the Borrower, Guarantors or other Person to perform any obligations under this Agreement or any other Note Documents or Financing Documents to which it is a party, (e) the legality, validity, binding effect, enforceability or admissibility into evidence of any Financing or Note Document or the ability of the Credit Institution to enforce any rights or remedies under or in connection with any Loan Document, or (f) the ability of the Borrower and its subsidiaries taken as a whole to conduct its business as currently conducted or contemplated. "Maximum Rate" shall mean the lesser of (a) the highest interest rate which may be borne by the Notes under Florida law or (b) twelve percent (12%) per year. "Mortgage" shall mean that certain Mortgage, Assignment of Rents and Security Agreement dated as of February 1, 1999, from the Company to the Credit Institution, pursuant to which the Company has granted a first lien mortgage in the Project and Project Site to secure the Company=s Obligations under this Agreement, as the same may be amended, modified or supplemented from time to time in accordance with its terms. "Note Documents" shall mean collectively, the Placement Agreement, the Remarketing Agreement, and the Placement Memorandum, as the same may be amended, modified or supplemented from time to time in accordance with their respective terms. 6 10 "Notes" shall mean the Taxable Variable Demand Notes, Series 1999, in the aggregate principal amount of Six Million Six Hundred Seventy Thousand Dollars ($6,670,000.00) to be issued pursuant to the terms and conditions of the Indenture. "Notes Closing" shall mean the authentication and delivery of the Notes pursuant to the Indenture. "Obligations" shall mean all loans and all other advances, debts, liabilities, obligations, covenants and duties owing, arising, due or payable from the Company to the Credit Institution of any kind or nature, present or future, whether or not evidenced by any note, guaranty, swap agreement, hedge agreement or other instrument, whether arising under this Agreement or any of the other Financing Documents or Note Documents or otherwise, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorney's fees, and any other sums chargeable to the Company under any of the Note Documents or Financing Documents. "PBGC" shall mean the Pension Benefit Guaranty Corporation, and any successor to all or any of the Pension Benefit Guaranty Corporation's functions under ERISA. "Permitted Encumbrances" shall have the meaning as provided in the Mortgage. "Permitted Liens" shall mean (i) Liens granted to the Credit Institution to secure the Obligations, (ii) pledges or deposits made to secure payment of worker's compensation insurance (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions or social security programs or under payment or performance bonds or as a condition to the transaction of any business, (iii) Liens imposed by mandatory provisions of law such as for materialmen's, mechanics', warehousemen's and other like Liens arising in the ordinary course of business, securing Indebtedness whose payment is not yet due or is due but is being contested in good faith by appropriate proceedings and as to which adequate reserves have been provided, (iv) Liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property (excluding any Lien imposed pursuant to any of the provisions of ERISA), if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate cash reserves have been provided, (v) Liens arising from good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations, deposits to secure (or in lieu of) surety, stay, appeal or customs bonds, and deposits to secure the payment of taxes, assessments, customs duties or other similar charges in the ordinary course of business, (vi) purchase money security interests in after-acquired personal property, which property has an aggregate value (when combined with all other Indebtedness of the Company) not exceeding $5,000,000.00, (vii) the Liens in favor of the Credit Institution under the Financing Documents, (viii) Permitted Encumbrances and other Liens on the Project Site in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property or minor defects or irregularities in the title to any real property, which do not materially detract from the value of such property or impair the use thereof in the business of the Company or its Subsidiaries, (ix) existing 7 11 liens as of the date of this Agreement that have been disclosed to the Credit Institution through the Loan Agreement, financial statements or otherwise, (x) Liens on money deposited by residents or others with the Company as security for or as prepayment of rent, and (xi) Liens on property received by the Company through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of property or the income thereon. "Person" shall mean an individual, partnership, corporation, limited liability company, trust, unincorporated organization, association, joint venture or a government or agency or political subdivision or instrumentality thereof. "Placement Agent" means NationsBank, N.A., the placement agent under the Placement Agreement with respect to the initial placement of the Notes. "Placement Agreement" shall mean the Placement Agreement, dated as of February 1, 1999, by and between the Company and the Placement Agent. "Placement Memorandum" shall mean the Private Placement Memorandum dated February 16, 1999, relating to the sale of the Notes by the Placement Agent and the Remarketing Agent. "Plan" shall mean an employee benefit plan or other plan maintained for employees of the Company covered by Title IV of ERISA, or subject to the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. "Prime Rate" shall mean that fluctuating rate of interest per annum established from time to time by the Credit Institution as its Prime Rate. The Company acknowledges and agrees that the Prime Rate is a reference used in determining interest rates on certain loans by the Credit Institution and is not intended to be the best or lowest rate of interest charged on any extension of credit to any customer. The rate of interest charged on amounts payable under the Financing Documents shall not exceed applicable legal limits. "Project" shall mean (i) the financing, in whole or in part, of the reimbursement to the Company cost of the acquisition, construction and equipping of a headquarters facility for the Company in Sunrise, Florida and (ii) the payment of the costs of issuance of the Notes and other related costs. "Project Manager" shall mean the person appointed by Butters and approved by the Company to manage the building of the Project Site. "Project Site" shall mean the real and personal property and all improvements subject to the Mortgage and described on Schedule A to the Mortgage. "Reimbursement Account" shall mean the Reimbursement Account established pursuant to Section 3.01 hereof. 8 12 "Release" shall mean any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal dumping, leaching, or migration of Hazardous Materials into the indoor or outdoor environment (including, without limitation, the abandonment or disposal of any barrels, containers, or other closed receptacles containing any Hazardous Materials), or into or out of any property owned, leased, operated, or used by the Company or any Subsidiaries (if any), including the movement of any Hazardous Material through the air, soil, surface water, groundwater, or property. "Remarketing Agent" shall mean, initially, NationsBank, N.A., and any successor agent or agents appointed from time to time pursuant to the terms of the Indenture. "Remarketing Agreement" means initially the Remarketing and Interest Services Agreement between the Remarketing Agent and the Company, dated as of February 1, 1999, and any and all modifications, alterations, amendments and supplements thereto and (b) any agreement between the Company and any successor remarketing agent appointed pursuant to the terms of the Indenture. "Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA. "Stated Expiration Date" shall have the same meaning as provided in the Letter of Credit. "Stated Amount" shall mean the face amount of the Letter of Credit, initially, up to $6,746,751.00 representing a $6,670,000.00 principal portion and up to $76,751.00 interest portion to cover 35 days' interest on the Notes at the Maximum Rate, as it may be reduced and reinstated from time to time in accordance with the terms of the Letter of Credit. "Subsidiary" shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not, at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any thereof, such stock is at such time owned by such Person and/or one or more Subsidiaries of such Person) and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time. Unless the context indicates otherwise, all references herein to Subsidiaries are references to subsidiaries of the Company. "Termination Date" shall mean the last day a drawing is available under the Letter of Credit. "UCC" shall mean the Uniform Commercial Code in effect in jurisdictions where assets of the Company or the Guarantors are located or subject to jurisdiction at any time during the term hereof. 9 13 ARTICLE II REPRESENTATIONS BY COMPANY; CONDITIONS TO ISSUANCE OF LETTER OF CREDIT Section II.1 REPRESENTATIONS BY COMPANY. The Company makes the following representations: (a) All representations and warranties made by the Company in the Financing Documents and the Note Documents are incorporated herein by reference and shall be deemed thereby to have been made and reaffirmed by the Company for the benefit of the Credit Institution as if they were fully set forth herein. (b) Other than Affiliates of the Company, there is no person, firm, partnership, limited liability company, joint venture or corporation that controls, is controlled by or is under common control with the Company. (c) The Company owns fee simple title to the Project Site and is in sole possession of the Project Site. The Mortgage will be a first lien against the Project Site, and there are and will be no encumbrances against the Project Site other than those listed in Schedule B-II of the Attorneys' Title Insurance Fund title commitment #C-2698338, dated February 22, 1999. (d) The Company has the power to own its property and to carry on its business as now being conducted and is in good standing in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. (e) The Company has full corporate power and authority to enter into and execute and deliver each of the Financing Documents and the Note Documents to which it is a party and to incur and perform the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action. No consent or approval of members or of any other person or Governmental Authority or regulatory body is required as a condition to the validity or enforceability of any of such Financing Documents or Note Documents, or if required the same has been duly obtained. The Company makes no representations as to compliance with federal securities laws or state blue sky laws with respect to the Notes. (f) The contemplated use of the Project is and will continue to be in conformity with all applicable governmental laws, ordinances, rules and regulations (including, but not limited to, all Environmental Laws, the Americans with Disabilities Act, health, safety and zoning laws, ordinances, rules and regulations), and all variances and exceptions granted with respect thereto; all governmental approvals necessary to acquire, construct and equip the Project have been obtained when needed; all site plans have been approved and all construction plans have been approved by the appropriate Governmental Authority and no building moratoria are in effect relating to the Project Site; all building permits have been issued by the appropriate Governmental Authority with respect to the construction of the Project when needed; no appeal has been filed with respect to any applicable zoning laws, ordinances, rules or regulations or with respect to the issuance of such 10 14 building permits; and there is no existing, threatened or pending action, suit, proceeding, inquiry or investigation wherein an unfavorable decision, ruling or finding would in any way have an adverse effect on the Project, or its existing or intended use, or the repayment of the Notes or the Obligations. (g) The Company is in compliance with all applicable governmental laws and regulations applicable to the conduct of its business and the operation of the Project, the noncompliance with which would have a Material Adverse Effect. (h) All of the Financing Documents and Note Documents to which the Company is a party have been duly authorized, executed and delivered by the Company, constitute valid and legally binding obligations of the Company and are fully enforceable against the Company in accordance with their respective terms. (i) The execution, delivery and performance by the Company of the Financing Documents and Note Documents will not: conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or bylaws of the Company or any of its Affiliates; result in a breach of any governmental requirement applicable to the Company or any of its Affiliates; conflict with, result in a breach of or require consent under any agreement, instrument or indenture to which the Company or any of its Affiliates is a party, or by which any of them or any of their property is bound, or constitute (with notice, lapse of time, or both) a default thereunder; result in the creation or imposition of any lien (other than the Lien created by or under the Financing Documents) upon any of the property or assets of the Company or any of its Affiliates; or result in or require the acceleration of any Indebtedness of the Company or any of its Affiliates. (j) Except as described in the Loan Agreement, there are no actions, claims, suits or proceedings pending, or, to the knowledge of the Company, threatened against or directly involving the Company, at law or in equity or before or by any Governmental Authority. The Company has received no notice that it is in default with respect to any governmental requirement or any judgment, order, writ, injunction, decree, rule, award or regulation of any Governmental Authority. (k) The Company is not in default under any contract, agreement, commitment or other instrument which default would have a Material Adverse Effect on the Company, or in the performance of any covenants or conditions respecting any of its Indebtedness. No holder of any Indebtedness of the Company has given notice of any asserted default thereunder. No liquidation or dissolution of the Company and no receivership, insolvency, bankruptcy, reorganization or other similar proceeding relative to the Company or its properties is pending or, to the knowledge of the Company, is contemplated or threatened against it. (l) All financial and other information heretofore furnished to the Credit Institution concerning the Company and the Guarantors is complete and correct and fairly presents the financial position of the Company and the Guarantors. There are no liabilities, direct or indirect, fixed or contingent, of the Company and the Guarantors except as reflected therein. There has been no Material Adverse Change in the financial condition or operations of the Company and the Guarantors since the most recent date as of which such financial information has been furnished to 11 15 the Credit Institution (and to the Company's knowledge no such Material Adverse Change is pending or threatened). Neither the Company nor any of the Guarantors have guaranteed the obligations of, or made any investment in or advances to, any person except as disclosed in such financial and other information provided to the Credit Institution. Each of the Company and the Guarantors has good and marketable title to all of its and their properties and assets, and all of such properties and assets are free and clear of encumbrances, except as reflected in such financial information. (m) Neither the Company nor any of the Guarantors is in default in the payment of the principal of or interest on any of its or their Indebtedness for borrowed money, nor is the Company or any of the Guarantors in default under any provision of any instrument under or subject to which any Indebtedness for borrowed money has been incurred, and no event has occurred and is continuing under the provisions of any such instrument that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. (n) No information (financial or otherwise) furnished by or on behalf of the Company in connection with the negotiation of the issuance of the Letter of Credit or the issuance of the Notes contains any untrue statement of a material fact or omits a material fact necessary to make such information not misleading. There is no fact that the Company has not disclosed to the Credit Institution that materially adversely affects or so far as the Company can now foresee based on facts known to it, and based on opinions of the Company's directors, officers, employees, agents and advisors concerning such facts, will materially adversely affect the properties, business, prospects, profits or condition (financial or otherwise) of the Company and the Guarantors, the ability of the Company to acquire, construct, equip and operate the Project, or the ability of the Company and the Guarantors to perform their respective obligations under the Financing Documents. (o) The Company is not a party to, or bound by, any contract, the performance by Company under which would have a Material Adverse Effect. (p) Every draw under the Letter of Credit shall constitute, without the necessity of specifically containing a written statement, a representation and warranty by the Company that no Default or Event of Default exists and that all representations and warranties by the Company contained in this Agreement, the Note Documents and the other Financing Documents are true and correct as of the date the advance is to be made. (q) The proceeds of the Notes will be used by the Company only for the purposes set forth herein and in the other Financing Documents and Note Documents. The Company's uses of the proceeds are, and continue to be, legal and proper corporate uses, and the uses are and will be consistent with all applicable laws and regulations, as in effect from time to time. None of the proceeds of the Notes will be used for the purposes of purchasing or carrying any "margin stock" as defined in Regulation U, Regulation X, or Regulation G of the Code of Federal Regulations, Parts 221, 224, and 207, respectively, or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry "margin stock," or for any other purpose which might cause this transaction to be deemed a "purpose credit" within the meaning given in Regulation U, Regulation X or Regulation G. The Company is not engaged in the business of extending credit 12 16 for the purpose of purchasing or carrying margin stocks. The Company, or any Person acting on behalf of the Company, has not taken and will not take any action which might cause any violation of Regulation U, Regulation X, or Regulation G or any other regulations of the Board of Governors of the Federal Reserve System or any violation of Section 8 of the Securities Exchange Act of 1934 or any rule or regulation thereunder as now or hereafter in effect. (r) All tax returns required to be filed by the Company in any jurisdiction have been filed and all taxes, assessments and other governmental charges on the Company or on any of its respective properties, income or franchises were paid timely, except for taxes contested in good faith by appropriate legal proceedings for which reserves have been established in an amount determined in accordance with GAAP. Other than current real estate taxes and special assessments, there is no proposed tax assessment against the Company, and there is no basis for any such assessment. No extension of time for assessment or payment of any tax by the Company is in effect. The tax returns of the Company have not been audited. (s) The Company has not incurred any accumulated unfunded deficiency within the meaning of ERISA, or incurred any liability to the PBGC (or any successor thereto) established under ERISA in connection with any Plan established or maintained by the Company or any other member of a Controlled Group, and no Reportable Event (as defined in ERISA) has occurred or is occurring. (t) The Company is not, and no Person having "control" (as that term is defined in U.S.C. Section 376(b)(5) or in regulations promulgated pursuant thereto) of such Person is, an "executive officer," "director," or "principal shareholder" (as those terms are defined in U.S.C. Section 375(b) or in regulations promulgated pursuant thereto) of the Credit Institution, or of any bank at which the Credit Institution maintains a "correspondent account" (as such term is defined in such statute or regulations), or of any bank which maintains a correspondent account with the Credit Institution. (u) The Company has complied with, and will continue to comply with, the provisions of the Fair Labor Standards Act of 1938, 29 U.S.C. Section 200, ET SEQ., as amended from time to time (the "FLSA"), including specifically, but without limitation, 29 U.S.C. Section 215(a). This representation and warranty, and each reconfirmation hereof, shall constitute written assurance from the Company, given as of the date hereof and as of the date of each reconfirmation, that the Company has complied with the requirements of the FLSA. (v) To the best knowledge of the Company and except as disclosed in writing to the Credit Institution, the operations of the Company have been and are conducted in a manner such that said operations have not created any level of regulatory concern with Environmental Laws or harm or potential harm to third parties from material violation of any Environmental Laws. The Company has obtained all material governmental authorizations under Environmental Laws necessary to its operations, and all such governmental authorizations are in good standing, and the Company is in compliance with all material terms and conditions of such governmental authorizations. 13 17 (w) The Company has not received: (i) any notice or claim to the effect that it is or may be liable to any person as a result of or in connection with any Hazardous Materials, or (ii) any letter or request for information under Section 104 of CERCLA or comparable state laws, and, to the best of the Company's knowledge, none of the operations of the Company have been subject to any federal or state investigation relating to or in connection with any Hazardous Materials at any location. (x) None of the operations of the Company is or will be subject to any judicial or administrative proceeding alleging the violation of or liability under any Environmental Law which, if adversely determined, could have a Material Adverse Effect on the Company. The Company and its facilities or operations are not subject to any outstanding written order or agreement with any Governmental Authority or private party relating to any Environmental Laws. (y) The Company has no contingent liability in connection with any Release of any Hazardous Materials in a reportable quantity by the Company. (z) Except as previously disclosed in writing to the Credit Institution, neither the Company, nor to the best knowledge of the Company, any predecessor of the Company, has filed any notice under any Environmental Laws indicating past or present treatment or Release of Hazardous Materials in a reportable quantity at any property owned, leased, operated, or used by the Company, and none of the Company's operations involves the generation, transportation, treatment, storage, or disposal of Hazardous Materials in a manner which violates any Environmental Laws. (aa) Except as previously disclosed in writing to the Credit Institution, to the best of the Company's knowledge, no Hazardous Materials exist on, under, or about any property owned, leased, operated, or used by the Company in a manner that has a reasonable possibility of giving rise to any Environmental Claim that could have a Material Adverse Effect. The Company has not filed any notice or report of the Release of any Hazardous Materials that has a reasonable possibility of giving rise to any Environmental Claim that could have a Material Adverse Effect. Except as disclosed in writing to the Credit Institution, neither the Company nor, to the best knowledge of the Company, any of its predecessors entitled to the real property encumbered by the Mortgage has disposed of any Hazardous Materials in a manner that has a reasonable possibility of giving rise to an Environmental Claim that could have a Material Adverse Effect. (bb) Except as previously disclosed in writing to the Credit Institution, to the best of the Company's knowledge no underground storage tanks or subsurface impoundments are on or at any property owned, leased, operated, or used by the Company. To the best of the Company's knowledge, and after reasonable inquiry, no Lien in favor of any Person relating to or in connection with any Environmental Claim has been filed or has been attached to any property owned, leased, operated, or used by the Company. (cc) The Company is not an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled by such a company. 14 18 (dd) The Company is solvent, and, after consummation of this Agreement, the other Financing Documents and the Note Documents and the contemplated transactions hereunder and thereunder, the Company will be solvent. (ee) All of the representations and warranties by the Company shall survive delivery of this Agreement, the other Financing Documents and the Note Documents. Any investigation at any time made by or on behalf of the Credit Institution will not diminish the Credit Institution's right to rely on the representations and warranties set forth herein and therein. (ff) The Construction Contract is in full force and effect. No event has occurred and is continuing under the provisions of the Construction Contract that with lapse of time or giving of notice, or both, would constitute an Event of Default thereunder. (gg) The Company (a) has initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Company or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (b) will by March 31, 1999 have developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (c) will implement that plan in accordance with that timetable. Based on the foregoing, the Company believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"). Section II.2 LETTER OF CREDIT COMMITMENT. (a) Subject to the terms and conditions set forth in this Agreement, the Credit Institution agrees to issue its Letter of Credit, in the form of Exhibit A hereto, in the original Stated Amount. (b) The Letter of Credit will expire three (3) years from the date the Notes are issued (unless 120 days prior to such expiration date the Credit Institution notifies the Company (at the Credit Institution's sole discretion) that the Letter of Credit will be renewed for an additional one-year period), unless earlier terminated as provided in the Letter of Credit. If the Company desires to request that the Credit Institution extend the expiration date of the Letter of Credit beyond February 22, 2002, or beyond any Stated Expiration Date to which the Letter of Credit has been previously extended, the Company must send a written request for such extension to the Credit Institution on or before ninety (90) days prior to the then Stated Expiration Date of the Letter of Credit. The Credit Institution agrees that, if it receives such a written request for an extension of the Letter of Credit from the Company on or before ninety (90) days prior to the then Stated Expiration Date of the Letter of Credit, the Credit Institution will, subject to the next succeeding sentence, consider such request in good faith and notify the Company in writing, on or before forty-five (45) days prior to the then Stated Expiration Date of the Letter of Credit, whether the Credit Institution 15 19 will or will not agree to the requested extension. The Company acknowledges and agrees that the Credit Institution shall have no obligation to extend the Letter of Credit beyond February 22, 2002, and that the decision whether to agree to any requested extension of the Stated Expiration Date of the Letter of Credit shall be made by the Credit Institution in its sole discretion. Section II.3 CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT. It is a condition precedent to the obligation of the Credit Institution to issue the Letter of Credit that it shall have received each of the following documents or other items in form and substance satisfactory to the Credit Institution, and, in the case of appraisals, environmental reports, insurance and architectural certifications and the like, prepared by professionals satisfactory to the Credit Institution; or if any such item shall be waived by the Credit Institution as a condition to the issuance of the Letter of Credit such item shall, at the option of the Credit Institution, be a condition to the Credit Institution's approval of any requisition of moneys from the Construction Fund to pay any Cost of the Project under Section 4.07 of the Indenture: (a) Certified copies of the articles of incorporation, bylaws and resolutions of, and incumbency certificates for, the Company and its officers, accompanied by an opinion of Akerman, Senterfitt & Eidson, P.A., counsel to the Company, in form and substance reasonably satisfactory to the Credit Institution, including but not limited to an opinion to the effect that the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, the Notes are validly issued pursuant to the terms of the Indenture, and that the Financing Documents, the Note Documents and any other documents to which the Company is a party and relating to the financing of the Project, have been duly authorized, executed and delivered by the Company and constitute legal, valid and binding obligations of the Company enforceable in accordance with their terms except as enforceability may be limited by public policy, bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles relating to or limiting creditors' rights generally and except as rights of indemnification relating to liability under federal and state securities laws may be limited by applicable law; (b) Copies of the fully executed Financing Documents and Note Documents; (c) An ALTA lender's title insurance policy (the "TITLE POLICY") on the Project and Project Site from Attorney's Title Insurance Fund, Inc. with minimum coverage in an amount not less than the original Stated Amount of the Letter of Credit. The Title Policy shall insure that the Mortgage in favor of the Credit Institution is a first lien on the Project and Project Site subject only to such exceptions as are Permitted Encumbrances and shall contain such endorsements and affirmative coverage as shall be requested by the Credit Institution; (d) Evidence that the Mortgage has been recorded in the office of land records for real property located in Broward County, Florida; (e) An opinion of Mays & Valentine, counsel to the Remarketing Agent, in form and substance satisfactory to the Credit Institution; 16 20 (f) A current boundary survey of the Project and the Project Site on which the Project is to be constructed certified to the Credit Institution using the Credit Institution's certification language and otherwise acceptable to the Credit Institution, which survey shall be prepared in accordance with the minimum technical standards of Florida and certified by a certified Florida land surveyor, shall indicate the absence of any encroachments and shall designate, without limitation, (i) the boundaries of the Project Site, (ii) the location of the buildings and the other improvements constituting the Project to be constructed thereon, (iii) the location of all items shown as exceptions to title on the Title Policy, including, without limitation, all easements of record affecting the Project or the Project Site, specifying the holder of each such easement and the pertinent recordation information, (iv) any and all building restrictions and/or setback lines, (v) all easements for ingress and egress across adjoining properties, and (vi) the location of all utilities, whether above or below ground; (g) An "as built" and "stabilized" appraisal of the Project by an appraiser engaged by the Credit Institution in form and substance satisfactory to the Credit Institution based on an internal review by the Credit Institution of the data, assumptions and conclusions found in the appraisal and which satisfies all applicable regulations of bank regulatory agencies having jurisdiction over the Credit Institution; (h) An environmental engineer's phase I and II audit report, as deemed necessary by the Credit Institution, addressing environmental matters and reflecting the degree to which the Project Site is free of Hazardous Materials and toxic substances and otherwise complying with the requirements of the Commitment Letter; (i) The Corporate Guaranty fully executed and in original form has been delivered to the Credit Institution; (j) Opinions of counsel, acceptable to the Credit Institution, to the effect that each of the Guaranties is the legal, valid and binding agreement of the respective Guarantor, enforceable in accordance with its terms and with respect to the Guarantors, such entities have the ability to borrow money for and guarantee debt of, the Company. (k) Evidence satisfactory to the Credit Institution that all utilities (including drainage both onsite and offsite) necessary for the occupancy, use and operation of the Project are available to and adequate for the Project, that the Project is or can be connected thereto without further governmental approvals and that all requisite tap-on and connection fees have been or will be paid. (l) A detailed cost-breakdown of the Project showing the intended use of the proceeds of the Letter of Credit (cost-breakdown should include all direct and indirect cost items associated with the construction and financing of the Project, including but not limited to the amounts allocated to pay the costs of issuing the Notes and the amount allocated to pay capitalized interest during construction) in form and substance acceptable to the Credit Institution (the "COST CERTIFICATE"). 17 21 (m) Evidence satisfactory to the Credit Institution that the Project complies and will comply with all applicable zoning and subdivision ordinances, building codes and other governmental laws and regulations. (n) A soil engineer's report relating to the Project acceptable to the Credit Institution. (o) Subject to Section 3.02(b) hereof, payment to the Credit Institution in cash of all fees due the Credit Institution including all reasonable attorneys' fees and expenses which are due on the Date of Issuance under Section 3.02 hereunder; and (p) Such other documents as may have been reasonably requested by the Credit Institution. Section 2.04 PROVISIONS REGARDING APPROVAL OF REQUISITIONS AND DISBURSEMENTS FROM CONSTRUCTION FUND. (a) The Company acknowledges and agrees that it shall have no right to receive any disbursement from the Construction Fund unless it has submitted a requisition to the Credit Institution in substantially the form attached to the Indenture as Exhibit C relating to that disbursement and such requisition has been approved by the Credit Institution as evidenced by its execution thereof (the "REQUISITION"). The Company further agrees that it will not submit any Requisition to the Trustee unless such Requisition has first been submitted to the Credit Institution and approved by the Credit Institution. Upon approval of the Requisition by the Credit Institution (which approval shall be subject to fulfillment of the conditions listed herein), the Credit Institution shall submit the Requisition directly to the Trustee on behalf of the Company. (b) Each Requisition shall be submitted by the Company to the Credit Institution at least ten (10) Business Days prior to the date on which its approval is desired. The Credit Institution shall not be required to approve a Requisition more often than once each calendar month. (c) Prior to approval by the Credit Institution of the first requisition submitted by the Company, the following conditions precedent must be satisfied unless waived by the Credit Institution in its sole and absolute discretion: (i) Evidence satisfactory to the Credit Institution that the Mortgage has been recorded in Broward County, Florida, and that a title commitment has been issued in a form satisfactory to the Credit Institution; (ii) Evidence satisfactory to the Credit Institution that all insurance required by the terms of the Commitment Letter and/or Mortgage to be in place at the time of the first Requisition is in effect. The Credit Institution reserves the right to require certifications regarding other insurance required by the terms of the Commitment Letter and/or Mortgage as a condition of approval of subsequent Requisitions. 18 22 (iii) The Credit Institution shall have received a copy of the site plan of the Project which site plan shall have been approved by all governmental agencies having jurisdiction over the Project, along with a complete and final set of working plans and specifications which have been approved by the Credit Institution, initialed for identification by the Company, the Project Manager, and the architect for the Project and assigned to the Credit Institution in form and substance satisfactory to the Credit Institution. Any and all subsequent changes to the plans and specifications must be approved by the Credit Institution (which approval shall not be unreasonably withheld) and any governmental agencies having jurisdiction over the Project whose approval may be required by applicable federal, state or local laws, rules or regulations. Unless waived by the Credit Institution, all such plans and specifications shall have been approved, prior to approval of the first Requisition, by all necessary governmental agencies. (iv) The Credit Institution shall have received copies of the Company's contract with the Project Manager and the Company's contract with the architect for the Project. The Project Manager, the architect for the Project and the terms and conditions of their respective contracts must be acceptable to the Credit Institution. The Construction Contract (and any specified subcontracts) and the architect's contract shall be assigned to the Credit Institution pursuant to the terms of the Assignment Agreement, as additional security for the Company's obligations under this Agreement with the concurrence of the Project Manager (and subcontractors) and the architect to continue to perform under the contracts for the Credit Institution or its assigns if the Company should default under the Financing Documents, the Construction Contract (or subcontract) or the architect's contract, provided that the Project Manager (and subcontractors) and the architect continue to be paid in accordance with their respective contracts. (v) The architect for the Project shall certify that the hard costs set forth in the Cost Certificate and all updates thereof are fair and reasonable and that the Cost Certificate and all updates thereof include all items necessary to complete the Project fully in accordance with the final approved plans and specifications. The Company shall also provide the Credit Institution with copies of all executed contracts and material subcontracts and a final construction budget and draw a schedule prepared by the Project Manager and accepted by the Company. For the purpose of the preceding sentence, the term "material subcontracts" shall mean any subcontract wherein the Company is obligated to pay more than $100,000.00 thereunder. (d) The Credit Institution shall have no obligation to approve any Requisition unless, in connection with the Requisition, it has received (i) if requested by the Credit Institution, copies of all contracts, invoices, billings, paid receipts and other documents which relate to that portion of the construction of the Project for which the Requisition was submitted and support the amount of the Requisition, (ii) appropriate construction lien waivers from the general contractor and each subcontractor performing work or providing materials to be paid from the proceeds of the Requisition, (iii) contractor's requisition forms which have been appropriately signed by both the Project Manager and the architect and notarized, (iv) title updates in form and substance satisfactory to the Credit Institution, and (v) such other documents and agreements as may be requested by the Credit Institution. 19 23 (e) If in the reasonable determination of the Credit Institution the unpaid balance of the cost to complete the Project at any time exceeds the balance remaining in the Construction Fund, the Company shall, if requested by the Credit Institution as a condition to approval of further Requisitions, pay to the Trustee for deposit into the Construction Fund cash in an amount that together with the amount of other undisbursed funds in the Construction Fund equals the amount necessary to complete the Project. If the actual costs within one of the cost categories set forth in the Cost Certificate should be less than the allocated amount, at the Credit Institution=s sole option, the additional funds may be allocated to other categories as deemed appropriate by the Credit Institution. If the actual or anticipated costs within any of such cost categories shall exceed the allocated amount, further Requisitions for such costs need not be approved by the Credit Institution until any costs or anticipated costs in excess of such projected amounts shall be paid in cash by the Company to the Trustee for deposit into the Construction Fund. (f) The Credit Institution may withhold approval of any Requisition or any part of any Requisition requesting a disbursement from the Construction Fund, or terminate or limit payments by the Trustee from the Construction Fund, on account of (i) the occurrence of Default or an Event of Default hereunder, (ii) defective work with respect to the construction of the Project not remedied to the satisfaction of the Credit Institution after notice and opportunity to cure has been given, or work not performed in a good and workmanlike fashion in all material respects in accordance with the approved plans and specifications, (iii) claims or Liens filed by contractors, builders or materialmen in connection with the construction of the Project that are not bonded to the satisfaction of the Credit Institution within the time period prescribed by the Credit Institution, or evidence indicating, in the opinion of the Credit Institution, the probable filing of claims or Liens, (iv) failure or inability of the Project Manager to make payments to subcontractors or for materials or labor, (v) in the reasonable opinion of the Credit Institution, the Project cannot be fully completed and all bills paid from funds not yet disbursed from the Construction Fund or otherwise available to the Company, (vi) failure of the Company to repair any damage to the Project, or any part thereof, to the reasonable satisfaction of the Credit Institution within the time period prescribed by the Credit Institution, (vii) condemnation of, or the pendency of condemnation proceedings against the Project or any part thereof, or (viii) the filing of a petition in bankruptcy by or against the Company, or any Guarantor. To the extent that the above grounds are removed and no Default or Event of Default otherwise exists hereunder, the Credit Institution shall approve Requisitions for funds withheld solely because of such grounds. (g) No Requisition shall be approved unless all work done in the construction and equipping of the Project to the date of such Requisition has been done in a good and workmanlike manner, as determined by the Credit Institution. (h) Except as provided in the next succeeding sentence, no Requisition shall be approved for materials stored on the Project site unless approved by the Credit Institution in its sole discretion on a case by case basis. If materials are suitably stored on the Project site, insured and the cost thereof does not exceed 10% of the Cost Certificate, the Credit Institution agrees not to withhold approval of the Requisition submitted for payment of such materials if all other conditions precedent for approval of such Requisition are satisfied. 20 24 (i) No Requisition shall be approved if any of the conditions set forth in Section 2.03 hereof are no longer satisfied, as determined in the sole discretion of the Credit Institution. Section 2.05 FOUNDATION SURVEY. Within thirty (30) days after a request from the Credit Institution, the Company shall provide to the Credit Institution a foundation survey of the Project meeting the minimum technical standards of Florida prepared and certified by a licensed certified Florida land surveyor with an updated certification, showing all improvements then constructed thereon and all horizontal lengths of all sides and relation thereof by distances to (a) all boundary lines of the Project Site and service easements, (b) all established building lines, and (c) all street lines, certified to the Credit Institution using the Credit Institution=s certification language and otherwise acceptable to the Credit Institution. Section 2.06 COST-BREAKDOWN UPDATES. As requested by the Credit Institution from time to time as construction of the Project progresses, the Company shall provide to the Credit Institution periodic updates of the Cost Certificate for the Project. Section 2.07 CONSENT TO FINAL DISBURSEMENT FROM THE CONSTRUCTION FUND. The Credit Institution shall have no obligation to approve the Requisition requesting the final disbursement from the Construction Fund unless the Credit Institution shall have received each of the following documents in form and substance satisfactory to the Credit Institution: (a) An as-built survey of the Project meeting the minimum technical standards of Florida certified to the Credit Institution using the Credit Institution=s certification language and otherwise acceptable to the Credit Institution. (b) A copy of the certificate of occupancy for the Project issued by the appropriate Governmental Authority and a certificate of completion signed by the Company, the Project Manager, and the architect stating that the Project has been properly completed in accordance with the final approved plans and specifications and that the Project is operable and is otherwise in form and substance satisfactory to the Credit Institution. (c) Final construction lien waivers from the Project Manager and each subcontractor in form and substance satisfactory to the Credit Institution. (d) A final title update in form and substance satisfactory to the Credit Institution. (e) Such other documents, agreements and other items as are reasonably requested by the Credit Institution. Section 2.08 CAPITALIZED INTEREST. Notwithstanding the conditions for approval of a Requisition set forth in Section 2.04 hereof, the Company is authorized to allow the Trustee, without the necessity of a Requisition, to release moneys on deposit in the Construction Fund for reimbursement to the Credit Institution for payment under the Letter of Credit for an A Drawing, provided the amount released to reimburse the Credit Institution does not exceed the amounts set forth in the cost breakdown for capitalized interest provided to Credit Institution pursuant to Section 21 25 2.03(l) hereof, unless a greater amount is first approved by the Credit Institution. Notwithstanding the foregoing, such amounts will not be released without the written approval of the Credit Institution in the event the amounts remaining in the Construction Fund are insufficient to complete the Project. ARTICLE III REIMBURSEMENT OBLIGATION; OTHER PAYMENTS; LETTER OF CREDIT FEES Section 3.01 REIMBURSEMENT AND OTHER PAYMENTS. (a) The Company hereby agrees to establish an interest-bearing escrow account with the Credit Institution known as the Kellstrom Industries, Inc. Reimbursement Account (the "REIMBURSEMENT ACCOUNT") and to pay to the Credit Institution (and the Credit Institution is hereby authorized to deduct from any and all operating accounts maintained by the Company with the Credit Institution) the following amounts in the manner and at the times set forth below: (i) Any amounts in the appropriate subaccount of the Reimbursement Account on the date any payment is due under any subparagraph hereof shall be credited against the amount due. Any balance remaining in the Reimbursement Account after the Termination Date and the payment of all Obligations of the Company due the Credit Institution hereunder and under all of the other Financing Documents and the Note Documents shall be paid to the Company. (ii) On or before the first Business Day of each month, beginning in the first month prior to the earlier of the date amounts in the Construction Fund are no longer available, or amounts in the Construction Fund are no longer authorized to be used to reimburse the Credit Institution for an "A Drawing" pursuant to the provisions of the last sentence of Section 2.08, the Company shall deposit an amount equal to the Interest Requirement in the interest subaccount of the Reimbursement Account and the Company shall, on the first Business Day of each month thereafter, pay the Credit Institution for deposit in the interest subaccount of the Reimbursement Account an amount equal to the "A Drawing" made in the previous month, in order to reimburse the Credit Institution for the amounts it advanced under an "A Drawing", which amounts when paid by the Company shall be deposited in the interest subaccount of the Reimbursement Account. The amounts received by the Credit Institution pursuant to this subparagraph shall be deposited in the interest subaccount of the Reimbursement Account and shall be debited by the Credit Institution as necessary to reimburse the Credit Institution for an "A Drawing". (iii) Each January 15 (or the next succeeding Business Day) during the term of this Agreement, the Company shall pay the Credit Institution for deposit in the principal subaccount of the Reimbursement Account the amounts the Credit Institution will be required to advance under each "A Drawing" on the next succeeding interest payment date for the Notes in accordance with the provisions for optional redemptions set forth in Schedule 3.01(a) attached hereto, which amounts shall not be less than the amount shown on Schedule 3.01(a) for such interest payment date. The principal amounts received by the Credit Institution pursuant to this subparagraph shall be deposited in the principal subaccount of the Reimbursement Account and shall 22 26 be debited by the Credit Institution as necessary to reimburse the Credit Institution for an "A Drawing" in connection with an optional redemption of the Notes. In the event the Trustee credits the amount to be drawn under the Letter of Credit for any principal payment made otherwise than from a draw on the Letter of Credit, a corresponding credit shall be granted to the Company for the amounts due hereunder. The Company hereby covenants to give the Trustee written instructions by January 1 (or the next succeeding Business Day) to give notice of optional redemption of the Notes in the manner provided in the Indenture for the optional redemption of the Notes, in part, on each February 1 (or the next succeeding Business Day) as shown on Schedule 3.01(a) during the term of this Agreement. Subject to credits available to the Company described in the next preceding sentence, unless waived by the Credit Institution in a writing delivered to the Trustee prior to the date notice of optional redemption is given, the minimum amount of each optional redemption described above shall be the amount shown on Schedule 3.01(a). (b) In the event of a "B Drawing" under the Letter of Credit to purchase Notes for the account of the Company pursuant to optional or mandatory tenders under the provisions of the Indenture, the Company shall continue to make the payments required by subparagraph (a)(iii) above, and such payments shall be applied first to optionally redeem Notes purchased with the proceeds of such "B Drawing" and held for the account of the Company or the Credit Institution as of any optional redemption date provided for in the Indenture. The Company shall cause all amounts received from the remarketing of such Notes prior to any optional redemption date provided for in the Indenture to be paid to the Credit Institution to reimburse it for the amount of such "B Drawing." On the Termination Date, the Company shall pay the Credit Institution the aggregate amount of any and all "B Drawings" that have not been previously reimbursed, subject to the applicable interest charges described herein for such late reimbursement and subject to a credit for any amounts available therefor in the principal subaccount of the Reimbursement Account. (c) In the event of a "C Drawing" under the Letter of Credit to make payments due on the Notes as a result of any other redemption or acceleration of the Notes as provided in the Indenture, the Company shall by no later than 12:00 noon (Dallas, Texas time) on the day of such "C Drawing" pay to the Credit Institution an amount sufficient to reimburse the Credit Institution for such "C Drawing" to the extent funds are not available in the principal subaccount of the Reimbursement Account to cover such "C Drawing" reimbursement. (d) In the event of a "B Drawing" under the Letter of Credit pursuant to subparagraph (b) above, the Company shall pay the Credit Institution interest on the entire amount of such "B Drawing" at the Prime Rate from the date of the draw until such amount is reimbursed in full, which interest shall be payable in arrears on the first Business Day of each month, on the Termination Date or on an earlier date of reimbursement pursuant to Section 3.06 hereof; provided, however, that if an Event of Default occurs hereunder prior to the date the entire amount of such "B Drawing" has been reimbursed in full, then from and after the date of such Event of Default such unreimbursed amount shall bear interest at the lesser of the maximum rate permitted by law or eighteen percent (18%) per annum until it has been repaid in full. (e) In the event, if as a result of an "A Drawing," the Credit Institution pays any amount under the Letter of Credit in excess of the amount in the Reimbursement Account applied 23 27 to reimburse the Credit Institution therefor, the Company shall upon demand immediately reimburse the Credit Institution for such amount. Any amounts not so paid shall bear interest at the lesser of the maximum rate permitted by law or eighteen percent (18%) per annum, which interest shall be payable on demand and failure to so reimburse shall be an Event of Default hereunder. (f) In the event the payments required by subparagraph (c), or (e) above and (h) or (i) below are not made on the due date thereof, it shall be an Event of Default hereunder and the Company shall pay the Credit Institution interest on such outstanding amounts from the due date thereof until such amounts are paid in full at the lesser of the maximum rate permitted by law or eighteen percent (18%) per annum and failure to so reimburse shall be an Event of Default hereunder. (g) In the event the Credit Institution holds Notes pursuant to the provisions of Section 3.06 hereof as pledgee or for its own account pursuant to a "B Drawing" and it receives payment in full for such Notes and for all amounts due to it under this Agreement, the Credit Institution shall release such Notes to the Fiscal Agent as provided in the Indenture. (h) The Company shall pay the Credit Institution upon each transfer of the Letter of Credit in accordance with its terms to any new Trustee appointed under the Indenture, such amount (and interest on such amount at the Prime Rate) as shall at the time of any transfer then be the charge which the Credit Institution is customarily making for transfer of similar letters of credit. (i) The Company shall pay the Credit Institution on demand any and all reasonable charges and expenses, including reasonable legal fees (and interest on such amounts at the Prime Rate), which the Credit Institution may pay or incur relative to the Letter of Credit or in reviewing, interpreting, administering or enforcing any of its rights or responsibilities under this Agreement or the other Financing Documents. Section 3.02 FEES. (a) On the Date of Issuance, the Company shall pay to the Credit Institution a one-time internal construction administration fee of $5,000.00. In addition to any other fees payable to the Credit Institution, the Company shall pay to the Credit Institution a fee with respect to the Letter of Credit equal to one percent (1%) per annum of the Initial Stated Amount of the Letter of Credit for the first year and of the Stated Amount of the Letter of Credit then in effect for each year thereafter as it is reduced from time to time by virtue of an "A Drawing" to redeem the principal of the Notes but not "B Drawings" to purchase Notes subject to optional or mandatory tender and as so determined on the date each fee payment is due. The full amount of such fee shall be paid by the Company in advance for each year (except for the payment due on the Date of Issuance) or portion of a year that the Letter of Credit is outstanding (beginning on the Date of Issuance and each Anniversary Date thereof) from the Date of Issuance until the Termination Date. The fee (herein, the "LETTER OF CREDIT FEE") shall be prepaid in full no later than fifteen (15) days prior to the first and each successive Anniversary Date, and in all cases shall be deemed earned upon receipt by the Credit Institution. Except as provided in the next succeeding sentence, there shall be no refund of any portion of such prepaid fee by reason of expiration, reduction, recertification, termination, 24 28 redemption or prepayment of any of the Stated Amount, the Letter of Credit or the Notes subsequent to the date of receipt of such fee by the Credit Institution. Notwithstanding the next preceding sentence, if the Obligations under this Agreement shall ever be recast as a new loan with Credit Institution, the Company shall receive a pro rata credit for any fees that have been paid in advance as described above. Section 3.03 SUPPLEMENTAL PAYMENTS. (a) If after the Date of Issuance (i) the Credit Institution determines or acquiesces in the determination by a court or administrative or Governmental Authority that its obligations under this Agreement or the Letter of Credit are a deposit insured by the Federal Deposit Insurance Company (AFDIC@) or (ii) the Credit Institution determines that any law or regulation, or any change in any law or regulation or in the interpretation thereof by any court or administrative or Governmental Authority charged with the administration thereof shall either (A) impose, modify or deem applicable any insurance (including, without limitation, FDIC insurance), reserve, capital adequacy, special deposit or similar requirement for or against letters of credit issued or assets held by, or deposits in or for the account of, the Credit Institution or (B) impose on the Credit Institution any other condition regarding this Agreement or the Letter of Credit, including any relating to capital adequacy, and the result of any event referred to in clause (a)(i) or (ii) above shall be to increase the cost to the Credit Institution of issuing or maintaining the Letter of Credit (which increase in cost shall be the result of the Credit Institution's reasonable allocation of the aggregate of such cost increases resulting from such events and shall be calculated without giving effect to any participation granted in the Letter of Credit) then, upon demand by the Credit Institution, the Company shall immediately pay to the Credit Institution all additional amounts which are necessary to compensate the Credit Institution for such increased cost incurred by the Credit Institution. A certificate as to such increased cost incurred by the Credit Institution as a result of any event referred to in clause (a)(i) or (ii) above submitted by the Credit Institution to the Company shall be conclusive, absent manifest error, as to the amount thereof. (b) The Company shall also pay interest on such increased costs at the highest rate of interest permitted from time to time by applicable law from the date of such change until such amount is paid in full. Section 3.04 COMPUTATION OF INTEREST: FORM AND PLACE OF PAYMENT. The interest payable hereunder shall be computed on the basis of the actual number of days elapsed over a year of 365 days or 366 days, as applicable. If the Prime Rate changes, the interest rate on all amounts due hereunder shall be adjusted on the day of each change in the Prime Rate. All payments by the Company to the Credit Institution hereunder shall be made in lawful currency of the United States and in immediately available funds on the date such payment is due at the Credit Institution's office at Letter of Credit Department, 901 Main Street, 9th Floor, Dallas, Texas 75202, Attention: Ginger Downs or Deborah Gassiot. Section 3.05 SECURITY FOR REIMBURSEMENT OBLIGATIONS. (a) As security for the payment of all of its Obligations under this Agreement, whether now existing or hereafter arising, the Company shall grant to the Credit Institution a first 25 29 lien on, and first priority assignment of and security interest in, the Project, all leases of and rents derived from the Project pursuant to the Mortgage and other Financing Documents and hereby grants to the Credit Institution a first priority assignment of and security interest in the other Collateral described in the Financing Documents in the manner provided therein. (b) The Company hereby pledges, assigns, hypothecates, transfers, and delivers to the Credit Institution all its right, title and interest in and to the Reimbursement Account and hereby grants to the Credit Institution a lien on, and security interest in, the Company's right, title and interest in and to the Reimbursement Account and in all proceeds thereof and substitutions therefore as additional collateral security for the prompt and complete payment when due of all amounts due from the Company to the Credit Institution and performance by the Company of its Obligations under this Agreement and the other Financing Documents and Note Documents. Section 3.06 ACQUISITION OF NOTES. (a) In the event the Remarketing Agent is able to remarket any Notes as of the date of any "B Drawing" and the proceeds of such remarketing are paid to the Credit Institution on the date of such drawing, the Credit Institution shall relinquish any interest it may have had in the Notes purchased with the proceeds of such drawing but only to the extent of such payment, and the Trustee and the Fiscal Agent shall deliver Notes, in a principal amount equal to the amount so paid, to the purchasers of such Notes free of any claim of the Credit Institution. (b) Subject to the provisions of this Agreement, in the event that as of the date of any "B Drawing", the Remarketing Agent has been unable to remarket any or all Notes that were subject to either optional or mandatory tender, a principal amount of Notes equal to the amount owed the Credit Institution for such "B Drawing" shall immediately as of such date become, and be deemed to be, held by the Credit Institution as pledgee of the Company (or, at the option of the Credit Institution upon prior written notice to the Company, the Trustee and the Fiscal Agent, for its own account), and the Company hereby pledges to the Credit Institution, and grants the Credit Institution a security interest in, all Notes so purchased for the account of the Company with the proceeds of a "B Drawing". The Company hereby irrevocably agrees that any Notes purchased with proceeds of a "B Drawing" shall not be extinguished or discharged until all Obligations of the Company relating to such "B Drawing" are paid and satisfied and the Notes are otherwise canceled under the terms of the Indenture. (c) Upon notice to the Credit Institution that any of the Notes held by the Credit Institution as pledgee or for its own account are to be remarketed and upon payment to the Credit Institution of the proceeds thereof and all accrued interest which is due the Credit Institution on the "B Drawing" used to purchase such Notes, the Credit Institution shall release to the Trustee and the Fiscal Agent, for delivery to the purchasers thereof, a principal amount of Notes equal to the principal amount of such payment from the proceeds of the remarketing thereof, free of any pledge or ownership interest of the Credit Institution. (d) The obligations of the Credit Institution hereunder shall remain in effect until the Termination Date. 26 30 (e) All amounts paid to the Credit Institution by the Company on Notes held by the Credit Institution as pledgee or for its own account shall be credited against amounts due from the Company under Section 3.01 (b) and (d) hereof. ARTICLE IV COVENANTS OF THE COMPANY; OTHER AGREEMENTS Section 4.01 SPECIAL COVENANTS OF COMPANY. All covenants of the Company in the other Financing Documents and the Note Documents to which it is a party, to the extent not inconsistent herewith, are incorporated herein by reference and shall be deemed thereby to have been made and reaffirmed by the Company for the benefit of the Credit Institution as if they were fully set forth herein. The Company shall give the Credit Institution written notice prior to any amendment of the Financing Documents that affects any covenants of the Company; all such amendments shall be incorporated herein as if set forth herein. The Company hereby further covenants and agrees that until the Termination Date and payment to the Credit Institution of all amounts due and performance of all other Obligations of the Company under the Financing Documents and the Note Documents to which it is a party, it shall comply with the following additional affirmative and negative covenants, unless the Credit Institution shall otherwise consent in writing: (a) ACCESS TO PROJECT AND RECORDS. The Company shall at any reasonable time and from time to time, upon reasonable prior notice from the Credit Institution, permit the Credit Institution or any agents or representatives thereof (i) to examine and make copies of and abstracts from all relevant records and books of account of the Company, (ii) to discuss all relevant affairs, finances and accounts of the Company with any of its officers so designated by the Company to provide such information, and (iii) to inspect the Project. ANY APPROVAL BY THE CREDIT INSTITUTION OF ANY PLANS AND SPECIFICATIONS RELATING TO THE PROJECT AND ANY INSPECTIONS OF THE PROJECT BY THE CREDIT INSTITUTION SHALL IN NO WAY CONSTITUTE A WARRANTY TO ANY PARTY AS TO THE TECHNICAL SUFFICIENCY OR ADEQUACY OF THE CONSTRUCTION OF THE PROJECT, OR THE STRUCTURAL, SOIL OR, ENVIRONMENTAL CONDITIONS OF THE FACILITIES. (b) PREPAYMENT OF OBLIGATIONS. In addition to the Company's optional redemption of the Notes pursuant to Section 3.01(a)(iii) hereof, the Company may cause, at any time, any optional prepayment of the Obligations as may be permitted under the Financing Documents and direct any corresponding optional redemption of Notes as may be permitted under the Indenture by providing the Credit Institution with notice of the desired prepayment and by making satisfactory arrangements with the Credit Institution for reimbursing the Credit Institution in full for the "A Drawing" on the Letter of Credit necessary to effect such redemption of the Notes by no later than the date on which the Trustee first sends notice thereof to the owners of the Notes. Thereupon the Credit Institution shall notify the Trustee to begin redemption proceedings and to draw on the Letter of Credit as required by the Indenture. Notwithstanding the foregoing, the Company may not prepay the Obligations (and direct a corresponding optional redemption of the Notes) in part from proceeds of an insurance recovery or condemnation award with respect to the Project unless the Company has first obtained the prior written consent of the Credit Institution. 27 31 (c) NOTICE OF DEFAULTS. The Company shall promptly notify the Credit Institution of any default by the Company under any of the Financing Documents or any filing by or against the Company of a petition in bankruptcy or any similar insolvency proceeding. (d) NOTICE OF LITIGATION. The Company shall promptly inform the Credit Institution of any litigation, the adverse determination of which might have a Material Adverse Effect with respect to the payment of the Notes, the performance of the Company's Obligations under the Financing Documents, or the operation of the Project. (e) COMPLIANCE WITH LAWS: PAYMENT OF OBLIGATIONS. The Company shall comply with all valid and applicable statutes, rules and regulations, and shall pay all taxes, assessments, governmental charges, claims for labor, supplies and rent, and other obligations which, if unpaid, might become a Lien against the Project (except liabilities being contested in good faith and against which, if requested by the Credit Institution, the Company shall set up reserves satisfactory to the Credit Institution). (f) SALE OR LEASE OF THE PROJECT. The Company shall not sell, lease or otherwise assign any interest in the Project or any portion thereof to any Person. (g) OPERATING LICENSES. The Company shall comply, and shall cause each of the Affiliates to comply, with all applicable rules and regulations of regulatory authorities having jurisdiction over the Project and shall maintain all licenses necessary to operate the Project. (h) YEAR 2000 COMPLIANCE. The Company shall promptly notify the Credit Institution in the event the Company discovers or determines that any computer application (including those of its suppliers, vendors and customers) that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 compliant (as defined in Section 2.01 (gg)). (i) AMENDMENT OF FINANCING DOCUMENTS. The Company shall not amend or consent to the amendment of any of the Financing Documents without the prior written consent of the Credit Institution. (j) SUBSTITUTE LETTER OF CREDIT. Except during any period a default or event of default under any Financing Documents has occurred and is continuing the Company shall be authorized to provide a Substitute Letter of Credit for the Notes. (k) CERTIFICATE AS TO NO DEFAULT. The Company shall furnish to the Credit Institution within 120 days after the close of each of its fiscal years a certificate signed by the President and the Chief Financial Officer of the Company stating that during such fiscal year and as of the date of such certificate no event or condition has happened or existed or is happening or existing, which constitutes a default or event of default under any Financing Documents or with notice or lapse of time or both would be an Event of Default, or if such an event or condition has occurred or is occurring, specifying the nature and period of such event or condition and what action the Company has taken, is taking and proposes to take with respect thereto. 28 32 (l) PRINCIPAL AMOUNT OF THE NOTES. The Company agrees that the principal amount of the Notes will not exceed 75% of the lesser of the appraised value or the cost of the property covered by the Project. The Company shall demonstrate compliance with this covenant on a quarterly basis. The "cost of the property" shall mean the purchase price of the Project Site plus the amount of the construction cost through and after completion of construction. Section 4.02 CONTINUOUS OBLIGATIONS: OBLIGATIONS ABSOLUTE. This Agreement is a continuing obligation and shall (a) be binding upon the Company, its successors and assigns, and (b) inure to the benefit of and be enforceable by the Credit Institution and its successors, transferees and assigns; provided that the Company may not assign all or any part of this Agreement without the prior written consent of the Credit Institution. The obligations of the Company under this Agreement shall be paid or performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever, and shall be absolute, irrevocable, and unconditional. Section 4.03 TRANSFER OF LETTER OF CREDIT. The Letter of Credit may be transferred in accordance with the provisions set forth therein and upon any transfer the Company shall pay the Credit Institution its then applicable transfer fee. Section 4.04 REDUCTION AND REINSTATEMENT OF STATED AMOUNT OF LETTER OF CREDIT. The reduction and reinstatement of the Stated Amount by virtue of drawings under the Letter of Credit shall be as provided therein. Section 4.05 SURVIVAL OF COMMITMENT. The terms and conditions of the Commitment Letter shall survive the issuance of the Letter of Credit to the extent they are not inconsistent with the terms of this Agreement or the other Financing Documents (which shall control to the extent of any inconsistency), and failure to comply therewith shall constitute a Default hereunder. Section 4.06 TERMINATION OF LOAN AGREEMENT. If the Loan Agreement is not renewed or extended, or is terminated before maturity during the term of the Letter of Credit, the Company shall within forty-five (45) days of such termination redeem all outstanding Notes and reimburse the Credit Institution in full for all amounts owing by the Company to the Credit Institution. Failure to fulfill this covenant shall constitute an Event of Default under this Agreement. ARTICLE V DEFAULTS AND REMEDIES Section V.1 EVENTS OF DEFAULT. Unless waived by the Credit Institution pursuant to Section 5.02 hereof, the following shall constitute an Event of Default under this Agreement: (a Any representation or warranty made in this Agreement, in any certificate, report or opinion (including legal opinions), financial statement or other instrument furnished in connection with this Agreement or any of the other Financing Documents or in any of the Note Documents to which the Company is a party proves to have been untrue or incomplete in any material respect when made; 29 33 (b) The Company fails to pay on the date on which the same is due and payable as herein provided any payment required by this Agreement to be paid by the Company and such default shall continue unremedied for five (5) Business Days provided the Credit Institution has provided written notice to the Company of such nonpayment; provided however, that the Credit Institution's failure to give notice of nonpayment shall not toll the five (5) day grace period if in fact (as determined by admission of an officer of the Company or by a court of competent jurisdiction), an officer of the Company had independent actual notice of such nonpayment, and provided further that no additional grace period shall apply in the event of a violation of Section 4.06 hereof; (c) If, for any reason (other than release by the Credit Institution), the Mortgage or any other Financing Document ceases to be in full force and effect and the same is not cured within fifteen (15) days after written notice thereof from the Credit Institution to the Company; (d) The Company defaults in the due and punctual observance or performance of any other term, covenant or agreement herein contained (other than as specified in subsection (b) of this Section), which default remains unremedied for thirty (30) days (or such other cure period as may be specified herein) after written notice from the Credit Institution to the Company of such breach or such longer period as may be permitted by the Credit Institution in its reasonable discretion if such breach cannot be cured within such thirty (30) day period, and the Company has commenced to cure such breach within such thirty (30) day period and continues to cure such breach with due diligence; (e) The Company is dissolved; (f) Any judgment against the Company or any attachment or levy against the property of the Company which involves potential liability of the Company or any affiliate in an amount in excess of $300,000.00 individually or $1,000,000.00 in the aggregate not adequately insured or indemnified against, remains unpaid, unstayed on appeal, undischarged or undismissed for a period of thirty (30) days or such longer period that may be permitted by the Credit Institution in its reasonable discretion if such breach or such longer period that may be permitted by the Credit Institution in its discretion if such breach cannot be cured within such thirty (30) day period, and the Company has commenced to cure such breach within such thirty (30) day period and continues to cure such breach with due diligence; (g) An "event of default" or "Event of Default" occurs under any of the other Financing Documents or the Note Documents; (h) The Company shall fail to make any payment due from it on any indebtedness or other security for borrowed money in excess of $1,000,000.00 in aggregate principal amount then outstanding beyond any applicable cure period (whether its liability therefor is direct or contingent), or if any event (other than the mere passage of time) or any condition in respect of any indebtedness or other security for borrowed money of the Company in excess of $1,000,000.00 in aggregate principal amount then outstanding (whether its liability therefor is direct or contingent) or under any agreement securing or relating to such indebtedness or other security for borrowed money shall occur the effect of which, after the giving of any required notice and the expiration of any applicable cure 30 34 period, is to cause (or permit any holder of such indebtedness or other security or a trustee to cause) such indebtedness or other security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, or if any such indebtedness or other security for borrowed money otherwise is accelerated and becomes due prior to its stated maturity or prior to its regularly scheduled dates of payment; (i) The determination by the Credit Institution in good faith that a Material Adverse Effect has occurred in the financial condition of the Company or any Guarantor, and such adverse change in financial condition is not remedied to the satisfaction of the Credit Institution within fifteen (15) days after written notice from the Credit Institution to the Company and/or any Guarantor that the Credit Institution has made such a determination; (j) (i) Failure of the Company or any Guarantor to pay generally its debts as they become due, (ii) commencement by the Company or any Guarantor of a voluntary case under the Bankruptcy Code, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, (iii) consent by the Company or any Guarantor to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Company or any Guarantor or any substantial part of its property, or to the taking possession by any such official of any substantial part of the property of the Company or any Guarantor, (iv) making by the Company or any Guarantor of any assignment for the benefit of creditors, or (v) taking of action by the Company or any Guarantor in furtherance of any of the foregoing; (k) The (i) entry of any decree or order for relief by a court having jurisdiction over the Company or any Guarantor or the property of any of them in an involuntary case under the Bankruptcy Code, as now or hereafter constituted, or any other applicable federal or state bankruptcy insolvency or other similar law, (ii) appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Company or any Guarantor or any substantial part of the property of any of them, or (iii) entry of any order for the termination or liquidation of the Company or any Guarantor; (l) Failure of the Company or any Guarantor within sixty (60) days after the commencement of any proceedings against it under the Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or other similar law, to have such proceedings dismissed or stayed; (m) Notwithstanding the provisions of Section 6.09 hereof, any material provision of this Agreement at any time for any reason ceases to be valid and binding on the Company, or is declared to be null and void, or the validity or enforceability thereof is contested by the Company or any governmental agency or authority, or the Company denies that it has any or further liability or obligation under this Agreement or any of the other Financing Documents; or (n) Any "event of default" occurs under any loan or financing agreement where the lender is the Credit Institution and the borrower or the guarantor is either the Company or the Guarantors, including without limitation the Loan Agreement. 31 35 Upon the occurrence of an Event of Default under this Agreement, the Credit Institution, by notice to the Company, may (in its sole discretion) but shall not be obligated to (i) declare all amounts outstanding and payable by the Company under this Agreement to be forthwith due and payable, and the same shall thereupon become immediately due and payable without demand, presentment, protest or further notice of any kind, all of which are hereby expressly waived and (ii) pursue any other remedy permitted to the Credit Institution under the Financing Documents under any other collateral agreements securing the Company's obligations hereunder, or at law or in equity, including but not limited to directing the Trustee to accelerate and make a Default Drawing under the Letter of Credit to pay or purchase the Notes in accordance with Sections 8.02 and 8.03 of the Indenture. Upon the occurrence of an Event of Default hereunder, the Credit Institution may also exercise any right of a secured party under the UCC of the State of Florida as to (i) any Notes held by it as pledgee pursuant to a "B Drawing", (ii) the collateral in the Reimbursement Account, and (iii) the other Collateral. Section 5.02 NO WAIVER: REMEDIES CUMULATIVE. No failure by the Credit Institution to exercise, and no delay in exercising, any right under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement preclude any other further exercise thereof or the exercise of any other right. No waiver under this Agreement shall be valid unless in writing signed by the Company and the Credit Institution, and, unless otherwise specified in such waiver, shall be effective only in the specific instance and for the specific purpose for which given and shall not preclude the right of the Credit Institution to require strict compliance with the terms hereof in any subsequent instance, whether similar or dissimilar. The remedies in this Agreement are cumulative and not exclusive of any remedies provided by law. ARTICLE VI MISCELLANEOUS Section 6.01 RIGHT OF SET-OFF. In addition to any other right or remedy that the Credit Institution may have by operation of law or otherwise, upon the occurrence of any Event of Default under this Agreement the Credit Institution shall be entitled to exercise its banker's lien upon and its right to setoff any and all balances, credits, deposits, accounts or moneys at any time held and other indebtedness at any time owing by the Credit Institution to or for the credit or account of the Company and apply the same against the payment of any and all of the obligations of the Company now or hereafter existing under this Agreement or any of the other Financing Documents. Section 6.02 LIABILITIES. All acts, including any failure to act, relating to the Project and the issuance of the Notes and the Letter of Credit by any director, officer, employee, agent, representative or designee of the Credit Institution are performed solely for the benefit of the Credit Institution to assure repayment of the Company's obligations to the Credit Institution hereunder and under the other Financing Documents are not for the benefit of the Company or the benefit of any other person. Under no circumstances whatsoever shall the Credit Institution, its directors, officers or employees, be deemed to assume any responsibility for, or obligation or duty with respect to, any part or all of the collateral of any nature or kind whatsoever, or in any matter or proceedings arising out of or relating thereto. The Credit Institution shall not be required to take any action of any kind to collect or protect any interest in the collateral, including but not limited to, the taking of any action 32 36 necessary to preserve the Credit Institution, the Company or rights against prior parties to any of the collateral. To the extent permitted by law, the Credit Institution shall not be liable or responsible in any way for the safekeeping, care or custody of any of the collateral, for any loss or damage thereto or for any diminution in the value thereof, or for any act or default of the Company or any of their agents or any third party, but the safekeeping shall be at the Company's sole risk at all times. Neither the Credit Institution nor any of its directors, officers or employees shall be liable or responsible for: (a) the use which may be made of the Letter of Credit or moneys drawn thereunder or for any acts or omissions of the Trustee and any beneficiary in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Credit Institution against presentation of documents provided such documents on their face appear to be in order and in compliance with the Letter of Credit; and (d) any other circumstances whatsoever in making or failing to make payment under the Letter of Credit, except only that the Company shall have a claim against the Credit Institution, and the Credit Institution shall be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Company which the Company proves were caused by (i) the Credit Institution's negligence in determining whether documents presented under the Letter of Credit comply with the terms of the Letter of Credit or (ii) the Credit Institution's willful failure to pay under the Letter of Credit after the presentation to it by the Trustee or a successor trustee of a sight draft and certificate strictly complying with the terms and conditions of the Letter of Credit (absent issuance of a court order purporting to enjoin such payment). In furtherance and not in limitation of the foregoing, the Credit Institution may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Section 6.03 CONSENT TO SERVICE OF PROCESS. The Company hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Agreement, the other Financing Documents and any related documents by (i) the mailing of a copy thereof by certified mail, postage prepaid, return receipt requested, to the Company at the address provided in Section 6.08 hereof; and (ii) serving a copy thereof upon Michael Wallace, who is the agent irrevocably designated and appointed by the Company as the Company's agent for service of process by or pursuant to the provisions hereof. The Company irrevocably agrees that upon receipt of both such notices, such notices shall be deemed to be service of process upon the Company in any such suit, action or proceeding. Nothing in this paragraph shall affect the right of the Credit Institution to serve process in any manner otherwise permitted by law. Section 6.04 ESTOPPEL CERTIFICATE. The Company will, upon not less than ten (10) days' request by the Credit Institution, execute, acknowledge and deliver to the Credit Institution or to such other person(s) as the Credit Institution shall identify a statement in writing, certifying (a) that this Agreement is unmodified and in full force and effect and the payments required by this Agreement to be paid by the Company have been paid, and (b) the then unpaid principal balance of the Obligations arising hereunder; and stating whether or not to the knowledge of the signer of such certificate any party to any of the Financing Documents or the Note Documents, is in default in the performance of any covenant, agreement or condition contained therein and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant to this section may be relied upon by the Credit Institution and such other person(s) to whom such statement is made. 33 37 Section 6.05 AMENDMENTS. No provision hereof shall be modified, altered or limited except by written instrument expressly referring to this Agreement and to the provisions that are modified, altered or limited, and executed by the parties to this Agreement. Section 6.06 SUCCESSORS. This Agreement shall inure to the benefit of and shall be binding upon each successor or assign of each party and shall continue in full force and effect until the Credit Institution shall no longer be bound to fund under the Letter of Credit and the Company shall have paid all amounts due hereunder and under the other Financing Documents or the Note Documents, and complied with all other provisions and conditions herein and therein. Section 6.07 FEES AND EXPENSES: EXPENSES OF COLLECTION. The Company shall pay all fees of the Trustee, the Fiscal Agent, the Placement Agent and the Remarketing Agent and shall pay all fees and expenses of, or reimburse the Credit Institution for amounts therefor paid by it to, all appraisers (regardless of whether engaged by the Company or the Credit Institution), engineers, surveyors, environmental auditors, architects, title insurers and counsel performing services for the Trustee, the Company, the Fiscal Agent, the Placement Agent, the Remarketing Agent and the Credit Institution and counsel to the Remarketing Agent with respect to or in any way connected with the issuance of the Notes, the Financing Documents, the Note Documents and the transactions contemplated thereby. The Company agrees to pay all expenses, including reasonable attorneys fees, which are incurred or paid by the Credit Institution in administering this Agreement, determining its rights and responsibilities hereunder and under the other Financing Documents and the Note Documents and collecting any amounts due it or protecting or enforcing any of its rights hereunder and thereunder, and notwithstanding any disposition of any collateral securing the Credit Institution hereunder and thereunder, the Company shall pay to the Credit Institution any deficiencies which remain after such disposition. In addition, the Company shall pay any and all stamp, recording, transfer and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and any recording of any Financing Documents and the Note Documents and agrees to save the Credit Institution harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. The Company shall pay any brokerage fees or commissions arising from the issuance of the Notes and the Letter of Credit and shall defend, indemnify, and hold the Credit Institution harmless against any and all expenses, liabilities and losses arising from such claims in connection therewith. Section 6.08 NOTICES. All demands, notices, approvals, consents, requests and other communications provided for hereunder shall be in electronic, telephonic or written (including bank wire, telegram, telecopier, telex or similar writing) form and shall be given to the party to whom sent, addressed to it, at its address or telephone, telecopier or telex number set forth below or such other address or telephone, telecopier or telex number as such party may hereafter specify for the purpose by notice to the other party set forth below. Each such notice, request or communication shall be effective (a) if given by telephone, telex, telecopier or other electronic means, when such communication is transmitted to the address specified below and any appropriate answerback is received, (b) if given by mail, three (3) Business Days after such communication is deposited in the 34 38 mails with first class postage prepaid, addressed as aforesaid, or (c) if given by any other means, when delivered at the address specified below: (i) if to the Company: Mr. Michael W. Wallace Kellstrom Industries, Inc. 1100 International Parkway Sunrise, FL 33323 Telephone No. (954) 845-0428 Telecopier No. (954) 845-0427 with a copy to: Bruce March, Esq. Akerman, Senterfitt & Eidson, P.A. Las Olas Centre, Suite 950 450 East Las Olas Blvd. Ft. Lauderdale, FL 33301 Telephone No. (954) 463-2700 Telecopier No. (954) 463-2224 (ii) if to the Credit Institution: Mr. Robert Walker NationsBank Business Credit 600 Peachtree Street, 13th Floor Atlanta, GA 30308 Telephone No. (404) 607-5387 Telecopier No. (404) 607-6281 and Ms. Ginger Downs or Ms. Deborah Gassiot NationsBank, N.A. Letter of Credit Department 901 Main Street, 9th Floor Dallas, TX 75202 Telephone No. (214) 508-3092 Telecopier No. (214) 508-2543 35 39 40 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 Telephone No. (954) 462-3300 Telecopier No. (954) 763-2439 or (iv) in either of the foregoing cases, at such other address or telex, telecopier, bank wire or telephone number as the addressee may hereafter specify for the purpose in a notice to the other party specifically captioned "Notice of Change of Address pursuant to Section 6.08 of the Letter of Credit Reimbursement Agreement." Section 6.09 SEVERABILITY. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby. Section 6.10 ASSIGNMENT. This Agreement may not be assigned by the Company without the prior written consent of the Credit Institution. Section 6.11 PARTICIPATIONS. The Company recognizes that the Credit Institution or a participant may sell and transfer interests in the Letter of Credit to one or more participants or subparticipants and that all documentation, financial statements, appraisals and other data, or copies thereof, relevant to the Company or the Letter of Credit may be exhibited to and retained by any such participant or subparticipant whether actual or prospective. Section 6.12 COUNTERPARTS. This Agreement may be executed by the parties in counterparts and each such counterpart shall be deemed to be an original, but both such counterparts shall together constitute but one and the same Agreement. Section 6.13 RULE OF CONSTRUCTION. As to the rights and obligations of the Company and the Credit Institution against and to each other, the provisions of this Agreement shall control to the extent they are inconsistent with the provisions of the Indenture, or any other Financing Agreement or Note Document. Section 6.14 GOVERNING LAW. This Agreement shall be governed by the laws of the State of Florida. Section 6.15 PREAMBLE: PRELIMINARY RECITALS. The Preliminary Recitals set forth in the Preamble are hereby incorporated and made part of this Agreement. Section 6.16 INDENTURE. The Credit Institution and the Company acknowledge and consent to the provisions of the Indenture. 36 41 Section 6.17 CREDIT INSTITUTION REPRESENTATION. Notwithstanding anything to the contrary that may be contained in the Commitment Letter, this Agreement, the other Financing Documents or the Note Documents or in any written or oral communication, neither the issuance of the Letter of Credit nor the consideration to be received for the same is conditioned upon the appointment of the Credit Institution or any of its Affiliates serving as Remarketing Agent, Placement Agent or in any other capacity with respect to the Notes. The Company hereby acknowledges that the foregoing representation of the Credit Institution is true and correct. Section 6.18 CONSENT TO JURISDICTION: WAIVER OF JURY TRIAL. (a) The Company hereby agrees and consents that any action or proceeding arising out of or brought to enforce the provisions of this Agreement, the other Financing Documents, the Note Documents and any related documents may be brought in any appropriate court in Broward County, Florida, and by the execution of this Agreement the Company irrevocably consents to the jurisdiction of such courts in Broward County, Florida. The Company irrevocably waives, to the fullest extent permitted by law, any objection that the Company may now or hereafter have to the laying of the venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon the Company and may be enforced in any court in which the Company is subject to jurisdiction by a suit upon such judgment provided that service of process is effected upon the Company as provided in this Agreement or as otherwise permitted by applicable law. (b) WAIVER OF JURY TRIAL. BY ACCEPTANCE HEREOF, THE COMPANY AGREES THAT NEITHER THE COMPANY NOR ANY OF ITS ASSIGNEES OR SUCCESSORS (ALL OF WHOM ARE HEREINAFTER REFERRED TO AS THE "PARTIES") SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION PROCEDURE BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING DOCUMENTS OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG THE PARTIES, OR ANY OF THEM. NONE OF THE PARTIES WILL SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY TRIAL HAS NOT BEEN WAIVED. THIS WAIVER IS KNOWINGLY, VOLUNTARILY AND INTENTIONALLY MADE BY COMPANY, AND THE COMPANY HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL OR ENTITY TO INDUCE THIS WAIVER OR TRIAL BY JURY OR TO IN ANY MODIFY OR NULLIFY ITS EFFECT. THE COMPANY FURTHER REPRESENTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. THE PROVISIONS OF THIS SECTION HAVE BEEN FULLY NEGOTIATED BY THE PARTIES WITH CREDIT INSTITUTION, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. THE CREDIT INSTITUTION HAS IN NO WAY AGREED WITH OR REPRESENTED TO ANY OF THE PARTIES THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 37 42 WITNESS the following signatures, all as of the date first above written. Attest: KELLSTROM INDUSTRIES, INC. By: /s/ By: /s/ -------------------------------- ------------------------------ Title: Secretary Title: Chief Financial Officer ----------------------------- --------------------------- Attest: NATIONSBANK, N.A. By: /s/ ----------------------------- Title: Senior Vice President -------------------------- STATE OF FLORIDA ) ) SS: COUNTY OF BROWARD ) THE FOREGOING INSTRUMENT was acknowledged before me this 19 day of February, 1999, by Michael W. Wallace the CFO of Kellstrom Industries, Inc., a Delaware corporation, on behalf of the Company. He/she is personally known to me or produced FL DL as identification. /s/ REGINA L. COVILLE ------------------------------- Notary Public, State of Florida Print Name: Regina L. Coville -------------------- My Commission Expires: 40 43 STATE OF FLORIDA ) ) SS: COUNTY OF BROWARD) THE FOREGOING INSTRUMENT was acknowledged before me this 19th day of February, 1999, by Robert J. Walker, as SVP of NationsBank, N.A., a national banking association, on behalf of the Credit Institution. He/she is personally known to me or produced FLDL as identification. /s/ REGINA L. COVILLE ------------------------------- Notary Public, State of Florida Print Name: Regina L. Coville -------------------- My Commission Expires: 41 44 SCHEDULE 3.01(A) OPTIONAL REDEMPTIONS KELLSTROM INDUSTRIES Amortization Schedule: OUTSTANDING PERIOD YEAR REDEMPTION BALANCE - --------------------------------------------------------------------------- 0 2/22/99 0 6,670,000 1 2/1/00 200,000 6,470,000 2 2/1/01 200,000 6,270,000 3 2/1/02 200,000 6,070,000 4 2/1/03 300,000 5,770,000 5 2/1/04 300,000 5,470,000 6 2/1/05 300,000 5,170,000 7 2/1/06 300,000 4,870,000 8 2/1/07 300,000 4,570,000 9 2/1/08 300,000 4,270,000 10 2/1/09 300,000 3,970,000 11 2/1/10 300,000 3,670,000 12 2/1/11 400,000 3,270,000 13 2/1/12 400,000 2,870,000 14 2/1/13 400,000 2,470,000 15 2/1/14 400,000 2,070,000 16 2/1/15 400,000 1,670,000 17 2/1/16 400,000 1,270,000 18 2/1/17 400,000 870,000 19 2/1/18 400,000 470,000 20 2/1/19 470,000 0 40 EX-21 18 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Subsidiaries of the Registrant Kellstrom Commercial Aircraft, Inc. Delaware Solair, Inc. Florida Aero Support Holdings, Inc. Delaware Integrated Technology Holdings Corp. Delaware Aerocar Aviation Corp. Florida Aerocar Parts, Inc. Florida Kellstrom International Sales Corporation U.S. Virgin Islands EX-23 19 CONSENT OF KPMG LLP 1 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, No. 333-41159 and No. 333-62247) on Form S-8 and in the registration statements (No. 333-10313, No. 333-44019 and No. 333-52917) on Form S-3 of Kellstrom Industries, Inc. and subsidiaries of our report dated February 17, 1999, except as to Note 18, which is as of March 30, 1999, relating to the consolidated balance sheets of Kellstrom Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998, and the related financial statement schedule, which report appears in the December 31, 1998 annual report on Form 10-K of Kellstrom Industries, Inc. and subsidiaries. KPMG LLP Ft. Lauderdale, Florida March 29, 1999 EX-27 20 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 3, 1998 AND IS QUALIFIED INITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1,107,102 0 36,785,331 5,417,996 149,957,320 272,729,783 19,759,387 3,004,202 434,050,496 42,147,181 237,586,821 0 0 11,762 149,747,476 434,050,496 148,901,686 180,048,809 100,221,300 139,019,157 0 0 10,259,749 31,256,760 11,678,641 19,578,119 0 0 0 19,578,119 1.94 1.53
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