U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 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.
(Exact name of small business issuer as specified in its charter)
Washington 91-1744587
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
434 Olds Station Road, Wenatchee, Washington 98801
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (509) 664-8000
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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_____
-----
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes____ No____
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 1, 1997, there were
11,271,889 shares outstanding of the Company's Common Stock, par value $.001 per
share.
Transitional Small Business Disclosure Format (check one): Yes___ No X
-----
1
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - August 31, 1997 and May 31, 1997
Consolidated Statements of Income - First Quarters Ended August 31, 1997 and
1996
Consolidated Statements of Cash Flow - First Quarters Ended August 31, 1997 and
1996
Management's Statement and Notes to Unaudited Consolidated Financial Statements
2
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PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FORM 10-QSB
AUGUST 31, 1997 AND MAY 31, 1997
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1997
ASSETS (Unaudited) (Audited)
- ----------------------------------------------------------- ------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 4,477,000 $ 3,048,000
Certificate of Deposit 1,000,000
Short-Term Investments 837,000
Accounts Receivable 6,048,000 5,455,000
Inventory 9,100,000 9,082,000
Current Portion of Note Receivable - Related Party 62,000 55,000
Prepaid Expense and Other 244,000 299,000
Notes Receivable 3,692,000
------------ ------------
Total Current Assets 24,460,000 18,939,000
------------ ------------
PROPERTY AND EQUIPMENT, NET 15,548,000 13,190,000
------------ ------------
OTHER ASSETS
Note Receivable, net 100,000 125,000
Costs in Excess of NBV Acquired Subsidiaries 2,035,000 2,071,000
Patents, net 1,305,000 1,331,000
Other Assets 89,000 96,000
------------ ------------
Total Other Assets 3,529,000 3,623,000
------------ ------------
TOTAL ASSETS $ 43,537,000 $ 35,752,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
CURRENT LIABILITIES
Accounts Payable $ 4,352,000 $ 3,736,000
Accrued Liabilities 1,471,000 1,116,000
Current Portion - Long-Term Debt 763,000 959,000
Current Portion - Capital Lease Obligations 35,000 38,000
------------ ------------
Total Current Liabilities 6,621,000 5,849,000
------------ ------------
LONG-TERM LIABILITIES
Long-Term Debt, net of Current Portion 3,923,000 3,138,000
Capital Leases, net of Current Portion 102,000 98,000
Convertible Debenture 5,439,000
Deferred Income Tax 592,000 592,000
Deferred Rent and Other 423,000 456,000
------------ ------------
Total Long Term Liabilities 10,479,000 4,284,000
------------ ------------
Total Liabilities 17,100,000 10,133,000
------------ ------------
STOCKHOLDERS' EQUITY
Convertible Preferred Stock 2,303,000 4,481,000
Common Stock 28,205,000 26,019,000
Accumulated Deficit (4,071,000) (4,881,000)
------------ ------------
Total Stockholders' Equity 26,437,000 25,619,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,537,000 $ 35,752,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FORM 10-QSB
First Quarters Ended August 31, 1997 and 1996
Quarters Ended
------------------------------
August 31, August 31,
1997 1996
Unaudited Unaudited
------------ ------------
NET SALES $ 11,776,000 $ 7,445,000
COST OF SALES 8,793,000 5,500,000
------------ ------------
GROSS PROFIT 2,983,000 1,945,000
OPERATING EXPENSES 2,007,000 1,576,000
------------ ------------
INCOME FROM OPERATIONS 976,000 369,000
------------ ------------
OTHER INCOME AND EXPENSE
Interest Income 19,000 14,000
Interest Expense (130,000) (174,000)
Other 8,000 22,000
------------ ------------
(103,000) (138,000)
------------ ------------
NET INCOME FROM BEFORE FEDERAL INCOME TAX 873,000 231,000
PROVISION FOR FEDERAL INCOME TAXES (62,000) (5,000)
------------ ------------
NET INCOME $ 811,000 $ 226,000
============ ============
EARNINGS PER SHARE OF COMMON STOCK $ 0.07 $ 0.03
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD 11,718,000 8,603,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
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<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FORM 10-QSB
FIRST QUARTERS ENDED AUGUST 31, 1997 AND 1996
Quarters Ended
---------------------------
August 31, August 31,
1997 1996
Unaudited Unaudited
----------- ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash from operating activities $ 1,612,000 $(1,042,000)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,700,000) (241,000)
Reduction in notes receivable 17,000 17,000
Reduction in stock subscriptions receivable 1,030,000
Reduction in public offering costs 379,000
Proceeds from certificate of deposit 1,000,000
Purchase of short term investments (836,000)
Increase in notes receivable (3,692,000)
Other Changes, net (18,000)
----------- -----------
Net cash from investing activities (6,211,000) 1,167,000
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on note payable (2,088,000)
Payments on notes payable to stockholders (150,000)
Proceeds from long-term debt 1,191,000
Payments on long term debt and capital leases (570,000) (442,000)
Sale of common stock, net of issuance costs 5,465,000
Sale of convertible debentures, net of issuance costs 5,439,000
Decrease in credit line (750,000)
Other Changes, Net (32,000) 8,000
----------- -----------
Net cash from financing activities 6,028,000 2,043,000
----------- -----------
NET CHANGE IN CASH 1,429,000 2,168,000
Cash, beginning of period 3,048,000 725,000
----------- -----------
Cash, end of period $ 4,477,000 $ 2,893,000
=========== ===========
Supplemental Schedule of Non Cash Investing and
Financing Activities: None during these periods
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-QSB
AUGUST 31, 1997
Management's Statement
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form 10-QSB instructions and, in the opinion of management,
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the Company's consolidated financial position as of August 31,
1997, and May 31, 1997, the consolidated results of operations for the
three-month periods ended August 31, 1997 and 1996, and the consolidated
statements of cash flow for the three-month periods ended August 31, 1997 and
1996. All significant intercompany transactions have been eliminated in the
consolidation process. These results have been determined on the basis of
generally accepted accounting principles and practices applied consistently with
those used in the preparation of the Company's annual and quarterly reports
under the Securities Exchange Act of 1934, as amended.
Certain information and footnote disclosures normally included in audited
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the years ended May 31, 1997 and 1996.
The results of operations for the three-month periods ended August 31, 1997 and
1996 are not necessarily indicative of the results to be expected or anticipated
for the full fiscal year. Also, certain reclassifications have been made to the
August 31, 1996 statement of income and statement of cash flow to conform to the
1997 presentations.
Significant Events and Transactions
Three Months Ended August 31, 1997:
Information Technology Group
In June 1997, the Company announced its plan to form an Information Technology
Group. The Company is currently conducting due diligence regarding its plan to
from the group and regarding several companies with which it has signed
nonbinding letters of intent to become part of that group. Closing of the
proposed acquisitions would be subject to the satisfactory completion of those
investigations, negotiation and execution of definitive purchase agreements, and
other closing conditions. In June and July 1997, the Company also entered into
Operations Consulting and Expense Reimbursement Agreements ("Operations
Agreements") with three of these companies. At August 31, 1997, the Company had
advanced an aggregate of $3,692,000 to two companies under Operations
Agreements, and to another company under a letter of intent, which amount is
included in current assets under the caption "Notes Receivable." As of October
1, 1997, the Company had advanced an aggregate of approximately $4,648,000 to
6
<PAGE>
three companies, under demand promissory notes. The advanced funds were
generally used to repay defaulted obligations and to fund operations of those
companies. On October 1, 1997, the Company demanded immediate repayment of
$845,000 from one of the companies under the terms of its demand promissory
notes.
Convertible Note Offering
In August 1997, the Company closed an offering of $5,800,000 in convertible debt
to a small group of accredited investors in a transaction exempt from
registration under Rule 506 of Regulation D of the Securities Act of 1933, as
amended. In connection with that offering, the Company agreed to register the
Common Stock issuable upon conversion of the Convertible Notes on a Form S-3
registration statement, within 90 days after closing of the offering. No cash
will be generated by conversion of the Convertible Notes to Common Stock. The
Company intends to use the proceeds of the Convertible Note offering primarily
in connection with acquisitions.
Three Months Ended August 31, 1996:
Registered Public Offering
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 had 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, to provide working capital for
operations, and to purchase capital equipment.
Computations of Earnings per Share
Earnings per common and common equivalent share are computed using the weighted
average number of common and common equivalent shares consists of convertible
preferred stock, convertible debentures, stock options and warrants outstanding
during each reported period. Common equivalent shares consist of stock options
and warrants, which are excluded from the computation if antidilutive. Fully
diluted earnings per common share did not differ significantly from primary
earnings per common share in any period reported.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties related to the Company's operations. These
risks and uncertainties include, but are not limited to, competitive factors
(including the possibility of increased competition or technological
development, competitors, and price pressures); legal factors (such as limited
protection of the Company's proprietary technology and changes in government
regulation); and the Company's dependence on key personnel and significant
customers.
Overview
The Company's net sales for the three-month period ended August 31, 1997 were
derived from its six operating subsidiaries, which are divided into two
operational and marketing groups. The Company's Aerospace Group consists of
Cashmere Manufacturing Co., Inc. ("Cashmere"), which manufactures high quality
machined aluminum parts and components, Seismic Safety Products, Inc.
("Seismic"), which markets seismic safety gas shutoff valves manufactured by
Cashmere, and Morel Industries, Inc. ("Morel"), which manufactures cast aluminum
parts and assemblies. The Company's Electronics Group consists of Pacific Coast
Technologies, Inc. ("Pacific Coast"), which manufactures and sells electrical
connectors and instrument packages, Ceramic Devices, Inc. ("Ceramic Devices"),
which manufactures ceramic capacitors, filters and feedthroughs, and Northwest
Technical Industries, Inc. ("NTI"), which manufactures explosively bonded
dissimilar metals.
The electronic products business of the Electronics Group is characterized by
relatively low volumes and higher margins, as compared with the metal products
business of the Aerospace Group, where volumes have historically been higher and
margins lower than in the electronic products business. The Company believes
that margins will generally remain higher in its Electronics Group than in its
Aerospace Group, 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
aerospace products can be expected to affect overall margins for the Company.
The Company's financial condition and results of operations have been
substantially affected by acquisitions. Most recently, in April 1997, the
Company acquired NTI as a part of its Electronics Group. The Company's net sales
for the three-month period ended August 31, 1996 were derived from the five
operating subsidiaries then owned by the Company: Cashmere, Morel and Seismic in
the Aerospace Group, and Pacific Coast and Ceramic Devices in the Electronics
Group. A portion of the changes in the Company's results of operations from the
first quarter of fiscal 1996 to the same period in fiscal 1997 are attributable
to the addition of NTI.
8
<PAGE>
Results of Operations
Quarter Ended August 31, 1997
Net sales for the quarter ended August 31, 1997 were $11,776,000, compared to
net sales of $7,445,000 for the quarter ended August 31, 1996, an increase of
$4,331,000. In the Aerospace Group, net sales of Cashmere increased by
$2,406,000, or 128.2%, between the two periods, and net sales of Morel increased
by $835,000, or 29.7%, between the two periods, in both cases primarily as a
result of increased orders in the commercial aircraft market. Net sales of
Seismic remained essentially the same. Within the Electronics Group, net sales
of Pacific Coast declined $108,000, or 4.6%, between the two periods. Net sales
of Ceramic Devices increased $652,000, or 177.2%, between the two periods,
primarily as a result of increased order backlog and production throughput
increases. NTI contributed net sales of $546,000 for the quarter, its first full
quarter of operations for the Company.
Gross profit for the quarter ended August 31, 1997 was $2,983,000, compared to
gross profit of $1,945,000 for the quarter ended August 31, 1996, an increase of
$1,038,000. The Company's gross profit percentage declined slightly from 26.1%
in 1996 to 25.3% in 1997. In the Aerospace Group, Cashmere's gross profit
increased $312,000, or 60.1%, between the two periods, primarily related to
Cashmere's increase in net sales, and Morel's gross profit increased $297,000,
or 94.3%, primarily related to Morel's increase in net sales and efficiencies
gained through the addition of capital assets in the production facility.
Seismic's gross profit remained the same. In the Electronics Group, Pacific
Coast's gross profit declined by $375,000, or 35.0%, primarily as a result of
changes in product mix between the two quarterly periods, and Ceramic Devices'
gross profit increased $515,000, or 1,287.5%, primarily as a result of Ceramic
Devices' increase in net sales and increased production efficiencies. NTI
contributed gross profit of $289,000 for the quarter.
Operating expenses for the quarter ended August 31, 1997 were $2,007,000,
compared to $1,576,000 for the quarter ended August 31, 1996, an increase of
$431,000. In the Aerospace Group, Cashmere's operating expenses increased
$5,000, or 1.0%, and Morel's operating expenses increased $31,000, or 6.9%. In
the Electronics Group, Pacific Coast's operating expenses increased $38,000, or
7.3%. Ceramic Devices' operating expenses increased $48,000, or 42.1%, primarily
as a result of its significant increase in net sales. NTI's operating expenses
for the quarter were $191,000. Interest expense for the quarter ended August 31,
1997 was $130,000, compared to $174,000 in the same quarter last year, an
increase of $44,000, or 25.3%, primarily related to the reduction of average
long term debt outstanding during the comparative periods.
Net income for the quarter ended August 31, 1997 was $811,000, or $.07 income
per share, which represents an improvement over net income of $226,000, or $.03
income per share for the quarter ended August 31, 1996.
Liquidity and Capital Resources
Overview
At August 31, 1997, total current assets were $24,460,000, and total current
liabilities were $6,621,000, resulting in net working capital of $17,839,000 and
a current ratio of 3.7 to 1.0.
9
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Comparable amounts at May 31, 1997 were $18,939,000 of current assets and
$5,849,000 of current liabilities, resulting in net working capital of
$13,090,000, and a current ratio of 3.2 to 1.0.
New Credit Facility
On May 29, 1997, the Company executed a commitment letter with Key Bank of
Washington providing for 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 an addition to the
Pacific Coast building. The Company executed a loan agreement and promissory
note for the working capital facility that extends until September 1998.
Convertible Note Offering
In August 1997, the Company closed an offering of $5,800,000, before expenses,
in convertible debt to a small group of accredited investors (the "Convertible
Notes"), in a transaction exempt from registration under Rule 506 of Regulation
D of the Securities Act of 1933, as amended. In connection with that offering,
the Company agreed to register the Common Stock issuable upon conversion of the
Convertible Notes on a Form S-3 registration statement, within 90 after closing
of the offering. No cash will be generated by conversion of the Convertible
Notes to Common Stock. The Company intends to use the proceeds of the
Convertible Note offering primarily in connection with acquisitions. See Item 5
- - "Other Information."
Formation of Information Technology Group
In June 1997, the Company announced a plan to form an Information Technology
Group. In connection with that plan, the Company has entered into nonbinding
letters of intent to acquire six companies (the "ITG Companies") that would
become part of the Information Technology Group if the transactions contemplated
in the letters of intent were to be consummated. The ITG Companies are: MONITRx,
Inc., Jungle Street, Inc. ("Jungle Street"), Digital Network Associates, Inc.,
Quantum Internet Interlink, Inc., Market Visibility, Inc. ("Market Visibility"),
and Brigadoon.com, Inc. ("Brigadoon"). The Company is currently conducting due
diligence regarding its plan to form the group and regarding the ITG Companies.
The proposed acquisition of each ITG Company is subject to the satisfactory
completion of the Company's due diligence investigations, negotiation and
execution of a definitive agreement with that company, and other closing
conditions.
In June and July 1997, in connection with the proposed acquisitions, the Company
entered into Operations Consulting and Expense Reimbursement Agreements
("Operations Agreements") with Brigadoon, Jungle Street and Market Visibility.
As of October 1, 1997, the Company had advanced approximately $1,630,000 to
Brigadoon, and $2,427,000 to Jungle Street and its wholly owned subsidiary,
Televar, Inc., under their respective Operations Agreements, and approximately
$591,000 to MONITRx, under a letter of intent, for aggregate advances of
approximately $4,648,000.
10
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On October 1, 1997, the Company demanded repayment from Brigadoon of $845,000 of
those advances, under the terms of five demand promissory notes from Brigadoon
to the Company. The Company currently plans to demand repayment on the remaining
$785,000 owing from Brigadoon in accordance with the terms of four other demand
promissory note, and has so advised Brigadoon. The Company has also advised
Brigadoon that the Company does not intend to make further loans to Brigadoon.
As of August 13, 1997, Brigadoon has issued to the Company a common stock
purchase warrant entitling the Company to purchase 12.5% of the fully diluted
common stock of Brigadoon for a purchase price of $1,000,000. That purchase
price would be reduced to $500,000 if Brigadoon did not repay one or more of the
foregoing notes when due. Brigadoon has indicated to the Company its intention
to repay the notes, and the Company and Brigadoon are beginning discussions
regarding a possible repurchase of the Brigadoon warrant from the Company. The
Company does not currently plan to proceed with the proposed acquisition of
Brigadoon.
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, Gerde, Wright, and Dahl have each personally
guaranteed, or indemnified guarantors of, certain obligations of Jungle Street
or its subsidiary. The Company has also purchased common stock of Jungle Street
amounting to approximately 4.9% of Jungle Street's outstanding common stock.
Acquisition of Olympic Tool & Engineering, Inc.
On August 26, 1997, the Company announced that it has signed a nonbinding letter
of intent to acquire all of the outstanding stock of Olympic Tool & Engineering,
Inc., of Shelton, Washington. The transaction is valued at approximately $3.2
million in cash, notes and the Company's Common Stock. Olympic Tool provides
precision machined and fabricated components primarily to the aerospace and
nuclear industries and employs approximately 70 people. Olympic Tool would join
Cashmere and Morel as members of the Company's Aerospace Group. The proposed
acquisition is subject to satisfactory completion of the Company's due diligence
investigations, negotiation and execution of a definitive purchase agreement,
and other closing conditions.
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 outstanding Series A Convertible
Preferred Stock, $.001 par value (the "Preferred Stock") on a Form S-3
Registration Statement. As of September 30, 1997, 34,415 shares of Preferred
Stock had been converted into 1,048,031 shares of Common Stock, and 15,585
shares of Preferred Stock remained unconverted. This registration related to a
$5 million offering of Preferred Stock that the Company closed in February 1997,
and neither the conversion of the Preferred Stock nor the registration will
generate any further cash to the Company.
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Material Purchase Obligations and Facilities Expansion
The Company has pending purchase orders with equipment suppliers for capital
equipment with an expected total cost of approximately $1,500,000, subject to
obtaining financing acceptable to the Company. The Company expects to take
delivery of the equipment during the second and third quarters of fiscal 1998.
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 from affiliates of the equipment vendors, the Company's lead
bank, or other financing institutions, which are secured by the equipment being
acquired.
During the first quarter of fiscal 1998, the Company substantially completed an
addition to the building that houses Pacific Coast and Ceramic Devices
consisting of approximately 12,000 square feet of production space, and costing
approximately $900,000. The Company has negotiated a term loan facility with its
lead bank to provide financing for approximately 80% of the costs of the
addition. The Company has also acquired certain property adjacent to its
existing Wenatchee facilities and begun construction of an office building to
house the Company's executive, administrative and accounting personnel. Total
project costs for the office building are estimated at approximately $2.8
million.
Future Working Capital Needs
The Company believes that the net proceeds from its February 1997 private
offering of Preferred Stock and its August 1997 Convertible Note offering,
together with its new credit facility with Key Bank of Washington, will be
sufficient to meet the Company's currently budgeted working capital requirements
for at least the next 12 months. However, the Company may also seek other equity
and/or debt financing for pending or future acquisitions or with respect to
capital equipment or facilities expansion plans. 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, any other future acquisitions, and the continuing availability of
bank financing, none of which can be predicted with certainty. The Company may
receive additional funds upon exercise of its publicly-traded common stock
purchase 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
growth and results of operations.
12
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
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.
Item 5. Other Information
A. Private Placement of Convertible Notes.
On August 11, 1997, the Company closed an offering of $5,800,000 in convertible
debt to a small group of accredited investors (the "Convertible Notes"), in a
transaction exempt from registration under Rule 506 of Regulation D of the
Securities Act of 1933, as amended. Pacific Continental Securities Corp.
received $295,000 as a commission as placement agent. In connection with that
offering, the Company agreed to register the Common Stock issuable upon
conversion of the Convertible Notes on a Form S-3 registration statement, within
90 days after closing of the offering. Under the terms of the agreement, the
registration statement must be effective by February 7, 1998. No cash will be
generated by conversion of the Convertible Notes to Common Stock. The Company
intends to use the proceeds of the Convertible Note offering primarily in
connection with acquisitions.
The holders of the Convertible Notes will not have voting rights. The holders
may convert the Convertible Notes to Common Stock at any time after the date of
the Conversion Notes, subject to certain volume limitations. The Company may
elect to pay accrued interest in cash or in Common Stock. Under certain
circumstances, the Company has the one-time right to cause the conversion to
Common Stock, after 20 days' notice to the holders, of up to 25% of the
Convertible Notes outstanding on the date of the notice. If not sooner
converted, the Convertible Notes will be automatically converted to Common Stock
on December 31, 1999.
On conversion of a Convertible Note, the holder will receive a number of shares
of Common Stock equal to the portion of the Convertible Note being converted
divided by the conversion price of the Convertible Notes. The conversion price
will be the lower of (i) $4.75 or (ii) the arithmetic average of the five lowest
closing bid prices on the Nasdaq National Market during the 40
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consecutive trading days immediately preceding the conversion date. At a $4.75
conversion rate, 1,221,052 shares of Common Stock would be issuable on
conversion of all of the Convertible Notes.
The Company intends to use the proceeds of the private placement for
strategic acquisitions, manufacturing equipment and facilities expansion and
working capital.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
The following are filed as exhibits to this Quarterly Report:
10.1 Securities Purchase Agreement between the Company, Nelson Partners
and Olympic Securities, Ltd. dated August 11, 1997.
10.2 Convertible Note from the Company to Nelson Partners dated August
11, 1997.
10.3 Convertible Note from the Company to Olympic Securities, Ltd. dated
August 11, 1997.
10.4 Registration Rights Agreement between the Company, Nelson Partners
and Olympic Securities, Ltd. dated August 11, 1997.
27. Financial Data Schedule.
- --------------------------
b. Reports on Form 8-K.
The Company filed with the Commission the following Current Report on Form 8-K
with regard to events occurring during the quarterly period ended August 31,
1997:
On June 23, 1997, the Company reported that it had announced its formation
of an Information Technology Group, and that, as of June 20, 1997, it had
entered into non-binding letters of intent to acquire three companies in
connection with the formation of the group. No financial statements were
filed with that Form 8-K report.
14
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFIC AEROSPACE & ELECTRONICS, INC.
Date: October 7, 1997 /S/ DONALD A. WRIGHT
--------------------------------------------
Donald A. Wright
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
Date: October 7, 1997 /S/ NICK A. GERDE
--------------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
15
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EXHIBIT INDEX
Exhibit
Number Description
10.1 Securities Purchase Agreement between the Company, Nelson Partners
and Olympic Securities, Ltd. dated August 11, 1997.
10.2 Convertible Note from the Company to Nelson Partners dated August
11, 1997.
10.3 Convertible Note from the Company to Olympic Securities, Ltd. dated
August 11, 1997.
10.4 Registration Rights Agreement between the Company, Nelson Partners
and Olympic Securities, Ltd. dated August 11, 1997.
27. Financial Data Schedule.
16
Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of August 11,
1997, by and among Pacific Aerospace & Electronics, Inc., a Washington
corporation, with headquarters located at 434 Olds Station Road, Wenatchee,
Washington 98801 (the "Company"), and the investors listed on the Schedule of
Buyers attached hereto (individually, a "Buyer" and collectively, the "Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("Regulation D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act");
B. Buyers desire to purchase and the Company desires to issue and sell,
upon the terms and conditions set forth in this Agreement, convertible notes of
the Company, in the form attached hereto as Exhibit A, in the aggregate
principal amount of $5,800,000 (together with any convertible notes issued in
replacement thereof in accordance with the terms thereof, the "Notes"), which
shall be convertible into shares of the Company's Common Stock, par value $.001
per share (the "Common Stock") (as converted the "Conversion Shares"), in
accordance with the terms of the Notes;
C. Each Buyer wishes to purchase, upon the terms and conditions stated in
this Agreement, such Notes in the respective principal amounts set forth
opposite each Buyer's name on the Schedule of Buyers; and
D. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit B (the "Registration Rights
Agreement") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Buyers (severally and not jointly)
hereby agree as follows:
1. PURCHASE AND SALE OF NOTES.
a. Purchase of Notes. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue and sell
to each Buyer and each Buyer shall purchase from the Company Notes, in the
respective principal
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amounts set forth opposite each Buyer's name on the Schedule of Buyers (the
"Closing"). The aggregate purchase price (the "Purchase Price") of the Notes
shall be $5,800,000.
b. Closing Date. The date and time of the Closing (the "Closing Date")
shall be 10:00 a.m. Central Standard Time, within five (5) business days
following the date hereof, subject to notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6 and 7 below (or such
later date as is mutually agreed to by the Company and the Buyers). The Closing
shall occur on the Closing Date at the offices of Katten Muchin & Zavis, 525
West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693.
c. Form of Payment. On the Closing Date, (i) each Buyer shall pay the
purchase price to the Company for the Notes to be issued and sold to such Buyer
at the Closing, by wire transfer of immediately available funds in accordance
with the Company's written wire instructions, and (ii) the Company shall deliver
to each Buyer Notes in a principal amount equal to the Purchase Price paid by
such Buyer (as indicated opposite such Buyer's name on the Schedule of Buyers),
duly executed on behalf of the Company and registered in the name of such Buyer
or its designee (the "Note Certificates").
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer severally represents and warrants with respect to only itself
that:
a. Investment Purpose. Such Buyer (i) is acquiring the Notes and (ii)
upon conversion of the Notes, will acquire the Conversion Shares then issuable,
for its own account, and not as a nominee or agent, for investment only and not
with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
Buyer does not agree to hold any Notes or Conversion Shares for any minimum or
other specific term and reserves the right to dispose of Notes and Conversion
Shares at any time in accordance with or pursuant to a registration statement or
an exemption under the 1933 Act. Such Buyer has not entered into any contract,
undertaking, agreement or arrangement (other than this Agreement, the
Registration Rights Agreement and any other agreement entered into by Buyer and
the Company in connection herewith) with any person or entity with respect to
the sale of any Notes or Conversion Shares.
b. Investor Status. Such Buyer is an "accredited investor" as that
term is defined in Rule 501(a)(3) of Regulation D. Such Buyer is not a "broker"
or "dealer" as those terms are defined in Section 3 of the Securities Exchange
Act of 1934, as amended.
c. Reliance on Exemptions. Such Buyer understands that the Notes and
the Conversion Shares are being offered and sold to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and such Buyer's compliance
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with, the representations, warranties, agreements, acknowledgments and
understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire
such securities.
d. Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Notes and the
Conversion Shares which have been requested by such Buyer. Such Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company. Neither such inquiries nor any other due diligence investigations
conducted by such Buyer or its advisors, if any, or its representatives shall
modify, amend or affect such Buyer's right to rely on the Company's
representations and warranties contained in Section 3 below. Such Buyer
understands that its investment in the Notes and the Conversion Shares involves
a high degree of risk, and such Buyer acknowledges that it is able to bear the
financial risks associated with an investment in the Notes, including the loss
of its entire investment. Such Buyer has sought such accounting, legal and tax
advice as it has considered necessary to make an informed investment decision
with respect to its acquisition of the Notes and the Conversion Shares.
e. No Governmental Review. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Notes or the
Conversion Shares or the fairness or suitability of the investment in the Notes
or the Conversion Shares nor have such authorities passed upon or endorsed the
merits of the offering of the Notes or the Conversion Shares.
f. Transfer or Resale. Such Buyer understands that except as provided
in the Registration Rights Agreement: (i) the Notes and the Conversion Shares
have not been and are not being registered under the 1933 Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (A) subsequently registered thereunder, (B) such Buyer shall have
delivered to the Company an opinion of counsel, in a generally acceptable form,
to the effect that such securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
or (C) such Buyer provides the Company with reasonable assurance that such
securities can be sold, assigned or transferred pursuant to Rule 144 promulgated
under the 1933 Act (or a successor rule thereto); (ii) any sale of such
securities made in reliance on Rule 144 promulgated under the 1933 Act (or a
successor rule thereto) ("Rule 144") may be made only in accordance with the
terms of Rule 144 and further, if Rule 144 is not applicable, any resale of such
securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
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<PAGE>
g. Legends. Such Buyer understands that the certificates or other
instruments representing the Notes and, until such time as the resale of the
Conversion Shares has been registered under the 1933 Act as contemplated by the
Registration Rights Agreement, the stock certificates representing the
Conversion Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form in addition to any legends required by
applicable blue sky laws (and a stop-transfer order may be placed against
transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Notes or the Conversion
Shares upon which it is stamped, if, unless otherwise required by state
securities laws, (i) in connection with a sale transaction, such holder provides
the Company with an opinion of counsel, in a form reasonably acceptable to the
Company and its counsel, to the effect that a public sale, assignment or
transfer of the Notes or the Conversion Shares may be made without registration
under the 1933 Act or applicable blue sky law, or (ii) such holder provides the
Company with reasonable assurances (including, except with respect to a sale
pursuant to Rule 144(k), an opinion of counsel in a form reasonably acceptable
to the Company and its counsel) that the Notes or the Conversion Shares can be
sold pursuant to Rule 144 without any restriction as to the number of securities
acquired as of a particular date that can then be immediately sold. Each Buyer
acknowledges, covenants and agrees to sell the Notes and the Conversion Shares
only pursuant to (i) a registration statement effective under the 1933 Act, or
(ii) advice of counsel that such sale is exempt from registration required by
Section 5 of the 1933 Act. The certificates representing Conversion Shares shall
also bear the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF A
REGISTRATION RIGHTS AGREEMENT BETWEEN THE HOLDER AND THE COMPANY DATED AS
OF AUGUST 8, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE
SHARES MAY NOT BE TRANSFERRED WITHOUT A
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<PAGE>
NOTICE FROM THE COMPANY THAT THE TRANSFER IS PERMITTED.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE THE SUBJECT OF A
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE SECURITIES ACT OF 1933 AND MAY BE TRANSFERRED ONLY ON
CONFIRMATION FROM THE COMPANY, THAT SUCH REGISTRATION IS EFFECTIVE AS OF
THE DATE OF TRANSFER AND MADE IN COMPLIANCE WITH THE PROSPECTUS DELIVERY
REQUIREMENTS OR RULES PROMULGATED BY THE SECURITIES AND EXCHANGE
COMMISSION, OR ON RECEIPT OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO THE COMPANY THAT REGISTRATION AND PROSPECTUS DELIVERY ARE NOT REQUIRED.
After the effectiveness of the Registration Statement contemplated in the
Registration Rights Agreement, and subject to any Grace Periods (as defined
therein), all of the foregoing legends will be removed from certificates
representing shares transferred in resale transactions covered by the
Registration Statement.
h. Authorization; Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that country specified in
its address on the Schedule of Buyers.
j. Organization. Such Buyer is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction in which it
is incorporated, and has the requisite corporate power to enter into this
Agreement, to perform its obligations hereunder, to own its respective
properties and to carry on its respective business as now being conducted.
k. No Conflicts. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement by such Buyer and the
consummation by such Buyer of the transactions contemplated hereby and thereby
will not (i) result in a violation of the charter or by-laws of such Buyer or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument to which such Buyer is a party.
-5-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that:
a. Organization and Qualification. The Company and its subsidiaries (a
complete list of which is set forth in Schedule 3(a)) are corporations duly
organized and validly existing under the laws of the State of Washington and
have the requisite corporate power to own their properties and to carry on their
business as now being conducted. Each of the Company and its subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, "Material Adverse Effect" means any material adverse
effect on the business, properties, assets, operations, results or operations or
financial condition of the Company and its subsidiaries, if any, taken as a
whole, or on the transactions contemplated hereby or by the agreements and
instruments to be entered into in connection herewith.
b. Authorization; Enforcement; Compliance with Other Instruments. (i)
The Company has the requisite corporate power and authority to enter into and
perform this Agreement and the Registration Rights Agreement, and to issue the
Notes and the Conversion Shares in accordance with the terms hereof and thereof,
(ii) the execution and delivery of this Agreement and the Registration Rights
Agreement by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including without limitation the issuance of
the Notes and the reservation for issuance and the issuance of the Conversion
Shares issuable upon conversion thereof, have been duly authorized by the
Company's Board of Directors and no further consent or authorization is required
by the Company, its Board of Directors or its stockholders, (iii) this Agreement
has been, and the Notes and the Registration Rights Agreement will be, duly
executed and delivered by the Company, and (iv) this Agreement constitutes, and
upon execution the Notes and the Registration Rights Agreement will constitute
the valid and binding obligations of the Company enforceable against the Company
in accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies.
c. Capitalization. As of the date hereof, the authorized capital stock
of the Company and the shares thereof issued and outstanding, are as set forth
on Schedule 3(c). All of the shares shown as outstanding on Schedule 3(c) have
been validly issued and are fully paid and nonassessable. Except as disclosed in
Schedule 3(c), no shares of Common Stock or preferred stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company. Except as disclosed in Schedule 3(c), as
of the effective date of this Agreement, (i) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, any shares of
capital stock of the Company or any of its subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
subsidiaries is or may become bound to
-6-
<PAGE>
issue additional shares of capital stock of the Company or any of its
subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, (ii) there are no outstanding debt securities, (iii) there are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act
(except the Registration Rights Agreement) and (iv) there are no outstanding
securities of the Company or its subsidiaries which contain any redemption or
similar provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its subsidiaries is or may become
bound to redeem a security of the Company or any of its subsidiaries. Except as
disclosed in Schedule 3(c), there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Notes or the Conversion Shares as described in this Agreement. The Company
has furnished to the Buyer true and correct copies of the Company's Articles of
Incorporation, as amended and as in effect on the date hereof (the "Articles of
Incorporation"), and the Company's Bylaws, as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
d. Issuance of Securities. The Conversion Shares are duly authorized
and, upon issuance in accordance with the terms hereof and of the Notes, shall
be (i) validly issued, fully paid and non-assessable, (ii) free from all taxes,
liens and charges with respect to the issue thereof and (iii) not subject to
preemptive or similar rights of stockholders of the Company. Sufficient shares
of Common Stock have been duly authorized and reserved for issuance upon
conversion of the Notes.
e. No Conflicts. Except as disclosed in Schedule 3(e), the execution,
delivery and performance of this Agreement, the Notes and the Registration
Rights Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
reservation for issuance and issuance of the Conversion Shares) will not (i)
result in a violation of the Articles of Incorporation, any Certificate of
Designations, Preferences and Rights of any outstanding series of preferred
stock of the Company or By-laws or (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its subsidiaries is a party, or result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the principal
market or exchange on which the Common Stock is traded or listed) applicable to
the Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected. Except as disclosed in
Schedule 3(e), neither the Company nor its subsidiaries is (i) in violation of
any term of or in default under its Articles of Incorporation, Certificate of
Designation, Preferences and Rights of any outstanding series of preferred stock
or By-laws or their organizational charter or by-
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<PAGE>
laws, respectively, or (ii) in violation in any material respect of any term of
or in default under any contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or order or any statute, rule or regulation
applicable to the Company or its subsidiaries. The business of the Company and
its subsidiaries is not being conducted, and shall not be conducted, in
violation of any law, ordinance, regulation of any governmental entity. Except
as specifically contemplated by this Agreement and as required under the 1933
Act, the Company is not required to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under or
contemplated by this Agreement, the Notes or the Registration Rights Agreement
in accordance with the terms hereof or thereof. Except as disclosed in Schedule
3(e), all consents, authorizations, orders, filings and registrations which the
Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the date hereof. The Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company is not in violation of the listing
requirements of the Nasdaq National Market ("Nasdaq") as in effect on the date
of this Agreement and the date of Closing and does not reasonably anticipate
that the Common Stock will be delisted from Nasdaq in the foreseeable future.
f. SEC Documents; Financial Statements. Since July 1, 1996, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the "SEC Documents"). The
Company has delivered to each Buyer or its representative true and complete
copies of the SEC Documents. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyer which is not included in the SEC Documents, including, without
limitation,
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<PAGE>
information referred to in Section 2(d) of this Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made, not misleading.
g. Absence of Certain Changes. Except as disclosed in Schedule 3(g),
since May 31, 1997 there has been no material adverse change and no material
adverse development in the business, properties, operations, financial condition
or results of operations of the Company or its subsidiaries. The Company has not
taken any steps, and does not currently expect to take any steps, to seek
protection pursuant to any bankruptcy law, nor does the Company or any of its
subsidiaries have any knowledge or reason to believe that its creditors intend
to initiate involuntary bankruptcy proceedings.
h. Absence of Litigation. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its subsidiaries, threatened against or affecting the Company,
the Common Stock or any of the Company's subsidiaries, wherein an unfavorable
decision, ruling or finding would (i) have a material adverse effect on the
transactions contemplated hereby, (ii) adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement, the Notes or any of the documents
contemplated herein or (iii), except as expressly set forth in the SEC Documents
or in Schedule 3(h), have a material adverse effect on the business, operations,
properties, financial condition or results of operation of the Company and its
subsidiaries taken as a whole.
i. Acknowledgment Regarding Buyers' Purchase of Notes. The Company
acknowledges and agrees that each of the Buyers is acting solely in the capacity
of arm's length purchaser with respect to this Agreement and the transactions
contemplated hereby. The Company further acknowledges that each Buyer is not
acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the transactions contemplated
hereby and any advice given by any of the Buyers or any of their respective
representatives or agents in connection with this Agreement and the transactions
contemplated hereby is merely incidental to such Buyer's purchase of the Notes
or the Conversion Shares. The Company further represents to each Buyer that the
Company's decision to enter into this Agreement has been based solely on the
independent evaluation by the Company and its representatives.
j. No Undisclosed Material Events, Liabilities, Developments or
Circumstances. No material event, liability, development or circumstance has
occurred or exists, or is contemplated to occur, with respect to the Company or
its subsidiaries or their respective business, properties, prospects, operations
or financial condition, which has not been publicly announced or disclosed to
the Buyers.
k. No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general
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solicitation or general advertising (within the meaning of Regulation D under
the 1933 Act) in connection with the offer or sale of the Notes or the
Conversion Shares.
l. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
Notes or the Conversion Shares under the 1933 Act or cause this offering of
Notes and the Conversion Shares to be integrated with prior offerings by the
Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
Nasdaq.
m. Employee Relations. Neither the Company nor any of its subsidiaries
is involved in any union labor dispute nor, to the knowledge of the Company or
any of its subsidiaries, is any such dispute threatened. None of the Company's
or its subsidiaries' employees is a member of a union and the Company and its
subsidiaries believe that their relations with their employees are good.
n. Intellectual Property Rights. The Company and its subsidiaries own
or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Schedule 3(n), none of the
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights have expired or terminated, or are expected to expire or
terminate in the near future. The Company and its subsidiaries do not have any
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service mark registrations, trade secret or other
similar rights of others, or of any such development of similar or identical
trade secrets or technical information by others and there is no claim, action
or proceeding being made or brought against, or to the Company's knowledge,
being threatened against, the Company or its subsidiaries regarding trademark,
trade name, patents, patent rights, invention, copyright, license, service
names, service marks, service mark registrations, trade secret or other
infringement; and the Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing. The Company and its
subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.
o. Environmental Laws. Except as set forth on Schedule 3(o), the
Company and its subsidiaries are (i) in compliance in all material respects with
any and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses
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or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance in all material
respects with all terms and conditions of any such permit, license or approval.
p. Title. The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(p) or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries. Any real property and facilities held under lease by the Company
and its subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its subsidiaries.
q. Insurance. The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its subsidiaries are
engaged. Neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
r. Regulatory Permits. Except as set forth on Schedule 3(o), the
Company and its subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, and neither the
Company nor any such subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
s. Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
-11-
<PAGE>
t. No Materially Adverse Contracts, Etc. Neither the Company nor any
of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
u. Tax Status. Except as set forth on Schedule 3(u), the Company and
each of its subsidiaries has made or filed all federal and state income and all
other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith, and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
v. Certain Transactions. Except as set forth on Schedule 3(v) and in
the SEC Documents and except for arm's length transactions pursuant to which the
Company makes payments in the ordinary course of business upon terms no less
favorable than the Company could obtain from third parties and other than the
grant of stock options disclosed on Schedule 3(c), none of the officers,
directors, or employees of the Company is presently a party to any transaction
with the Company (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
w. Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Notes will increase
in certain circumstances. The Company further acknowledges that its obligation
to issue Conversion Shares upon conversion of the Notes in accordance with this
Agreement and the Notes is absolute and unconditional regardless of the dilutive
effect that such issuance may have on the ownership interests of other
stockholders of the Company.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
-12-
<PAGE>
b. Form D. The Company agrees to file a Form D with respect to the
Notes and the Conversion Shares as required under Regulation D and to provide a
copy thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Notes and the Conversion Shares for, or
obtain exemption for the Notes and the Conversion Shares for, sale to the Buyers
at the Closing pursuant to this Agreement under applicable securities or "Blue
Sky" laws of the states of the United States, and shall provide evidence of any
such action so taken to the Buyers on or prior to the Closing Date.
c. Reporting Status. Until the earlier of (i) the date as of which the
Investors (as that term is defined in the Registration Rights Agreement) may
sell all of the Conversion Shares without restriction pursuant to Rule 144(k)
promulgated under the 1933 Act (or successor thereto), or (ii) the date on which
(A) the Investors shall have sold all the Conversion Shares and (B) none of the
Notes is outstanding (the "Registration Period"), the Company shall file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale of
the Notes for substantially the same purposes and in substantially the same
amounts as indicated in Schedule 4(d).
e. Financial Information. The Company agrees to send the following to
each Investor (as that term is defined in the Registration Rights Agreement)
during the Registration Period: (i) within five (5) days after the filing
thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly
Reports on Form 10-Q, any Current Reports on Form 8-K and any registration
statements or amendments filed pursuant to the 1933 Act; (ii) within one (1)
business day after release thereof, copies of all press releases issued by the
Company or any of its subsidiaries and (iii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
f. Reservation of Shares. The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, a
number of shares of Common Stock sufficient to provide for the issuance of the
Conversion Shares.
g. Compliance with Section 9 of the 1934 Act. For so long as a Buyer
holds Notes or Conversion Shares, such Buyer shall comply with the provisions of
Section 9 of the 1934 Act with respect to the Company's Common Stock.
h. Listing. The Company shall promptly secure the listing of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system (including
Nasdaq), if any, upon which
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<PAGE>
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all Registrable Securities from time to time issuable
under the terms of this Agreement and the Registration Rights Agreement. The
Company shall maintain the Common Stock's authorization for quotation on Nasdaq,
The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. ("AMEX").
The Company shall promptly provide to each Buyer copies of any notices it
receives from Nasdaq regarding the continued eligibility of the Common Stock for
listing on Nasdaq. The Company shall pay all fees and expenses in connection
with satisfying its obligations under this Section 4(h).
i. Expenses. Subject to Section 9(l) below, at the Closing, the
Company shall pay to the Buyers or their designee(s) the lesser of (i) $10,000
and (ii) one-third of the Buyers' legal fees as shown on an itemized accounting
provided by Buyers to the Company.
j. Corporate Existence. So long as any Notes remain outstanding, the
Company shall not directly or indirectly (i) consummate any merger,
reorganization, restructuring, consolidation or similar transaction by or
involving the Company except a merger or consolidation where the Company is the
survivor or (ii) consummate any sale of all or substantially all of the assets
of the Company or the assets or stock of any of its material subsidiaries or any
similar transaction or related transactions which effectively results in a sale
of all or substantially all of the assets of the Company and/or its
subsidiaries.
k. Transactions With Affiliates. So long as (i) any Notes are
outstanding or (ii) any Buyer owns Conversion Shares with a market value equal
to or greater than $1.0 million, the Company shall not, and shall cause each of
its subsidiaries not to, enter into, amend, modify or supplement, or permit any
subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any subsidiary's
officers, directors, person who were officers or directors at any time during
the previous two years, stockholders who beneficially own 5% or more of the
Common Stock, or affiliates or with any individual related by blood, marriage or
adoption to any such individual or with any entity in which any such entity or
individual owns a 5% or more beneficial interest (each a "Related Party"),
except for (a) customary employment or consulting arrangements and benefit
programs on reasonable terms, (b) any agreement, transaction, commitment or
arrangement on an arms-length basis on terms no less favorable to the Company
than terms which would have been obtainable from a person other than such
Related Party, or (c) any agreement, transaction, commitment or arrangement
which is approved by a majority of the disinterested directors of the Company.
For purposes hereof, any director who is also an officer of the Company or any
subsidiary of the Company shall not be a disinterested director with respect to
any such agreement, transaction, commitment or arrangement. "Affiliate" for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a 5% or more equity interest in
that person or entity, (ii) has 5% or more common ownership with that person or
entity, (iii) controls that person or entity, or (iv) shares common control with
that person or entity. "Control" or "controls" for purposes hereof means that a
person or entity has the power,
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<PAGE>
direct or indirect, to conduct or govern the policies of another person or
entity.
5. TRANSFER AGENT INSTRUCTIONS.
Prior to the Closing, the Company will issue to the transfer agent for
the Common Stock the instructions in the form attached hereto as Exhibit E (the
"Transfer Agent Instructions").
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Notes to
each Buyer at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
a. Such Buyer shall have executed this Agreement and the Registration
Rights Agreement and delivered the same to the Company.
b. Such Buyer shall have delivered to the Company the Purchase Price
for the Notes being purchased by such Buyer at the Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.
c. The representations and warranties of such Buyer shall be true and
correct in all material respects as of the date when made and as of the Closing
Date as though made at that time (except for representations and warranties that
speak as of a specific date), and such Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by such
Buyer at or prior to the Closing Date, and the Company shall have received a
certificate from each Buyer to that effect.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by this Agreement or the
Registration Rights Agreement.
e. No action, suit, investigation or proceeding before or by any
arbitrator or any governmental authority shall have been commenced or threatened
against the Company or any of its subsidiaries, or any of the officers,
directors or affiliates of the Company or any subsidiary seeking to restrain,
prevent or change the transactions contemplated by this Agreement or the
Registration Rights Agreement.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Notes at the
Closing is
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<PAGE>
subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for each Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:
a. The Company shall have executed this Agreement and the Registration
Rights Agreement, and delivered the same to such Buyer.
b. The Common Stock shall be authorized for quotation on Nasdaq, The
New York Stock Exchange, Inc. or AMEX; and, trading in the Common Stock shall
not have been suspended by the SEC, The Nasdaq Stock Market, Inc., The New York
Stock Exchange, Inc. or AMEX.
c. The representations and warranties of the Company shall be true and
correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such representations and warranties shall be true and
correct without further qualification) as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. Such Buyer
shall have received a certificate, executed by the Chief Executive Officer of
the Company, dated as of the Closing Date, to the foregoing effect, including
updates to Section 3 above as may be reasonably requested by such Buyer
including, without limitation, an update as of the Closing Date regarding the
representation contained in Section 3(c) above.
d. Such Buyer shall have received the opinion of the Company's counsel
dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to such Buyer and in substantially the form of Exhibit C attached
hereto.
e. The Company shall have executed and delivered to such Buyer the
Notes (in such denominations as such Buyer shall request) being purchased by
such Buyer at the Closing.
f. The Board of Directors of the Company shall have adopted the
resolutions in substantially the form of Exhibit D attached hereto.
g. As of the Closing Date, the Company shall have reserved out of its
authorized and unissued Common Stock, sufficient shares of Common Stock to
provide for the issuance of the Conversion Shares upon conversion of the Notes.
h. The Transfer Agent Instructions, in the form of Exhibit E attached
hereto, shall have been delivered to and acknowledged in writing by the
Company's transfer agent.
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<PAGE>
i. The Company shall have delivered a certificate evidencing the
incorporation and existence of the Company and each subsidiary in the State of
Washington issued by the Secretary of State of the State of Washington as of a
date within 10 days of the Closing.
j. The Company shall have delivered certified copies of its Articles
of Incorporation and bylaws, each as in effect at the Closing.
k. The Company shall have delivered such other documents relating to
the transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and delivery
of this Agreement and acquiring the Notes and the Conversion Shares hereunder
and in addition to all of the Company's other obligations under this Agreement,
the Company shall defend, protect, indemnify and hold harmless each Buyer and
each other holder of Notes or the Conversion Shares and all of their officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnities") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement, the Notes or
the Registration Rights Agreement or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement, the Notes or
the Registration Rights Agreement or any other certificate, instrument or
document contemplated hereby or thereby, or (c) any cause of action, suit or
claim brought or made against such Indemnitee and arising out of or resulting
from the execution, delivery, performance or enforcement of this Agreement or
any other instrument, document or agreement executed pursuant hereto by any of
the Indemnitees, any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Notes or the
status of such Buyer or holder of the Notes or the Conversion Shares as an
investor in the Company. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
Each Buyer, severally and not jointly agrees to protect, indemnify and hold
harmless the Company and its subsidiaries, and all of their officers, directors
and employees, from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities, damages and expenses
incurred by them as a result of, or arising out of, or relating to any
misrepresentations or breach of any warranty or covenant contained in this
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<PAGE>
Agreement or the Registration Rights Agreement.
9. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of New York without regard to the
principles of conflict of laws.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all other
prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be waived or amended other than by an instrument in writing signed
by the party to be charged with enforcement.
f. Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested, or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
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<PAGE>
If to the Company:
Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, Washington 98801
Telephone: (509) 664-8000
Facsimile: (509) 664-6868
Attention: President
Attention: Vice President/General Counsel
With a copy to:
Stoel Rives LLP
600 University Street, Suite 3600
Seattle, Washington 98101
Telephone: (206) 624-0900
Facsimile: (206) 386-7500
Attention: L. John Stevenson, Jr., Esq.
If to the Transfer Agent:
Interwest Transfer Co., Inc.
1981 E. Murray-Holladay Road
P.O. Box 17136
Salt Lake City, Utah 84117
Telephone: (801) 272-9294
Facsimile: (801) 277-3147
Attention: Ms. Melinda Orth
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's counsel as set forth on the Schedule of
Buyers. Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes. The Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Buyer including by merger or consolidation, except as expressly
provided in Section 4(j) hereof. A Buyer may assign some or all of its rights
hereunder without the consent of the Company, provided, however, that any such
assignment shall not release such Buyer from its obligations hereunder unless
such obligations are assumed by such assignee and the Company has consented to
such assignment and assumption.
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<PAGE>
h. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. Unless this Agreement is terminated under Section 9(l),
the representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive the
Closing. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer shall have the right to
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although each Buyer shall be
provided with a copy of any such press release or other public disclosure prior
to its release and shall be provided with a copy of any 1934 Act filings
providing public disclosure with respect to such transactions in accordance with
Section 4(e)).
k. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have occurred
with respect to a Buyer on or before five (5) business days from the date hereof
due to the Company's or such Buyer's failure to satisfy the conditions set forth
in Sections 6 and 7 above (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, that if this Agreement is terminated pursuant to this Section
9(l), the Company shall remain obligated to reimburse the Buyers for the
expenses described in Section 4(i) above.
m. Placement Agent. The Company acknowledges that it has engaged a
placement agent in connection with the sale of the Notes. The Company shall be
responsible for the payment of any placement agent's fees relating to or arising
out of the transactions contemplated hereby. The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, attorneys' fees and out of pocket expenses) arising in connection
with any such claim.
n. No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
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IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
PACIFIC AEROSPACE & NELSON PARTNERS
ELECTRONICS, INC.
By:/s/ DONALD A. WRIGHT By:/s/ANNE DUPUY
-------------------------------- ------------------------------------
Name: Donald A. Wright Name: Anne Dupuy
Its: President Its: Officer
OLYMPUS SECURITIES, LTD.
By:/s/ ANNE DUPUY
------------------------------------
Name: Anne Dupuy
Its: Alternate Director
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Principal
Investor Address Amount of Investor's Representatives'
Investor Name and Facsimile Number Notes Address and Facsimile
- --------------------------------- --------------------------------------- ------------- -------------------------------
<S> <C> <C> <C>
Nelson Partners c/o Leeds Management Services $2,610,000 Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Malcolm Fairbairn
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street, #1600
Chicago, Illinois 60661-3693
Attention: Robert J. Brantman, Esq.
Marguerite M. Elias, Esq.
Facsimile: (312) 902-1061
Olympus Securities, Ltd. c/o Leeds Management Services $3,190,000 Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Malcolm Fairbairn
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street, #1600
Chicago, Illinois 60661-3693
Attention: Robert J. Brantman, Esq.
Marguerite M. Elias, Esq.
Facsimile: (312) 902-1061
</TABLE>
<PAGE>
SCHEDULE 3(a)
Subsidiaries
<PAGE>
SCHEDULE 3(c)
Capitalization
<PAGE>
SCHEDULE 3(e)
Conflicts
<PAGE>
SCHEDULE 3(g)
Material Changes
<PAGE>
SCHEDULE 3(h)
Litigation
<PAGE>
SCHEDULE 3(n)
Intellectual Property
<PAGE>
SCHEDULE 3(p)
Liens
<PAGE>
SCHEDULE 3(u)
Tax Status
<PAGE>
SCHEDULE 3(v)
Certain Transactions
<PAGE>
SCHEDULE 4(d)
Use of Proceeds
Exhibit 10.2
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS
OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
ANY PROSPECTIVE TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
HEREOF, INCLUDING, WITHOUT LIMITATION, SECTION 1(f)(vi) RELATING TO THE
PRINCIPAL AMOUNT OF THIS NOTE.
CONVERTIBLE NOTE
Wenatchee, Washington
August 11, 1997 $2,610,000
FOR VALUE RECEIVED, PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington
corporation (the "Company"), hereby promises to pay to the order of NELSON
PARTNERS or registered assigns ("Holder") the principal amount of TWO MILLION
SIX HUNDRED TEN THOUSAND DOLLARS ($2,610,000), on December 31, 1999 (the
"Maturity Date"), and to pay interest on the unpaid principal balance hereof at
the rate of 5.0% per annum from the date hereof (the "Issue Date") until the
same becomes due and payable, whether at maturity or upon acceleration or by
conversion or redemption in accordance with the terms hereof or otherwise.
Interest on this Note shall commence accruing on the Issue Date and shall be
computed on the basis of a 365-day year and actual days elapsed and shall be
payable at the time of optional or mandatory conversion of the principal to
which such interest relates in accordance with Section 1 hereof. Any amount of
interest on this Note being paid in shares of Common Stock which is not paid
when it is due and any amount of interest on this Note being paid in cash which
is not paid within five Business Days (as defined below) of when it is due shall
bear interest at the rate of 8.0% per annum from the date thereof until the same
is paid ("Default Interest").
All payments of principal and interest on this Note (to the extent such
principal and/or interest is not converted into Common Stock in accordance with
the terms hereof) shall be made in lawful money of the United States of America
by wire transfer of immediately available funds to such account as the Holder
may from time to time designate by written
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notice in accordance with the provisions of this Note or by Company check.
Whenever any amount expressed to be due by the terms of this Note is due on any
day which is not a Business Day (as defined below), the same shall instead be
due on the next succeeding day which is a Business Day and, in the case of any
interest payment date which is not the date on which this Note is paid in full,
the extension of the due date thereof shall not be taken into account for
purposes of determining the amount of interest due on such date. For purposes of
this Note, "Business Day" shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in the City of New York are authorized or required
by law or executive order to remain closed. Each capitalized term used herein,
and not otherwise defined, shall have the meaning ascribed thereto in the
Securities Purchase Agreement, dated August 11, 1997, pursuant to which this
Note was originally issued (the "Purchase Agreement"). This Note and the other
subordinated convertible notes issued by the Company on the Issuance Date
pursuant to the Purchase Agreement are collectively referred to in this Note as
the "Notes."
The following terms shall apply to this Note:
i. Holder's Conversion of Note. The Holder shall have the right, at the
Holder's option, to convert this Note into shares of the Company's
common stock, par value $.001 per share (the "Common Stock"), on the
following terms and conditions:
(1) Conversion Right. The Holder shall have the right at any time or
times after the Issue Date and then at any time on or prior to
the day that all of the principal, accrued interest and other
payments payable hereunder are paid in full, to convert at any
time and from time to time any part of the outstanding and unpaid
principal amount of this Note of at least $10,000, or such lesser
amount as shall remain unpaid at the time of the conversion
(together with accrued interest thereon, unless the Company pays
such accrued interest in cash as provided below), into fully paid
and nonassessable shares (rounded to the nearest whole share in
accordance with Section 1(i) below) of Common Stock, at the
Conversion Rate (as defined below); provided, however, that in no
event shall any holder be entitled to convert any portion of this
Note in excess of that portion of this Note which, upon giving
effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the Holder and its
affiliates to exceed 4.9% of the outstanding shares of the Common
Stock following such conversion. For purposes of the foregoing
proviso, the aggregate number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of
the
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portion of this Note with respect to which the determination of
such proviso is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (i)
conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder and its affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion
of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion
or exercise analogous to the limitation contained herein
beneficially owned by the Holder and its affiliates. Except as
set forth in the preceding sentence, for purposes of this
paragraph, beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as
amended. The Holder may waive the foregoing limitations by
written notice to the Company upon not less than 61 days prior
notice (with such waiver taking effect only upon the expiration
of such 61 day notice period). The Company shall have the right
to elect to pay accrued interest (including Default Interest, if
any) in cash, in lieu of conversion to Common Stock in accordance
with this Section 1. If the Company elects to pay accrued
interest (including Default Interest, if any) in cash, such cash
shall be paid simultaneously with the delivery to the Holder of
the certificates representing the Common Stock issuable upon
conversion in accordance with Section 1(f) below. At the written
request of the Holder, the Company shall advise such Holder in
writing, within three business days of such request, whether
conversion of accrued interest (including Default Interest, if
any) will be paid in Common Stock or in cash, and such election
shall be binding on the Company for 30 days following the date of
the Company's response. Failure of the Company to respond to the
Holder within three business days shall be deemed to be an
election to convert the accrued interest into Common Stock for
any conversions pursuant to Conversion Notices (as defined in
Section 1(f) below) submitted within 30 days plus three business
days of the Holder's request, unless conversion of the interest
into Common Stock would otherwise be limited by the terms of this
Note.
(2) Conversion Rate. The number of shares of Common Stock issuable
upon conversion of this Note pursuant to Sections (1)(a) shall be
determined according to the following formula (the "Conversion
Rate"):
Conversion Amount
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Conversion Price
For purposes of this Note, the following terms shall have the following
meanings:
(i) "Conversion Price" means, as of any Conversion Date (as
defined below) or other date of determination, the lower of the Fixed
Conversion Price and the Floating Conversion Price, each in effect as
of such date and subject to adjustment as provided herein.
(ii) "Fixed Conversion Price" means $4.75, subject to adjustment
as provided herein.
(iii) "Floating Conversion Price" means, as of any date of
determination, the amount obtained by multiplying the Conversion
Percentage in effect as of such date by the Average Market Price for
the Common Stock.
(iv) "Conversion Percentage" means one hundred (100%), subject in
each case to adjustment as provided herein.
(v) "Average Market Price" means, the arithmetic average of the
five lowest Closing Bid Prices (as defined below) during the 40
consecutive trading days. immediately preceding such date.
(vi) "Closing Bid Price" means, for any security as of any date,
the last closing bid price for such security on the Nasdaq National
Market as reported by Bloomberg Financial Markets ("Bloomberg"), or,
if the Nasdaq National Market is not the principal trading market for
such security, the last closing bid price of such security on the
principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the last closing trade price
of such security as reported by Bloomberg, or, if no last closing
trade price is reported for such security by Bloomberg, the average of
the bid prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date
on any of the foregoing bases, the Closing Bid Price of such security
on such date shall be the fair market value as mutually determined by
the Company and the holders of the Notes. If the Company and the
holders of Notes are unable to
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agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 1(f)(iii) below with the
term "Closing Bid Price" being substituted for the term "Average
Market Price." (All such determinations to be appropriately adjusted
for any stock dividend, stock, split or other similar transaction
during such period).
(vii) "Conversion Amount" means the sum of (A) the principal
amount of this Note to be converted in such conversion, (B) accrued
and unpaid interest, if any, on such principal amount and (C) Default
Interest, if any, on the interest referred to in clause (B) above
(subject to the Company's right to pay the interest referred to in
clauses (B) and (C) in cash, as provided in Section 1(a) above).
(3) Effect of Failure to Obtain and Maintain Effectiveness of
Registration Statement. If the registration statement (the
"Registration Statement") covering the resale of the shares of
Common Stock issuable upon conversion of this Note and required
to be filed by the Company pursuant to the Registration Rights
Agreement between the Company and the Buyers referred to therein
(the "Registration Rights Agreement") is not declared effective
by the Securities and Exchange Commission (the "SEC") on or
before 180 days after the Issue Date (the "Scheduled Effective
Date"), or if after the Registration Statement has been declared
effective by the SEC, sales cannot be made pursuant to the
Registration Statement (whether because of a failure to keep the
Registration Statement effective, to disclose such information as
is necessary for sales to be made pursuant to the Registration
Statement, to register sufficient shares of Common Stock or
otherwise), then, as liquidated damages for any delay in or
reduction of its ability to sell the underlying shares of Common
Stock, but subject to the Holder's rights under Section 2(d), the
Company shall pay to the Holder an amount in cash equal to the
product of (i) the outstanding principal amount of this Note at
such time multiplied by (ii) .02 multiplied by (iii) the quotient
of (x) the sum of (A) the number of days after the Scheduled
Effective Date and prior to the date the relevant Registration
Statement is declared effective by the SEC and (B) the number of
days that sales cannot be made pursuant to the Registration
Statement after the Registration Statement has been declared
effective by the SEC (such number of days being collectively
referred to herein as the "Registration Statement Default Days")
divided by (y) 30. Notwithstanding the foregoing, the
Registration Statement Default Days shall not
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include the number of days during any Grace Period (as defined in
the Registration Rights Agreement). The Company shall not be
required to make the foregoing payments in respect of any
principal amount of this Note that the Holder requires the
Company to redeem pursuant to Section 2(d)(i) or 2(d)(ii) hereof,
provided that the Company has paid the applicable Redemption
Price in compliance with Section 2 hereof.
(4) Adjustment to Conversion Price -- Dilution and Other Events. In
order to prevent dilution of the rights granted under this Note,
the Conversion Price will be subject to adjustment from time to
time as provided in this Section 1(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of Common
Stock. If and whenever on or after the Issuance Date, the Company
issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (other than shares of Common Stock deemed to have been
issued by the Company in connection with an Approved Stock Plan or an
Approved Acquisition (each as defined below)) or in connection with
the conversion of the Company's Series A Convertible Preferred Stock)
for a consideration per share less than the lesser of the arithmetic
average of the Closing Bid Prices for the ten (10) consecutive trading
days immediately preceding the date of such issuance or sale and the
Fixed Conversion Price in effect immediately prior to such time (the
"Applicable Price"), then immediately after such issue or sale, the
Fixed Conversion Price shall be reduced to an amount equal to the
product of (x) the Fixed Conversion Price in effect immediately prior
to such issue or sale and (y) the quotient determined by dividing (1)
the sum of (I) the product derived by multiplying the Applicable Price
by the number of shares of Common Stock Deemed Outstanding (as defined
below) immediately prior to such issue or sale, and (II) the
consideration, if any, received by the Company upon such issue or
sale, by (2) the product derived by multiplying (I) the Applicable
Price by (II) the number of shares of Common Stock Deemed Outstanding
immediately after such issue or sale. For purposes of determining the
adjusted Fixed Conversion Price under this Section 1(d)(i), the
following shall be applicable:
(A) Issuance of Options. If the Company in any manner grants
any rights or options to subscribe for or to purchase Common
Stock (other than pursuant to an Approved Stock Plan, in
connection with an approved Acquisition or upon conversion of the
Notes or the Series A Convertible Preferred Stock) or any stock
or other securities convertible into or
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exchangeable for Common Stock (such rights or options being
herein called "Options" and such convertible or exchangeable
stock or securities being herein called "Convertible Securities")
and the price per share for which Common Stock is issuable upon
the exercise of such Options or upon conversion or exchange of
such Convertible Securities is less than the Applicable Price,
then the total maximum number of shares of Common Stock issuable
upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities
issuable upon the exercise of such Options shall be deemed to be
outstanding and to have been issued and sold by the Company for
such price per share. For purposes of this Section 1(d)(i)(A),
the "price per share for which Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such
Convertible Securities" is determined by dividing (I) the total
amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the
Company upon the exercise of all such Options, plus in the case
of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any,
payable to the Company upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by
(II) the total maximum number of shares of Common Stock issuable
upon exercise of such Options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of
such Options. No adjustment of the Fixed Conversion Price shall
be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon
the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If the Company in
any manner issues or sells any Convertible Securities and the
price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Applicable Price, then
the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities shall be
deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of this
Section 1(d)(i)(B), the "price per share for which Common Stock
is issuable upon such conversion
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<PAGE>
or exchange" is determined by dividing (I) the total amount
received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to
the Company upon the conversion or exchange thereof, by (II) the
total maximum number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities. No
adjustment of the Fixed Conversion Price shall be made upon the
actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options
for which adjustment of the Fixed Conversion Price had been or
are to be made pursuant to other provisions of this Section
1(d)(i), no further adjustment of the Fixed Conversion Price
shall be made by reason of such issue or sale.
(C) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or
exchange of any Convertible Securities, or the rate at which any
Convertible Securities are convertible into or exchangeable for
Common Stock change at any time, the Fixed Conversion Price in
effect at the time of such change shall be readjusted to the
Fixed Conversion Price which would have been in effect at such
time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at
the time initially granted, issued or sold; provided that no
adjustment shall be made if such adjustment would result in an
increase of the Fixed Conversion Price then in effect.
(D) Certain Definitions. For purposes of determining the
adjusted Fixed Conversion Price under this Section 1(d)(i), the
following terms have meanings set forth below:
(I) "Approved Stock Plan" shall mean any contract, plan
or agreement which has been approved by the Board of
Directors of the Company, pursuant to which the Company's
securities may be issued to any employee, officer, director,
consultant, financial advisor or other service provider.
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<PAGE>
(II) "Common Stock Deemed Outstanding" means, at any
given time, the number of shares of Common Stock actually
outstanding at such time, plus the number of shares of
Common Stock deemed to be outstanding pursuant to Sections
1(d)(i)(A) and 1(d)(i)(B) hereof regardless of whether the
Options or Convertible Securities are actually exercisable
at such time, but excluding any shares of Common Stock
issuable upon conversion of the Notes.
(III) "Approved Acquisition" means any acquisition, by
way of asset purchase, stock purchase, merger or otherwise,
of any business by the Company that has been approved by the
Board of Directors of the Company.
(E) Effect on Fixed Conversion Price of Certain Events. For
purposes of determining the adjusted Fixed Conversion Price under
this Section 1(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If any
Common Stock, Options or Convertible Securities are issued
or sold or deemed to have been issued or sold for cash, the
consideration received therefor will be deemed to be the net
amount received by the Company therefor. In case any Common
Stock, Options or Convertible Securities are issued or sold
for a consideration other than cash, the amount of the
consideration other than cash received by the Company will
be the fair value of such consideration, except where such
consideration consists of securities, in which case the
amount of consideration received by the Company will be the
Average Market Price of such securities for the twenty (20)
consecutive trading days immediately preceding the date of
receipt. In case any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is
the surviving entity the amount of consideration therefor
will be deemed to be the fair value of such portion of the
net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any
consideration
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other than cash or securities will be determined jointly by
the Company and the holders of a majority of the principal
amount of the Notes then outstanding. If such parties are
unable to reach agreement within ten (10) days after the
occurrence of an event requiring valuation (the "Valuation
Event"), the fair value of such consideration will be
determined within forty-eight (48) hours of the tenth (10th)
day following the Valuation Event by an independent,
reputable appraiser selected by the Company. The
determination of such appraiser shall be deemed binding upon
all parties absent manifest error.
(II) Integrated Transactions. In case any Option is
issued in connection with the issue or sale of other
securities of the Company, together comprising one
integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a
consideration of $.01.
(III) Treasury Shares. The number of shares of Common
Stock outstanding at any given time does not include shares
owned or held by or for the account of the Company, and the
disposition of any shares so owned or held will be
considered an issue or sale of Common Stock.
(IV) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them
(1) to receive a dividend or other distribution payable in
Common Stock, Options or in Convertible Securities or (2) to
subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed
to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other
distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(ii) Adjustment of Fixed Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or
more classes of its outstanding shares of Common
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Stock into a greater number of shares, the Fixed Conversion Price in
effect immediately prior to such subdivision will be proportionately
reduced. If the Company at any time combines (by combination, reverse
stock split or otherwise) one or more classes of its outstanding
shares of Common Stock into a smaller number of shares, the Fixed
Conversion Price in effect immediately prior to such combination will
be proportionately increased.
(iii) Intentionally omitted.
(iv) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the
Company's assets to another Person (as defined below) or other
transaction which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in
exchange for Common Stock, other than by way of an event described in
Section 1(d)(ii), is referred to herein as "Organic Change." Prior to
the consummation of any Organic Change, the Company will make
appropriate provision (in form and substance satisfactory to the
holders of a majority of the principal amount of the Notes then
outstanding) to insure that each of the holders of the Notes will
thereafter have the right to acquire and receive in lieu of or
addition to (as the case may be) the shares of Common Stock
immediately theretofore acquirable and receivable upon the conversion
of such holder's Notes, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for the number
of shares of Common Stock immediately theretofore acquirable and
receivable upon the conversion of such holder's Notes had such Organic
Change not taken place. In any such case, the Company will make
appropriate provision (in form and substance satisfactory to the
holders of a majority of the principal amount of the Notes then
outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 1(d) and Section 1(e) below
will thereafter be applicable to the Notes (including, in the case of
any such consolidation, merger or sale in which the successor entity
or purchasing entity is other than the Company, an immediate
adjustment of the Fixed Conversion Price to the value for the Common
Stock reflected by the terms of such consolidation, merger or sale, if
the value so reflected is less than the Fixed Conversion Price in
effect immediately prior to such consolidation, merger or sale). The
Company will not effect any such consolidation, merger or sale, unless
prior to the consummation thereof, the successor entity (if other than
the Company) resulting from consolidation or merger or the entity
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<PAGE>
purchasing such assets assumes, by written instrument (in form and
substance satisfactory to the holders of a majority of the principal
amount of the Notes then outstanding), the obligation to deliver to
each holder of the Notes such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be
entitled to acquire. "Person" shall mean an individual, a limited
liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any
department or agency thereof. The provisions of this Section 1(d)(iv)
will not apply with respect to any Conversion Amount which the Company
has redeemed in accordance with Section 2 below.
(v) Certain Events. If any event occurs of the type contemplated
by the provisions of this Section 1(d) but not expressly provided for
by such provisions (including, without limitation, the granting of
stock appreciation rights, phantom stock rights or other rights with
equity features), then the Company's Board of Directors will make an
appropriate adjustment in the Conversion Price so as to protect the
rights of the holders of the Notes; provided that no such adjustment
will increase the Conversion Price as otherwise determined pursuant to
this Section 1(d).
(vi) Notices.
(A) Immediately upon any adjustment of the Conversion Price
pursuant to Section 1(d), the Company will give written notice
thereof to each holder of the Notes, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(B) The Company will give written notice to each holder of
Notes at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with
respect to any pro rata subscription offer to holders of Common
Stock or (III) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation; provided that in no
event shall such notice be provided to such holder prior to such
information being made known to the public.
(C) To the extent notice is not required to be given under
clause B(III) above, the Company will give written notice to each
holder of Notes at least twenty (20) days prior to the
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date on which any Organic Change, dissolution or liquidation will
take place.
(5) Purchase Rights. In addition to any adjustments of the Conversion
Price pursuant to Section 1(d) above, if at any time the Company
grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then the holders of Notes will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired
if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Notes immediately
before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such
Purchase Rights.
(6) Mechanics of Conversion. Subject to the Company's inability to
fully satisfy its obligations under a Conversion Notice (as
defined below) as provided for in Section 5 below:
(i) Holder's Delivery Requirements. To convert this Note into
shares of Common Stock on any date (the "Conversion Date"), the holder
thereof shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., Central Time on such date, a copy
of a fully executed notice of conversion in the form attached hereto
as Exhibit I (the "Conversion Notice"), to the Company or its
designated agent (the "Agent"), and (B) subject to Section 1(f)(vi)
below, surrender to a common carrier for delivery to the Company or
the Agent as soon as practicable following such date, the Notes being
converted (or an indemnification undertaking with respect to such
Notes in the case of their loss, theft or destruction) and the
originally executed Conversion Notice. If the Conversion Notice is
transmitted (as evidenced by the sender's time/date stamp as shown on
the facsimile) after 5:00 p.m, Pacific time, the date of receipt, for
purposes of Section 1(f)(ii), shall be deemed to be the business day
immediately following the date of transmission.
(ii) Company's Response. Upon receipt by the Company of a
Conversion Notice in proper form, the Company shall (A) immediately
send, via facsimile, a confirmation of receipt of such Conversion
Notice to such holder and (B) cause its Transfer Agent
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within five business days following the date of receipt to (I) issue
and surrender to a common carrier for overnight delivery to the
address as specified in the Conversion Notice, a certificate,
registered in the name of the holder or its designee, for the number
of shares of Common Stock to which the holder shall be entitled or
(II) credit such aggregate number of shares of Common Stock to which
the holder shall be entitled to the holder's or its designee's balance
account with The Depository Trust Company. The Company shall use its
best efforts to cause its Transfer Agent to take the actions specified
in clause (I) or clause (II) of the preceding sentence within three
business days following the date of receipt. Subject to Section
1(f)(vi) below, if this Note is physically delivered upon conversion
and if the Conversion Amount represented by this Note submitted for
conversion is greater than the Conversion Amount being converted, then
the Company shall as soon as practicable and in no event later than
five business days after receipt of this Note and at the Company's own
expense, issue and deliver to the holder a new Note representing the
Conversion Amount not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
determination of the Average Market Price or the arithmetic
calculation of the Conversion Rate, the Company shall promptly issue
to the holder the number of shares of Common Stock that is not
disputed and shall submit the disputed determinations or arithmetic
calculations to the holder via facsimile within two (2) business days
of receipt of such holder's Conversion Notice. If such holder and the
Company are unable to agree upon the determination of the Average
Market Price or arithmetic calculation of the Conversion Rate within
one (1) business day of such disputed determination or arithmetic
calculation being submitted to the holder, then the Company shall
within one (1) business day submit via facsimile (A) the disputed
determination of the Average Market Price to an independent, reputable
investment bank or (B) the disputed arithmetic calculation of the
Conversion Rate to its independent, outside accountant. The Company
shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company
and the holder of the results no later than forty-eight (48) hours
from the time it receives the disputed determinations or calculations.
Such investment bank's or accountant's determination or calculation,
as the case may be, shall be binding upon all parties absent manifest
error.
(iv) Record Holder. The person or persons entitled to receive the
shares of Common Stock issuable upon a conversion of this
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Note shall be treated for all purposes as the record holder or holders
of such shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If the Company shall
fail to issue to the Holder, or credit the Holder's balance account
with The Depository Trust Company on a timely basis as described in
this Section 1(f) for, the number of shares of Common Stock to which
the Holder is entitled upon the Holder's conversion of the Conversion
Amount of this Note or, in the event this Note is physically delivered
upon a conversion, the Company shall fail to deliver a new Note
representing the Conversion Amount to which such holder is entitled
pursuant to Section 2(f), in addition to all other available remedies
which such holder may pursue hereunder and under the Purchase
Agreement (including indemnification pursuant to Section 8 thereof),
the Company shall pay additional damages to the Holder on each such
date after the fifth Business Day following the receipt by the Company
or the Agent of the Conversion Notice such conversion or delivery of a
new Note is not timely effected in an amount equal to 1.0% of the sum
of (A) the Conversion Amount in the event that such conversion is not
timely effected and (B) if the Conversion Amount represented by this
Note submitted for conversion is greater than the Conversion Amount
being converted, the Conversion Amount represented by this Note which
is not being converted, in the event that such new Note is not timely
delivered.
(vi) Notwithstanding anything to the contrary set forth herein,
upon conversion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to the
Company unless the entire unpaid principal amount of this Note is so
converted. The Holder and the Company shall maintain records showing
the principal amount so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and
the Company, so as not to require physical surrender of this Note upon
each such conversion. In the event of any dispute or discrepancy, such
records of the Company shall be controlling and determinative in the
absence of manifest error. Notwithstanding the foregoing, if any
portion of this Note is converted as aforesaid, the Holder may not
transfer this Note unless the Holder first physically surrenders this
Note to the Company, whereupon the Company will forthwith (subject to
any restrictions on transfer contained in the Purchase Agreement)
issue and deliver upon the order of the Holder a new note of like
tenor, registered as the Holder may request, representing in the
aggregate the remaining unpaid principal amount of this Note. The
Holder and any assignee, by acceptance of this Note,
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acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Note, the unpaid
and unconverted principal amount of this Note represented by this Note
may be less than the amount stated of the face hereof.
(7) Conversion at the Option of the Company. At any time or times on
or after the Issue Date, the Company shall have the right, in its
sole discretion, to require that any or all of the outstanding
Notes be converted ("Conversion at Company's Election") at the
Conversion Rate, provided that the Conditions to Conversion at
the Option of the Company (as set forth below) are satisfied. The
Company shall exercise its right to Conversion at the Company's
Election by providing each holder of Notes written notice
("Notice of Conversion at Company's Election") at least 20
business days prior to the date selected by the Company for
conversion ("Company's Election Conversion Date"). The Notice of
Conversion at Company's Election shall indicate (x) the
Conversion Amount of the Notes the Company has selected for
conversion, (y) the Company's Election Conversion Date, which
date shall be not less than 20 business days or more than 40
calendar days after each holder's receipt of such notice, and (z)
each holder's pro-rata share of outstanding Conversion Amount of
the Notes. All of the Conversion Amounts of the Notes selected
for conversion in accordance with the provision of this Section
1(g) shall be converted as of the Company's Election Conversion
Date in accordance with this Section 1 as if the holders of such
Notes had given the Conversion Notice on the Company's Election
Conversion Date, and the Conversion Date had been fixed as of the
Company's Election Conversion Date, for all purposes of this
Section 1, and all holders of the Notes shall thereupon and
within two (2) business days after the Company's Election
Conversion Date surrender the Notes selected for conversion to
the Company or the Agent. "Conditions to Conversion at the
Company's Election" means the following conditions: (i) the
arithmetic average of the Closing Bid Prices for the 30
consecutive trading days immediately preceding the date of the
Company's Notice of Conversion at the Company's Election is at
least 150% of the Fixed Conversion Price; (ii) the Closing Bid
Price on the Company's Election Conversion Date is at least 150%
of the Fixed Conversion Price; (iii) the Company shall not have
previously given Notice of Conversion at Company's Election; (iv)
the Conversion Amount selected for conversion is not more than
25% of the Conversion Amount of this Note on
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the date of the Company's Notice of Conversion at the Company's
Election; (v) the Registration Statement shall have been declared
effective by the SEC and for the period beginning 30 consecutive
trading days prior to the Company's Notice of Conversion at the
Company's Election and ending on the Company's Election Conversion
Date (the "Company's Election Conversion Period") sales can be made
pursuant to the Registration Statement; (vi) at all times during the
Company's Election Conversion Period the Common Stock shall be
included for quotation on the Nasdaq National Market, The American
Stock Exchange, Inc. or the New York Stock Exchange, Inc. and the
trading of the Common Stock shall not have been suspended by the SEC,
any such exchange or the National Association of Securities Dealers,
Inc.; (vii) at all times during the Company's Election Conversion
Period, the Company shall have delivered certificates representing
shares of Common Stock or credited the Holder's general account with
The Depository Trust Company within five Business Days of the
Company's or the Transfer Agent's receipt of the Note Certificates
submitted for conversion pursuant to a Conversion Notice; and (viii)
the Company is not in default under this Note, the Securities Purchase
Agreement and the Registration Rights Agreement. Notwithstanding the
above, any holder of the Notes may convert any of the Notes (including
the Notes selected for conversion) into Common Stock pursuant to
Section 1(a) on or prior to the date immediately preceding the
Company's Election Conversion Date.
(8) Mandatory Conversion. If any Conversion Amount of this Note
remains outstanding on the Maturity Date, then all of such
Conversion Amount shall be converted as of such date in
accordance with this Section 1(h) as if the Holder had given a
Conversion Notice with respect to the remaining Conversion Amount
on the Maturity Date. The Holder shall, within three business
days following the Maturity Date, surrender this Note to the
Company or the Transfer Agent.
(9) Fractional Shares. The Company shall not issue any fraction of a
share of Common Stock upon any conversion. All shares of Common
Stock (including fractions thereof) issuable upon conversion of
more than one of the Notes held by the same holder shall be
aggregated for purposes of determining whether the conversion
would result in the issuance of a fraction of a share of Common
Stock. If, after the aforementioned
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aggregation, the issuance would result in the issuance of a
fraction of a share of Common Stock, the Company shall round such
fraction of a share of Common Stock up or down to the nearest
whole share.
(10) Taxes. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of
Common Stock upon the conversion of this Note; provided that the
Company shall not be required to pay any transfer taxes or fees
related to any transfer of Common Stock by a Holder in connection
with a conversion.
ii. Redemption at Option of Holders.
(1) Redemption Option Upon Major Transaction. In addition to all
other rights of the Holder contained herein, after a Major
Transaction (as defined below), the Holder shall have the right,
at the Holder's option, to require the Company to redeem all or a
portion of this Note for an amount in cash equal to 115% of the
Conversion Amount being redeemed ("Major Transaction Redemption
Price").
(2) Redemption Option Upon Triggering Event. In addition to all other
rights of the Holder contained herein, after a Triggering Event
(as defined below), the Holder shall have the right, at the
Holder's option, to require the Company to redeem all or a
portion of this Note for an amount in cash equal to 115% of the
Conversion Amount being redeemed ("Triggering Event Redemption
Price" and, collectively with "Major Transaction Redemption
Price," the "Redemption Price").
(3) "Major Transaction". A "Major Transaction" shall be deemed to
have occurred at the closing of any of the following events:
(i) the consolidation, merger or other business combination
of the Company with or into another Person if stockholders of the
Company immediately prior to such transaction do not, immediately
following such transaction, hold stock or other ownership
interests of the surviving entity possessing voting power
sufficient to elect a majority of such entity's Board of
Directors.
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
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(iii) a purchase, tender or exchange offer made to and
accepted by the holders of more than 50% of the outstanding
shares of Common Stock.
(4) "Triggering Event". A "Triggering Event" shall be deemed to have
occurred at such time as any of the following events:
(i) the failure of the Registration Statement to be declared
effective by the SEC on or prior to the date that is 180 days
after the Issue Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration
Rights Agreement, the effectiveness of the Registration Statement
lapses for any reason (including, without limitation, the
issuance of a stop order) or is unavailable to the Holder for the
sale of the Registrable Securities (as defined in the
Registration Rights Agreement) in accordance with the terms of
the Registration Rights Agreement, and such lapse or
unavailability continues for a period of five consecutive
Business Days, provided that the cause of such lapse or
unavailability is not due to factors solely within the control of
the Holder, and provided further that the Registration Statement
shall not be deemed to be unavailable during any Grace Period (as
defined in the Registration Rights Agreement);
(iii) the delisting of the Common Stock from the Nasdaq
National Market System, The New York Stock Exchange, Inc. or The
American Stock Exchange, Inc.
(iv) the Company's notice to any holder of the Notes,
including by way of public announcement, at any time, of its
intention not to comply with proper requests for conversion of
any of the Notes into shares of Common Stock, except for the
reasons set forth in Section 4(a) but including failure to
convert for reasons stated in Section 3(a); or
(v) Donald A. Wright ceases to be the President of the
Company for any reason prior to the Registration Statement being
declared effective by the SEC.
(5) Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No sooner than 20 days nor later than 10 days prior
to the consummation of a Major Transaction, but not
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prior to the public announcement of such Major Transaction, the
Company shall deliver written notice thereof via facsimile
("Notice of Major Transaction") to each holder of the Notes. At
any time after receipt of a Notice of Major Transaction, the
holders of at least two-thirds (2/3) of the principal amount of
the Notes then outstanding may require the Company to redeem all
of the Notes then outstanding by delivering written notice
thereof via facsimile ("Notice of Redemption at Option of Buyer
Upon Major Transaction") to the Company, which Notice of
Redemption at Option of Buyer Upon Major Transaction shall
indicate (i) the Conversion Amount that such holders are voting
in favor of redemption and (ii) the applicable Redemption Price,
as calculated pursuant to Section 2(a) above.
(6) Mechanics of Redemption at Option of Buyer Upon Triggering Event.
Within one (1) business day after the occurrence of a Triggering
Event, the Company shall deliver written notice thereof via
facsimile ("Notice of Triggering Event") to each holder of the
Notes. At any time after receipt of a Notice of Triggering Event,
the holders of at least two-thirds (2/3) of the principal amount
of the Notes then outstanding may require the Company to redeem
all of the Notes by delivering written notice thereof via
facsimile ("Notice of Redemption at Option of Buyer Upon
Triggering Event") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the
Conversion Amount that such holders are voting in favor of
redemption and (ii) the applicable Triggering Event Redemption
Price, as calculated pursuant to Section 2(b) above.
(7) Payment of Redemption Price. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction
or a Notice(s) of Redemption at Option of Buyer Upon Triggering
Event, as the case may be, from the holders of at least
two-thirds (2/3) of the principal amount of the Notes then
outstanding, the Company shall immediately notify each holder by
facsimile of the Company's receipt of such requisite notices
necessary to affect a redemption and each holder of the Notes
shall thereafter promptly send such holder's Note Certificates to
be redeemed to the Company or its Agent. The Company shall
deliver the applicable Redemption Price, as the case may be, to
such holder within thirty (30) days after the Company's receipt
of the requisite notices required to affect a redemption;
provided that a holder's Note Certificates shall have
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been so delivered to the Company or its Agent; provided further
that if the Company is unable to redeem all of the Notes, the
Company shall redeem a Conversion Amount from each holder of the
Notes equal to such holder's pro-rata amount (based on the
principal amount of the Notes then held by such holder relative
to the aggregate principal amount of the Notes then outstanding)
of all the Notes being redeemed. If the Company shall fail to
redeem all of the Notes submitted for redemption (other than
pursuant to a dispute as to the arithmetic calculation of the
Redemption Price), in addition to any remedy such holder of the
Notes may have under this Note and the Securities Purchase
Agreement, the applicable Redemption Price payable in respect of
such unredeemed Notes shall bear interest at the rate of 2.0% per
month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to
each holder, holders of at least two-thirds (2/3) of the
outstanding principal amount of the Notes, including principal
amounts of the Notes submitted for redemption pursuant to this
Section 2 and for which the applicable Redemption Price has not
been paid, shall have the option (the "Void Optional Redemption
Option") to, in lieu of redemption, require the Company to
promptly return to each holder all of the Notes that were
submitted for redemption by such holder under this Section 2 and
for which the applicable Redemption Price has not been paid, by
sending written notice thereof to the Company via facsimile (the
"Void Optional Redemption Notice"). Upon the Company's receipt of
such Void Optional Redemption Notice(s) and prior to payment of
the full applicable Redemption Price to each holder, (i) the
Notice(s) of Redemption at Option of Buyer Upon Triggering Event
or the Notice(s) of Redemption at Option of Buyer Upon Major
Transaction, as the case may be, shall be null and void with
respect to those Notes submitted for redemption and for which the
applicable Redemption Price has not been paid and default
interest on such unpaid Redemption Price shall cease to accrue on
the Notes not redeemed, (ii) the Company shall immediately return
any Notes submitted to the Company by each holder for redemption
under this Section 2(g) and for which the applicable Redemption
Price has not been paid, and (iii) if the Company has failed to
pay all accrued default interest on the unpaid Redemption Price
as required by this Section, (A) the Fixed Conversion Price of
such returned Notes shall be adjusted to the lesser of (x) the
Fixed Conversion Price as in effect on the date on which the Void
Optional Redemption Notice(s) is delivered to
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the Company and (y) the average of the five lowest Closing Bid
Prices during the period beginning on the date on which the
Notice(s) of Redemption of Option of Buyer Upon Major Transaction
or the Notice(s) of Redemption at Option of Buyer Upon Triggering
Event, as the case may be, is delivered to the Company and ending
on the date on which the Void Optional Redemption Notice(s) is
delivered to the Company; provided that no adjustment shall be
made if such adjustment would result in an increase of the Fixed
Conversion Price then in effect, and (B) the Conversion
Percentage in effect at such time shall be reduced by a number of
percentage points equal to the product of (x) .25 and (y) the
number of days in the period beginning on the date on which the
Notice(s) of Redemption at Option of Buyer Upon Major Transaction
or the Notice(s) of Redemption at Option of Buyer Upon Triggering
Event, as the case may be, is delivered to the Company and ending
on the date on which the Void Optional Redemption Notice(s) is
delivered to the Company. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the Closing Bid
Price or the arithmetic calculation of the Redemption Price, such
dispute shall be resolved pursuant to Section 1(f)(iii) above
with the term "Closing Bid Price" being substituted for the term
"Average Market Price" and the term "Redemption Price" being
substituted for the term "Conversion Rate". Payments provided for
in this Section 2 shall have priority to payments to stockholders
or holders of convertible notes (other than the Notes) in
connection with a Major Transaction.
iii. Inability to Fully Convert.
(1) Holder's Option if Company Cannot Fully Convert. If, upon the
Company's receipt of a Conversion Notice, the Company can not
issue shares of Common Stock registered for resale under the
Registration Statement for any reason (other than due to the
Nasdaq Cap which limitation shall be governed by Section 4
below), including, without limitation, because the Company (x)
does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by
applicable law or by the rules or regulations of any
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stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Company
or its Securities, from issuing all of the Common Stock which is
to be issued to a holder of any of the Notes pursuant to a
Conversion Notice or (z) fails to have a sufficient number of
shares of Common Stock registered for resale under the
Registration Statement (other than due to the Nasdaq Cap), then
the Company shall issue as many shares of Common Stock as it is
able to issue in accordance with such holder's Conversion Notice
and pursuant to Section 1(f) above and, with respect to the
unconverted portion of this Note, the Holder, solely at the
Holder's option, can elect to:
(a) require the Company to redeem from such holder that portion
of this Note for which the Company is unable to issue Common
Stock in accordance with Section 2(b) above;
(b) if the Company's inability to fully convert the Notes is
pursuant to clause (z) of Section 3(a) above, require the
Company to issue restricted shares of Common Stock in
accordance with such holder's Conversion Notice and pursuant
to Section 1(f) above; or
(c) void its Conversion Notice and retain or have returned, as
the case may be, the nonconverted portion of the Notes that
were to be converted pursuant to such holder's Conversion
Notice;
(2) Mechanics of Fulfilling Holder's Election. The Company shall
immediately send via facsimile to a holder of the Notes, upon
receipt of a facsimile copy of a Conversion Notice from such
holder which cannot be fully satisfied as described in Section
3(a) above, a notice of the Company's inability to fully satisfy
such holder's Conversion Notice (the "Inability to Fully Convert
Notice"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy such
holder's Conversion Notice, (ii) the portion of the
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Conversion Amount which cannot be converted and (iii) the
applicable Mandatory Redemption Price. Such holder must within
five (5) business days of receipt of such Inability to Fully
Convert Notice deliver written notice via facsimile to the
Company ("Notice in Response to Inability to Convert") of its
election pursuant to Section 3(a) above.
(3) Payment of Redemption Price. If such holder shall elect to have
its shares redeemed pursuant to Section 3(a)(i) above, the
redemption will occur pursuant to Sections 2(f) and (g) above.
(4) Pro-rata Conversion and Redemption. In the event the Company
receives a Conversion Notice from more than one holder of the
Notes on the same day and the Company can convert and redeem
some, but not all, of the Conversion Amounts pursuant to this
Section 3, the Company shall convert and redeem from each holder
of Notes electing to have Conversion Amounts converted and
redeemed at such time an amount equal to such holder's pro-rata
amount (based on the principal amount of the Notes held by such
holder relative to the aggregate principal amount of the Notes
outstanding) of all Notes being converted and redeemed at such
time.
iv. Inability to Convert due to Nasdaq Cap.
(1) Company's Option if it Cannot Fully Convert due to Nasdaq Cap. If
upon the Company's receipt of a Conversion Notice, the Company
can not issue shares of Common Stock due to the Nasdaq Cap (as
defined in Section 10 below) (a "Nasdaq Cap Event"), then the
Company shall, at its option, either (i) redeem the remaining
Conversion Amount of this Note pursuant to Section 4(b) below or
(ii) use its best efforts to obtain the approval of its
shareholders of the issuance of the Notes and the shares of
Common Stock issuable upon conversion of the Notes, including the
issuance of shares of Common Stock in excess of the Nasdaq Cap,
pursuant to Section 4(c) below. Upon the occurrence of a Nasdaq
Cap Event, the Company shall issue as many shares of Common Stock
as it is able to issue in accordance with the Holder's Conversion
Notice and pursuant to Section 1(f) above and, within five
Business Days after a Nasdaq Cap Event, the Company shall send a
notice via facsimile to each holder of the Notes of the Company's
election to redeem all Conversion Amounts of the Notes which can
not be
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converted or to obtain shareholder approval, each as described
above.
(2) Payment of Redemption Price. If the Company elects to redeem the
portion of the Conversion Amounts of the Notes which can not be
converted due to the Nasdaq Cap, the Company shall pay to each
holder within 25 days of the Nasdaq Cap Event an amount in cash
equal to (i) if such payment is made within 365 days after the
Issue Date, 110% of the Conversion Amount of the Note as of the
date the redemption amount is paid in full or (ii) if such
payment is made more than 365 days after the Issue Date, 115% of
the Conversion Amount of the Note as of the date the redemption
amount is paid in full (collectively, the "Nasdaq Cap Redemption
Price"). If the Company shall fail to pay the applicable Nasdaq
Cap Redemption Price to such holder on a timely basis as
described in this Section 4(b), in addition to any remedy such
holder of the Notes may have under this Note and the Securities
Purchase Agreement, such unpaid amount shall bear interest at the
rate of 2.0% per month (prorated for partial months) until paid
in full and shall be payable on the last day of each 30-day
period following the twenty-fifth (25th) day after the Nasdaq Cap
Event.
(3) Shareholder Approval. If the Company elects to seek shareholder
approval of the issuance of the Notes and the shares of Common
Stock issuable upon conversion of the Notes, including the
issuance of shares of Common Stock in excess of the Nasdaq Cap,
then the Company shall (i) call a special meeting of its
shareholders, if necessary, (ii) provide each shareholder
entitled to vote at such meeting a proxy statement, a copy of
which has been previously provided to the holders of the Notes
and a counsel of their choice, soliciting each such shareholder's
affirmative vote at such meeting for the approval of the issuance
of the Notes and the shares of Common Stock issuable upon
conversion of the Notes and (iii) use its best efforts to obtain
such shareholder approval. In the event such shareholder approval
is not obtained within 60 days after the Nasdaq Cap Event, the
Company shall pay to each holder an amount in cash equal to 2.0%
per month of the remaining Conversion Amount (pro rated for
partial months) from the date of the Nasdaq Cap Event until such
shareholder approval is obtained. The first of such payments
shall be made on the sixty-first (61st) day after the Nasdaq Cap
Event and succeeding
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payments shall be made on the last day of each 30-day period
following the 60-day period after the Nasdaq Cap Event. In the
event shareholder approval is not obtained within 120 days of the
Nasdaq Cap Event, the Company shall redeem the remaining
Conversion Amounts on or before the date that is 135 days after
the Nasdaq Cap Event and shall continue to make the payments
described above in the amount of 2.0% per month until the
Conversion Amounts have been redeemed in full.
v. Reissuance of Notes. In the event of a conversion or redemption
pursuant to this Note of less than all of the principal amount
represented by this Note, the Company shall promptly cause to be
issued and delivered to the Holder, upon tender by the Holder of the
Note converted or redeemed, a new note of like tenor representing the
remaining principal amount of this Note which has not been so
converted or redeemed.
vi. Defaults and Remedies.
(1) Events of Default. An Event of Default is: (i) default for thirty
(30) days in payment of interest or Default Interest on this Note
on or after the Maturity Date; (ii) default in payment of the
principal amount of this Note when and as due; (iii) failure by
the Company for thirty (30) days after notice to it to comply
with any other material provision of this Note, except in the
case of optional redemption by Holder upon the occurrence of a
Major Transaction or Trigger Event; (iv) any acceleration prior
to maturity, due to a default under any mortgage, indenture or
instrument under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by
the Company or for money borrowed the repayment of which is
guaranteed by the Company, whether such indebtedness or guarantee
now exists or shall be created hereafter, provided that the
Company's obligation with respect to any such borrowed or
accelerated amount exceeds, in the aggregate, $2,000,000; (v) if
the Company pursuant to or within the meaning of any Bankruptcy
Law; (A) commences a voluntary case; (B) consents to the entry of
an order for relief against it in an involuntary case; (C)
consents to the appointment of a Custodian of it or for all or
substantially all of its property; (D) makes a general assignment
for the benefit of its creditors; or (E) admits in writing that
it is generally unable to pay its debts as the same become due;
or (vi) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law
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that: (1) is for relief against the Company in an involuntary
case; (2) appoints a Custodian of the Company or for all or
substantially all of its property; or (3) orders the liquidation
of the Company or any subsidiary, and the order or decree remains
unstayed and in effect for ninety (90) days. The Term "Bankruptcy
Law" means Title 11, U.S. Code, or any similar Federal or State
Law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under
any Bankruptcy Law.
(2) Remedies. If an Event of Default occurs and is continuing, the
Holder of this Note may declare all of this Note, including any
interest and Default Interest and other amounts due, to be due
and payable immediately, except that in the case of an Event of
Default arising from events described in clauses (iv) and (v) of
Section 6(a), this Note shall become due and payable without
further action or notice (an "Automatic Acceleration"); provided,
however, that in the case of an Event of Default arising from
events described in clause (iv) of Section 6(a), an Automatic
Acceleration shall be deemed to be waived if the acceleration of
the indebtedness as described in clause (iv) of Section 6(a) is
cured by the Company and waived by the holder of such
indebtedness within 10 days of the acceleration of such
indebtedness. Holder may not enforce the agreements contained in
this Note except as provided herein. In addition to any remedy
such holder of the Notes may have under this Note and the
Purchase Agreement, such unpaid amount shall bear interest at the
rate of 2.0% per month (prorated for partial months) until paid
in full
vii. Reservation of Shares. The Company shall, so long as any portion of
this Note is outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of this Note, such number of shares of Common
Stock as shall from time to time be sufficient to effect the
conversion of all of the Conversion Amount of this Note then
outstanding.
viii. Voting Rights. Holders of this Note shall have no voting rights.
ix. Restriction on Redemption and Cash Dividends with respect to Other
Capital Stock. Until all of the principal and interest on this Note
has been converted, redeemed or otherwise satisfied as provided
herein, the Company shall not, directly or indirectly, redeem, or
declare or pay
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any cash dividend or distribution on, its Common Stock without the
prior express written consent of the holders of not less than
two-thirds (2/3) of the principal amount of the Notes then
outstanding.
x. Limitation on Number of Conversion Shares. The Company shall not be
obligated to issue, in the aggregate, more than 2,172,690 shares of
Common Stock (such amount to be proportionately and equitably adjusted
from time to time in the event of stock splits, stock dividends,
combinations, reverse stock splits, reclassification, capital
reorganizations and similar events relating to the Common Stock if
such adjustment would not result in the Company violating any Nasdaq
rule limiting the number of shares of Common Stock issuable by the
Company) (the "Nasdaq Cap") upon conversion of the Notes, if issuance
of a larger number of shares of Common Stock would constitute a breach
of the Company's obligations under the rules or regulations of The
Nasdaq Stock Market, Inc. or any other principal securities exchange
or market upon which the Common Stock becomes traded. The Nasdaq Cap
shall be allocated among the Notes pro rata based on the aggregate
principal amount of the Notes as of the Issuance Date.
xi. Vote to Change the Terms of this Note. This Note and any provision
hereof may only be amended by an instrument in writing signed by the
Company and Holder and then only if such amendment is also offered to
the other holders of the Notes then outstanding. The term "Note" and
all reference thereto, as used throughout this instrument, shall mean
this instrument (and the other Notes issued pursuant to the Purchase
Agreement) as originally executed, or if later amended or
supplemented, then as so amended or supplemented.
xii. Lost or Stolen Notes. Upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or
mutilation of any Note, and, in the case of loss, theft or
destruction, of an indemnification undertaking by the holder to the
Company in a form reasonably acceptable to the Company and, in the
case of mutilation, upon surrender and cancellation of the Notes, the
Company shall execute and deliver new notes of like tenor and date;
provided, however, the Company shall not be obligated to re-issue
notes if the holder contemporaneously requests the Company to convert
such remaining principal amount into Common Stock.
xiii. Payment of Collection, Enforcement and Other Costs. If: (i) this Note
is placed in the hands of an attorney for collection or enforcement or
is collected or enforced through any legal proceeding;
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or (ii) an attorney is retained to represent the holder of this Note
in any bankruptcy, reorganization, receivership or other proceedings
affecting creditors' rights and involving a claim under this Note; or
(iii) an attorney is retained to represent the holder of this Note in
any other proceedings whatsoever in connection with this Note, then
the Company shall pay to the Holder all reasonable attorneys' fees,
costs and expenses incurred in connection therewith, in addition to
all other amounts due hereunder.
xiv. Cancellation. After all principal and accrued interest at any time
owed on this Note has been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
xv. Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the holder at the principal
office of the Company, for a new Note or Notes (in principal amounts
of at least $100,000) containing the same terms and conditions and
representing in the aggregate the principal amount of this Note, and
each such new Note will represent such portion of such principal
amount as is designated by the holder at the time of such surrender.
The date the Company initially issues this Note will be deemed to be
the "Issuance Date" hereof regardless of the number of times a new
Note shall be issued.
xvi. Waiver of Notice. To the extent permitted by law, the Company hereby
waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note and the Purchase Agreement.
xvii. Governing Law. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be
governed by, the laws of the State of New York, without giving effect
to provisions thereof regarding conflict of laws.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its duly authorized officer on the day and in the year first above
written.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /S/ DONALD A. WRIGHT
-----------------------------------------
Name: Donald A. Wright
Title: President
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Exhibit 10.3
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS
OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
ANY PROSPECTIVE TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
HEREOF, INCLUDING, WITHOUT LIMITATION, SECTION 1(f)(vi) RELATING TO THE
PRINCIPAL AMOUNT OF THIS NOTE.
CONVERTIBLE NOTE
Wenatchee, Washington
August 11, 1997 $3,190,000
FOR VALUE RECEIVED, PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington
corporation (the "Company"), hereby promises to pay to the order of OLYMPUS
SECURITIES, LTD. or registered assigns ("Holder") the principal amount of THREE
MILLION ONE HUNDRED NINETY THOUSAND DOLLARS ($3,190,000), on December 31, 1999
(the "Maturity Date"), and to pay interest on the unpaid principal balance
hereof at the rate of 5.0% per annum from the date hereof (the "Issue Date")
until the same becomes due and payable, whether at maturity or upon acceleration
or by conversion or redemption in accordance with the terms hereof or otherwise.
Interest on this Note shall commence accruing on the Issue Date and shall be
computed on the basis of a 365-day year and actual days elapsed and shall be
payable at the time of optional or mandatory conversion of the principal to
which such interest relates in accordance with Section 1 hereof. Any amount of
interest on this Note being paid in shares of Common Stock which is not paid
when it is due and any amount of interest on this Note being paid in cash which
is not paid within five Business Days (as defined below) of when it is due shall
bear interest at the rate of 8.0% per annum from the date thereof until the same
is paid ("Default Interest").
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<PAGE>
All payments of principal and interest on this Note (to the extent such
principal and/or interest is not converted into Common Stock in accordance with
the terms hereof) shall be made in lawful money of the United States of America
by wire transfer of immediately available funds to such account as the Holder
may from time to time designate by written notice in accordance with the
provisions of this Note or by Company check. Whenever any amount expressed to be
due by the terms of this Note is due on any day which is not a Business Day (as
defined below), the same shall instead be due on the next succeeding day which
is a Business Day and, in the case of any interest payment date which is not the
date on which this Note is paid in full, the extension of the due date thereof
shall not be taken into account for purposes of determining the amount of
interest due on such date. For purposes of this Note, "Business Day" shall mean
any day other than a Saturday, Sunday or a day on which commercial banks in the
City of New York are authorized or required by law or executive order to remain
closed. Each capitalized term used herein, and not otherwise defined, shall have
the meaning ascribed thereto in the Securities Purchase Agreement, dated August
11, 1997, pursuant to which this Note was originally issued (the "Purchase
Agreement"). This Note and the other subordinated convertible notes issued by
the Company on the Issuance Date pursuant to the Purchase Agreement are
collectively referred to in this Note as the "Notes."
The following terms shall apply to this Note:
i. Holder's Conversion of Note. The Holder shall have the right, at the
Holder's option, to convert this Note into shares of the Company's
common stock, par value $.001 per share (the "Common Stock"), on the
following terms and conditions:
(1) Conversion Right. The Holder shall have the right at any time or
times after the Issue Date and then at any time on or prior to
the day that all of the principal, accrued interest and other
payments payable hereunder are paid in full, to convert at any
time and from time to time any part of the outstanding and unpaid
principal amount of this Note of at least $10,000, or such lesser
amount as shall remain unpaid at the time of the conversion
(together with accrued interest thereon, unless the Company pays
such accrued interest in cash as provided below), into fully paid
and nonassessable shares (rounded to the nearest whole share in
accordance with Section 1(i) below) of Common Stock, at the
Conversion Rate (as defined below); provided, however, that in no
event shall any holder be entitled to convert any portion of this
Note in excess of that portion of this Note which, upon giving
effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the Holder and its
affiliates to exceed 4.9% of the outstanding shares of the Common
Stock following such
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<PAGE>
conversion. For purposes of the foregoing proviso, the aggregate
number of shares of Common Stock beneficially owned by the Holder
and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of the portion of this Note with
respect to which the determination of such proviso is being made,
but shall exclude the number of shares of Common Stock which
would be issuable upon (i) conversion of the remaining,
nonconverted portion of this Note beneficially owned by the
Holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the
Company (including, without limitation, any warrants) subject to
a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder and
its affiliates. Except as set forth in the preceding sentence,
for purposes of this paragraph, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. The Holder may waive the
foregoing limitations by written notice to the Company upon not
less than 61 days prior notice (with such waiver taking effect
only upon the expiration of such 61 day notice period). The
Company shall have the right to elect to pay accrued interest
(including Default Interest, if any) in cash, in lieu of
conversion to Common Stock in accordance with this Section 1. If
the Company elects to pay accrued interest (including Default
Interest, if any) in cash, such cash shall be paid simultaneously
with the delivery to the Holder of the certificates representing
the Common Stock issuable upon conversion in accordance with
Section 1(f) below. At the written request of the Holder, the
Company shall advise such Holder in writing, within three
business days of such request, whether conversion of accrued
interest (including Default Interest, if any) will be paid in
Common Stock or in cash, and such election shall be binding on
the Company for 30 days following the date of the Company's
response. Failure of the Company to respond to the Holder within
three business days shall be deemed to be an election to convert
the accrued interest into Common Stock for any conversions
pursuant to Conversion Notices (as defined in Section 1(f) below)
submitted within 30 days plus three business days of the Holder's
request, unless conversion of the interest into Common Stock
would otherwise be limited by the terms of this Note.
(2) Conversion Rate. The number of shares of Common Stock issuable
upon conversion of this Note pursuant to Sections
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<PAGE>
(1)(a) shall be determined according to the following formula
(the "Conversion Rate"):
Conversion Amount
-----------------
Conversion Price
For purposes of this Note, the following terms shall have the following
meanings:
(i) "Conversion Price" means, as of any Conversion Date (as
defined below) or other date of determination, the lower of
the Fixed Conversion Price and the Floating Conversion
Price, each in effect as of such date and subject to
adjustment as provided herein.
(ii) "Fixed Conversion Price" means $4.75, subject to adjustment
as provided herein.
(iii) "Floating Conversion Price" means, as of any date of
determination, the amount obtained by multiplying the
Conversion Percentage in effect as of such date by the
Average Market Price for the Common Stock.
(iv) "Conversion Percentage" means one hundred (100%), subject in
each case to adjustment as provided herein.
(v) "Average Market Price" means, the arithmetic average of the
five lowest Closing Bid Prices (as defined below) during the
40 consecutive trading days. immediately preceding such
date.
(vi) "Closing Bid Price" means, for any security as of any date,
the last closing bid price for such security on the Nasdaq
National Market as reported by Bloomberg Financial Markets
("Bloomberg"), or, if the Nasdaq National Market is not the
principal trading market for such security, the last closing
bid price of such security on the principal securities
exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing
bid price is reported for such security by Bloomberg, the
last closing trade price of such security as reported by
Bloomberg, or, if no last closing trade price is reported
for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc. If
the Closing Bid Price cannot be
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<PAGE>
calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually
determined by the Company and the holders of the Notes. If
the Company and the holders of Notes are unable to agree
upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 1(f)(iii)
below with the term "Closing Bid Price" being substituted
for the term "Average Market Price." (All such
determinations to be appropriately adjusted for any stock
dividend, stock, split or other similar transaction during
such period).
(vii) "Conversion Amount" means the sum of (A) the principal
amount of this Note to be converted in such conversion, (B)
accrued and unpaid interest, if any, on such principal
amount and (C) Default Interest, if any, on the interest
referred to in clause (B) above (subject to the Company's
right to pay the interest referred to in clauses (B) and (C)
in cash, as provided in Section 1(a) above).
(3) Effect of Failure to Obtain and Maintain Effectiveness of
Registration Statement. If the registration statement (the
"Registration Statement") covering the resale of the shares of
Common Stock issuable upon conversion of this Note and required
to be filed by the Company pursuant to the Registration Rights
Agreement between the Company and the Buyers referred to therein
(the "Registration Rights Agreement") is not declared effective
by the Securities and Exchange Commission (the "SEC") on or
before 180 days after the Issue Date (the "Scheduled Effective
Date"), or if after the Registration Statement has been declared
effective by the SEC, sales cannot be made pursuant to the
Registration Statement (whether because of a failure to keep the
Registration Statement effective, to disclose such information as
is necessary for sales to be made pursuant to the Registration
Statement, to register sufficient shares of Common Stock or
otherwise), then, as liquidated damages for any delay in or
reduction of its ability to sell the underlying shares of Common
Stock, but subject to the Holder's rights under Section 2(d), the
Company shall pay to the Holder an amount in cash equal to the
product of (i) the outstanding principal amount of this Note at
such time multiplied by (ii) .02 multiplied by (iii) the quotient
of (x) the sum of (A) the number of days after the Scheduled
Effective Date and prior to the date the relevant Registration
Statement is declared effective by the SEC and (B) the number of
days that sales cannot be made pursuant to the Registration
Statement after the Registration
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<PAGE>
Statement has been declared effective by the SEC (such number of
days being collectively referred to herein as the "Registration
Statement Default Days") divided by (y) 30. Notwithstanding the
foregoing, the Registration Statement Default Days shall not
include the number of days during any Grace Period (as defined in
the Registration Rights Agreement). The Company shall not be
required to make the foregoing payments in respect of any
principal amount of this Note that the Holder requires the
Company to redeem pursuant to Section 2(d)(i) or 2(d)(ii) hereof,
provided that the Company has paid the applicable Redemption
Price in compliance with Section 2 hereof.
(4) Adjustment to Conversion Price -- Dilution and Other Events. In
order to prevent dilution of the rights granted under this Note,
the Conversion Price will be subject to adjustment from time to
time as provided in this Section 1(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of Common
Stock. If and whenever on or after the Issuance Date, the
Company issues or sells, or is deemed to have issued or
sold, any shares of Common Stock (other than shares of
Common Stock deemed to have been issued by the Company in
connection with an Approved Stock Plan or an Approved
Acquisition (each as defined below)) or in connection with
the conversion of the Company's Series A Convertible
Preferred Stock) for a consideration per share less than the
lesser of the arithmetic average of the Closing Bid Prices
for the ten (10) consecutive trading days immediately
preceding the date of such issuance or sale and the Fixed
Conversion Price in effect immediately prior to such time
(the "Applicable Price"), then immediately after such issue
or sale, the Fixed Conversion Price shall be reduced to an
amount equal to the product of (x) the Fixed Conversion
Price in effect immediately prior to such issue or sale and
(y) the quotient determined by dividing (1) the sum of (I)
the product derived by multiplying the Applicable Price by
the number of shares of Common Stock Deemed Outstanding (as
defined below) immediately prior to such issue or sale, and
(II) the consideration, if any, received by the Company upon
such issue or sale, by (2) the product derived by
multiplying (I) the Applicable Price by (II) the number of
shares of Common Stock Deemed Outstanding immediately after
such issue or sale. For purposes of determining the adjusted
Fixed Conversion Price under this Section 1(d)(i), the
following shall be applicable:
(A) Issuance of Options. If the Company in any manner
grants any rights or options to subscribe for or to
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<PAGE>
purchase Common Stock (other than pursuant to an
Approved Stock Plan, in connection with an approved
Acquisition or upon conversion of the Notes or the
Series A Convertible Preferred Stock) or any stock or
other securities convertible into or exchangeable for
Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable
stock or securities being herein called "Convertible
Securities") and the price per share for which Common
Stock is issuable upon the exercise of such Options or
upon conversion or exchange of such Convertible
Securities is less than the Applicable Price, then the
total maximum number of shares of Common Stock issuable
upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of
such Options shall be deemed to be outstanding and to
have been issued and sold by the Company for such price
per share. For purposes of this Section 1(d)(i)(A), the
"price per share for which Common Stock is issuable
upon exercise of such Options or upon conversion or
exchange of such Convertible Securities" is determined
by dividing (I) the total amount, if any, received or
receivable by the Company as consideration for the
granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the
Company upon the exercise of all such Options, plus in
the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by (II) the total
maximum number of shares of Common Stock issuable upon
exercise of such Options or upon the conversion or
exchange of all such Convertible Securities issuable
upon the exercise of such Options. No adjustment of the
Fixed Conversion Price shall be made upon the actual
issuance of such Common Stock or of such Convertible
Securities upon the exercise of such Options or upon
the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If the Company in
any manner issues or sells any Convertible Securities
and the price per share for which Common Stock is
issuable upon such conversion or exchange is less than
the Applicable Price, then the maximum number of shares
of Common Stock issuable upon conversion or exchange of
such
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<PAGE>
Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of
this Section 1(d)(i)(B), the "price per share for which
Common Stock is issuable upon such conversion or
exchange" is determined by dividing (I) the total
amount received or receivable by the Company as
consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by
(II) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such
Convertible Securities. No adjustment of the Fixed
Conversion Price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of such
Convertible Securities, and if any such issue or sale
of such Convertible Securities is made upon exercise of
any Options for which adjustment of the Fixed
Conversion Price had been or are to be made pursuant to
other provisions of this Section 1(d)(i), no further
adjustment of the Fixed Conversion Price shall be made
by reason of such issue or sale.
(C) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the
additional consideration, if any, payable upon the
issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible
Securities are convertible into or exchangeable for
Common Stock change at any time, the Fixed Conversion
Price in effect at the time of such change shall be
readjusted to the Fixed Conversion Price which would
have been in effect at such time had such Options or
Convertible Securities still outstanding provided for
such changed purchase price, additional consideration
or changed conversion rate, as the case may be, at the
time initially granted, issued or sold; provided that
no adjustment shall be made if such adjustment would
result in an increase of the Fixed Conversion Price
then in effect.
(D) Certain Definitions. For purposes of determining the
adjusted Fixed Conversion Price under this Section
1(d)(i), the following terms have meanings set forth
below:
(I) "Approved Stock Plan" shall mean any contract,
plan or agreement which has been approved by the
Board of Directors of the Company, pursuant to
which the Company's securities may be issued to
any
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<PAGE>
employee, officer, director, consultant, financial
advisor or other service provider.
(II) "Common Stock Deemed Outstanding" means, at any
given time, the number of shares of Common Stock
actually outstanding at such time, plus the number
of shares of Common Stock deemed to be outstanding
pursuant to Sections 1(d)(i)(A) and 1(d)(i)(B)
hereof regardless of whether the Options or
Convertible Securities are actually exercisable at
such time, but excluding any shares of Common
Stock issuable upon conversion of the Notes.
(III) "Approved Acquisition" means any acquisition, by
way of asset purchase, stock purchase, merger or
otherwise, of any business by the Company that has
been approved by the Board of Directors of the
Company.
(E) Effect on Fixed Conversion Price of Certain Events. For
purposes of determining the adjusted Fixed Conversion
Price under this Section 1(d)(i), the following shall
be applicable:
(I) Calculation of Consideration Received. If any
Common Stock, Options or Convertible Securities
are issued or sold or deemed to have been issued
or sold for cash, the consideration received
therefor will be deemed to be the net amount
received by the Company therefor. In case any
Common Stock, Options or Convertible Securities
are issued or sold for a consideration other than
cash, the amount of the consideration other than
cash received by the Company will be the fair
value of such consideration, except where such
consideration consists of securities, in which
case the amount of consideration received by the
Company will be the Average Market Price of such
securities for the twenty (20) consecutive trading
days immediately preceding the date of receipt. In
case any Common Stock, Options or Convertible
Securities are issued to the owners of the
non-surviving entity in connection with any merger
in which the Company is the surviving entity the
amount of consideration therefor will be deemed to
be the fair value of such portion of the net
assets and
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<PAGE>
business of the non-surviving entity as is
attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The
fair value of any consideration other than cash or
securities will be determined jointly by the
Company and the holders of a majority of the
principal amount of the Notes then outstanding. If
such parties are unable to reach agreement within
ten (10) days after the occurrence of an event
requiring valuation (the "Valuation Event"), the
fair value of such consideration will be
determined within forty-eight (48) hours of the
tenth (10th) day following the Valuation Event by
an independent, reputable appraiser selected by
the Company. The determination of such appraiser
shall be deemed binding upon all parties absent
manifest error.
(II) Integrated Transactions. In case any Option is
issued in connection with the issue or sale of
other securities of the Company, together
comprising one integrated transaction in which no
specific consideration is allocated to such
Options by the parties thereto, the Options will
be deemed to have been issued for a consideration
of $.01.
(III) Treasury Shares. The number of shares of Common
Stock outstanding at any given time does not
include shares owned or held by or for the account
of the Company, and the disposition of any shares
so owned or held will be considered an issue or
sale of Common Stock.
(IV) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of
entitling them (1) to receive a dividend or other
distribution payable in Common Stock, Options or
in Convertible Securities or (2) to subscribe for
or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed
to be the date of the issue or sale of the shares
of Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the
making of such other distribution or the date of
the granting of such right of subscription or
purchase, as the case may be.
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<PAGE>
(ii) Adjustment of Fixed Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time
subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of
shares, the Fixed Conversion Price in effect immediately
prior to such subdivision will be proportionately reduced.
If the Company at any time combines (by combination, reverse
stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of
shares, the Fixed Conversion Price in effect immediately
prior to such combination will be proportionately increased.
(iii) Intentionally omitted.
(iv) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or
substantially all of the Company's assets to another Person
(as defined below) or other transaction which is effected in
such a way that holders of Common Stock are entitled to
receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange
for Common Stock, other than by way of an event described in
Section 1(d)(ii), is referred to herein as "Organic Change."
Prior to the consummation of any Organic Change, the Company
will make appropriate provision (in form and substance
satisfactory to the holders of a majority of the principal
amount of the Notes then outstanding) to insure that each of
the holders of the Notes will thereafter have the right to
acquire and receive in lieu of or addition to (as the case
may be) the shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such
holder's Notes, such shares of stock, securities or assets
as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of
such holder's Notes had such Organic Change not taken place.
In any such case, the Company will make appropriate
provision (in form and substance satisfactory to the holders
of a majority of the principal amount of the Notes then
outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 1(d)
and Section 1(e) below will thereafter be applicable to the
Notes (including, in the case of any such consolidation,
merger or sale in which the successor entity or purchasing
entity is other than the Company, an immediate adjustment of
the Fixed Conversion Price to the value for the Common Stock
reflected by the terms of such consolidation, merger or
sale, if the value so reflected is less than the Fixed
Conversion Price in effect
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<PAGE>
immediately prior to such consolidation, merger or sale).
The Company will not effect any such consolidation, merger
or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from
consolidation or merger or the entity purchasing such assets
assumes, by written instrument (in form and substance
satisfactory to the holders of a majority of the principal
amount of the Notes then outstanding), the obligation to
deliver to each holder of the Notes such shares of stock,
securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire. "Person"
shall mean an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any
department or agency thereof. The provisions of this Section
1(d)(iv) will not apply with respect to any Conversion
Amount which the Company has redeemed in accordance with
Section 2 below.
(v) Certain Events. If any event occurs of the type contemplated
by the provisions of this Section 1(d) but not expressly
provided for by such provisions (including, without
limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an
appropriate adjustment in the Conversion Price so as to
protect the rights of the holders of the Notes; provided
that no such adjustment will increase the Conversion Price
as otherwise determined pursuant to this Section 1(d).
(vi) Notices.
(A) Immediately upon any adjustment of the Conversion Price
pursuant to Section 1(d), the Company will give written
notice thereof to each holder of the Notes, setting
forth in reasonable detail and certifying the
calculation of such adjustment.
(B) The Company will give written notice to each holder of
Notes at least twenty (20) days prior to the date on
which the Company closes its books or takes a record
(I) with respect to any dividend or distribution upon
the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III)
for determining rights to vote with respect to any
Organic Change, dissolution or liquidation; provided
that in no event shall such notice be provided to such
holder prior to such information being made known to
the public.
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<PAGE>
(C) To the extent notice is not required to be given under
clause B(III) above, the Company will give written
notice to each holder of Notes at least twenty (20)
days prior to the date on which any Organic Change,
dissolution or liquidation will take place.
(5) Purchase Rights. In addition to any adjustments of the Conversion
Price pursuant to Section 1(d) above, if at any time the Company
grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then the holders of Notes will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired
if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Notes immediately
before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such
Purchase Rights.
(6) Mechanics of Conversion. Subject to the Company's inability to
fully satisfy its obligations under a Conversion Notice (as
defined below) as provided for in Section 5 below:
(i) Holder's Delivery Requirements. To convert this Note into
shares of Common Stock on any date (the "Conversion Date"),
the holder thereof shall (A) transmit by facsimile (or
otherwise deliver), for receipt on or prior to 11:59 p.m.,
Central Time on such date, a copy of a fully executed notice
of conversion in the form attached hereto as Exhibit I (the
"Conversion Notice"), to the Company or its designated agent
(the "Agent"), and (B) subject to Section 1(f)(vi) below,
surrender to a common carrier for delivery to the Company or
the Agent as soon as practicable following such date, the
Notes being converted (or an indemnification undertaking
with respect to such Notes in the case of their loss, theft
or destruction) and the originally executed Conversion
Notice. If the Conversion Notice is transmitted (as
evidenced by the sender's time/date stamp as shown on the
facsimile) after 5:00 p.m, Pacific time, the date of
receipt, for purposes of Section 1(f)(ii), shall be deemed
to be the business day immediately following the date of
transmission.
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(ii) Company's Response. Upon receipt by the Company of a
Conversion Notice in proper form, the Company shall (A)
immediately send, via facsimile, a confirmation of receipt
of such Conversion Notice to such holder and (B) cause its
Transfer Agent within five business days following the date
of receipt to (I) issue and surrender to a common carrier
for overnight delivery to the address as specified in the
Conversion Notice, a certificate, registered in the name of
the holder or its designee, for the number of shares of
Common Stock to which the holder shall be entitled or (II)
credit such aggregate number of shares of Common Stock to
which the holder shall be entitled to the holder's or its
designee's balance account with The Depository Trust
Company. The Company shall use its best efforts to cause its
Transfer Agent to take the actions specified in clause (I)
or clause (II) of the preceding sentence within three
business days following the date of receipt. Subject to
Section 1(f)(vi) below, if this Note is physically delivered
upon conversion and if the Conversion Amount represented by
this Note submitted for conversion is greater than the
Conversion Amount being converted, then the Company shall as
soon as practicable and in no event later than five business
days after receipt of this Note and at the Company's own
expense, issue and deliver to the holder a new Note
representing the Conversion Amount not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
determination of the Average Market Price or the arithmetic
calculation of the Conversion Rate, the Company shall
promptly issue to the holder the number of shares of Common
Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via
facsimile within two (2) business days of receipt of such
holder's Conversion Notice. If such holder and the Company
are unable to agree upon the determination of the Average
Market Price or arithmetic calculation of the Conversion
Rate within one (1) business day of such disputed
determination or arithmetic calculation being submitted to
the holder, then the Company shall within one (1) business
day submit via facsimile (A) the disputed determination of
the Average Market Price to an independent, reputable
investment bank or (B) the disputed arithmetic calculation
of the Conversion Rate to its independent, outside
accountant. The Company shall cause the investment bank or
the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and
the holder of the results no later than forty-eight (48)
hours from the time it receives the disputed determinations
or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be
binding upon all parties absent manifest error.
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<PAGE>
(iv) Record Holder. The person or persons entitled to receive the
shares of Common Stock issuable upon a conversion of this
Note shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on the Conversion
Date.
(v) Company's Failure to Timely Convert. If the Company shall
fail to issue to the Holder, or credit the Holder's balance
account with The Depository Trust Company on a timely basis
as described in this Section 1(f) for, the number of shares
of Common Stock to which the Holder is entitled upon the
Holder's conversion of the Conversion Amount of this Note
or, in the event this Note is physically delivered upon a
conversion, the Company shall fail to deliver a new Note
representing the Conversion Amount to which such holder is
entitled pursuant to Section 2(f), in addition to all other
available remedies which such holder may pursue hereunder
and under the Purchase Agreement (including indemnification
pursuant to Section 8 thereof), the Company shall pay
additional damages to the Holder on each such date after the
fifth Business Day following the receipt by the Company or
the Agent of the Conversion Notice such conversion or
delivery of a new Note is not timely effected in an amount
equal to 1.0% of the sum of (A) the Conversion Amount in the
event that such conversion is not timely effected and (B) if
the Conversion Amount represented by this Note submitted for
conversion is greater than the Conversion Amount being
converted, the Conversion Amount represented by this Note
which is not being converted, in the event that such new
Note is not timely delivered.
(vi) Notwithstanding anything to the contrary set forth herein,
upon conversion of this Note in accordance with the terms
hereof, the Holder shall not be required to physically
surrender this Note to the Company unless the entire unpaid
principal amount of this Note is so converted. The Holder
and the Company shall maintain records showing the principal
amount so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical
surrender of this Note upon each such conversion. In the
event of any dispute or discrepancy, such records of the
Company shall be controlling and determinative in the
absence of manifest error. Notwithstanding the foregoing, if
any portion of this Note is converted as aforesaid, the
Holder may not transfer this Note unless the Holder first
physically surrenders this Note to the Company, whereupon
the Company will forthwith (subject to any restrictions on
transfer contained in the Purchase Agreement) issue and
deliver upon the order of the Holder a new note of like
tenor, registered as the Holder may request,
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representing in the aggregate the remaining unpaid principal
amount of this Note. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by
reason of the provisions of this paragraph, following
conversion of a portion of this Note, the unpaid and
unconverted principal amount of this Note represented by
this Note may be less than the amount stated of the face
hereof.
(7) Conversion at the Option of the Company. At any time or times on
or after the Issue Date, the Company shall have the right, in its
sole discretion, to require that any or all of the outstanding
Notes be converted ("Conversion at Company's Election") at the
Conversion Rate, provided that the Conditions to Conversion at
the Option of the Company (as set forth below) are satisfied. The
Company shall exercise its right to Conversion at the Company's
Election by providing each holder of Notes written notice
("Notice of Conversion at Company's Election") at least 20
business days prior to the date selected by the Company for
conversion ("Company's Election Conversion Date"). The Notice of
Conversion at Company's Election shall indicate (x) the
Conversion Amount of the Notes the Company has selected for
conversion, (y) the Company's Election Conversion Date, which
date shall be not less than 20 business days or more than 40
calendar days after each holder's receipt of such notice, and (z)
each holder's pro-rata share of outstanding Conversion Amount of
the Notes. All of the Conversion Amounts of the Notes selected
for conversion in accordance with the provision of this Section
1(g) shall be converted as of the Company's Election Conversion
Date in accordance with this Section 1 as if the holders of such
Notes had given the Conversion Notice on the Company's Election
Conversion Date, and the Conversion Date had been fixed as of the
Company's Election Conversion Date, for all purposes of this
Section 1, and all holders of the Notes shall thereupon and
within two (2) business days after the Company's Election
Conversion Date surrender the Notes selected for conversion to
the Company or the Agent. "Conditions to Conversion at the
Company's Election" means the following conditions: (i) the
arithmetic average of the Closing Bid Prices for the 30
consecutive trading days immediately preceding the date of the
Company's Notice of Conversion at the Company's Election is at
least 150% of the Fixed Conversion Price; (ii) the Closing Bid
Price on the Company's Election Conversion Date is at least 150%
of the Fixed Conversion Price; (iii) the Company shall not have
previously given Notice of Conversion at Company's
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Election; (iv) the Conversion Amount selected for conversion is
not more than 25% of the Conversion Amount of this Note on the
date of the Company's Notice of Conversion at the Company's
Election; (v) the Registration Statement shall have been declared
effective by the SEC and for the period beginning 30 consecutive
trading days prior to the Company's Notice of Conversion at the
Company's Election and ending on the Company's Election
Conversion Date (the "Company's Election Conversion Period")
sales can be made pursuant to the Registration Statement; (vi) at
all times during the Company's Election Conversion Period the
Common Stock shall be included for quotation on the Nasdaq
National Market, The American Stock Exchange, Inc. or the New
York Stock Exchange, Inc. and the trading of the Common Stock
shall not have been suspended by the SEC, any such exchange or
the National Association of Securities Dealers, Inc.; (vii) at
all times during the Company's Election Conversion Period, the
Company shall have delivered certificates representing shares of
Common Stock or credited the Holder's general account with The
Depository Trust Company within five Business Days of the
Company's or the Transfer Agent's receipt of the Note
Certificates submitted for conversion pursuant to a Conversion
Notice; and (viii) the Company is not in default under this Note,
the Securities Purchase Agreement and the Registration Rights
Agreement. Notwithstanding the above, any holder of the Notes may
convert any of the Notes (including the Notes selected for
conversion) into Common Stock pursuant to Section 1(a) on or
prior to the date immediately preceding the Company's Election
Conversion Date.
(8) Mandatory Conversion. If any Conversion Amount of this Note
remains outstanding on the Maturity Date, then all of such
Conversion Amount shall be converted as of such date in
accordance with this Section 1(h) as if the Holder had given a
Conversion Notice with respect to the remaining Conversion Amount
on the Maturity Date. The Holder shall, within three business
days following the Maturity Date, surrender this Note to the
Company or the Transfer Agent.
(9) Fractional Shares. The Company shall not issue any fraction of a
share of Common Stock upon any conversion. All shares of Common
Stock (including fractions thereof) issuable upon conversion of
more than one of the Notes held by the same holder shall be
aggregated for purposes of determining whether
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the conversion would result in the issuance of a fraction of a
share of Common Stock. If, after the aforementioned aggregation,
the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a
share of Common Stock up or down to the nearest whole share.
(10) Taxes. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of
Common Stock upon the conversion of this Note; provided that the
Company shall not be required to pay any transfer taxes or fees
related to any transfer of Common Stock by a Holder in connection
with a conversion.
ii. Redemption at Option of Holders.
(1) Redemption Option Upon Major Transaction. In addition to all
other rights of the Holder contained herein, after a Major
Transaction (as defined below), the Holder shall have the right,
at the Holder's option, to require the Company to redeem all or a
portion of this Note for an amount in cash equal to 115% of the
Conversion Amount being redeemed ("Major Transaction Redemption
Price").
(2) Redemption Option Upon Triggering Event. In addition to all other
rights of the Holder contained herein, after a Triggering Event
(as defined below), the Holder shall have the right, at the
Holder's option, to require the Company to redeem all or a
portion of this Note for an amount in cash equal to 115% of the
Conversion Amount being redeemed ("Triggering Event Redemption
Price" and, collectively with "Major Transaction Redemption
Price," the "Redemption Price").
(3) "Major Transaction". A "Major Transaction" shall be deemed to
have occurred at the closing of any of the following events:
(i) the consolidation, merger or other business combination of
the Company with or into another Person if stockholders of
the Company immediately prior to such transaction do not,
immediately following such transaction, hold stock or other
ownership interests of the surviving entity possessing
voting power sufficient to elect a majority of such entity's
Board of Directors.
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<PAGE>
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to and accepted
by the holders of more than 50% of the outstanding shares of
Common Stock.
(4) "Triggering Event". A "Triggering Event" shall be deemed to have
occurred at such time as any of the following events:
(i) the failure of the Registration Statement to be declared
effective by the SEC on or prior to the date that is 180
days after the Issue Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of the
Registration Statement lapses for any reason (including,
without limitation, the issuance of a stop order) or is
unavailable to the Holder for the sale of the Registrable
Securities (as defined in the Registration Rights Agreement)
in accordance with the terms of the Registration Rights
Agreement, and such lapse or unavailability continues for a
period of five consecutive Business Days, provided that the
cause of such lapse or unavailability is not due to factors
solely within the control of the Holder, and provided
further that the Registration Statement shall not be deemed
to be unavailable during any Grace Period (as defined in the
Registration Rights Agreement);
(iii) the delisting of the Common Stock from the Nasdaq National
Market System, The New York Stock Exchange, Inc. or The
American Stock Exchange, Inc.
(iv) the Company's notice to any holder of the Notes, including
by way of public announcement, at any time, of its intention
not to comply with proper requests for conversion of any of
the Notes into shares of Common Stock, except for the
reasons set forth in Section 4(a) but including failure to
convert for reasons stated in Section 3(a); or
(v) Donald A. Wright ceases to be the President of the Company
for any reason prior to the Registration Statement being
declared effective by the SEC.
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<PAGE>
(5) Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No sooner than 20 days nor later than 10 days prior
to the consummation of a Major Transaction, but not prior to the
public announcement of such Major Transaction, the Company shall
deliver written notice thereof via facsimile ("Notice of Major
Transaction") to each holder of the Notes. At any time after
receipt of a Notice of Major Transaction, the holders of at least
two-thirds (2/3) of the principal amount of the Notes then
outstanding may require the Company to redeem all of the Notes
then outstanding by delivering written notice thereof via
facsimile ("Notice of Redemption at Option of Buyer Upon Major
Transaction") to the Company, which Notice of Redemption at
Option of Buyer Upon Major Transaction shall indicate (i) the
Conversion Amount that such holders are voting in favor of
redemption and (ii) the applicable Redemption Price, as
calculated pursuant to Section 2(a) above.
(6) Mechanics of Redemption at Option of Buyer Upon Triggering Event.
Within one (1) business day after the occurrence of a Triggering
Event, the Company shall deliver written notice thereof via
facsimile ("Notice of Triggering Event") to each holder of the
Notes. At any time after receipt of a Notice of Triggering Event,
the holders of at least two-thirds (2/3) of the principal amount
of the Notes then outstanding may require the Company to redeem
all of the Notes by delivering written notice thereof via
facsimile ("Notice of Redemption at Option of Buyer Upon
Triggering Event") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the
Conversion Amount that such holders are voting in favor of
redemption and (ii) the applicable Triggering Event Redemption
Price, as calculated pursuant to Section 2(b) above.
(7) Payment of Redemption Price. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction
or a Notice(s) of Redemption at Option of Buyer Upon Triggering
Event, as the case may be, from the holders of at least
two-thirds (2/3) of the principal amount of the Notes then
outstanding, the Company shall immediately notify each holder by
facsimile of the Company's receipt of such requisite notices
necessary to affect a redemption and each holder of the Notes
shall thereafter promptly send such holder's Note Certificates to
be redeemed to the Company or its Agent. The Company shall
deliver the applicable Redemption Price, as
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<PAGE>
the case may be, to such holder within thirty (30) days after the
Company's receipt of the requisite notices required to affect a
redemption; provided that a holder's Note Certificates shall have
been so delivered to the Company or its Agent; provided further
that if the Company is unable to redeem all of the Notes, the
Company shall redeem a Conversion Amount from each holder of the
Notes equal to such holder's pro-rata amount (based on the
principal amount of the Notes then held by such holder relative
to the aggregate principal amount of the Notes then outstanding)
of all the Notes being redeemed. If the Company shall fail to
redeem all of the Notes submitted for redemption (other than
pursuant to a dispute as to the arithmetic calculation of the
Redemption Price), in addition to any remedy such holder of the
Notes may have under this Note and the Securities Purchase
Agreement, the applicable Redemption Price payable in respect of
such unredeemed Notes shall bear interest at the rate of 2.0% per
month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to
each holder, holders of at least two-thirds (2/3) of the
outstanding principal amount of the Notes, including principal
amounts of the Notes submitted for redemption pursuant to this
Section 2 and for which the applicable Redemption Price has not
been paid, shall have the option (the "Void Optional Redemption
Option") to, in lieu of redemption, require the Company to
promptly return to each holder all of the Notes that were
submitted for redemption by such holder under this Section 2 and
for which the applicable Redemption Price has not been paid, by
sending written notice thereof to the Company via facsimile (the
"Void Optional Redemption Notice"). Upon the Company's receipt of
such Void Optional Redemption Notice(s) and prior to payment of
the full applicable Redemption Price to each holder, (i) the
Notice(s) of Redemption at Option of Buyer Upon Triggering Event
or the Notice(s) of Redemption at Option of Buyer Upon Major
Transaction, as the case may be, shall be null and void with
respect to those Notes submitted for redemption and for which the
applicable Redemption Price has not been paid and default
interest on such unpaid Redemption Price shall cease to accrue on
the Notes not redeemed, (ii) the Company shall immediately return
any Notes submitted to the Company by each holder for redemption
under this Section 2(g) and for which the applicable Redemption
Price has not been paid, and (iii) if the Company has failed to
pay all accrued default interest on the unpaid Redemption Price
as required by this Section, (A) the Fixed
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Conversion Price of such returned Notes shall be adjusted to the
lesser of (x) the Fixed Conversion Price as in effect on the date
on which the Void Optional Redemption Notice(s) is delivered to
the Company and (y) the average of the five lowest Closing Bid
Prices during the period beginning on the date on which the
Notice(s) of Redemption of Option of Buyer Upon Major Transaction
or the Notice(s) of Redemption at Option of Buyer Upon Triggering
Event, as the case may be, is delivered to the Company and ending
on the date on which the Void Optional Redemption Notice(s) is
delivered to the Company; provided that no adjustment shall be
made if such adjustment would result in an increase of the Fixed
Conversion Price then in effect, and (B) the Conversion
Percentage in effect at such time shall be reduced by a number of
percentage points equal to the product of (x) .25 and (y) the
number of days in the period beginning on the date on which the
Notice(s) of Redemption at Option of Buyer Upon Major Transaction
or the Notice(s) of Redemption at Option of Buyer Upon Triggering
Event, as the case may be, is delivered to the Company and ending
on the date on which the Void Optional Redemption Notice(s) is
delivered to the Company. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the Closing Bid
Price or the arithmetic calculation of the Redemption Price, such
dispute shall be resolved pursuant to Section 1(f)(iii) above
with the term "Closing Bid Price" being substituted for the term
"Average Market Price" and the term "Redemption Price" being
substituted for the term "Conversion Rate". Payments provided for
in this Section 2 shall have priority to payments to stockholders
or holders of convertible notes (other than the Notes) in
connection with a Major Transaction.
iii. Inability to Fully Convert.
(1) Holder's Option if Company Cannot Fully Convert. If, upon the
Company's receipt of a Conversion Notice, the Company can not
issue shares of Common Stock registered for resale under the
Registration Statement for any reason (other than due to the
Nasdaq Cap which limitation shall be governed by Section 4
below), including, without limitation, because the Company (x)
does not have a sufficient number of shares of
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Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the rules or regulations of
any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Company
or its Securities, from issuing all of the Common Stock which is
to be issued to a holder of any of the Notes pursuant to a
Conversion Notice or (z) fails to have a sufficient number of
shares of Common Stock registered for resale under the
Registration Statement (other than due to the Nasdaq Cap), then
the Company shall issue as many shares of Common Stock as it is
able to issue in accordance with such holder's Conversion Notice
and pursuant to Section 1(f) above and, with respect to the
unconverted portion of this Note, the Holder, solely at the
Holder's option, can elect to:
(a) require the Company to redeem from such holder that portion
of this Note for which the Company is unable to issue Common
Stock in accordance with Section 2(b) above;
(b) if the Company's inability to fully convert the Notes is
pursuant to clause (z) of Section 3(a) above, require the
Company to issue restricted shares of Common Stock in
accordance with such holder's Conversion Notice and pursuant
to Section 1(f) above; or
(c) void its Conversion Notice and retain or have returned, as
the case may be, the nonconverted portion of the Notes that
were to be converted pursuant to such holder's Conversion
Notice;
(2) Mechanics of Fulfilling Holder's Election. The Company shall
immediately send via facsimile to a holder of the Notes, upon
receipt of a facsimile copy of a Conversion Notice from such
holder which cannot be fully satisfied as described in Section
3(a) above, a notice of the Company's inability to fully satisfy
such holder's Conversion Notice (the "Inability to Fully
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Convert Notice"). Such Inability to Fully Convert Notice shall
indicate (i) the reason why the Company is unable to fully
satisfy such holder's Conversion Notice, (ii) the portion of the
Conversion Amount which cannot be converted and (iii) the
applicable Mandatory Redemption Price. Such holder must within
five (5) business days of receipt of such Inability to Fully
Convert Notice deliver written notice via facsimile to the
Company ("Notice in Response to Inability to Convert") of its
election pursuant to Section 3(a) above.
(3) Payment of Redemption Price. If such holder shall elect to have
its shares redeemed pursuant to Section 3(a)(i) above, the
redemption will occur pursuant to Sections 2(f) and (g) above.
(4) Pro-rata Conversion and Redemption. In the event the Company
receives a Conversion Notice from more than one holder of the
Notes on the same day and the Company can convert and redeem
some, but not all, of the Conversion Amounts pursuant to this
Section 3, the Company shall convert and redeem from each holder
of Notes electing to have Conversion Amounts converted and
redeemed at such time an amount equal to such holder's pro-rata
amount (based on the principal amount of the Notes held by such
holder relative to the aggregate principal amount of the Notes
outstanding) of all Notes being converted and redeemed at such
time.
iv. Inability to Convert due to Nasdaq Cap.
(1) Company's Option if it Cannot Fully Convert due to Nasdaq Cap. If
upon the Company's receipt of a Conversion Notice, the Company
can not issue shares of Common Stock due to the Nasdaq Cap (as
defined in Section 10 below) (a "Nasdaq Cap Event"), then the
Company shall, at its option, either (i) redeem the remaining
Conversion Amount of this Note pursuant to Section 4(b) below or
(ii) use its best efforts to obtain the approval of its
shareholders of the issuance of the Notes and the shares of
Common Stock issuable upon conversion of the Notes, including the
issuance of shares of Common Stock in excess of the Nasdaq Cap,
pursuant to Section 4(c) below. Upon the occurrence of a Nasdaq
Cap Event, the Company shall issue as many shares of Common Stock
as it is able to issue in accordance with the Holder's Conversion
Notice and pursuant to Section 1(f) above and, within five
Business Days after a Nasdaq
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Cap Event, the Company shall send a notice via facsimile to each
holder of the Notes of the Company's election to redeem all
Conversion Amounts of the Notes which can not be converted or to
obtain shareholder approval, each as described above.
(2) Payment of Redemption Price. If the Company elects to redeem the
portion of the Conversion Amounts of the Notes which can not be
converted due to the Nasdaq Cap, the Company shall pay to each
holder within 25 days of the Nasdaq Cap Event an amount in cash
equal to (i) if such payment is made within 365 days after the
Issue Date, 110% of the Conversion Amount of the Note as of the
date the redemption amount is paid in full or (ii) if such
payment is made more than 365 days after the Issue Date, 115% of
the Conversion Amount of the Note as of the date the redemption
amount is paid in full (collectively, the "Nasdaq Cap Redemption
Price"). If the Company shall fail to pay the applicable Nasdaq
Cap Redemption Price to such holder on a timely basis as
described in this Section 4(b), in addition to any remedy such
holder of the Notes may have under this Note and the Securities
Purchase Agreement, such unpaid amount shall bear interest at the
rate of 2.0% per month (prorated for partial months) until paid
in full and shall be payable on the last day of each 30-day
period following the twenty-fifth (25th) day after the Nasdaq Cap
Event.
(3) Shareholder Approval. If the Company elects to seek shareholder
approval of the issuance of the Notes and the shares of Common
Stock issuable upon conversion of the Notes, including the
issuance of shares of Common Stock in excess of the Nasdaq Cap,
then the Company shall (i) call a special meeting of its
shareholders, if necessary, (ii) provide each shareholder
entitled to vote at such meeting a proxy statement, a copy of
which has been previously provided to the holders of the Notes
and a counsel of their choice, soliciting each such shareholder's
affirmative vote at such meeting for the approval of the issuance
of the Notes and the shares of Common Stock issuable upon
conversion of the Notes and (iii) use its best efforts to obtain
such shareholder approval. In the event such shareholder approval
is not obtained within 60 days after the Nasdaq Cap Event, the
Company shall pay to each holder an amount in cash equal to 2.0%
per month of the remaining Conversion Amount (pro rated for
partial months) from the date
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of the Nasdaq Cap Event until such shareholder approval is
obtained. The first of such payments shall be made on the
sixty-first (61st) day after the Nasdaq Cap Event and succeeding
payments shall be made on the last day of each 30-day period
following the 60-day period after the Nasdaq Cap Event. In the
event shareholder approval is not obtained within 120 days of the
Nasdaq Cap Event, the Company shall redeem the remaining
Conversion Amounts on or before the date that is 135 days after
the Nasdaq Cap Event and shall continue to make the payments
described above in the amount of 2.0% per month until the
Conversion Amounts have been redeemed in full.
v. Reissuance of Notes. In the event of a conversion or redemption
pursuant to this Note of less than all of the principal amount
represented by this Note, the Company shall promptly cause to be
issued and delivered to the Holder, upon tender by the Holder of the
Note converted or redeemed, a new note of like tenor representing the
remaining principal amount of this Note which has not been so
converted or redeemed.
vi. Defaults and Remedies.
(1) Events of Default. An Event of Default is: (i) default for thirty
(30) days in payment of interest or Default Interest on this Note
on or after the Maturity Date; (ii) default in payment of the
principal amount of this Note when and as due; (iii) failure by
the Company for thirty (30) days after notice to it to comply
with any other material provision of this Note, except in the
case of optional redemption by Holder upon the occurrence of a
Major Transaction or Trigger Event; (iv) any acceleration prior
to maturity, due to a default under any mortgage, indenture or
instrument under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by
the Company or for money borrowed the repayment of which is
guaranteed by the Company, whether such indebtedness or guarantee
now exists or shall be created hereafter, provided that the
Company's obligation with respect to any such borrowed or
accelerated amount exceeds, in the aggregate, $2,000,000; (v) if
the Company pursuant to or within the meaning of any Bankruptcy
Law; (A) commences a voluntary case; (B) consents to the entry of
an order for relief against it in an involuntary case; (C)
consents to the appointment of a Custodian of it or for all or
substantially all of its property; (D) makes a general assignment
for the benefit of its creditors;
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or (E) admits in writing that it is generally unable to pay its
debts as the same become due; or (vi) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law
that: (1) is for relief against the Company in an involuntary
case; (2) appoints a Custodian of the Company or for all or
substantially all of its property; or (3) orders the liquidation
of the Company or any subsidiary, and the order or decree remains
unstayed and in effect for ninety (90) days. The Term "Bankruptcy
Law" means Title 11, U.S. Code, or any similar Federal or State
Law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under
any Bankruptcy Law.
(2) Remedies. If an Event of Default occurs and is continuing, the
Holder of this Note may declare all of this Note, including any
interest and Default Interest and other amounts due, to be due
and payable immediately, except that in the case of an Event of
Default arising from events described in clauses (iv) and (v) of
Section 6(a), this Note shall become due and payable without
further action or notice (an "Automatic Acceleration"); provided,
however, that in the case of an Event of Default arising from
events described in clause (iv) of Section 6(a), an Automatic
Acceleration shall be deemed to be waived if the acceleration of
the indebtedness as described in clause (iv) of Section 6(a) is
cured by the Company and waived by the holder of such
indebtedness within 10 days of the acceleration of such
indebtedness. Holder may not enforce the agreements contained in
this Note except as provided herein. In addition to any remedy
such holder of the Notes may have under this Note and the
Purchase Agreement, such unpaid amount shall bear interest at the
rate of 2.0% per month (prorated for partial months) until paid
in full
vii. Reservation of Shares. The Company shall, so long as any portion of
this Note is outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of this Note, such number of shares of Common
Stock as shall from time to time be sufficient to effect the
conversion of all of the Conversion Amount of this Note then
outstanding.
viii. Voting Rights. Holders of this Note shall have no voting rights.
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<PAGE>
ix. Restriction on Redemption and Cash Dividends with respect to Other
Capital Stock. Until all of the principal and interest on this Note
has been converted, redeemed or otherwise satisfied as provided
herein, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or distribution on, its Common Stock
without the prior express written consent of the holders of not less
than two-thirds (2/3) of the principal amount of the Notes then
outstanding.
x. Limitation on Number of Conversion Shares. The Company shall not be
obligated to issue, in the aggregate, more than 2,172,690 shares of
Common Stock (such amount to be proportionately and equitably adjusted
from time to time in the event of stock splits, stock dividends,
combinations, reverse stock splits, reclassification, capital
reorganizations and similar events relating to the Common Stock if
such adjustment would not result in the Company violating any Nasdaq
rule limiting the number of shares of Common Stock issuable by the
Company) (the "Nasdaq Cap") upon conversion of the Notes, if issuance
of a larger number of shares of Common Stock would constitute a breach
of the Company's obligations under the rules or regulations of The
Nasdaq Stock Market, Inc. or any other principal securities exchange
or market upon which the Common Stock becomes traded. The Nasdaq Cap
shall be allocated among the Notes pro rata based on the aggregate
principal amount of the Notes as of the Issuance Date.
xi. Vote to Change the Terms of this Note. This Note and any provision
hereof may only be amended by an instrument in writing signed by the
Company and Holder and then only if such amendment is also offered to
the other holders of the Notes then outstanding. The term "Note" and
all reference thereto, as used throughout this instrument, shall mean
this instrument (and the other Notes issued pursuant to the Purchase
Agreement) as originally executed, or if later amended or
supplemented, then as so amended or supplemented.
xii. Lost or Stolen Notes. Upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or
mutilation of any Note, and, in the case of loss, theft or
destruction, of an indemnification undertaking by the holder to the
Company in a form reasonably acceptable to the Company and, in the
case of mutilation, upon surrender and cancellation of the Notes, the
Company shall execute and deliver new notes of like tenor and date;
provided, however, the Company shall not be obligated to re-issue
notes if the holder contemporaneously requests the Company to convert
such remaining principal amount into Common Stock.
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<PAGE>
xiii. Payment of Collection, Enforcement and Other Costs. If: (i) this Note
is placed in the hands of an attorney for collection or enforcement or
is collected or enforced through any legal proceeding; or (ii) an
attorney is retained to represent the holder of this Note in any
bankruptcy, reorganization, receivership or other proceedings
affecting creditors' rights and involving a claim under this Note; or
(iii) an attorney is retained to represent the holder of this Note in
any other proceedings whatsoever in connection with this Note, then
the Company shall pay to the Holder all reasonable attorneys' fees,
costs and expenses incurred in connection therewith, in addition to
all other amounts due hereunder.
xiv. Cancellation. After all principal and accrued interest at any time
owed on this Note has been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
xv. Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the holder at the principal
office of the Company, for a new Note or Notes (in principal amounts
of at least $100,000) containing the same terms and conditions and
representing in the aggregate the principal amount of this Note, and
each such new Note will represent such portion of such principal
amount as is designated by the holder at the time of such surrender.
The date the Company initially issues this Note will be deemed to be
the "Issuance Date" hereof regardless of the number of times a new
Note shall be issued.
xvi. Waiver of Notice. To the extent permitted by law, the Company hereby
waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note and the Purchase Agreement.
xvii. Governing Law. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be
governed by, the laws of the State of New York, without giving effect
to provisions thereof regarding conflict of laws.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its duly authorized officer on the day and in the year first above
written.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-------------------------------------
Name: Donald A. Wright
Title: President
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Exhibit 10.4
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of August 11,
1997, by and among Pacific Aerospace & Electronics, Inc., a Washington
corporation, with headquarters located at 434 Olds Station Road, Wenatchee,
Washington 98801 (the "Company"), and the undersigned buyers (each, a "Buyer"
and collectively, the "Buyers").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties of even date herewith (the "Securities Purchase Agreement"), the Company
has agreed, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to issue and sell to the Buyers the Company's Convertible
Notes (the "Notes"), which will be convertible into shares of the Company's
common stock, par value $.001 per share (the "Common Stock") (as converted, the
"Conversion Shares") in accordance with the terms of the Notes; and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
a. "Investor" means a Buyer and any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9 and
agrees to become bound by Section 4(g) of the Securities Purchase Agreement.
b. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
<PAGE>
c. "Register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
d. "Registrable Securities" means the Conversion Shares issued or
issuable upon conversion of the Notes and any shares of capital stock issued or
issuable with respect to the Conversion Shares or the Notes as a result of any
stock split, stock dividend, recapitalization, exchange or similar event or
otherwise.
e. "Registration Statement" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, on or prior
to 90 days after the date of issuance of the Notes, file with the SEC a
Registration Statement or Registration Statements (as is necessary) on Form S-3
(or, if such form is unavailable for such a registration, on such other form as
is available for such a registration, subject to the consent of each Buyer and
the provisions of Section 2(c), which consent will not be unreasonably
withheld), covering the resale of all of the Registrable Securities, which
Registration Statement(s) shall state that, in accordance with Rule 416
promulgated under the 1933 Act, such Registration Statement(s) also covers such
indeterminate number of additional shares of Common Stock as may become issuable
upon conversion of the Notes to prevent dilution resulting from stock splits,
stock dividends or similar transactions. Such Registration Statement shall
initially register for resale at least 2,172,690 shares of Common Stock, subject
to adjustment as provided in Section 3(b). Such registered shares of Common
Stock shall be allocated among the Investors pro rata based on the total number
of Registrable Securities issued or issuable as of each date that a Registration
Statement, as amended, relating to the resale of the Registrable Securities is
declared effective by the SEC. The Company shall use its best efforts to have
the Registration Statement declared effective by the SEC within 180 days after
the issuance of the Notes.
b. Counsel and Investment Bankers. Subject to Section 5 hereof, in
connection with any offering pursuant to Section 2, the Buyers shall have the
right to select one legal counsel and an investment banker or bankers and
manager or managers to administer their interest in the offering at their own
expense, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company. The Company shall reasonably cooperate
with any such counsel and investment bankers.
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<PAGE>
c. Piggy-Back Registrations. If at any time during the period
beginning 180 days after the date of issuance of the Notes and ending at the
expiration of the Registration Period (as hereinafter defined) (i) a
Registration Statement with respect to the Registrable Securities as required by
Section 2(a) is not effective, and (ii) the Company proposes to file with the
SEC a Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its securities (other than on
Form S-4 or Form S-8 or their then equivalents relating to securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans) the Company shall promptly send to each Investor who is entitled
to registration rights under this Section 2(c) written notice of the Company's
intention to file a Registration Statement and of such Investor's rights under
this Section 2(c) and, if within twenty (20) days after receipt of such notice,
such Investor shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, subject to the priorities set forth in
Section 2(d) below. No right to registration of Registrable Securities under
this Section 2(c) shall be construed to limit any registration required under
Section 2(a). The obligations of the Company under this Section 2(c) may be
waived by Investors holding a majority of the Registrable Securities. If an
offering in connection with which an Investor is entitled to registration under
this Section 2(c) is an underwritten offering, then each Investor whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters and, subject
to the provisions of this Agreement, on the same terms and conditions as other
shares of Common Stock included in such underwritten offering. The provisions of
this Section 2(c) shall not apply during a Registration Delay (as hereinafter
defined).
d. Priority in Piggy-Back Registration Rights in connection with
Registrations for Company Account. If the registration referred to in Section
2(c) is to be an underwritten public offering and the managing underwriter(s)
advise the Company in writing, that in their reasonable good faith opinion,
marketing or other factors dictate that a limitation on the number of shares of
Common Stock which may be included in the Registration Statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities in the Registration
Statement by reason of demand registration rights, and (3) third, the securities
requested to be registered by the Investors and other holders of securities
entitled to participate in the registration, as of the date hereof, drawn from
them pro rata based on the number each has requested to be included in such
registration.
e. Eligibility for Form S-3. The Company represents, warrants and
covenants that on and after the date hereof it meets and will meet the
requirements for the use of Form S-3 for registration of the sale by the Buyers
and any other Investor of the Registrable Securities and the Company has filed
and shall file all reports required to be filed
3
<PAGE>
by the Company with the SEC in a timely manner so as to obtain and maintain such
eligibility for the use of Form S-3. In the event that Form S-3 is not available
for sale by the Investors of the Registrable Securities, then the Company (i)
with the consent of each Investor pursuant to Section 2(a), shall register the
sale of the Registrable Securities on another appropriate form and (ii) the
Company shall undertake to register the Registrable Securities on Form S-3 as
soon as such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(c) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the ninetieth (90th) day after the date of issuance of any Notes for the
registration of Registrable Securities pursuant to Section 2(a)) and use its
best efforts to cause such Registration Statement relating to the Registrable
Securities to become effective within 180 days after the issuance of any Notes
for the registration of Registrable Securities pursuant to Section 2(a), and
keep the Registration Statement effective pursuant to Rule 415 at all times
until the earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities without restriction pursuant to Rule 144(k) promulgated
under the 1933 Act (or successor thereto) or (ii) the date on which (A) the
Investors shall have sold all the Registrable Securities and (B) none of the
Notes is outstanding (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; provided, however, that for up to a period of twenty (20) days, the
Company may delay filing or seeking effectiveness of the Registration Statement
if such Registration Statement would be required to disclose material non-public
information concerning the Company, the disclosure of which at the time would
reasonably be expected, in the good faith opinion of the Board of Directors of
the Company, to have an adverse effect on any proposal or plan of the Company to
engage in any acquisition of assets (other than in the ordinary course), merger,
consolidation, public issuance of stock or debt, tender offer or similar
transaction and, in the opinion of counsel to the Company, is not otherwise
required (a "Registration Delay"); provided, further, that the Company shall
promptly (x) notify the Investors in writing of the existence of events giving
rise to a Registration Delay and (y) provide the Investors with such opinions
4
<PAGE>
in writing. The provisions of Section 1.c. of the Notes shall not be applicable
during the period of a Registration Delay.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, if applicable, as may be necessary to keep such Registration
Statement effective at all times during the Registration Period. In the event
the number of shares available under a Registration Statement filed pursuant to
this Agreement is insufficient to cover all of the Registrable Securities, the
Company shall amend the Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both, so as
to cover all of the Registrable Securities, in each case, as soon as
practicable, but in any event within fifteen (15) days after the necessity
therefor arises (based on the market price of the Common Stock and other
relevant factors on which the Company reasonably elects to rely). The Company
shall use it best efforts to cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement and its legal counsel
without charge (i) promptly after the same is prepared and filed with the SEC at
least one copy of such Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits, the prospectus included in such Registration
Statement (including each preliminary prospectus) and, with regards to such
Registration Statement(s), any correspondence by or on behalf of the Company to
the SEC or the staff of the SEC and any correspondence from the SEC or the staff
of the SEC to the Company or its representatives, (ii) upon the effectiveness of
any Registration Statement, at least one (1) copy of the prospectus included in
such Registration Statement and all amendments and supplements thereto (or such
other number of copies as such Investor may reasonably request) and (iii) such
other documents, including any preliminary prospectus, as such Investor may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor.
d. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as any Investor reasonably requests, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be
5
<PAGE>
required to qualify but for this Section 3(d), (y) subject itself to general
taxation in any such jurisdiction, or (z) file a general consent to service of
process in any such jurisdiction. The Company shall promptly notify each
Investor who holds Registrable Securities of the receipt by the Company of any
notification with respect to the suspension of the registration or qualification
of any of the Registrable Securities for sale under the securities or "blue sky"
laws of any jurisdiction in the United States or its receipt of actual notice of
the initiation or threatening of any proceeding for such purpose.
e. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters for the offering,
the Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering.
f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor in writing of the happening of any event as a
result of which the prospectus included in a Registration Statement, as then in
effect, includes an untrue statement of a material fact or omission to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and, except as otherwise provided herein, promptly prepare a
supplement or amendment to the Registration Statement to correct such untrue
statement or omission, and deliver at least one (1) copy of such supplement or
amendment to each Investor (or such other number of copies as such Investor may
reasonably request). The Company shall also promptly notify each Investor in
writing (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when a Registration Statement or any
post-effective amendment has become effective (notification of such
effectiveness shall be delivered to each Investor by facsimile on the same day
of such effectiveness), (ii) of any request by the SEC for amendments or
supplements to a Registration Statement or related prospectus or related
information, and (iii) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.
Notwithstanding anything to the contrary in this Section 3(f), the Company may
delay the disclosure of material non-public information concerning the Company
the disclosure of which at the time is not, in the good faith opinion of the
Board of Directors of the Company and its counsel, in the best interest of the
Company and, in the opinion of counsel to the Company, otherwise required (a
"Grace Period"); provided, that the Company shall promptly (i) notify the
Investors in writing of the existence of material non-public information giving
rise to a Grace Period and the date on which the Grace Period will begin, and
(ii) notify the Investors in writing of the date on which the Grace Period ends;
and provided, further that during any consecutive twelve (12) month period, the
Grace Period shall not exceed sixty (60) calendar days in the aggregate. For
purposes of determining the length of a Grace Period above, the Grace Period
shall begin on and include the date the holders receive the notice referred to
in clause (i) and shall end on and include the date the holders receive the
notice referred to in clause (ii). The provisions of Section 1.c. of the Notes
shall not be applicable during the period of an Grace Period.
6
<PAGE>
Upon expiration of the Grace Period, the Company shall again be bound by the
first sentence of this Section 3(f) with respect to the information giving rise
thereto.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify each Investor who holds Registrable Securities being sold
(and, in the event of an underwritten offering, the managing underwriters) of
the issuance of such order and the resolution thereof or its receipt of actual
notice of the initiation or threat of any proceeding for such purpose.
h. The Company shall permit each Investor and a single firm of
counsel, initially Katten Muchin & Zavis or such other counsel as thereafter
designated as selling stockholders' counsel by the Investors who hold a majority
of the Registrable Securities being sold, to review and comment upon a
Registration Statement (at least seven (7) days prior to its filing with the
SEC) and all amendments and supplements thereto (at least two (2) full business
days prior to their filing with the SEC), and not file any document in a form to
which such counsel reasonably objects. The Company shall not submit a request
for acceleration of the effectiveness of a Registration Statement or any
amendment or supplement thereto without the prior approval of such counsel,
which consent shall not be unreasonably withheld.
i. At the request of the Investors who hold a majority of the
Registrable Securities being sold, the Company shall furnish, on the date that
Registrable Securities are delivered to an underwriter, if any, for sale in
connection with the Registration Statement (i) if required by an underwriter, a
letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, and (ii) an opinion, dated as of such date, of
counsel representing the Company for purposes of such Registration Statement, in
form, scope and substance as is customarily given in an underwritten public
offering, addressed to the underwriters and the Investors.
j. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to a
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "Inspectors"), during
regular business hours and upon reasonable prior notice, all pertinent financial
and other records, and pertinent corporate documents and properties of the
Company (collectively, the "Records"), as shall be reasonably deemed necessary
by each Inspector to enable each Inspector to exercise its due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information which any Inspector may reasonably request for purposes
of such due diligence; provided, however, that each
7
<PAGE>
Inspector shall hold in strict confidence and shall not make any disclosure
(except to an Investor) or use of any Record or other information unless (a) the
disclosure of such Records is necessary to avoid or correct a misstatement or
omission in any Registration Statement or is otherwise required under the 1933
Act, (b) the release of such Records is ordered pursuant to a final,
non-appealable subpoena or order from a court or government body of competent
jurisdiction, or (c) the information in such Records previously has been made
generally available to the public other than by disclosure in violation of this
or any other agreement of which the Inspector has knowledge. Each Investor
agrees that it shall, upon learning that disclosure of such Records is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement. The
Company agrees that it shall, upon learning that disclosure of such information
concerning an Investor is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt written notice to
such Investor and allow such Investor, at the Investor's expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
l. The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by a Registration Statement to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq National Market System or, if, despite the
Company's best efforts to satisfy the preceding clause (i) or (ii), the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the
inclusion for quotation on the Nasdaq Small Cap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(l).
m. In connection with any sale of Registrable Securities that will
result in such securities no longer being restricted securities, the Company
shall cooperate with the Investors who hold Registrable Securities being offered
and, to the extent applicable, any
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<PAGE>
managing underwriter or underwriters, to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request.
n. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
o. The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of such
Registration Statement.
p. If requested by the managing underwriters or an Investor, the
Company shall (i) immediately incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters and the
Investors agree should be included therein relating to the sale and distribution
of Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
if requested by a shareholder or any underwriter of such Registrable Securities.
q. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
r. The Company shall make generally available to its security holders
as soon as practical, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the 1933 Act) covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement.
s. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
9
<PAGE>
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing date
of the Registration Statement, the Company shall notify each Investor in writing
of the information the Company requires from each such Investor if such Investor
elects to have any of such Investor's Registrable Securities included in the
Registration Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
promptly furnish to the Company such information regarding itself, the
Registrable Securities held by it and the intended method of disposition of the
Registrable Securities held by it as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. In the event any Investor elects to participate in an underwritten
public offering pursuant to Section 2, each such Investor agrees to enter into
and perform such Investor's obligations under an underwriting agreement, in
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities, unless
such Investor notifies the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from such Registration
Statement.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f) and, if so directed by the Company, such Investor shall
deliver to the Company (at the expense of the Company) or destroy all copies in
such Investor's possession, of any prospectus covering such Registrable
Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required
10
<PAGE>
under the terms of such underwriting arrangements, and (iii) agrees to pay its
pro rata share of all underwriting discounts and commissions.
f. Each Investor agrees to comply with all applicable prospectus
delivery requirements, if any, under the 1933 Act in connection with the sale of
Registrable Securities pursuant to the Registration Statement.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions and other than Investors and underwriters' legal fees and expenses,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company, shall be paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents and
each Person, if any, who controls any Investor within the meaning of the 1933
Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), and any
underwriter (as defined in the 1933 Act) for the Investors, and the directors
and officers of, and each Person, if any, who controls, any such underwriter
within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified
Person"), against any losses, claims, damages, liabilities, judgments, fines,
penalties, charges, costs, attorneys' fees, amounts paid in settlement or
expenses, joint or several, (collectively, "Claims") incurred in investigating,
preparing or defending any action, claim, suit, inquiry, proceeding,
investigation or appeal taken from the foregoing by or before any court or
governmental, administrative or other regulatory agency, body or the SEC,
whether pending or threatened, whether or not an indemnified party is or may be
a party thereto ("Indemnified Damages"), to which any of them may become subject
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
"blue sky" laws of any jurisdiction in which Registrable Securities are offered
("Blue Sky Filing"), or the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which the statements therein were made, not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as
11
<PAGE>
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to state
therein any material fact necessary to make the statements made therein, in
light of the circumstances under which the statements therein were made, not
misleading, or (iii) any violation or alleged violation by the Company of the
1933 Act, the 1934 Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities pursuant to a Registration Statement (the
matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to the restrictions set forth in Section 6(d) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to Section 3(c);
(ii) with respect to any preliminary prospectus, shall not inure to the benefit
of any such person from whom the person asserting any such Claim purchased the
Registrable Securities that are the subject thereof (or to the benefit of any
person controlling such person) if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected in the prospectus, as
then amended or supplemented, if such prospectus was timely made available by
the Company pursuant to Section 3(c), and the Indemnified Person was promptly
advised in writing not to use the incorrect prospectus prior to the use giving
rise to a violation and such Indemnified Person, notwithstanding such advice,
used it; (iii) shall not be available to the extent such Claim is based on a
failure of the Investor to deliver or to cause to be delivered the prospectus
made available by the Company; (iv) shall not be available with respect to any
Claim that arises out of or results from the use by an Indemnified Person of any
prospectus or the sale of any Registrable Securities during a Grace Period,
provided that such Investor has received proper notice of such Grace Period; and
(v) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of its
officers, and employees and agents and each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
or Indemnified Damages to which any of them may become subject, under the
12
<PAGE>
1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified
Damages arise out of or are based upon any Violation, in each case to the
extent, and only to the extent, that such Violation occurs in reliance upon and
in conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and, subject
to Section 6(d), such Investor will reimburse any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) and the agreement with respect to contribution contained in Section
7 shall not apply to amounts paid in settlement of any Claim if such settlement
is effected without the prior written consent of such Investor, which consent
shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Section 6(b) for only that amount of a Claim
or Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding and such counsel is
reasonably acceptable to the
13
<PAGE>
indemnifying party. The Company shall pay reasonable fees for only one separate
legal counsel for the Investors, and such legal counsel shall be selected by the
Investors holding a majority in interest of the Registrable Securities included
in the Registration Statement to which the Claim relates. The Indemnified Party
or Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. If
the Indemnified Party or Indemnified Person is represented by its own counsel
(or counsel to the Investors generally, if the indemnifying party is the
Company), such counsel will use its reasonable efforts to keep the indemnifying
party apprised as to the status of the defense or settlement negotiations. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the consent of the Indemnified
Party or Indemnified Person, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such claim or
litigation. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the
14
<PAGE>
fault standards set forth in Section 6; (ii) no seller of Registrable Securities
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of fraudulent misrepresentation; and (iii)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the investors to
sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by
15
<PAGE>
clause (ii) of this sentence the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions contained herein and in Section
4(g) of the Securities Purchase Agreement; (v) such transfer shall have been
made in accordance with the applicable requirements of the Securities Purchase
Agreement; and (vi) such transferee shall be an "accredited investor" as that
term is defined in Rule 501 of Regulation D promulgated under the 1933 Act and
shall not be a broker-dealer.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold two-thirds (2/3) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically generated and kept on file by the sending
party); (iii) three (3) days after being sent by U.S. certified mail, return
receipt requested; or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, Washington 98801
Telephone: (509) 664-8000
Facsimile: (509) 664-6868
Attention: President
Attention: General Counsel
With a copy to:
16
<PAGE>
Stoel Rives LP
600 University Street, Suite 3600
Seattle, Washington 98101
Telephone: (206) 624-0900
Facsimile: (206) 386-7500
Attention: L. John Stevenson, Jr., Esq.
If to a Buyer, to its address and facsimile number on the
Schedule of Buyers attached hereto, with copies to such Buyer's
counsel as set forth on the Schedule of Buyers.
Each party shall provide five (5) days prior notice to the other party of any
change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York without regard to the principles of
conflict of laws. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. This Agreement, the Notes, and the Securities Purchase Agreement
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the Notes, and the Securities Purchase Agreement
supersede all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
17
<PAGE>
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if all of the Notes have been converted into Registrable
Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
18
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
PACIFIC AEROSPACE & NELSON PARTNERS
ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT By: /s/ ANNE DUPUY
------------------------------ ------------------------------
Name: Donald A. Wright Name: Anne Dupuy
Its: President Its: Officer
OLYMPUS SECURITIES, LTD.
By: /s/ ANNE DUPUY
------------------------------
Name: Anne Dupuy
Its: Alternate Director
19
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Investor Address Investor's Representatives' Address
Investor Name and Facsimile Number I and Facsimile Number
- ------------- -------------------- - --------------------
<S> <C> <C>
Nelson Partners c/o Leeds Management Services Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Malcolm Fairbairn
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street, #1600
Chicago, Illinois 60661-3693
Attention: Robert J. Brantman, Esq.
Marguerite M. Elias, Esq.
Facsimile: (312) 902-1061
Olympus Securities, Ltd. c/o Leeds Management Services Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Malcolm Fairbairn
Facsimile: (441) 292-2239 Kenneth C.Griffin
Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street, #1600
Chicago, Illinois 60661-3693
Attention: Robert J. Brantman, Esq.
Marguerite M. Elias, Esq.
Facsimile: (312) 902-1061
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
unaudited consolidated financial statements of Pacific Aerospace & Electronics,
Inc., and its subsidiaries for the three-month period ended August 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> AUG-31-1997
<CASH> 4,477,000
<SECURITIES> 837,000
<RECEIVABLES> 6,116,000
<ALLOWANCES> (95,000)
<INVENTORY> 9,100,000
<CURRENT-ASSETS> 24,460,000
<PP&E> 19,199,000
<DEPRECIATION> (3,651,000)
<TOTAL-ASSETS> 43,537,000
<CURRENT-LIABILITIES> 6,621,000
<BONDS> 10,623,000
0
2,303,000
<COMMON> 28,205,000
<OTHER-SE> (4,071,000)
<TOTAL-LIABILITY-AND-EQUITY> 43,537,000
<SALES> 11,776,000
<TOTAL-REVENUES> 11,776,000
<CGS> 8,793,000
<TOTAL-COSTS> 10,808,000
<OTHER-EXPENSES> 2,007,000
<LOSS-PROVISION> 27,000
<INTEREST-EXPENSE> 130,000
<INCOME-PRETAX> 873,000
<INCOME-TAX> 62,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 811,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
