SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 1997
[ ] 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 0-26088
PACIFIC AEROSPACE & ELECTRONICS, INC.
(Name of small business issuer in its charter)
Washington 91-1744587
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
434 Olds Station Road
Wenatchee, Washington 98801
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (509) 664-8000
Securities registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
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State issuer's revenues for its most recent fiscal year: $34,175,000
State the aggregate market value of the voting stock held by non-affiliates,
based on the closing price for the registrant's Common Stock on the Nasdaq
National Market System, as of June 25, 1997:
approximately $35,083,859.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of June 25, 1997:
Common Stock, $.001 par value ("Common Stock"): 10,482,430 shares
Common Stock Purchase Warrants ("Warrants"): 2,250,000 Warrants
Documents Incorporated by Reference: None, except certain Exhibits referred to
on the list of Exhibits, contained in Item 13 of this report.
Transitional small business disclosure format: Yes No X
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TABLE OF CONTENTS
Item of Form 10-KSB Page
- ------------------- ----
PART I
Item 1 - Description of Business............................................ 1
Item 2 - Description of Property............................................14
Item 3 - Legal Proceedings..................................................15
Item 4 - Submission of Matters to a Vote of Security Holders................15
PART II
Item 5 - Market for Common Equity and Related
Shareholder Matters................................................16
Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................18
Item 7 - Financial Statements...............................................24
Item 8 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................43
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................44
Item 10 - Executive Compensation.............................................47
Item 11 - Security Ownership of Certain Beneficial
Owners and Management..............................................54
Item 12 - Certain Relationships and Related
Transactions.......................................................57
Item 13 - Exhibits and Reports on Form 8-K...................................59
SIGNATURES....................................................................64
EXHIBIT INDEX.................................................................65
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Pacific Aerospace & Electronics, Inc. (the "Company") is an
acquisition-oriented, technology-driven company that currently develops,
manufactures, markets and sells a broad range of precision components and
electronic assemblies designed to operate with a high degree of reliability in
harsh environments such as the ocean, space and the human body. Markets served
by the Company include the aerospace, space, defense, medical, energy,
transportation, telecommunications and general electronics industries. The
Company's common stock trades on the Nasdaq National Market System under the
symbol "PCTH," and its warrants trade under the symbol "PCTHW."
The Company currently operates through six wholly owned subsidiaries that
are organized into two operational groups: the Electronics Group and the
Aerospace Group. The Company has also recently announced the formation of an
Information Technology Group. See "The Information Technology Group."
The Company's Electronics Group is composed of three businesses: Pacific
Coast Technologies, Inc. ("Pacific Coast"), Ceramic Devices, Inc. ("Ceramic
Devices"), and Northwest Technical Industries, Inc. ("NTI"). Pacific Coast
produces a variety of electronics packages and connectors shielded from their
environment by the Company's proprietary ceramic seals, Ceramic Devices produces
devices designed to filter out electromagnetic interference detrimental to other
electronic devices, and NTI produces explosively bonded metals that are used in
the electronic devices produced by Pacific Coast and Ceramic Devices.
The Company's Aerospace Group is also composed of three businesses:
Cashmere Manufacturing Co., Inc. ("Cashmere"), Morel Industries, Inc. (Morel"),
and Seismic Safety Products, Inc. ("Seismic"). Cashmere and Morel manufacture
machined or cast metal products for many applications, including products that
are incorporated into or complementary with the products of the Company's other
subsidiaries, and Seismic designs and sells automatic natural gas shut-off
valves manufactured by Cashmere.
The customers of the Company's Electronics Group consist, to a substantial
degree, of large manufacturing companies in the aerospace, defense, energy,
medical and general electronics industries. These include Hughes Aircraft
Company ("Hughes Aircraft"), Honeywell Inc.'s Military Avionics Division,
Lockheed Martin Corporation ("Lockheed Martin"), Northrop Grumman Corporation
("Northrop Grumman"), Space Systems/Loral, Inc., Westinghouse Electric
Corporation, TRW, Inc., Litton, Tri Manufacturing and Maritime Manufacturing.
The Electronics Group also markets and sells its electronic products to a
variety of smaller, specialized electronics companies. The customers of the
Company's Aerospace Group include The Boeing Company ("Boeing"), Kawasaki Heavy
Industries, Ltd., Deere & Company, Northrop Grumman and PACCAR, Inc. ("PACCAR").
The Company's strategy for its Electronics and Aerospace Groups is to
expand the range of products it offers and to produce a larger portion of the
customer's total product requirement, through internal growth and the
acquisition or development of new technologies. The Company has recently
experienced significant growth in revenues, as a result of both the acquisition
of complementary
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businesses and internal growth within the operating subsidiaries in those
groups. The Company hopes to continue to experience growth and to exploit both
technological and marketing synergies resulting from the integration of the
businesses it has acquired and other businesses or technologies that it may
acquire in the future. See Item 6 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Company's
business segments.
Formation
The Holding Company
Original PCTH. In May 1994, Donald A. Wright, the Company's Chief Executive
Officer and President, formed PCT Holdings, Inc., a Washington corporation
("Original PCTH"), to hold the stock of Pacific Coast, which Mr. Wright had
originally acquired in 1990, and to acquire Cashmere. See "Acquisition of
Subsidiaries" below. The formation of Original PCTH was treated as if a pooling
of interests for accounting purposes.
Merger into Public Company. In February 1995, Original PCTH merged into a
wholly owned subsidiary of Verazzana Ventures, Ltd. ("Verazzana"), an inactive
public company (the "Verazzana merger"). In that merger, Verazzana changed its
name to PCT Holdings, Inc., a Nevada corporation ("PCTH"). The surviving
subsidiary in the Verazzana merger was dissolved in May 1996, causing Pacific
Coast, Cashmere and Seismic to become direct subsidiaries of PCTH, along with
Ceramic Devices and Morel. The Verazzana Merger was treated as if a pooling for
accounting purposes.
Reincorporation Merger. In November 1996, PCTH merged into the Company,
with the Company as the surviving entity, in order to reincorporate under the
laws of the State of Washington (the "Reincorporation Merger"). Prior to the
Reincorporation Merger, the Company was a wholly owned subsidiary of PCTH. In
the Reincorporation Merger, each share of PCTH common stock was converted into
one share of the Company's Common Stock, and each of the warrants to purchase
shares of PCTH's common stock were converted into warrants to purchase the same
number of shares of the Company's Common Stock. The Reincorporation Merger was
treated as if a pooling for accounting purposes.
Acquisition of Subsidiaries
Pacific Coast. Donald A. Wright purchased Pacific Coast in April 1990,
before the formation of the holding company. Mr. Wright acquired Pacific Coast
in exchange for cash and a promissory note to the sellers. In 1994, Mr. Wright
formed the holding company and initiated a series of strategic acquisitions of
companies whose operations and products the Company believes are complementary
to the products designed, manufactured and marketed by Pacific Coast. Pacific
Coast designs, manufactures and markets hermetically sealed electrical
connectors, electronic sealants and instrument packages, using patented and
proprietary technology.
Cashmere. The first company acquired by the holding company was Cashmere,
which was acquired in May 1994. The purchase price of the Cashmere acquisition
was the issuance of Original PCTH common stock, which was later exchanged for
791,666 shares of PCTH common stock. The transaction was treated as a purchase
for accounting purposes. Cashmere operates a precision machine shop that
produces diversified components and assemblies for the aerospace, defense,
electronics and
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transportation industries, including products and services provided to the
Company's other subsidiaries.
Ceramic Devices. The next company acquired was Ceramic Devices, which was
acquired in April 1995 (effective for accounting purposes as of February 28,
1995). The purchase price for the Ceramic Devices acquisition was the issuance
to the sellers of two promissory notes from PCTH totaling $600,000 in principal
amount, and 133,333 shares of PCTH common stock. The transaction was treated as
a purchase for accounting purposes. Ceramic Devices designs and manufactures a
line of specialized filtering devices for use with electronic circuits operating
in hostile environments and has a customer base similar to that of Pacific
Coast.
Seismic. In November 1995, Seismic was formed to acquired substantially all
of the assets of a Florida corporation of the same name and to acquire certain
patents from affiliates of the Florida corporation. The purchase price for the
Seismic asset and patent acquisition was cash, certain deferred payment
obligations and 128,750 shares of PCTH common stock. The transaction was treated
as a purchase for accounting purposes. Seismic markets an automatic natural gas
shut-off valve activated by earthquakes, which is manufactured by Cashmere.
Morel. The next company acquired was Morel, which was acquired in December
1995 (effective for accounting purposes as of November 30, 1995). The purchase
price for the Morel acquisition was the issuance of 650,000 shares of PCTH
common stock, after certain post-closing adjustments. The transaction was
treated as a purchase for accounting purposes. Morel manufactures precision cast
aluminum parts used principally in the transportation, heavy trucking and
aerospace industries.
NTI. Most recently, the Company formed NTI which, on April 30, 1997,
acquired substantially all of the assets of Northwest Technical Industries,
Incorporated. The purchase price for the NTI acquisition was the issuance of
477,540 shares of the Company's Common Stock. The transaction was treated as a
purchase for accounting purposes. NTI manufactures explosively bonded dissimilar
metals and is a supplier to Pacific Coast.
Management of Growth
The Company intends to continue to evaluate opportunities for growth
through expansion of current operations and through the acquisition of other
entities or lines of business. The Company's ability to manage its current and
future growth will require it to implement and improve its operational,
financial, budgeting, management information and internal control systems. The
future success of the Company will depend in part on the ability of management
to implement effectively these changes and to manage the Company's operations
over the long term.
Past Acquisitions. The Company's historical acquisitions have been made in
its Electronics and Aerospace Groups on the philosophy that certain synergies
and operating efficiencies can be achieved in the combined operation of
companies with a similar focus. While the Company believes that it has
experienced some of the anticipated benefits from its past acquisitions, there
is no assurance that all of the expected benefits will be achieved.
Future Acquisitions. As noted above, the Company is in the process of
forming the Information Technology Group and has recently entered into letters
of intent with five companies that
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would be included in this group. See "The Information Technology Group." The
Company believes that the philosophy it applied in its historical acquisitions
will apply to acquisitions by this group. In addition, the Company continues to
evaluate other acquisition opportunities in its Information Technology Group, as
well as in its Aerospace and Electronics Groups.
Acquisition Risk Factors. Past and future acquisitions may subject the
Company to many risks, including risks relating to integrating and managing the
operations and personnel of acquired companies, and maintaining and implementing
uniform standards, controls, procedures and policies. The success of future
acquisitions will depend, in part, upon the Company's ability to assess and
manage the risks typically associated with acquisitions, including the risks of
assessing the value, strengths, and weaknesses of acquisition candidates or new
products, possible diversion of management attention from the Company's existing
businesses, reduction of cash, disruption of product development cycles,
dilution of earnings per share, or other factors. A failure to achieve or
sustain the anticipated benefits of any acquisition could result in that
acquisition having a detrimental effect on the Company's results of operations,
cash flow and financial condition.
The Electronics Group
Pacific Coast Technologies, Inc.
Products. Pacific Coast designs, manufactures and markets hermetically
sealed electrical connectors, electronic sealants and instrument packages, using
patented and proprietary technology. Pacific Coast was founded in 1976 and was
acquired by Mr. Wright in 1990. See "Formation Acquisition of Subsidiaries -
Pacific Coast". Pacific Coast's products are specifically designed for use in
applications that operate in harsh environments, such as the ocean, space and
the human body, which experience extremes in temperature, pressure or
corrosiveness. Pacific Coast distributes its products primarily to the defense,
aerospace, and telecommunications industries, the energy industry, and the
medical industry. In the defense, aerospace, and telecommunications industries,
Pacific Coast's largest customer group, its products are used in radar,
avionics, and telecommunications applications. Pacific Coast participated in the
production of the world's first hermetically sealed fiber optic connector for
use on the international space station Alpha. In the energy industry, Pacific
Coast's products are used in tools for drilling oil wells. In the medical
industry, Pacific Coast's products can be found in pacemakers, bone growth
stimulators and other implantable electronic devices such as audio implants for
the hearing impaired.
Pacific Coast uses its proprietary hermetic sealant, Kryoflex(R), in many
of its products to provide a high level of hermetic seal protection in harsh
environments. Kryoflex is a multiple-phase derivative of ceramic oxide
crystalline silicate. A Kryoflex seal is mechanically stronger, and withstands
and dissipates more heat, than the glass or brazed ceramic seals used by many of
Pacific Coast's competitors. Unlike many of its competitors, a Kryoflex seal can
bond to a number of different metals and can bond dissimilar metals. The
composition and method of making Kryoflex is a proprietary trade secret of
Pacific Coast.
Pacific Coast has patented its technology in the field of explosively
bonded metals. This technology allows dissimilar metals to be welded together to
make electronic connectors and packages. The resulting devices are lighter than
those made entirely of stainless steel but have equivalent hermetic seal
protection. This technology makes Pacific Coast products competitive where light
weight is a requirement, such as in space applications.
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Pacific Coast also has several patented metal matrix composite
technologies. Further development of metal matrix composites will allow Pacific
Coast to make lighter, more durable electronic packages.
Pacific Coast generally develops new products from its existing
technologies in response to specific customer needs, with such development
almost exclusively funded by its customers. Pacific Coast plans to continue
developing new technologies to meet the changing requirements of its customers
and, where appropriate, to file additional patent applications for those new
technologies. Pacific Coast may also purchase additional strategic proprietary
technology from third-party developers. Pacific Coast does not expect to devote
substantial resources to research and development that is not funded by
customers.
Customers. Pacific Coast's customer base includes Fortune 1000 companies as
well as smaller, specialized firms. For fiscal 1997, Pacific Coast's major
customers in the defense, aerospace and telecommunications markets included ST
Olektron Corp., Honeywell Inc.'s Military Avionics Division, Amphenol
Corporations, AlliedSignal Inc.'s Aerospace Equipment Systems division, Space
Systems/Loral, Inc., Hughes Aircraft, Litton, Santa Barbara Research Center, and
Lockheed Martin. Pacific Coast's major customers in the energy market during
that period included Schlumberger Industries, Inc. and its French parent
company, Baker Hughes and Western Atlas International, Inc. Pacific Coast's
major customers in the medical market during that year were Advanced Bionics
Corporation and Electro-Biology, Inc. Pacific Coast has a varied customer base,
and no single customer accounted for more than 10% of its net sales for fiscal
1997, except for Amphenol Aerospace at 17.2%.
Strategy. Pacific Coast's strategy is to increase its sales and market
share by developing increasingly sophisticated electronic packages, modules and
subsystems that integrate its proprietary technology and products made by the
Company's other subsidiaries. Pacific Coast also plans to expand its
cross-marketing with the Company's other subsidiaries. As sales volumes
increase, Pacific Coast intends to increase its automation in order to obtain
additional efficiencies. In addition, Pacific Coast is developing a number of
standard products that it believes can be produced and sold more cost
effectively than custom products. In the aerospace and defense industries, the
Company believes that there is a significant potential for increased use of its
products in satellite and ground-based radar applications. In the communications
industry, Pacific Coast believes that there is similar potential for use of its
products in radio frequency applications. In the energy market, Pacific Coast
plans to continue to develop new devices to be incorporated on oil drilling
tools in order to take advantage of the emerging development of oil fields in
Russia, China, and other areas. In the medical devices market, Pacific Coast
expects to develop standard and custom devices to support more sophisticated
audio implants, bone growth stimulators, pacemakers and other implantable
electronic devices.
Ceramic Devices, Inc.
Products. Ceramic Devices designs and manufactures a line of specialized
filtering devices for use with electronic circuits operating in hostile
environments. Ceramic Devices was founded in 1982, and the Company purchased it
as of February 1995 to obtain a source of ceramic filters for Pacific Coast's
connectors and electronic products. Ceramic Devices' products filter out
electromagnetic interference and other electrical signals that pose significant
problems for the manufacturers and users of high-performance, high-reliability
electronic systems. Ceramic Devices is an approved supplier of ceramic filtering
devices to military contractors. Ceramic Devices fabricates
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all components of its multilayer capacitors and filters to military requirements
and individualized customer specifications. Ceramic Devices' product development
is generally funded by its customers.
Customers. Ceramic Devices' customer base is generally the same as the
customer base of Pacific Coast, including large defense, aerospace and
telecommunications companies. Such customers purchase Ceramic Devices products
for incorporation into sophisticated electronic systems. Ceramic Devices' major
customers include Hughes Aircraft, Lockheed Martin, AlliedSignal Inc.'s
Aerospace Equipment Systems division, and Litton Corp. No one customer accounted
for more than 10% of Ceramic Devices' net sales for fiscal 1997, except for
Hughes Aircraft at 22% and Litton Corp. at 12%. Because the customer base of
Pacific Coast represents potential customers for Ceramic Devices, the companies
use the same direct sales force and manufacturers' representative group.
Strategy. The Ceramic Devices growth strategy includes increasing its
marketing efforts to existing and potential customers in the defense, aerospace
and telecommunications industries, and targeting customers of Pacific Coast in
the medical industry. In May 1996, Ceramic Devices completed its move from San
Diego, California to the Pacific Coast facility in Wenatchee, Washington. The
Ceramic Devices strategy also includes increasing the efficiency of its
production process through interaction with Pacific Coast, combining its filters
with Pacific Coast products, and marketing Ceramic Devices products together
with products of Pacific Coast.
Northwest Technical Industries, Inc.
Products. NTI manufactures explosively bonded dissimilar metals, such as
aluminum and stainless steel, using proprietary technology. This technology is
used in products where light weight is a requirement, such as in space
applications, energy and physics applications where strength at high temperature
and heat dissipation is a requirement, and marine and chemical processing
applications where anti-corrosiveness is a requirement. NTI distributes its
products primarily to the aerospace, defense, energy and marine industries.
NTI's predecessor was founded in 1970, and was acquired by the Company in 1997
in order to assure a source of explosively bonded metals for the other companies
in the Electronics Group.
Customers. NTI's largest single customer in fiscal 1997 was Pacific Coast,
representing approximately 15.8% of sales. Pacific Coast incorporates NTI's
explosively bonded materials into a variety of its connectors and electronic
packages. Other significant customers of NTI include TRI Manufacturing, Newport
News, Oxford Instruments, Rail Products, Litton Systems and Lockheed Martin.
Strategy. NTI's strategy is to continue to serve its current customer base,
and to increase its sales and market share by targeting customers of Pacific
Coast and Ceramic Devices who may need permanently bonded, lightweight metal
composites for other uses in their products. NTI also plans to use the direct
sales force and manufacturing representative group used by Pacific Coast and
Ceramic Devices and to participate in cross-marketing to potential customers
with Pacific Coast and Ceramic Devices.
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The Aerospace Group
Cashmere Manufacturing Co., Inc.
Products. Cashmere operates a precision machine shop that produces
diversified components and assemblies for the aerospace, defense, electronics
and transportation industries. Cashmere was founded in 1969, and the Company
purchased it in 1994 to provide precision machined products initially for
Pacific Coast. Cashmere now provides products for other subsidiaries of the
Company as well. Cashmere produces principally aluminum products, ranging from
small connectors to very complex assemblies. Cashmere builds to order only, in
conformance with the machining specifications of its customers. Cashmere is ISO
9000 approved, which qualifies it to perform work for most aerospace and general
electronic companies.
Customers. Prior to its acquisition by the Company, Cashmere's sales were
almost exclusively to Boeing. Through a diversification program, the percentage
of Cashmere's sales to Boeing was decreased to approximately 66% for fiscal
1997, down from 75% for fiscal 1996. Sales to Boeing by Cashmere and other
Company subsidiaries constituted approximately 24% of the Company's consolidated
net sales for fiscal 1997. General economic conditions and events affecting
Boeing, all of which are outside the control of the Company, may have a
significant impact on Cashmere's sales and consequently on the overall results
of operations of the Company. Cashmere has entered into contracts with Boeing
which extend beyond one year to supply parts at fixed prices, and, accordingly,
aluminum or other metal price increases or other cost increases can adversely
affect Cashmere's margins on the sale of those parts. Boeing has considerable
flexibility under its contracts with Cashmere to reduce its level of orders or
to cease ordering products from Cashmere.
During fiscal 1997, Cashmere's major customers were Boeing, NTK Aviation,
Nissho Iwai American Corporation, Kawasaki Heavy Industries, Ltd. and Northrop
Grumman. Pacific Coast, Morel, and Seismic together accounted for 5% of
Cashmere's sales for fiscal 1997. Cashmere manufactures a variety of aluminum
and stainless steel connector shells and electronic packages for Pacific Coast,
machines cast parts for Morel, and is the sole manufacturer of the natural gas
shut-off valve marketed by Seismic.
Strategy. Through access to the customer base of Pacific Coast, Cashmere is
pursuing strategies intended to continue reducing its dependency on Boeing.
Cashmere has expanded its direct sales effort, and intends to concentrate on
customer service and offer additional value-added services. Most Pacific Coast
products require machining, allowing Cashmere to benefit from the sales and
marketing efforts of Pacific Coast. Morel is also currently a customer of
Cashmere. Cashmere and Morel have joint direct sales coverage in the Pacific
Northwest and Southern California in an effort to expand the market for products
of both companies.
Morel Industries, Inc.
Products. Morel manufactures precision cast aluminum parts used principally
in the transportation, heavy trucking and aerospace industries. Morel was
founded in 1909, and the Company purchased Morel in 1995 to provide cast parts
for its other subsidiaries and to expand its presence in the transportation
industry. Morel uses sand castings, lost foam and permanent molds to contain and
shape molten aluminum. These components are often further shaped or patterned on
Morel's machinery to meet a customer's specific needs. Morel also provides
additional services such as
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painting, machining and general assembly work. Morel is currently operating at
less than full capacity and believes that it could use its remaining capacity
without significant additional capital expenditures.
Customers. Morel is dependent on sales to PACCAR, Inc., including its
Kenworth and Peterbilt divisions (collectively, "PACCAR"). Net sales to PACCAR
constituted 63% of Morel's net sales in fiscal 1997. Net sales to PACCAR
constituted 22% of the Company's consolidated net sales for that year. PACCAR
has no contractual obligation to continue to place orders for products of Morel.
Morel's other major customers include Deere & Company, Western Star Trucks,
Smith Co., Impco Technologies, and Boeing.
Strategy. Morel's customers are increasingly requesting products that are
cast and machined by a single provider. The Company believes that Morel's
ability to machine its aluminum parts, combined with additional capacity at
Cashmere, will increase its ability to compete for finished cast aluminum
business. The Company plans to diversify Morel's customer base by taking
advantage of its access to the customers and marketing of the Company's other
subsidiaries. The Company also has plans to provide Morel access to proprietary
technology in order to enhance Morel's competitive advantages in its industry.
The Company believes the addition of direct sale representatives in the Pacific
Northwest and Southern California for Morel and Cashmere will allow Morel to
diversify its customer base and reduce its dependence on PACCAR. There is no
assurance, however, that Morel can successfully implement these or other
strategies so as to reduce its reliance on PACCAR to a degree that will protect
the Company in the event of unexpected decreases in sales to PACCAR.
Seismic Safety Products, Inc.
Products. Seismic develops and markets natural gas shut-off valves that are
automatically activated by earthquakes. Cashmere manufactures the natural gas
shut-off valve using patented technology that Seismic purchased in November 1995
from the inventors after six years of development. Seismic's valves are designed
to be installed in new and existing natural gas lines and to automatically shut
off the supply of gas in an earthquake. The valve may also be used as a manual
natural gas shut-off valve to avert fires in other emergency situations.
Significant patented features of the valve include a mechanism for manual reset
of the shut-off valve without special tools and a seamless design to prevent
potential leakage. Seismic's natural gas shut-off valve is certified by the
American Gas Association and the State of California. The Seismic patents and
patent applications extend beyond the current product to cover other possible
products, such as an industrial version of the natural gas shut-off valve and an
electrical shut-off product currently under development.
Customers. Seismic began marketing its residential valve in December 1995
under the brand name "Northridge Valve(TM)". In March 1996, Seismic began
supplying the valve to several large home improvement centers; however, Seismic
has decided not to pursue this market sector for sales of its valves in the
future. Current purchasers of Seismic's valve include Ace Hardware Corporation,
Gensco, Inc., Northwest Water Heater and Western Supplies, with prospective
purchasers including builders, plumbers, security companies and utility
companies.
Strategy. Unlike the other businesses acquired by the Company, there had
been no sales of the Seismic subsidiary's natural gas shut-off valve before the
Company acquired the technology for that product in November 1995. Since that
time, Seismic's strategy has been to sell its gas shut-off valve through a
variety of sources in earthquake-prone areas. The City of Los Angeles requires
that new construction have an automatic natural gas shut-off valve installed.
The Company believes that
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similar regulations may appear elsewhere on the West Coast due to its relatively
high potential for seismic activity.
This represents a different type of product and market for the Company.
There is no assurance that this product will achieve market acceptance, or that
the Company will be able to market the product successfully or to compete in
this new market. The Company is evaluating several potential third-party
marketing agreements and strategic partnership proposals with regard to the
marketing of Seismic's natural gas shut-off valve currently marketed by Seismic.
Under these proposals, Cashmere would retain the right to manufacture the valve.
The Information Technology Group
The Company recently announced that it is forming an Information Technology
Group. In connection with the formation of this group, the Company has entered
into nonbinding letters of intent (together, the "Letters of Intent") with five
companies: Brigadoon.com, Inc. ("Brigadoon"), of Bellevue, Washington; Market
Visibility, Inc. ("Market Visibility"), of New York, New York; Jungle Street,
Inc. ("Jungle Street"), of Everett, Washington, Quantum Interlink Internet, Inc.
("Quantum") of Provo, Utah, and MONITRx, Inc. ("MONITRx") of Larkspur,
California. Brigadoon, Quantum and Jungle Street, through its wholly owned
operating subsidiary, Televar Northwest, Inc., are Internet access providers.
Market Visibility and MONITRx produce products for the Internet. Brigadoon,
Market Visibility, Quantum and MONITRx are privately-held companies, and Jungle
Street is a publicly-held reporting company.
Under the Brigadoon Letter of Intent, Brigadoon would be merged into a
subsidiary of the Company, with the shareholders of Brigadoon receiving a total
of 1,000,000 newly issued shares of the Company's Common Stock. Under the Market
Visibility Letter of Intent, a subsidiary of the Company would purchase all of
the assets of Market Visibility for a total of 50,000 newly issued shares of the
Company's Common Stock. In addition, the shareholders of Brigadoon and Market
Visibility would be entitled to a declining percentage of any net profits of the
acquiring subsidiary in excess of $2.5 million a year, over a five-year period
after closing of the acquisitions and stock purchase. Under the Jungle Street
Letter of Intent, a subsidiary of the Company would purchase newly issued common
stock of Jungle Street amounting to 60% of the outstanding common stock of
Jungle Street, for $1.5 million in cash. Under the Quantum Letter of Intent, a
subsidiary of the Company would purchase all of Quantum's assets for a total of
100,000 newly issued shares of the Company's Common Stock. Under the MONITRx
Letter of Intent, MONITRx would be merged into a subsidiary of the Company, with
the shareholders of MONITRx receiving approximately 600,000 newly issued shares
of the Company's common stock. The shareholders of MONITRx would be entitled to
a declining percentage of any net profits of the acquiring subsidiary in excess
of $1.2 million a year, over a five-year period after closing of the
acquisition.
All five transactions are subject to a number of conditions, including
without limitation: the approval of the Boards of Directors of each of the
companies; completion of satisfactory due diligence investigations; and the
execution of definitive agreements between the Company and each of the
companies. Pending the conclusion of due diligence investigations, the Company
has entered into operations consulting and expense reimbursement agreements (the
"Operating Agreements") with Brigadoon, Market Visibility and Jungle Street,
pursuant to which the Company intends to assist in, consult with, and oversee
the operations and management of these companies for an initial period of six
months. Pursuant to the Operating Agreements, the Company has advanced funds to
Brigadoon
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and to Jungle Street and its subsidiary. See Item 6 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
If the five transactions are completed as contemplated in the Letters of
Intent, it is anticipated that the Information Technology Group will provide
Internet services throughout the United States. These services are expected to
include: Internet access; Internet and highly customized web content; intranet
systems; long distance telephony services; proprietary software; and a product
line of multi-protocol computer network bridge/routers.
The Company is currently considering the possible acquisition of other
companies for inclusion in the Information Technology Group. See "Management of
Growth."
Marketing
Electronics Group. Pacific Coast and Ceramic Devices market their products
in the United States, Europe and Japan through a network of 22 manufacturer
representatives and resellers as of May 31, 1997, generally established on a
geographic basis. These representatives and resellers are subject to agreements
that prevent them from selling the products of competitors of Pacific Coast and
Ceramic Devices. In addition, Pacific Coast and Ceramic Devices maintain a joint
internal sales and customer service staff and engineering capability to meet
customer requirements for technical support. NTI currently markets its products
through customer referrals and industry meetings and trade shows. In the future,
NTI intends to also participate in the joint marketing efforts of Pacific Coast
and Ceramic Devices to existing and potential customers.
Aerospace Group. Cashmere and Morel have a similar existing and potential
customer base and use the same direct sales approach and personnel. They
currently have direct regional sales personnel covering the West Coast. The
Company expects to engage additional salespeople for other geographic regions as
business warrants. Seismic currently markets the natural gas shut-off valve in
California, Oregon, Utah, Washington and British Columbia, Canada. In addition,
the Company believes that there is a significant market for Seismic's valves in
other earthquake-prone areas, such as Japan. The Company is assessing whether it
should substantially revise its strategy with respect to Seismic. See "Aerospace
Group - Seismic Safety Products, Inc."
Competition
The Company operates in highly competitive markets. Most of its competitors
have greater financial resources, broader experience, better name recognition
and more substantial marketing operations than does the Company, and represent
substantial long-term competition. The industries in which the Company competes
are characterized by ongoing product development efforts and evolving
technology, and success depends in part upon the ability to gain a competitive
advantage through proprietary technology. Although the Company believes that its
proprietary technology may give it a competitive advantage with respect to its
technology-based products, new developments by competitors are expected to
continue. The Company's competitors may develop products that are viewed by
customers as more effective or more economic than the Company's product lines.
There is no assurance that the Company will be able to compete successfully
against current and future competitors or that the competitive pressures faced
by the Company will not materially or adversely affect the Company's business
and results of operations.
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Electronics Group. The market for Pacific Coast and Ceramic Devices
products is highly competitive and is composed of numerous competitors, none of
which dominates the market. Competition is based primarily on product quality,
price, custom product development capability, and technical support. Pacific
Coast's principal competitors include Balo Precision Parts, Inc., Amphenol
Corporation, Hermetic Seal Corporation, Kemlon Products and Development Co., ITT
Cannon Inc. and Alberox Corporation. Pacific Coast is not aware of any
competitor that competes with all of its product lines, although competitors do
exist in each market. Ceramic Devices' principal competitors in all of its
markets include AVX Corporation, Spectrum Control, Inc. and Maxwell
Laboratories, Inc.'s Sierra Capacitor/Filter Division. The market for NTI's
products is somewhat competitive and is composed of one domestic and three
foreign competitors. NTI's principal competitors in all of its markets include
OMC (U.S.), Nitro Neobel (Sweden), Northern Energetics (Scotland), and Asahi
(Japan). The Company believes that the products of the Electronics Group are
positioned to be competitive in these markets due to the quality of the
products, the proprietary and patented technology, and their custom product
development capability.
Aerospace Group. The market for Cashmere and Morel products is very
competitive on a regional basis. The Company expects that access to Pacific
Coast's proprietary technology and customer base will provide Cashmere and Morel
with a competitive advantage in their industries. In addition, the Company
believes that modernization accomplished when Morel purchased its current
facilities in March 1994 enables Morel to produce its products more efficiently.
The Company believes that the ability to offer combined and complementary
products and value-added services with the Company's other subsidiaries will
enhance the ability of Cashmere and Morel to compete in this market. The market
for Seismic's natural gas shut-off valve includes several principal competitors,
such as Safe T Quake Corporation, Engdahl Enterprises and Pacific Seismic
Valves, Inc. The Company believes that its valve's rugged construction, ease of
installation, easy patented reset feature, and pricing should allow it to be
competitive in its market.
Suppliers and Production
Availability and Cost of Materials. The Company does not have fixed price
contracts or arrangements for all of the raw materials and other supplies it
purchases. The Company generally has readily available sources of raw materials
and other supplies required for the manufacture of its products and, where
possible, the Company maintains alternate sources of supply. However, shortages
of, and price increases for, certain raw materials and supplies used by the
Company have occurred in the past and may occur in the future. Future shortages
or price fluctuations could have a material adverse effect on the Company's
ability to manufacture and sell its products in a timely and cost effective
manner.
Electronics Group. Pacific Coast, Ceramic Devices and NTI have multiple
competitive sources generally available to supply all of their needs for raw,
processed and machined materials. However, these companies occasionally
experience delivery and quality difficulties with their vendors, and maintain
secondary sources of supply for outside purchases. Pacific Coast and Ceramic
Devices also maintain a quality control program to monitor supplier compliance
with their supply requirements.
Aerospace Group. Cashmere has a readily available source of supply for the
raw materials it requires through numerous product distributors. Morel has
several suppliers of aluminum for its casting process, including Aluminum
Company of America, Inc. (ALCOA), Morel's largest supplier, which has a supply
facility located within approximately 35 miles of Morel's facility. However,
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delivery and quality of supplies may vary or change from time to time. In
addition, the price of aluminum fluctuates with the market, which is generally
absorbed by Cashmere but which Morel can generally pass through to its
customers. All of Seismic's products are supplied by Cashmere.
Proprietary Rights
The Company relies primarily on a combination of patent, trade secret,
copyright and trademark laws, confidentiality procedures, and other intellectual
property protection methods to protect its proprietary technology. The Company
currently holds 33 United States patents and has three United States patent
applications pending and three international patent applications pending. Of
these, Pacific Coast owns 30 United States patents and has two United States
patent applications pending and two foreign patent applications pending, and
Seismic owns three United States patents, has one United States patent
application pending and has one international patent application pending.
The Company's issued patents will expire at various times over the next 15
years. Two of these patents, relating to connectors for pacemakers, will expire
in September 1997, and another 16 of the patents will expire over the next five
years. Although the Company believes that the manufacturing processes of its
technology that is currently protected by patents, particularly that of Pacific
Coast, are sufficiently complex that competing products made with the same
technology are unlikely, there is no assurance that the Company's competitors
will not design competing products using the same or similar technology once
these patents have expired.
There is no assurance that the patent applications by Pacific Coast and
Seismic will result in issued patents, that the existing patents or any future
patents issued to the Company or its subsidiaries will provide any competitive
advantages for their products or technology, or that, if challenged, the patents
issued to the Company or its subsidiaries will be held valid and enforceable.
Despite the precautions taken by the Company, unauthorized parties may attempt
to copy aspects of the Company's products or obtain and use information that the
Company regards as proprietary, and existing intellectual property laws afford
only limited protection. Policing violations of such laws is difficult. The laws
of certain countries in which the Company's products are or may be distributed
do not protect the Company's products and intellectual property rights to the
same extent as do the laws of the United States. There is no assurance that
these protections will be adequate or that the Company's competitors will not
independently develop similar technology, gain access to the Company's trade
secrets or other proprietary information, or design around the Company's
patents.
The market for the Company's products is characterized by steadily evolving
technology and industry standards, changes in customer needs and new product
introductions. The Company's success has depended, and will continue to depend,
on its ability to enhance its current products, develop new products that meet
changing customer needs, advertise and market its products, and respond to
evolving industry standards and other technological changes on a timely and
cost-effective basis. There is no assurance that the Company will be successful
in developing new products or enhancing its existing products on a timely basis,
or that such new products or enhancements will achieve market acceptance.
Furthermore, from time to time the Company and others may announce new products,
enhancements or technologies that have the potential to replace or render
obsolete one or more of the Company's existing products. The Company will need
to continue to anticipate or respond adequately to changes in technology and
customer preferences, the introduction of new products or enhancements by others
and avoid significant delays in the development or introduction of new products
by the Company.
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The Company may be required to enter into costly litigation to enforce its
intellectual property rights or to defend infringement claims by others. Such
infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all.
Government Regulation
Certain of the Company's products are manufactured and sold under United
States government contracts or subcontracts. As with all companies that provide
products or services to the federal government, the Company is directly and
indirectly subject to various federal rules, regulations and orders applicable
to government contractors. Certain of these government regulations relate
specifically to the vendor-vendee relationship with the government, such as the
bidding and pricing rules. Under regulations of this type, the Company must
observe certain pricing restrictions, produce and maintain detailed accounting
data, and meet various other requirements. The Company is also subject to a
number of regulations affecting the conduct of its business generally. For
example, the Company must adhere to federal acquisition requirements and to
standards established by the Occupational Safety and Health Act relating to
labor practices and occupational safety standards. Violation of applicable
government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds.
Environmental Matters
The Company is subject to federal, state and local laws, regulations and
ordinances concerning solid waste disposal, hazardous materials storage, use and
disposal, air emissions, waste water and storm water disposal, employee health
and other environmental matters (together, "Environmental Laws"). Proper waste
disposal and environmental regulation are major considerations for the Company
because certain metals and chemicals used in its manufacturing processes are
classified as hazardous substances.
Since the Company's acquisition of Morel in December 1995, the Company has
initiated an environmental compliance program for the Morel facility, which
includes obtaining all permits necessary for that facility to operate in
compliance with applicable Environmental Laws. As part of this program, in
January 1996, Morel obtained a temporary permit to discharge air emissions, and
in May, 1997, Morel obtained a permit to discharge waste water and storm water,
pending the state's further review.
Since the Company's acquisition of NTI in April 1997, the Company has
initiated an assessment of NTI's environmental conditions, including the
possible need for permits to discharge air emissions and storm water.
From time to time, the Company's operations may result in noncompliance
with Environmental Laws. If any violations of Environmental Laws occur, the
Company could be liable for damages and for the costs of remedial actions, could
be subject to revocation of permits necessary to conduct its business, or could
be ordered to cease operations until such noncompliance is corrected. Any such
revocation or stop work order could require the Company to cease or limit
production at one or more of its facilities, which could have a material adverse
effect on the Company. As a generator of hazardous materials, the Company is
subject to financial exposure even if it fully complies with these laws.
Environmental Laws could become more stringent over time, imposing
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<PAGE>
greater compliance costs and increasing risks and penalties associated with any
violations. There is no assurance that any present or future noncompliance with
Environmental Laws will not have a material adverse effect on the Company's
results of operations or financial condition.
Employees
As of July 1, 1997, the Company and its subsidiaries had a total of 488
full-time employees, of which 387 were in manufacturing and quality assurance,
20 were in customer service, marketing and sales, five were in engineering, 68
were in administration, and eight were in customer-sponsored product
development. None of the Company's employees is covered by an ongoing collective
bargaining agreement, the Company has experienced no work stoppages, and the
Company believes that its relationship with its employees is good.
The Company anticipates that the Information Technology Group being formed
will have about 100 employees initially, if the Company's proposed acquisitions
are completed as contemplated in the Letters of Intent. See "Formation -
Acquisition of Subsidiaries - Information Technology Group."
ITEM 2. DESCRIPTION OF PROPERTY
All of the Company's current subsidiaries, except for NTI, are located in
the greater Wenatchee, Washington area. Pacific Coast, Ceramic Devices, Cashmere
and Seismic operate from adjacent buildings in Wenatchee. Morel is located 15
miles away in Entiat. The close proximity of these subsidiaries is part of the
Company's strategy to enhance the efficiencies between the companies in the
Electronics Group and Aerospace Group. In the opinion of the Company's
management, these properties are adequately covered by insurance.
Existing Properties
Wenatchee Facilities. Pacific Coast operates from facilities in Wenatchee,
Washington of approximately 31,000 square feet, which it has leased from the
Port of Chelan County since September 1994. Ceramic Devices completed its move
to Wenatchee from San Diego, California in May 1996. An additional 7,500 square
feet were added to the Pacific Coast lease in September 1995 to house Ceramic
Devices' operations. The lease was also amended in June 1997 to add another
11,400 square feet to this lease to allow the construction of an addition to the
Pacific Coast building. See "Future Properties - Facilities Expansion Plan."
Cashmere operates from an adjacent facility of approximately 42,000 square feet.
This facility was built to suit Cashmere by the Port of Chelan, and Cashmere has
leased this facility from the Port of Chelan County since October 1995. The
leases for these facilities expire in the year 2007 and both contain options to
renew for two additional five-year terms. Total lease costs for these facilities
were $382,000 in fiscal 1997. The Company's leasehold interest in these
facilities is encumbered by a security interest in favor of Silicon Valley Bank,
the Company's primary lender in the current principal amount of $125,000. See
Item 7 - "Financial Statements - Notes to Consolidated Financial Statements -
Note 8 - Long-Term Debt."
Morel Facilities. Morel operates from facilities in Entiat, Washington of
approximately 84,000 square feet. Morel purchased these facilities and relocated
from Seattle in August 1994, at which time the facilities were renovated into a
modern foundry operation. The title to these facilities is encumbered by a deed
of trust in favor of Seattle-First National Bank in the current principal amount
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of $1,242,000. See Item 7 - "Financial Statements - Notes to Consolidated
Financial Statements - Note 8 - Long Term Debt."
NTI Facilities. NTI operates from owned facilities located in Sequim,
Washington of approximately 18,355 square feet. NTI purchased these facilities
in April 1997 when it acquired its assets. The seller of the assets had owned
and operated its business in this location for approximately 20 years. NTI also
leases a former quarry near Sequim, in order to conduct its blasting activities.
The title to these facilities is encumbered by a deed of trust in favor of North
Sound Bank in the current principal amount of $168,000. See Item 7 - "Financial
Statements - Notes to Consolidated Financial Statements - Note 8 - Long Term
Debt."
Cashmere Storage. Cashmere owns a portion of its previous facility of
approximately 46,000 square feet located in nearby Cashmere, Washington.
Although the Company held this property for sale during a portion of fiscal
1996, it is currently using the property for staging and storage, and is
assessing its long-term plans for the property, including the possibility of
retaining the property. The title to these facilities is encumbered by a deed of
trust in favor of Cashmere Valley Bank. See Item 7 - "Financial Statements -
Notes to Consolidated Financial Statements - Note 8 - Long Term Debt."
Future Properties
Facilities Expansion Plan. The Company's Board of Directors has recently
authorized a facilities expansion plan that includes construction of an addition
to the Pacific Coast building, the purchase of adjacent property from the Port
of Chelan, and the construction of a corporate headquarters building on that
property. The addition to the Pacific Coast building is currently under
construction and is scheduled for completion in August 1997.
Information Technology Group Facilities. The Company's new Information
Technology Group is expected to initially be headquartered out of leased
facilities located in or near Bellevue, Washington, if the acquisitions are
completed as contemplated in the Letters of Intent.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its property is subject to any pending material
legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Market Information, Shareholders, and Dividends
Until March 13, 1995, there was no public market for the Company's Common
Stock. From that date through September 14, 1995, the Common Stock was listed on
the Nasdaq Electronic Bulletin Board. From September 15, 1995 through July 15,
1996, the Common Stock was traded on the Nasdaq - Small Cap Market System under
the symbol "PCTH." Since July 16, 1996, the Company's Common Stock and Common
Stock Purchase Warrants ("Warrants") have been traded on the Nasdaq National
Market System under the symbols "PCTH" for the Common Stock and "PCTHW" for the
Warrants. Each Warrant entitles the holder to purchase one share of Common Stock
at an exercise price of $4.6875 per share.
The Nasdaq National Market System reported the following range of high and
low sales prices for the Common Stock and the Warrants for each calendar quarter
within the Company's 1996 and 1997 fiscal years:
<TABLE>
<CAPTION>
Common Stock Warrants
----------------- ------------------
Calendar Period High Low High Low
- --------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1995
Second Quarter (June 1- June 30).................... $8.00 $5.00 -- --
Third Quarter....................................... 8.00 5.00 -- --
Fourth Quarter...................................... 6.00 4.00 -- --
1996
First Quarter....................................... 4.38 3.75 -- --
Second Quarter...................................... 5.00 2.75 -- --
Third Quarter....................................... 5.0625 2.00 $ .75 $ .375
Fourth Quarter ..................................... 3.125 1.9375 .6875 .28125
1997
First Quarter....................................... 4.75 2.75 1.40625 .5
Second Quarter (March 1- May 31, 1997) ........... 4.0625 2.6875 1.1875 .71875
</TABLE>
As of July 30, 1997, the closing sales price on the Nasdaq National Market
System for the Common Stock was $4.0625 per share and the closing sales price on
the Nasdaq National Market System for the Warrants was $1.90625 per Warrant.
As of July 30, 1997, there were 900 holders of record of 10,865,292 shares
of Common Stock, and 12 holders of record of 2,250,000 Warrants. In addition,
the two underwriters in the July 1996 public offering hold warrants to purchase
a total of 225,000 units, with each unit comprised of one share of Common Stock
and one Warrant to purchase one share of Common Stock.
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends on
the Common Stock in the foreseeable future. The Company's agreement with its
principal lender restricts the Company's ability to pay dividends.
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Registration of Common Stock Issuable under Series A Convertible Preferred Stock
Effective as of June 11, 1997, the Company registered 1,948,541 shares of
Common Stock underlying 50,000 shares of the Company's Series A Convertible
Preferred Stock, $.001 par value (the "Preferred Stock") on a Form S-3
Registration Statement (the "Form S-3 Registration"). As of June 25, 1997, 2,138
shares of Preferred Stock had been converted into 75,080 shares of Common Stock,
and 47,862 shares of Preferred Stock remained unconverted. On conversion of a
share of Preferred Stock, the holder will receive a number of shares of
registered Common Stock equal to $100 divided by the "conversion price" of the
Preferred Stock. The conversion price will be the lower of (a) $3.49 or (b) 85%
of the average closing bid price per share of the Common Stock over the five
trading days before conversion. The Company must redeem any Preferred Stock that
it is not permitted to convert under the terms of the Company's Statement of
Rights and Preferences for the Series A Convertible Preferred Stock.
Non-Public Warrants
The Company has outstanding warrants to purchase a total of 622,500 shares
of Common Stock. Of this amount, 160,000 shares have been registered by the
Company under a Form S-8 registration statement. See Item 10 - "Executive
Compensation - Benefit Plans - Registration of Underlying Shares." The warrants
for the remaining shares contain registration rights provisions.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject
to the safe harbor created by those sections. Actual results could differ
materially from those projected in the forward-looking statements set forth in
Item 6 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the captions "Overview" and "Liquidity and Capital
Resources" and in Item 1 - "Description of Business" under each of the captions.
Overview
Effect of Acquisitions and Reincorporation Merger
The Company's financial condition and results of operations have been
substantially affected by two corporate acquisitions in fiscal 1996 and its most
recent acquisition in fiscal 1997. These acquisitions, as well as internal
growth in the Company's existing businesses and the acquired businesses, have
resulted in substantial increases in net sales, from $3,456,000 in the first
quarter of fiscal 1996 to $10,320,000 in the fourth quarter of fiscal 1997.
Approximately $3,725,000 of this growth in net sales resulted from the
acquisitions and approximately $3,139,000 resulted from internal growth.
Operating expenses and margins have also been substantially affected by the
expenses directly associated with the acquisitions. Expenses related to the July
1996 public offering (as defined below), the Reincorporation Merger, and various
capital-raising transactions, including transaction-related legal, accounting
and other expenses, and merger and equity capital costs, amounted to
approximately $104,000 in fiscal 1996 and approximately $103,000 in fiscal 1997.
The Company has also experienced substantial increases in all other expense
categories as a result of the increase in operations. A portion of these
expenses can be attributed to the assimilation of acquired operations into the
existing business.
The Company reported net profits of $1,682,000 in fiscal 1997 and net
losses of $999,000 in fiscal 1996. Although the Company achieved profitability
in each quarter of fiscal 1997, the Company has not yet demonstrated an ability
to achieve consistently profitable operations over a longer period. There is no
assurance that profitable operations will be sustained in fiscal 1998 or at any
time thereafter. The Company's ability to maintain a profitable level of
operations in the future will depend on many factors, including the Company's
ability to assimilate its recent and potential future acquisitions, the degree
of market penetration of its products, its ability to develop new products, the
degree of market acceptance of new products, and the level of competition in
those markets in which the Company operates. The Company is currently
experiencing significant growth in orders and backlog, which will require
additional expenditures to support a higher level of inventory and operations.
These requirements will affect cash flow and results of operations over the
short term.
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Product Margins; Seasonality
The electronic products business conducted by the Company's Electronics
Group is characterized by relatively low volumes and high margins. In
comparison, volumes have historically been higher and margins lower in the metal
products business conducted by the Company's Aerospace Group, than in the
electronic products business. The Company believes that margins will remain
higher for electronic products than for metal products, although products
incorporating both electronic and metal parts are expected to generate margins
closer to electronic product margins. As a result of margin differences, changes
in product mix between electronic and metal products can be expected to affect
overall margins for the Company. The Company's historical results of operations
are therefore not necessarily indicative of future operating performance. The
Company has not experienced any material seasonality in its operations.
Working Capital; Financings
The Company has relied on equity infusions and commercial borrowing
arrangements to supply significant portions of its required working capital. The
Company's working capital requirements have been substantially increased by the
growth in its operations and by the significant transaction-related expenses
associated with its acquisitions.
In March and May 1996, the Company received aggregate net proceeds of
approximately $1,270,000 from the issuance of short-term debt. The proceeds were
used principally to repay indebtedness to an existing lender and for operating
capital. In May 1996, the Company also closed a Regulation S offering pursuant
to which the Company raised proceeds, net of commissions, of approximately
$1,340,000. The proceeds of that offering were used primarily for working
capital and to retire short-term debt.
On July 19, 1996, the Company closed an underwritten public offering of
2,250,000 Units, with each Unit consisting of one share of Common Stock and one
Warrant, at a total offering price of $7,031,250 (the "July 1996 public
offering"). The proceeds of the July 1996 public offering have been used, as of
July 1997, primarily to pay off $2,438,000 in short-term debt and certain
interest and fees associated with such debt, and to provide working capital for
operations, and to purchase capital equipment.
Effective as of February 28, 1997, the Company completed a private
placement of 50,000 shares of Preferred Stock, at a total offering price of
$5,000,000 (the "Preferred Stock offering"). The Company intends to use $1.5
million of the proceeds of the Preferred Stock offering to acquire a majority of
Jungle Street's common stock. See Item 1 - "Description of Business - Formation
Acquisition of Subsidiaries - Information Technology Group." The Company intends
to use the remainder of the proceeds for other strategic acquisitions, purchase
of manufacturing equipment, facilities expansion and working capital. Effective
as of June 11, 1997, the Company registered 1,948,541 shares of Common Stock
underlying the Preferred Stock on a Form S-3 Registration Statement. The Company
will receive no cash as a result of any conversions of the Series A Convertible
Preferred Stock to Common Stock.
The Company is contemplating an offering of approximately $5,000,000 of
convertible debt to a small group of accredited investors. If such an offering
is consummated, the Company would use the proceeds primarily in connection with
the formation of the Information Technology Group.
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The Company believes that the net proceeds from the securities offerings
described above, together with its existing credit facilities, will be
sufficient to meet the Company's currently budgeted working capital requirements
for at least the next 12 months. The Company may also seek other equity or debt
financing in connection with the operation and funding of the Information
Technology Group. However, there is no assurance that additional financing will
be available to the Company, if and when needed, or that the Company's working
capital requirements will not exceed those currently budgeted.
Segments
The Company has determined that it currently operates in two business
segments within the guidelines of SFAS No. 14. These business segments are
"Electronics" (Pacific Coast, Ceramic Devices and NTI) and "Aerospace and
Transportation" (Cashmere, Morel and Seismic). Accordingly, the Company has
included the appropriate disclosure in Note 16, Business Segment Information, in
its audited financial statements. See Item 7 - "Financial Statements."
Implementation of Accounting Pronouncements
The Company has evaluated the effect of the recent accounting
pronouncements with future effective dates. SFAS No. 128 "Earnings Per Share,"
SFAS No. 130 "Reporting Comprehensive Income," and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." Management believes
that provisions of these recent pronouncements will not have a material effect
on its financial condition or reported results of operations.
Net Operating Loss Carryforwards
The Company has available net operating loss carryforwards for federal
income tax purposes of approximately $6,279,000, the benefits of which expire
beginning in fiscal 2001 through fiscal 2011. The net operating losses created
by the subsidiaries prior to their acquisition and the net operating losses
created as a consolidated group or groups subsequent to a qualifying tax free
merger or acquisition have limitations related to the amount of usage by each
subsidiary or consolidated group, as described in the Internal Revenue Code. The
following approximate net operating losses are available on an individual
company basis, without taking into account any relevant expirations or
limitations: Pacific Aerospace & Electronics, Inc. $218,000, Pacific Coast
$3,680,000, Ceramic Devices $184,000, Cashmere $532,000, Morel $1,573,000, and
Seismic $92,000. If the subsidiaries achieve profitable operations, the net
operating loss carryforwards available should reduce the federal income taxes
due in future years.
Results of Operations for the Fiscal Years Ended May 31, 1997 and 1996
The Company acquired Seismic and Morel in fiscal 1996, and NTI in fiscal
1997. Accordingly, the Company's results of operations for fiscal 1996 included
a full year of operations at Pacific Coast, Ceramic Devices and Cashmere and six
months at Morel and Seismic. Fiscal 1997 operations included a full year of
operations at Pacific Coast, Cashmere, Ceramic Devices, Morel and Seismic, and
one month at NTI.
The Company's net sales increased a total of $13,450,000 in fiscal 1997
from fiscal 1996. Of that increase, $2,270,000 resulted from increased revenue
of Pacific Coast; $3,488,000 resulted from increased revenue of Cashmere;
$429,000 resulted from increased revenue of Ceramic Devices;
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<PAGE>
($7,000) was from a full year of operations of Seismic; $7,087,000 was from a
full year of operations of Morel, and $183,000 was from one month of operations
of NTI.
Pacific Coast's net sales in fiscal 1997 were 36% higher than its net sales
in fiscal 1996. The Company believes that this increase is a result of a variety
of factors, including larger order sizes, broader market acceptance of the
Company's proprietary technologies, increased sales of higher priced products,
the addition of new customers, and improved engineering, design and
manufacturing capabilities. Based on these factors and the revenue growth in
fiscal 1996 and 1997, the Company expects that Pacific Coast will experience the
most substantial rates of growth in revenue in the future.
Cashmere's net sales in fiscal 1997 increased by 50% over net sales in
1996. The Company believes that the increase in Cashmere's net sales is
primarily due to increased production levels of commercial aircraft by Boeing.
Net sales of Ceramic Devices in fiscal 1997 increased by 32% over net sales in
fiscal 1996. The Company believes that the increase in net sales of Ceramic
Devices is due primarily to increasing order sizes from existing customers.
Morel's net sales in fiscal 1997 were 17% higher than its annualized net sales
in the prior year. The Company believes that increase is a result of a variety
of factors, including the addition of new customers, including Boeing. Seismic's
net sales in fiscal 1997 decreased 4% from net sales in 1996.
Intercompany sales, which were eliminated in consolidation and not included
in the above analysis, totaled $589,000 for fiscal 1997. Intercompany sales for
fiscal 1997 were made by Cashmere to Pacific Coast ($151,000), to Seismic
($82,000), and to Morel ($300,000), by Pacific Coast to Ceramic Devices
($6,000), and by NTI to Pacific Coast ($60,000). In comparison, intercompany
sales in fiscal 1996 were made by Cashmere to Pacific Coast ($375,000), to
Seismic ($124,000) and to Morel ($224,000).
Gross profit of the Company increased to $8,206,000 in fiscal 1997 from
$4,286,000 in fiscal 1996. This represents an increase to 24% of net sales in
fiscal 1997 from 20% of net sales in fiscal 1996. The increase in gross profit
margin is primarily attributable to the increase in net sales of Pacific Coast,
Cashmere, Ceramic Devices and Morel, and the corresponding production
efficiencies gained with those sales increases. The Company also believes that
its investments in new state-of-the-art equipment contributed to the improvement
in gross profit.
Interest income increased to $126,000 in fiscal 1997 from $37,000 in fiscal
1996. Interest income in fiscal 1997 resulted primarily from earnings on a
$1,000,000 certificate of deposit held as collateral for Pacific Coast's
Community Development Block Grant loan from Washington State and Chelan County.
Interest expense decreased to $510,000 in fiscal 1997 from $535,000 in fiscal
1996, primarily as a result of the reduction of debt associated with the use of
proceeds from its July 1996 public offering, proceeds from its February 1997
preferred stock sale, and reduction of its bank line of credit balances
throughout the year.
Merger and equity capital costs of $103,000 in fiscal 1997 primarily
represent expenses related to the NTI acquisition, the Reincorporation Merger,
and of the legal costs associated with pending or abandoned acquisition
opportunities. Since "merger and equity capital costs" are no longer significant
enough to require line item treatment, they have been included in operating
expenses. Merger and equity capital costs of $104,000 in fiscal 1996 primarily
represent expenses related to the Morel and Seismic acquisitions. See Item 1 -
"Description of Business - Formation."
21
<PAGE>
The federal income tax expense of $50,000 for fiscal 1997 represents the
alternative minimum tax impact of taxable net income, since the Company has net
operating loss carryforwards sufficient to offset fiscal 1997 regular taxable
income. The federal income benefit of $67,000 for fiscal 1996 resulted from
recording deferred tax assets for certain net operating losses generated during
fiscal 1996.
Liquidity and Capital Resources
At May 31, 1997, the Company had $18,939,000 in current assets and
$5,849,000 in current liabilities, resulting in net working capital of
$13,090,000 and a current ratio of 3.24 to 1.00. At May 31, 1996, the Company
had $13,009,000 in total current assets and $12,057,000 in total current
liabilities, resulting in net working capital of $952,000 and a current ratio of
1.08 to 1.00.
On July 2, 1997, the Company executed a commitment letter, loan agreement
and promissory note for a new credit facility with Key Bank of Washington that
extends until September 1998. The new facility includes a revolving working
capital line of credit of up to $3,500,000, a capital equipment acquisition
credit facility of up to $2,000,000, and a construction loan of $600,000, or 80%
of the cost, of the addition to the Pacific Coast building. Security documents
for these loans have not yet been executed. In June and July 1997, the Company
advanced approximately $2.9 million under interest-bearing promissory notes to
Brigadoon and Jungle Street and its subsidiary, pursuant to the Operating
Agreements, which was generally used to repay defaulted obligations of those
companies. The Company used a portion of the net proceeds from the July 1996
public offering to pay off obligations to certain lenders to Ceramic Devices and
Morel. The Company believes that the net proceeds from its equity and debt
financing activities, together with its new credit facilities, will be
sufficient to meet its budgeted working capital requirements for at least the
next 12 months. See "Overview - Working Capital; Financings."
The Company's actual capital needs will depend upon numerous factors,
including the amount of revenue generated from operations, the cost of
increasing the Company's sales and marketing activities, the ability of
third-party suppliers to meet product commitments, and any future acquisitions
(including the proposed acquisitions of Jungle Street, Brigadoon, Market
Visibility, Quantum and MONITRx), and the continuing availability of bank
financing, none of which can be predicted with certainty. The Company may
receive additional funds upon exercise of the Warrants and other outstanding
warrants and stock options, but there is no assurance that any such warrants or
stock options will be exercised. As a result of these and other factors, the
Company is unable to predict accurately the amount or timing of future capital
that it will require. Inability to obtain additional future capital could have a
material adverse effect on the Company's business and results of operations.
The Company currently has no material purchase commitments for capital
equipment, except with respect to the remaining $876,000 due on certain
equipment recently purchased by Cashmere. Additions and replacements of plant
and equipment are generally funded through working capital, trade-in credits for
the replaced equipment, or capital leases or long-term notes secured by the
equipment purchased.
22
<PAGE>
Recent Developments
Preferred Stock Offering
The Company completed the Preferred Stock offering in February 1997, for a
total offering price of $5,000,000 and net proceeds to the Company after
offering costs and expenses of $4,481,000. The Company intends to use the
proceeds of the Preferred Stock Offering primarily in connection with the
acquisitions proposed for the Information Technology Group (See Item 1 -
"Description of Business - Formation - Acquisition of Subsidiaries - Information
Technology Group"), and the remainder of the proceeds for other strategic
acquisitions, purchase of manufacturing equipment, facilities expansion and
working capital.
Acquisition of NTI
On April 30, 1997, NTI, Inc., a Washington corporation and wholly owned
subsidiary of the Company, acquired substantially all of the assets of Northwest
Technical Industries, Incorporated (the "Seller"). Immediately after the closing
the Company's subsidiary, changed its name to Northwest Technical Industries,
Inc., and the Seller changed its name to Northwest Explosives Bonding, Inc. In
consideration for the Seller's assets, NTI assumed substantially all of the
Seller's liabilities, and the Company issued 477,540 newly issued and
unregistered shares of the Company's Common Stock to the Seller.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pacific Aerospace & Electronics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Pacific Aerospace
& Electronics, Inc. (formerly PCT Holdings, Inc.) and Subsidiaries (the Company)
as of May 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Aerospace &
Electronics, Inc. and Subsidiaries as of May 31, 1997 and 1996, and the results
of their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
Everett, Washington
July 2, 1997
/s/ MOSS ADAMS LLP
24
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
May 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,048,000 $ 725,000
Certificates of deposit 1,000,000
Restricted cash 1,000,000
Stock subscriptions receivable 1,030,000
Accounts receivable, net of allowance for doubtful
accounts of $247,000 and $69,000 5,455,000 3,359,000
Inventory 9,082,000 6,699,000
Current portion of note receivable from related party 55,000 52,000
Prepaid expenses and other 299,000 144,000
--------------- ---------------
Total current assets 18,939,000 13,009,000
--------------- ---------------
PROPERTY AND EQUIPMENT 13,190,000 10,656,000
--------------- ---------------
OTHER ASSETS
Note receivable from related party,
net of current portion 125,000 183,000
Costs in excess of net book value
of acquired subsidiaries 2,071,000 1,938,000
Patents 1,331,000 1,387,000
Other 96,000 476,000
--------------- ---------------
Total other assets 3,623,000 3,984,000
--------------- ---------------
Total assets $ 35,752,000 $ 27,649,000
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
25
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 2,438,000
Bank line of credit 1,224,000
Accounts payable $ 3,736,000 3,142,000
Accrued liabilities 1,116,000 840,000
Current portion of long-term debt 997,000 4,413,000
--------------- ---------------
Total current liabilities 5,849,000 12,057,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 3,236,000 1,991,000
Deferred income tax 592,000 592,000
Deferred rent and other 456,000 470,000
--------------- ---------------
Total liabilities 10,133,000 15,110,000
--------------- ---------------
STOCKHOLDERS' EQUITY
Convertible preferred stock 4,481,000
Common stock 26,019,000 19,102,000
Accumulated deficit (4,881,000) (6,563,000)
--------------- ---------------
Total stockholders' equity 25,619,000 12,539,000
--------------- ---------------
Total liabilities and stockholders' equity $ 35,752,000 $ 27,649,000
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
26
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
Year Ended May 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
NET SALES $ 34,175,000 $ 20,725,000
COST OF SALES 25,969,000 16,439,000
--------------- ---------------
GROSS PROFIT 8,206,000 4,286,000
OPERATING EXPENSES 6,259,000 4,869,000
--------------- ---------------
INCOME (LOSS) FROM OPERATIONS 1,947,000 (583,000)
--------------- ---------------
OTHER INCOME AND EXPENSE
Interest income 126,000 37,000
Interest expense (510,000) (535,000)
Other 169,000 15,000
--------------- ---------------
(215,000) (483,000)
INCOME (LOSS) BEFORE FEDERAL INCOME TAX 1,732,000 (1,066,000)
FEDERAL INCOME TAX BENEFIT (PROVISION) (50,000) 67,000
--------------- ---------------
NET INCOME (LOSS) $ 1,682,000 $ (999,000)
=============== ===============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ 0.17 $ (0.16)
=============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD 9,989,000 6,209,000
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
27
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE YEARS ENDED MAY 31, 1997 AND 1996
Convertible
Preferred Stock Common Stock
-------------------------- ------------------------------- Accumulated
Shares Amount Shares Amount Deficit
---------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, May 31, 1995 5,196,008 $ 11,018,000 $ (5,564,000)
Common stock issued 1,503,551 4,932,000
Common stock warrants issued 69,000
Common stock issued in
connection with acquisitions 778,750 3,083,000
Net loss (999,000)
-------------- --------------- --------------
BALANCE, May 31, 1996 7,478,309 19,102,000 (6,563,000)
Common stock issued 2,264,400 5,349,000
Common stock options and warrants
issued 16,000
Common stock issued in
connection with an acquisition 477,540 1,552,000
Preferred stock issued 50,000 $ 4,481,000
Net income 1,682,000
---------- -------------- -------------- --------------- --------------
BALANCE, May 31, 1997 50,000 $ 4,481,000 10,220,249 $ 26,019,000 $ (4,881,000)
========== ============== ============== =============== ==============
The Company has authorized 100,000,000 shares of common stock and 5,000,000
shares of preferred stock.
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
28
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
Year Ended May 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
FROM OPERATING ACTIVITIES
Net income (loss) $ 1,682,000 $ (999,000)
Adjustments to reconcile net income (loss) to net cash
from operating activities
Depreciation and amortization 1,358,000 871,000
Loss on sale of property and equipment 8,000
Director compensation paid in common stock 44,000 24,000
Consulting services paid through issuance of stock option 6,000
Federal income tax benefit (67,000)
Changes in operating assets and liabilities
Accounts receivable (1,774,000) (1,018,000)
Inventory (1,951,000) (1,303,000)
Prepaid expenses and other (178,000) 8,000
Accounts payable and accrued liabilities 557,000 (216,000)
--------------- ---------------
Net cash from operating activities (256,000) (2,692,000)
---------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES
Transfer between cash and restricted cash 1,000,000 (1,000,000)
Purchase of certificate of deposit (1,000,000)
Proceeds from stock subscription receivable 1,030,000
Purchase of property and equipment (2,100,000) (754,000)
Proceeds from sale of property and equipment 9,000
Purchase of patents (400,000)
Payments received on note receivable from related party 58,000 44,000
Increase in other assets, net 44,000 (79,000)
--------------- ---------------
Net cash from investing activities (968,000) (2,180,000)
---------------- ---------------
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
29
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
------------------------------------------------
Year Ended May 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Net change in bank line of credit (1,224,000) 308,000
Payments on notes payable (2,438,000)
Proceeds from long-term debt 237,000 767,000
Payments on long-term debt (3,248,000) (1,457,000)
Proceeds from notes payable 1,338,000
Proceeds from sale of common stock 7,137,000 3,878,000
Common stock issue costs paid (1,398,000) (328,000)
Proceeds from sale of preferred stock 5,000,000
Preferred stock issue costs paid (519,000)
Proceeds from sale of warrants 12,000
--------------- ---------------
Net cash from financing activities 3,547,000 4,518,000
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,323,000 (354,000)
CASH AND CASH EQUIVALENTS, beginning of year 725,000 1,079,000
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 3,048,000 $ 725,000
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
30
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MAY 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Operations and principles of consolidation - Pacific Aerospace &
Electronics, Inc. (formerly PCT Holdings, Inc.), located in Wenatchee,
Washington, develops, manufactures, markets and sells a broad range of precision
electronic components, designed to operate with a high degree of reliability in
harsh environments, and machine or cast metal products for applications in the
aerospace, defense, telecommunications, energy, transportation, medical and
general electronics industries. The consolidated financial statements of Pacific
Aerospace & Electronics, Inc. and Subsidiaries (the Company) include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions have been eliminated.
The Company's customers are located throughout the United States and
Europe. Included in accounts receivable at May 31, 1997 are $795,000, on 1997
sales of $8.0 million, and $489,000, on 1997 sales of $7.7 million, which are
due from The Boeing Company and PACCAR, respectively. Included in accounts
receivable at May 31, 1996 are $250,000, on 1996 sales of $5.9 million, and
$569,000, on 1996 sales of $3.1 million, which are due from The Boeing Company
and PACCAR, respectively.
(b) Cash and cash equivalents - The Company considers all highly-liquid
investments purchased with original maturity of three months or less to be cash
equivalents. The Company places its cash and cash equivalents with high credit
quality institutions. At times, such investments may be in excess of the Federal
Deposit Insurance Corporation insurance limits.
(c) Inventory - Inventory is generally stated at the lower of cost
(first-in, first-out method) or market.
(d) Depreciation - Property and equipment is depreciated for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets. For federal income tax purposes, accelerated methods are
used over statutory lives.
(e) Patents - Purchased patents are recorded at cost. Developed patents are
recorded at the value of related compensation awarded. Patents are amortized on
the straight-line basis over the estimated useful lives of the patents of 11 to
17 years.
(f) Federal income tax - Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between the tax bases
of assets and liabilities and their reported amounts. The Company and its
Subsidiaries file a consolidated federal income tax return.
(g) Per share information - Earnings (Loss) per share of common stock is
based upon the weighted average number of common stock and dilutive common stock
equivalents outstanding using the treasury stock method. Stock options and
warrants and convertible preferred stock are considered common stock
equivalents. The weighted average number of shares outstanding was 9,989,000 and
6,209,000 during the years ended May 31, 1997 and 1996, respectively.
(h) Fair value of financial instruments - The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. The carrying amounts of cash, accounts
receivable, other noncurrent assets, accounts payable, accrued expenses, and
notes
31
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
payable at May 31, 1997 and 1996, and long-term debt at May 31, 1997, are a
reasonable estimate of their fair value. The carrying value of long-term debt at
May 31, 1996 of $6,099,000 differs from the estimated fair value of $5,999,000.
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of the year end or that
will be realized in the future.
(i) Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
(j) Revenue recognition - Revenue is recognized when products are shipped
to customers.
(k) Reclassifications - Certain 1996 amounts have been reclassified to
conform with the 1997 presentation.
(l) New Accounting Standards - In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128. The new standard replaces primary and fully diluted earnings per share
with basic and diluted earnings per share. SFAS No. 128 is required to be
adopted by the Company in the year ending May 31, 1998. Had the Company been
required to adopt SFAS No. 128 for the periods presented, the adoption would not
have impacted diluted or primary earnings per share.
In June 1997, the FASB issued SFAS No. 130 and 131. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS No. 131 establishes standards for reporting about operating
segments, products and services, geographic areas, and major customers. The
standards becomes effective for fiscal years beginning after December 15, 1997.
Management plans to adopt these standards in the year ending May 31, 1998.
Management believes that provisions of SFAS No. 130 and 131 will not have a
material effect on its financial condition or reported results of operation.
32
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
NOTE 2 - BUSINESS ACQUISITIONS
In November 1995, the Company acquired all of the assets of Seismic Safety
Products, Inc. (Seismic). The asset purchase price consisted of $70,000 in cash
and 128,750 shares of the Company's common stock valued at $483,000, for a total
of $553,000. In connection with the transaction, the Company acquired certain
patents for a total consideration of $520,000. Costs in excess of net book value
of $535,000 were recorded as a result of this acquisition.
Effective for accounting purposes on November 30, 1995, a wholly-owned
subsidiary of the Company merged with Morel Industries, Inc. (Morel). The
purchase price consisted of 650,000 shares of the Company's common stock valued
at approximately $2.6 million. Costs in excess of net book value of $939,000
were recorded as a result of this acquisition.
On April 30, 1997, the Company, acquired all of the assets of Northwest
Technical Industries, Inc. (NTI). The asset purchase price consisted of 477,540
shares of the Company's common stock valued at $1,552,000. Costs in excess of
net book value of $270,000 were recorded as a result of this acquisition.
The business combinations described above have been accounted for using the
purchase method. Accordingly, assets and liabilities have been reflected at fair
value. The operating results of these acquired companies are included in the
consolidated statements of operations from their respective acquisition dates.
Any costs in excess of net book value as a result of these transactions are
being amortized over 15 years. The Company assesses the recoverability of this
intangible asset on a regular basis by determining whether the amortization of
the balance over its remaining life can be recovered through projected
undiscounted future cash flows.
The following summary, prepared on a pro forma basis, combines the
consolidated condensed results of operations as if Morel, Seismic and NTI had
been acquired as of the beginning of the year ended May 31, 1996. There are no
material adjustments which impact the summary.
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Net sales $ 36,158,000 $ 26,801,000
Income (Loss) from operations $ 2,084,000 $ (908,000)
Net income (loss) $ 1,802,000 $ (1,660,000)
Earnings (Loss) per share of common stock $ 0.17 $ (0.25)
Weighted average shares outstanding during the period 10,426,000 6,687,000
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
indicated nor are they intended to indicate results that may occur in the
future.
33
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
NOTE 3 - INVENTORY
May 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $ 2,685,000 $ 1,900,000
Work in progress 3,387,000 2,134,000
Purchased and manufactured
components and finished goods 3,010,000 2,665,000
------------ ------------
$ 9,082,000 $ 6,699,000
============ ============
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital lease arrangement,
are as follows:
<TABLE>
<CAPTION>
Estimated May 31,
Useful Life ---------------------------------
in Years 1997 1996
------------------ ---------------- --------------
<S> <C> <C> <C>
Land $ 895,000 $ 470,000
Buildings 20-39 4,300,000 3,915,000
Machinery and equipment 5-20 9,305,000 7,376,000
Furniture and fixtures 3-15 1,215,000 854,000
Leasehold improvements 7-31 401,000 273,000
---------------- --------------
16,116,000 12,888,000
Less accumulated depreciation
and amortization 3,309,000 2,232,000
---------------- --------------
Construction and purchases in progress 383,000
----------------
$ 13,190,000 $ 10,656,000
================ ==============
</TABLE>
Estimated costs to complete the construction and purchases in progress at
May 31, 1997 are approximately $1.8 million.
The Company recognized depreciation of property and equipment of $1,103,000
and $696,000 during the years ended May 31, 1997 and 1996, respectively.
NOTE 5 - NOTE RECEIVABLE FROM RELATED PARTY
The Company has a note receivable from a stockholder collectible in monthly
installments of $5,900, with interest at a designee's prime rate (8.5% at May
31, 1997) plus 1%. The remaining outstanding balance matures in March 1999. The
terms of the note receivable mirror the terms of a note payable of the same
amount (Note 8).
34
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
NOTE 6 - BANK LINE OF CREDIT
The Company has a bank line of credit arrangement which expires on July 27,
1997. On July 2, 1997, the Company entered into a new credit arrangement (the
New Agreement) which expires in September 1998. The New Agreement provides for a
revolving line of credit up to $3,500,000, a non-revolving capital expenditure
facility up to $2,000,000, and a term loan for the lessor of $600,000 or 80% of
the cost of certain building improvements. Borrowings will bear interests at
variable rates, and will be secured by inventory, accounts receivable, and
certain equipment and building improvements. The agreement contains restrictive
covenants related to working capital, net worth and debt service coverage.
NOTE 7 - NOTES PAYABLE
During the year ended May 31, 1997, the Company repaid notes payable of
$2,438,000, of which $150,000 was to a related party. In connection with the
related party note and another note payable, during the year ended May 31, 1996,
the Company issued the lenders warrants to purchase 337,500 shares of common
stock at an excise price of $4.80 per share. The warrants expire in five years
and were independently valued at approximately $12,000. This amount represents
original issue discount which was charged to operations in the first quarter of
1997.
<TABLE>
<CAPTION>
NOTE 8 - LONG-TERM DEBT
May 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Bank
Industrial revenue bond payable in monthly installments of $19,200,
including interest at 8.12% through November 2009. Collateralized by
land, building and equipment and
the personal guarantees of certain stockholders. $ 1,242,000 $ 1,367,000
City of Entiat
Note payable in monthly installments of $7,300, including interest at
8% through May 2001 at which time the balance of $200,100 will be
due. Collateralized by accounts receivable, inventory, equipment and
real property. Subordinated to the
bank industrial revenue bond debt. 551,000 600,000
Individual
Note payable in monthly installments of $8,300, including interest at
10.25% until February 1998 at which time the balance of $179,000 will
be due. Collateralized by patents,
accounts receivable and inventory. 231,000 303,000
Bank
Note payable in monthly installments of $5,900, including interest at
a designee's prime rate plus 1% through March 1999, at which time the
balance of $82,000 is due. Collateralized by real property and
personal guarantee of
a certain stockholder (Note 5). 180,000 235,000
</TABLE>
35
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
May 31,
------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Bank
Note payable in monthly installments of $1,125 plus
interest at prime plus 2.25% through October 1999.
Collateralized by the assets of a subsidiary and the
guarantee of a certain stockholder. 168,000
Corporation
Note payable in quarterly installments of $12,200, including
interest at 8% through March 2001. Collateralized by a patent. 166,000 200,000
Various
Notes payable in total monthly installments of $52,000,
including interest at 9% to 11%. Collateralized by
equipment of the Company. 1,695,000 1,322,000
Various notes paid in 1997 2,377,000
------------ ------------
4,233,000 6,404,000
Less current portion 997,000 4,413,000
------------ ------------
Long-term portion $ 3,236,000 $ 1,991,000
============ ============
</TABLE>
The industrial revenue bond agreements require, among other matters, that
the Company maintain minimum working capital, tangible net worth, and debt to
tangible net worth ratios.
Long-term debt matures for fiscal years ending May 31 as follows: $997,000
for 1998; $744,000 for 1999; $787,000 for 2000; $534,000 for 2001; $445,000 for
2002; and the balance of $726,000 in years thereafter.
NOTE 9 - LEASING ARRANGEMENTS
The Company leases the manufacturing facilities in which Pacific Coast,
Cashmere, Ceramic Devices, and Seismic are located through November 2005 from
the Port of Chelan County. Rent payments through September 2000 are based on a
percentage of the base rent, resulting in a deferred rent liability. Rental
expense is recorded ratably over the term of the lease. Beginning in October
1998, the base rent is subject to annual adjustments for increases in the
Consumer Price Index.
The Company has several vehicle and equipment leases with minimum monthly
lease payments in the aggregate of approximately $3,000. The lease terms range
from three to six years.
Total rental expense was $475,000 and $516,000 for the years ended May 31,
1997 and 1996, respectively.
Minimum lease payments under these leases for fiscal years ending May 31
are as follows: $377,000 for 1998; $386,000 for 1999; $357,000 for 2000;
$339,000 for 2001; $326,000 for 2002; and $1,131,000 in years thereafter.
36
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
NOTE 10 - FEDERAL INCOME TAX
The current federal income tax provision of $50,000 in 1997, represents the
tax on alternative minimum taxable income. The deferred federal income tax
benefit of $67,000 in 1996 represents the expected utilization of net operating
loss (NOL) carryforwards available to offset deferred tax liabilities. Loss
carryforwards generated by the Company prior to certain acquisitions may,
subject to certain limitations, reduce tax liabilities on future earnings, or in
part, reduce remaining deferred tax liabilities by reduction of the costs in
excess of net book value of acquired assets in the Morel acquisition (Note 2).
Reconciliation of the Federal statutory tax rate of 34% and the Company
effective tax rates of 3% and 6% in 1997 and 1996, respectively, is as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Tax provision (benefit) at statutory rate $ 588,000 $ (362,000)
Utilization of NOL carryforwards (558,000)
NOLs with no current tax benefit 241,000
Other 20,000 54,000
--------------- --------------
$ 50,000 $ (67,000)
=============== ==============
</TABLE>
The Company has NOL carryforwards for federal income tax purposes of
approximately $7,079,000, the benefits of which expire in the tax year 2001
through the tax year 2011. The Company also has AMT credits of $50,000 available
for carryforward with no expiration date, which may be used to offset future
regular tax liabilities. The NOLs created by the Company's subsidiaries prior to
their acquisition and the NOLs created as a consolidated group or groups
subsequent to a qualifying tax free merger or acquisition, have limitations
related to the amount of usage by each subsidiary or consolidated group as
described in the Internal Revenue Code. As a result of these limitations,
approximately $800,000 of the $7,079,000 of NOLs will never become available.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
May 31,
----------------------------
1997 1996
------------- -----------
<S> <C> <C>
Deferred tax assets
NOL carryforward $ 2,135,000 $ 3,002,000
Other 290,000 274,000
Valuation allowances (1,717,000) (2,429,000)
-------------- -----------
708,000 847,000
Deferred tax liabilities
Depreciation 1,300,000 1,439,000
------------- -----------
Net deferred tax liability $ 592,000 $ 592,000
============= ===========
</TABLE>
37
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
SFAS No. 109 requires the Company to record a valuation allowance when it
is "more likely than not that some portion or all of the deferred tax assets
will not be realized." Management believes that some of the excess of NOL
carryforwards over temporary differences may be utilized in future periods.
However, due to the uncertainty of future federal taxable income, a valuation
allowance for the full amount of the net deferred tax asset has been recorded at
May 31, 1997 and 1996. Due to limitations on the availability of certain of the
NOLs referred to above, deferred tax liabilities associated with fixed assets
acquired in the Morel merger have not been fully offset.
NOTE 11 - COMPENSATION PLANS AND COMMITMENTS
Long-term investment and incentive plan - The Company has a long-term stock
investment and incentive plan (the Option Plan) under which directors, officers,
key employees, and other key individuals may be awarded stock options, stock
appreciation rights, stock bonuses, and cash bonuses. Under the plan, the option
exercise price is generally no less than fair-market value at the date of grant.
Options expire no later than ten years from the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows companies
to record compensation cost for stock-based compensation plans at fair value or
provide pro forma disclosures. The Company has chosen to continue to account for
stock based compensation using the method whereby compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of grant over the exercise price of the
option.
If the estimated fair value of the options at the grant dates had been
recognized as compensation expense over the vesting periods of the options, the
Company's pro forma net income in the year ended May 31, 1997 would have been
approximately $342,000, or $0.03 per share, and the pro forma net loss in the
year ended May 31, 1996 would have been approximately $(1,079,000), or $(0.17)
per share. Recognition of compensation expense for options granted would create
a deferred tax asset of $483,000 and $27,000 at May 31, 1997 and 1996,
respectively. However, no benefit for the deferred tax assets has been included
in the pro forma net income (loss) for 1997 and 1996, as a valuation allowance
would be recognized for the full amount of the deferred tax asset, consistent
with other deferred tax assets (Note 10). The fair value of the options granted
during 1997 and 1996 is estimated as $1,298,000 and $247,000, respectively, on
the date of grant using the Black-Scholes, option-pricing model with the
following assumptions: dividend none, expected volatility of 38.06%, risk-free
interest rate of 6.49%, and expected life of 7 years.
Stock option and long-term performance award and warrant transactions,
excluding warrants sold in the public offering (Note 13) were:
38
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Shares of Common Stock
---------------------------------------------------
Available For Weighted
Exercise of Options Under Average Price
Option/Award Plan Warrants of Shares
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, June 1, 1995 1,000,000 160,000 $ 2.00
Granted (145,283) 145,283 337,500 4.89
------------- ------------- -----------
Balance, May 31, 1996 854,717 145,283 497,500 4.17
Authorized 1,000,000
Granted (998,333) 998,333 4.34
------------- ------------- -----------
Balance, May 31, 1997 856,384 1,143,616 497,500 $ 4.27
============= ============= ===========
</TABLE>
No options were exercised or lapsed during 1997 and 1996.
The following table summarizes information concerning currently outstanding
and exercisable options and warrants, excluding warrants sold in the public
offering (Note 13):
<TABLE>
<CAPTION>
Options and
Options and Warrants Outstanding Warrants Exercisable
-------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Prices Exercisable Price
--------------- -------------- ------------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$2.00 - $3.00 313,333 8.00 $ 2.22 258,333 $ 2.20
$4.50 - $5.50 1,327,783 7.77 $ 4.76 1,230,223 $ 4.73
-------------- -----------
1,641,116 1,488,556
============== ===========
</TABLE>
Of the 152,560 options unexercisable at May 31, 1997, 10,000 are
performance-based options.
Independent Director Stock Plan - The Company has an Independent Director
Stock Plan under which non-employee directors of the Company are awarded stock
for service on the Company's board of directors. In 1997 and 1996, 14,400 and
9,000 shares of the Company's common stock, respectively, were issued under the
plan. Included in compensation expense is $44,000 and $24,000 in 1997 and 1996,
respectively, resulting from the shares issued.
Retirement plan - The Company maintains a 401(k) plan covering all eligible
employees who meet service requirements as provided in the plan. Company
contributions to the profit sharing plan are determined annually by the Board of
Directors. No contributions were made by the Company to the plan during the
years ended May 31, 1997 and 1996.
39
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
NOTE 12 - CONVERTIBLE PREFERRED STOCK
In February 1997, the Company sold 50,000 shares of Series A Convertible
Preferred Stock through a private placement for $5,000,000, incurred related
offering costs of $519,000, with net proceeds of $4,481,000. Conversion
provisions include conversion any time after June 12, 1997; conversion to common
shares equal to $100 divided by the lower of $3.49 or 85% of the average closing
common per share bid price over the 5 days before conversion; and total shares
converted cannot exceed 20% of total common shares outstanding or approximately
1,950,000 shares. If converted on May 31, 1997, 1,920,000 shares of common stock
would be issued.
NOTE 13 - COMMON STOCK
During the fiscal year ended May 31, 1996, the Company sold 1,429,470
shares of its common stock at an average of $3.43 per share, in an offering
exempt from registration under Regulation S of the Securities Act of 1933, as
amended (Regulation S). The Company incurred approximately $375,000 of costs
related to the offering, which were charged against the proceeds of the offering
in 1996. At May 31, 1996, the Company had stock subscriptions receivable of
$1,030,000 related to the offering. The Company received the stock subscription
funds in June 1996.
In July 1996, the Company sold 2,250,000 units composed of one share of the
Company's common stock and a warrant to purchase one share of the Company's
common stock at a price of $3.125 per unit in a public offering. The warrants
entitle the holder to purchase one share of common stock at $4.6875 per share,
exercisable anytime through July 2001. In addition, the Company issued warrants
to two underwriters for the purchase of an additional 225,000 units at $3.75 per
unit. All of these warrants are outstanding at May 31, 1997. During 1997 and
1996, the Company incurred $1,398,000 and $328,000, respectively, of costs
related to the offering. The costs incurred during 1996 were deferred and at May
31, 1996, are included in other assets. These costs were charged against the
proceeds of the stock offering in 1997.
<TABLE>
<CAPTION>
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended May 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash paid during the year for:
Interest $ 613,000 $ 658,000
Federal income taxes $ 18,000
Acquisition of Subsidiaries:
Fair value of assets acquired, other than cash $ 1,928,000 $10,286,000
Liabilities assumed (482,000) (7,203,000)
------------ -----------
Common stock issued $ 1,446,000 $ 3,083,000
============ ===========
</TABLE>
40
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Non-cash investing and financing activities:
Seller financed purchase of property and equipment $ 639,000 $ 539,000
Seller financed purchase of patents $ 35,000 $ 520,000
Patent acquired through issuance of warrant $ 10,000 $ 57,000
Stock subscriptions receivable for issuance of common stock $ 1,030,000
</TABLE>
NOTE 15 - CONTINGENCIES
The Company is currently party to various legal actions arising out of the
normal course of business, none of which is expected to have a material effect
on the Company's financial position or results of operations.
In the normal course of business, the Company disposes of potentially
hazardous material which could result in claims related to environmental
cleanup. The Company has not been notified of any related claims. The Company is
subject to various other environmental and governmental regulations, however,
the extent of any non-compliance with those regulations is not ascertainable.
NOTE 16 - SUBSEQUENT EVENT
In June 1997, the Company entered into nonbinding letters of intent for a
merger between a wholly owned subsidiary of the Company and Brigadoon.com, Inc.
(Brigadoon), for 1.0 million shares of the Company's common stock; the purchase
of a 60% ownership interest of Jungle Street, Inc. (Jungle Street) through newly
issued shares of Jungle Street common stock for $1.5 million in cash; and for
the purchase of the assets of Market Visibility, Inc. (Market Visibility) for
50,000 shares of the Company's common stock. In addition, the Company has
entered into six-month operating agreements with these companies to assist in,
consult with and oversee their operations and management. Subsequent to May 31,
1997, pursuant to terms of the operating agreements, the Company has advanced
funds in return for interest bearing notes payable, generally used to repay past
due or defaulted obligations, $1,390,000 to Brigadoon, $1,487,000 to Jungle
Street and its subsidiary. Certain officers and directors of the Company own
approximately 23% of the outstanding common stock of Jungle Street after giving
effect for the purchase of the Company, and have personally guaranteed certain
obligations of Jungle Street totaling $650,000. All these transactions are
subject to a number of conditions, including without limitation, the approval of
the Boards of Directors of each of the companies, completion of due diligence,
execution of definitive agreements, and closing.
NOTE 17 - BUSINESS SEGMENT INFORMATION
The Company operates through six subsidiaries and operates in two general
business segments, "Electronics" and "Aerospace and Transportation". In
computing income (loss) from continuing operations for each segment, all costs
have been allocated to segments. Identifiable assets are those assets used in
the Company's operations in each business segment, and the identifiable assets
do not include advances or loans between the business segments. The corporate
assets are identified below, and no allocations were necessary for assets used
jointly by the business segments.
41
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Aerospace
and
Year Ended May 31, 1997 Electronics Transportation Elimination Total
- ----------------------- --------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales to customers $ 11,226,000 $ 22,949,000 $ 34,175,000
Net sales between segments 151,000 $ (151,000)
--------------- --------------- -------------
Net sales $ 11,226,000 $ 23,100,000 $ (151,000) $ 34,175,000
=============== =============== ============= ==============
Profit from operations $ 1,595,000 $ 137,000 $ 1,732,000
=============== =============== ==============
Identifiable assets $ 11,419,000 $ 21,011,000 $ 32,430,000
=============== ===============
Corporate assets $ 3,322,000
--------------
$ 35,752,000
Capital Expenditures $ 778,000 $ 1,961,000 $ 2,739,000
=============== =============== ==============
Depreciation and amortization $ 338,000 $ 765,000 $ 1,103,000
=============== =============== ==============
Aerospace
and
Year Ended May 31, 1996 Electronics Transportation Elimination Total
- ----------------------- --------------- --------------- ------------- --------------
Net sales $ 8,343,000 $ 12,382,000 $ 20,725,000
Net sales between segments $ 376,000 $ (376,000)
---------------- --------------- ------------- --------------
Net sales $ 8,343,000 $ 12,758,000 $ (376,000) $ 20,725,000
=============== =============== ============= ==============
Loss from operations $ (312,000) $ (754,000) $ (1,066,000)
=============== =============== ==============
Identifiable assets $ 7,527,000 $ 17,429,000 $ 24,956,000
=============== ===============
Corporate assets $ 2,693,000
--------------
$ 27,649,000
Capital Expenditures $ 469,000 $ 1,424,000 $ 1,893,000
=============== =============== ==============
Depreciation and amortization $ 263,000 $ 433,000 $ 696,000
=============== =============== ==============
</TABLE>
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
43
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth information as of July 18, 1997 (unless
otherwise noted) regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Director or
Name Age Officer Since Position with Company
- ---- --- ------------- ---------------------
<S> <C> <C> <C>
Donald A. Wright(1) 45 02/95 Chairman of the Board, Chief
Executive Officer and President
Nick A. Gerde 52 02/95 Vice President Finance, Chief
Financial Officer, Treasurer and
Assistant Secretary
Donald B. Cotton(2)(4) 59 02/95 Director
Allen W. Dahl, M.D.(1)(2)(3)(4) 69 02/95 Director
Dr. Urs Diebold 46 07/97 Director
Herman L. "Jack" Jones 66 02/95 Director
Dale L. Rasmussen(4) 47 06/97 Director
Roger P. Vallo(1)(2)(3)(4) 62 02/95 Director
William A. Wheeler (2) 62 06/97 Director
- --------------
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Option Committee
(4) Member of the Finance and Audit Committee
</TABLE>
Donald A. Wright has been the Chairman of the Board, Chief Executive
Officer and President of the Company and PCTH since February 1995, and held
those same positions with Original PCTH and its successor from May 1994 until
the successor was dissolved in May 1996. Mr. Wright has been an officer and
director of Pacific Coast and its predecessor, Kyle Technology Corporation,
since 1990. Mr. Wright also has been an officer and director of each of the
Company's other operating subsidiaries since their respective acquisitions by
the Company. In addition, Mr. Wright was a director of Jungle Street from
January 1996 to June 1997.
Nick A. Gerde has been the Vice President Finance and Chief Financial
Officer of the Company and PCTH since February 1995, and held those same
positions with Original PCTH since August 1994. He has been the Treasurer of the
Company and PCTH since August 9, 1996. Mr. Gerde is also an officer and director
of each of the Company's operating subsidiaries. Mr. Gerde served as
Controller/CFO of Hydraulic Repair & Design, Inc., a regional hydraulic
component repair and wholesale distribution company, from March 1990 through
April 1993; Business Development Specialist with the Economic Development
Council
44
<PAGE>
of North Central Washington from July 1993 to June 1994; and vice president of
Televar Northwest, Inc. (now a wholly owned subsidiary of Jungle Street), from
July 1994 to February 1995. In addition, Mr. Gerde was a director of Jungle
Street, Inc. from January 1996 to June 1997. Mr. Gerde is a certified public
accountant.
Donald B. Cotton has been a director of the Company and PCTH since February
1995, and was a director of Original PCTH and its successor from May 1994 until
the successor was dissolved. He was a director of Pacific Coast from October
1993 to October 1994. Mr. Cotton retired from GTE in 1993, where he served most
recently as a vice president. He is currently self-employed as a software
consultant. Mr. Cotton is also a director of Jungle Street.
Allen W. Dahl, M.D. has been a director of the Company and PCTH since
February 1995, and was a director of Original PCTH and its successor from
October 1994 until the successor was dissolved. Dr. Dahl is retired from
practice as a physician in the Puget Sound region of Washington.
Dr. Urs Diebold has been a director of the Company since July 1997. Dr.
Diebold has been a managing partner of Lysys AGREEMENT ("Lysys"), a Swiss
financing and investment management company, since September 1990. Prior to
joining Lysys in 1990, Dr. Diebold was an investment advisor at the Zurich
office of Credit Suisse. Dr. Diebold is also a director of several Swiss
companies, including Hottinger Zurich Valore, a Swiss company listed on the
Zurich Stock Exchange, and of one of the Company's shareholders, Capital
International Fund Limited.
Herman L. "Jack" Jones has been a director of the Company and PCTH since
February 1995 and was a director of Original PCTH and its successor from May
1994 until the successor was dissolved. Mr. Jones has served as a director of
Cashmere since 1969. Mr. Jones founded Cashmere, and served as President of
Cashmere from 1969 until August 1996. Mr. Jones was also Executive Vice
President and Chief Operating Officer of each of the Company, PCTH, Original
PCTH and its successor, from May 1994 to June 1997, and served as a director of
Pacific Coast from April 1994 to October 1996, of Morel from December 1995 to
October 1996, and of Seismic from October 1995 to October 1996.
Dale L. Rasmussen has been a director of the Company since June 1997. Mr.
Rasmussen has been employed as the Senior Vice President and Secretary of
AirSensors, Inc. since 1989.
Roger P. Vallo has been a director of the Company and PCTH since February
1995 and was the Secretary of the Company and PCTH from that date until August
1996. Mr. Vallo held those same positions with Original PCTH and its successor
from May 1994 until the successor was dissolved. Mr. Vallo served as a director
of Pacific Coast from February 1991 to November 1995 and as Secretary from July
1993 to October 1994. From 1990, he served as a director of the predecessor of
Pacific Coast and subsequently as a director of Pacific Coast. Mr. Vallo is a
retired Group President of GTE, and until recently was the President and Chief
Executive Officer of Prudential Preferred Properties in Everett, Washington. Mr.
Vallo is currently the President, Chief Executive Officer and a director of
Jungle Street. The Company intends that Mr. Vallo will become the Group
President of the Information Technology Group if the Company consummates the
transactions contemplated in the Letters of Intent. See Item 1 - "Description of
Business - Formation Acquisition of Subsidiaries - Information Technology
Group."
William A. Wheeler has been a director of the Company since June 1997. Mr.
Wheeler retired from Dowty Aerospace Yakima in May 1997, where he served as
President, Chief Executive Officer and Chairman of the Board of Directors since
1979.
45
<PAGE>
Directors of the Company hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and duly
qualified. Under the terms of an agreement between Lysys and the Company, dated
January 3, 1995, Lysys has the right to nominate one of the Company's Board
members, until July 1998. Dr. Diebold is the current designee of Lysys to the
Board of Directors. See Item 12 - "Certain Relationships and Related
Transactions." Executive officers are elected by the Board of Directors of the
Company at the first Board meeting after each annual meeting of shareholders and
hold office until their successors are elected and duly qualified.
Significant Employees
Lewis L. Wear, 56, has been the Group President of the Electronics Group
since August 1996, President of Pacific Coast since February 1996, and a
director of Pacific Coast since November 1995. He also has been a director of
Ceramic Devices since November 1995 and President of NTI since April 1997. Prior
to November 1995, Mr. Wear was Vice President of Operations for Vacuum
Atmospheres, a division of WEMS, Inc.
Garry R. Vandekieft, 55, has been Group President of the Aerospace Group
since October 1996, President of Cashmere since August 1996, a director of
Cashmere since October 1996, and was General Manager of Cashmere from June 1996
to August 1996. Prior to being employed by Cashmere, Mr. Vandekieft served as
Manufacturing Operations Manager of Advanced Wind Turbines during 1995 and 1996,
and as Director of Manufacturing of Master-Halco from 1990 through 1994.
Director Compensation
The Company's Independent Director Stock Plan provides for an initial award
of 500 shares of Common Stock and an annual award of $5,000 worth of Common
Stock to each non-employee director. See Item 10 - "Executive Compensation -
Benefit Plans - Independent Director Stock Plan." Each non-employee director who
serves on a committee of the Board of Directors is entitled to receive a fee of
$1,000 per year for each committee on which that director serves, and the
chairperson of each committee is entitled to receive an additional $500 fee per
year. In addition, each non-employee director of a subsidiary of the Company,
who is not a director of the Company, will receive a fee of up to $1,000 per
year. At the Board's option, persons who serve as directors of a subsidiary of
the Company may be eligible for additional fees. Each of the cash fees may be
paid, at the Board's option, in shares of Common Stock. Non-employee directors
receive no salary for their services and receive no fee from the Company for
their participation in meetings, although all directors are reimbursed for
reasonable travel and other out-of-pocket expenses incurred in attending
meetings of the Board. As of May 31, 1997, 23,400 shares had been issued to
directors under the Independent Director Stock Plan and an additional 3,609
shares have been issued to new directors since that date.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of Forms 3 and 4 and amendments thereto furnished
to the Company pursuant to Rule 16a-3(e) during its most recent fiscal year, and
on written representations that none of the Company's officers, directors, or
principal shareholders ("Reporting Persons") were required to report any
transactions on Form 5, the Company believes that, during the fiscal year ended
May 31, 1997, the Reporting Persons complied in all material respects with all
applicable filing requirements under Section 16(a) of the Securities Exchange
Act, as amended. Donald A. Wright and Nick A. Gerde each filed an amended report
to reflect an increase in an option exercise price related to certain previously
reported option grants. Allen W. Dahl filed an amended report to include shares
that had been acquired by his wife prior to their marriage, with respect to
which he disclaims any beneficial interest.
46
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the annual and long-term compensation of
Donald A. Wright ("Named Executive") for services in all capacities to the
Company for the last three fiscal years. No other officer of the Company
received annual salary and bonuses exceeding $100,000 in the fiscal year ended
May 31, 1997.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------------- -------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Fiscal Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Position Year(1) ($) ($) ($) ($) (#) ($) ($)
- --------- ------- --------- ----- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald A.
Wright 1997 160,000(3) 0 0 0 920,000 0 400(5)
CEO(2) and 1996 110,577 0 0 0 112,560 0 400(5)
President 1995 83,654(3) 0 0 0 100,000(4) 0 0
- -----------
(1) Information is shown for the May 31 fiscal years of the Company after
November 1996, of PCTH prior to November 1996, and of Original PCTH prior
to February 1995, which employed Mr. Wright during the relevant periods.
(2) Mr. Wright became the Chief Executive Officer of the Company in November
1996 upon the Reincorporation Merger, and of PCTH in February 1995, upon
effectiveness of the Verazzana merger. See Item 1 - "Description of
Business - Formation - Holding Company."
(3) A portion of the compensation shown for Mr. Wright for the fiscal year
ended May 31, 1997 was paid by PCTH, and the remainder was paid by the
Company. A portion of his compensation for fiscal year ended May 31, 1995
was paid by Original PCTH, and the remainder was paid by PCTH.
(4) Represents unexercised, but exercisable, warrants to purchase 100,000
shares of Common Stock. See "Aggregated Option/SAR Exercises and Fiscal
Year-End Option/SAR Values," below.
(5) Represents estimated value of the personal use of a company car.
</TABLE>
Option Grants
The following table sets forth information on grants of stock options or
other similar rights by the Company during the last fiscal year to the Named
Executive.
47
<PAGE>
<TABLE>
<CAPTION>
Percent of Total Market Price
Number of Securities Options/SARs Exercise or on Date of
Underlying Options/ Granted to Employees Base Price Grant Expiration
Name SARs Granted (#) in Fiscal Year ($/Share) ($/Share) Date
- ---- -------------------- -------------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Donald A. Wright 920,000 94.52% 2.375- 2.365- July 2006-
4.6875 4.6875 May 2007
</TABLE>
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values. The
following table sets forth information concerning exercise of stock options and
warrants during the last fiscal year by the Named Executive and the fiscal year
end value of unexercised options:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/SARs at FY-end (#) SARs at FY-end ($)
-------------------------- -------------------
Shares Acquired Value
Name on Exercise (#) Realized Exercisable Unexercisable Exercisable(2) Unexercisable
- ---- --------------- -------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald A. Wright 0 0 1,074,024(1) 58,536 $167,375 N/A
- --------------
(1) Includes warrants that were granted by Original PCTH on December 24, 1994,
and converted by the Company, as of November 30, 1996, into warrants to
purchase 100,000 shares of Common Stock at $2.00 per share, which are
currently exercisable in full.
(2) Exercisable options and warrants to purchase 229,024 shares have exercise
prices of less than $3.16 per share, the closing price of the Common Stock
on May 31, 1997.
</TABLE>
Employment Agreements
Donald A. Wright
Recent Employment Agreement. Mr. Wright was employed by the Company during
fiscal 1997 pursuant to an Employment Agreement dated June 1, 1996 (the "Recent
Employment Agreement"). Under the Recent Employment Agreement, Mr. Wright
received an annual base salary of $160,000 for fiscal year 1997.
New Employment Agreement. The Recent Employment Agreement was superseded by
an Employment Agreement dated as of June 1, 1997 (the "New Employment
Agreement"). The New Employment Agreement has a term of five years, ending on
May 31, 2002, unless terminated earlier. Under the New Employment Agreement, Mr.
Wright will receive an annual base salary of $192,000 for fiscal year 1998, a
15% increase for each of fiscal years 1999 and 2000, and such increases as are
determined by the Board of Directors for fiscal years 2001 and 2002. The New
Employment Agreement prohibits Mr. Wright from competing with the Company for
two years following termination.
Option Grant. Pursuant to the Recent Employment Agreement, the Board of
Directors awarded Mr. Wright options to purchase up to 15,000 shares of Common
Stock at $2.875 per share for his performance during fiscal year 1997, all of
which are currently exercisable. Under the New Employment Agreement, Mr. Wright
will be entitled to an award of fully-vested options to purchase 25,000 shares
of
48
<PAGE>
Common Stock at the end of each fiscal year during the term of the New
Employment Agreement, and options to purchase up to another 250,000 shares per
year based on a specified formula.
Severance Provisions. Under the New Employment Agreement, if a "change of
control" of the Company occurs and within six months thereafter Mr. Wright is
terminated without "cause" or terminates his employment for "good reason" (as
such terms are defined in the New Employment Agreement), Mr. Wright would be
entitled to receive a severance payment equal to twice his annual base salary
then in effect, subject to certain exceptions provided in the New Employment
Agreement. The term "change of control" includes the following events: (1) a
change in composition of the Board of Directors over any two-year period such
that the directors at the beginning of the period, together with directors
subsequently approved by the continuing directors, no longer constituted a
majority of the Board, (2) any person becoming the beneficial owner of
securities having 30% or more of the voting power of the Company's outstanding
voting securities, subject to certain exceptions in the New Employment
Agreement, or (3) a change of control of beneficial ownership of the Company's
voting securities that triggers reporting under Item 16(e) of Schedule 14A of
Regulation 14 under the Exchange Act. Any such severance payment under the New
Employment Agreement would be reduced to the extent necessary to avoid
subjecting the payment to penalty taxes on parachute payments. In addition to
such severance payment, Mr. Wright and his family would be entitled to continue
to participate for one year after such termination in employee health and
medical benefits plans and programs in which they were participants when
employment terminated, to the extent permitted by such plans and programs.
Benefit Plans
Registration of Underlying Shares
In June 1997, the Company filed a Form S-8 Registration Statement with the
Commission registering the 2,260,000 shares issuable under the Company's Amended
and Restated Stock Incentive Plan, Independent Director Stock Plan, and three
stand-alone common stock purchase warrants issued to Donald A. Wright, Nick A.
Gerde, and an employee of Pacific Coast, in connection with their employment.
See "Summary Compensation - Option Grants."
Amended and Restated Stock Incentive Plan
The Company's Amended and Restated Stock Incentive Plan (the "Plan")
provides for the award of incentive stock options ("ISOs") to key employees and
the award of non-qualified stock options ("NSOs"), stock appreciation rights
("SARs"), bonus rights, and other incentive grants to employees and certain
non-employees (other than non-employee directors) who have important
relationships with the Company or its subsidiaries.
Administration. The Plan may be administered by the Board of Directors or
by a committee of directors or officers of the Company. The Board of Directors
has designated an Option Committee to administer the Plan. The Option Committee
determines and designates the individuals to whom awards under the Plan should
be made and the amount and terms and conditions of the awards, except that if
officers of the Company serve on the Option Committee it may not grant options
to such officers. The Option Committee may adopt and amend rules relating to the
administration of the Plan, but only the Board of Directors may amend or
terminate the Plan. The Plan is administered in accordance with Rule 16b-3
adopted under the Exchange Act.
Eligibility. Awards under the Plan may be made to employees, including
employee directors, of the Company and its subsidiaries, and to nonemployee
agents, consultants, advisors, and other persons (but not
49
<PAGE>
including nonemployee directors) that the Option Committee believes have made or
will make an important contribution to the Company or any subsidiary thereof.
Shares Available. Subject to adjustment as provided in the Plan, a maximum
of 2,000,000 shares of Common Stock are reserved for issuance thereunder. The
maximum number of shares with respect to which options may be granted to any
person during any fiscal year is 1,000,000. If an option, SAR or performance
unit granted under the Plan expires or is terminated or canceled, the unissued
shares subject to such option, SAR or performance unit are again available under
the Plan. In addition, if shares sold or awarded as a bonus under the Plan are
forfeited to the Company or repurchased thereby, the number of shares forfeited
or repurchased are again available under the Plan.
Term. Unless earlier terminated by the Board, the Plan will continue in
effect until the earlier of: (i) ten years from the date on which the Plan is
adopted by the Board, and (ii) the date on which all shares available for
issuance under the Plan have been issued and all restrictions on such shares
have lapsed. The Board may suspend or terminate the Plan at any time except with
respect to options, performance units, and shares subject to restrictions then
outstanding under the Plan.
Stock Option Grants. The Option Committee may grant ISOs and NSOs under the
Plan. With respect to each option grant, the Option Committee determines the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised (including
whether the option will be subject to any vesting requirements and whether there
will be any conditions precedent to exercise of the option), and the other terms
and conditions of the option. As of the end of fiscal 1997, options to purchase
an aggregate of 1,143,616 shares of Common Stock had been granted under the
Plan. See "Description of Securities - Stock Options."
ISOs are subject to special terms and conditions. The aggregate fair market
value, on the date of the grant, of the Common Stock for which an ISO is
exercisable for the first time by the optionee during any calendar year, may not
exceed $100,000. An ISO may not be granted to an employee who possesses more
than 10% of the total voting power of the Company's stock unless the option
price is at least 110% of the fair market value of the Common Stock subject to
the option on the date it is granted and the option is not exercisable five
years after the date of grant. No ISO may be exercisable after ten years from
the date of grant. The option price may not be less than 100% of the fair market
value of the Common Stock covered by the option at the date of grant.
In general, no vested option may be exercised unless at the time of such
exercise the optionee is employed by or in the service of the Company or any
subsidiary thereof, within 12 months following termination of employment by
reason of death or disability, or within three months following termination for
any other reason except for cause. Options are nonassignable and nontransferable
by the optionee except by will or by the laws of descent and distribution at the
time of the optionee's death. No shares may be issued pursuant to the exercise
of an option until full payment therefor has been made. Upon the exercise of an
option, the number of shares reserved for issuance under the Plan will be
reduced by the number of shares issued upon exercise of the option.
Stock Appreciation Rights. The Option Committee may grant SARs under the
Plan. Each SAR entitles the holder, upon exercise, to receive from the Company
an amount equal to the excess of the fair market value on the date of exercise
of one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a SAR granted in connection with an option,
the excess of the fair market value of one share of Common Stock of the Company
over the option price per share under the option to which the SAR relates),
multiplied by the number of shares covered by the SAR or the option. Payment by
the Company
50
<PAGE>
upon exercise of a SAR may be made in Common Stock, in cash, or by a combination
of Common Stock and cash.
If a SAR is granted in connection with an option, the following rules shall
apply: (i) the SAR shall be exercisable only to the extent and on the same
conditions that the related option could be exercised; (ii) the SAR shall be
exercisable only when the fair market value of the stock exceeds the option
price of the related option; (iii) the SAR shall be for no more than 100% of the
excess of the fair market value of the stock at the time of exercise over the
option price; (iv) upon exercise of the SAR, the option or portion thereof to
which the SAR relates terminates; and (v) upon exercise of the option, the
related SAR or portion thereof terminates.
Each SAR is nonassignable and nontransferable by the holder except by will
or by the laws of descent and distribution at the time of the holder's death.
Upon the exercise of a SAR for shares, the number of shares reserved for
issuance under the Plan will be reduced by the number of shares issued. Cash
payments of SARs will not reduce the number of shares of Common Stock reserved
for issuance under the Plan. No SARs have been granted under the Plan.
Restricted Stock. The Option Committee may issue shares of Common Stock
under the Plan subject to the terms, conditions, and restrictions determined
thereby. Upon the issuance of restricted stock, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued. No
restricted shares have been granted under the Plan.
Stock Bonus Awards. The Option Committee may award shares of Common Stock
as a stock bonus under the Plan. The Option Committee may determine the
recipients of the awards, the number of shares to be awarded, and the time of
the award. Stock received as a stock bonus is subject to the terms, conditions,
and restrictions determined by the Option Committee at the time the stock is
awarded. No stock bonus awards have been granted under the Plan.
Cash Bonus Rights. The Option Committee may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii) SARs
granted or previously granted, (iii) stock bonuses awarded or previously
awarded, and (iv) shares issued under the Plan. Bonus rights granted in
connection with options entitle the optionee to a cash bonus if and when the
related option is exercised. The amount of the bonus is determined by
multiplying the excess of the total fair market value of the shares acquired
upon the exercise over the total option price for the shares by the applicable
bonus percentage. The bonus rights granted in connection with a SAR entitle the
holder to a cash bonus when the SAR is exercised. The amount of the bonus is
determined by multiplying the total fair market value of the shares or cash
received pursuant to the exercise of the SAR by the applicable percentage. The
bonus percentage applicable to any bonus right is determined by the Option
Committee but may in no event exceed 75%. Bonus rights granted in connection
with stock bonuses entitle the recipient to a cash bonus, in an amount
determined by the Option Committee, when the stock is awarded or purchased or
any restrictions to which the stock is subject lapse. No bonus rights have been
granted under the Plan.
Performance Units. The Option Committee may grant performance units
consisting of monetary units which may be earned if the Company achieves certain
goals established by the Committee over a designated period of time. The goals
established by the Option Committee may include earnings per share, return on
shareholders' equity, return on invested capital, and similar benchmarks.
Payment of an award earned may be in cash or in Common Stock or partly in both,
and may be made when earned, or vested and deferred, as the Option Committee
determines. Each performance unit will be nonassignable and nontransferable by
the holder except by will or by the laws of descent and distribution at the time
of the holder's death. The number of shares reserved for issuance under the Plan
shall be reduced by the number of shares issued upon payment of an award. No
performance units have been granted under the Plan.
51
<PAGE>
Changes in Capital Structure. The Plan provides that if the outstanding
Common Stock of the Company is increased or decreased or 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 recapitalization, stock split
or certain other transactions, appropriate adjustment will be made by the Option
Committee in the number and kind of shares available for grants under the Plan.
In addition, the Option Committee will make appropriate adjustments in the
number and kind of shares as to which outstanding options will be exercisable.
In the event of a merger, consolidation or other fundamental corporate
transformation, the Board may, in its sole discretion, permit outstanding
options to remain in effect in accordance with their terms; to be converted into
options to purchase stock in the surviving or acquiring corporation in the
transaction; or to be exercised, to the extent then exercisable, during a 30-day
period prior to the consummation of the transaction.
Independent Director Stock Plan
The Company's Independent Director Stock Plan (the "Director Plan")
provides for the award of shares of Common Stock to non-employee directors of
the Company to attract, reward, and retain qualified individuals to serve as
directors and to provide added incentive to such persons by increasing their
ownership interest in the Company.
Administration. The Director Plan may be administered by the Board of
Directors or by a committee of directors and officers of the Company. The Board
has delegated to the Compensation Committee the responsibility of administering
the Director Plan. Subject to the requirements of the Director Plan, the
Compensation Committee has the authority to, among other things, determine the
fair market value of the Common Stock, interpret the Director Plan and
prescribe, amend, and rescind rules and regulations relating thereto, and make
all determinations deemed necessary or advisable to administer the Director
Plan, except that only the Board of Directors may suspend, amend or terminate
the Director Plan. No director may vote on any action by the Board of Directors
with respect to any matter relating to an award held by such director. The
Director Plan is administered in accordance with Rule 16b-3 adopted under the
Exchange Act.
Eligibility. Shares may be awarded under the Director Plan only to
Independent Directors. The term "Independent Director" means a director who is
not an employee of the Company or any of its subsidiaries.
Shares Available. The total number of shares of Common Stock that may be
awarded as bonuses under the Director Plan may not exceed 100,000 shares. If any
share awarded under the Director Plan is forfeited, such share will again be
available for purposes of the Director Plan.
Term. Unless earlier suspended or terminated by the Board, the Director
Plan will continue in effect until the earlier of: (a) ten years from the date
on which it is adopted by the Board, and (b) the date on which all shares
available for issuance under the Director Plan have been issued.
Initial Award. Each of the Independent Directors elected at and since the
shareholders' meeting at which the Director Plan was adopted received 500 shares
of Common Stock (the "Initial Award"), for a total of 3,500 shares as of May 31,
1997. Since May 31, 1997, three new directors have joined the Board, and a total
of 1,500 shares of Common Stock have been issued to them pursuant to Annual
Awards. Any new Independent Director will receive an Initial Award upon such
Independent Director's first election or appointment to the Board.
Annual Award. Each Independent Director also will be awarded additional
shares (the "Annual Award") in an amount determined in accordance with the
formula set forth below, on an annual basis, each time he or she is elected to
the Board (or, if directors are elected to serve terms longer than one year, as
of the date of each annual shareholders' meeting during that term). The number
of shares awarded in the Annual
52
<PAGE>
Award will be equivalent to the result of $5,000 divided by the fair market
value of a share on the date of the award, rounded to the nearest 100 shares (or
a fraction thereof if the Independent Director is elected or appointed to the
Board at any time other than at the annual meeting of shareholders). At May 31,
1997, a total of 19,900 shares of Common Stock had been issued to Independent
Directors as Annual Awards, and an additional 2,109 shares have been issued to
new directors since that date.
Vesting and Forfeiture. Shares issued pursuant to an Initial Award are
fully vested upon the date of the award. Shares issued pursuant to an Annual
Award vest in full on the first anniversary following the date of the Annual
Award if the Independent Director has attended at least 75% of the regularly
scheduled meetings of the Board during that year (the "Vesting Period"). If an
Independent Director does not attend at least 75% of the regularly scheduled
meetings of the Board during the Vesting Period, the shares issued pursuant to
that Annual Award will expire and be forfeited without having vested. If a
Director ceases to be an Independent Director for any reason other than death or
disability before his or her last Annual Award vests, the shares issued pursuant
to that Annual Award will be forfeited. However, the Board of Directors may
waived or modify the vesting requirement prior to the first anniversary date of
any Annual Award by unanimous vote. If an Independent Director is unable to
continue his or her service as a director as a result of his or her disability
or death, unvested shares of such Independent Director will immediately become
vested as of the date of disability or death. In the event of a merger,
consolidation or plan of exchange to which the Company is a party and in which
the Company is not the survivor, or a sale of all or substantially all of the
Company's assets, any unvested shares will vest automatically upon the closing
of such transaction.
Status Before Vesting. Each Independent Director will be a shareholder of
record with respect to all shares awarded under the Director Plan, whether or
not vested. No Independent Director may transfer any interest in unvested shares
to any person other than to the Company.
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, in the event that compensation paid by the Company to a "covered
employee" (the chief executive officer and the next four highest paid employees)
in a year were to exceed an aggregate of $1,000,000, the Company's deduction for
such compensation could be limited to $1,000,000.
53
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table shows, to the best of the Company's knowledge based on
the records of the Company's transfer agent and the Company's records on
issuances of shares, as adjusted to reflect changes in ownership documented in
filings with the Securities and Exchange Commission made by certain shareholders
and provided to the Company pursuant to Section 16 of the Exchange Act and
statements provided to the Company by certain shareholders, Common Stock
ownership as of June 25, 1997 (except as otherwise noted), by (1) each person
known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock ("Principal Shareholder"), (2) each of the Company's
directors, (3) the Named Executive in the Summary Compensation Table, and (4)
all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership of:
--------------------------------------------
% of % of
Common Common % of Preferred Preferred
Name and Address of Beneficial Owner Stock(1) Stock(2) Warrants Warrants Stock Stock(2)
- ------------------------------------ -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Donald A. Wright
c/o Pacific Aerospace & Electronics,
Inc.
434 Olds Station Road
Wenatchee, WA 98801 1,387,474(3) 12.01% 1,500 * --- ---
Herman L. "Jack" Jones
3761 School Street
Wenatchee, WA 98801 701,437 7.18% --- --- --- ---
Roger Vallo
2707 Colby Avenue
Suite 1101
Everett, WA 98201 221,326(4) 2.27% --- --- --- ---
Donald B. Cotton
538 Timber Ridge Drive
Trophy Club, TX 76262 105,909(5) 1.08% --- --- --- ---
Allen W. Dahl
7300 Madrona Drive N.E.
Bainbridge Island, WA 98110 62,825(6) * --- --- --- ---
Dr. Urs Diebold
c/o Lysys AGREEMENT
Gessnerallee 38
P.O. Box CH-8023
Zurich, Switzerland 6,300(7) * --- * --- ---
William A. Wheeler
2011 Lombard Lane
Yakima, WA 98902 4,267 * --- * --- ---
54
<PAGE>
Dale L. Rasmussen
c/o AirSensors, Inc.
708 Industra Dr.
Tukwila, WA 98188 1,267 * --- * --- ---
Leonard, L.P.
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167 --- --- --- --- 15,500 32%
Paresco, Inc.
101 Hudson Street, 37th Floor
Jersey City, NJ 07302 130,718 1.25% --- --- 10,000 20%
Strome Partners, L.P.
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401 35,118 * --- --- 4,145 9%
Strome Offshore, Ltd.
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401 34,069 * --- --- 4,430 9%
Strome Hedgecap, L.P.
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401 32,557 * --- --- 4,215 9%
GAM Arbitrage Investments, Inc.
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167 --- --- --- --- 2,500 5%
All Executive Officers and Directors as
a group (nine persons) 2,598,977(8) 22.3% 5,500 * --- ---
- --------------
* Less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days are treated as outstanding
for determining the amount and percentage of Common or Preferred Stock
owned by such individual. Shares for which beneficial ownership is
disclaimed by an individual also are included for purposes of determining
the amount and percentage of Common or Preferred Stock owned by such
individual. To the Company's knowledge, each person has sole voting and
sole investment power with respect to the shares shown except as noted,
subject to community property laws, where applicable.
(2) Rounded to the nearest 1/10th of one percent, based on 10,482,430 shares of
Common Stock outstanding on June 25, 1997, and 47,862 shares of Preferred
Stock outstanding on June 25, 1997.
(3) Includes 34,266 shares held by Ragen MacKenzie, Incorporated, custodian for
Donald A. Wright, in two IRA accounts. Also includes currently exercisable
warrants to purchase 100,000 shares of Common Stock, and currently
exercisable options to purchase 974,024 shares of Common Stock.
55
<PAGE>
(4) Includes 216,666 shares held by PACO on behalf of Seattle-First National
Bank, custodian for Roger P. Vallo IRA.
(5) Includes 69,443 shares held by Lincoln Trust Company, custodian for Donald
B. Cotton IRA.
(6) Includes 31,249 shares issued to Evablanche Armson Dahl. Dr. Dahl disclaims
beneficial ownership of these securities.
(7) Does not include 1,075 shares issued pursuant to the Company's Independent
Director Stock Plan upon Dr. Diebold's appointment to the Board as of July
18, 1977.
(8) Includes currently exercisable warrants to purchase up to 125,000 shares of
Common Stock, and currently exercisable options to purchase up to 1,045,446
shares of Common Stock. Does not include the shares described in note (7),
above.
</TABLE>
56
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's acquisition of Cashmere in May 1994,
Cashmere sold the land and buildings, located in Cashmere, Washington, where its
manufacturing facilities were then located, to Herman L. "Jack" Jones, a
Principal Shareholder and director of the Company, and to John M. Eder, a former
director of the Company and presently President of Seismic and an Executive Vice
President of Cashmere, for $975,207. Cashmere received a note from Mr. Jones for
the sales price, payable in monthly installments of $7,600 through May 2014,
including interest at 7% per annum. The note was collateralized by the land and
the buildings that then housed Cashmere's operations. No significant gain or
loss to the Company resulted from this transaction. Cashmere leased these
premises from Mr. Jones for a term of three years with monthly lease payments of
$9,000. In May 1995, the Company and Messrs. Jones and Eder reached an agreement
for Cashmere to reacquire a portion of the land and buildings. Under that
agreement, Cashmere canceled $673,990 of the outstanding note from Mr. Jones,
Mr. Jones agreed to assume the payment obligation of Cashmere under certain bank
debt related to the property, although Cashmere remains an obligor under that
bank debt, and Cashmere renewed the $278,795 balance of the note from Mr. Jones
under the same terms as the bank debt. Although Mr. Jones has agreed to
negotiate to refinance the bank debt in his name and remove Cashmere as an
obligor, there is no assurance that Cashmere will be removed as an obligor on
the bank debt. The Company paid Mr. Jones $108,000 in May 1995 for the
cancellation of the lease, which was terminated upon completion of Cashmere's
new facility in Wenatchee, Washington.
In fiscal 1995, Original PCTH entered into a funding agreement (the
"Funding Agreement") with Lysys Ltd. ("Lysys"). Under the Funding Agreement,
Lysys has the right to nominate one of the Company's Board members until July
1998. Dr. Diebold was nominated by Lysys and was appointed as a director of the
Company by the Board of Directors on July 18, 1997, upon the resignation of
Lysys' previous nominee. Dr. Diebold is a general partner of Lysys. Roger D.
Dudley, one of the Company's directors from February 1995 to November 1995, was
associated with Lysys, although he was not a director, executive officer or
equity owner of Lysys.
The Company entered into another agreement with Lysys in fiscal 1996, as
amended (the "Placement Agreement"), pursuant to which Lysys facilitated the
sale by the Company of 838,470 shares of Common Stock in an offering exempt from
registration under Regulation S of the Securities Act. The Company raised
approximately $3.4 million from the offering, from which Lysys was paid a
commission of $234,772. Pursuant to the Placement Agreement, the Company issued
30,000 shares of Common Stock to a designee of Lysys as additional compensation
in connection with the offering.
In fiscal 1996, Allen W. Dahl, a director of the Company, loaned Morel
$100,000 pursuant to the terms of a promissory note, for working capital until
consummation of the Morel merger, as defined in the following paragraph. All
amounts due under this note were paid in full by Morel in December 1995.
On December 1, 1995 (effective for accounting purposes on November 30,
1995), the Company effected a merger between a subsidiary of the Company that
was formed for such purpose and Morel (the "Morel merger"). See Item 1 -
"Description of Business - Formation - Acquisition of Subsidiaries." As
consideration for the Morel merger, the Company, after certain post-closing
adjustments, issued 650,000 shares of Common Stock to Stephen L. Morel and Mark
Morel (the "Morel Shareholders"). Also in connection with the Morel merger, the
Company entered into a registration rights agreement with the Morel
Shareholders, pursuant to which the Morel Shareholders were granted the right,
under certain circumstances, to have up to 50% of their shares registered, at
the Company's expense, on an equal basis with other shareholders of the Company
within two years after the date of closing. These registration rights were
waived as to the July 1996 public offering and as to the Form S-3 Registration.
Prior to the Morel merger, no material relationship existed between Morel and
the Company or any of its affiliates, directors, officers, or
57
<PAGE>
their associates, except that Morel and certain subsidiaries of the Company
transacted business from time to time in the ordinary course of business.
In fiscal 1996, Robert L. Smith, then a director of the Company, loaned the
Company $150,000 pursuant to a promissory note from the Company to Mr. Smith
that accrued interest at 18% per annum and was due in full on September 27,
1996. This loan, plus accrued interest and a loan fee that together amounted to
$15,000, was paid in full on August 9, 1996. The Company also issued Mr. Smith a
warrant to purchase 37,500 shares of Common Stock at $4.80 per share that is now
immediately exercisable. In addition, the warrant grants Mr. Smith certain
rights to register the shares issuable upon exercise of the warrant. Mr. Smith
waived his rights to register those shares in the July 1996 public offering and
the Preferred Stock offering. The warrant is currently held by Mr. Smith's
estate.
In June 1997, the Company entered into a letter of intent with Jungle
Street in connection with the Company's formation of its Information Technology
Group. See Item 1 - "Description of Business - The Information Technology
Group." Under the Jungle Street letter of intent, the Company would purchase
newly issued shares of common stock of Jungle Street amounting to 60% of the
outstanding common stock of Jungle Street. In addition, the Company has entered
into an Operating Agreement with Jungle Street, and has advanced funds to Jungle
Street and its subsidiary pursuant to that Operating Agreement. See Item 2
"Business - Information Technology Group" and Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Roger Vallo and Donald Cotton, directors of the Company, are
directors and shareholders, and Mr. Vallo is CEO, of Jungle Street. In addition,
Donald A. Wright, the Company's Chief Executive Officer and President, and Nick
A. Gerde, the Company's Chief Financial Officer, Vice President, Finance and
Treasurer, are shareholders of Jungle Street and were directors until June 1997.
Allen Dahl, a director of the Company, is a shareholder, but not a director, of
Jungle Street. Messrs. Vallo, Cotton, Dahl, Wright, and Gerde have each
personally guaranteed, or indemnified guarantors of, certain obligations of
Jungle Street or its subsidiary.
58
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc. as
filed on September 20, 1996, with the Secretary of State of the State
of Washington.(12)
3.2 Articles of Merger of PCT Holdings, Inc. into Pacific Aerospace &
Electronics, Inc., filed with the Nevada Secretary of State on
November 30, 1996.(12)
3.3 Articles of Merger of PCT Holdings, Inc. with and into Pacific
Aerospace & Electronics, Inc., filed with the Washington Secretary of
State on November 30, 1996.(12)
3.4 Amendment to Articles of Incorporation of the Company Containing
Designation of Rights and Preferences of Series A Convertible
Preferred Stock, as corrected. (13)
3.5 Bylaws of Pacific Aerospace & Electronics, Inc.(12)
4.1 Form of specimen certificate for Common Stock.(12)
4.2 Form of specimen certificate for Warrants.(12)
4.3 Form of specimen certificate for the Preferred Stock.(13)
4.4 Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1, 1996.(11)
4.5 Registration Rights Agreement, dated December 1, 1995, between PCT
Holdings, Inc. and Stephen L. Morel and Mark Morel.(6)
4.6 Registration Rights Agreement, dated November 30, 1995, between PCT
Holdings, Inc., Seismic Safety Products, Inc., a Florida corporation,
and certain of its shareholders.(6)
4.7 Registration Rights Agreement between the Company and the Selling
Shareholders in the Preferred Stock offering. (13)
4.8 Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO
Associates, Ltd. dated May 22, 1996.(2)
4.9 Purchase Warrant from PCT Holdings, Inc. to Paulson Investment
Company, Inc. dated July 15, 1996.(11)
4.10 Purchase Warrant from PCT Holdings, Inc. to Cohig & Associates, Inc.
dated July 15, 1996.(11)
4.11 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Donald A. Wright dated as of November 30, 1996.(15)
4.12 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Nick A. Gerde dated as of November 30, 1996.(15)
4.13 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L.
Smith dated as of May 22, 1996.(7)
4.14 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to David A. Noyes & Company dated June 3, 1997 (18)
4.15 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Gregory K. Smith dated June 3, 1997 (18)
4.16 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Richard Cross dated June 3, 1997 (18)
4.17 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Nestor Wiegand dated June 3, 1997 (18)
10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc.
and Lysys Ltd.(4)
10.2 Amended and Restated Stock Incentive Plan.(17)
10.3 Independent Director Stock Plan.(16)
59
<PAGE>
10.4 Amendment to Employment Agreement, dated March 1, 1996, between PCT
Holdings, Inc. and Donald A. Wright.(7)
10.5 Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
Electronics, Inc. and Donald A. Wright. (18)
10.6 Amended Employment Agreement, dated March 1, 1996, between PCT
Holdings, Inc. and Nick A. Gerde.(7)
10.7 Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
Electronics, Inc. and Nick A. Gerde.(18)
10.8 Commitment Letter, dated May 29, 1997, from Key Bank of Washington to
Pacific Aerospace & Electronics, Inc.(18)
10.9 Loan Agreement, dated June 30, 1997, between Keybank National
Association and Pacific Aerospace & Electronics, Inc.(18)
10.10 Revolving Note, dated June 30, 1997, from Pacific Aerospace &
Electronics, Inc. to Keybank National Association.(18)
10.11 Loan and Security Agreement, dated April 24, 1995, between Silicon
Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
Technologies, Inc.(4)
10.12 Loan Modification Agreement, dated July 26, 1996, between Silicon
Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere
Manufacturing Co., Inc., Pacific Coast Technologies, Inc. and Seismic
Safety Products, Inc.(11)
10.13 Loan Modification Agreement, dated January 31, 1997, between Silicon
Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
Technologies, Inc. and Seismic Safety Products, Inc.(18)
10.14 Promissory Note, dated June 1, 1994, in the principal amount of
$400,000, from Pacific Coast Technologies, Inc. to James C. Kyle and
Carol A. Kyle.(4)
10.15 Promissory Note Extension, dated January 1, 1995, in the principal
amount of $387,800, from Pacific Coast Technologies, Inc. to James C.
Kyle and Carol A. Kyle.(4)
10.16 Revised and Restated Promissory Note, dated May 17, 1996, from Morel
Industries, Inc. to Richard and Jacquelyn Doane.(8)
10.17 Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard
and Jacquelyn Doane.(7)
10.18 Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc.
to Richard and Jacquelyn Doane.(8)
10.19 Promissory Note, dated March 15, 1996, from Cashmere Manufacturing
Co., Inc. to Cashmere Valley Bank, Inc.(8)
10.20 Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones
to Cashmere Valley Bank.(8)
10.21 Amended and Restated Promissory Note from PCT Holdings, Inc. to
Robert L. Smith dated as of May 22, 1996.(7)
10.22 Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd.
dated as of May 22, 1996.(7)
10.23 Security Agreement between PCT Holdings, Inc. and UTCO Associates,
Ltd. dated as of May 22, 1996.(8)
10.24 Asset Purchase Agreement, dated October 27, 1995, between PCT
Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc.,
a Washington corporation, PCT Holdings, Inc., a Washington
corporation, Seismic Safety Products, Inc., a Florida corporation,
and certain of its affiliates.(5)
10.25 Patent Purchase Agreement, dated October 27, 1995, between PCT
Holdings, Inc., a Washington corporation, Seismic Safety Products,
Inc., a Washington corporation, and James C. McGill.(5)
60
<PAGE>
10.26 Patent Purchase Agreement, dated October 24, 1995, between PCT
Holdings, Inc., a Washington corporation, Seismic Safety Products,
Inc., a Washington corporation, and James C. McGill and Antonio F.
Fernandez.(5)
10.27 Agreement and Plan of Merger, dated November 30, 1995, between PCT
Holdings, Inc., a Nevada corporation, Morel Acquisition Corporation,
Morel Industries, Inc., Stephen L. Morel, and Mark Morel.(6)
10.28 Asset Purchase Agreement, dated April 30, 1997, between Pacific
Aerospace & Electronics, Inc., NTI, Inc. and Northwest Technical
Industries, Incorporated.(14)
10.29 Intellectual Property Acquisition and License Agreement, dated June
1, 1994, between Pacific Coast Technologies, Inc. and James C.
Kyle.(4)
10.30 Amended and Restated Agreement, dated May 30, 1996, between Herman L.
"Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(9)
10.31 Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings,
Inc. dated March 15, 1996.(9)
10.32 Lease Agreement, dated February 1, 1993, between the Port of Chelan
County and Pacific Coast Technologies, Inc.(4)
10.33 Addendum to Lease Agreement with Pacific Coast Technologies, Inc.,
dated April 22, 1993, between the Port of Chelan County and Pacific
Coast Technologies, Inc.(4)
10.34 1994 Addendum to Lease Agreement with Pacific Coast Technologies,
Inc., executed May 11, 1995 between the Port of Chelan County and
Pacific Coast Technologies, Inc.(18)
10.35 1995 Addendum to Lease Agreement with Pacific Coast Technologies,
Inc., dated September 19, 1995 between the Port of Chelan County and
Pacific Coast Technologies, Inc.(18)
10.36 1997 Addendum to Lease Agreement with Pacific Coast Technologies,
Inc., last executed as of June 19, 1997 between the Port of Chelan
County and Pacific Coast Technologies, Inc.(18)
10.37 Lease Agreement between the Port of Chelan County and Cashmere
Manufacturing Co., Inc. dated November 4, 1994.(8)
10.38 Building Construction Agreement between the Port of Chelan County and
Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8)
10.39 General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft
between Cashmere Manufacturing Co., Inc. and Boeing Commercial
Airplane Group, effective as of February 5, 1990, as amended.(8)
10.40 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of December
18, 1992.(8)(10)
10.41 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of December
31, 1991.(8)(10)
10.42 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of August
11, 1994.(8)(10)
10.43 Special Business Provisions No. PLR-950A between The Boeing Company
and Cashmere Manufacturing Co., Inc. effective as of February 5,
1990.(8)(10)
10.44 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(8)
10.45 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of February
26, 1996.(8)(10)
10.46 General Terms Agreement No. BCA-65311-0044 between The Boeing Company
and Cashmere Manufacturing Co., Inc. effective as of February 26,
1996.(8)
16.1 Letter from accountant regarding a change of accountants.(3)
21. List of Subsidiaries.(18)
23. Consent of Moss Adams LLP.(18)
61
<PAGE>
27. Financial Data Schedule.(18)
- --------------
(1) Purposely Omitted.
(2) Incorporated by reference to the Company's Registration Statement on Form
8-A filed on May 16, 1995.
(3) Incorporated by reference to the Company's Current Report on Form 8-K/A
filed on June 22, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB of
the year ended May 31, 1995.
(5) Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1995.
(6) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 18, 1995.
(7) Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed on May 31, 1996.
(8) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(9) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form SB-2 filed on July 12, 1996.
(10) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1996.
(12) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 12, 1996, reporting the Reincorporation Merger.
(13) Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997, reporting the Preferred Stock offering.
(14) Incorporated by reference to the Company's Current Report on Form 8-K filed
on May 15, 1997. reporting the NTI acquisition.
(15) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on June 11, 1997.
(16) Incorporated by reference to the Company's Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.
(17) Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.
62
<PAGE>
(18) Filed with this Form 10-KSB.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K, dated February 10,
1997, reporting the Preferred Stock offering and the NTI letter of intent.
(ii) The Company filed a Current Report on Form 8-K, dated April 30,
1997, reporting the acquisition of NTI.
63
<PAGE>
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: July 31, 1997
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
-------------------------------------
DONALD A. WRIGHT
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on July 31, 1997.
Signatures Title
- ---------- -----
/s/ DONALD A. WRIGHT President, Chief Executive Officer, and
- ---------------------------------- Chairman of the Board
DONALD A. WRIGHT (Principal Executive Officer)
/s/ NICK A. GERDE Vice President, Finance, Chief Financial
- ---------------------------------- Officer, Treasurer and Assistant
NICK A. GERDE Secretary (Principal Financial and
Accounting Officer)
/s/ DONALD B. COTTON
- ---------------------------------- Director
DONALD B. COTTON
/s/ ALLEN W. DAHL Director
- ----------------------------------
ALLEN W. DAHL
/s/ HERMAN L. "JACK" JONES Director
- ----------------------------------
HERMAN L. "JACK" JONES
/s/ DALE L. RASMUSSEN Director
- ----------------------------------
DALE L. RASMUSSEN
/s/ URS DIEBOLD Director
- ----------------------------------
URS DIEBOLD
/s/ ROGER P. VALLO Director
- ----------------------------------
ROGER P. VALLO
/s/ WILLIAM A. WHEELER Director
- ----------------------------------
WILLIAM A. WHEELER
64
<PAGE>
EXHIBIT INDEX
The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc. as
filed on September 20, 1996, with the Secretary of State of the State
of Washington.(12)
3.2 Articles of Merger of PCT Holdings, Inc. into Pacific Aerospace &
Electronics, Inc., filed with the Nevada Secretary of State on
November 30, 1996.(12)
3.3 Articles of Merger of PCT Holdings, Inc. with and into Pacific
Aerospace & Electronics, Inc., filed with the Washington Secretary of
State on November 30, 1996.(12)
3.4 Amendment to Articles of Incorporation of the Company Containing
Designation of Rights and Preferences of Series A Convertible
Preferred Stock, as corrected. (13)
3.5 Bylaws of Pacific Aerospace & Electronics, Inc.(12)
4.1 Form of specimen certificate for Common Stock.(12)
4.2 Form of specimen certificate for Warrants.(12)
4.3 Form of specimen certificate for the Preferred Stock.(13)
4.4 Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1, 1996.(11)
4.5 Registration Rights Agreement, dated December 1, 1995, between PCT
Holdings, Inc. and Stephen L. Morel and Mark Morel.(6)
4.6 Registration Rights Agreement, dated November 30, 1995, between PCT
Holdings, Inc., Seismic Safety Products, Inc., a Florida corporation,
and certain of its shareholders.(6)
4.7 Registration Rights Agreement between the Company and the Selling
Shareholders in the Preferred Stock offering. (13)
4.8 Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO
Associates, Ltd. dated May 22, 1996.(2)
4.9 Purchase Warrant from PCT Holdings, Inc. to Paulson Investment
Company, Inc. dated July 15, 1996.(11)
4.10 Purchase Warrant from PCT Holdings, Inc. to Cohig & Associates, Inc.
dated July 15, 1996.(11)
4.11 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Donald A. Wright dated as of November 30, 1996.(15)
4.12 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Nick A. Gerde dated as of November 30, 1996.(15)
4.13 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L.
Smith dated as of May 22, 1996.(7)
4.14 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to David A. Noyes & Company dated June 3, 1997 (18)
4.15 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Gregory K. Smith dated June 3, 1997 (18)
4.16 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Richard Cross dated June 3, 1997 (18)
4.17 Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
Inc. to Nestor Wiegand dated June 3, 1997 (18)
10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc.
and Lysys Ltd.(4)
10.2 Amended and Restated Stock Incentive Plan.(17)
10.3 Independent Director Stock Plan.(16)
10.4 Amendment to Employment Agreement, dated March 1, 1996, between PCT
Holdings, Inc. and Donald A. Wright.(7)
10.5 Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
Electronics, Inc. and Donald A. Wright. (18)
65
<PAGE>
10.6 Amended Employment Agreement, dated March 1, 1996, between PCT
Holdings, Inc. and Nick A. Gerde.(7)
10.7 Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
Electronics, Inc. and Nick A. Gerde.(18)
10.8 Commitment Letter, dated May 29, 1997, from Key Bank of Washington to
Pacific Aerospace & Electronics, Inc.(18)
10.9 Loan Agreement, dated June 30, 1997, between Keybank National
Association and Pacific Aerospace & Electronics, Inc.(18)
10.10 Revolving Note, dated June 30, 1997, from Pacific Aerospace &
Electronics, Inc. to Keybank National Association.(18)
10.11 Loan and Security Agreement, dated April 24, 1995, between Silicon
Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
Technologies, Inc.(4)
10.12 Loan Modification Agreement, dated July 26, 1996, between Silicon
Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere
Manufacturing Co., Inc., Pacific Coast Technologies, Inc. and Seismic
Safety Products, Inc.(11)
10.13 Loan Modification Agreement, dated January 31, 1997, between Silicon
Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
Technologies, Inc. and Seismic Safety Products, Inc.(18)
10.14 Promissory Note, dated June 1, 1994, in the principal amount of
$400,000, from Pacific Coast Technologies, Inc. to James C. Kyle and
Carol A. Kyle.(4)
10.15 Promissory Note Extension, dated January 1, 1995, in the principal
amount of $387,800, from Pacific Coast Technologies, Inc. to James C.
Kyle and Carol A. Kyle.(4)
10.16 Revised and Restated Promissory Note, dated May 17, 1996, from Morel
Industries, Inc. to Richard and Jacquelyn Doane.(8)
10.17 Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard
and Jacquelyn Doane.(7)
10.18 Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc.
to Richard and Jacquelyn Doane.(8)
10.19 Promissory Note, dated March 15, 1996, from Cashmere Manufacturing
Co., Inc. to Cashmere Valley Bank, Inc.(8)
10.20 Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones
to Cashmere Valley Bank.(8)
10.21 Amended and Restated Promissory Note from PCT Holdings, Inc. to
Robert L. Smith dated as of May 22, 1996.(7)
10.22 Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd.
dated as of May 22, 1996.(7)
10.23 Security Agreement between PCT Holdings, Inc. and UTCO Associates,
Ltd. dated as of May 22, 1996.(8)
10.24 Asset Purchase Agreement, dated October 27, 1995, between PCT
Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc.,
a Washington corporation, PCT Holdings, Inc., a Washington
corporation, Seismic Safety Products, Inc., a Florida corporation,
and certain of its affiliates.(5)
10.25 Patent Purchase Agreement, dated October 27, 1995, between PCT
Holdings, Inc., a Washington corporation, Seismic Safety Products,
Inc., a Washington corporation, and James C. McGill.(5)
10.26 Patent Purchase Agreement, dated October 24, 1995, between PCT
Holdings, Inc., a Washington corporation, Seismic Safety Products,
Inc., a Washington corporation, and James C. McGill and Antonio F.
Fernandez.(5)
10.27 Agreement and Plan of Merger, dated November 30, 1995, between PCT
Holdings, Inc., a Nevada corporation, Morel Acquisition Corporation,
Morel Industries, Inc., Stephen L. Morel, and Mark Morel.(6)
10.28 Asset Purchase Agreement, dated April 30, 1997, between Pacific
Aerospace & Electronics, Inc., NTI, Inc. and Northwest Technical
Industries, Incorporated.(14)
66
<PAGE>
10.29 Intellectual Property Acquisition and License Agreement, dated June
1, 1994, between Pacific Coast Technologies, Inc. and James C.
Kyle.(4)
10.30 Amended and Restated Agreement, dated May 30, 1996, between Herman L.
"Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(9)
10.31 Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings,
Inc. dated March 15, 1996.(9)
10.32 Lease Agreement, dated February 1, 1993, between the Port of Chelan
County and Pacific Coast Technologies, Inc.(4)
10.33 Addendum to Lease Agreement with Pacific Coast Technologies, Inc.,
dated April 22, 1993, between the Port of Chelan County and Pacific
Coast Technologies, Inc.(4)
10.34 1994 Addendum to Lease Agreement with Pacific Coast Technologies,
Inc., executed May 11, 1995 between the Port of Chelan County and
Pacific Coast Technologies, Inc.(18)
10.35 1995 Addendum to Lease Agreement with Pacific Coast Technologies,
Inc., dated September 19, 1995 between the Port of Chelan County and
Pacific Coast Technologies, Inc.(18)
10.36 1997 Addendum to Lease Agreement with Pacific Coast Technologies,
Inc., last executed as of June 19, 1997 between the Port of Chelan
County and Pacific Coast Technologies, Inc.(18)
10.37 Lease Agreement between the Port of Chelan County and Cashmere
Manufacturing Co., Inc. dated November 4, 1994.(8)
10.38 Building Construction Agreement between the Port of Chelan County and
Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8)
10.39 General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft
between Cashmere Manufacturing Co., Inc. and Boeing Commercial
Airplane Group, effective as of February 5, 1990, as amended.(8)
10.40 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of December
18, 1992.(8)(10)
10.41 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of December
31, 1991.(8)(10)
10.42 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of August
11, 1994.(8)(10)
10.43 Special Business Provisions No. PLR-950A between The Boeing Company
and Cashmere Manufacturing Co., Inc. effective as of February 5,
1990.(8)(10)
10.44 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(8)
10.45 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of February
26, 1996.(8)(10)
10.46 General Terms Agreement No. BCA-65311-0044 between The Boeing Company
and Cashmere Manufacturing Co., Inc. effective as of February 26,
1996.(8)
16.1 Letter from accountant regarding a change of accountants.(3)
21. List of Subsidiaries.(18)
23. Consent of Moss Adams LLP.(18)
27. Financial Data Schedule.(18)
- --------------
(1) Purposely Omitted.
(2) Incorporated by reference to the Company's Registration Statement on Form
8-A filed on May 16, 1995.
(3) Incorporated by reference to the Company's Current Report on Form 8-K/A
filed on June 22, 1995.
67
<PAGE>
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB of
the year ended May 31, 1995.
(5) Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1995.
(6) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 18, 1995.
(7) Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed on May 31, 1996.
(8) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(9) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form SB-2 filed on July 12, 1996.
(10) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1996.
(12) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 12, 1996, reporting the Reincorporation Merger.
(13) Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997, reporting the Preferred Stock offering.
(14) Incorporated by reference to the Company's Current Report on Form 8-K filed
on May 15, 1997. reporting the NTI acquisition.
(15) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on June 11, 1997.
(16) Incorporated by reference to the Company's Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.
(17) Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.
(18) Filed with this Form 10-KSB.
68
EXHIBIT 4.14
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE LAW, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANT
Expiring June 3, 2002
June 3, 1997
Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), for value received, hereby certifies that David A. Noyes & Company,
of 208 South LaSalle Street, Chicago, Illinois 60604, is entitled to purchase
from the Company at any time from time to time beginning on the date of this
warrant and prior to 5:00 p.m., Pacific Standard time, on June 3, 2002, 50,000
duly authorized shares (subject to adjustment pursuant to Section 2 below) of
the Company's common stock, $.001 par value per share (the "Warrant Stock"), at
a purchase price per share of $3.45, all subject to the terms, conditions, and
possible adjustments set forth below.
1. Exercise of Warrant.
1.1 Manner of Exercise. The holder of this Warrant may exercise it, in
whole or in part, during normal business hours on any business day by
surrendering this Warrant to the Company at the Company's principal office,
accompanied by an executed subscription agreement in substantially the form
attached hereto as Exhibit A and by payment, in cash or by certified or official
bank check payable to the order of the Company, or by any combination of such
methods, in the amount obtained by multiplying (a) the number of shares of
Warrant Stock designated in such subscription by (b) $3.45, whereupon such
holder shall be entitled to receive the number of duly authorized, validly
issued, fully paid and nonassessable shares of Warrant Stock as is indicated on
the subscription.
1.2 When Exercise Effective. Each exercise of this Warrant shall be
deemed to have been effected immediately prior to the close of business on the
business day on which this Warrant shall have been surrendered to the Company as
provided in Section 1.1 and, at such time, the person or persons in whose name
or names any certificate or certificates for shares of
-1-
<PAGE>
Warrant Stock shall be issued upon such exercise shall be deemed for all
corporate purposes to have become the holder of record thereof.
1.3 Delivery of Stock Certificates. As soon as practicable after each
exercise of this Warrant, and in any event within five business days thereafter,
the Company, at its expense, will cause to be issued in the name of and
delivered to the holder hereof, or to the person or entity such holder may
direct (after payment by such holder of any applicable transfer taxes), a
certificate or certificates for the number of duly authorized, validly issued,
fully paid and nonassessable shares of Warrant Stock to which the holder or its
designee shall be entitled upon such exercise.
1.4 Partial Exercise.
1.4.1 Fractional Shares. In the event of any partial exercise of
this Warrant, the Company will not issue certificates for any fractional shares
of the Warrant Stock to which the holder otherwise may be entitled, and the
Company shall not be obligated to refund an amount of cash comprising the market
value of any fractional share of Warrant Stock for which the Company will not
issue a certificate.
1.4.2 Replacement Warrant. In the event of any partial exercise
of this Warrant, upon tender of this Warrant to the Company, the Company shall
issue a new Warrant containing the same terms and conditions as this Warrant but
calling on the face thereof for the number of shares of Warrant Stock equal to
the number of shares called for on the face of this Warrant minus the number of
shares of Warrant Stock issued upon the partial exercise of this Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at
any time or from time to time after the date of this Warrant, but before
expiration, effects a split or subdivision of the outstanding shares of its then
outstanding common stock into a greater number of shares of common stock, or if
the Company effects a reverse split of the outstanding shares of its common
stock into a lesser number of shares of common stock (by reclassification or
otherwise than by payment of a dividend in common stock), then, and in each such
case, the number of shares called for on the face of this Warrant (or the face
of any replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
3. Restrictions on Transfer.
3.1 Restrictive Legends. Each replacement Warrant issued upon partial
exercise or the transfer of any Warrant shall contain a legend in substantially
the following form:
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS
-2-
<PAGE>
OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT
AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THIS WARRANT.
Each certificate for Warrant Stock issued upon the exercise of any Warrant, and
each certificate issued upon the transfer of any such Warrant Stock, shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, OR
TRANSFERRED IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933 AND
APPROPRIATE STATE SECURITIES LAWS. FURTHERMORE, NO OFFER, SALE, OR
TRANSFER, IS TO TAKE PLACE UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL, AT SHAREHOLDER'S EXPENSE, AND SATISFACTORY TO IT, THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
3.2 Notice of Proposed Transfer. Prior to the transfer of any shares
of Warrant Stock, and during any period during which such shares of Warrant
Stock are not registered by the Company under an effective registration
statement filed pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), the holder thereof shall give written notice to the Company,
which notice shall (a) state such holder's intention to transfer such restricted
shares and to comply in all other respects with the transfer requirements of
this Warrant; (b) describe the circumstances of the proposed transfer in
sufficient detail to enable counsel to render the opinions referred to below;
and (c) designate counsel for the holder giving such notice. The holder giving
such notice shall submit a copy thereof to the counsel designated in such notice
and the Company will promptly submit a copy thereof to its counsel. The
following provisions shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder designated
in the notice the proposed transfer may be effected without registration of such
shares of Warrant Stock under the Securities Act and any applicable state
securities laws, and (b) counsel for the Company shall not have rendered an
opinion within 15 days after receipt by the Company of the notice required by
Section 3.2 that registration is required, the holder shall thereupon be
entitled to transfer such shares of Warrant Stock in accordance with the terms
of the notice delivered by such holder to the Company. Each Warrant or
certificate, if any, issued upon or in connection with such transfer shall bear
the appropriate restrictive legend set forth in Section 3.1, unless in the
opinion of each such counsel the legend is no longer required to insure
compliance with the Securities Act.
-3-
<PAGE>
3.2.2 If in the opinion of either or both of such counsel the
proposed transfer may not legally be effected without registration of the shares
of Warrant Stock under the Securities Act or applicable state securities laws,
the Company will promptly so notify the holder thereof and the holder shall not
be entitled to transfer the shares of Warrant Stock until receipt of a further
notice from the holder under Section 3.2.1 above and opinions as to
transferability, or until registration of such shares of Warrant Stock under the
Securities Act or applicable state law has become effective (provided that the
Company has no obligation to register Warrant Stock other than pursuant to
Section 6 below).
4. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
the number of shares of Warrant Stock that would be issuable upon the exercise
of all Warrants at the time outstanding. All such shares shall be duly
authorized and, when issued upon such exercise, shall be validly issued, fully
paid and nonassessable.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in whose
name any Warrant is registered on the Company's records as the owner and holder
thereof for all purposes, notwithstanding any notice to the contrary.
Nevertheless, when a Warrant is properly assigned in blank, the holder thereof
may exercise the Warrant without first having a new Warrant issued.
5.2 Transfer and Exchange of Warrants. Upon the surrender of any
Warrant, properly endorsed, for registration of transfer or exchange at the
principal office of the Company, the Company will execute and (after payment by
the holder of any applicable transfer taxes) deliver to any person specified by
the holder of the Warrant a new Warrant or Warrants of like tenor.
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any loss, theft or destruction of any Warrant, upon
delivery of indemnity reasonably satisfactory to the Company in form and amount
or, in the case of mutilation, upon surrender of the Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
6. Registration Rights. For a period of one year following the final
exercise of rights to purchase Warrant Stock under this Warrant, if the Company
shall determine to register any of its common stock either for its own account
or the account of a security holder or holders, other than a registration
relating solely to (i) employee benefit plans, or (ii) registration on any
registration form that does not permit secondary sales, the Company will: (a)
promptly give written notice of the proposed registration to the holder of this
Warrant or any Warrant Stock issued or issuable upon the exercise of this
Warrant; and (b) with respect to any Warrant
-4-
<PAGE>
Stock that has not been held for a two-year period, include in such registration
(and any related qualification or other compliance filing under applicable blue
sky laws), and in any underwriting involved therein, all or any portion of the
Warrant Stock then issued or issuable upon exercise of this Warrant as specified
in a written request made by such holders within thirty (30) days after receipt
of the written notice from the Company described in clause (a) above. If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the holders as
part of the written notice described in clause (a) above. In such event, the
holders' rights to registration pursuant to this Section 6 shall be conditioned
upon participation in the underwriting and the inclusion of stock in the
underwriting to the extent provided herein. Holders and the Company (and any
other security holders proposing to distribute their securities through the
underwriting) shall enter into an underwriting agreement in customary form with
the representatives of the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provisions of this
Section 6, if the representatives of the underwriter or underwriters determine
in good faith that marketing factors make it advisable to impose a limitation on
the number of secondary shares to be included in the registration, the number of
such secondary shares, if any, that may be included in the registration and
underwriting on behalf of such holders, and any other security holders proposing
to distribute their securities of the Company through such underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
securities that they had requested to be included in such registration at the
time of filing the registration statement. If such holders disapprove of the
terms of any such underwriting, they may elect to withdraw therefrom by written
notice to the Company and the representatives of the underwriter or
underwriters.
7. No Rights or Liabilities as Stockholder. Nothing herein shall give or
shall be construed to give the holder of this Warrant any of the rights of a
shareholder of the Company, including without limitation the right to vote on
matters requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders of common stock, or the right to a pro-rata
distribution upon the Company's dissolution.
8. Notices. All notices and other communications provided for herein shall
be delivered or mailed by first class mail, postage prepaid, addressed (a) if to
the holders of any Warrant, to the registered address of the holder as set forth
in the register kept at the principal office of the Company, or (b) if to the
Company, to its principal office, 434 Olds Station Road, Wenatchee, Washington
98801, or to the address of such other principal office of the Company as the
Company shall have furnished to each holder of any Warrants in writing; provided
that the exercise of any Warrants shall be effective only in the manner provided
in Section 1.
9. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by the laws of the State of Washington.
The headings of this Warrant are inserted for convenience only and shall not be
deemed to constitute a part hereof.
-5-
<PAGE>
10. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Pacific Standard time, on June 3, 2002.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: DONALD A. WRIGHT
------------------------------------------
Donald A. Wright, President
-6-
<PAGE>
Exhibit A
SUBSCRIPTION
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant.)
To: Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, WA 98801
Attn: President
The undersigned hereby irrevocably subscribes for ________ shares of the
Common Stock, $.001 par value per share, of Pacific Aerospace & Electronics,
Inc., a Washington corporation, pursuant to and in accordance with the terms and
conditions of a Warrant dated June 3, 1997 (the "Warrant"), and tenders with the
Warrant and this Subscription Agreement payment of $_____________ as payment for
the shares, and requests that a certificate for such shares be issued in the
name of the undersigned and be delivered to the undersigned at the address
stated below.
-----------------------------------------
(Print name)
-----------------------------------------
(Signature)
By
--------------------------------------
Its
----------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
Taxpayer ID #:
--------------------------
Date:
--------------
-7-
EXHIBIT 4.15
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE LAW, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANT
Expiring June 3, 2002
June 3, 1997
Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), for value received, hereby certifies that Gregory K. Smith, of 208
South LaSalle Street, Chicago, Illinois 60604, is entitled to purchase from the
Company at any time from time to time beginning on the date of this warrant and
prior to 5:00 p.m., Pacific Standard time, on June 3, 2002, 50,000 duly
authorized shares (subject to adjustment pursuant to Section 2 below) of the
Company's common stock, $.001 par value per share (the "Warrant Stock"), at a
purchase price per share of $3.45, all subject to the terms, conditions, and
possible adjustments set forth below.
1. Exercise of Warrant.
1.1 Manner of Exercise. The holder of this Warrant may exercise it, in
whole or in part, during normal business hours on any business day by
surrendering this Warrant to the Company at the Company's principal office,
accompanied by an executed subscription agreement in substantially the form
attached hereto as Exhibit A and by payment, in cash or by certified or official
bank check payable to the order of the Company, or by any combination of such
methods, in the amount obtained by multiplying (a) the number of shares of
Warrant Stock designated in such subscription by (b) $3.45, whereupon such
holder shall be entitled to receive the number of duly authorized, validly
issued, fully paid and nonassessable shares of Warrant Stock as is indicated on
the subscription.
1.2 When Exercise Effective. Each exercise of this Warrant shall be
deemed to have been effected immediately prior to the close of business on the
business day on which this Warrant shall have been surrendered to the Company as
provided in Section 1.1 and, at such time, the person or persons in whose name
or names any certificate or certificates for shares of
-1-
<PAGE>
Warrant Stock shall be issued upon such exercise shall be deemed for all
corporate purposes to have become the holder of record thereof.
1.3 Delivery of Stock Certificates. As soon as practicable after each
exercise of this Warrant, and in any event within five business days thereafter,
the Company, at its expense, will cause to be issued in the name of and
delivered to the holder hereof, or to the person or entity such holder may
direct (after payment by such holder of any applicable transfer taxes), a
certificate or certificates for the number of duly authorized, validly issued,
fully paid and nonassessable shares of Warrant Stock to which the holder or its
designee shall be entitled upon such exercise.
1.4 Partial Exercise.
1.4.1 Fractional Shares. In the event of any partial exercise of
this Warrant, the Company will not issue certificates for any fractional shares
of the Warrant Stock to which the holder otherwise may be entitled, and the
Company shall not be obligated to refund an amount of cash comprising the market
value of any fractional share of Warrant Stock for which the Company will not
issue a certificate.
1.4.2 Replacement Warrant. In the event of any partial exercise
of this Warrant, upon tender of this Warrant to the Company, the Company shall
issue a new Warrant containing the same terms and conditions as this Warrant but
calling on the face thereof for the number of shares of Warrant Stock equal to
the number of shares called for on the face of this Warrant minus the number of
shares of Warrant Stock issued upon the partial exercise of this Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at
any time or from time to time after the date of this Warrant, but before
expiration, effects a split or subdivision of the outstanding shares of its then
outstanding common stock into a greater number of shares of common stock, or if
the Company effects a reverse split of the outstanding shares of its common
stock into a lesser number of shares of common stock (by reclassification or
otherwise than by payment of a dividend in common stock), then, and in each such
case, the number of shares called for on the face of this Warrant (or the face
of any replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
3. Restrictions on Transfer.
3.1 Restrictive Legends. Each replacement Warrant issued upon partial
exercise or the transfer of any Warrant shall contain a legend in substantially
the following form:
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS
-2-
<PAGE>
OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT
AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THIS WARRANT.
Each certificate for Warrant Stock issued upon the exercise of any Warrant, and
each certificate issued upon the transfer of any such Warrant Stock, shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, OR
TRANSFERRED IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933 AND
APPROPRIATE STATE SECURITIES LAWS. FURTHERMORE, NO OFFER, SALE, OR
TRANSFER, IS TO TAKE PLACE UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL, AT SHAREHOLDER'S EXPENSE, AND SATISFACTORY TO IT, THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
3.2 Notice of Proposed Transfer. Prior to the transfer of any shares
of Warrant Stock, and during any period during which such shares of Warrant
Stock are not registered by the Company under an effective registration
statement filed pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), the holder thereof shall give written notice to the Company,
which notice shall (a) state such holder's intention to transfer such restricted
shares and to comply in all other respects with the transfer requirements of
this Warrant; (b) describe the circumstances of the proposed transfer in
sufficient detail to enable counsel to render the opinions referred to below;
and (c) designate counsel for the holder giving such notice. The holder giving
such notice shall submit a copy thereof to the counsel designated in such notice
and the Company will promptly submit a copy thereof to its counsel. The
following provisions shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder designated
in the notice the proposed transfer may be effected without registration of such
shares of Warrant Stock under the Securities Act and any applicable state
securities laws, and (b) counsel for the Company shall not have rendered an
opinion within 15 days after receipt by the Company of the notice required by
Section 3.2 that registration is required, the holder shall thereupon be
entitled to transfer such shares of Warrant Stock in accordance with the terms
of the notice delivered by such holder to the Company. Each Warrant or
certificate, if any, issued upon or in connection with such transfer shall bear
the appropriate restrictive legend set forth in Section 3.1, unless in the
opinion of each such counsel the legend is no longer required to insure
compliance with the Securities Act.
-3-
<PAGE>
3.2.2 If in the opinion of either or both of such counsel the
proposed transfer may not legally be effected without registration of the shares
of Warrant Stock under the Securities Act or applicable state securities laws,
the Company will promptly so notify the holder thereof and the holder shall not
be entitled to transfer the shares of Warrant Stock until receipt of a further
notice from the holder under Section 3.2.1 above and opinions as to
transferability, or until registration of such shares of Warrant Stock under the
Securities Act or applicable state law has become effective (provided that the
Company has no obligation to register Warrant Stock other than pursuant to
Section 6 below).
4. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
the number of shares of Warrant Stock that would be issuable upon the exercise
of all Warrants at the time outstanding. All such shares shall be duly
authorized and, when issued upon such exercise, shall be validly issued, fully
paid and nonassessable.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in whose
name any Warrant is registered on the Company's records as the owner and holder
thereof for all purposes, notwithstanding any notice to the contrary.
Nevertheless, when a Warrant is properly assigned in blank, the holder thereof
may exercise the Warrant without first having a new Warrant issued.
5.2 Transfer and Exchange of Warrants. Upon the surrender of any
Warrant, properly endorsed, for registration of transfer or exchange at the
principal office of the Company, the Company will execute and (after payment by
the holder of any applicable transfer taxes) deliver to any person specified by
the holder of the Warrant a new Warrant or Warrants of like tenor.
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any loss, theft or destruction of any Warrant, upon
delivery of indemnity reasonably satisfactory to the Company in form and amount
or, in the case of mutilation, upon surrender of the Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
6. Registration Rights. For a period of one year following the final
exercise of rights to purchase Warrant Stock under this Warrant, if the Company
shall determine to register any of its common stock either for its own account
or the account of a security holder or holders, other than a registration
relating solely to (i) employee benefit plans, or (ii) registration on any
registration form that does not permit secondary sales, the Company will: (a)
promptly give written notice of the proposed registration to the holder of this
Warrant or any Warrant Stock issued or issuable upon the exercise of this
Warrant; and (b) with respect to any Warrant
-4-
<PAGE>
Stock that has not been held for a two-year period, include in such registration
(and any related qualification or other compliance filing under applicable blue
sky laws), and in any underwriting involved therein, all or any portion of the
Warrant Stock then issued or issuable upon exercise of this Warrant as specified
in a written request made by such holders within thirty (30) days after receipt
of the written notice from the Company described in clause (a) above. If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the holders as
part of the written notice described in clause (a) above. In such event, the
holders' rights to registration pursuant to this Section 6 shall be conditioned
upon participation in the underwriting and the inclusion of stock in the
underwriting to the extent provided herein. Holders and the Company (and any
other security holders proposing to distribute their securities through the
underwriting) shall enter into an underwriting agreement in customary form with
the representatives of the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provisions of this
Section 6, if the representatives of the underwriter or underwriters determine
in good faith that marketing factors make it advisable to impose a limitation on
the number of secondary shares to be included in the registration, the number of
such secondary shares, if any, that may be included in the registration and
underwriting on behalf of such holders, and any other security holders proposing
to distribute their securities of the Company through such underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
securities that they had requested to be included in such registration at the
time of filing the registration statement. If such holders disapprove of the
terms of any such underwriting, they may elect to withdraw therefrom by written
notice to the Company and the representatives of the underwriter or
underwriters.
7. No Rights or Liabilities as Stockholder. Nothing herein shall give or
shall be construed to give the holder of this Warrant any of the rights of a
shareholder of the Company, including without limitation the right to vote on
matters requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders of common stock, or the right to a pro-rata
distribution upon the Company's dissolution.
8. Notices. All notices and other communications provided for herein shall
be delivered or mailed by first class mail, postage prepaid, addressed (a) if to
the holders of any Warrant, to the registered address of the holder as set forth
in the register kept at the principal office of the Company, or (b) if to the
Company, to its principal office, 434 Olds Station Road, Wenatchee, Washington
98801, or to the address of such other principal office of the Company as the
Company shall have furnished to each holder of any Warrants in writing; provided
that the exercise of any Warrants shall be effective only in the manner provided
in Section 1.
9. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by the laws of the State of Washington.
The headings of this Warrant are inserted for convenience only and shall not be
deemed to constitute a part hereof.
-5-
<PAGE>
10. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Pacific Standard time, on June 3, 2002.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: DONALD A. WRIGHT
------------------------------------------
Donald A. Wright, President
-6-
<PAGE>
Exhibit A
SUBSCRIPTION
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant.)
To: Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, WA 98801
Attn: President
The undersigned hereby irrevocably subscribes for ________ shares of the
Common Stock, $.001 par value per share, of Pacific Aerospace & Electronics,
Inc., a Washington corporation, pursuant to and in accordance with the terms and
conditions of a Warrant dated June 3, 1997 (the "Warrant"), and tenders with the
Warrant and this Subscription Agreement payment of $_____________ as payment for
the shares, and requests that a certificate for such shares be issued in the
name of the undersigned and be delivered to the undersigned at the address
stated below.
-----------------------------------------
(Print name)
-----------------------------------------
(Signature)
By
--------------------------------------
Its
----------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
Taxpayer ID #:
--------------------------
Date:
--------------
-7-
EXHIBIT 4.16
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE LAW, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANT
Expiring June 3, 2002
June 3, 1997
Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), for value received, hereby certifies that Richard Cross, of 208
South LaSalle Street, Chicago, Illinois 60604, is entitled to purchase from the
Company at any time from time to time beginning on the date of this warrant and
prior to 5:00 p.m., Pacific Standard time, on June 3, 2002, 20,000 duly
authorized shares (subject to adjustment pursuant to Section 2 below) of the
Company's common stock, $.001 par value per share (the "Warrant Stock"), at a
purchase price per share of $3.45, all subject to the terms, conditions, and
possible adjustments set forth below.
1. Exercise of Warrant.
1.1 Manner of Exercise. The holder of this Warrant may exercise it, in
whole or in part, during normal business hours on any business day by
surrendering this Warrant to the Company at the Company's principal office,
accompanied by an executed subscription agreement in substantially the form
attached hereto as Exhibit A and by payment, in cash or by certified or official
bank check payable to the order of the Company, or by any combination of such
methods, in the amount obtained by multiplying (a) the number of shares of
Warrant Stock designated in such subscription by (b) $3.45, whereupon such
holder shall be entitled to receive the number of duly authorized, validly
issued, fully paid and nonassessable shares of Warrant Stock as is indicated on
the subscription.
1.2 When Exercise Effective. Each exercise of this Warrant shall be
deemed to have been effected immediately prior to the close of business on the
business day on which this Warrant shall have been surrendered to the Company as
provided in Section 1.1 and, at such time, the person or persons in whose name
or names any certificate or certificates for shares of
-1-
<PAGE>
Warrant Stock shall be issued upon such exercise shall be deemed for all
corporate purposes to have become the holder of record thereof.
1.3 Delivery of Stock Certificates. As soon as practicable after each
exercise of this Warrant, and in any event within five business days thereafter,
the Company, at its expense, will cause to be issued in the name of and
delivered to the holder hereof, or to the person or entity such holder may
direct (after payment by such holder of any applicable transfer taxes), a
certificate or certificates for the number of duly authorized, validly issued,
fully paid and nonassessable shares of Warrant Stock to which the holder or its
designee shall be entitled upon such exercise.
1.4 Partial Exercise.
1.4.1 Fractional Shares. In the event of any partial exercise of
this Warrant, the Company will not issue certificates for any fractional shares
of the Warrant Stock to which the holder otherwise may be entitled, and the
Company shall not be obligated to refund an amount of cash comprising the market
value of any fractional share of Warrant Stock for which the Company will not
issue a certificate.
1.4.2 Replacement Warrant. In the event of any partial exercise
of this Warrant, upon tender of this Warrant to the Company, the Company shall
issue a new Warrant containing the same terms and conditions as this Warrant but
calling on the face thereof for the number of shares of Warrant Stock equal to
the number of shares called for on the face of this Warrant minus the number of
shares of Warrant Stock issued upon the partial exercise of this Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at
any time or from time to time after the date of this Warrant, but before
expiration, effects a split or subdivision of the outstanding shares of its then
outstanding common stock into a greater number of shares of common stock, or if
the Company effects a reverse split of the outstanding shares of its common
stock into a lesser number of shares of common stock (by reclassification or
otherwise than by payment of a dividend in common stock), then, and in each such
case, the number of shares called for on the face of this Warrant (or the face
of any replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
3. Restrictions on Transfer.
3.1 Restrictive Legends. Each replacement Warrant issued upon partial
exercise or the transfer of any Warrant shall contain a legend in substantially
the following form:
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS
-2-
<PAGE>
OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT
AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THIS WARRANT.
Each certificate for Warrant Stock issued upon the exercise of any Warrant, and
each certificate issued upon the transfer of any such Warrant Stock, shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, OR
TRANSFERRED IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933 AND
APPROPRIATE STATE SECURITIES LAWS. FURTHERMORE, NO OFFER, SALE, OR
TRANSFER, IS TO TAKE PLACE UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL, AT SHAREHOLDER'S EXPENSE, AND SATISFACTORY TO IT, THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
3.2 Notice of Proposed Transfer. Prior to the transfer of any shares
of Warrant Stock, and during any period during which such shares of Warrant
Stock are not registered by the Company under an effective registration
statement filed pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), the holder thereof shall give written notice to the Company,
which notice shall (a) state such holder's intention to transfer such restricted
shares and to comply in all other respects with the transfer requirements of
this Warrant; (b) describe the circumstances of the proposed transfer in
sufficient detail to enable counsel to render the opinions referred to below;
and (c) designate counsel for the holder giving such notice. The holder giving
such notice shall submit a copy thereof to the counsel designated in such notice
and the Company will promptly submit a copy thereof to its counsel. The
following provisions shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder designated
in the notice the proposed transfer may be effected without registration of such
shares of Warrant Stock under the Securities Act and any applicable state
securities laws, and (b) counsel for the Company shall not have rendered an
opinion within 15 days after receipt by the Company of the notice required by
Section 3.2 that registration is required, the holder shall thereupon be
entitled to transfer such shares of Warrant Stock in accordance with the terms
of the notice delivered by such holder to the Company. Each Warrant or
certificate, if any, issued upon or in connection with such transfer shall bear
the appropriate restrictive legend set forth in Section 3.1, unless in the
opinion of each such counsel the legend is no longer required to insure
compliance with the Securities Act.
-3-
<PAGE>
3.2.2 If in the opinion of either or both of such counsel the
proposed transfer may not legally be effected without registration of the shares
of Warrant Stock under the Securities Act or applicable state securities laws,
the Company will promptly so notify the holder thereof and the holder shall not
be entitled to transfer the shares of Warrant Stock until receipt of a further
notice from the holder under Section 3.2.1 above and opinions as to
transferability, or until registration of such shares of Warrant Stock under the
Securities Act or applicable state law has become effective (provided that the
Company has no obligation to register Warrant Stock other than pursuant to
Section 6 below).
4. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
the number of shares of Warrant Stock that would be issuable upon the exercise
of all Warrants at the time outstanding. All such shares shall be duly
authorized and, when issued upon such exercise, shall be validly issued, fully
paid and nonassessable.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in whose
name any Warrant is registered on the Company's records as the owner and holder
thereof for all purposes, notwithstanding any notice to the contrary.
Nevertheless, when a Warrant is properly assigned in blank, the holder thereof
may exercise the Warrant without first having a new Warrant issued.
5.2 Transfer and Exchange of Warrants. Upon the surrender of any
Warrant, properly endorsed, for registration of transfer or exchange at the
principal office of the Company, the Company will execute and (after payment by
the holder of any applicable transfer taxes) deliver to any person specified by
the holder of the Warrant a new Warrant or Warrants of like tenor.
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any loss, theft or destruction of any Warrant, upon
delivery of indemnity reasonably satisfactory to the Company in form and amount
or, in the case of mutilation, upon surrender of the Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
6. Registration Rights. For a period of one year following the final
exercise of rights to purchase Warrant Stock under this Warrant, if the Company
shall determine to register any of its common stock either for its own account
or the account of a security holder or holders, other than a registration
relating solely to (i) employee benefit plans, or (ii) registration on any
registration form that does not permit secondary sales, the Company will: (a)
promptly give written notice of the proposed registration to the holder of this
Warrant or any Warrant Stock issued or issuable upon the exercise of this
Warrant; and (b) with respect to any Warrant
-4-
<PAGE>
Stock that has not been held for a two-year period, include in such registration
(and any related qualification or other compliance filing under applicable blue
sky laws), and in any underwriting involved therein, all or any portion of the
Warrant Stock then issued or issuable upon exercise of this Warrant as specified
in a written request made by such holders within thirty (30) days after receipt
of the written notice from the Company described in clause (a) above. If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the holders as
part of the written notice described in clause (a) above. In such event, the
holders' rights to registration pursuant to this Section 6 shall be conditioned
upon participation in the underwriting and the inclusion of stock in the
underwriting to the extent provided herein. Holders and the Company (and any
other security holders proposing to distribute their securities through the
underwriting) shall enter into an underwriting agreement in customary form with
the representatives of the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provisions of this
Section 6, if the representatives of the underwriter or underwriters determine
in good faith that marketing factors make it advisable to impose a limitation on
the number of secondary shares to be included in the registration, the number of
such secondary shares, if any, that may be included in the registration and
underwriting on behalf of such holders, and any other security holders proposing
to distribute their securities of the Company through such underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
securities that they had requested to be included in such registration at the
time of filing the registration statement. If such holders disapprove of the
terms of any such underwriting, they may elect to withdraw therefrom by written
notice to the Company and the representatives of the underwriter or
underwriters.
7. No Rights or Liabilities as Stockholder. Nothing herein shall give or
shall be construed to give the holder of this Warrant any of the rights of a
shareholder of the Company, including without limitation the right to vote on
matters requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders of common stock, or the right to a pro-rata
distribution upon the Company's dissolution.
8. Notices. All notices and other communications provided for herein shall
be delivered or mailed by first class mail, postage prepaid, addressed (a) if to
the holders of any Warrant, to the registered address of the holder as set forth
in the register kept at the principal office of the Company, or (b) if to the
Company, to its principal office, 434 Olds Station Road, Wenatchee, Washington
98801, or to the address of such other principal office of the Company as the
Company shall have furnished to each holder of any Warrants in writing; provided
that the exercise of any Warrants shall be effective only in the manner provided
in Section 1.
9. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by the laws of the State of Washington.
The headings of this Warrant are inserted for convenience only and shall not be
deemed to constitute a part hereof.
-5-
<PAGE>
10. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Pacific Standard time, on June 3, 2002.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: DONALD A. WRIGHT
------------------------------------------
Donald A. Wright, President
-6-
<PAGE>
Exhibit A
SUBSCRIPTION
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant.)
To: Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, WA 98801
Attn: President
The undersigned hereby irrevocably subscribes for ________ shares of the
Common Stock, $.001 par value per share, of Pacific Aerospace & Electronics,
Inc., a Washington corporation, pursuant to and in accordance with the terms and
conditions of a Warrant dated June 3, 1997 (the "Warrant"), and tenders with the
Warrant and this Subscription Agreement payment of $_____________ as payment for
the shares, and requests that a certificate for such shares be issued in the
name of the undersigned and be delivered to the undersigned at the address
stated below.
-----------------------------------------
(Print name)
-----------------------------------------
(Signature)
By
--------------------------------------
Its
----------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
Taxpayer ID #:
--------------------------
Date:
--------------
-7-
EXHIBIT 4.17
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE LAW, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANT
Expiring June 3, 2002
June 3, 1997
Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), for value received, hereby certifies that Nestor Wiegand, of 208
South LaSalle Street, Chicago, Illinois 60604, is entitled to purchase from the
Company at any time from time to time beginning on the date of this warrant and
prior to 5:00 p.m., Pacific Standard time, on June 3, 2002, 5,000 duly
authorized shares (subject to adjustment pursuant to Section 2 below) of the
Company's common stock, $.001 par value per share (the "Warrant Stock"), at a
purchase price per share of $3.45, all subject to the terms, conditions, and
possible adjustments set forth below.
1. Exercise of Warrant.
1.1 Manner of Exercise. The holder of this Warrant may exercise it, in
whole or in part, during normal business hours on any business day by
surrendering this Warrant to the Company at the Company's principal office,
accompanied by an executed subscription agreement in substantially the form
attached hereto as Exhibit A and by payment, in cash or by certified or official
bank check payable to the order of the Company, or by any combination of such
methods, in the amount obtained by multiplying (a) the number of shares of
Warrant Stock designated in such subscription by (b) $3.45, whereupon such
holder shall be entitled to receive the number of duly authorized, validly
issued, fully paid and nonassessable shares of Warrant Stock as is indicated on
the subscription.
1.2 When Exercise Effective. Each exercise of this Warrant shall be
deemed to have been effected immediately prior to the close of business on the
business day on which this Warrant shall have been surrendered to the Company as
provided in Section 1.1 and, at such time, the person or persons in whose name
or names any certificate or certificates for shares of
-1-
<PAGE>
Warrant Stock shall be issued upon such exercise shall be deemed for all
corporate purposes to have become the holder of record thereof.
1.3 Delivery of Stock Certificates. As soon as practicable after each
exercise of this Warrant, and in any event within five business days thereafter,
the Company, at its expense, will cause to be issued in the name of and
delivered to the holder hereof, or to the person or entity such holder may
direct (after payment by such holder of any applicable transfer taxes), a
certificate or certificates for the number of duly authorized, validly issued,
fully paid and nonassessable shares of Warrant Stock to which the holder or its
designee shall be entitled upon such exercise.
1.4 Partial Exercise.
1.4.1 Fractional Shares. In the event of any partial exercise of
this Warrant, the Company will not issue certificates for any fractional shares
of the Warrant Stock to which the holder otherwise may be entitled, and the
Company shall not be obligated to refund an amount of cash comprising the market
value of any fractional share of Warrant Stock for which the Company will not
issue a certificate.
1.4.2 Replacement Warrant. In the event of any partial exercise
of this Warrant, upon tender of this Warrant to the Company, the Company shall
issue a new Warrant containing the same terms and conditions as this Warrant but
calling on the face thereof for the number of shares of Warrant Stock equal to
the number of shares called for on the face of this Warrant minus the number of
shares of Warrant Stock issued upon the partial exercise of this Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at
any time or from time to time after the date of this Warrant, but before
expiration, effects a split or subdivision of the outstanding shares of its then
outstanding common stock into a greater number of shares of common stock, or if
the Company effects a reverse split of the outstanding shares of its common
stock into a lesser number of shares of common stock (by reclassification or
otherwise than by payment of a dividend in common stock), then, and in each such
case, the number of shares called for on the face of this Warrant (or the face
of any replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
3. Restrictions on Transfer.
3.1 Restrictive Legends. Each replacement Warrant issued upon partial
exercise or the transfer of any Warrant shall contain a legend in substantially
the following form:
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS
-2-
<PAGE>
OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT
AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THIS WARRANT.
Each certificate for Warrant Stock issued upon the exercise of any Warrant, and
each certificate issued upon the transfer of any such Warrant Stock, shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, OR
TRANSFERRED IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933 AND
APPROPRIATE STATE SECURITIES LAWS. FURTHERMORE, NO OFFER, SALE, OR
TRANSFER, IS TO TAKE PLACE UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL, AT SHAREHOLDER'S EXPENSE, AND SATISFACTORY TO IT, THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
3.2 Notice of Proposed Transfer. Prior to the transfer of any shares
of Warrant Stock, and during any period during which such shares of Warrant
Stock are not registered by the Company under an effective registration
statement filed pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), the holder thereof shall give written notice to the Company,
which notice shall (a) state such holder's intention to transfer such restricted
shares and to comply in all other respects with the transfer requirements of
this Warrant; (b) describe the circumstances of the proposed transfer in
sufficient detail to enable counsel to render the opinions referred to below;
and (c) designate counsel for the holder giving such notice. The holder giving
such notice shall submit a copy thereof to the counsel designated in such notice
and the Company will promptly submit a copy thereof to its counsel. The
following provisions shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder designated
in the notice the proposed transfer may be effected without registration of such
shares of Warrant Stock under the Securities Act and any applicable state
securities laws, and (b) counsel for the Company shall not have rendered an
opinion within 15 days after receipt by the Company of the notice required by
Section 3.2 that registration is required, the holder shall thereupon be
entitled to transfer such shares of Warrant Stock in accordance with the terms
of the notice delivered by such holder to the Company. Each Warrant or
certificate, if any, issued upon or in connection with such transfer shall bear
the appropriate restrictive legend set forth in Section 3.1, unless in the
opinion of each such counsel the legend is no longer required to insure
compliance with the Securities Act.
-3-
<PAGE>
3.2.2 If in the opinion of either or both of such counsel the
proposed transfer may not legally be effected without registration of the shares
of Warrant Stock under the Securities Act or applicable state securities laws,
the Company will promptly so notify the holder thereof and the holder shall not
be entitled to transfer the shares of Warrant Stock until receipt of a further
notice from the holder under Section 3.2.1 above and opinions as to
transferability, or until registration of such shares of Warrant Stock under the
Securities Act or applicable state law has become effective (provided that the
Company has no obligation to register Warrant Stock other than pursuant to
Section 6 below).
4. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
the number of shares of Warrant Stock that would be issuable upon the exercise
of all Warrants at the time outstanding. All such shares shall be duly
authorized and, when issued upon such exercise, shall be validly issued, fully
paid and nonassessable.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in whose
name any Warrant is registered on the Company's records as the owner and holder
thereof for all purposes, notwithstanding any notice to the contrary.
Nevertheless, when a Warrant is properly assigned in blank, the holder thereof
may exercise the Warrant without first having a new Warrant issued.
5.2 Transfer and Exchange of Warrants. Upon the surrender of any
Warrant, properly endorsed, for registration of transfer or exchange at the
principal office of the Company, the Company will execute and (after payment by
the holder of any applicable transfer taxes) deliver to any person specified by
the holder of the Warrant a new Warrant or Warrants of like tenor.
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any loss, theft or destruction of any Warrant, upon
delivery of indemnity reasonably satisfactory to the Company in form and amount
or, in the case of mutilation, upon surrender of the Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
6. Registration Rights. For a period of one year following the final
exercise of rights to purchase Warrant Stock under this Warrant, if the Company
shall determine to register any of its common stock either for its own account
or the account of a security holder or holders, other than a registration
relating solely to (i) employee benefit plans, or (ii) registration on any
registration form that does not permit secondary sales, the Company will: (a)
promptly give written notice of the proposed registration to the holder of this
Warrant or any Warrant Stock issued or issuable upon the exercise of this
Warrant; and (b) with respect to any Warrant
-4-
<PAGE>
Stock that has not been held for a two-year period, include in such registration
(and any related qualification or other compliance filing under applicable blue
sky laws), and in any underwriting involved therein, all or any portion of the
Warrant Stock then issued or issuable upon exercise of this Warrant as specified
in a written request made by such holders within thirty (30) days after receipt
of the written notice from the Company described in clause (a) above. If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the holders as
part of the written notice described in clause (a) above. In such event, the
holders' rights to registration pursuant to this Section 6 shall be conditioned
upon participation in the underwriting and the inclusion of stock in the
underwriting to the extent provided herein. Holders and the Company (and any
other security holders proposing to distribute their securities through the
underwriting) shall enter into an underwriting agreement in customary form with
the representatives of the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provisions of this
Section 6, if the representatives of the underwriter or underwriters determine
in good faith that marketing factors make it advisable to impose a limitation on
the number of secondary shares to be included in the registration, the number of
such secondary shares, if any, that may be included in the registration and
underwriting on behalf of such holders, and any other security holders proposing
to distribute their securities of the Company through such underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
securities that they had requested to be included in such registration at the
time of filing the registration statement. If such holders disapprove of the
terms of any such underwriting, they may elect to withdraw therefrom by written
notice to the Company and the representatives of the underwriter or
underwriters.
7. No Rights or Liabilities as Stockholder. Nothing herein shall give or
shall be construed to give the holder of this Warrant any of the rights of a
shareholder of the Company, including without limitation the right to vote on
matters requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders of common stock, or the right to a pro-rata
distribution upon the Company's dissolution.
8. Notices. All notices and other communications provided for herein shall
be delivered or mailed by first class mail, postage prepaid, addressed (a) if to
the holders of any Warrant, to the registered address of the holder as set forth
in the register kept at the principal office of the Company, or (b) if to the
Company, to its principal office, 434 Olds Station Road, Wenatchee, Washington
98801, or to the address of such other principal office of the Company as the
Company shall have furnished to each holder of any Warrants in writing; provided
that the exercise of any Warrants shall be effective only in the manner provided
in Section 1.
9. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by the laws of the State of Washington.
The headings of this Warrant are inserted for convenience only and shall not be
deemed to constitute a part hereof.
-5-
<PAGE>
10. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Pacific Standard time, on June 3, 2002.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: DONALD A. WRIGHT
------------------------------------------
Donald A. Wright, President
-6-
<PAGE>
Exhibit A
SUBSCRIPTION
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant.)
To: Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, WA 98801
Attn: President
The undersigned hereby irrevocably subscribes for ________ shares of the
Common Stock, $.001 par value per share, of Pacific Aerospace & Electronics,
Inc., a Washington corporation, pursuant to and in accordance with the terms and
conditions of a Warrant dated June 3, 1997 (the "Warrant"), and tenders with the
Warrant and this Subscription Agreement payment of $_____________ as payment for
the shares, and requests that a certificate for such shares be issued in the
name of the undersigned and be delivered to the undersigned at the address
stated below.
-----------------------------------------
(Print name)
-----------------------------------------
(Signature)
By
--------------------------------------
Its
----------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
Taxpayer ID #:
--------------------------
Date:
--------------
-7-
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of June 1, 1997, by
and between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation
having its principal place of business at 434 Olds Station Road, Wenatchee,
Washington (the "Company"), and DONALD A. WRIGHT, a resident of Washington (the
"Executive").
RECITALS
A. The Company desires to continue the services of the Executive, who is
presently a shareholder, executive officer, and director of the Company, and the
Executive is willing to continue rendering such services to the Company in
accordance with the terms hereinafter set forth; and
B. The Compensation Committee of the Board of Directors of the Company, by
appropriate resolutions, has authorized the employment of the Executive as
provided for in this Agreement.
AGREEMENT
The Company and the Executive agree as follows:
ARTICLE 1.
Employment; Duties
1.1 Employment. The Company hereby employs the Executive as President and
Chief Executive Officer of the Company, and the Executive accepts such
employment, upon the terms and conditions of this Agreement.
1.2 Duties. The duties to be performed by the Executive under this
Agreement are as specified in the Company's Bylaws and as may be reasonably
prescribed from time to time by the Board of Directors of the Company (the
"Board").
1.3 Hours. During the Contract Term (as defined below), excluding any
periods of vacation, sick leave or disability to which the Executive is entitled
and without limiting the Executive's ability to participate in unrelated
business or other activities on his personal time, the Executive agrees to
devote his full attention and working time to the business and affairs of the
Company and, to the extent necessary to discharge his duties hereunder, to use
his best efforts to perform faithfully and efficiently such duties.
-1-
<PAGE>
ARTICLE 2.
Term of Agreement
The term of this Agreement shall commence on the date of this Agreement and
end on May 31, 2002, or on such date as this Agreement may be earlier terminated
pursuant to Article 7 (the "Contract Term").
ARTICLE 3.
Compensation
3.1 Annual Salary. For services rendered by the Executive under this
Agreement, the Company agrees to pay to the Executive, and the Executive agrees
to accept, an annual salary ("Annual Salary") for each year during the Contract
Term (a "Contract Year") as follows:
Contract Year Annual Salary
------------- -------------
6/1/97 - 5/31/98 $192,000
6/1/98 - 5/31/99 15% increase over previous Contract Year's
Annual Salary
6/1/99 - 5/31/00 15% increase over previous Contract Year's
Annual Salary
Thereafter Increase for Contract Years beginning
6/1/00 and 6/1/01 to be determined by the
Board, or the Compensation Committee
thereof, prior to 5/31/00
The Company shall pay the Executive's Annual Salary in installments not less
frequently than monthly, less all amounts required by law to be withheld,
deducted or collected, in accordance with the Company's normal payroll policies
for executive officers, as such policies may be changed from time to time.
3.2 Optional Increases. The Company may from time to time increase the
Executive's Annual Salary, provided that it shall not be reduced after any such
increase, and the term Annual Salary as used in this Agreement shall refer to
the Annual Salary as so increased.
3.3 Stock Options. The Executive shall be entitled to receive options to
purchase shares of the Common Stock, $.001 par value, of the Company (the
"Common Stock") under the provisions of Sections 3.3.1 and 3.3.2, subject to the
conditions of Section 3.3.3.
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3.3.1 Fixed Options. Beginning immediately after the first fiscal year
during the Contract Term, and immediately after each subsequent fiscal year end
during the Contract Term, the Executive shall be entitled to receive fully
vested options to purchase 25,000 shares of Common Stock per Contract Year (the
"Fixed Options").
3.3.2 Formula Options. In addition to the Fixed Options, beginning
immediately after the first fiscal year end during the Contract Term, and
immediately after each subsequent fiscal year end during the Contract Term, the
Executive shall be entitled to receive an option to purchase up to 250,000
shares of Common Stock per Contract Year (the "Formula Options"). The number of
shares subject to such options shall be determined in two steps, as follows:
(a) Calculation of Maximum Formula Shares. The maximum number of
shares potentially subject to Formula Options for any fiscal year during
the Contract Term (the "Maximum Formula Shares") will be calculated in
accordance with the following formula:
10% of Dollar Value Increase in Net Sales = Maximum Formula Option Shares
-----------------------------------------
Current Share Price
For purposes of the foregoing formula, (i) "net sales" for any fiscal year
means net sales as shown on the audited consolidated financial statements
of the Company and its subsidiaries for that fiscal year; (ii) the "dollar
value increase in net sales" means the amount, if any, by which net sales
for the applicable fiscal year exceed net sales for the previous fiscal
year; and (iii) the "current share price" means the average closing bid
price of the Common Stock for the last five trading days of the applicable
fiscal year. If the calculation of the foregoing formula results in a
number higher than 250,000, the Maximum Formula Option Shares will equal
250,000.
(b) Calculation of Actual Formula Shares. To determine the actual
number of shares subject to the Formula Option for any fiscal year during
the Contract Term, the Maximum Formula Option Shares shall be divided by 3.
An option to purchase a number of shares equal to one third of the Maximum
Formula Option Shares shall be awarded to the Executive for each of the
following three goals that has been met for that fiscal year: (i) the
Company had net income; (ii) net sales exceeded budgeted net sales; and
(iii) net income exceeded budgeted net income. For purposes of clauses (i),
(ii) and (iii), net income and net sales shall be as shown on the audited
consolidated financial statements of the Company and its subsidiaries for
the relevant fiscal year, and budgeted net income and budgeted net sales
shall be as shown on the last budget for that year presented to the Board
or the Finance and Audit Committee, as accepted or amended by direction of
the Board or committee. Any new subsidiaries acquired during the relevant
fiscal year shall be excluded from actual results unless they were
specifically provided for in the budget, and new subsidiaries budgeted for
but not acquired and subsidiaries that have been disposed of shall be
excluded from the budgeted results; provided that any such changes shall
have been approved by the Board or the
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Compensation Committee. Fractional numbers of shares shall be rounded up or
down to the closest whole number.
(c) Example. As an example, assume that net sales for fiscal 1998
(the end of the first Contract Year) exceed net sales for fiscal 1997 by
$4,000,000 and that the current share price at the end of fiscal 1998 is
$4.00. The Formula Option would be determined as follows:
Maximum Formula Option Shares: 10% of $4,000,000 = 100,000 shares
-----------------
$4.00
Executive to Receive: If 3 goals met -- Formula Option for 100,000
shares
If 2 goals met -- Formula Option for 66,667
shares
If 1 goal met -- Formula Option for 33,333
shares
If no goals met -- No Formula Option
3.3.3 Conditions. Formula Options granted pursuant to this Agreement
shall be subject to any vesting periods prescribed by the Board of Directors of
the Company or any committee thereof. All Fixed Options and any Formula Options
shall be granted at an exercise price equal to the fair market value of the
Common Stock on the date of grant and in accordance with, and subject to, the
Company's Amended and Restated Stock Incentive Plan, as amended from time to
time (or any other stock plan adopted by the Company for the benefit of
employees). No options will be deemed to have been granted until they are
specifically authorized by the Board of Directors of the Company or a committee
thereof. The parties recognize that the number of Formula Options issuable for
the final Contract Year may not be determined prior to the expiration of the
Contract Term. In such event, the Company's obligations pursuant to Section
3.3.2 will not expire until any Formula Options to which the Executive would be
entitled, but for expiration of the Contract Term, have been granted.
ARTICLE 4.
Other Benefits
4.1 Savings and Retirement Plans. The Executive shall be entitled to
participate in all savings and retirement plans or programs applicable to other
executive officers of the Company.
4.2 Welfare Benefits. The Executive and his family shall be eligible for
participation in, and shall receive all benefits under, welfare benefit plans,
practices, policies, and programs provided by the Company to other executive
officers of the Company. These may, but will not necessarily include medical,
prescription, dental, optical, disability, salary continuance, employee life,
group life, dependent life, accidental death, and travel accident insurance
plans and programs.
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4.3 Fringe Benefits. The Executive shall be entitled to fringe benefits
applicable to other executive officers of the Company.
4.4 Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable employment-related expenses incurred by the
Executive upon the Company's receipt of accountings in accordance with
practices, policies, and procedures applicable to executive officers of the
Company.
4.5 Office and Support Staff. The Executive shall be entitled to an office
or offices of a size and with furnishings and other appointments, and to
personal secretarial and other assistance, of the type provided to other
executive officers of the Company.
4.6 Vacation. The Executive shall be entitled to paid vacation time in
accordance with the plans, policies, and programs applicable to other executive
officers of the Company.
4.7 Automobile. The Executive shall have the use of an automobile of make,
size and model reasonably satisfactory to the Executive and to the Company. The
Company shall pay all acquisition or rental costs for that automobile, as well
as costs of operation, maintenance, and insurance.
ARTICLE 5.
Change of Control
5.1 Definitions. For purposes of this Article 5, the following terms shall
have the meaning set forth below:
5.1.1 Continuing Directors. "Continuing Directors" means those members
of the Board at any relevant time (a) who were directors on the effective date
of this Agreement or (b) are Approved Directors.
5.1.2 Approved Directors. "Approved Directors" means those members of
the Board who were approved, after the relevant event, for nomination, election
or appointment to the Board by at least two-thirds of the Continuing Directors
on the Board at the time of such approval.
5.1.3 Change in Control. "Change in Control" means:
(1) during any period of two consecutive years, the members of
the Board at the beginning of such period, together with any Approved
Directors elected during such period, cease for any reason to constitute at
least a majority of the Board;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities representing 30% or more of the
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combined voting power of the Company's then-outstanding voting securities.
However, a Change in Control shall not be deemed to have occurred under
this Section 5.1.3(b) if (i) a Change in Control under Section 5.1.3(a) has
not occurred, and (ii) the Continuing Directors (by a vote of at least
two-thirds of the Continuing Directors then on the Board) (1) approve in
advance an acquisition resulting in beneficial ownership as described in
Section 5.1.3(b), or (2) declare that a Change in Control under Section
5.1.3(b) has ceased if subsequently no person beneficially owns securities
of the Company representing 30% or more of the combined voting power of the
Company's then-outstanding securities; or
(c) a change in control of beneficial ownership of the Company's
voting securities of a nature that would be required to be reported
pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or any
similar item on a successor or revised form.
5.1.4 Good Reason "Good Reason," in connection with the termination by
the Executive of his employment with the Company subsequent to a Change in
Control, means:
(a) A diminution in the responsibilities, title or office of the
Executive such that he does not serve as President or Executive
Vice-President of the Company (which diminution was not a result of the
Executive's disability), or the assignment (without the Executive's express
written consent) by the Company to the Executive of any significant duties
that are inconsistent with the Executive's position, duties,
responsibilities and status as President or Executive Vice President of the
Company;
(b) Any reduction by the Company in the Executive's Annual Base
Salary as in effect on the date of a Change in Control or as the same may
be increased from time to time thereafter in accordance with this
Agreement;
(c) The Company's transfer or assignment of the Executive,
without the Executive's prior express written consent, to any location
other than the Company's principal executive offices, except for required
travel on Company business to an extent that does not constitute a
substantial abrupt departure from the Executive's business travel
obligations prior to the Change in Control; or
(d) The failure by the Company to continue in effect any benefit
or compensation plan, life insurance plan, health and medical benefit plan,
disability plan or any other benefit plan in which the Executive is a
participant at the time of a Change in Control or provide a substantially
equivalent substitute, or the taking of any action by the Company that
would adversely affect the Executive's right to participate in or
materially reduce the Executive's benefits under any of such plans or
benefits, or deprive the Executive of any material fringe benefit enjoyed
by the Executive at the time of the Change in Control, or as the same may
be increased from time to time thereafter.
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5.1.5 Parachute Payments. "Parachute Payments" and "Excess Parachute
Payments" shall each have the meanings attributed to them under Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"), or any successor
section, and any regulations which may be promulgated in connection with said
section.
5.2 Severance Payments. If a Change of Control has occurred, and during the
Contract Term and within six months after such Change in Control occurs, the
Executive's employment is terminated:
(a) by the Company for any reason, other than (i) for Cause (as
defined below), (ii) as a result of the Executive's death or disability, or
(iii) as a result of the Executive's retirement in accordance with the
Company's general retirement policies; or
(b) by the Executive for Good Reason;
then, within 30 days after termination of the Executive, the Company shall pay
to the Executive an amount equal to two times his Annual Salary then in effect,
in cash (the "Severance Payment"). The Severance Payment, together with any
unpaid compensation owed to Executive under Article 3 for services rendered
through the effective date of termination, shall constitute the sole obligation
of the Company payable with respect to termination of the Executive.
5.3 Severance Benefits. If the Executive is entitled to a Severance
Payment, then the Company shall also maintain in full force and effect, for one
year after termination of the Executive, all employee health and medical benefit
plans and programs in which the Executive or his family were participants
immediately prior to termination, provided that such continued participation is
possible under the general terms and provisions of such plans and programs.
However, if the Executive becomes eligible to participate in a health and
medical benefit plan or program of another employer which confers substantially
similar benefits, then the Executive shall cease to receive benefits under this
Section 5.3 in respect of such plan or program.
5.4 Parachute Payment Limitation. Notwithstanding any other provision of
this Agreement, if any Parachute Payment or Payments are characterized as Excess
Parachute Payments, then the following rules shall apply:
5.4.1 The Company shall compute the net value to the Executive of all
such severance payments after reduction for the excise taxes imposed by Section
4999 of the Code and for any normal income taxes that would be imposed on the
Executive if such severance payments constituted the Executive's sole taxable
income;
5.4.2 The Company shall next compute the maximum amount of severance
payments that can be provided without any such payments being characterized as
Excess Parachute Payments, and reduce the result by the amount of any normal
income taxes that would be imposed on the Executive if such reduced severance
benefits constituted the Executive's sole taxable income;
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5.4.3 If the amount derived in Section 5.4.1 is greater than the
amount derived in Section 5.4.2, then the Company shall pay the Executive the
full the amount of severance payments without reduction. If the amount derived
in Section 5.4.1 is not greater than the amount derived in Section 5.4.2, then
the Company shall pay the Executive the maximum amount of severance payments
that can be provided without any such payments being characterized as Excess
Parachute Payments.
5.5 No Mitigation. The Executive shall not be required to mitigate the
amount of the Parachute Payment by seeking other employment or otherwise, nor
shall the amount of the Parachute Payment be reduced by any compensation earned
by the Executive as a result of employment by another company, self-employment
or otherwise.
ARTICLE 6.
Restrictive Covenants
6.1 Protected Information.
6.1.1 Covenant. Either during or after expiration of the Contract
Term, the Executive shall not, directly or indirectly, divulge, furnish or make
accessible to any person, firm, corporation, association or other entity, or use
in any manner, any Protected Information (as defined below), or cause any
Protected Information to enter the public domain, except as may be required in
the regular course of the Executive's employment by the Company.
6.1.2 Access to Protected Information. The Company has advised the
Executive and the Executive has acknowledged that it is the policy of the
Company to maintain as secret and confidential all Protected Information, and
that Protected Information has been and will be developed at substantial cost
and effort to the Company. The Executive acknowledges that he will acquire
Protected Information with respect to the Company, which information is a
valuable, special, and unique asset of the Company's business and operations,
and that disclosure of such Protected Information would cause irreparable damage
to the Company.
6.1.3 Employee-Created Protected Information. The Executive agrees to
promptly disclose to the Company all Protected Information developed in whole or
in part by the Executive during his employment with the Company and which
relates to the Company's business. Such Protected Information is, and shall
remain, the exclusive property of the Company. All writings created during the
Executive's employment with the Company (excluding writings unrelated to the
Company's business) are considered to be "works-for-hire" for the benefit of the
Company, and the Company shall own all rights in such writings. Washington law
requires the following notice to be given to the Executive:
This Agreement does not require the Executive to assign to the Company any
invention by the Executive for which no equipment, supplies, facility or
trade secret information of the Company was used and which was developed
entirely on the Executive's own time
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unless the invention related (i) directly to the Company's business, or
(ii) to the Company's actual or demonstrably anticipated research or
development, or (iii) the development results from any work performed by
the Executive for the Company.
6.1.4 Return of Confidential Records. All forms of information and all
physical property made or compiled by the Executive prior to or during the
Contract Term containing or relating in any way to Protected Information shall
be the Company's exclusive property. All such materials and any copies thereof
shall be held by the Executive in trust solely for the benefit of the Company
and shall be delivered to the Company upon expiration of the Contract Term, or
at any other time upon the Company's request.
6.1.5 Protected Information. "Protected Information" means trade
secrets, confidential and propriety business information of the Company, any
information of the Company other than information which has entered the public
domain (unless the Executive caused such information to enter the public domain)
and all valuable and unique information and techniques acquired, developed or
used by the Company relating to its business, operations, employees, customers
and suppliers, which give the Company a competitive advantage over those who do
not know the information and techniques and which are protected by the Company
from unauthorized disclosure, including but not limited to, customer lists
(including potential customers), sources of supply, processes, patented or
proprietary technologies, plans, materials, pricing information, internal
memoranda, marketing plans, internal policies, and products and services which
may be developed from time to time by the Company and its agents or employees.
6.2 Non-Competition.
6.2.1 Covenant. The Executive agrees that, during the Contract Term
and for a period of two years after the expiration of the Contract Term, he will
not (i) directly or indirectly, in any capacity, engage or participate in, or
become employed by or render advisory or consulting or other services in
connection with any Prohibited Business, as defined below, or (ii) make any
financial investment, whether in the form of equity or debt, or own any
interest, directly or indirectly, in any Prohibited Business.
6.2.2 Exception. Nothing in this Section 6.2 shall restrict the
Executive from making any investment in any company whose stock is listed on a
national securities exchange or actively traded in the over-the-counter market;
provided that (i) such investment does not give the Executive the right or
ability to control or influence the policy decisions of any Prohibited Business,
and (ii) such investment does not create a conflict of interest between the
Executive's duties hereunder and the Executive's interest in such investment.
6.2.3 Prohibited Business. "Prohibited Business" means any business
entity whose activities or products are directly or indirectly competitive with
those of the Company and which has contact, or seeks to establish contact
(including without limitation by making or
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soliciting sales or submitting bids), with any business or governmental entity
in the United States that is, at any time, a customer of the Company.
6.3 Non-Interference with Employment Relationships. The Executive agrees
that during the Contract Term and for a period of two years after the expiration
of the Contract Term, he will not (i) directly or indirectly solicit, induce, or
encourage any employee of the Company to leave his or her employment with the
Company or interfere with any employment relationship between the Company and
any of its employees, or (ii) hire or encourage or assist any other person to
hire any person who has been an employee of the Company within the previous
three months.
6.4 Disclosure of Business Opportunities. The Executive agrees to promptly
and fully disclose to the Company, and not to divert to his own use or benefit
or the use or benefit of others, any business opportunities involving any
existing or prospective line of business, supplier, product or activity of the
Company or any business opportunities that otherwise should be afforded to the
Company.
6.5 Survival of Undertakings and Injunctive Relief.
6.5.1 Survival. The provisions of Sections 6.1, 6.2, 6.3, and 6.4
shall survive the expiration of the Contract Term, irrespective of the reasons
therefor. In the event of any such violation of Sections 6.1, 6.2, 6.3, 6.4, the
Executive further agrees that the time periods set forth in such sections shall
be extended by the period of such violation.
6.5.2 Injunctive Relief. The Executive acknowledges and agrees that
the restrictions imposed upon him by Sections 6.1, 6.2, 6.3, and 6.4 and the
purpose of such restrictions are reasonable and are designed to protect the
Protected Information and the continued success of the Company without unduly
restricting the Executive's future employment by others. Furthermore, the
Executive acknowledges that, in view of the Protected Information which the
Executive has or will acquire or has or will have access to, and in view of the
necessity of the restrictions contained in Sections 6.1, 6.2, 6.3, and 6.4, any
violation of any provision of Sections 6.1, 6.2, 6.3, and 6.4 hereof would cause
irreparable injury to the Company with respect to the resulting disruption in
their operations. By reason of the foregoing, the Executive consents and agrees
that if the Executive violates any of the provisions of Sections 6.1, 6.2, 6.3,
or 6.4, the Company shall be entitled, in addition to any other remedies that it
may have, including money damages, to an injunction to be issued by a court of
competent jurisdiction, restraining the Executive from committing or continuing
any violation of such sections of this Agreement.
6.6 References to the Company. All references to the Company in this
Article 6 shall be deemed to include any subsidiary, parent, successor in
interest, or other affiliate of the Company.
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ARTICLE 7.
Termination
7.1 Termination of Employment. The Executive's employment may be terminated
at any time during the Contract Term by mutual agreement of the parties, or as
otherwise provided in this Article 7.
7.2 Termination for Cause. The Company may terminate the Executive's
employment without notice at any time for Cause. For purposes of this Agreement,
the term "Cause" shall include: continued neglect, after notice thereof, or
willful misconduct by the Executive with respect to his duties and obligations
under this Agreement; unauthorized expenditure of the Company's funds; unethical
business practices in connection with the Company's business; misappropriation
of the Company's assets; any material breach by the Executive of any term or
provision of this Agreement; any act or action of the Executive during the
Contract Term involving embezzlement, dishonesty related to the Company or the
Company's business, or habitual use of alcohol or drugs; conviction of any
felony; or any similar or related act, insubordination, or failure to act by the
Executive. Upon termination for Cause, the Executive shall not be entitled to
payment of any compensation other than salary and accrued benefits under this
Agreement earned up to the date of such termination.
7.3 Termination without Cause. The Company may terminate the Executive's
employment without notice at any time without Cause. In the event of any such
termination, the Executive shall be entitled to receive from the Company an
amount equal to two times the Annual Salary then in effect, which shall be
payable in cash in accordance with the normal payroll practices of the Company
for executive officers, including deductions, withholdings, and collections as
required by law, in equal installments over a two-year period not less
frequently than monthly. If the Executive's employment is terminated pursuant to
this Section 7.3, the Company shall be obligated to maintain in full force and
effect, for one year after termination, all employee health and medical benefit
plans and programs in which the Executive or his family were participants
immediately prior to termination, if such continued participation is possible
under the general terms and provisions of such plans and programs. However, if
the Executive becomes eligible to participate in a health and medical benefit
plan or program of another employer which confers substantially similar
benefits, the Executive shall cease to receive benefits under this subparagraph
in respect of such plan or program. Any amount payable pursuant to this Section
7.3, together with any compensation pursuant to Article 3 that is payable for
services rendered through the effective date of termination, shall constitute
the sole obligation of the Company payable with respect to the termination of
the Executive as provided in this Section 7.3. The Executive shall not be
required to mitigate the amount of any payment provided for in this Section 7.3
by seeking other employment or otherwise, nor shall the amount of any payment
provided for in Section 7.3 be reduced by any compensation earned by the
Executive as a result of employment by another company, self-employment or
otherwise.
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ARTICLE 8.
Miscellaneous
8.1 Assignment, Successors. The Company may freely assign its rights and
obligations under this Agreement to a successor of the Company's business,
without the prior written consent of the Executive. This Agreement shall be
binding upon and inure to the benefit of the Executive and the Executive's
estate and the Company and any assignee of or successor to the Company.
8.2 Beneficiary. If the Executive dies prior to receiving all of the salary
otherwise payable during the full Contract Term, such salary shall be paid in a
lump sum payment to the beneficiary designated in writing by the Executive
("Beneficiary") or, if no such Beneficiary is designated, to the Executive's
estate.
8.3 Nonalienation of Benefits. Benefits payable under this Agreement shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, prior to actually being received by the
Executive, and any such attempt to dispose of any right to benefits payable
hereunder shall be void.
8.4 Severability. If all or any part of this Agreement is declared by any
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.
8.5 Amendment and Waiver. This Agreement shall not be altered, amended or
modified except by written instrument executed by the Company and the Executive.
A waiver of any term, covenant, agreement or condition contained in this
Agreement shall not be deemed a waiver of any other term, covenant, agreement or
condition, and any waiver of any other term, covenant, agreement or condition,
and any waiver of any default in any such term, covenant, agreement or condition
shall not be deemed a waiver of any later default thereof or of any other term,
covenant, agreement or condition.
8.6 Notices. All notices and other communications hereunder shall be in
writing and either hand delivered or delivered by overnight courier or first
class registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company: PACIFIC AEROSPACE & ELECTRONICS, INC.
434 Olds Station Road
Wenatchee, WA 98801
Attn: Chief Financial Officer
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If to the Executive: Mr. Donald A. Wright
150 Manhattan Square
East Wenatchee, WA 98802
Either party may from time to time designate a new address by notice given in
accordance with this section. Notice and communications shall be effective when
actually received by the addressee.
8.7 Applicable Law. The provisions of this Agreement shall be interpreted
and construed in accordance with the laws of the State of Washington, without
regard to its choice of law principles.
8.8 Effect on Other Agreements. This Agreement shall supersede all prior
agreements, promises, and representations regarding employment by the Company
and severance or other payments contingent upon termination of employment.
Notwithstanding the foregoing, the Executive shall be entitled to any other
severance plan generally applicable to other executive officers of the Company.
8.9 Counterpart Originals. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
8.10 Entire Agreement. This Agreement forms the entire agreement between
the parties hereto with respect to any severance payment and with respect to the
subject matter contained in the Agreement.
Executed as of the date first written above.
THE COMPANY:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ NICK A. GERDE
-------------------------------------
Nick A. Gerde, V.P. Finance and Chief
Financial Officer
THE EXECUTIVE:
/s/ DONALD A. WRIGHT
-----------------------------------------
DONALD A. WRIGHT
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of June 1, 1997, by
and between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation
having its principal place of business at 434 Olds Station Road, Wenatchee,
Washington (the "Company"), and NICK A. GERDE, a resident of Washington (the
"Executive").
RECITALS
A. The Company desires to continue the services of the Executive, who is
presently an executive officer of the Company, and the Executive is willing to
continue rendering such services to the Company in accordance with the terms
hereinafter set forth; and
B. The Compensation Committee of the Board of Directors of the Company, by
appropriate resolutions, has authorized the employment of the Executive as
provided for in this Agreement.
AGREEMENT
The Company and the Executive agree as follows:
ARTICLE 1.
Employment; Duties
1.1 Employment. The Company hereby employs the Executive as Vice President
Finance and Chief Financial Officer of the Company, and the Executive accepts
such employment, upon the terms and conditions of this Agreement.
1.2 Duties. The duties to be performed by the Executive under this
Agreement are as specified in the Company's Bylaws and as may be reasonably
prescribed from time to time by the Board of Directors of the Company or the
Chief Executive Officer of the Company.
1.3 Hours. During the Contract Term (as defined below), excluding any
periods of vacation, sick leave or disability to which the Executive is entitled
and without limiting the Executive's ability to participate in unrelated
business or other activities on his personal time, the Executive agrees to
devote his full attention and working time to the business and affairs of the
Company and, to the extent necessary to discharge his duties hereunder, to use
his best efforts to perform faithfully and efficiently such duties.
1.4 Related Companies. At the discretion of the Board of Directors of the
Company, the Executive may be transferred or assigned to an equivalent
management-level position at the
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Company or one of its subsidiaries, provided that the Executive shall not be
required to change his place of residence without his consent in order to take
such a position. In such event, all other terms of this Agreement will continue
to apply during the Contract Term.
ARTICLE 2.
Term of Agreement
The term of this Agreement shall commence on the date of this Agreement and
end on May 31, 2000, or on such date as this Agreement may be earlier terminated
pursuant to Article 7 (the "Contract Term").
ARTICLE 3.
Compensation
3.1 Annual Salary. For services rendered by the Executive under this
Agreement, the Company agrees to pay to the Executive, and the Executive agrees
to accept, an annual salary ("Annual Salary") for each year during the Contract
Term (a "Contract Year") as follows:
Contract Year Annual Salary
------------- -------------
6/1/97 - 5/31/98 $100,000
6/1/98 - 5/31/99 $110,000
6/1/99 - 5/31/00 $120,000
The Company shall pay the Executive's Annual Salary in installments not less
frequently than monthly, less all amounts required by law to be withheld,
deducted or collected, in accordance with the Company's normal payroll policies
for executive officers, as such policies may be changed from time to time.
3.2 Optional Increases. The Company may from time to time increase the
Executive's Annual Salary, provided that it shall not be reduced after any such
increase, and the term Annual Salary as used in this Agreement shall refer to
the Annual Salary as so increased.
3.3 Stock Options.
3.3.1 Upon Execution of Agreement. Immediately after the execution of
this Agreement, the Executive shall be entitled to receive options to purchase
15,000 shares of Common Stock, $.001 par value, of the Company (the "Common
Stock").
3.3.2 Annually. At the sole discretion of the Board of Directors of
the Company, or a committee of the Board of Directors of the Company, the
Executive may be entitled to receive, after completion of each Contract Year, a
bonus in the form of options to
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purchase up to 25,000 shares of Common Stock, based on the performance of the
Executive and the Company during the Contract Year just ended.
3.3.3 Conditions. Any options granted pursuant to this Agreement shall
be subject to any vesting periods prescribed by the Board of Directors of the
Company or a committee thereof. All options shall be granted at an exercise
price equal to the fair market value of the Common Stock on the date of grant
and in accordance with, and subject to, the Company's Amended and Restated Stock
Incentive Plan, as amended from time to time (or any other stock plan adopted by
the Company for the benefit of employees). No options will be deemed to have
been granted until they are specifically authorized by the Board of Directors of
the Company or a committee thereof.
ARTICLE 4.
Other Benefits
4.1 Savings and Retirement Plans. The Executive shall be entitled to
participate in all savings and retirement plans or programs applicable to other
executive officers of the Company.
4.2 Welfare Benefits. The Executive and his family shall be eligible for
participation in, and shall receive all benefits under, welfare benefit plans,
practices, policies, and programs provided by the Company to other executive
officers of the Company. These may, but will not necessarily include medical,
prescription, dental, optical, disability, salary continuance, employee life,
group life, dependent life, accidental death, and travel accident insurance
plans and programs.
4.3 Fringe Benefits. The Executive shall be entitled to fringe benefits
applicable to other executive officers of the Company.
4.4 Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable employment-related expenses incurred by the
Executive upon the Company's receipt of accountings in accordance with
practices, policies, and procedures applicable to executive officers of the
Company.
4.5 Office and Support Staff. The Executive shall be entitled to an office
or offices of a size and with furnishings and other appointments, and to
personal secretarial and other assistance, of the type provided to other
executive officers of the Company.
4.6 Vacation. The Executive shall be entitled to paid vacation time in
accordance with the plans, policies, and programs applicable to other executive
officers of the Company.
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ARTICLE 5.
Change of Control
5.1 Definitions. For purposes of this Article 5, the following terms shall
have the meaning set forth below:
5.1.1 Continuing Directors. "Continuing Directors" means those members
of the Board at any relevant time (a) who were directors on the effective date
of this Agreement or (b) are Approved Directors.
5.1.2 Approved Directors. "Approved Directors" means those members of
the Board who were approved, after the relevant event, for nomination, election
or appointment to the Board by at least two-thirds of the Continuing Directors
on the Board at the time of such approval.
5.1.3 Change in Control. "Change in Control" means:
(a) during any period of two consecutive years, the members of
the Board at the beginning of such period, together with any Approved
Directors elected during such period, cease for any reason to constitute at
least a majority of the Board;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities representing 30% or more of the combined voting power of the
Company's then-outstanding voting securities. However, a Change in Control
shall not be deemed to have occurred under this Section 5.1.3(b) if (i) a
Change in Control under Section 5.1.3(a) has not occurred, and (ii) the
Continuing Directors (by a vote of at least two-thirds of the Continuing
Directors then on the Board) (1) approve in advance an acquisition
resulting in beneficial ownership as described in Section 5.1.3(b), or (2)
declare that a Change in Control under Section 5.1.3(b) has ceased if
subsequently no person beneficially owns securities of the Company
representing 30% or more of the combined voting power of the Company's
then-outstanding securities; or
(c) a change in control of beneficial ownership of the Company's
voting securities of a nature that would be required to be reported
pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or any
similar item on a successor or revised form.
5.1.4 Good Reason "Good Reason," in connection with the termination by
the Executive of his employment with the Company subsequent to a Change in
Control, means:
(a) A diminution in the responsibilities, title or office of the
Executive such that he does not serve as Chief Financial Officer of the
Company (which diminution
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was not a result of the Executive's disability), or the assignment (without
the Executive's express written consent) by the Company to the Executive of
any significant duties that are inconsistent with the Executive's position,
duties, responsibilities and status as President or Executive Vice
President of the Company;
(b) Any reduction by the Company in the Executive's Annual Salary
as in effect on the date of a Change in Control or as the same may be
increased from time to time thereafter in accordance with this Agreement;
(c) The Company's transfer or assignment of the Executive,
without the Executive's prior express written consent, to any location
other than the Company's principal executive offices, except for required
travel on Company business to an extent that does not constitute a
substantial abrupt departure from the Executive's business travel
obligations prior to the Change in Control; or
(d) The failure by the Company to continue in effect any benefit
or compensation plan, life insurance plan, health and medical benefit plan,
disability plan or any other benefit plan in which the Executive is a
participant at the time of a Change in Control, or the taking of any action
by the Company that would adversely affect the Executive's right to
participate in or materially reduce the Executive's benefits under any of
such plans or benefits, or deprive the Executive of any material fringe
benefit enjoyed by the Executive at the time of the Change in Control, or
as the same may be increased from time to time thereafter.
5.1.5 Parachute Payments. "Parachute Payments" and "Excess Parachute
Payments" shall each have the meanings attributed to them under Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"), or any successor
section, and any regulations which may be promulgated in connection with said
section.
5.2 Severance Payments. If a Change of Control has occurred, and during the
Contract Term and within six months after such Change in Control occurs, the
Executive's employment is terminated:
(a) by the Company for any reason, other than (i) for Cause (as
defined below), (ii) as a result of the Executive's death or disability, or
(iii) as a result of the Executive's retirement in accordance with the
Company's general retirement policies; or
(b) by the Executive for Good Reason;
then, within 30 days after termination of the Executive, the Company shall pay
to the Executive an amount equal to one-half his Annual Salary then in effect,
in cash (the "Severance Payment"). The Severance Payment, together with any
unpaid compensation owed to Executive under Article 3 for services rendered
through the effective date of termination, shall constitute the sole obligation
of the Company payable with respect to termination of the Executive.
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5.3 Severance Benefits. If the Executive is entitled to a Severance
Payment, then the Company shall also maintain in full force and effect for six
months after termination of the Executive, all employee health and medical
benefit plans and programs in which the Executive or his family were
participants immediately prior to termination, provided that such continued
participation is possible under the general terms and provisions of such plans
and programs. However, if the Executive becomes eligible to participate in a
health and medical benefit plan or program of another employer which confers
substantially similar benefits, then the Executive shall cease to receive
benefits under this Section 5.3 in respect of such plan or program.
5.4 Parachute Payment Limitation. Notwithstanding any other provision of
this Agreement, if any Parachute Payment or Payments are characterized as Excess
Parachute Payments, then the following rules shall apply:
5.4.1 The Company shall compute the net value to the Executive of all
such severance payments after reduction for the excise taxes imposed by Section
4999 of the Code and for any normal income taxes that would be imposed on the
Executive if such severance payments constituted the Executive's sole taxable
income;
5.4.2 The Company shall next compute the maximum amount of severance
payments that can be provided without any such payments being characterized as
Excess Parachute Payments, and reduce the result by the amount of any normal
income taxes that would be imposed on the Executive if such reduced severance
benefits constituted the Executive's sole taxable income;
5.4.3 If the amount derived in Section 5.4.1 is greater than the
amount derived in Section 5.4.2, then the Company shall pay the Executive the
full the amount of severance payments without reduction. If the amount derived
in Section 5.4.1 is not greater than the amount derived in Section 5.4.2, then
the Company shall pay the Executive the maximum amount of severance payments
that can be provided without any such payments being characterized as Excess
Parachute Payments.
5.5 No Mitigation. The Executive shall not be required to mitigate the
amount of the Parachute Payment by seeking other employment or otherwise, nor
shall the amount of the Parachute Payment be reduced by any compensation earned
by the Executive as a result of employment by another company, self-employment
or otherwise.
ARTICLE 6.
Restrictive Covenants
6.1 Protected Information.
6.1.1 Covenant. Either during or after expiration of the Contract
Term, the Executive shall not, directly or indirectly, divulge, furnish or make
accessible to any person, firm, corporation, association or other entity, or use
in any manner, any Protected Information
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(as defined below), or cause any Protected Information to enter the public
domain, except as may be required in the regular course of the Executive's
employment by the Company.
6.1.2 Access to Protected Information. The Company has advised the
Executive and the Executive has acknowledged that it is the policy of the
Company to maintain as secret and confidential all Protected Information, and
that Protected Information has been and will be developed at substantial cost
and effort to the Company. The Executive acknowledges that he will acquire
Protected Information with respect to the Company, which information is a
valuable, special, and unique asset of the Company's business and operations,
and that disclosure of such Protected Information would cause irreparable damage
to the Company.
6.1.3 Employee-Created Protected Information. The Executive agrees to
promptly disclose to the Company all Protected Information developed in whole or
in part by the Executive during his employment with the Company and which
relates to the Company's business. Such Protected Information is, and shall
remain, the exclusive property of the Company. All writings created during the
Executive's employment with the Company (excluding writings unrelated to the
Company's business) are considered to be "works-for-hire" for the benefit of the
Company, and the Company shall own all rights in such writings. Washington law
requires the following notice to be given to the Executive:
This Agreement does not require the Executive to assign to the Company
any invention by the Executive for which no equipment, supplies,
facility or trade secret information of the Company was used and which
was developed entirely on the Executive's own time unless the
invention related (i) directly to the Company's business, or (ii) to
the Company's actual or demonstrably anticipated research or
development, or (iii) the development results from any work performed
by the Executive for the Company.
6.1.4 Return of Confidential Records. All forms of information and all
physical property made or compiled by the Executive prior to or during the
Contract Term containing or relating in any way to Protected Information shall
be the Company's exclusive property. All such materials and any copies thereof
shall be held by the Executive in trust solely for the benefit of the Company
and shall be delivered to the Company upon expiration of the Contract Term, or
at any other time upon the Company's request.
6.1.5 Protected Information. "Protected Information" means trade
secrets, confidential and propriety business information of the Company, any
information of the Company other than information which has entered the public
domain (unless the Executive caused such information to enter the public domain)
and all valuable and unique information and techniques acquired, developed or
used by the Company relating to its business, operations, employees, customers
and suppliers, which give the Company a competitive advantage over those who do
not know the information and techniques and which are protected by the Company
from unauthorized disclosure, including but not limited to, customer lists
(including potential customers), sources of supply, processes, patented or
proprietary technologies, plans, materials, pricing information, internal
memoranda, marketing plans, internal policies, and products and
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services which may be developed from time to time by the Company and its agents
or employees.
6.2 Non-Competition.
6.2.1 Covenant. The Executive agrees that, during the Contract Term
and for a period of two years after the expiration of the Contract Term (or for
such other period as may be applicable pursuant to Section 7.3), he will not (i)
directly or indirectly, in any capacity, engage or participate in, or become
employed by or render advisory or consulting or other services in connection
with any Prohibited Business, as defined below, or (ii) make any financial
investment, whether in the form of equity or debt, or own any interest, directly
or indirectly, in any Prohibited Business.
6.2.2 Exception. Nothing in this Section 6.2 shall restrict the
Executive from making any investment in any company whose stock is listed on a
national securities exchange or actively traded in the over-the-counter market;
provided that (i) such investment does not give the Executive the right or
ability to control or influence the policy decisions of any Prohibited Business,
and (ii) such investment does not create a conflict of interest between the
Executive's duties hereunder and the Executive's interest in such investment.
6.2.3 Prohibited Business. "Prohibited Business" means any business
entity whose activities or products are directly or indirectly competitive with
those of the Company and which has contact, or seeks to establish contact
(including without limitation by making or soliciting sales or submitting bids),
with any business or governmental entity in the United States that is, at any
time, a customer of the Company.
6.3 Non-Interference with Employment Relationships. The Executive agrees
that during the Contract Term and for a period of two years after the expiration
of the Contract Term (or for such other period as may be applicable pursuant to
Section 7.3), he will not (i) directly or indirectly solicit, induce, or
encourage any employee of the Company to leave his or her employment with the
Company or interfere with any employment relationship between the Company and
any of its employees, or (ii) hire or encourage or assist any other person to
hire any person who has been an employee of the Company within the previous
three months.
6.4 Disclosure of Business Opportunities. The Executive agrees to promptly
and fully disclose to the Company, and not to divert to his own use or benefit
or the use or benefit of others, any business opportunities involving any
existing or prospective line of business, supplier, product or activity of the
Company or any business opportunities that otherwise should be afforded to the
Company.
6.5 Survival of Undertakings and Injunctive Relief.
6.5.1 Survival. The provisions of Sections 6.1, 6.2, 6.3, and 6.4
shall survive the expiration of the Contract Term, irrespective of the reasons
therefor. In the event of any
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such violation of Sections 6.1, 6.2, 6.3, 6.4, the Executive further agrees that
the time periods set forth in such sections shall be extended by the period of
such violation.
6.5.2 Injunctive Relief. The Executive acknowledges and agrees that
the restrictions imposed upon him by Sections 6.1, 6.2, 6.3, and 6.4 and the
purpose of such restrictions are reasonable and are designed to protect the
Protected Information and the continued success of the Company without unduly
restricting the Executive's future employment by others. Furthermore, the
Executive acknowledges that, in view of the Protected Information which the
Executive has or will acquire or has or will have access to, and in view of the
necessity of the restrictions contained in Sections 6.1, 6.2, 6.3, and 6.4, any
violation of any provision of Sections 6.1, 6.2, 6.3, and 6.4 hereof would cause
irreparable injury to the Company with respect to the resulting disruption in
their operations. By reason of the foregoing, the Executive consents and agrees
that if the Executive violates any of the provisions of Sections 6.1, 6.2, 6.3,
or 6.4, the Company shall be entitled, in addition to any other remedies that it
may have, including money damages, to an injunction to be issued by a court of
competent jurisdiction, restraining the Executive from committing or continuing
any violation of such sections of this Agreement.
6.6 References to the Company. All references to the Company in this
Article 6 shall be deemed to include any subsidiary, parent, successor in
interest, or other affiliate of the Company.
ARTICLE 7.
Termination
7.1 Termination of Employment. The Executive's employment may be terminated
at any time during the Contract Term by mutual agreement of the parties, or as
otherwise provided in this Article 7.
7.2 Termination for Cause. The Company may terminate the Executive's
employment without notice at any time for Cause. For purposes of this Agreement,
the term "Cause" shall include: continued neglect, after notice thereof, or
willful misconduct by the Executive with respect to his duties and obligations
under this Agreement; unauthorized expenditure of the Company's funds; unethical
business practices in connection with the Company's business; misappropriation
of the Company's assets; any material breach by the Executive of any term or
provision of this Agreement; any act or action of the Executive during the
Contract Term involving embezzlement, dishonesty related to the Company or the
Company's business, or habitual use of alcohol or drugs; conviction of any
felony; or any similar or related act, insubordination, or failure to act by the
Executive. Upon termination for Cause, the Executive shall not be entitled to
payment of any compensation other than salary and accrued benefits under this
Agreement earned up to the date of such termination.
7.3 Termination without Cause. The Company may terminate the Executive's
employment without notice at any time without Cause. In the event of any such
termination,
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the Executive shall be entitled to receive from the Company an amount equal to
one-half the Annual Salary then in effect, which shall be payable in cash in
accordance with the normal payroll practices of the Company for executive
officers, including deductions, withholdings, and collections as required by
law, in installments not less frequently than monthly. If the Executive's
employment is terminated pursuant to this Section 7.3, the Company shall be
obligated to maintain in full force and effect, for six months after
termination, all employee health and medical benefit plans and programs in which
the Executive or his family were participants immediately prior to termination,
if such continued participation is possible under the general terms and
provisions of such plans and programs. However, if the Executive becomes
eligible to participate in a health and medical benefit plan or program of
another employer which confers substantially similar benefits, the Executive
shall cease to receive benefits under this subparagraph in respect of such plan
or program. Any amount payable pursuant to this Section 7.3, together with any
compensation pursuant to Article 3 that is payable for services rendered through
the effective date of termination, shall constitute the sole obligation of the
Company payable with respect to the termination of the Executive as provided in
this Section 7.3. The Executive shall not be required to mitigate the amount of
any payment provided for in this Section 7.3 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in Section 7.3 be
reduced by any compensation earned by the Executive as a result of employment by
another company, self-employment or otherwise. If the Executive's employment is
terminated pursuant to this Section 7.3, the time periods stated in Sections
6.2.1 and 6.3 shall be changed to six months.
ARTICLE 8.
Miscellaneous
8.1 Assignment, Successors. The Company may freely assign its rights and
obligations under this Agreement to a successor of the Company's business,
without the prior written consent of the Executive. This Agreement shall be
binding upon and inure to the benefit of the Executive and the Executive's
estate and the Company and any assignee of or successor to the Company.
8.2 Beneficiary. If the Executive dies prior to receiving all of the salary
otherwise payable during the full Contract Term, any salary owing to the
Executive for the period through the Executive's last actual day of employment,
plus a lump sum payment of three months' salary shall be paid to the beneficiary
designated in writing by the Executive ("Beneficiary") or, if no such
Beneficiary is designated, to the Executive's estate.
8.3 Nonalienation of Benefits. Benefits payable under this Agreement shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, prior to actually being received by the
Executive, and any such attempt to dispose of any right to benefits payable
hereunder shall be void.
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8.4 Severability. If all or any part of this Agreement is declared by any
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.
8.5 Amendment and Waiver. This Agreement shall not be altered, amended or
modified except by written instrument executed by the Company and the Executive.
A waiver of any term, covenant, agreement or condition contained in this
Agreement shall not be deemed a waiver of any other term, covenant, agreement or
condition, and any waiver of any other term, covenant, agreement or condition,
and any waiver of any default in any such term, covenant, agreement or condition
shall not be deemed a waiver of any later default thereof or of any other term,
covenant, agreement or condition.
8.6 Notices. All notices and other communications hereunder shall be in
writing and either hand delivered or delivered by overnight courier or first
class registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company: PACIFIC AEROSPACE & ELECTRONICS, INC.
434 Olds Station Road
Wenatchee, WA 98801
Attn: President
If to the Executive: Nick A. Gerde
1906 Rocklund Drive
Wenatchee, WA 98801
Any party may from time to time designate a new address by notice given in
accordance with this section. Notice and communications shall be effective when
actually received by the addressee.
8.7 Applicable Law. The provisions of this Agreement shall be interpreted
and construed in accordance with the laws of the State of Washington, without
regard to its choice of law principles.
8.8 Effect on Other Agreements. This Agreement shall supersede all prior
agreements, promises, and representations regarding employment by the Company
and severance or other payments contingent upon termination of employment.
Notwithstanding the foregoing, the Executive shall be entitled to any other
severance plan generally applicable to other management-level employees of the
Company and its subsidiaries.
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8.9 Counterpart Originals. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
8.10 Entire Agreement. This Agreement forms the entire agreement between
the parties hereto with respect to any severance payment and with respect to the
subject matter contained in the Agreement.
Executed as of the date first written above.
THE COMPANY:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-------------------------------------
Donald A. Wright, President & Chief
Executive Officer
THE EXECUTIVE:
/s/ NICK A. GERDE
-----------------------------------------
NICK A. GERDE
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Exhibit 10.8
Key Bank of Washington
A KeyCorp Bank
- --------------------------------------------------------------------------------
Wenatchee CBC
MS-WA-31-35-0163
P.O. Box 1301
Wenatchee, WA 98807
(509) 664-2309 John Thoren
(509) 663-9010 Vice President
May 29, 1997
Donald A. Wright,
President, CEO and Chairman of the Board
Nick A. Gerde,
Vice President, CFO and Treasurer
PACIFIC AEROSPACE & ELECTRONICS, INC.
434 Olds Station Road
Wenatchee, WA 98801
Re: Revolving Line of Credit
Capital Expenditure Facility
Term Loan
Dear Don and Nick:
We are pleased to inform you that Key Bank of Washington (Bank) has approved
loans on the following terms:
1. BORROWER:
Pacific Aerospace & Electronics, Inc.
2. GUARANTOR(S):
The various subsidiaries of Pacific Aerospace & Electronics, Inc.
3. SUMMARY OF FACILITIES:
Revolving Line of Credit
------------------------
A secured revolving line of credit for use by the borrower for general
operating requirements.
Capital Expenditure Facility
----------------------------
A secured one year non-revolving line of credit for use by the borrower
to fund acquisition of various capital items. It also provides for
terming for up to
<PAGE>
Commitment Letter
Page 2
seven years, of a portion of the acquisition cost of the various
capital items that are purchased during the year.
Term Loan
---------
A secured term loan to fund a portion of the costs the borrower is
expending to improve its building at Olds Station.
4. AMOUNT:
Revolving Line of Credit
------------------------
Time to time advances up to $3,500,000
Capital Expenditure Facility
----------------------------
Aggregate advances not to exceed $2,000,000
Term Loan
---------
The lesser of $600,000 or 80 percent of the cost of the improvements
5. COLLATERAL: First and only (except for encumbrances approved in writing by
the Bank) lien the following property, to be owned by Borrower.
Revolving Line of Credit
------------------------
All inventory and accounts receivable of Borrower.
Capital Expenditure Facility
----------------------------
The specific items being purchased with loan proceeds
Term Loan
---------
Lease hold improvements, assignment of lease and if available, a
repurchase agreement from the Port of Chelan County on the specific
building.
Bank may require that you provide, at your expense, a FIRREA conforming
appraisal supporting the loan amount, which is subject to the Bank's
review and acceptance in its sole discretion, or other verification of
collateral value acceptable to the Bank in its sole discretion.
6. RESTRICTIONS:
None
<PAGE>
Commitment Letter
Page 3
7. LOAN TERMS:
(a) Interest Rate:
Revolving Line of Credit
------------------------
A rate fixed at the discretion of the borrower for one (1), three (3),
six (6) or twelve (12) month time periods at the LIBOR rate for the
appropriate time period plus 250 basis points. For today, this would
provide rates to the borrower of 8.19% for one month, 8.31% for three
months, 8.50% for six months and 8.78% for 12 months.
Capital Expenditure Facility
----------------------------
Until the items are termed or the maturity date of the facility, the
rate will be the one month LIBOR plus 250 basis points adjusted on a
monthly basis. On the individual financings, if a term loan, the
borrower will have the option of a rate at TCM plus 275 basis points
for the appropriate amortization period or an equivalent LIBOR rate.
If the term financing vehicle is a lease the rates for each financing
will be negotiated at the time the lease proposal is requested. Based
upon an average for the month of April, this would generate a rate of
9.29 percent.
Term Loan
---------
The borrower will have the option of fixing the rate at either TCM
plus 275 basis points or the equivalent LIBOR rate for the appropriate
time period for up to five years.
(b) Term:
Revolving Line of Credit
------------------------
This financing vehicle will mature September 5, 1998. Interest will be
payable monthly with principal and any accrued unpaid interest due at
maturity.
Capital Expenditure Facility
----------------------------
Individual financings will have maturities up to seven years from the
month of acquisition of the specific asset being financed and will be
amortized by monthly payments of principal and interest.
<PAGE>
Commitment Letter
Page 4
Term Loan
---------
This loan will have a ten year maturity with an interest rate
adjustment at the end of five years but the loan will be amortized
with monthly payments of principal and interest over fifteen years.
(c) Financial Covenants:
(Financial measures are to be tested for compliance on a
quarterly basis)
Debt to Worth Ratio Not greater than 0.75:1
Working Capital Not less than $7,500,000
Current Ratio Not less than 2.0:1
Debt Service Coverage Ratio Not less than 1.50:1
Net Worth Not less than $18,000,000
Borrower will provide quarterly copies of Form 10-QSB with financial
information filed with the SEC
Borrower will provide annual audited financial statements along with a
copy of the annual report.
In addition, if acquisitions in any one year would dilute net worth by
more than 25 percent or jeopardize the company's ability to meet other
loan covenants will require prior bank approval.
(d) Collateral Administration:
Revolving Line of Credit
------------------------
i. A bancontrol account with full dominion basis will be used when
the line is active
ii. A borrowing base certificate will be required with each advance
and also on a monthly basis with accounts receivable and accounts
payable agings attached.
iii. Advances will be limited to 80% of invoice for current to 90 day
accounts, less any foreign or intercompany/related accounts and
any cross aging remainders over 50%.
iv. Bank will perform semi-annual collateral audits with a collateral
audit required prior to initial funding.
<PAGE>
Commitment Letter
Page 5
8. FEES:
Revolving Line of Credit $4,500
Capital Expenditure Facility $10,000
Term Loan $6,000
In addition, Borrower will pay all of Bank's out-of-pocket costs in
connection with the loan, including, if applicable, title insurance,
appraisals, environmental assessments, filing and recording fees, and legal
fees, including, if applicable, fees for work performed by Bank's in-house
counsel if such counsel is used instead of outside counsel.
9. ADDITIONAL TERMS: Loan documents will be in the standard form customarily
required by the Bank and will include additional terms and conditions not
discussed above. The Bank will also require certain financial and other
information prior to closing this loan, which will be discussed with you in
detail upon your acceptance of this commitment. At the date of closing the
loan, the financial condition and credit of Borrower and any Guarantor(s)
and all other features of this transaction will be as represented to the
Bank without material adverse change. In the event of bankruptcy or
insolvency or adverse material changes in credit worthiness of Borrower or
Guarantors, this commitment will terminate upon notice by Bank. This
commitment is non-assignable by Borrower and Guarantor(s) will not disclose
the terms of this commitment except to their legal and financial advisors.
This commitment supersedes any prior commitments, offers, or agreements,
written or oral concerning this financing, and can only be modified in
writing.
10. ACCEPTANCE: This commitment is not binding unless this letter is signed by
Borrower and received by us by 5:00 p.m. on June 20, 1997, at which time
the commitment will expire without notice if not so accepted. If, after
acceptance, the loan has not closed by September 1, 1997, this commitment
will expire without notice and all fees paid by Borrower will be retained
by Bank as compensation for expenses incurred. Closing will be deemed to
take place when the Borrower is eligible for and receives the first
disbursement, even if security documents are filed or recorded earlier.
<PAGE>
Commitment Letter
Page 6
11. EXPENSES: Borrower agrees that whether or not Bank makes the loan (unless
failure to make the loan is a consequence of default by Bank), Borrower is
liable for the payment of all expenses, fees, and charges incurred by Bank
with respect to this commitment and the loan.
12. SPECIAL CONDITIONS:
ORAL AGREEMENTS OR ORAL COMMITMENT TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
If this commitment is acceptable to you and your company, please sign and return
this letter. A copy is enclosed. We look forward to working with you!
KEY BANK OF WASHINGTON
By: /s/ JOHN THOREN
-----------------------------------
Its: Vice President
-----------------------------------
Acknowledged and accepted this 6th day of June, 1997.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
Its: President/CEO
-----------------------------------
Borrower's Tax Identification Number 91-1744587
-----------------
Exhibit 10.9
[GRAPHIC OMITTED]
LOAN AGREEMENT
<TABLE>
<CAPTION>
=======================================================================================================================
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
Up to 3,500,000.00 06-30-1997 09-05-1998 1009501 016 302 357577 JCT02
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or item.
=======================================================================================================================
BORROWER: PACIFIC AEROSPACE & ELECTRONICS, INC. LENDER: KEY BANK NATIONAL ASSOCIATION
434 OLD STATION ROAD WEN/ML COMMERCIAL BANKING CENTER
WENATCHEE, WA 99116 102 SOUTH WENATCHEE AVENUE
P.O. BOX 1301 WA-31-35-0163
WENATCHEE, WA 98807
</TABLE>
THIS LOAN AGREEMENT between PACIFIC AEROSPACE & ELECTRONICS, INC. ("Borrower")
and KEYBANK NATIONAL ASSOCIATION ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of June 30, 1997, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means PACIFIC AEROSPACE & ELECTRONICS, INC.
The word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined from time to
time, the lessor of: (a) $3,500,000.00; or (b) 80% of Invoice to 90 day
accounts less any foreign or intercompany/related accounts and any cross
agings/remainders over 50%.
Business Day. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Washington.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt lien,
<PAGE>
6-30-97 LOAN AGREEMENT Page 2
Loan No. 1009501 (Continued)
================================================================================
charge, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever
whether created by law, contract, or otherwise. The word "Collateral"
includes without limitation all collateral described below in the section
titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable
to Lender. The net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits and offsets of any
nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts
do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of,
or affiliated with or related to Borrower or its shareholders,
officers or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a resident of
the United States, except to the extent such Accounts are supported by
insurance, bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion, deems
the creditworthiness or financial condition of the Account Debtor to
be unsatisfactory.
(i) _________________________________________________________ provision of
any state or federal bankruptcy, insolvency, or debtor-in-relief acts;
or who has had appointed a trustee, custodian, or receiver for the
assets of such Account Debtor; or who has made an assignment for the
benefit of creditors or has become insolvent or fails generally to pay
its debts (including its payrolls) as such debts become due.
(j) Accounts with respect to which the Account Debtor is the United States
government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 days from the
invoice date.
(l) Accounts which are subject to retainages and accounts which include
dated items.
Eligible Inventory. The words "Eligible Inventory" mean, at any time, all of
Borrower's inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be obsolete,
unsalable, damaged, defective, or unfit for further processing.
(c) Work in progress.
(d) Inventory which is held or maintained out-of-state.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
<PAGE>
6-30-97 LOAN AGREEMENT Page 3
Loan No. 1009501 (Continued)
================================================================================
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation all
Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such Indebtedness may be or hereafter may become otherwise
unenforceable.
Inventory. The word "Inventory" means all of Borrower's raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes inventory
temporarily out of Borrower's custody or possession and all returns on
Accounts.
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and including without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar items, but
including leaseholds and leasehold improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
<PAGE>
6-30-97 LOAN AGREEMENT Page 4
Loan No. 1009501 (Continued)
================================================================================
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender.
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by Guarantor, delivered to Lender, and be in full force
and effect.
(e) Lender, at its option and for its sole benefit, shall have conducted
an audit of Borrower's Accounts, Inventory, books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified In this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be requested
orally by authorized persons. Lender may, but need not, require that all
oral requests be confirmed in writing. Each Advance shall be conclusively
deemed to have been made at the request of and for the benefit of Borrower
(a) when credited to any deposit account of Borrower maintained with Lender
or (b) when advanced in accordance with the instructions of an authorized
person. Lender, at its option, may set a cutoff time, after which all
requests for Advances will be treated as having been requested on the next
succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender. Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts, general intangibles, and Inventory.
Lander's Security Interests in the Collateral shall be continuing liens and
shall include the proceeds and products of the Collateral, including without
limitation the proceeds of any insurance. With respect to the Collateral,
Borrower agrees and represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's Interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and
any similar statements as may be required by applicable law, and will file
such financing statements and all such similar statements in the
appropriate location or locations. Borrower hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at
any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for
use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower
promptly will notify Lander of any change in Borrower's name including any
change to the assumed business names of Borrower. Borrower also promptly
will notify Lender of any change in Borrower's Social Security Number of
Employer Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's principal
governance office or should Borrower merge or consolidate with any other
entity.
<PAGE>
6-30-97 LOAN AGREEMENT Page 5
Loan No. 1009501 (Continued)
================================================================================
Collateral Records. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and agings. With respect to Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Inventory and
records itemizing and describing the kind, type, quality, and quantity of
inventory, Borrower's Inventory costs and selling prices, and the daily
withdrawal and additions to Inventory.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible Inventory, in
form and substance satisfactory to the Lender. Thereafter and at such
frequency as Lender shall require, Borrower shall execute and deliver to
Lender such supplemental schedules of Eligible Accounts and Eligible
Inventory and such other matters and information relating to the Accounts
and Inventory as Lender may request.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
Representations and Warranties Concerning Inventory. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on
approval, o___ ____________________________________________ of good and
merchantable quality, free from defects; (f) Eligible Inventory is not now
and will not at any time hereafter be stored with a bailee, warehouseman,
or similar party without Lender's prior written consent, and, in such
event, Borrower will concurrently at the time of bailment cause any such
bailee, warehouseman, or similar party to issue and deliver to Lender, in
form acceptable to Lender, warehouse receipts in Lender's name evidencing
the storage of Inventory; and (g) Lender, its assigns, or agents shall have
the right at any time and at Borrower's expense to inspect and examine the
Inventory and to check and test the same as to quality, quantity, value and
condition.
Remittance Account. Borrower agrees that Lender may at any time require
Borrower to institute procedures whereby the payments and other proceeds of
the Accounts shall be paid by the Account Debtors under a remittance
account or lock box arrangement with Lender, or Lender's agent, or with one
or more financial institutions designated by Lender. Borrower further
agrees that, if no Event of Default exists under this Agreement, any and
all of such funds received under such a remittance account or lock box
arrangement shall, at Lender's sole election and discretion, either be (a)
paid or turned over to Borrower; (b) deposited into one or more accounts
for the benefit of Borrower (which deposit accounts shall be subject to a
security assignment in favor of Lender); (c) deposited into one or more
accounts for the joint benefit of Borrower and Lender (which deposit
accounts shall likewise be subject to a security assignment in favor of
Lender); (d) paid or turned over to Lender to be applied to the
Indebtedness in such order and priority as Lender may determine within its
sole discretion; or (e) any combination of the foregoing as Lender shall
determine from time to time. Borrower further agrees that, should one or
more Events of Default exist, any and all funds received under such a
remittance account or lock box arrangement shall be paid or turned over to
Lender to be applied to the Indebtedness, again in such order and priority
as Lender may determine within its sole discretion.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Washington
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower, do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
<PAGE>
6-30-97 LOAN AGREEMENT Page 6
Loan No. 1009501 (Continued)
================================================================================
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security interests, and
has not executed any security documents, or financial statements relating
to such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests in or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally ____________.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 434 OLDS STATION ROAD, WENATCHEE, WA 98001.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be true
<PAGE>
6-30-97 LOAN AGREEMENT Page 7
Loan No. 1009501 (Continued)
================================================================================
and accurate in every material respect on the date as of which such
information is dated or certified; and none of such Information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than sixty (60) days after the end of each
fiscal quarter, Borrower's balance sheet and profit and loss statement for
the period ended, prepared and certified as correct to the best knowledge
and belief by Borrower's chief financial officer or other officer or person
acceptable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less
than $18,000,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 0.75 to 1.00.
Working Capital. Maintain Working Capital in excess of $7,500,000.00.
Current Ratio. Maintain a ratio of Current Assets to Current
Liabilities, in excess of 2.00 to 1.00. Except as provided above, all
computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
Borrower, upon request of Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person.
In connection with all policies covering assets in which Lender holds
or is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the follow: (a) the name
of the insurer; (b) the risks insured; (c) the amount of the policy; (d)
the properties insured; (e) the then current property values on the basis
of which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantors
named below, on Lender's forms, and in the amounts and under the conditions
spelled out in those guaranties.
<PAGE>
6-30-97 LOAN AGREEMENT Page 8
Loan No. 1009501 (Continued)
================================================================================
Guarantors Amounts
---------- -------
PACIFIC COAST TECHNOLOGIES, INC. Unlimited
CASHMERE MANUFACTURING CO., INC. Unlimited
CERAMIC DEVICES, INC. Unlimited
SEISMIC SAFETY PRODUCTS, INC. Unlimited
MOREL INDUSTRIES, INC. Unlimited
NTI, INC. Unlimited
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for the following specific
purposes: SHORT TERM OPERATING.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties
_____________________________ books adequate reserves with respect to such
contested assessment, tax, charge, levy, lien, or claim in accordance with
generally accepted accounting practices. Borrower, upon demand of Lender,
will furnish to Lender evidence of payment of the assessments, taxes,
charges, levies, liens and claims and will authorize the appropriate
governmental official to deliver to Lender at any time a written statement
of any assessments, taxes, charges, levies, liens and claims against
Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection, federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's party in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents, and other agreements as Lender or its
attorney may reasonably request to evidence and secure and Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
<PAGE>
6-30-97 LOAN AGREEMENT Page 9
Loan No. 1009501 (Continued)
================================================================================
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
DISPOSITION OF CASH COLLATERAL ACCOUNT PROCEEDS.
Account proceeds will be deposited to cash collateral account
#_________________________ as follows: ______ all proceeds ______ Proceeds
of accounts or invoices assigned ______ Other (specify)
______________________________________________________
Cash Collateral account funds will be applied to note balance as follows:
_______________________ and _______________________ of each week (day of
week); or ____________________ days after deposit; or ____________________
business days after deposit.
PAYMENT OF INTEREST.
Interest is to be paid as follows:
_______ First from each payment;
_______ Monthly per billing statement;
_______ By charging account #________________________;
COLLATERAL SCHEDULE TIMETABLES.
Borrower shall execute and deliver to Lender the following schedules:
Accounts Receivable Agings __X__ Monthly ______ Quarterly _______ Other
_______ within ______ days of period end Accounts Payable Agings __X__
Monthly ______ Quarterly _______ Other _______ within ______ days of period
end Inventory Schedules __X__ Monthly ______ Quarterly _______ Other
_______ within ______ days of period end Certificate for Borrowing ______
Each Advance __X__ Monthly _______ Other (Specify) ________________. Other
Schedules ___________________________________________________.
ADDITIONAL PROVISIONS. MINIMUM DEBT SERVICE COVERAGE RATIO OF 1.50 TO 1.00
BORROWING CERTIFICATES TO BE SUBMITTED MONTHLY. A/R & A/P AGEINGS MONTHLY.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
<PAGE>
6-30-97 LOAN AGREEMENT Page 10
Loan No. 1009501 (Continued)
================================================================================
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property of Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
Change in Ownership. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
<PAGE>
6-30-97 LOAN AGREEMENT Page 11
Loan No. 1009501 (Continued)
================================================================================
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. It there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of King
or Pierce County, the State of Washington. Lender and Borrower hereby waive
the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. This Agreement
shall be governed by and construed in accordance with the laws of the State
of Washington.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
relating to the Loan, and Borrower hereby waives any rights to privacy it
may have with respect to such matters. Borrower additionally waives any and
all notices of sale of participation interests, as well as all notices of
any repurchase of such participation interests. Borrower also agrees that
the purchasers of any such participation interests will be considered as
the absolute owners of such interests in the Loans and will have all the
rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall binds its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
<PAGE>
6-30-97 LOAN AGREEMENT Page 12
Loan No. 1009501 (Continued)
================================================================================
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE 30, 1997.
BORROWER:
PACIFIC AEROSPACE & ELECTRONICS, INC.
/s/ Donald A. Wright, Pres/CEO
- -------------------------------------
Authorized Officer
LENDER:
KEYBANK NATIONAL ASSOCIATION
By: /s/
- -------------------------------------
Authorized Officer
Exhibit 10.10
Loan Number: 357577-1009501
REVOLVING NOTE
(Prime/LIBOR)
Date: June 30, 1997
Principal Amount: $3,500,000.00
Interest Rate: Variable Rate or LIBO Fixed Rate
Maturity Date: September 5, 1998
Borrower: PACIFIC AEROSPACE & ELECTRONICS, INC.
1. PROMISE TO PAY. PACIFIC AEROSPACE & ELECTRONICS, INC. ("Borrower")
promises to pay to KEYBANK NATIONAL ASSOCIATION, Wenatchee-Moses Lake Commercial
Banking Office, Wenatchee, Washington ("Lender"), or order, in lawful money of
the United States of America, the principal amount set forth above or so much as
may be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
2. PAYMENT. Borrower will pay this loan on demand, or if no demand is made,
on the Maturity Date set forth above. In addition, Borrower will pay regular
monthly payments of accrued unpaid interest, beginning August 1, 1997, and
continuing on the same day of each month after that. Interest on this Note is
computed on a 365/360 simple interest basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, times the outstanding
principal balance, times the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
3. INTEREST RATE. This Note shall bear interest at the Variable Rate,
unless Borrower elects to have an Advance bear interest at a LIBO Fixed Rate, as
described below. Advances may bear interest at different rates.
(a) Variable Rate. Unless Borrower elects to have an advance bear
interest at a Fixed Rate, amounts outstanding hereunder shall bear interest
from the date of advance at a floating rate equal to the Prime Rate plus
zero percent (0.000%) (the "Variable Rate"). "Prime Rate" means the
floating commercial loan rate announced
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from time to time by Lender as its "prime rate," and is not necessarily the
lowest rate offered by Lender. Changes in the Variable Rate will be
effective on the date the Prime Rate changes.
(b) LIBO Fixed Rate. Borrower may elect to have one or more advances
(each a "Fixed Rate Advance") bear interest for a term of 30, 60, 90, 120
or 180 days (the "Advance Period") at a fixed rate of interest equal to the
then-current LIBO Quote for the requested Advance Period, plus 2.50 percent
(2.500%) (the "LIBO Fixed Rate"). "LIBO Quote" means a rate calculated by
Lender acting in good faith, which Lender determines with reference to, but
which may be different from, its LIBOR or Eurodollar based costs of funds,
on the date of the advance request for the Advance Period selected by
Borrower. The formula used by Lender in determining the LIBO Quote is
within its absolute discretion and may be changed from time to time.
Borrower may not select an Advance Period that extends beyond the Maturity
Date of the Note. Upon expiration of the applicable Advance Period,
Borrower may elect to roll the advance to a new LIBO Fixed Rate, to pay the
advance off, or have the advance bear interest thereafter at the Variable
Rate. If Borrower fails to elect any of these options, the advance will
thereafter bear interest at the Variable Rate until Borrower selects a new
LIBO Fixed Rate.
4. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. This Note evidences a revolving line, which may be
borrowed, repaid, and re-borrowed from time until maturity or earlier
termination. Principal payments shall first be applied to reduce principal
bearing interest at the Variable Rate, then to Fixed Rate Advances. If Borrower
prepays a Fixed Rate Advance prior to the last day of the applicable Advance
Period, Borrower shall also pay a Prepayment Premium, calculated as set forth
below. Lender will be entitled to receive the Prepayment Premium regardless of
whether prepayment is voluntary or involuntary, (including a demand on the Note
at a time when Borrower is in default hereunder) but not in the event of a
demand by Lender prior to the stated Termination Date in the absence of default
under this Note. Borrower acknowledges that Lender may or may not, in any
particular case, match-fund a Fixed Rate Advance and Borrower agrees that Lender
will be entitled to receive the Prepayment Premium irrespective of
match-funding. Early payments will not, unless agreed to by Lender in writing,
relieve Borrower of Borrower's obligation to continue to make payments of
accrued unpaid interest. Rather, they will reduce the principal balance due.
5. LATE CHARGE. If a payment is ten days or more late, Borrower will be
charged 5.000% of the regularly scheduled payment or $10.00, whichever is
greater.
6. DEFAULT. Borrower will be in default if any of the following happens:
(a) Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower
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has made to Lender, or Borrower fails to comply with or to perform when due any
other term, obligation, covenant, or condition contained in this Note or any
agreement related to this Note, or in any other agreement or loan Borrower has
with Lender. (c) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material respect,
either now or at the time made or furnished. (d) Borrower becomes insolvent, a
receiver is appointed for any part of Borrower's property, Borrower makes an
assignment for the benefit of creditors, or any proceeding is commenced either
by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any
creditor tries to take any of Borrower's property on or in which Lender has a
lien or security interest. This includes a garnishment of any of Borrower's
accounts with Lender. (f) Any of the events described in this default section
occurs with respect to any guarantor of this Note. (f) A material adverse change
occurs in Borrower's financial conditions, or Lender believes the prospect of
payment or performance of the Indebtedness is impaired. If any default, other
than a default in payment, is curable and if Borrower has not been given a
notice of a breach of the same provision of this Note within the preceding
twelve (12) months, it may be cured (and no event of default will have occurred)
if Borrower, after receiving written notice from Lender demanding cure of such
default: (a) cures the default within fifteen (15) days; or (b) if the cure
requires more than fifteen (15) days, immediately initiates steps which Lender
deems in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
7. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately due,
without notice, and then Borrower must pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also increase the
interest rate on this Note to a floating rate equal to the Prime Rate plus 5.00%
per annum. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, court costs, Lender's attorneys'
fees and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. This Note has been delivered to
and accepted by Lender in the State of Washington. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of King or Pierce County, State of Washington. This Note shall be
governed by and construed in accordance with the laws of the State of
Washington.
8. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if
Borrower makes a payment on Borrower's loan and the check or preauthorized
charge with which Borrower pays is later dishonored.
9. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested orally by Borrower or as provided in this
paragraph.
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Lender may, but need not, require that all oral requests be confirmed in
writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized as provided in this paragraph to
request advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority:
Don Wright and Nick Gerde. Borrower agrees to be liable for all sums either
advanced in accordance with the instructions of an authorized person or credited
to any of Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or by
Lender's internal records, including daily computer print-outs. Lender will have
no obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement with Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; or (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender.
10. PREPAYMENT PREMIUM. If for any reason Borrower shall prepay all or a
portion of the principal amount of any Fixed Rate Advance prior to the
expiration of the applicable Advance Period, Borrower shall also pay Lender a
Prepayment Premium. The Prepayment Premium will be qual to the present value, at
the time of prepayment (the "Prepayment Date"), of the excess of (i) the
interest that would have been payable on the amount prepaid at the interest rate
applicable to the Advance(s) from the Prepayment Date to the expiration date of
the Advance Period applicable to such Advance, over (ii) the interest that would
be chargeable on a note equal to the amount prepaid at a New Rate. The "New
Rate" shall be equal to the United States Treasury Security yield on a security
with a current remaining term to maturity the same as the Advance at the
Prepayment Date, plus the comparable interest rate spread as the Advance had to
the United States Treasury Security yield with the same maturity. The present
value shall be computed using 1/12th of the New Rate as the monthly discount
rate. If there is no U.S. Treasury Security with a comparable maturity, Lender
will determine the appropriate yield by interpolating between maturities.
11. SWAP PROVISIONS. If Borrower and Lender are entering or subsequently
enter into an interest rate swap agreement related to this Note (a "Swap"), then
the following provisions shall apply: This Note shall be deemed to be modified
so that interest will accrue during the period of time the Swap is in effect at
a Fixed Rate equal to the rate designated in the Confirmation issued by Lender
applicable to such Swap, and calculated in accordance with the procedures and
quotation sources used in connection with the Swap. Upon a termination of the
Swap that does not constitute a default under this Note, the interest and
payment provisions under this Note shall, at Lender's sole and exclusive option,
revert to what they would have been absent the Swap. If this Note is prepaid,
the Lender shall have the right in its sole and absolute discretion to terminate
the Swap upon or at any time after
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<PAGE>
such prepayment. In addition to any premium that may be due under this Note upon
prepayment, Borrower will pay any amounts that may be due to Lender upon Early
Termination (as defined in the 1991 ISDA Definitions published by the
International Swap Dealers Association, Inc.) of the Swap.
12. ADDITIONAL PROVISIONS. Any advance that Lender in its sole discretion
may permit after the final payment date provided in this Note will be due on
demand and otherwise subject to the terms of this Note. If there is a statutory
change in state or federal law (including without limitation, a change related
to required reserves under applicable bank regulatory law or a change in any
provision of the Internal Revenue Code), or any regulation or interpretation
issued thereunder, that lowers Lender's effective yield on this Note, Lender
shall notify Borrower in writing of the change, and Borrower shall pay as
additional interest on this Note, the amount necessary to compensate Lender for
the amount by which Lender's effective yield was reduced.
13. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its
rights and remedies under this Note without losing them. Borrower and any other
person who signs, guarantees or endorses this Note, to the extent allowed by
law, each waive presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Note, and unless otherwise expressly stated
in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT
OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
KEYBANK NATIONAL BORROWER:
ASSOCIATION PACIFIC AEROSPACE & ELECTRONICS,
INC.
/s/ JOHN THOREN BY:
- ----------------------------------
Authorized Officer
/s/ DONALD A. WRIGHT
-----------------------------------------
Pres/CEO
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Exhibit 10.13
LOAN MODIFICATION AGREEMENT
BETWEEN: Pacific Aerospace & Electronics, Inc., a Washington corporation,
successor by merger to PCT Holdings, Inc., a Nevada corporation;
Ceramic Devices, Inc., a Washington corporation; Cashmere
Manufacturing Co., Inc., a Washington corporation; Pacific Coast
Technologies, Inc., a Washington corporation; and Seismic Safety
Products, Inc., a Washington corporation (each, a "Borrower," and
collectively, the Borrowers"), whose address is c/o Pacific Aerospace
& Electronics, Inc., 434 Olds Station Road, Wenatchee, WA 98801;
AND: Silicon Valley Bank ("Silicon") whose address is 3003 Tasman Drive,
Santa Clara, California 95054;
DATE: January 31, 1997.
This Loan Modification Agreement ("Agreement") is entered into on the above
date by Borrowers and Silicon.
1. Background. The Borrowers listed above other than Seismic Safety
Products, Inc. entered into a Loan and Security Agreement with accompanying
Schedule with Silicon in April 1995 (as amended from time to time, the "Loan
Agreement"). Capitalized terms used in this Loan Modification Agreement shall,
unless otherwise defined in this Agreement, have the meaning given to such terms
in the Loan Agreement.
2. Modifications to Loan Agreement and Schedule.
a. PCT Holdings, Inc. merged with and into Pacific Aerospace &
Electronics, Inc., with the survivor of the merger being Pacific Aerospace &
Electronics, Inc.
b. Effective the date hereof, the interest rate applicable to the
Secured Accounts Receivable Line of Credit has been changed from a rate equal to
the "Prime Rate" in effect from time to time, plus 2.0% per annum, to a rate
equal to the "Prime Rate" in effect from time to time, plus 0.75% per annum.
c. The "Financial Statements and Reports" section of the Schedule is
modified to provide as follows:
"Financial Statements and Reports. Notwithstanding any other
provision of the Loan Agreement, the Borrowers shall provide
Silicon: (a) within 30 days after the end of each month, a
monthly
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financial statement (consisting of a income statement and a
balance sheet) prepared by the Borrowers in accordance with
generally accepted accounting principles; (b) within 20 days
after the last day of each month, an accounts receivable
report and an accounts payable report for the prior period,
in such form as Silicon shall reasonably specify; (c) within
20 days after the end of each month, an inventory report in
such form as Silicon shall reasonably specify; (d) within 20
days after the last day of each month, a Borrowing Base
Certificate in the form attached to this Agreement as
Exhibit A, as Silicon may reasonably modify such Certificate
from time to time, signed by the Chief Financial Officer or
President of PCT Holdings, Inc.; (e) within 50 days after
the end of each quarter, a Compliance Certificate in such
form as Silicon shall reasonably specify, signed by the
Chief Financial Officer or President of Pacific Aerospace &
Electronics, Inc., setting forth calculations showing
compliance (at the end of each such calendar quarter) with
the financial covenants set forth on the Schedule, and
certifying that throughout such quarter the Borrowers were
in full compliance with all other terms and conditions of
this Agreement and the Schedule, and providing such other
information as Silicon shall reasonably request; (f) within
120 days following the end of the Borrowers' fiscal year,
complete annual CPA-audited financial statements, such audit
being conducted by independent certified public accountants
reasonably acceptable to Silicon, together with an
unqualified opinion of such accountants; and (g) within five
days after filing, a copy of all IOQ and 10K filings and
other filings made by any Borrower with the Securities
Exchange Commission."
3. No Other Modifications: No Defenses. Except as expressly modified by
this Loan Modification Agreement, the terms of the Loan Agreement shall remain
unchanged and in full force and effect. Silicon's agreement to modify the Loan
Agreement pursuant to this Loan Modification Agreement shall not obligate
Silicon to make any future modifications to the Loan Agreement or any other loan
document. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of any indebtedness of any Borrower to Silicon. It is the intention
of Silicon and Borrowers to retain as liable parties all makers and endorsers of
the Loan Agreement or any other loan document. No maker, endorser, or guarantor
shall be released by virtue of this Loan Modification Agreement. The terms of
this paragraph shall apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements. Borrowers agree that they
have no defenses against the obligations to pay any amounts of the Obligations.
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4. Representations and Warranties.
a. Each Borrower represents and warrants to Silicon that the
execution, delivery and performance of this Agreement are within such Borrower's
corporate powers, and have been duly authorized and are not in contravention of
law or the terms of such Borrower's charter, bylaws or other incorporation
papers, or of any undertaking to which such Borrower is a party or by which such
Borrower is bound.
b. Each Borrower understands and agrees that in entering into this
Agreement, Silicon is relying upon the Borrowers' representations, warranties
and agreements as set forth in the Loan Agreement and other loan documents. Each
Borrower jointly and severally represents and warrants to Silicon that the
representations and warranties stated in the Loan Agreement and Schedule are
true as of the date of this Agreement, and will continue to be true during the
term of the Loan Agreement, with respect to each Borrower.
Borrowers: PACIFIC AEROSPACE &
ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
----------------------------------------
Title: President / CEO
-------------------------------------
CERAMIC DEVICES, INC.
By: /s/ DONALD A. WRIGHT
----------------------------------------
Title: Exec. V.P.
-------------------------------------
CASHMERE MANUFACTURING CO., INC.
By: /s/ Donald A. Wright
----------------------------------------
Title: Exec. V.P.
-------------------------------------
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<PAGE>
PACIFIC COAST TECHNOLOGIES, INC.
By: /s/ DONALD A. WRIGHT
----------------------------------------
Title: Exec. V.P.
-------------------------------------
SEISMIC SAFETY PRODUCTS, INC.
By: /s/ DONALD A. WRIGHT
----------------------------------------
Title: Exec. V.P.
-------------------------------------
Silicon: SILICON VALLEY BANK
By: /s/ RON SHERMAN
----------------------------------------
Title: VP
-------------------------------------
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Exhibit 10.34
AMENDMENT TO
"LEASE AGREEMENT PACIFIC COAST TECHNOLOGIES, INC. 1993"
(1994 AMENDMENT)
This Amendment is entered into this date by and between PACIFIC COAST
TECHNOLOGIES, INC. ("Tenant") and PORT OF CHELAN COUNTY, a Washington municipal
corporation ("Landlord").
RECITALS
On about February 1, 1993, the parties entered into a "Lease Agreement
Pacific Coast Technologies, Inc. 1993" for a lease term of 10 years beginning on
October 1, 1993.
On about April 22, 1993, the parties entered into an "Addendum to Lease
Agreement with Pacific Coast Technologies, Inc. 1993."
The Lease and Addendum to Lease referred to above are collectively referred
to in this Amendment as the "1993 Lease."
At about the time of the execution of this Amendment the parent company of
Tenant, being PCT Holdings, Inc., is entering into a new lease agreement with
Landlord ("PCT Lease") for additional facilities to be constructed on the leased
premises described in the PCT Lease.
The parties wish to amend the term and renewal terms of the 1993 Lease so
the term and renewal options of the 1993 Lease will be consistent and run
concurrent with the term and renewal options for the PCT Lease, and to make
certain other revisions and clarifications as set out below.
AGREEMENT
In consideration of the foregoing, the parties agree as set forth below:
1. Section 2 "TERM OF LEASE" shall be amended so that the term of the Lease
shall be for a term ending August 31, 2005.
2. Section 3 "OPTION TO RENEW" is hereby amended so that the second
sentence of Section 3 shall read as follows:
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The option to renew shall be exercised in writing and
delivered to Landlord not less than one hundred eighty (180)
days prior to the expiration of the then-current lease term.
3. Section 17 "INSURANCE" shall be amended by adding the following sentence
to the end of the second paragraph in Section 17:
The limits of liability may be raised at the time of any
lease renewal, by the percent increase in rent to become
effective at the first month of the renewal term, calculated
pursuant to Paragraph 4.6 of this 1993 Lease, upon the
written request of Landlord.
4. Consistent with Paragraph 5 of the Construction Agreement between the
parties executed February 1, 1993, the Base Rent as calculated pursuant to
Paragraph 4.2 of the 1993 Lease is set at 35.45 cents per square foot per month.
Combined with the leasehold tax the parties have agreed to round the initial
monthly payment for Base Rent plus leasehold tax to 40 cents per square foot per
month for a monthly amount of Twelve Thousand Dollars ($12,000).
5. All the remaining terms and provisions of the 1993 Lease are
incorporated herein by this reference and are binding and effective as set forth
therein except as a provision might be affected by the extension of the end of
the original term from July 31, 2003 to August 31, 2005. The changes and
increases in rent as set out in the 1993 Lease shall occur at the time those
changes are set to occur in the 1993 Lease, without reference to the lease
extension set out above.
DATED this 11th day of May, 1995.
TENANT LANDLORD
Pacific Coast Technologies, Inc. Port of Chelan County
By /s/ DONALD A. WRIGHT By /s/ MARK URDAHL
------------------------------- -------------------------------
DON A. WRIGHT MARK URDAHL
Its President Its Manager
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STATE OF WASHINGTON )
)ss.
COUNTY OF CHELAN )
I certify that I know or have satisfactory evidence that DON A. WRIGHT is
the person who appeared before me, and said person acknowledged that he signed
this instrument, on oath stated that he was authorized to execute this
instrument and acknowledged it as the President of Pacific Coast Technologies,
Inc., to be the free and voluntary act of such party for the uses and purposes
mentioned in this instrument.
Dated this 11th day of May, 1995.
/s/ ARTHUR H. KEMBALL
-----------------------------------------
(Print Name)
NOTARY PUBLIC, State of Washington
My appointment expires: 1-23-99
-------------
STATE OF WASHINGTON )
)ss.
COUNTY OF CHELAN )
I certify that I know or have satisfactory evidence that MARK URDAHL is the
person who appeared before me, and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute this instrument and
acknowledged it as the Manager of Port of Chelan County, to be the free and
voluntary act of such party for the uses and purposes mentioned in this
instrument.
Dated this 2nd day of May, 1995.
/s/ DAYLE S. RUSHING
-----------------------------------------
(Print Name)
NOTARY PUBLIC, State of Washington
My appointment expires: 3-3-97
-------------
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EXHIBIT 10.35
ADDENDUM TO LEASE AGREEMENT
WITH
PACIFIC COAST TECHNOLOGIES, INC. 1993
1995 ADDENDUM
THIS ADDENDUM is made as of this date as an addendum to the 1993 Lease, as
defined herein, and this Addendum is made by and among the PORT OF CHELAN
COUNTY, a Washington municipal corporation ("Landlord") and PCT HOLDINGS, INC.
("PCT") and PACIFIC COAST TECHNOLOGIES, INC., a Washington corporation ("Pacific
Coast"), PCT and PACIFIC COAST are sometimes collectively referred to herein as
the "Tenant." This Addendum is referred to herein as "1995 Addendum."
RECITALS
A. The documents set forth below are collectively referred to in this 1995
Addendum as the "1993 Lease":
(i) Pacific Coast and Landlord, on February 1, 1993, entered into a
"Lease Agreement Pacific Coast Technologies, Inc. 1993" for a lease of land
and a building to be constructed on that land ("PCT Building #1"), for a
term of ten (10) years commencing October 1, 1993 (sometimes referred to
herein as the "Pacific Coast Lease");
(ii) Tenant and Landlord, on April 22, 1993, entered into an "Addendum
to Lease Agreement with Pacific Coast Technologies, Inc. 1993" amending the
Pacific Coast Lease; and
(iii) Tenant and Landlord, on May 11, 1995, executed an Amendment to
"Lease Agreement Pacific Coast Technologies, Inc. 1993 (1994 Amendment),"
again amending the Pacific Coast Lease.
B. Tenant desires to lease a new multi-purpose 7,500 square foot facility
("Addition") to be constructed at the north end of PCT Building #1 on Landlord's
property described on attached Exhibit "A," which is incorporated herein by this
reference (the "1995 Leased Property"). Landlord has agreed to construct the
Addition and lease it and the 1995 Leased Property to Tenant provided the terms
of the 1993 Lease are amended as necessary to reflect addition of the 1995
Leased Property, the construction of the Addition, and the payment of additional
rent, as well as other provisions related to the Addition.
C. The parties now wish to amend certain provisions of the 1993 Lease to
ensure the lease provisions as to the term and renewal options of the 1993 Lease
will be consistent and run concurrently with the term and renewal options for
the lease of the Addition, make
<PAGE>
certain other revisions as set forth below, and provide for those terms
applicable to the Tenant's lease of the Addition.
AGREEMENT
In consideration of the mutual covenants, promises and the consideration
set forth herein, the parties agree as follows:
1. Construction of Addition. Landlord shall construct the Addition, at the
north end of PCT Building #1 on the 1995 Leased Premises. The Addition shall be
constructed pursuant to the plans and specifications for the Addition previously
approved by Tenant, and which were the basis for the bid awarded by Landlord at
a meeting of Landlord's Board on September 8, 1995. Such plans and
specifications were approved by Tenant prior to the bid award.
All work provided and called for by the plans and specifications shall be
done in a good and workmanlike manner and in compliance with all applicable
laws, ordinances, regulations or requirements of governmental authority,
Landlord's protective covenants, and the reasonable requirements of the insurers
of the Addition.
2. Possession. The parties anticipate the Addition will be completed by
December 1, 1995. On substantial completion of the Addition, Tenant shall assume
possession of the Addition pursuant to the terms of this 1995 Addendum and the
1993 Lease. The substantial completion date shall be the "Commencement Date" for
the purposes of this 1995 Addendum.
3. Incorporation of 1993 Lease. The 1993 Lease is hereby amended, effective
upon the Commencement Date, to include the 1995 Leased Property and the Addition
as part of the "Property," "Leased Premises" or "Premises," as those terms are
defined in the 1993 Lease. From and after the Commencement Date, the Tenant's
occupancy of, and rights and obligations regarding the Addition and the 1995
Leased Premises, including, without limitation, the initial and renewal term
provisions, shall in all respects and for all purposes be subject to the terms
and conditions of the 1993 Lease and all the provisions of the 1993 Lease are
incorporated herein by reference, except as specifically modified, amended, or
as is otherwise provided in this 1995 Addendum. Provisions of the 1993 Lease
which by the context in which those provisions are used clearly apply solely to
PCT Building #1, shall not apply to the 1995 Leased Property and the Addition.
4. Term of Lease and Renewal. In the Pacific Coast Lease, the first
paragraph of Section 2 "TERM OF LEASE" is amended so that the initial term of
the 1993 Lease and therefore of this 1995 Addendum, shall be for a period ending
November 30, 2005, or ten (10) years after the Commencement Date, whichever is
later.
<PAGE>
5. Payment of Rent. During the initial lease term and any renewal term,
Tenant shall pay Landlord monthly rental for the 1995 Property and the Addition
in the amount determined as set out below in Paragraph 6 ("Base Rent"), adjusted
as set forth in Paragraph 7 below for the first and subsequent years, payable in
lawful money of the United States. Rent shall be paid in advance on the first
day of each month of the lease term and any renewals thereof.
6. Base Rent. The actual Base Rent amount will be determined when the Cost
of Construction, as defined below, of the Addition is fixed, and shall be the
amount determined by the following procedure:
6.1 The monthly payment amount necessary to amortize the Cost of
Construction of the Addition, as defined below, excluding sales taxes, over
thirty (30) years with interest at seven percent (7%) per annum shall be
determined.
6.2 The monthly payment amount necessary to amortize the amount of
sales taxes payable for the construction of the Addition over ten (10)
years with interest at seven percent (7%) per annum shall be determined
6.3 The sum of the two monthly payment amounts determined pursuant to
Paragraphs 6.1 and 6.2 above shall be the Base Rent; provided that if the
payment of sales taxes for the construction of the Addition is deferred or
waived, the determination of Base Rent shall, during any period of deferral
or during the entire Lease if the sales tax is waived, exclude the amount
necessary to amortize the sales tax from the calculation so that during any
period of deferral or during the entire lease if the sales tax is waived,
Base Rent shall be the amount set out in Paragraph 6.1, subject to
adjustment as hereafter set forth.
7. Adjustment to Base Rent. The provisions of Paragraph 4 of the 1993 Lease
regarding the rent payable as calculated in the Pacific Coast Lease is
applicable only to the rent payable for the Property other than the 1995 Leased
Property and Addition. Paragraph 4.6 of the Pacific Coast Lease captioned
"Consumer Price Index" shall apply to the rent due for all the Property,
including the 1995 Leased Property and the Addition so that the Base Rent for
the 1995 Leased Property and the Addition shall also be adjusted by the formula
in Paragraph 4.6 of the 1993 Lease. Provided that for the CPI adjustment set
forth under Paragraph 4.6.1 relative to the rent amount established by this 1995
Addendum, the reference month and year in the denominator shall be December,
1995, utilizing, therefore the semi-annual data for the half year ending
December, 1995 as that consumer price index is applied to the calculation of
rent adjustments for the rent established in this 1995 Addendum, and the term
"Adjusted Base Rent" shall refer to "Base Rent" established pursuant to
Paragraph 6 above when determining rental adjustments for this 1995 Addendum.
<PAGE>
8. Deposit. Landlord reserves the right upon thirty (30) calendar days
advance written notice to require Tenant to make a security deposit in the
amount of Forty Thousand Dollars ($40,000), in the form of a bond or other
deposit acceptable to Landlord to be held by Landlord as security for the full
and faithful performance by Tenant of each and every term, covenant and
condition of this 1995 Addendum.
If Tenant Breaches any of the terms of this 1995 Addendum or the 1993
Lease, including the obligation to pay Rent, Landlord may, at Landlord's option,
make demand upon such security and apply the proceeds thereof to cure the
breach. The deposits set forth in this section are in addition to and not in
place of any other deposits called for in the 1993 Lease.
9. Leasehold Tax. In addition to Rent, Tenant shall pay to the Landlord
such sums as may be required by law for payment of leasehold or other tenant tax
as required by the State of Washington or other governmental entity, as such
laws now exist or as they hereafter may be amended (such leasehold tax currently
being 12.84%). If leasehold tax is increased or decreased, the total amount
payable for Rent plus leasehold tax shall increase or decrease, but the amount
of Rent shall not be changed.
10. Full Utilization of Facilities. The following language shall be added
to the 1993 Lease:
The parties recognize that Tenant may not always be in a position to
fully utilize all facilities located on the Leased Premises and
Landlord deems full occupancy to be most appropriate. Since Landlord
is commonly made aware of businesses needing space, both short and
long term, the parties will seek to identify any space leased by
Tenant from Landlord that is not fully utilized ("excess space"). If
such excess space is identified, the parties will agree on a period
for which such excess space may be rented consistent with Tenant's
requirements. When this has been agreed in writing, Landlord shall
have the discretion to locate a renter and rent the excess space for a
rate and on terms determined by Landlord. Any rents derived from such
rentals shall be credited to the Tenant's account under the 1993
Lease. Tenant shall remain fully liable for the rental of excess space
as stated therein. All renters shall be regarded solely as temporary
occupants of excess space for the agreed period subject to notice
requirements consistent with the rental periods allowed by the
parties' agreement.
11. Cost of Construction. For purposes of this 1995 Addendum, "Cost of
Construction" means the value of the 1995 Leased Property at Three Dollars ($3)
per square foot, totalling Eighty-One Thousand One Hundred Fifty Dollars
($81,150), and all actual costs for constructing the addition and improving the
1995 Leased Property, consistent with the plans and specifications, and, in
addition, includes engineering, accounting, legal
<PAGE>
expenses, costs of financing, and miscellaneous expenses that may be incurred as
part of the construction process.
12. Ratification. All the remaining terms and provisions of the 1993 Lease
are incorporated herein by this reference and are binding and effective as set
forth therein except as a provision might be modified or affected by the
extension of the end of the initial term from July 31, 2003, or as a provision
is otherwise amended or clearly not applicable to this 1995 Addendum. The
changes and increases in rent as set out in the 1993 Lease shall occur at the
time those changes are set to occur in the 1993 Lease, and continue through the
end of the initial term and any renewal terms, unaffected by the Lease extension
set forth in Paragraph 4 above except as to the end of the lease term.
13. Controlling Agreement. The terms set forth herein shall control
concerning the construction of the Addition.
DATED this 19 day of September , 1995.
LANDLORD: TENANT:
PORT OF CHELAN COUNTY PACIFIC COAST TECHNOLOGIES, INC.
By: /s/ MARK URDAHL By: /s/ DONALD A. WRIGHT
--------------------------- ---------------------------
MARK URDAHL DONALD WRIGHT
Manager President
PCT HOLDINGS, INC.
By: /s/ D.A. WRIGHT
----------------------------
Name: Don A. Wright
--------------------------
Title: President
-------------------
<PAGE>
STATE OF WASHINGTON )
) ss.
County of Chelan )
I certify that I know or have satisfactory evidence that MARK URDAHL is the
person who appeared before me, and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the Manager of Port of Chelan County to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated this 19 day of September, 1995.
Dayle S. Rushing
/s/ DAYLE S. RUSHING
---------------------------------------------
(printed name)
NOTARY PUBLIC, State of Washington
My appointment expires 3-3-97
---------
STATE OF WASHINGTON )
) ss.
County of Chelan )
I certify that I know or have satisfactory evidence that DONALD WRIGHT is
the person who appeared before me, and said person acknowledged that he signed
this instrument, on oath stated that he was authorized to execute the instrument
and acknowledged it as the President of Pacific Coast Technologies, Inc. to be
the free and voluntary act of such party for the uses and purposes mentioned in
the instrument.
DATED this 19 day of September, 1995.
/s/ DAYLE S. RUSHING
---------------------------------------------
(printed name)
NOTARY PUBLIC, State of Washington
My appointment expires 3-3-97
----------
<PAGE>
STATE OF WASHINGTON )
)ss.
County of Chelan )
I certify that I know or have satisfactory evidence that DON WRIGHT is the
person who appeared before me, and said person acknowledged that he/she signed
this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the ______________ of PCT Holdings, Inc. to be
the free and voluntary act of such party for the uses and purposes mentioned in
the instrument.
DATED this 19 day of September, 1995.
Dayle S. Rushing
/s/ DAYLE S. RUSHING
---------------------------------------------
(printed name)
NOTARY PUBLIC, State of Washington
My appointment expires
---------
EXHIBIT 10.36
1997 ADDENDUM TO LEASE AGREEMENT
WITH PACIFIC COAST TECHNOLOGIES, INC. 1993
This addendum ("Addendum") is entered into this date between the PORT OF
CHELAN COUNTY, a Washington municipal corporation, hereafter referred to as
"Landlord" and PACIFIC COAST TECHNOLOGIES, INC., a Washington corporation,
hereafter referred to as "Tenant," (collectively the "Parties").
RECITALS
A. On or about February 1, 1993, the Parties entered into a "Lease
Agreement Pacific Coast Technologies, Inc. 1993" (the "1993 Lease"); on or about
April 22, 1993, the Parties entered into an "Addendum to Lease Agreement with
Pacific Coast Technologies, Inc. 1993" (the "1993 Addendum"); on or about May
11, 1995, the Parties entered into an "Amendment to "Lease Agreement with
Pacific Coast Technologies, Inc., 1993" (1994 Amendment)" (the "1994
Amendment"); and on September 19, 1995, the Parties entered into an "Addendum to
Lease Agreement with Pacific Coast Technologies, Inc., 1993, 1995 Addendum" (the
"1995 Addendum") (all of which documents are collectively referred to as the
"Lease").
B. The Lease set forth certain real property which was the subject of the
Lease, together with Facilities (as Facilities is defined in the Lease) and the
Addition (as Addition is defined in the Lease) which as of the date of this
Agreement has been constructed on the real property described in the Lease. For
purposes of this Addendum and the Lease reference to "Facilities" includes the
Addition.
C. Tenant has been and now is in possession of the Leased Premises (as
defined in the Lease) which includes the Facilities on the real property.
D. The Parties wish to execute an addendum to the Lease to extend the term
of the Lease, to increase the amount of real property and improvements which are
subject to the Lease and to allow Tenant to build improvements on the real
property which is leased to Tenant under the Lease and this Addendum, which
improvements will be attached to the existing Facilities and owned by Tenant.
AGREEMENT
1. Additional Premises.
1.1 Landlord hereby leases to Tenant and Tenant leases from Landlord,
upon the terms and conditions set out in this Addendum and in the Lease,
except as otherwise provided in this Addendum, the real property described
on Exhibit "A," and the
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<PAGE>
improvements thereon not owned by Tenant, which exhibit is incorporated
herein by this reference as if set forth herein. The legal description for
all of the real property leased to Tenant pursuant to the Lease and this
Addendum is described on Exhibit "B" to this Addendum.
1.2 The real property described on Exhibit A includes a house and
improvements associated with the house (the "House"). The House shall be
considered as part of the Facilities, and the provisions of the Lease
relative to the Facilities and all improvements on the Leased Premises
apply to the House, except as the context clearly requires otherwise.
Landlord hereby consents to the use of the House as a residence and to the
Tenant subletting the House to an employee or agent of Tenant or of a
company or business related to Tenant, provided that Tenant shall provide
written notice to Landlord of the name and telephone number of the Tenant
and shall provide Landlord a copy of any lease agreement between Tenant and
the subtenant within 15 days of the subtenant having the right to occupy
the House.
1.3 The real property described on attached Exhibit "B," together with
the Facilities already existing on that real property, and together with
the new building and improvements to be constructed by Tenant on the Leased
Premises (which new building and other improvements are referred to as the
"Tenant's New Facility" or "Tenant's New Facilities") are collectively
referred to in the Lease and this Addendum as the "Property," "Leased
Premises," or "Premises," except as otherwise provided or limited in this
Addendum.
2. Cross-Incorporation by Reference. All of the provisions of the Lease are
incorporated within this Addendum as if fully set forth in this Addendum, except
to the extent modified or altered by this Addendum; and all of the terms and
provisions of this Addendum are incorporated within the Lease, subject to the
provisions of the Lease being modified or altered by this Addendum. (By way of
example and not by way of limitation the provisions of the Lease relative to
such things as the term of the Lease, the option to renew, indemnities,
insurance, assignment and subletting are intended to apply to all the real
property described on Exhibit "A" together with all improvements, including
Tenant's New Facility and the Facilities on such real property, except as
otherwise provided in this Addendum). The following provisions of the Lease
shall not apply to Tenant's New Facility: Paragraphs 5, 6, 7, 8, 11, 13, 15.2,
15.3, 15.4, and 32 of the 1993 Lease; the entirety of the 1993 Addendum; and the
entirety of the 1995 Addendum. References in this Addendum to "Lease" and
"Addendum" are intended to apply to both the Lease and the Addendum, unless the
context clearly requires the reference to apply only to one of such agreements.
3. Term. The Term of the Lease is hereby amended so that the term of the
Lease is for a period ending December 31, 2007.
4. Option to Renew. Section 3 of Lease, as previously amended, is hereby
further amended to read as follows:
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<PAGE>
4.1 Tenant shall have the option to renew this Lease for one
additional ten-year term and following the expiration of that ten-year term
shall have the option to further renew this Lease for an additional
five-year term, each term to commence immediately upon the expiration of
the preceding term. In each case the option to renew shall be exercised in
writing and delivered to Landlord not less than 180 days prior to the
expiration of the then current Lease term. Each renewal term shall be on
the same terms and conditions applicable to the original lease term, except
for the rent, which, during the first renewal term of ten years shall be
adjusted as provided for in Paragraph 4.6 of the Lease, as amended hereby,
and during the second renewal term of five years shall be adjusted as
provided below in this Addendum.
5. Rent.
5.1 During the term of the Lease the Tenant shall pay monthly rent for
the real property described on Exhibit "A" and improvements thereon, in an
initial amount equal to seven percent (7%) of the fair market value of that
real property divided by twelve (12), plus Nine Hundred Fifty-Three Dollars
($953.00) (being the amount of rent currently being received by Landlord
for the home located on that real property) per month ("Additional Base
Rent"), plus leasehold tax. This Additional Base Rent is in addition to the
rental amount payable by Tenant for the month of May, 1997, pursuant to the
Lease prior to the execution of this Addendum (the "Initial Base Rent").
The collective amount of the Initial Base Rent plus the Additional Base
Rent becomes the Base Rent, upon execution of this Addendum.
5.1.1 The Parties shall meet to attempt to agree upon the fair
market value of the real property described on Exhibit "A." If no
agreement is reached within 60 days from the date of this Agreement,
the fair market value of that property shall be determined pursuant to
the procedure established in Paragraph 5.4.1 below for valuing the
Tenant's New Facility.
5.1.2 In the event Tenant desires to remove the home located on
the real property described on Exhibit "A" Tenant shall provide a
written request to Landlord asking Landlord's approval for the
removal, which notice shall state the business purpose of the Tenant
for the removal. Landlord shall have a period of 30 days following
receipt of the written request to evaluate Tenant's request and to
approve or deny the request. In the event Tenant's request for the
removal of the home is related to the Tenant's projected use of the
Leased Premises in a manner reasonably calculated to have a meaningful
increase (as reasonably determined by Landlord) in the number of
employees at the Leased Premises, Landlord shall not unreasonably
withhold the approval. In the event the removal is not tied to a
projected use which is reasonably projected to generate meaningful
additional employment at the Leased Premises, or to otherwise meet
economic development goals that may be consistent with the Port's
goals at that time, the
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<PAGE>
Port may either deny the request to remove the home, or approve
removal of the home on the condition that there shall be no reduction
or abatement of Base Rent following removal of the home. In the event
the Port grants approval for removal of the home, and there is a
meaningful increase in the number of employees of the Tenant at the
Leased Premises, the rental amount shall be reduced by the amount of
the rent attributable to the home, as that rent may have been
increased from time to time consistent with the provisions of the
Lease, effective on the date agreed upon between the Parties, or in
absence of agreement, effective at the time objective evidence of the
meaningful increase of employment at the Leased Premises is presented.
5.2 The Initial Base Rent shall be adjusted beginning in September of
1999 and again on September 1 on each year thereafter as provided in
Paragraph 4.6 of the Lease, through the last year of the final renewal
term.
5.3 The Additional Base Rent shall be adjusted at the same time and in
the same manner as the Initial Base Rent is adjusted except that the
denominator of the fraction used in adjusting the Additional Base Rent
shall be the semi-annual CPI-U for the period ending June of 1997 for
Seattle.
5.4 If Tenant exercises the option for the second renewal term of five
years, the rent for the first year of the second renewal term shall be
determined as follows:
5.4.1 Landlord shall cause the Leased Premises, excluding the
Tenant's New Facility, to be valued by an appraiser familiar with and
experienced in valuing real property and improvements in North Central
Washington similar to the Leased Premises. The appraisal shall be
complete within sixty (60) days after Tenant has provided written
notice of Landlord of its intent to exercise the option for the second
renewal term. Landlord shall provide Tenant with a copy of the
appraisal setting forth the value assigned by the appraiser to the
Leased Premises. Tenant shall have a period of ten (10) days after
receipt of the appraisal to notify Landlord, in writing, if Tenant
objects to the value assigned to the Leased Premises by the appraiser.
If the Tenant objects to the value, the Tenant may have the Leased
Premises valued by an appraiser selected by the Tenant, which
appraiser shall be familiar with and experienced in valuing real
property and improvements in North Central Washington similar to the
Leased Premises. Tenant shall, within sixty (60) days after notifying
Landlord it objects to the appraised value, provide a copy of the
appraisal by Tenant's appraiser to Landlord, setting forth the value
of the Leased Premises. Landlord shall have a period of ten (10) days
after receipt of the appraisal from the Tenant's appraiser to notify
Tenant if it objects to the value set by Tenant's appraisal. If
Landlord objects, the appraiser selected by Landlord and the appraiser
selected by Tenant shall confer to determine if they can agree on a
fair market value of the Leased Premises and if they cannot agree, the
two shall select a third appraiser who shall
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<PAGE>
determine the value, which determination shall be binding upon the
Landlord and the Tenant. Landlord and Tenant shall each pay one-half
of the cost of all appraisals.
5.4.2 Once the value of the Leased Premises has been determined,
the rent for the first year of the second renewal term shall be an
amount equal to seven percent (7%) of the appraised value of the
Leased Premises (for example, if the fair market value of the Leased
Premises is $3,000,000, the annual rent for the first year of the
second renewal term shall be $210,000).
5.4.3 The Base Rent for the first year of the second renewal
term, as determined in this Paragraph 5.4, shall be adjusted September
of each year of the second renewal term beginning with September 1,
2018, in the same manner as the Base Rent is adjusted in the Lease
except that the denominator of the fraction used for adjusting the
Base Rent during the second renewal term shall be the semi-annual
CPI-U for the period ending June of 2017 for Seattle.
6. Construction of Additional Improvements.
6.1 Tenant shall have the right to construct a building which shall
connect to the exiting Facility and shall make other improvements on the
Leased Premises, consistent with plans and specifications approved by
Landlord (the "plans and specifications"). Such building and improvements
to be constructed by the Tenant are collectively referred to as the
"Tenant's New Facility" or "Tenant's New Facilities." Prior to commencement
of construction of Tenant's New Facility, the Landlord shall review and,
when acceptable, approve all plans and specifications for the Tenant's New
Facility and the use of the Property, including review of landscaping and
parking plans, and review for consistency with the Protective Covenants
applicable to the Landlord's property in the Olds Station area of Chelan
County. Landlord shall not unreasonably withhold its approval.
6.2 It is understood that the plans and specifications will call for
the Facilities to be structurally and aesthetically altered. The Landlord
agrees to not unreasonably withhold consent to such alteration. Tenant
understands and agrees that the cost and responsibility for any such
alteration shall be Tenant's.
6.3 Tenant shall use its good faith efforts to have all work provided
and called for by the plans and specifications done in a good and
workmanlike manner and in compliance with all applicable laws, ordinances,
regulations or requirements of governmental authority, Landlord's
protective covenants, and the reasonable requirements of the insurers of
the Tenant's New Facility.
6.4 Tenant shall indemnify Landlord from and against any and all
claims, demands, causes of action, suits, judgments, or liabilities
(including attorneys' fees,
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<PAGE>
costs, and expenses (including attorneys' fees in enforcing this
indemnity)) for any matter, including death or injuries to persons or loss
or damage to property, arising out of or in connection with the
construction of Tenant's New Facility, except as caused by Landlord's
negligence, willful misconduct, or breach of the terms of this Lease. This
indemnification does not limit Tenant's indemnification under Paragraph 16
of the Lease, and includes, without limitation, any liability for injury to
the person or property of Tenant, its agents, officers, employees,
invitees, or licensees.
6.5 Tenant shall provide plans and specifications to Landlord within
ninety (90) days from the date of this Addendum and shall commence
construction of the Tenant's New Facilities within sixty (60) days after
Landlord has approved the plans and specifications. Tenant shall proceed to
completion of the construction in a reasonable and diligent manner.
6.6 Additional or altered improvements to the Leased Premises may be
added at Tenant's expense, upon prior written approval by the Landlord of
plans and specifications for the new improvements. Such improvements shall
be considered as part of the Tenant's New Facility and shall be constructed
and kept as such, consistent with this Lease.
6.6.1 All approved alterations or improvements shall be at the
Tenant's sole cost and expense; and Tenant shall use a licensed and
bonded contractor for them. Tenant agrees that any alterations or
improvements made shall not abate the rent. In the performance of such
work Tenant agrees to comply with all laws and ordinances and to hold
Landlord harmless from any damage, loss or expense caused by work
performed by the Tenant.
6.6.2 Except as provided in Paragraph 7.1 below, Tenant shall
keep the Leased Premises free from any liens and shall indemnify and
hold Landlord harmless and defend it from any liens or encumbrances,
damage loss or expense arising out of any work performed or materials
furnished by or at the direction of the Tenant, or otherwise, or the
Tenant's new facilities and to the Leased Premises.
6.7 Tenant is solely responsible for all aspects of the proposed
Tenant's New Facility and is not relying on representations or warranties
from Landlord regarding the proposed Tenant's New Facility.
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<PAGE>
7. Ownership.
7.1 Tenant shall own and have all right, title, and interest in and to
the Tenant's New Facility, including, without limitation, the right to
encumber the Tenant's New Facility, to make repairs and do remodeling, the
right to sell the Tenant's New Facility, subject to all the provisions of
the Lease, and subject to Landlord's right to approve an assignee or a
subtenant, and shall have all other rights incident to ownership, except as
otherwise limited by this Addendum.
7.2 Except as specifically provided in this Addendum, the Landlord has
no right to the Tenant's New Facility and has no responsibility or
liability for any cost associated with the Tenant's New Facility or for any
changes to the existing Facilities resulting from the construction or use
of the Tenant's New Facilities.
7.3 The Tenant shall indemnify and hold Landlord harmless from costs
and expenses associated with the Tenant's New Facility and any costs and
expenses to the existing Facility incurred during the Lease term or caused
by Tenant's demolition as a result of the construction or use of the
Tenant's New Facility.
7.4 Notwithstanding the foregoing, the Landlord's responsibilities
under the Lease for the Leased Premises, excluding the Tenant's New
Facility, including the Landlord's obligation for repair and maintenance,
as set out in Paragraphs 13 and 14 of the Lease, for portions of the
existing Facilities not affected by the Tenant's New Facility are not
altered or diminished, except as specifically set forth in this Addendum.
7.5 Unless otherwise agreed, Tenant is responsible for and shall, at
its own expense, make all necessary repairs and replacements to the
Tenant's New Facility. Tenant shall repair and maintain the aesthetic
appearance of the exterior and the structural integrity of the Tenant's New
Facility consistent with the Tenant's responsibility for the repair and
maintenance of the remainder of the Leased Premises, except that all
expenses related to maintenance, repair and condition of the Tenant's New
Facility, including that related to the exterior and the roof, shall be the
responsibility of the Tenant.
8. Possession. Possession of the real property described as Parcel 1 on
attached Exhibit "A" shall be delivered to Tenant upon execution of this
Addendum by the Tenant and the Landlord.
9. Purchase by Landlord. Tenant shall not sell or convey the Tenant's New
Facility, or the Tenant's leasehold interest in the Leased Premises, or any part
thereof without first offering such property to Landlord, and Tenant hereby
grants to Landlord the option and right to purchase the Tenant's New Facility
and the leasehold interest of Tenant in the Leased Property as set forth below:
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<PAGE>
9.1 At any time during the Lease Term or any renewal thereof, Tenant
may provide written notice to Landlord of Tenant's offer to sell to
Landlord the Tenant's New Facility, and if Tenant elects, Tenant's
leasehold interest in the Leased Premises, or any portion of either
("Offered Property"). If Landlord desires to pursue the purchase of the
Offered Property, Landlord and Tenant shall meet and negotiate in an effort
to agree on price and terms for the sale of the Offered Property. If the
Parties cannot reach agreement on the price and terms within forty-five
(45) days from the date Landlord receives Tenant's written offer, Landlord
may, within ten (10) days after the expiration of the forty-five (45) days,
set forth in a notice in writing to the Tenant the price and terms that
Landlord is willing to pay for the Offered Property. If the Parties have
not reached agreement for the sale of the Offered Property within the
forty-five (45) days, Tenant may for a period of 180 days after the
expiration of the forty-five (45) days sell all, but not less than all, of
the Offered Property to a third party at a price and on terms which are not
more favorable to the buyer than those set out in the Landlord's notice to
Tenant; provided that if a proposed sale within the 180 days is more
favorable to the proposed buyer than the price and terms set out in
Landlord's notice, Tenant shall first offer the property it is proposing to
sell to the third party, to Landlord on the same price and at the same
terms as offered to the third party, and Landlord shall have fifteen (15)
days after receipt of the written offer from Tenant to accept or reject the
offer; and provided further that if no sale of the Offered Property or any
part thereof is completed within the 180 days, Tenant shall not sell the
Tenant's New Facility or the Tenant's leasehold interest in the Leased
Premises, or any part thereof, without first complying with this Paragraph
9 and offering to sell such property to the Landlord.
9.2 A sale by Tenant to any third party shall be conditioned on such
third party agreeing to be bound by and comply with the provisions of
Lease, including the provisions regarding the sale of the Tenant's New
Facility or leasehold interest, and the Landlord's right of approval to any
assignee or sub-tenant, as applicable.
10. Rights at Lease Termination
10.1 At the end of the initial term or at the end of any renewal term,
if Tenant has not exercised the option of further renewal or if there are
no other options for renewal, Tenant shall have the right to remove the
Tenant's New Facility, repair the Leased Premises, including the Facility,
and restore the Facility and the Leased premises to essentially the
condition they were in prior to the addition of the Tenant's New Facility,
damage caused by the Landlord or resulting from condemnation, and normal
wear and tear excepted, all at Tenant's expense; provided, however, Tenant
shall have no duty to repair, restore or replace damage caused by an
insured casualty when Landlord has received the insurance proceeds and when
Tenant has no further obligation under other provisions of the Lease for
responsibility for repair and maintenance which is not offset by the
insurance proceeds, and Landlord's remedy shall be limited to the insurance
proceeds; provided further, however, that if the responsibility to repair
or restore any damage caused by casualty is the responsibility of the
Tenant under the Lease
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<PAGE>
and the insurance proceeds are insufficient to restore the Facility or the
Leased Premises, Tenant shall be responsible for the cost for repair and
restoration in excess of the insurance proceeds. Alternatively, Tenant may
leave the Leased Premises intact and not remove the Tenant's New Facility,
in which case all right, title and interest in and to the Tenant's New
Facility shall transfer automatically to and without payment of
consideration by, the Landlord, in which case the Landlord shall then be
the owner of the Tenant's New Facility, free from any interest of the
Tenant.
10.2 If the Tenant elects to remove the Tenant's New Facility, such
removal shall occur pursuant to plans and specifications approved in
advance, in writing, by Landlord, and Landlord agrees not to unreasonably
withhold its approval. Tenant shall proceed promptly, with reasonable
diligence, to complete the removal and restoration, provided that the
removal shall be complete and the Leased Premises repaired and restored
within one hundred twenty (120) days after the end of the Lease term,
unless a longer period is reasonably required because of weather conditions
or other acts of God. If Tenant fails to commence or pursue the removal and
restoration in a reasonable manner, Landlord may, upon providing Tenant
fifteen (15) days written notice of its intent to do so, undertake the
removal and restoration itself, at the expense of the Tenant, and Tenant
agrees to reimburse Landlord for all Landlord's reasonable costs and
expenses, direct and indirect, for the removal and restoration, promptly
upon Landlord billing Tenant for them.
10.3 If Landlord terminates the Lease because of Tenant's default,
then, notwithstanding the termination, the Landlord shall have the option
to purchase the Tenant's New Facility at the fair market value, without
considering the value of any prior interest of Tenant in the Leased
Premises, as the Lease shall have been terminated. If the Landlord and
Tenant have not agreed upon the fair market value of the Leased Premises
within thirty (30) days after Landlord has given Tenant written notice of
its election to purchase the Tenant's New Facility, then the Tenant shall
have the rights and responsibilities set out below. If the Parties agree on
the fair market value the closing of the purchase shall occur within thirty
(30) days after the agreement. The purchase price shall be paid in full at
closing.
10.4 If Landlord does not exercise its option to purchase, or if the
Parties do not agree on the fair market value as provided above, then,
notwithstanding the termination of the Lease, Tenant shall have an
additional sixty (60) days after the expiration of the period during which
Landlord has the right to exercise its option to find a new tenant for the
Tenant's New Facility, and the Leased Premises, which new tenant and the
use to which the new tenant intends to put the Leased Premises must be
acceptable to the Landlord. In the event the Tenant has located a new
tenant for a use which is acceptable to the Landlord within the time period
set forth above, Tenant may sell the Tenant's New Facility to the new
tenant on such terms and conditions as the parties agree. Tenant
understands that since the Lease shall have terminated, the Landlord's
right to determine whether a proposed new tenant, and/or the use to which
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<PAGE>
the proposed tenant intends to put the Leased Premises are acceptable to
the Landlord under circumstances which exist at the time is not subject to
the provisions of the Lease, and that the Landlord may withhold consent to
an approval of a proposed new tenant for reasons which the Landlord
determines at the time, are reasonable, and which are based on the sole and
exclusive judgment of the Landlord.
10.5 If the Tenant has not sold the Tenant's New Facility to the
Landlord or to an acceptable new tenant within ninety (90) after the Lease
has been terminated, the Tenant shall have the right to remove the Tenant's
New Facility, as set forth in Paragraph 10.2 above, or to leave the
Tenant's New Facility and convey all of the Tenant's right, title and
interest in the Tenant's New Facility to the Landlord.
10.6 In the event of conveyance of the Tenant's New Facility to the
Landlord, Tenant shall execute appropriate conveyance documents to transfer
title of the Tenant's New Facility to Landlord, including Special Warranty
Deed, Warranty Bill of Sale, and the like, free of encumbrances, defects
and claims of any party other than Landlord, and other than those commonly
excepted on the printed form portion of an ALTA owner's form of title
insurance policy and those existing at the date of this Addendum.
10.7 At the time of closing of Tenant's conveyance of Tenant's New
Facility to Landlord, except for any condition or damage caused by Landlord
or resulting from condemnation, or as a result of a casualty for which the
Landlord has received insurance proceeds sufficient to restore or repair
the Tenant's New Facility to the condition it was in prior to the damage,
the Tenant's New Facility shall be free from toxic or environmental waste
or hazards for which Tenant has responsibility under Paragraph 23 of the
Lease, shall be free from internal defects not known by or disclosed to the
Landlord and which are not obvious by casual inspection (and have therefore
been considered in valuing the Tenant's New Facility), shall not be in
disrepair and shall be clean.
10.8 The Tenant shall be responsible for any transfer taxes associated
with the sale, and shall pay the costs of any Title Insurance. The Parties
shall divide equally the document preparation fee and the closing fee. The
Landlord shall be responsible for and pay costs of recording of the
documents.
11. Alterations, Improvements and Encumbrances.
11.1 Landlord acknowledges that the Tenant may need to make
alterations to portions of the Leased Premises. Tenant shall make no
changes, improvements or alterations to the Leased Premises without the
Landlord's prior written consent, as set out in the Lease. Notwithstanding
the foregoing, Tenant may make non-structural changes to the Tenant's New
Facility without the Landlord's prior written approval, provided that such
changes are consistent with this Lease, including the Protective Covenants.
-10-
<PAGE>
11.2 Landlord agrees not to unreasonably deny approval for changes,
improvements or alterations; provided design plans are submitted to
Landlord for prior review and approval. Approval for structural changes,
including structural changes to the Tenant's New Facility, must be approved
in advance by Landlord's engineer. Tenant shall bear Landlord's reasonable
costs of investigation of requested structural changes, including
engineer's and other expert's fees.
11.3 All such approved changes shall be at the Tenant's sole cost and
expense; and Tenant shall use a licensed and bonded contractor or
contractors to do the work for such changes. In the performance of such
work, Tenant agrees to comply with all laws and ordinances and to hold
Landlord harmless from any damage, loss or expense caused by work performed
by or on behalf of Tenant.
11.4 Except as provided in this Addendum, Tenant shall keep the Leased
Premises free from any liens. Tenant shall indemnify and hold Landlord
harmless and defend it from any liens or encumbrances, damage, loss or
expense arising out of any work performed or materials furnished by or at
the direction of Tenant, to the Leased Premises. Tenant shall be entitled
to encumber its leasehold interest in the Leased Property, and the
Facilities, provided that any such encumbrance is limited to the value of
the purchase price as set out in Section 9, and is subject to the rights
and duties of the Landlord hereunder, including, without limitation,
Landlord's right to purchase set out in this Lease. Tenant has no interest
in and therefore no right to encumber the Leased Premises or the Tenant's
New Facility for an amount in excess of the purchase price set out in
Section 9 of this Addendum. Any lien or encumbrance of the Tenant's New
Facility or Tenant's leasehold interest, voluntary or involuntary, shall be
subject and subordinate to the provisions of this Lease, and shall be
terminated and released of record by the holder of such lien or encumbrance
upon termination of the Lease or upon the purchase price determined as set
out in Section 9 of this Addendum, being paid to the agent closing the sale
from Tenant to Landlord, regardless of whether or not the purchase price
pays the lien or encumbrance in full.
12. Other Agreements. Paragraph 10 of the Lease is hereby amended to read
as follows:
Tenant is owned by Pacific Aerospace and Engineering, Inc.,
a Washington corporation which is the parent company of the
Tenant and Cashmere Manufacturing, Inc. Pacific Aerospace
and Engineering, Inc., Pacific Coast Technologies, Inc., and
Cashmere Manufacturing, Inc., are referred to as the "PA&E
Companies." All PA&E Companies have agreements with Landlord
by way of other leases or guarantees of other leases, as
well as a guarantee of the Lease. It is anticipated the PA&E
Companies may have additional agreements in the future with
Landlord. The default and remedy provisions of other leases
or agreements which have been
-11-
<PAGE>
or may in the future be entered into between Landlord and
any of the PA&E Companies are incorporated herein by this
reference. A default in any one of the leases or agreements
between the Landlord and any of the PA&E Companies shall be
deemed a default in any and all of the other leases or
agreements between them at Landlord's election, and such
default shall entitle Landlord to exercise the remedies set
out in favor of the Landlord in any and all of such
agreements or leases.
13. Damage or Destruction. If the Tenant's New Facility is damaged or
destroyed Tenant shall promptly repair and restore the Tenant's New Facility to
substantially the condition it was in prior to the destruction, or to such other
condition as may be approved by Landlord in advance in writing, consistent with
plans and specifications approved by Landlord which approval Landlord will not
unreasonably withhold. Alternatively, Tenant may remove the Tenant's New
Facility, repair the Leased Premises, including the Facility, and restore the
Facility and the Leased Premises to essentially the condition they were in prior
to the addition of the Tenant's New Facility, damage from condemnation or caused
by Landlord, and normal wear and tear excepted, all at Tenant's expense;
provided, however, that to the extent Landlord has received insurance proceeds
as a result of damage to Landlord's Facility or the Leased Premises other than
Tenant's New Facility, Landlord shall utilize the insurance proceeds for the
repair of the Facility and Tenant shall be relieved from the financial
responsibility for such repair to the extent of the insurance proceeds received
by Landlord.
14. Casualty and Condemnation. In the event of any fire or other casualty
or condemnation, Tenant shall be entitled to the portion of the insurance
proceeds or condemnation award related to the value of the Tenant's New
Facilities and to the loss of the value of its leasehold interest, if any.
Landlord shall be entitled to recover for the value of the Facilities and the
real property. In the event of such casualty or condemnation, Tenant shall have
no obligation to rebuild the New Facilities.
15. Reasonableness. Any consent or approval required to be given by any
party hereto shall not be unreasonably withhold, delayed or conditioned.
16. Execution in Counterparts. This Addendum may be executed in two ore
more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same contract.
17. No Partnership, Co-Venture, Agency, Employment. This Lease shall not
create any partnership, joint venture, or other joint undertaking between the
parties hereto, and neither party shall be liable for the debts or have the
authority to make any representations, enter into any agreements or admit,
compromise, modify or waive any obligations on behalf of the other.
-12-
<PAGE>
18. Brokers. Each party hereto warrants that it has had no dealings with
any broker or agent in connection with the negotiation of this Addendum and it
knows of no broker or agent who is entitled to a commission in connection with
this Addendum.
19. Waivers. The failure of Tenant at any time to require performance of
any provision of this Lease shall not limit Tenant's right to enforce said
provision. The waiver of any breach of any provision in this Lease shall not
constitute a waiver of any succeeding breach thereof or the breach of any other
provision.
Dated effective June 14, 1997
PORT OF CHELAN COUNTY PACIFIC COAST TECHNOLOGIES, INC.
By: /s/ Mark Urdahl By: /s/ Donald A. Wright
-------------------------------- ------------------------------------
Name: Mark Urdah Name: Donald A. Wright
------------------------------ ----------------------------------
Its: Director Its: Executive Vice President
------------------------------ ----------------------------------
STATE OF WASHINGTON )
)ss.
County of Chelan )
On this 14th day of June, 1997, before me personally appeared Donald A.
Wright, to me known to be the Executive Vice President of the corporation
described herein and that he executed the within and foregoing instrument, and
acknowledged said instrument to be the free and voluntary act and deed of said
corporation, for the uses and purposes therein mentioned, and on oath stated
that he was authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereto set my hand and affixed my official seal
the day and year first above written.
/s/ STEPHANIE D. SCHILLER
-----------------------------------------
NOTARY PUBLIC, State of Washington
Residing at: Seattle, Washington
----------------------------
My appointment expires 1-10-01
------------------
STATE OF WASHINGTON )
)ss.
County of Chelan )
On this 19th day of June, 1997, before me personally appeared Mark Urdahl,
to me known to be the Director of the Port of Chelan County, a municipal
corporation, and that he executed the within and foregoing instrument, and
acknowledged said instrument to be the free
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<PAGE>
and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument.
IN WITNESS WHEREOF, I have hereto set my hand and affixed my official seal
the day and year first above written.
/s/ DARLENE LUFT (Darlene Luft)
-----------------------------------------
NOTARY PUBLIC, State of Washington
Residing at: Wenatchee, WA
----------------------------
My appointment expires 12-7-98
------------------
-14-
Exhibit 21
List of Subsidiaries
Electronics Group
1. Pacific Coast Technologies, Inc.
2. Ceramic Devices, Inc.
3. Northwest Technical Industries, Inc.
Aerospace Group
1. Cashmere Manufacturing Co., Inc.
2. Morel Industries, Inc.
3. Seismic Safety Products, Inc.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-KSB, and to
the inclusion in the Form S-8 Registration Statement No. 333-29007, of our
report dated July 2, 1997, on our audits of the consolidated financial
statements of Pacific Aerospace & Electronics, Inc. and its subsidiaries.
/s/ MOSS ADAMS LLP
Seattle, Washington
July 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 4,048,000
<SECURITIES> 0
<RECEIVABLES> 5,733,000
<ALLOWANCES> (278,000)
<INVENTORY> 9,082,000
<CURRENT-ASSETS> 18,939,000
<PP&E> 16,409,000
<DEPRECIATION> (3,309,000)
<TOTAL-ASSETS> 35,752,000
<CURRENT-LIABILITIES> 5,849,000
<BONDS> 3,236,000
0
4,481,000
<COMMON> 26,019,000
<OTHER-SE> (4,481,000)
<TOTAL-LIABILITY-AND-EQUITY> 35,752,000
<SALES> 34,175,000
<TOTAL-REVENUES> 34,175,000
<CGS> 25,969,000
<TOTAL-COSTS> 32,228,000
<OTHER-EXPENSES> 6,259,000
<LOSS-PROVISION> 295,000
<INTEREST-EXPENSE> 510,000
<INCOME-PRETAX> 1,732,000
<INCOME-TAX> 50,000
<INCOME-CONTINUING> 1,682,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
